Good News For People Who Love Bad News
Researchers at VoxEU say that understanding recent inflation behavior in the United States requires some modification to the traditional Phillips Curve (“high level of unemployment causes inflation to fall over time”). Specifically, they suggest that anchored inflation expectations and short-term unemployment are critical features of the new relationship between employment and inflation. Meanwhile, the Phillips Curve is doing its thing in Europe: “figures released Wednesday showed consumer prices [in Europe] were lower in December than a year earlier, the first such drop since October 2009. Economists expect prices to continue to fall in January and February.” So…deflation? “Many economists and central bankers believe that falling prices do not by themselves constitute deflation. For that chronic condition to take root, consumers and businesses have to cut back on spending because they expect prices to fall further, the outcome being a decline in output and employment that pushes prices even lower.” The ECB “wants households, businesses and investors to disregard short-term variations and remain convinced that policy makers will do their job and succeed in hitting the [2% inflation target]…over the medium term.” Meanwhile, the Federal Reserve isn’t super convinced (alt): references to “insufficient” foreign policy responses in the minutes from their December meeting “amounted to a warning…that markets and the global economy more broadly could respond negatively if foreign policy makers don’t deliver on expectations for action.” Meanwhile, European stocks are rallying thanks to the
terrible great news on deflation inflation expectations. “Confirmation of outright deflation in the eurozone was taken as good news…as investors judged that it made QE this month all the more certain.” Also, the euro is trading at $1.17 and may have “further room, given expectations that QE may be announced [Jan. 22].” Meanwhile, Frances Coppola says “calls for QE seem to have more than a hint of the politician’s fallacy about them; ‘We need to do something. QE is something. Let’s do it’…’because nobody’s got any better ideas.”
Good News For People Who Aren’t True Believers In Oil’s Natural Price
“Investors betting oil will rebound from the lowest prices in 5-½ years poured the most money in more than four years into funds that track crude…The U.S. Oil Fund (USO), the biggest oil ETF, attracted $629.9 million in December…There are a lot of true believers in the commodity space. A lot of people are attached to the idea that oil’s natural price should be $100, not $50.” Meanwhile, the people at Moody’s aren’t exactly true believers in Russian debt: “Moody’s…has lowered the maximum rating allowed for Russian firms to two notches above junk — in line with how it currently rates Russia.” Two notches above junk may have something to do with this: “debt levels (including hidden debt issued offshore, or “dark debt”) for the majority of EM countries look manageable at the macro level, as they are not of a magnitude what could trigger a self-fulfilling currency crisis given FX reserve levels and low global rates…The exceptions are the countries that have seen declining GDP and/or idiosyncratic currency tensions. This group includes Venezuela, Ukraine and Russia.” Also, exposure to energy isn’t helping (again, Venezuela and Russia top the list).
“On one hand, [Germany] doesn’t want to become Europe’s main paymaster, funding the currency area’s stricken periphery economies, thus encouraging unsustainable policies. On the other hand, German policymakers are seriously worried about the economic and political repercussions of a euro collapse.”