Having revealed his own economy to be in “a state of crisis,” Japanese Prime Minister Taro Aso today told the Financial Times in London that the German government should get off its Teutonic high-horse and get to grips with the essence of fiscal stimulus. Mr. Aso told the FT, “There are countries that understand the importance of fiscal mobilization and some that do not, which is why, I believe, Germany has come up with their views.”
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The words of warning underscore the likely lack of action that many expect from the conclusion of the London G20 meeting. Japan's own problems took roots throughout the 1980's due to excessive bank balance sheet lending and asset appreciation, which drove the Nikkei close to 40,000 at the end of the decade. Failure to deal with problem loans in the aftermath ensured the Japanese system lay pinned to the seabed for more than a decade after the bubble burst, and today the benchmark Nikkei carries a similar index value to the S&P some 20 years later. The Japanese nation has been through a period of sincere chest-beating throughout its decade of torpor and hardly needed the world's largest economy to go belly up, just when they were enjoying the recovery.
So the veiled assault on Germany's fiscal fear is one spoken from the gut and one that deserves a page one headline of, “Aso lays bare G20 split.” Yesterday's Eurozone inflation data halved in February to 0.6% from 1.2% and reveals a real chance that at as early as the summer, the ECB will be faced with the prospect of deflation. Arguably, in a declining economy, falling prices are harder to eradicate than rising prices. Just ask Mr. Aso if you have any doubts about that.
The euro accordingly has felt a little pressure overnight as dealers prepare for a potential interest rate cut on Thursday. But speculation is growing that the ECB might yet launch some element of quantitative easing, not just to stay in line with other central banks, but because monetary policy has proven to be just one minor part of the solution in spurring lending. We'd argue that failure to join the club will ultimately be a bad move for the Eurozone and there will be additional pressure on its currency going forward for failing to prevent a deepening recession turning worse. We're not sure what the Japanese for, “See! We told you so!” is, but we're pretty sure that as and when Europe's prices turn negative, the rear-view crowd will be telling the ECB that rates should have been cut faster and the governments that fiscal spending should have been sooner.
At $1.3267 the euro is unchanged overnight, while it has lost a little ground to the Japanese yen at ¥130.80. The Japanese Tankan index of manufacturers revealed the most pessimistic conditions since 1974. Investors' angst continues to center on the yen in response to the ongoing release of dire data. Arguably, a far better target would be the euro where deflation is a threat and a raft of fresh data released today highlights the worsening situation.
Unemployment in the region rose to 8.5% - a three-year high. Germany's retail sales numbers showed shoppers stayed clear creating a drop of 0.2% instead of the consensus rise of 0.3%. A survey of manufacturers confirmed an ongoing sign of Eurozone decay as further industrial contraction was indicated. When you stop to think that the dollar took it in the neck because of the Fed's announced quantitative easing and compare the prospects for each economic area, the U.S. wins hands down. The failure to implement quantitative easing in the Eurozone for fear of a collapse of the common budget boundaries that created the single euro currency might just turn out to be the reason why the euro collapses.
A rebound in British manufacturing helped rally the troops around the pound today, which rose against both the dollar to $1.4350 and the euro, where one euro buys 92.30 pennies.
Weakness in commodity markets is weighing on the commodity dollars today. Crude oil for May delivery is off almost $2.00 at $47.60 in early trade, which is substantially below the rally peak at $54.50 last week. That move was inspired by expectations that growth was set to return inspired by U.S. quantitative easing. As we know, that impacted the dollar negatively yet at the same time provided a double-whammy of enthusiasm for commodities, which typically trade inversely to the performance of the dollar.
Today's ADP payroll data bodes badly for Friday's key non-farm payroll report for the U.S. in which the current expectation will see a fifteenth consecutive month of job losses in which five million jobs will have been lost. That would send the unemployment rate careening towards double-digits at 8.5% from 8.2% as more companies see sales slump in the face of weakening consumer spending and tightening credit conditions.
The Aussie and the Canadian dollars look increasingly vulnerable here without firm evidence of a turnaround in economic data. Overnight, Aussie retail sales took a turn for the worse and it appears a matter of time before bears assault its currency.