MacroScope

Shock now clearly trumps transparency in central bank policymaking

The days of guided monetary policy, telegraphed by central banks and priced in by markets in advance, are probably coming to an end if recent decisions around the world are any guide.

From Turkey, which hiked its overnight lending rate by an astonishing 425 basis points in an emergency meeting on Tuesday, to India which delivered a surprise repo rate hike a day earlier, central banks are increasingly looking to “shock and awe” markets into submission with their policy decisions.

A wide sample of economists polled by Reuters on Monday already expected a massive rise of 225 basis points by Turkey’s central bank to stop a sell-off in the lira. Instead it doubled the consensus and opted for the highest forecast.

Gizem Oztok Altinsac, chief economist at Garanti Securities in Istanbul, who correctly called the size of the Turkish rate hike said:

I was expecting this kind of a move because Brazilian interest rates are at 11 percent and they (Turkey) have to give something close to that and maybe somewhat above.

Brazil’s need for dollars to shrink in 2014 – but the long-term view remains bleak

Brazil’s current account deficit will probably narrow this year. That may sound as a reassuring (or rather optimistic) forecast after the recent sharp sell-off in emerging markets, which prompted Turkey to raise interest rates dramatically to 12 percent from 7.75 percent in a single shot on Tuesday. But that was the outlook of three major banks – HSBC, Credit Suisse and Barclays - in separate research published earlier this week.

The gap, a measure of the extra foreign resources Brazil needs to pay for the goods and services it buys overseas, will probably shrink to 3.0-3.4 percent of GDP in 2014, from 3.7 percent last year, they said.

“Brazil’s external vulnerabilities are overstated,” claims Barclays’ Sebastian Brown, adding: “the central bank’s FX intervention program should limit bouts of excessive BRL weakness.”

Ker-pow! Turkey leaps to lira’s defence

 

Turkey’s central bank bit the bullet last night, despite Prime Minister Tayyip Erdogan calling for it to hold firm just hours beforehand, and what a bite it was.

After months trying to avoid a rate rise it put 4.25 full percentage points on the overnight lending rate, taking it to 12 percent. No one can accuse Governor Basci of being under the government’s thumb now. The move vaulted expectations.

The big questions for Turkey are what such a magnitude of tightening, which the central bank said would persist, does to a faltering economy and how Erdogan, who is on a two-day trip to Iran, reacts.

The UK economy – what a difference a year makes

This time last year, an imminent sovereign credit rating downgrade and a 1-in-3 chance of a new recession dominated talk on Britain’s economy.

To say 2013 turned out better than expected - at least by the simple yardsticks of economic growth and unemployment - would be an understatement, then, even if tepid wage growth, weak productivity and a rising cost of living still dog the economy.

None of the 63 forecasters polled by Reuters in Jan last year predicted that growth for the 2013 as a whole would hit 1.9 percent, as official data showed on Tuesday.

Crunch day for Turkey, and Ukraine

Hard to look beyond Turkey today. The central bank will issue its quarterly inflation report and has called an emergency policy meeting thereafter and will deliver a verdict at midnight local time. All very cloak and dagger.

The central bank, under heavy political pressure, has so far not raised interest rates but is instead burning through its reserves to defend the tumbling lira with only limited success.

It has floated the idea of “additional tightening days” when it will fund the interbank market at a higher rate, which is essentially monetary tightening by the back door. But in the throes of a full-on emerging market selloff it’s hard to see that doing the trick.

Emerging wobbles

This week will go a long way to determining whether a violent emerging market shake-out turns into a prolonged panic or is limited to a flight of hot money that quickly fizzles out.

On our patch, Turkey is under searing pressure, largely of its own making and that is the theme here. Yes, the Federal Reserve’s slowing of money printing is the common factor, prompting funds to quit emerging markets, but it is those countries with acute problems of their own that are really under the cosh.

Prime Minister Tayyip Erdogan’s purging of the police and judiciary in response to a corruption inquiry that has got uncomfortably close to him has unnerved investors. The central bank, under political pressure, has not raised interest rates but is instead burning through its reserves to defend the lira with only limited success.

Will rounding cents bring euro zone down?

The 18-country euro zone has had a rough ride in the past 6 years, and even with the glimmers of good news reaching the darkest corners of the debt crisis, the European Central Bank has been anything but ready to sound a crisis-over siren.

Right after ECB President Mario Draghi warned against undue optimism, the central bank has identified a new threat to the common currency’s integrity – rounding up or down small change.

Belgium plans to allow retailers to round 1 and 2-cent coins to the closest five cents, in a similar fashion as Finland and the Netherlands already do. But the ECB had harsh words against such going-it-alone moves, published in a legal opinion published on its Internet site.

Why are US corporate profits so high? Because wages are so low

U.S. businesses have never had it so good.

Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.

The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago.

Coincidence?

Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs:

Ireland: bailout poster child, but hardly textbook

Amid the euphoria surrounding Ireland’s removal from junk credit rating status, it’s easy to get swept along by the consensus tide of opinion that the Emerald Isle is the “poster child” for euro zone austerity.

But were another country to find itself in Ireland’s unfortunate financial predicament now, few would suggest it follow the path Dublin took.

The Irish government assumed the entire nation’s private banking sector debt in 2008 after then finance minister Brian Lenihan explicitly guaranteed all bank debt in the country. It was hailed as a masterstroke at the time, but in an instant Ireland’s hands were tied and its options all but evaporated. Even the stuff that posed no systemic risk was put on the government’s – the taxpayers’ – books. This prevented the collapse of the financial system, but at a price: the country’s sovereign debt load almost doubled to around 100% of annual economic output, and in order to do that it was forced to take an €85 billion bailout from international creditors two years later.

Davos Day Two — Rouhani, Lew and Lagarde

Day one in Davos showed the masters of the universe fretting about Sino-Japanese military tensions, the treacherous investment territory in some emerging markets and the risk of a lurch to the right in Europe at May’s parliamentary elections which could make reform of the bloc even harder.

Today, the focus will be on Iranian President Hassan Rouhani (and his main detractor, Israel’s Netanyahu). Presumably he’s there to woo the world of commerce now sanctions are to be relaxed in return for Tehran suspending enrichment of uranium beyond a certain level. Anything he says about Syria’s peace talks, which have so far been more hostile than conciliatory, will instantly be headline news.

Other big name speakers are U.S. Treasury Secretary Jack Lew, IMF chief Christine Lagarde, who is going around warning about the threat of European deflation, Australian premier Tony Abbott, who is running the G20 this year, and a session featuring the BRICS finance ministers.