The German wholesale price index was published this morning with a 0.7% year on year decline in October, following a 0.9% decline in September, which to some extent illustrates the concerns the ECB has regarding deflationary risk… that is if you actually believe falling prices are a bad thing! Carrying on the same theme, the BDO Inflation Index in the UK, which predicts cost expectations for businesses over the next 3 months declined, again a signal that deflation could be around the corner. The collapse of crude oil prices over the last few months have been well documented, and no doubt are a significant component of this deflation paradigm. But what does this all mean? Clearly in Europe the reaction function of the central bank is going to be towards accommodation, but I just wonder about economies like the UK and US where we’re approaching full employment. I’m no economist, but it seems to me that the potential for stable or even falling prices in a low unemployment situation could be a great boost to confidence and consumption. Glass half full? Yes I’ll take it!
The Inflation Report in the UK will be published later this morning, with Governor Carney speaking. We will highlight any notable points in later blogs. It remains of great interest to see if the UK will be able to demonstrate the same confidence and resolve with the strength of its recovery that has recently been shown in the US. Clearly the proximity of the Eurozone and its economic importance, to the UK, has led to far more caution recently, but it will be important to see how the thought process of Bank of England board members evolves in coming months, particularly as we have general elections next year.
Over the last few days the dollar has stabilised against major currencies after its recent central bank inspired impulsive appreciation. Periods like this are inevitable in a trend, and indeed are welcome for sustainability of the trend. There has, however, been somewhat more pressure on less liquid developing market currencies, we expect this theme of developing currency underperformance to persist over the weeks and months ahead. Indeed we assert that the likelihood of crises occurring in emerging markets in 2015 is one of the key risks facing a global interlinked economy.
Nothing earth shaking on the data front today. But it’s worth noting that Japanese equities made a fresh intra-day 7 year high today. It wasn’t able to hold up into the close, but a new high is a new high, and this reinforces our suspicion that equities will continue to rally strongly into the yearend. What was more interesting however was the jump in Japanese bond yields as reports came out suggesting that the Japanese government could delay a sales tax hike and call early elections. They are in a really tricky spot and I don’t envy them… on the one hand they are running a horrendous fiscal deficit and have debt to GDP ratios that would force default in a smaller less developed economy. But on the other hand, Japan has one of the lowest sales tax rates in the world, and obviously a raising revenues from a tax hike would be a logical route to reducing the deficit, the only problem is that it will absolutely crush consumption, which is precisely what no one wants to see. The currency is being used as a panacea at a time when it is no longer even clear that a weaker currency actually benefits corporate Japan anymore, but far be it for me to argue with a central bank that is willing to dump the better part of a trillion dollar’s worth of yen on to an undesiring but credulous global market. You do what you have to, and others be damned!
Finally.. on a day when a group of major global banks have been fined a substantial amount for their part in the international FX probe, it highlights the importance and necessity of trust in relationships with those who are responsible for dealing your FX. We at ParityFX consider trust to be essential for good business practice. In light of this, we are delighted with the partnerships we have formed with you over the past year and we are thoroughly excited about the opportunities we see in the future.