Another week in which central banks took center stage. Again, it became pretty clear that the performance of equity markets is still heavily impacted by the actions, speeches and ‘internal presentations’ of central bankers.
The big news this week was the Eurozone CPI number. Dragged down by energy prices, the energy component of the CPI is down 6.3% YoY, Eurozone inflation dropped to -0.2%. This was below expectations and also represents the first negative reading since September 2009. Interestingly, while most attention goes to the headline number, the core CPI actually ticked up 0.1% to 0.8%. Still, also way below the ECB target.
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In case you missed it. Eurozone #CPI fell for the first time since 2009, but core CPI ticked up to 0.8% in December. http://t.co/Ji2mC8KSG1
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jeroen blokland (@jsblokland) January 07, 2015
Chances are we haven’t seen the low in the Eurozone CPI just yet. As mentioned above the energy component of the CPI is down 6.3%, while oil prices have more than halved. As the graph below shows, deflation could linger for quite some time.
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This is a pretty convincing chart that #oil prices will push the Eurozone headline #CPI into negative territory. http://t.co/eNP52P3WUV
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jeroen blokland (@jsblokland) January 05, 2015
The upside of the deflationary environment is that central bankers around the globe rush to ensure investors they will do whatever it takes to stimulate growth and thus inflation. Yellen’s tone remained dovish, while Draghi continues his quest for QE. Hence, after a couple of shaky days stocks recovered from their year-to-date losses.
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The central bank effect! Equity prices are soaring worldwide. #ECB #FED #BOJ http://t.co/ya6s9Nu5EO
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jeroen blokland (@jsblokland) January 08, 2015
On Friday, Bloomberg published a story that ECB staff members presented ECB policy makers various quantitative-easing options, with up to EUR 500 billion of (investment grade) government bond buying. Such an amount would increase the ECB balance sheet by roughly a quarter.
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#QE of EUR 500 billion would represent 23% of the #ECB balance sheet. http://t.co/rVzkag4EbP
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jeroen blokland (@jsblokland) January 09, 2015
Although this is, of course, a serious amount of money, the ECB would remain dead last in the balance sheet expansion race. We should not forget about the other programs as well, but to play with the big boys the ECB would have to come up with something more ‘bazooka-like’.
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It's all relative! #ECB balance sheet if it would buy EUR 500 bln. of bonds in #QE right now. http://t.co/pK6WdTExF0
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jeroen blokland (@jsblokland) January 09, 2015
Meanwhile, bond yields are having a race of their own. Lower inflation expectations and the anticipated Eurozone QE are driving yields ever lower. Many short-term rates are already negative, and at this pace, 10-year bonds yields could be heading there as well. The table below gives a excellent overview of what is happening in bond yields right now. All time lows are hit almost every day.
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The best chart on global bond yields heading for 'zero'. via @MktOutperform http://t.co/FfOA5XyQqz
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jeroen blokland (@jsblokland) January 08, 2015
A big contender to win the race to the bottom is Japan. This week the yield on the benchmark bond with a 10 year maturity hit an all time low of just 0.26%! For reference, Japanese inflation stands at +2.4%.
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The 10-year bond yield in #Japan is heading for zero! http://t.co/sGTyNr8Jeh
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jeroen blokland (@jsblokland) January 06, 2015
The upcoming QE program by the ECB already drove the euro to new lows as well. This week it matched the first quote that was ever given on the euro, just below the 1.18 level against the dollar. But, looking at the short-term interest rate differential between the US and Germany reveals the latest fall in the euro may be a little bit too much for now.
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The #euro falls below 1.18 against the US dollar, as #QE gets priced in. Not in line with short-term interest rates. http://t.co/IGC6j1TKkv
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jeroen blokland (@jsblokland) January 08, 2015
With all the central bank activity going on, Greece was less dominant in markets than the week before. However, the issue is far from resolved and recent poll results showed that Syriza may have increased its lead. A ‘grexit’ is not imminent, but a messy debt financing cycle, which should start as early as February, is not unlikely.
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Palmos Analysis for @tvxs
SYRIZA 28.1%
ND 22.6
G Dawn 6.7
Potami 5.5
KKE 4.3
Ind Grks 2.3
PASOK 2.1
Papandreou 1.5
Undecided 14.8
#Greece
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MacroPolis (@MacroPolis_gr) January 09, 2015
Perhaps the chart below could influence the election outcome in January, although I don’t think there are many Greek left with investments in either bonds or equity. Anyway, the trend is down.
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Will this chart impact the Greek election outcome? Equity market sell off intensifies, bond yield above 10%. #Greece http://t.co/K7Blse5IU8
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jeroen blokland (@jsblokland) January 09, 2015
The same holds for oil prices. Although oil prices recovered somewhat towards the end of the week, the trend remains down. OPEC does not really seem to care and production continues to grow. Yes, there are many winners of lower oil prices, but don’t forget about the losers.
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#oil damage! http://t.co/uBql5E0ud6
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jeroen blokland (@jsblokland) January 06, 2015
The US job market is doing fine. After a stellar job growth in November (revised +353K) the nonfarms again beat expectations in December (+252K). Average hourly earnings, a gauge of wage growth, fell, however. A development the Fed will surely take into account. Also interesting, the Twitter forecast for the nonfarms beat the Bloomberg consensus forecast. I leave it up to you how to interpret this.
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#NFPGuesses Twitter (F +251K) beats Bloomberg (F +240K). Nonfarms rise 252K, previous month revised upward to +353K. http://t.co/sCp3gGgbqe
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jeroen blokland (@jsblokland) January 09, 2015
Finally, it has been a while, bitcoin re-enters the Week End Blog. A nice chart by The Economist as a reminder that 2015 could indeed be a decisive year for the virtual currency. The number of transactions is up, but its value is down. Bitcoin was the worst ‘currency’ of 2014 (except for the fact it’s not really a currency).
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The 'evolution' of #bitcoin! Graph by @EconEconomics http://t.co/DWeH2Vwn8n
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jeroen blokland (@jsblokland) January 08, 2015
This wraps up this Week End Blog. Thank you for reading. If you have any remarks or questions please let me know (@jsblokland). Enjoy your weekend!
Excellent blog keep up the good work!