Holiday Spending “Hopes” Crumble As Income Gains Stagnate

But this year was supposed to be different… Early-year prospects for a revival in consumer spending quickly faded in the wake of the lagged impact of the $148 billion tax hike that began the year. As Bloomberg’s Joe Brusuelas notes in the following brief interview, combined with a slower pace of hiring and sluggish wage growth, the result will probably be another in a string of disappointing holiday shopping seasons. It is increasingly doubtful that consumers have the wherewithal to meet the ambitious National Retail Federation forecast for a 3.9% increase in holiday spending to $602.1 billion. Brusuelas believes a 2 to 2.5% increases appears closer to the mark given the economic and policy challenges in place this year.

Via Bloomberg Briefs,

First, starting Nov. 1 one-sixth, or about 48 million, of individuals receiving food stamps will see a net loss of almost $16 billion in transfer payments due to cuts in the Supplemental Nutrition Assistance Program (SNAP).

 

Those in the lower two quintile of income earners, which receive the bulk of U.S. SNAP payments, will probably transfer outlays on discretionary items like electronics and apparel to inelastic non-discretionary categories such food and utilities. Accordingly, large retail operations such as Krogers, Target and Wal-Mart have reduced their holiday shopping estimates. These reductions, in part, are being attributed to the reduction in SNAP payments, the impact of the government shutdown and overall tepid job and income growth, according to the retailers.

Second, recent fundamental data on manufacturing activity, durable goods orders and hiring slowed noticeably, even before the government shutdown, during the first three weeks of this quarter. With hiring during the past three months barely sufficient to meet demographic needs, and inflation-adjusted personal disposable income up a scant 0.9 percent on a year-ago basis, it is unsurprising that both topline retail sales and sales excluding autos, building materials and gasoline, which feeds into the calculation of GDP, have slowed since June of this year, reflecting a deceleration in overall economic activity.

 

Third, the inventory buildup among retailers is also somewhat troubling given the macroeconomic slowdown and probable fiscal restraint due to policy shifts and standoffs that have characterized the second half of the year. Retailers have increased their inventories by about 6 percent compared to year-ago levels, in contrast with a 5 percent decline in 2012 versus 2011 levels.

Given the well-recognized problems with the JC Penney inventory overhang from earlier in the year, retailers such as the Gap have already begun aggressive discounting. Many have annoucned plans to open stores on Thanksgiving in order to add another shopping day to the season. While that may help bolster sales, the severe discounting will compress margins and add to bottom line woes in the quarter.

Perhaps more troubling is the likelihood that the large inventory build will spill over into the first quarter next year. There is also likely to be a repeat performance of “fiscal follies” in Washington, creating an even greater drag on overall economic growth.

While firms that employ state-of-the-art inventory optimization, such as Wal-Mart, began pulling back on orders in mid-September to mitigate the slowdown in consumer demand, most firms in the supply chain do not have that ability. Carol Lapidus, the National Consumer Products Industry Leader at McGladrey (see the clip above) noted that middle market companies that sell into retail for 2014 are getting smaller. Given where the U.S. is in the business cycle, the opposite should be occurring, which should provide a sober note heading into what will probably be another difficult holiday shopping season.

Finally, an unusual confluence of calendar quirks will result in a net decline of five selling days compared to 2012 in between Thanksgiving and Christmas. In addition, with Hanukkah starting on Nov. 28, a portion of traditional holiday spending will probably be pulled forward into late November and early December, creating a scenario where retailers may be tempted into even greater discounting.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/RBzFKp5igjA/story01.htm Tyler Durden

Holiday Spending "Hopes" Crumble As Income Gains Stagnate

But this year was supposed to be different… Early-year prospects for a revival in consumer spending quickly faded in the wake of the lagged impact of the $148 billion tax hike that began the year. As Bloomberg’s Joe Brusuelas notes in the following brief interview, combined with a slower pace of hiring and sluggish wage growth, the result will probably be another in a string of disappointing holiday shopping seasons. It is increasingly doubtful that consumers have the wherewithal to meet the ambitious National Retail Federation forecast for a 3.9% increase in holiday spending to $602.1 billion. Brusuelas believes a 2 to 2.5% increases appears closer to the mark given the economic and policy challenges in place this year.

