MacroScope

Escalation in Crimea

Worrying escalation in Crimea. Interfax reports Russian servicemen have take over a military airport in the Russian-speaking region of Ukraine and armed men are also patrolling the airport at Crimea’s regional centre of Simferopol.
Kiev has condemned the moves as an “armed invasion”.

There has been no bloodshed and there are more constructive noises from Moscow to weigh in the balance.

Russian President Vladimir Putin has ordered his government to continue talks with Ukraine on economic and trade relations and to consult foreign partners including the IMF and the G8 on financial aid.

This is a developing theme from Moscow, military muscle flexing on the one hand while making encouraging noises about an aid package for Ukraine on the other. The interesting thing is this is the first time Putin has put his name to the call for financial help. Which impulse will prevail is the $64 million question. 

The United States has told Russia to demonstrate it was sincere about its promise not to intervene in Ukraine.

Japan-style deflation in Europe getting harder to dismiss

To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks – just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.

That front is shifting westward, to the euro zone.

Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.

In many ways, policymakers fear deflation more than inflation as it’s a more difficult spiral to exit. After all, interest rates can only go as low as zero and if that doesn’t kickstart spending, they’re in trouble. Again, just ask the Japanese.

Cold War chill over Ukraine

Dramatic twist in the Ukraine saga last night with a conversation between a State Department official and the U.S. ambassador to Ukraine posted on YouTube which appeared to show the official, Assistant Secretary of State Victoria Nuland, deliberating on the make-up of the next government in Kiev.

That led to a furious tit-for-tat with Moscow accusing Washington of planning a coup and the United States in turn saying Russia had leaked the video, which carried subtitles in Russian. A Kremlin aide said Moscow might block U.S. “interference” in Kiev.

Nuland is due to give a news conference today after her visit to Kiev.

Vladimir Putin is likely to meet Ukrainian President Viktor Yanukovich in Sochi as the Winter Olympics get underway. It could be awkward for Yanukovich’s opponents if they look like western pawns.

High unemployment putting the ECB in isolation

 

Unemployment in the euro zone is stuck at 12 percent, an already high rate that masks eye-popping rates in many of its struggling member economies.

But in a press conference lasting one hour, European Central Bank President Mario Draghi mentioned the problem of high unemployment only a few times – satisfied with the central bank’s usual stance of imploring euro zone governments to implement structural reforms to their labour markets, on a case by case basis.

Draghi said:

 … although unemployment in the euro area is stabilising, it remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on the pace of the economic recovery.   

ECB – stick or twist?

 

The European Central Bank meets today with emerging market disorder high on its agenda.

It’s probably  too early to force a policy move – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January, way below the ECB’s target of close to but below two percent.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.

PMIs on the up

Slowing growth in the Chinese and U.S. factory sectors earlier this week did nothing to soothe frayed market nerves and put a firm focus on today’s service sector PMI surveys in Europe along with the equivalent U.S. report and a weekly jobless number there.

While the world’s two largest economies suffered a hiccup, euro zone factories had their best month since mid-2011 in January. But it is the service sector that dominates in Europe. Flash readings, which are not usually revised much, showed the euro zone services reading hit a four-month high with France lagging Germany again although even its number rose. Today we’ll get the first numbers for Italy, Spain and Britain.

The reports will be the last meaningful pieces of evidence the European Central Bank gets to chew over before Thursday’s policy decision. Emerging market tumult and its possible effect on already vanishing inflation will be bang at the top of its agenda.

Euro zone inflation falls again; economists base ECB rate cut calls on deja vu

Euro zone inflation has dipped again and some forecasters are hedging their bets on the policy response by saying the European Central Bank could either cut rates this week or sometime in the next two months.

That lack of conviction, although not a recent phenomenon, is driven by memory of the ECB’s surprise cut in November after a similar drop in inflation and a nagging belief that things have not worsened enough in the interim to warrant another.

Only two of 76 analysts - Barclays and IFR Markets – in a Reuters poll conducted before news on Friday that January euro zone inflation fell to 0.7 percent said the ECB would trim its refinancing rate below 0.25 percent this week.

ECB under pressure, March move more likely

The European Central Bank meets on Thursday with emerging market tumult bang at the top of its agenda.

It’s probably too early to force a policy move this week – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.
Euro zone and UK PMI surveys for January will give the latest on the state of Europe’s economic recovery this morning. The Markit/HSBC manufacturing PMI for China has fallen to a six-month low.

A week before emerging-market turmoil, a prescient exchange on just how much the Fed cares

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The last seven days has been a glaring example of fallout from the cross-border carry trade. That’s the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.

The Fed’s decision on Wednesday to keep cutting its stimulus effectively ignores the turmoil in such developing countries. And while the Fed may well be right not to overreact, it makes one wonder just how much attention major central banks pay to the carry trade and its global effects — and it brings to mind a prescient exchange between some of the brightest lights of western economics, just a week before emerging markets were to run off the rails.

On January 16, minutes before Ben Bernanke took the stage for his last public comments as Fed chairman, the Brookings Institution in Washington held a panel discussion featuring former BoE Deputy Governor Paul Tucker, Harvard University professor Martin Feldstein and San Francisco Fed President John Williams. They were asked about the global effects of U.S. monetary policy:

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.