Article / 19 November 2014 at 9:52 GMT

Daily Shot: Europe's lost decade

TradingFloor.com Team / Saxo Bank
Denmark
  • Eurozone could be facing a Japan-style 'lost decade'
  • Indian growth expected to outpace China by 2016
  • US homebuilder optimish up, but lumber futures down sharply

By Walter Kurtz

German economic sentiment (ZEW) surprised to the upside today, sending the euro higher. 
ZEW
While this is good news for the Eurozone, growth remains subpar and many are suggesting that the area is facing its own Japanese-style "lost decade". Rumours are circulating of a concerted effort to convince the Germans to expand the European Central Bank’s monetary easing beyond the targeted long-term refinancing operations and the asset-backed securities buying programs to full-blown quantitative easing. To be continued…

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In the UK, the forecasts for the Bank of England "liftoff" have shifted to the middle of 2015 or later. (I think the Bloomberg “consensus” projection below is outdated).

BoE
These expectations may extend even further as the UK's inflation weakens (disinflation imported from the Eurozone).

Core CPI
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With China's growth continuing to moderate, India is expected to outpace China by 2016. India's economy is quite diversified and less reliant on property development and manufacturing exports.
India and China
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Saudi Arabia's crude oil in storage is at record levels, making "dumping" fairly easy. It's not significantly different from other types of commodity dumping — such as South Korea's dumping of steel in the US market for example. After all, it's about grabbing market share.
Saudi crude
And it’s working.
WTI
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In the United States the Producer Price Index surprised to the upside today. 
Core PPI
Improved pricing power? Hardly. Did you ever have a feeling of being ripped off at the gas station when oil prices are falling while prices at the pump barely move? Well, it’s not just a feeling.
 
"The headline PPI rose 0.2% in October (vs. consensus -0.1%). The surprise was entirely due to core prices, which rose 0.4% (vs. consensus +0.1%), while energy prices declined 3.0%. Within the core, the volatile trade services category — which measures retail and wholesale margins — rose 1.5%, adding three-tenths to the core. Drilling down further, a sizable part of the jump in trade services came from a huge 26% month-on-month increase in fuel retail margins (i.e., gasoline stations). While counterintuitive in light of the decline in energy prices on the month, the increase in this category reflects retail prices declining more slowly than wholesale prices. On balance, we would heavily discount this month's report in light of the volatility in trade services. The core PPI according 
 to the "old methodology" — finished goods less food and energy —increased a more modest 0.1%." — Goldman
 
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In another surprising economic report, the US homebuilder optimism index came in stronger than expected.

NAHB














This is supposed to be a leading indicator for housing starts. Markets remain sceptical however, as lumber futures declined sharply in recent weeks. 

Lumber futures

















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2014 has been a good year for mergers and acquisitions activity in the US and globally (it may be a record year for the US). The Halliburton/Banker Hughes deal may start off a chain of M&A activity in the energy/oil services sector as price pressures force consolidation.

Mergers
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Underperformance in a bull market is normal for hedge funds (and I get the market-neutral and the short-bias strategies), but this is just sad …  

Missing Alpha
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I don’t mean to be a cynic here, but this ratings distribution of tech firms’ long-term debt just looks a bit “odd”… Selection bias?

Tech sector debt
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The US 10-year (TIPS-based) breakeven inflation expectations are now at their lowest level since 2011. A paradigm shift has taken place in the markets as low inflation is now being priced in years into the future. It’s no longer viewed as a temporary phenomenon.

10-year inflation
 Source: Federal Reserve Economic Data

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The Treasury International Capital net long-term securities transactions have spiked to record levels. Foreigners really like US long-term securities all of a sudden? FX reserves have to go somewhere.

TIC
















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Now some food for thought. Americans currently spend more time on their mobile devices than they do watching TV.

Mobile devices versus TV
 

-- Edited by Michael McKenna

* Walter Kurtz is an alias

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