Via Bloomberg Briefs,

First, starting Nov. 1 one-sixth, or about 48 million, of individuals receiving food stamps will see a net loss of almost $16 billion in transfer payments due to cuts in the Supplemental Nutrition Assistance Program (SNAP).

 

Those in the lower two quintile of income earners, which receive the bulk of U.S. SNAP payments, will probably transfer outlays on discretionary items like electronics and apparel to inelastic non-discretionary categories such food and utilities. Accordingly, large retail operations such as Krogers, Target and Wal-Mart have reduced their holiday shopping estimates. These reductions, in part, are being attributed to the reduction in SNAP payments, the impact of the government shutdown and overall tepid job and income growth, according to the retailers.

Second, recent fundamental data on manufacturing activity, durable goods orders and hiring slowed noticeably, even before the government shutdown, during the first three weeks of this quarter. With hiring during the past three months barely sufficient to meet demographic needs, and inflation-adjusted personal disposable income up a scant 0.9 percent on a year-ago basis, it is unsurprising that both topline retail sales and sales excluding autos, building materials and gasoline, which feeds into the calculation of GDP, have slowed since June of this year, reflecting a deceleration in overall economic activity.

 

Third, the inventory buildup among retailers is also somewhat troubling given the macroeconomic slowdown and probable fiscal restraint due to policy shifts and standoffs that have characterized the second half of the year. Retailers have increased their inventories by about 6 percent compared to year-ago levels, in contrast with a 5 percent decline in 2012 versus 2011 levels.

Given the well-recognized problems with the JC Penney inventory overhang from earlier in the year, retailers such as the Gap have already begun aggressive discounting. Many have annoucned plans to open stores on Thanksgiving in order to add another shopping day to the season. While that may help bolster sales, the severe discounting will compress margins and add to bottom line woes in the quarter.

Perhaps more troubling is the likelihood that the large inventory build will spill over into the first quarter next year. There is also likely to be a repeat performance of “fiscal follies” in Washington, creating an even greater drag on overall economic growth.

While firms that employ state-of-the-art inventory optimization, such as Wal-Mart, began pulling back on orders in mid-September to mitigate the slowdown in consumer demand, most firms in the supply chain do not have that ability. Carol Lapidus, the National Consumer Products Industry Leader at McGladrey (see the clip above) noted that middle market companies that sell into retail for 2014 are getting smaller. Given where the U.S. is in the business cycle, the opposite should be occurring, which should provide a sober note heading into what will probably be another difficult holiday shopping season.

Finally, an unusual confluence of calendar quirks will result in a net decline of five selling days compared to 2012 in between Thanksgiving and Christmas. In addition, with Hanukkah starting on Nov. 28, a portion of traditional holiday spending will probably be pulled forward into late November and early December, creating a scenario where retailers may be tempted into even greater discounting.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/RBzFKp5igjA/story01.htm Tyler Durden

Southern Poverty Law Center Warns: “Far-Right Homophobes” Are Criticizing the TSA

Can't you feel the homophobia?You probably won’t be surprised to learn that
Mark Potok of the Southern Poverty Law Center jumped on the news
that the alleged gunman at last week’s Los Angeles Airport shooting
possessed “anti-government” literature. But you might be surprised
at how Potok describes
the critics of the TSA’s intrusive pat-downs:

The TSA, short for the Transportation Security
Administration, is an agency of the DHS charged with ensuring the
security of transportation, most notably air transportation.
Although it has not been widely singled out by Patriots, it has
been subjected to criticism by far-right homophobes, among others,
who have alleged that TSA agents engaging in hand searches are
really sexually groping travelers.

