Some might find the opening salvoes at the beginning of this new week a tad boring as they will be influenced by three old friends: Greece, China and the US Employment Report of Friday.
Is it a matter of “Ooops!” or “Yippee!” as we look at yet another rate cut in China? Overnight, the PBOC has again cut the RRR (Reserve Requirement Ratio), by 25bp, its third rate cut so far this year.
When economies are slowing, rate cuts are good – I am reminded of Larry Summers’ recent comments on the problems that the Fed might face, seeing as that its own arsenal is so depleted. I am, however, more sceptical when it comes to the position in which China finds itself. Its economy is slowing, weighed down by a debt-overhang and a property slump. This rate cut is not aimed at revitalising an economy which is in the grip of a cyclical downturn but it looks to have nothing better in mind that keeping a corpse breathing.
Reflating a deflating bubble
The global financial crisis was ultimately quite clearly the result of the Fed not only trying to smooth a cyclical decline in US economic activity at the beginning of the century, but of it trying to reverse the move and create growth where there wasn’t supposed to be any. There resulted an asset price bubble fed by a credit bubble. When the two of them deflated simultaneously, all hell broke loose. Were one to have the feeling that the PBOC were trying to engineer a soft landing, then the 25bp cut would have to be seen as a positive. But this is not, or so it would appear to me, the case. It looks like a fairly blunt move and which points towards a simple policy of trying to reflate a deflating bubble.
There is something about 21st century central banking which seems to determine that economic cycles do not have to be managed but jumped on and wrestled to the ground, whatever the cost. The PBOC at least has the tools but the Fed doesn’t.
The Fed will see it faced with a non-farm payroll report on Friday which did nothing for either man or beast. The miss in the headline figure of 223,000 vs. 228,000 was so small it was no miss at all, but the downward revision in the March number from an already disappointing 126,000 to 85,000 was bruising.
Markets, on the other hand, decided that the numbers were good enough so as to not have to worry about the economy going into reversal but then again they were also soft enough as not to have to oblige the Fed to take early action. That was just what the doctor ordered and the Dow closed up 256.05 points or 1.49% with the S&P lagging slightly at +1.35% and the Treasury curve rallied too with 10s closing back down below 1.15%. During the wobble mid-week, they’d spiked to above 2.30%.
This is a busy week in the US, release wise, but there is barely anything which will make the market fall over; it might wobble a bit, here and there, there is barely anything which can substantially trip it up. April retail sales which are due on Wednesday might be the most important, but with the softish payroll number glaring over its shoulder, it might not cause too much disruption, irrespective.
And then there is Greece…. I saw some happy picture on the TV of a beaming Alexis Tsipras welcoming back to work a bevy of cleaning ladies who had been laid off by the previous government as it had tried to economise. Even the biggest battery cannot restart a car with either no engine or no fuel. Greece, as it currently presents itself, has neither. What part of that does Syriza not get?
Tomorrow it is due to repay €747,000,000.00 to the IMF which it claims to be able to do. How it will then pay the cleaning ladies is a different matter entirely but it would appear that the likes of the Muppet in Chief, Jean-Claude Juncker, are so intent on avoiding a Grexit that we have to assume that they will fall over when crunch time approaches, which it currently seems to do about once a day.
The ECB is doing what it can in terms of non- ideological support while protecting itself from ever having to bear the blame for being the reason Greece had defaulted. The Eurogroup is still staunchly maintaining that there is no Plan B. With that reassurance in his pocket, is it surprising that Tsipras, who ought to be suicidal, looks so happy while surrounded by his cleaners?
Here in the UK, the victorious Tories are declaring that they have nothing at all to be smug about while all looking sickeningly smug. On the other side, history was made on Friday with three party leaders all resigning. Saturday saw the Occupy movement exercising its democratic right to demonstrate against the outcome of a democratic election. That the first-past-the-post electoral system delivers strange results is nothing new but it ought not be forgotten that a referendum was held on electoral reform and it was clearly defeated by the British people, Scots included.
Just under 1.5m votes gave the SNP 56 seats while UKIP polled over 4m votes and has only one single MP to show for it. I wonder how Nicola Sturgeon will deal with such a lack of democratic representation as she sends her 56 Bravehearts off to enjoy the bright lights, big city and the temptations of the fleshpots of the nation’s capitol while she sits at home in austere Calvinist purity. Oops, can’t be austere, can it; she fiercely opposes austerity, doesn’t she?
