Month: August 2022

The confusion amid the “world’s smartest people”, where they hope to trigger a global, economy-crushing depression in order to somehow prompt Putin to send more gas to Europe, got worse today when Europe reported another hotter than expected record inflation print, which sent short-end yields sharply higher.

To wit, in the flash inflation release for August, Euro area core HICP inflation rose 25bp to 4.28%yoy, and headline HICP inflation rose 21bp to 9.08%yoy, both above expectations.

Key Numbers:

• Euro area Core HICP (August, Flash): 4.28% vs. GS 4.14%, consensus 4.0%, last 4.03%, all %yoy
• Euro area Headline HICP (August, Flash): 9.08% vs. GS 8.82%, consensus 9.0%, last 8.87%, all %yoy

Some more details:

1. Core HICP inflation, excluding energy, food, alcohol and tobacco, rose 25bp to 4.28%yoy.
2. The breakdown by main expenditure categories showed services inflation rose one-tenth of a percentage point to 3.8%, and non-energy industrial goods inflation rose 0.5pp to 5.0%. Of the non-core components, energy inflation fell 1.3pp to 38.3%, while food, alcohol and tobacco inflation rose 0.8pp to 10.6%.
3. Following today’s releases, we mechanically update our Euro area inflation forecast, and now expect Euro area core inflation to peak at 4.6%yoy in September and October, and look for headline inflation close to 10% in Q4.
4. Eurostat will publish the final HICP release with the full component breakdown on Friday, September 16. We will then also update our Euro Area Inflation Monitor.

In response to the numbers, Goldman wrote that it now expects Euro area core inflation to peak at 4.6%yoy in September and October, and looks for headline inflation close to 10% in Q4.

More importantly, moments after the data printed, both Bank of America and Goldman (and soon, most other banks) changed their forecast for what the ECB will do next, and both now expect Lagarde to hike rates by 75bps in September. Here is Goldman’s Sven Jari Stehn:

• BOTTOM LINE: Given today’s stronger-than-expected inflation data—together with hawkish commentary and upside risks to near-term growth—we now expect the Governing Council to hike by 75bp at the September meeting, and upgrade our forecast for the terminal rate to 1.75% in February 2023.

Some more points from Goldman:

1. We now expect the Governing Council to hike by 75bp at the September meeting. First, today’s inflation data surprised further to the upside, with headline HICP climbing to 9.1%yoy and, importantly, core HICP rising to 4.3%yoy, in another strong sequential monthly print. We expect inflation pressures to rise further in coming months as the 9-Euro ticket in Germany ends and high energy prices feed through into retail prices, with a peak in core inflation at 4.6% in September and headline inflation close to 10% in Q4.

2. Second, the incoming activity indicators have, so far, held up somewhat better than expected, and we see upside risk to our forecast for a slight contraction in Q3. Given ongoing tensions in European gas markets, we remain comfortable with our forecast for a Euro area recession but look for a mild downturn.

3. Third, recent ECB commentary has been hawkish. Following Executive Board member Schnabel’s speech at Jackson Hole—where she argued that the ECB needs to “act forcefully” to “bring inflation back to target quickly”—a number of speakers have said that another half-point rise is the minimum and that 75bp should be considered at the next meeting (Exhibit 2). While not a done deal—as some Governing Council members have advocated a steady pace of hikes—we therefore think a 75bp hike at the September meeting is more likely than another half-point step.

4. Looking beyond next week, we now look for 50bp in October (vs 25bp before), followed by two more 25bp hikes for a terminal rate of 1.75% (vs 1.5% before), taking policy more clearly into restrictive territory (Exhibit 3). While a sharper recession or a return of sovereign stress could lead to an earlier end to the hiking cycle, we see risks skewed towards a higher terminal rate in the event of more persistent inflationary pressures and stronger second-round effects.

A European Union meeting of foreign and defense ministers this week has failed to agree on a bloc-wide visa ban for Russians, after Poland, Finland, as well as Baltic countries pushed for a blanket ban on all entrances for Russian nationals – whether for tourism or business. Ukraine’s President Zelensky has been lobbying European capitals to move through with the ban, even if just on individual country levels. 