So: “far-right homophobes, among others.” Among others, yes.

from Hit & Run http://reason.com/blog/2013/11/04/southern-poverty-law-center-warns-far-ri
via IFTTT

Southern Poverty Law Center Warns: "Far-Right Homophobes" Are Criticizing the TSA

Can't you feel the homophobia?You probably won’t be surprised to learn that
Mark Potok of the Southern Poverty Law Center jumped on the news
that the alleged gunman at last week’s Los Angeles Airport shooting
possessed “anti-government” literature. But you might be surprised
at how Potok describes
the critics of the TSA’s intrusive pat-downs:

The TSA, short for the Transportation Security
Administration, is an agency of the DHS charged with ensuring the
security of transportation, most notably air transportation.
Although it has not been widely singled out by Patriots, it has
been subjected to criticism by far-right homophobes, among others,
who have alleged that TSA agents engaging in hand searches are
really sexually groping travelers.

So: “far-right homophobes, among others.” Among others, yes.

from Hit & Run http://reason.com/blog/2013/11/04/southern-poverty-law-center-warns-far-ri
via IFTTT

A.M. Links: Drone Strike Against Pakistan Taliban Leader Killed Peace Process Says Interior Minister, European Agencies Cooperated on Mass Surveillance, Toronto Mayor Wants Cops to Release Alleged Crack Video

alleged video screen cap

  • Pakistan’s interior minister
    says
    the killing of the leader of the Pakistani Taliban has
    effectively ended the attempt at a peace process in the country.
    Meanwhile,
    according
    to a new book on the Obama Administration, President
    Obama bragged to aides that he was “really good at killing
    people”.
  • The intelligence services of France, Germany, Spain and Sweden
    have
    reportedly
    been working together with the United Kingdom’s GCHQ
    on developing methods to conduct mass surveillance of Internet and
    telephone communications. GCHQ and the NSA have been criticized for
    those practices in part by some of the political leaders in the
    European countries whose intelligence services they have been
    cooperating with.
  • The White House and top lawmakers in Congress continue to

    reject
    calls for clemency for Edward Snowden, whose disclosures
    have revealed the breadth of the NSA’s mass surveillance
    programs.
  • John Kerry
    went
    to Egypt to tell Egyptians that democracy brings
    stability, which brings jobs, as part of his call for the violence
    in the country to stop. Meanwhile, the former president, Mohammed
    Morsi, claimed
    in front of the court where he is on trial that the case against
    him was illegitimate as he remained the country’s legitimate
    president.
  • The White House
    denies
    Barack Obama considered dumping Joe Biden as his running
    mate for the 2012 election.
  • Rep. Mike Michaud, who is running for governor of Maine in
    2014, has come out
    as gay.
  • Paul Ciancia has been
    charged
    with the murder of a TSA agent in last week’s shooting
    at the Los Angeles International Airport.
  • An attorney for the mayor of Toronto has called on
    the city’s police department to release a video alleged to show
    Mayor Bob Ford smoking crack. His attorney says it shows no such
    thing.

Follow Reason and Reason 24/7 on
Twitter, and like us on Facebook.
  You
can also get the top stories mailed to
you—
sign
up here.
 

Have a news tip? Send it to us!

from Hit & Run http://reason.com/blog/2013/11/04/am-links-drone-strike-against-pakistan-t
via IFTTT

Blackberry Craters After Report Company Abandons Sale, To Replace CEO, To Issue 19.2% Dilutive Convert Instead

Just over a month ago, when we shared our cynical view on the “hopium” inspired LBO of Blackberry, we commented as follows: “In other words an LBO, one which however has not only one but many outs: “There can be no assurance that due diligence will be satisfactory, that financing will be obtained, that a definitive agreement will be entered into or that the transaction will be consummated.” Which means that once the buyers figure out the potential disaster on the books, expect the final price (if any) to be revised lower as one after another MAC clause is triggered.” Not even we were right: as it turns out moments ago, the Globe & Mail reported that having looked at the BBRY, not only will the price be revised lower, but the “purchase” price will be eliminated altogether as any deal is now dead, the company will do a convert offering instead and deadpan CEO Torsten Heins is history.

