Sunday, 19 August 2018

On German factories, the BoE and Darling's Scotland

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Anthony Peters sees Bund yields heading even lower. 

Oh dear, oh dear, oh dear … that certainly wasn’t part of the script. This morning Germany reported June Factory Orders so far off expectations as to cause a proper shock.

The month-over-month forecast was for +0.9% and 1.1% for the year-over-year figure. In the event, the Ministry for the Economy and Labour reported –3.2% and –2.4% respectively.

I had received a number of responses to my musings of yesterday as to whether and when Bund yields would break through 1%. Not one of them questioned the whether. There seems to be uniform agreement that it is only a matter of time before we get there and with the benefit of today’s releases it might prove to be sooner rather than later. No wonder investors are snapping up everything in sight, both in the rates and the credit space. “Buy now to avoid disappointment…” 10-year Bund yields have been off their all-time lows of last Tuesday when they briefly dipped below 1.10% in intra-day trading, but on current form it won’t be long before that level is again breached.

Speaking to a fellow strategist at a market making house yesterday I was told of what looked to him like a “liftathon” where investors appeared willing to pay the full offered side for anything in sight, so long as it had a coupon and they knew how to spell it.

Panic buying? I can understand the euro-denominated market being swept clean, not least of all in light of today’s horrid German releases. But it appears as though, despite the clear and present risk of the respective monetary authorities moving to a tightening bias, sterling and dollar bonds are seeing the same sort of blind demand.

Meanwhile, in London…

It is unlikely that the UK’s MPC will move tomorrow, although pundits are now confidently forecasting the first dissenting votes from the policy of maintaining rates at the current level of 0.5% which has prevailed since March 2009.

My mind is still for the Old Lady to move in November. Should the MPC wait beyond that date, it will quickly find itself getting perilously close to the May general election and in political black-out territory. By June it could be too late for we are getting the first signs of wage pressure building up. Pay has so far lagged through the entire recovery but the skills shortage – we still have far too many young people with joint honours degrees in ikebana and media studies and not enough brick-layers and electricians – will surely begin to tell on the income front.

The MPC will be loath to have its hands tied until June 2015 and must, in my opinion, bite the bullet and make the first move. I can’t see an initial rise in base rate from 0.5% to 0.75% bringing the recovery to a halt and pushing this nation of people who love to buy what they don’t need with money they don’t have into the economic abyss. A small signal of intent would, however, not go amiss.

In the US, we had the hawkish Richard Fisher of the Dallas Fed comment yesterday on Fox News that the FOMC was generally “coming in my direction” and that he therefore had no need to dissent. With stronger figures coming through from the labour market and with the soft GDP growth elephant no longer in the room, the FOMC might be emboldened.

The Bank of England set the precedent for underestimating the growth momentum which can quickly build up when the right things are pointing in the right direction and I’m certain that Janet Yellen and her merry men will never want to find themselves accused of having been caught napping. The Fed has to stay ahead of the curve without actually knowing where the curve is. My money remains on April which seems to be more or less how the euro-dollar strip is pricing now with white Marches at 0.375% and white Junes at 0.565%.

Scotland, Darling…

Meanwhile the gloves were off yesterday in Scotland where Alex Salmond and Alistair Darling conducted their first 2 hour TV debate on independence. Salmond was clearly trounced, not least of all when asked what his new country was going to use for a currency. His weak reply was that it would retain the pound for the pound, in his view, is as much a Scottish pound as it is an English one. Wrong.

Darling is a quiet man but it was he who, as Chancellor of the Exchequer, took all the right decisions in the darkest days of 2008 – George Osborne inherited a pretty well constructed and well considered financial life raft which had prevented the banking system from sinking without trace. Now Darling could be set to be the one who equally, without bluster, could preserve the Union. He might, at some point in the future, be recognised as one of the finest and most effective political characters of his generation.

Forget the invisible Scotsman, hail the quiet one.

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