Via Marc Chandler at Brown Brothers Harriman:<\/p>\n
Eight Themes at the Start of the New Week<\/b><\/span><\/p>\n 1. \u00a0 \u00a0 \u00a0 \u00a0There are several political and economic consequences, aside from the tighter security and elevated alertness, from the attacks in Paris<\/span> Price action: \u00a0The dollar is mostly firmer against the majors. \u00a0The Loonie is the exception, up 0.1% on the day and outperforming. \u00a0The Kiwi and the euro are underperforming. \u00a0The euro is trading back near $1.0725, while sterling is trading right around $1.52. \u00a0Dollar\/yen is trading around 123 after earlier dipping to 122.25. \u00a0EM currencies are mostly weaker too. \u00a0SGD and RUB are outperforming, while TRY and KRW are underperforming. \u00a0MSCI Asia Pacific fell 1.2%, with the Nikkei down 1%. \u00a0China markets were higher, with the Shanghai Composite up 0.7% and the Shenzen Composite up 2.1%. \u00a0The Dow Jones Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a lower open. \u00a0The 10-year UST yield is flat at 2.26%, while European bond markets are mostly softer. \u00a0Commodity prices are mostly higher, with oil up 1% but copper down 1% and still making new cycle lows.<\/i><\/span><\/p>\n 1. Nous Sommes Paris:<\/b> \u00a0The attack in Paris is tragic and reprehensible.<\/b> \u00a0Our thoughts and prayers are with the victims and the people in France. \u00a0There are several political and economic consequences, aside from the tighter security and elevated alertness. \u00a0The attack overshadowed other issues at the G20 meeting. On one hand facing terror, investors often reduce risk. \u00a0At the same time, officials often provide reassurances that they have the will and means to address any liquidity needs. \u00a0<\/span><\/p>\n The attack on France may have serious repercussions on the immigration\/refugee debate that has already unleashed centrifugal forces pulling Europe apart. \u00a0These forces are as much if not more strong than the creditor\/debtor dispute that focused on Greece earlier this year. \u00a0In terms of more parochial political issues, it may serve as an opportunity for a political reset for French President Hollande, whose support has been undermined by the poor economic performance. \u00a0In Germany, Merkel has taken a bold and controversial stance, and her critics are likely to use the Paris attack to press their case.<\/span><\/p>\n 2. \u00a0SDR: \u00a0After the markets had closed for the week, IMF’s Lagarde announced that the staff has concluded that China meets the requirements to join the Special Drawing Right basket.<\/b> \u00a0Not only do they judge the yuan to be “freely usable”, but also that China has “addressed all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July.” \u00a0In recent days, some observers feared that nine consecutive higher dollar-yuan fixes and some re-widening of the spread between the onshore and offshore yuan (CNY and CNH) would jeopardize China’s ascension. \u00a0US and European officials have indicated that provided that China meets the IMF criteria, which the staff says it does, they will not block it. \u00a0<\/span><\/p>\n Assuming that this is the case, there are two immediate issues.<\/b> \u00a0First, currencies in the SDR are assigned a weight. \u00a0What will be the yuan’s weight? \u00a0Many observers who have addressed this issue anticipate that the yuan’s initial weight will be something more than the yen’s 9.4% share and around sterling’s 11.3% weight. \u00a0The risk seems to be on the downside. \u00a0The weighting is determined by the size of a country’s exports and the use as a reserve asset. \u00a0The first consideration would appear to give China a high share given that it is the world’s largest exporter. \u00a0However, an important caveat is that Hong Kong, a part of China it refers to as a Special Administrative Region, takes in around 15% of China’s exports, which are not really exports under the traditional definition. \u00a0As a reserve asset, China’s share is well below even the Canadian and Australian dollars, let alone the yen and sterling. \u00a0 The IMF estimates that it is around 1%.<\/span><\/p>\n The second issue involves the reaction by investors and reserve managers. \u00a0<\/b>Recall that the new SDR basket will not be launched until September 2016. \u00a0The yen’s inclusion in the SDR has not made the Japanese currency a major reserve currency or an important international currency. \u00a0Foreign investors tend to hold a low share of Japanese equities, and their Japanese government bond holdings are well below benchmark indices. \u00a0Inclusion in the SDR is not the necessary and sufficient condition to attract asset and reserve managers. \u00a0The continued opening up of China’s financial markets and greater transparency are the keys. \u00a0We argue that the real value of joining the SDR lies in the acknowledgment that China is one of the great financial powers.