MacroScope

Obama impatient with EU over Russia

The G7 has said tougher sanctions on Russia could be imposed as soon as today. EU ambassadors  are holding an emergency meeting in Brussels.

The EU will extend travel bans and asset freezes to more people involved in the Ukraine intervention. For now, Washington is treading the same path though maybe more explicitly targeting Vladimir Putin’s “cronies”.

Barack Obama is already looking ahead to a third round of measures and hinted at impatience with Europe, saying there had to be a united front if future sanctions on sectors of the Russian economy were to have real bite.

One key question for this week’s measures will be whether Rosneft’s Igor Sechin and Gazprom’s Alexei Miller are put in the firing line this time. A top Obama aide said the measures would target people in Putin’s inner circle who have a significant impact on the Russian economy and the companies they control, and would also curb high-tech exports to Russia’s defense industry.

In eastern Ukraine, there’s been a lot of brinkmanship over the holding by separatists of eight European observers who were there under the auspices of the OSCE.

Scrambling to flesh out skeleton Fed board

“It’s about time” was the general reaction when on Thursday the Senate Banking Committee scheduled a vote on Barack Obama’s nominees for the Federal Reserve board. Not that Stanley Fischer, Lael Brainard and Jerome Powell (a sitting governor who needs re-confirmation) have been waiting all that long; it was January that the U.S. president nominated them as central bank governors, and only a month ago that the trio testified to the committee. The urgency and even anxiety had more to do with the fact that only four members currently sit on the Fed’s seven-member board and one of those, Jeremy Stein, is retiring in a month. The 100-year old Fed has never had only three governors, and the thought of the policy and administrative headaches that would bring was starting to stress people out. After all, the Fed under freshly-minted chair Janet Yellen is in the midst of its most difficult policy reversal ever.

“Boy it would be more comfortable if there were at least five governors and hopefully more” to help Yellen “think through these very difficult communications challenges,” said Donald Kohn, a former Fed vice chair. Former governor Elizabeth Duke, who stepped down in August, said one of the Fed board’s strengths is its diversity of members’ backgrounds. “With fewer people you don’t have as many different points of view on policy,” she said in an interview.

The Senate committee votes on the three nominees April 29. But they can’t start the job until the full Democratic-controlled Senate also schedules a vote and gives them the green light.

Nearer to the brink

De-escalation?  Forget it. Ukrainian forces killed up to five pro-Moscow rebels in the east yesterday and Russia launched army drills near the border in response.

The big question now is whether Russian troops will cross into eastern Ukraine following a constant stream of warnings from Moscow about the security of Russian speakers there.

Foreign Minister Sergei Lavrov is expected to have a telephone conversation with U.S. Secretary of State John Kerry, following last week’s Geneva accord which aimed to pull things back from the brink. Kerry said yesterday that Russia’s “window to change course is closing” and U.S. President Barack Obama said tougher sanctions were ready to go. There is no question of Western military intervention.

Talking the talk

European Central Bank President Mario Draghi delivers a speech in Amsterdam which will fixate the markets following his recent statement that a stronger euro would prompt an easing of monetary policy.

Most notably via his Clint Eastwood-style “whatever it takes” declaration the best part of two years ago, Draghi has proved to be peerless in the art of verbal intervention. But even for him there is a law of diminishing returns which may require words to be backed up with action before long. 

In the 12 days since he put the euro firmly on the ECB’s agenda, the currency has actually weakened a little and certainly shied away from the $1.40 mark which many in the market see as a first red line for the euro zone’s central bank. That is probably because investors expect action from the ECB  soon and if so, there are good reasons to think they may be wide of the mark.

U.S. new home sales: the good, the bad and the ugly

What’s happening with the U.S. housing market?

Ask three different economists and you’ll get three different answers.

While that’s not anything new, the different ways some analysts have spun the surprise — one of the biggest on U.S. data in many months — is exceptionally far from anything resembling a consensus.

New home sales – a leading indicator for housing – plummeted by 14.5 percent in March, totally wrong-footing the Reuters consensus of forecasters. They were expecting modest improvement after a decidedly poor winter for the U.S. economy on nearly all measures.