Instead of selling itself, Blackberry is doing a Hail Mary convert offering, which net of all greenshoes, will amount to 19.2% equity dilution: ” If an additional U.S. $250 million of Debentures is issued and all U.S. $1.25 billion of Debentures were converted, the common shares issued upon conversion would represent approximately 19.2% of the common shares after giving effect to the conversion, based on the number of common shares currently outstanding.”

And here is the reaction…


Via The Globe And Mail,

BlackBerry Ltd. is abandoning a plan to find a buyer and will instead raise $1-billion of new funds and replace its chief executive and some directors, sources said.

 

 

The new plan will involve raising roughly $1-billion by selling convertible notes to a group of investors, according to people familiar with the transaction. Chief executive officer Thorsten Heins will depart the company, and the company will announce changes to its board, the people said.

And the official release:

BlackBerry (BBRY)(BB.TO), a world leader in the mobile communications market, today announced that it has entered into an agreement pursuant to which Fairfax Financial Holdings Limited (“Fairfax”) and other institutional investors (collectively, the “Purchasers”) will invest in BlackBerry through a U.S. $1 billion private placement of convertible debentures. Fairfax has agreed to acquire U.S. $250 million principal amount of the Debentures. The transaction is expected to be completed within the next two weeks.

 

Under the terms of the transaction, the Purchasers will subscribe for U.S. $1 billion aggregate principal amount of 6% unsecured subordinated convertible debentures (the “Debentures”) convertible into common shares of BlackBerry at a price of U.S. $10.00 per common share (the “Transaction”), a 28.7% premium to the closing price of BlackBerry common shares on November 1, 2013. The Debentures have a term of seven years. Based on the number of common shares currently outstanding, if all of the U.S. $1 billion of Debentures were converted, the common shares issued upon conversion would represent approximately 16% of the common shares outstanding after giving effect to the conversion.

 

Upon the closing of the transaction, John S. Chen will be appointed Executive Chair of BlackBerry’s Board of Directors and, in that role, will be responsible for the strategic direction, strategic relationships and organizational goals of BlackBerry. Prem Watsa, Chairman and CEO of Fairfax, will be appointed Lead Director and Chair of the Compensation, Nomination and Governance Committee and Thorsten Heins and David Kerr intend to resign from the Board at closing.

 

In addition, Mr. Heins will step down as Chief Executive Officer at closing and Mr. Chen will serve as Interim Chief Executive Officer pending completion of a search for a new Chief Executive Officer.

 

Today’s announcement marks the conclusion of the review of strategic alternatives previously announced on August 12, 2013.

 

“Today’s announcement represents a significant vote of confidence in BlackBerry and its future by this group of preeminent, long-term investors,” said Barbara Stymiest, Chair of BlackBerry’s Board. “The BlackBerry Board conducted a thorough review of strategic alternatives and pursued the course of action that it concluded is in the best interests of BlackBerry and its constituents, including its shareholders. This financing provides an immediate cash injection on terms favorable to BlackBerry, enhancing our substantial cash position. Some of the most important customers in the world rely on BlackBerry and we are implementing the changes necessary to strengthen the company and ensure we remain a strong and innovative partner for their needs.”

 

Ms. Stymiest added, “I am also pleased that John Chen, a distinguished and proven leader in the technology industry, has agreed to serve as BlackBerry’s Executive Chairman. I look forward to continuing to serve BlackBerry as a member of its Board of Directors and chair of the Board’s Audit and Risk Management Committee. On behalf of the Board, I would also like to thank Thorsten for his service to BlackBerry over the past six years. Under his leadership, BlackBerry established a more efficient cost structure, developed new products, saw the adoption of BES 10 and delivered the BlackBerry 10 platform. These are all significant accomplishments. We are grateful for his contributions and wish him well in his future endeavors.”

