It seems strange that the end of the first quarter of the year is already peeping over the horizon before the year has decided what it wants to be when it grows up.
Week 16 could prove to be pivotal as it brings us the FOMC meeting as well as the Dutch elections, both of which will, in all likelihood, cause less ructions than many might have feared. There is, of course, also the possibility that Theresa “Kitten Heel” May might trigger Article 50 this week but I think it would be politic of her to wait until after the 60th anniversary jamboree for the Treaty of Rome has taken place.
Somewhere in the back of my mind I have a memory of Alan Greenspan talking to markets ahead of the first tightening in February 1994 and suggesting that anybody who was not positioned for it would have to be mad. In the end, the reaction to the rate move and to the subsequent ones which took Fed funds from 3% to 5.5% between February and November of that year was fierce and many a shirt was lost along with the odd job or two.
In the current case we’ve already had two shifts higher and another one on Wednesday has been signalled so clearly that you’d have had to be in another solar system to have missed it. That said, there is a possibility that the FOMC might choose to go by 50bp and not 25bp but, to be frank, the chances of that happening are barely any higher than those of them leaving rates unchanged. And to go with Greenspan, anybody who hasn’t priced the tightening into their model must be mad.
There was nothing in Friday’s February US labour market report that disappointed and even the much vaunted participation rate and underemployment rate rose and fell to 63% and 9.2%, respectively. The headline nonfarm payroll was stronger than forecast at 235,000 (200,000 expected) and the revision of the January release to 238,000 from 227,000 underlined the strength of the US labour market. The fly in the ointment, if you wish, is the persistent absence of wage pressure, which should have the central bank celebrating non-inflationary expansion but it won’t entirely as it doesn’t fit any empirical expectations and thus confuses the issue. That alone, however, will not stop what some see as a tightening cycle but others mark as nothing more than a long overdue normalisation of monetary policy. Best, for this week, we tick the 25bp box and move on.
GOING DUTCH
On to the Dutch elections. How can it be that a significant part of the electorate of one of the world’s richest nations – average income in something in the region of US$53,000 – could choose to go rogue and support a right wing, xenophobic, populist movement? The answer is as simple as it is wrong. Popular perception is that we, and the Dutch, have worked hard to build a strong and successful economy and we don’t want anybody from anywhere around the world to come sailing in and living in comfort and at no cost on the back of our and our fathers’ labours. That the Dutch economy, just like that of pretty much every industrial nation, the US included, is anchored on a foundation of low cost, aspirational immigrant labour can easily be forgotten when entire quarters of a town or village turn into “foreign” enclaves.
Yes, there is a problem and no, Geert Wilders does not have the solution. The outcome of Wednesday’s elections might in fact, with a good showing by Wilders and the Freedom Party, be very positive. In order to keep Wilders out of office – normally the largest party seeks to form the coalition government – the other parties might have to swallow some of their pride and create a true rainbow coalition. The Dutch have a reputation for being a pragmatic lot and I’d hope to see a broad-based government that acknowledges that money can’t buy you love. A wealthy electorate is saying that it might be time to review the cost/benefit analysis. There is no revolution taking place but a warning shot will have been fired across the boughs of the political establishment. The effect on markets will, most probably, be negligible and if that is so, then the political risk premium can also be taken out of France and, to a lesser extent, Germany.
TUCKER’S LUCK
All change at HSBC. As Chairman Douglas Flint prepares to clear his office in favour of Mark Tucker, currently CEO of AIA Group, the latter is immediately challenged with finding a replacement for HSBC’s mercurial CEO Stuart Gulliver. Flint rose gently to the top through the CFO’s office while Gulliver fought his way across the jungle of the bank’s trading floors. Both are, more or less, career-long HSBC men. The bank has long held on to the principle of breeding its own leadership through the long process of the international manager system, which in many ways resembled the Colonial Office.
IMs signed up for life and the banks moved them at will while at the same time taking care of them, their families, their careers and their retirements. HSBC had, in other words, a deep and meaningful corporate culture. Hence, while “culture” was the great bogeyman of the global financial crisis, the bank which really did have a corporate culture fared pretty well. The “culture” that failed was the one of the hired gun, the sacrifice of everything and anything for profits and dividends. The closed shop, internal promotion system that HSBC thrived on might not have been perfect but it has done its shareholders and its staff alike no particular harm. Goldman Sachs, let’s not forget, also promotes from within and, love ‘em or hate ‘em, they are still the best of breed. The results of chequebook growth can be seen in Deutsche Bank, in Barclays, or in some of the Swiss banks where pump and dump management prevailed.
This is not to say that it is wrong to bring in Mark Tucker – Flint was a compromise candidate last time round when the bank got close to appointing an external candidate to the chair – but the strength of HSBC is that it promotes people for whom the brand is as important as the P&L. Shares reacted positively to the announcement this morning, which they should do when succession becomes clearer but I hope that Tucker doesn’t feel the need to write a big cheque to another outsider, just for the sake of it.
CRUDITÉS
This time last week I noted that if oil isn’t going any higher, then it must go lower. At that point WTI was trading just above US$53 per barrel. On Friday it closed at US$48.49, post Opec lows and the first time in three months that is has fallen below US$50. This is unlikely to mark the beginning of another bear market for the black stuff but it gives succour to those who don’t give any more credence to Opec promises than they do to the letters in the post that tell them that they have just won a million dollars in a lottery they never entered and that they will get the cash released if they send US$1,000 to man in Lagos.
Finally, on Friday the SEC rejected the first application for a Bitcoin-based ETF. Bitcoin immediately tanked 8% but is bouncing back as the refusal was more a function of the proposed structure of the ETF and there are two more in the works. If you want a bit of volatility, you know where to look.
Have a good week.