MacroScope

For markets, non-farms eclipse G20

By Mike Peacock
September 6, 2013

The G20 will wrap up with entrenched positions on Syria and a little more entente over the emerging market turmoil prompted by the Federal Reserve’s impending move to slow the pace of its dollar creation programme.

The BRICS are plugging away with their plan for a $100 billion currency reserve pool to help calm forex volatility but officials admitted this is still a work in progress and won’t be deployable soon.

So, as China and Russia told India – and Washington said more broadly – it’s still incumbent upon countries to put their own houses in order.
The unsurprising rule of thumb is that countries with profound domestic problems have been the ones hit hardest since Ben Bernanke first put up his tapering plan in May. So, while the Fed may have caused the ripples, the fact the rupee is drowning is more due to India’s gaping current account deficit and general economic malaise.

The fact China and Russia have been making that point at the G20 is telling in terms of emerging market unity.

The final G20 communique is set to echo the finance ministers’ language in July, saying changes to monetary policy must be “carefully calibrated and clearly communicated”. There’s not a whole lot more that can be done given the Fed has ample domestic economic reasons to begin slowly rowing back.

The bottom line is that even if the G20 manages to beef up the form of words it issues, it will be utterly eclipsed by today’s monthly U.S. jobs report which will go a long way to dictating whether the Fed begins slowing its pace of money-printing later this month or not.

Equally, debate in Congress will probably have far more influence on any U.S. attack on Syria than international opposition at the G20.
That aside, the G20 will trumpet agreements on tax avoidance, and derivatives and shadow banking regulation. Progress on the former is incremental and some delegations were concerned about soft-pedalling on the latter.

While we’re on central banks, it’s worth pondering Mario Draghi’s signal yesterday that interest rates could yet be cut further and more liquidity thrown into the financial system (another LTRO?) if the ECB judges money market rates to have risen too high. That contrasts with the Bank of England’s effort to push money rates down by asserting that official interest rates won’t rise for the best part of three years.

The ECB is often portrayed as the slowest mover of the top central banks. But Draghi is a different animal (remember the 1 trillion euros of long-term liquidity and OMT?). In July, he ushered through forward guidance for the first time, last month he said that was all the market would get, then just a month later has issued a string of actions that he might take if the markets don’t behave.

Euro zone money rates didn’t budge much yesterday but the short sterling strip moved aggressively to price in an earlier British rate rise. Actions speak louder than words. It will be interesting to see if Mr. Carney follows Draghi’s lead.

The great and good of the Italian political and business elite gather on the shores of Lake Como for an annual shindig – a good opportunity to gauge the level of alarm about the impending vote on barring Silvio Berlusconi from public office and the possibility that his followers could try and pull down the coalition government, and also the state of the Italian economy and its banks.

The OECD this week raised its growth forecasts for German, Britain and France but left Italy languishing at a 1.8 percent contraction this year.
German exports have posted a surprise fall in July, while imports rose albeit by less than expected, narrowing the trade surplus. France’s trade deficit has also widened a little while consumer confidence has ticked up.

Italian trade figures are due in a bit along with Spanish and UK industry output data. Perhaps most interesting will be Germany’s industrial production figure at 1000 GMT. Yesterday, industry orders were shown to have tumbled by 2.7 percent although that followed a five percent leap in June so the trend is still firmly upwards.

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