 

“Fairfax is a long-time supporter, investor and partner to BlackBerry and, with this investment, reinforces its deep commitment to the future success of this company,” said Prem Watsa, Chairman and CEO of Fairfax. “I look forward to rejoining the BlackBerry Board and to working with the other directors and management team, under John Chen’s leadership, to shape the next stage of BlackBerry’s strategy and growth.”

 

“I am pleased to join a company with as much potential as BlackBerry,” said Mr. Chen. “BlackBerry is an iconic brand with enormous potential – but it’s going to take time, discipline and tough decisions to reclaim our success. I look forward to leading BlackBerry in its turnaround and business model transformation for the benefit of all of its constituencies, including its customers, shareholders and employees.”

 

Pursuant to the Transaction agreement, the investors have an option to purchase up to an add
itional U.S. $250 million principal amount of Debentures within 30 days following closing. If an additional U.S. $250 million of Debentures is issued and all U.S. $1.25 billion of Debentures were converted, the common shares issued upon conversion would represent approximately 19.2% of the common shares after giving effect to the conversion, based on the number of common shares currently outstanding.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-3B2jLGoB8Q/story01.htm Tyler Durden

Key Events And Issues In The Coming Week

Looking ahead, Thursday will be a busy day with the ECB (plus Draghi’s press conference) and BoE meetings. Some are expecting the ECB to cut rates as early at this week although most believe the rate cut will not happen until December. Draghi will likely deflect the exchange rate’s relevance via its  impact on inflation forecasts. This could strengthen the credibility of the forward guidance message, but this is just rhetoric — a rate cut would require a rejection of the current recovery hypothesis. They expect more focus on low inflation at this press conference, albeit without pre-empting the ECB staff new macroeconomic forecasts that will be published in December.

Elsewhere on Thursday, the advanced Q3 GDP report for the US is scheduled, which may have some bearing on market expectations for tapering. Consensus is calling for 2% QoQ ann growth. We’ll be interested in the nominal growth numbers as ever to see whether the recent global inflation downdraft continues to keep YoY US nominal GDP depressed. The first two quarters of the years have seen this number at only 3.1% – the lowest since 2010. Other data releases on Thursday include German industrial production and US initial jobless claims.

This week we have a lot of CB speakers from major regions. On Tuesday, BoJ Governor Kuroda will speak while we also await the BoJ minutes from the last meeting. Interesting to see what Draghi and other ECB speakers will say after a soft inflation number before the ECB announcement on Thursday. We forecast no change in the monetary policy stance. We also have a BoE decision on Thursday. Again, we do not anticipate change in the policy stance. Other MPC meetings this week: Australia, Russia, Poland, Czech Republic, Malaysia, and Peru – in all cases we and consensus forecast no changes in the policy rates.

In China on Saturday together with important data releases we also have the widely anticipated commencement of the 3rd plenary session during which a package of economic reforms could be announced.

Monday, Nov 4

  • Euro Area ECB speakers: Asmussen, Nowotny
  • Euro Area PMIs (Oct final): Consensus 51.3, previous 51.3 (Flash)
  • US Fed speakers: Powell (FOMC voter), Rosengren (FOMC voter), Fisher (FOMC non-voter)
  • US Factory Orders (Aug): consensus +0.3%, previous -2.4%
  • US Factory Orders (Sep): consensus +1.8%
  • UK PMI Construction (Oct): consensus 58.7, previous 58.9
  • Turkey CPI (Oct): consensus +7.2%yoy, previous +7.9%yoy
  • Also interesting: Spain PMI (Oct), UK HBOS House Prices (Oct)