 

 

 

 

 

 

 

 

 

Here’s how some of them explained away the data.

 

The good

“Based on the data, it is easy to conclude that housing demand is rolling over, perhaps due to higher mortgage rates. Yet, this conclusion is out of synch with home prices which continue to appreciate rapidly and indeed show no sign of slowing. We believe that the answer to these seemingly diverging trends lies on the supply side. Measured as a percentage of the housing stock, total housing inventory – including shadow or pending supply – stands at the lowest level since 2005, when the housing boom was in full swing. While inventory shortages may be curtailing sales, they are unambiguously positive for residential construction and for the broader economy going forward.” – Aneta Markowska and Brian Jones, Societe Generale

Will French numbers add up?

French President Francois Hollande’s cabinet meets to adopt a new debt reduction plan.

After outlining 50 billion euros of savings for 2015-2017 to help pay for consumer and business tax cuts, the government is due to sign off on already delayed deficit reductions to bring it, eventually, to three percent of output as demanded by Brussels.

The European Commission has taken a dim view of any further relaxation, having previously granted Paris two years extra leeway. The French government insists it will meet its targets but appears to be trying to deliver one message to Brussels and another to its electorate, with domestic politics likely to hold sway.

Five days on, Ukraine accord at risk of unravelling

An international agreement to avert wider conflict in Ukraine, brokered only five days ago, is teetering with pro-Moscow separatist gunmen showing no sign of surrendering government buildings and Kiev and Moscow trading accusations over who was responsible for killings over the weekend.

Washington, which signed last week’s accord in Geneva along with Moscow, Kiev and the European Union, said it would decide “in days” on additional sanctions if Russia does not take steps to implement the agreement. U.S. Vice President Joe Biden is in Kiev where he is expected to announce a package of technical assistance.

So far, markets’ worst fears have not materialized but with thousand of Russian troops massed on the frontier with Ukraine and deadly clashes between Ukrainian forces and pro-Russian separatists, it would not take much to change that.

Deconstructing UK job numbers

On the face of it, the good news for the British government keeps on coming. Britain’s economy grew surprisingly fast last year and inflation fell below the Bank of England’s target for the first time in over four years in January. The government this month even got a nod from the International Monetary Fund which only last year criticized its austerity programme.

The latest confidence boost came from jobless figures on Wednesday. Not only did the unemployment rate fall to a five-year low of 6.9 percent but pay growth caught up with  inflation for the first time in nearly four years. That provides Prime Minister David Cameron’s government with another lift ahead of the 2015 elections, after it has come  under fire from the Labour opposition for overseeing a fall in living standards.

But a closer look at the data suggests a more nuanced picture.

Indeed, total pay growth in February reached 1.7 percent – matching the 1.7 percent rise in consumer prices in February and above their 1.6 percent increase in March.

Euro will rally further, say the most accurate FX forecasters

The euro will rise even more, according to some of the top foreign exchange strategists who accurately predicted resilience in the common currency over the past year.

If it does, policymaking will get even tougher for Mario Draghi and the European Central Bank, who are already grappling with inflation at a four-year low and well below the bank’s target.

In 2013, the euro was the best performer among the majors, gaining almost five percent against the dollar, wrong-footing the consensus view in Reuters polls during that period.

Greeks bearing bonds

Greece will sell its first bond in four years.

We know it will aim to raise up to 2.5 billion euros of five-year paper via syndication and wants to pay less than 5.3 percent – remarkable since only two years ago it was tipped to crash out of the euro zone and yields on 10-year debt peaked above 40 percent on the secondary market. They dropped below six percent for the first time since 2010 on Wednesday.

Athens has no pressing funding needs but wants to test the waters as part of its strategy to cover all its financing from the market by 2016. It still has a mountain to climb and may well need more debt relief from its EU partners to corral a national debt that is not falling much from 175 percent of GDP. 

But for all that, it’s a propitious time to borrow. Peripheral euro zone bond yields have tumbled this year, benefiting from wobbles in emerging markets, and now European Central Bank consideration of printing money has given bond prices a further lift.