Proponents cast allowance of Russian travel within the EU as some kind of reward: “There must be more restrictions on travel for Russian citizens,” Latvian Defense Minister Artis Pabriks said. “We cannot simply give bonuses to people which are supporting such presidents as Putin,” he told reporters in Prague, where the EU meeting is taking place. But coming out of Wednesday’s meeting Hungarian Foreign Minister Peter Szijjarto was the first to announce that the policy measure has failed to gain necessary unity, after those who opposed were led chiefly by Hungary and Germany. EU leaders did still, however, tried to spin this as a “win”:

• EU’S BORRELL: EU MEMBERS POLITICALLY AGREE TO FULLY SUSPEND FACILITATION AGREEMENT FOR RUSSIAN VISAS
• EU WON’T RECOGNIZE PASSPORTS ISSUED BY RUSSIA IN OCCUPIED AREAS

Russian state media is also reporting based on regional sources: 

There was “no consensus” among EU member states on the proposed full ban for Russian tourists, Hungarian Foreign Minister Peter Szijjarto said on Wednesday, as quoted by a journalist from news agency MTI.

As for the latter country, Chancellor Olaf Scholz, was recently on record as saying “there are a lot of people fleeing from Russia because they disagree with the Russian regime” – thus it would unfairly punish all Russians no matter their viewpoints of Putin’s war, including journalists. 

Going into the talks, EU foreign policy chief Josep Borrell strongly suggested the Russian travel ban is unlikely to happen. Days ago he stressed in a speech, “More than 300,000 Russians have [fled] their country because they don’t want to live under the rule of [Russian President Vladimir] Putin. Are we going to close the door to these Russians? I don’t think it’s a good idea.”

Such a policy would likely eventually involve kicking out a lot of people too as visas wouldn’t be renewed under the proposal. Last Thursday the European Union’s border agency Frontex issued updated numbers on how many Russians it had tracked entering EU borders during the six months since the invasion of Ukraine began. It said nearly 1 million Russian citizens entered the EU since that time, or more precisely a total of 998,085 Russian passport holders had entered since Feb. 24. 

Some European officials have suggested a more nuanced approach and limited ban: 

German Foreign Minister Annalena Baerbock expressed support for suspending more parts of the 2007 EU agreement with Russia, and to halt the issuing of multiple-entry or multi-year visas.

But Baerbock said it’s important “that we don’t deprive ourselves of what made it possible for us to allow persecuted people in Russia to leave very quickly.”

Meanwhile, on a related note to EU law and policymaking, controversy over so-called rule of law mechanism and the need for greater reforms is back, as German Chancellor Olaf Scholz in a speech given at Charles University in Prague stressed the need to get rid of the requirement for unanimity when it comes to EU-wide binding decisions. The idea is that ‘back-slidden’ democracies like Hungary should no longer hold veto power. 

“we know that the EU must reform to be able to operate efficiently and effectively in a wider Europe. This concerns institutional governance, as well as decision making, such as reconsidering the unanimity rule” – French Minister for Europehttps://t.co/SIv1QiilWD

— David Phinnemore (@DPhinnemore) August 25, 2022

According to one report covering the speech, those seeking to abandon the unanimity rule wish to take aim at the more conservative and traditional countries like Hungary and Poland: 

In effect, Scholz is pushing to get rid of the veto power of member states. Currently, all member states must agree on a course of action, and if one member state rejects that course of action, they can issue a veto. Such a move would represent a major threat to countries like Hungry and Poland, which have come under extreme pressure on issues such as LGBT ideology, migrant quotas, taxation rules regarding a global minimum tax, and energy policy — just to name a few key areas.

France too has long been critical of the unanimity rule. The controversy comes at a moment both EU and NATO leadership is calling on EU populations to harden their resolve against what is set up to be a winter of hardship, given Russian energy cut-offs and uncertainty over whether the heat and lights will stay on in major European cities. 

By Michael Every of Rabobank

The Punt For Red October

It was another red day in markets yesterday despite a positive start, as the post-Jackson Hole hangover continues to bite.

Stocks were lower, with the S&P -1.1%, carrying over into red Hong Kong and Nikkei futures this morning. Bonds were lower too: US 2-year Treasury yields were +3bp at 3.45% having tested up to 3.50%, and 10-years +1bp to 3.11% having been at 3.15%; German 2-year Bunds were +8bp to 1.14% and 10-years +3bp to 1.51%; and UK Gilts were little changed despite large swings, closing before former Chancellor and would-be PM Sunak warned that markets may lose faith in the UK economy. (GBP is the more likely channel than Gilts, one would think.)