<\/span><\/p>\n 3. \u00a0Fed and US Data: <\/b>\u00a0 The data in the week ahead is unlikely to shake investors’ confidence that the Fed will raise interest rates next month.<\/b> \u00a0The Reuters survey found that following the jobs data 15 of 17 primary dealers (~88%) expect a December lift-off. \u00a0A Wall Street Journal poll found 92% of business and academic economists expect a hike then as well. \u00a0Many Fed officials that have spoken, including the leadership, have noted the resilience of the US economy. \u00a0Moreover, due to recent inventory and trade figures, Q3 GDP is likely to be revised up, while the Atlanta Fed GDPNow is tracking 2.3% growth in Q4. The Federal Reserve will recognize that as a little above trend growth, which means it is consistent with further absorption of labor market slack. \u00a0<\/span><\/p>\n Minutes from last month’s FOMC meeting will be released in the middle of the week. \u00a0While offering some insight into the Fed’s thinking about the downgrade of the global risks and the departure from the data dependence to specifically refer to “the next meeting”, it is unlikely to alter opinions about the timing of lift-off. \u00a0<\/span><\/p>\n 4. \u00a0ECB and EU: \u00a0Both monetary and fiscal policy issues will be on the agenda in the week ahead. <\/b>\u00a0The EU anticipates finalizing its assessment on the draft budgets of its members for the New Year. \u00a0Investors may concentrate on three countries: \u00a0France, Italy, and Spain, who appear to be seeking some degree of forbearance. \u00a0The EU reviewing draft budgets is a new post-crisis development, and represents some whittling down of sovereignty, especially for EMU members, who can ostensibly be sanctioned.<\/span><\/p>\n The record of last month’s ECB meeting will be published midweek.<\/b> \u00a0Draghi sent dovish signals that raised confidence that the ECB would adjust its asset purchase program in some way (size, duration, instruments) and would also consider cutting the already negative deposit rate. \u00a0Previously, Draghi had indicated that at minus <\/i>20 bp monetary policy had been exhausted. \u00a0However, other countries, such as Switzerland, Denmark, and Sweden have demonstrated that however far policy rates can be pushed below zero, minus 20 bp is not the limit.<\/span><\/p>\n In recent days, Draghi has elaborated on his argument.<\/b> \u00a0He anticipates that the new staff forecasts will project that reaching the ECB’s inflation goal will take longer. \u00a0A possible uptick in the final October CPI to 0.1% from zero will not change the debate one iota. \u00a0Draghi expressed disappointment that the previous signs of a sustained recovery in the core rate of inflation appear to be fizzling. \u00a0Some ECB officials have pushed back, and the record may offer insight into the relative strength of these objections. \u00a0The record will also be read with an eye toward assessing how the asset purchase program will be adjusted.<\/span><\/p>\n Cutting the deposit rate further would also potentially expand the universe of assets the ECB can buy.<\/b> \u00a0It is currently limited to buying instruments with yields above minus<\/i> 20 bp. \u00a0This presently excludes two-four year German paper, for example. \u00a0Buying municipal and regional bonds, which has been floated, would also increase the universe of German assets that can be bought. \u00a0Germany has the most developed sub-sovereign bond market. \u00a0We do not expect to see much discussion of this in the ECB’s record.<\/span><\/p>\n Lastly, here may have been some discussion of the Emergency Lending Assistance program.<\/b> \u00a0The Greek experience raised various questions about its operation. \u00a0Currently the ECB grants (2\/3 majority required) the authority to the national central bank, who bears all the risk. \u00a0Given the ECB’s function, it is not exactly clear what it means that the national central bank is responsible. \u00a0 There are several ways that the Eurosystem is ultimately responsible. \u00a0There may be discussions of changes in the operation of ELA, and the direction is to formally make it more European and less national.<\/span><\/p>\n 5. \u00a0Japan: \u00a0The first estimate of Q3 GDP came in at -0.8% q\/q.<\/b> \u00a0This compares with -0.2% expected and a revised -0.7% in Q2. \u00a0Business investment, shrinking inventories, and net exports are the suspected drags, while private consumption likely gained traction. \u00a0Pay no mind to those claims that Japan has fallen into a recession. \u00a0Remember recession has no fixed definition, though plenty of rules of thumb. \u00a0There is no reason to believe that Japan’s business cycle has turned. \u00a0When trend growth is 0.5% or less as the BOJ suggests, the normal variance of GDP could push it into contraction territory without signalling anything very meaningful. \u00a0Importantly, Japanese officials, including BOJ’s Kuroda are not going to respond as if it were a recession. \u00a0<\/span><\/p>\n 6. \u00a0UK: \u00a0Following