Tuesday, Nov 5

  • Australia MPC: Consensus has cash rate target unchanged at 2.50%. Financial markets have all but completely ruled-out a chance of a rate cut  in November (~3% chance), with only a one-in-three chance of another 25bp reduction this cycle. We continue to lean towards another  reduction by March 2014.
  • Euro Area ECB speakers: Draghi, Asmussen
  • US Fed Williams (FOMC non-voter) speaks
  • US ISM Non-manufacturing (Oct): consensus 54.0, previous 54.4
  • Japan BoJ governor Kuroda speaks in Osaka
  • Japan BoJ MPC minutes
  • Chile MPC minutes (Oct)
  • UK PMI Composite (Oct): previous 60.5
  • Switzerland CPI (Oct): consensus -0.1%yoy, previous -0.1%yoy
  • Taiwan CPI (Oct): consensus +1.1%yoy, previous +0.8%yoy
  • Chile Economic Activity Index (Sep): consensus +4.2%yoy, previous +4.1%yoy
  • Also interesting: Canada Trade Balance (Sep), Venezuela INPC Headline Inflation (Oct), Philippines CPI (Oct), Colombia CPI (Oct)

Wednesday, Nov 6

  • Poland MPC: Consensus has policy rate unchanged at 2.50%
  • US Fed Pianalto (FOMC non-voter) speaks
  • UK BoE Don Kohn speaks
  • US Non-Farm Productivity and Unit Labour Costs (Q3 prelim.)
  • Euro Area PMIs Services (Oct final): Consensus 50.9, previous 50.9 (Flash)
  • Euro Area PMI Composite (Oct final): Consensus 51.5, previous 51.5 (Flash)
  • Euro Area Retail Sales (Sep): consensus +0.6%yoy, previous -0.3%yoy
  • Germany Factory Orders (Sep): consensus +5.6%yoy, previous +3.1%yoy
  • UK IP (Sep): Consensus +1.8%yoy, previous -1.5%yoy
  • Czech Republic Trade Balance (Sep): consensus EUR+33.3bn, previous EUR+20.6bn
  • Indonesia GDP (Q3): consensus +5.7%yoy, previous +5.8%yoy
  • Also interesting: Russia CPI (Oct), Czech Republic IP (Sep)

Thursday, Nov 7

  • Euro Area MPC: Consensus has main policy tools – interest rate and deposit facility rate – unchanged at 0.50% and 0.00% respectively. The ECB is expected to express more explicitly its concern about the recent strength of the Euro
  • UK MPC: Consensus has main policy tools – policy rate and asset purchases – unchanged at 0.50% and GBP375bn respectively. Consistent with its forward guidance framework, the MPC will almost certainly leave policy unchanged at its November meeting. The messages of the subsequent Inflation Report are somewhat less clear. An improved outlook for growth in Q3 and Q4 suggests the BoE will revise lower its unemployment rate forecast
  • Malaysia MPC: Consensus has policy rate unchanged at 3.00%yoy
  • Peru MPC: Consensus has policy rate unchanged at 4.25%yoy
  • US Fed Stein (FOMC voter) speaks
  • US GDP (Q3 adv.): Consensus +2.0%, previous +2.5%
  • US Initial Jobless Claims: consensus 335,000, previous 340,000
  • Germany IP (Sep): consensus +0.8%yoy, previous +0.3%yoy
  • Brazil IPCA Inflation (Oct): Consensus +5.87%yoy, previous +5.86%yoy
  • Chile Trade Balance (Oct): consensus $-132mn, previous $-220mn
  • Taiwan Trade Balance (Oct): consensus $+3.2bn yoy, previous $+2.3bn yoy
  • Mexico INPC Core Inflation (Oct): Previous +2.52%yoy
  • Also interesting: US Consumer Credit (Sep), UK Halifax House Prices (Oct), Switzerland FX Reserves (Oct)