In FX, CNY could not keep a foothold even despite another in a series of stronger-than-expected PBOC fixes. That a weakening currency cannot be ‘fixed’ even alongside a vast trade surplus that should be pushing it higher speaks to the upwards structural pressures on the US dollar, and the downwards ones on China and CNY.

Oil slumped around 5% after it became clear Iraq is not turning into the next Libya, and its oil output was not hit by recent unrest. (Although Iran, linked to the Iraq unrest, is playing hard to get with the nuclear deal again – presumably because of regional whispers that regardless of what Tehran does, President Biden has decided to sign the deal anyway, “because oil markets.”) Other commodities were also mostly lower on the day.

The broad-based sell-off was helped by German inflation rising 8.8% y-o-y and strong US data in the form of consumer confidence (103.2 vs. 98 consensus, with expectations 75.1, up from 65.6) and JOLTS job openings (11.2m vs. 10.4m consensus, or around two jobs going for everyone officially looking for work).

The last thing markets wanted to see was good economic news that would tip the Fed further towards another 75bps hike in September, let alone encourage its ‘higher for longer’ stance. If we get a US payrolls number that matches the consumer and JOLTS data on Friday, it will certainly back the punt for red October as well as red September.

Of course, it is not just the Fed’s bailout function that markets may lose faith in, nor just the UK economy. Indeed, combining the two, Stefan Koopman and myself just underlined the limited policy options available to *all* central banks as reflected in the possible external review of the Bank of England (BOE) presumed UK PM Truss may soon launch.

‘Bank of England Dreaming’ asks, “what is central bank inflation targeting good for?” given it only seems to work in a limited set of geopolitical and macroeconomic circumstances, which have now structurally changed. As such, we argue there are no policy framework tweaks that can help with the current backdrop. (And where I just heard a UK publican say beer needed to be £15 a pint to cover costs, but doesn’t dare raise prices; and a fish-and-chip shop owner say cod and chips is already £11 and will soon go up: given the minimum wage of £9.5 an hour, that’s potentially over 2.5 hours work, pre-tax, for traditional UK fare!)    

A further conclusion is that the only possible central bank policy answers are: 1) to assume geopolitics doesn’t exist, and so inflation goes back to 2% again – “because economics”; or 2) to look backwards to look forwards.

The BOE was specifically established to lend to the government for war against France, which in a zero-sum mercantilist world was seen as the route to greater flows of resources, and to macroeconomic stability. With regret, doesn’t that backdrop sound at least partly applicable to today’s geopolitical world, rather than forlornly saying “2%”? Indeed, back in 1694 the BOE was an early example of industrial policy in that England needed to build ships, requiring nails, etc., and to feed and arm its soldiers and sailors, all to help the flow of resources in its direction – and the policy *worked brilliantly*. As the same trick has for many others over history.

Of course, to aim for such ambitious and controversial policy and to fail, as so often seen during Covid, would likely accelerate the UK along the path to higher macroeconomic instability, greater socio-political alienation and polarisation, and more violent financial market volatility. The same is true for many other economies too: it’s a very high risk/very high reward strategy, and a very red October, and many more to come, could easily be seen. Then again, things are unravelling all over at the moment.

On which note, former Soviet President Mikhail Gorbachev just passed away at 91. A reviled figure in Russia for presiding over the collapse of the USSR, with all associated socio-economic and psycho-cultural woes, he will be held in fond memory in the West for having seen the peaceful end of the Cold War. Looking at current Western-Russian relations –as gas flows to France were cut again yesterday, and potential EU visa bans on Russians are floated– it’s hard to recall the heady days of the late 1980s, when US heavy metal bands strutted like rock gods in Moscow’s Luzhniki stadium to fist pumps and headbanging from Soviet soldiers.

