From Soc Gen:
Two things caught my eye this week. The first was more soggy Japanese economic data which suggests that the BoJ may soon hit the QE button even harder. That would trigger a renewed slide in the yen and another round of Asian currency turmoil – plus c?a change! But, secondly and perhaps more important is increasing evidence of a loss of confidence that the Fed is actually in control. Ignore for a moment the stock market’s celebration of weaker than expected payrolls. Instead investors should focus on the rapid decline in US inflation expectations since the Fed meeting – even now converging to dire eurozone levels!
Expectations of the first Fed rate hike were kicked into March next year in the wake of the weaker than expected payroll release. We?ve been here before and it?s becoming tedious. But at least the equity market?s euphoric reaction was entirely predictable.
Far more interesting is the continuing slide in US break-even inflation expectations. The measure for 5y expectations, in 5 years time, has now decisively fallen below the January low (see chart below) and the spread verses the eurozone has now fallen to only 20bp against 60bp last October. Bond investors are signalling to us that they don?t believe the Fed is in control anymore. The Fed by contrast is brushing aside the market?s deflation concerns. It all feels very much like Japan circa 1995 in the wake of the yen?s then surge.
Talking about Japan, we are at a crucial crossroads. Most observers, except perhaps the BoJ and the Abe government, believe the economic data has been disturbingly weak. Most therefore expect the BoJ to crank up QE, or QQE as it is known in Japan ? having added a wishful qualitative to their quantitative easing. You know my view. All this money printing will ultimately end in tears. Despite being a fully paid up member to the school of thought that believes that Japan has no option other than to monetise its public sector deficit because the government is insolvent, that is also the same reason why I remain bullish on the Nikkei. Japan?s massive QQE (many times that of the Fed and ECB) is the steroids that mean Japan should outsprint all other runners in this currency race to the bottom. And when the yen renews its slide, expect round two of Asian emerging currency weakness to begin and US and eurozone inflation expectations to head lower still.
Only QE4 can save us!
