The Week Ahead Is Not About The Week Ahead

It's the last week of August. Several economic reports will be released in the coming days. They include the US deflator of consumer expenditures that the Federal Reserve targets, China's PMI, and the eurozone's preliminary August CPI. It is not that the data do not matter, but investors realize the die is cast. 

They are looking further afield. The next US tax increase on Chinese imports goes into effect on September 1, and Beijing has threatened to retaliate. The Federal Reserve and the ECB will ease policy in the coming weeks. The twice-delayed Japanese sales tax hike will be implemented in about five weeks. 

A cartoon I saw recently seems to capture the sentiment in the market at the moment. One person was carrying a sign like the "end is nigh" and another person complains about the optimism, that this could last forever. Whether it is the protest in Hong Kong, negative interest rates, or the US-China trade conflict, many think the status quo is unsustainable, and others believe it can persist as in a "new normal."  

Paradoxically, both may be true. The market may have gone too far in the short-term, but it does not mean a return to the status quo ante. Some suspect that the collapse of Argentina's 100-year bond that was oversubscribed when it was sold in 2017 ($9.75 billion of bids for the $2.75 billion offering) and the poor reception to Germany's sale of a zero-coupon 30-year bond (which based on pricing was tantamount to a yield-to-maturity of -11 bp), is a turning point.It also coincides with a ratchet up in the decibel of arguments that monetary policy is exhausted and fiscal policy is required. 

The poor data from northern Europe, and especially the slump in Germany, are fanning hopes that the purse strings will loosen. The Bundesbank acknowledged that the Germany economy may be contracting in the current quarter, which would be the third of the past five quarters.The year-over-year pace has been below 1% for the past three quarters. Germany is moving to end the Solidarity Tax for most, but there still is a reluctance to do anything meaningful in terms of new stimulus, which, as of last week, the Bundesbank thought unnecessary. Yet, even the amount that the German SPD Finance Minister suggested (~50 billion euros) seemed like a rounding error for the roughly 3.4 trillion euro economy. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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