Talking of heady early days –and mercantilism, industrial policy, and soldiers– Tuesday also saw Beijing announce the CCP’s key 20th Party Congress will take place on 16 October. The official announcement was replete with the official language heard back in the USSR in the late 1980s: “The congress will hold high the great banner of socialism with Chinese characteristics, uphold Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents and the Scientific Outlook on Development, and thoroughly implement Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.” Of course, the aforementioned terms are largely incomprehensible to 99% of Wall Street analysts covering Chinese assets. Yet how this news was portrayed in Chinese media led to immediate to-and-fro Kremlinology over what it implied for policy. Here is another hat to throw into that crowded ring.

The official text stated: “All Party members and people from all ethnic groups across the country will be mobilized to continue advancing the Five-Sphere Integrated Plan and the Four-Pronged Comprehensive Strategy in a coordinated manner, pushing forward common prosperity for all, advancing the great new project of Party building, and promoting the building of a community with a shared future for humanity.”

1. Common prosperity needs no introduction, even to Wall Street, and in 2022 is no longer taken to mean what it did when used in the reform period of 1978 (allowing some regions and groups to get rich first, then sharing their wealth). Markets now see it as closer to its first coinage in 1953, when it contrasted socialism with capitalism – “A road of a few getting rich, while the vast majority are poor and destitute.”
2. The community of a shared future for humanity is seen as linked to China’s more muscular foreign policy, which is challenging established western norms/hegemony. That, as the Solomon Islands will no longer allow Five Eyes nations’ navies to make port calls, and Australia and New Zealand begin negotiations over an economic and security deal with nearby Papua New Guinea.

In short, will we get a ‘pro-markets shift’, or a continuation of a more volatile policy trend? (As the annual US-China Business Council survey released yesterday, while still showing slightly more optimists than pessimists, also saw 83% of companies less optimistic than 3 years ago, and around a fifth having moved some operations out of China.)

Make up your mind, and then either do or don’t have the punt for Red October.

German lawmakers have called it the “greatest tax heist” in history: the loophole in the tax law of Germany, Denmark, and the UK to pocket hundreds of millions of euros, if not billions, via a trading strategy known as “Cum-Ex” – or “With-Without.”

In the past, we have noted Deutsche Bank, Morgan Stanley, Barclays Plc, and Bank of America Corp.’s Merrill Lynch’s Frankfurt offices were raided as part of a money laundering probe. 

This week, JPMorgan Chase & Co.’s Frankfurt office was raided as part of a widening Cum-Ex scandal centered on cross-border tax fraud. 

“A spokesman for Cologne prosecutors on Wednesday said searches at an unidentified bank started on Tuesday and included the homes of four suspects and an auditing firm that isn’t a target in the probe. More than 50 officers are involved, including specialists, to unearth evidence buried in emails,” Bloomberg reported Wednesday morning. 

JPMorgan confirmed to Reuters that their “Frankfurt offices were visited this week” by “German authorities on their ongoing investigation” in the share-trading scheme that cost taxpayers billions of euros.

Cum-Ex reportedly diverted “at least 10 billion euros” in government revenue by exploiting German tax laws that allowed multiple investors to claim refunds of a tax on dividends that were paid only once, Bloomberg reported.

For those who aren’t familiar with Cum-Ex, here’s a quick rundown showing how it works, courtesy of the Conversation:

Party One, typically an asset manager who owns valuable company shares, “lends” its stock to Party Two, a bank. Under the agreement, the title and ownership of the stock is temporarily transferred to the borrower in return for a fee. Such practices are not only legal but a common part of “short selling,” the practice featured in the 2015 film The Big Short. Essentially, it is where an investor borrows a stock (for a fee), sells it, then buys it back later at a lower price to return it to the original – on the expectation the stock’s value will fall and a profit made.

Party Two then sells the shares with-dividend to Party Three fractionally before the Record Date. However, the shares are delivered without-dividend just after.

Timing, speed and complexity are key. Like a magic trick, the shares “disappear” fractionally before the Record Date and “reappear” with a new owner just after. The aim is to obscure exactly who – Party One, Two or Three – owns the stock on the Record Date. As a result, two parties can simultaneously claim ownership of the one stock.

Up until 2011, a loophole in the German tax code allowed both Party One (the owner of the original stock who had received the dividend and paid tax on it) and Party Three (the holder of the stock just after the Record Date) to claim a tax reimbursement. All colluding parties would then split the gains.

The practice was abolished in 2012, but prosecutors in Cologne are probing about 1,500 people and increasing pressure on international banks. 