the guidance of the BOE’s leadership, the market accepts that a UK rate hike is unlikely to be delivered in the next few months. <\/b>\u00a0It will lag further behind the Federal Reserve than previously understood. \u00a0Data in the week ahead will give investors little reason to question this view. \u00a0Consumer inflation is expected to remain at -0.1% year-over-year, but the risk is on the downside. \u00a0However, looking at base effects, this looks to be the bottom for now and possibly for the cycle. \u00a0Retail sales are likely to be soft on a month-over-month basis as the rugby championship goose to sales unwinds. \u00a0As an alternative to the dollar, and as the long leg of crosses, sterling has much to recommend itself. \u00a0<\/span><\/p>\n 7. \u00a0 Canada: \u00a0Oil, interest rate differentials, and the general appetite for risk are the drivers of the Canadian dollar.<\/b> \u00a0The three forces are moving against it. \u00a0The CPI and retail sales reports that will be released in the days ahead are unlikely to do it any favors. \u00a0Headline inflation is expected to be little changed while the core rate is anticipated to be steady at 2.1%. \u00a0The decline in oil prices is deflationary, but the Canadian dollar’s depreciation is inflationary. \u00a0The more pressing problem for Canada is growth. \u00a0Retail sales will likely drag down by the decline in gasoline. \u00a0Excluding autos and gasoline, Canadian retail sales are expected to have risen by 0.4%. \u00a0We suspect the risk is on the downside. \u00a0<\/span><\/p>\n 8: \u00a0Politics on the Iberian Peninsula: \u00a0Portugal finds itself at a precarious juncture.<\/b> \u00a0The minority center-right government collapsed when a center-left coalition blocked its program. \u00a0However, rather than allowing the center-left coalition to form a government, there is pressure to allow the minority center-right government to serve as caretaker until elections can be called, which constitutionally would not be for several months. \u00a0Meanwhile, over the objections of the center-left, the government has gone ahead with the privatization of an airline. \u00a0Before the weekend, DBRS affirmed Portugal’s investment grade status, with a stable outlook. \u00a0This averts a crisis. \u00a0DBRS is the only ECB-recognized rating agency that gives the country such a rating. \u00a0For the others, Portugal is not investment grade. \u00a0If Portugal were to lose it, it could limit the use of the government bonds for collateral at the ECB, and prevent the purchases of those Portugal’s bonds under QE. \u00a0The economy stagnated in Q3, and the EU is requiring more austerity measures. \u00a0<\/span><\/p>\n There are two main forces that are elevating the political risk in Spain. <\/b>\u00a0First, Catalonia is pushing hard for independence, and this is a serious confrontation with Madrid. \u00a0The federal government and the judiciary are pushing back. \u00a0Ironically, the secessionists may impact the second source of political risk which is next month’s national elections. \u00a0Although Spain has emerged with one of the more robust economies the-the euro area over the past 18 months or so, Prime Minister Rajoy has received very little credit. \u00a0Scandals and frustration with the PP have seen the rise of a centrist alternative, which is running ahead in the polls. \u00a0The once vibrant Podemos is now polling around 10%. \u00a0While Syriza may not have helped, reports suggest internal strife within the party was its downfall.<\/span><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":" Via Marc Chandler at Brown Brothers Harriman: Eight Themes at the Start of the New Week 1. \u00a0 \u00a0 \u00a0 \u00a0There are several political and economic consequences, aside from the tighter security and elevated alertness, from the attacks in Paris 2. \u00a0 \u00a0 \u00a0 \u00a0IMF’s Lagarde announced that the staff has concluded that China meets 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\n2. \u00a0 \u00a0 \u00a0 \u00a0IMF’s Lagarde announced that the staff has concluded that China meets the requirements to join the Special Drawing Right basket<\/span>
\n3. \u00a0 \u00a0 \u00a0 \u00a0The data in the week ahead is unlikely to shake investors’ confidence that the Fed will raise interest rates next month<\/span>
\n4. \u00a0 \u00a0 \u00a0 \u00a0In Europe, both monetary and fiscal policy issues will be on the agenda in the week ahead<\/span>
\n5. \u00a0 \u00a0 \u00a0 \u00a0The first estimate of Q3 GDP in Japan came in at -0.8% q\/q<\/span>
\n6. \u00a0 \u00a0 \u00a0 \u00a0Following the guidance of the BOE’s leadership, the market accepts that a UK rate hike is unlikely to be delivered in the next few months.<\/span>
\n7. \u00a0 \u00a0 \u00a0 \u00a0In Canada, oil, interest rate differentials and the general appetite for risk are the drivers of the Canadian dollar<\/span>
\n8. \u00a0 \u00a0 \u00a0 \u00a0Politics on the Iberian Peninsula will remain in focus <\/span><\/p>\n