Friday, Nov 8

  • Russia MPC: Consensus have weekly auction rate unchanged at 5.50%
  • US Fed speakers: Bernanke (FOMC voter), Lockhart (FOMC non-voter), Williams (FOMC non-voter), Fisher (FOMC non-voter)
  • US Ex-candidate for Fed governor Lawrence Summers speaks at IMF
  • US Non-farm Payrolls (Oct): Consensus 125K, previous 148K
  • US Unemployment Rate (Oct): Consensus 7.3%, previous 7.2%
  • US Personal Consumption (Sep): Consensus +0.2%, previous +0.3%
  • US Personal Income (Sep): Consensus +0.3%, previous +0.4%
  • US U. of Michigan Consumer Sentiment (Nov, provisional): Consensus 74.5, previous 73.2
  • Euro Area ECB Asmussen speaks
  • Mexico MPC minutes (Oct)
  • Colombia MPC minutes (Oct)
  • China Trade Balance (Oct): consensus $+23.5bn yoy, previous $+15.2bn yoy
  • UK Trade Balance (Sep): consensus GBP-2.70bn, previous GBP-3.32bn
  • Malaysia Trade Balance (Sep): consensus MYR+6.00bn, previous MYR+7.11bn
  • Also interesting: France IP (Sep), UK Construction (Sep), Canada Housing Starts (Oct), Sweden IP (Sep), Chile CPI (Oct)

Saturday, Nov 9

  • China IP (Oct): consensus +10.1%yoy, previous +10.2%yoy
  • China CPI (Oct): consensus +3.3%yoy, previous +3.1%yoy
  • China PPI (Oct): consensus -1.4%yoy, previous -1.3%yoy
  • Retail Sales (Oct): consensus +13.4%yoy, previous +13.3%yoy

SocGen’s visual summary of the above:

And the key issues as summarized again by SocGen:

ECB NEEDS TO DO MUCH MORE THAN CUT RATES

Expectations of soon to come ECB action and a stronger US ISM manufacturing release (56.4 in
October) pushed the EUR/USD back below 1.35 on Friday, triggering a welcome sign of relief in the euro area. Nonetheless, the euro remains uncomfortably strong and inflation uncomfortably low. It is this combination that we now expect will push the ECB to a December rate cut. Alone, however, we expect a 25bp rate cut to have only a very modest impact on the EUR/USD; nor will it do much to fix the financial fragmentation that plagues the periphery.

This was a point that we also made when the ECB last cut rates in back in May. Fed taper expectations may help push the EUR/USD lower, but with a nasty twist as US bond yields then head north. Either way, the ECB will have to do more. Banned from QE, we see a fixed rate LTRO as the best tool at the ECB’s disposal. This would have the ability to cement a commitment to low interest rates for an extended period of time, helping on both the currency and bond market front. Ultimately, however, to get the euro area’s credit channels working again we believe it will be up to the government rather than the ECB. Our base case remains that repair of financial fragmentation will come only slowly.

BETTER US DATA BETTER HOPE FOR EUROPE

We expect to see overall healthy readings across a busy week of US data releases. October non-farm payrolls due on Friday will be the most closely watched report of the week and we expect to see a gain of +175K. Following in the wake of the strong manufacturing ISM released last Friday, we expect to see a gain to 56 on the service sector. Q3 GDP also out this week is expected to clock in at 2.3% qoq annualised. Stronger US data will see Fed taper expectations rebuild; with a still unresolved situation on the fiscal front we maintain our base case scenario for taper to start at the March FOMC.

CHINA STILL BUMPY LANDING

Monthly activity data for October are expected to show softer activity growth against a backdrop on on-going deleveraging pressures. It is against  this backdrop that the Third Communist Party Plenary meeting is due to take place on 9-12 November. We do not expect detailed reform measures to emerge, but look rather for a broader policy framework focusing on financial market and corporate sector liberalisation. Changes to the Hukou system (a system of mandatory household registration that leads unequal social benefits between urban and rural population in China), on the other hand, will most likely have to wait. The key test for reform resolve will come in the three to six months that follow the meeting; this is when we will see just how many tangible measures are taken.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/21HwF958MwQ/story01.htm Tyler Durden