Authored by Steve Watson via Summit News,

Raul Ortiz, The Head of The U.S. Border Patrol has testified under oath that he believes the Biden administration’s policy of “no consequences” for illegal immigrants trying to enter the country has made the border less safe, caused an exponential increase in people attempting to cross, and has directly caused what he believes constitutes a “crisis”.

The footage of Ortiz’s comments was obtained by Fox News and comes from a deposition from last month relating to a lawsuit brought against the Department of Homeland Security by Florida Attorney General Ashley Moody.

The suit alleges that Biden’s ending of Trump administration policies, such as the ‘Remain in Mexico’ policy where migrants were not allowed into the U.S. until fully background checked, has led to a mass migration emergency in the last year and a half.

“In my experience, we have seen increases when there are no consequences,” Ortiz said during the deposition, adding  “There is an assumption that if migrant populations are told that there is a potential that they may be released, that, yes, you can see increases.”

“So, it will increase at an exponential rate. Is that what is being suggested here?” the attorney further probed.

“Well, I do think it will increase, yeah,” responded Ortiz.

The attorney also pointed to a spring 2021 memo that disclosed Biden’s immigration policies, asking Ortiz “Since President Biden was elected, does this document indicate that aliens illegally entering the United States perceive that they will be able to enter and remain in the United States?”

“Yes,” Ortiz replied.

Watch:

Ortiz further described the southern border as being in “crisis” and replied in the affirmative when asked if the border is “less safe for Americans and aliens alike.”

Ortiz also agreed with a statement by the plaintiff attorney that “unprecedented numbers” of migrants have illegally entered the U.S. this year.

According to data from Customs and Border Protection, more than two million people have attempted to cross the border in the 2022 fiscal year so far.

That figure equates to a 22 year high.

The Biden administration has also repeatedly attempted to lift Title 42, which is aimed at preventing the spread of communicable diseases in the country by turning back those trying to enter from a country where that disease is rife.

Critics have pointed out that while vast numbers of undocumented and unvaccinated migrants are being bussed from the border to American cities, the administration has barred non vaccinated visitors, including high profile figures such as tennis star Novak Djokovic.

Responding to Ortiz’s deposition, AG Moody stated “The Biden administration caused the surge, made the border less safe and is flagrantly violating the very federal laws they swore to uphold. The Biden administration is putting hard-working border patrol agents in impossible and untenable positions — risking their lives and safety, and I want to thank Chief Ortiz for testifying truthfully at his deposition.”

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Having abandoned its model in May – after months of optically systemically underpredicting the BLS payrolls print…

Source: Bloomberg

…ADP is ready to unveil its fresh new Employment Index 2.0 today “to provide a more robust, high-frequency view of the labor market and trajectory of economic growth.”

The revamped report, developed with the Stanford Digital Economy Lab, will include figures on both jobs and pay, ADP said in a statement. It will feature the monthly change in private employment as well as weekly payrolls data for the preceding month. Median annual pay growth by industry, company size, region, gender and age will also now be available each month.

“As the labor market evolves, methods for measuring employment dynamics also need to evolve,” Nela Richardson, ADP chief economist, said in the statement.

“Combining job and pay data in one report, coupled with high-frequency releases, will give us a clearer picture of the labor market.”

Instead of its previous model-based approach, the figure will now be constructed from ADP payroll data and weighted with an expansive, quarterly BLS dataset to make it more nationally representative.

So, what does the new data show?

Analysts forecast ADP would report a 300k rise in employment in August (exactly in line with the BLS payrolls estimate due to be released on Friday) but instead it printed a drastically disappointing +132k jobs added.

Source: Bloomberg

According to ADP data, US Private Employment levels are back at pre-pandemic highs…

Source: ADP

Goods-producing firms added just 23k jobs in August while Services added 110k, despite serveral Services sectors seeing job losses…

If it wasn’t for Truck drivers, waiters, and bartenders we could be facing a negative print.

“Our data suggests a shift toward a more conservative pace of hiring, possibly as companies try to decipher the economy’s conflicting signals,” said Nela Richardson, chief economist, ADP.

“We could be at an inflection point, from super-charged job gains to something more normal.”

The MidWest saw net job losses in August…

Perhaps most critically, wages are still soaring (especially for job-changers)…

Time to revise that model again?