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US Economy Officially In Deflation

US Economy Officially In Deflation

We spoke, we warned, and it has now happened. For reference, we have included a bevy of links documenting our explanation of why deflation was going to be the elephant in the China room.

With the significance of this being the first deflationary headline figure 6 years after Lehman collapsed, low oil prices have conveniently been cast as the straw man. There is some truth to this - the energy index fell 9.7% while the gasoline index fell 18.7% in January, both over December. This marks the fiercest plunge in the 7 consecutive negative prints; the report also noted that the decline in the gasoline was "overwhelmingly the cause" for broad weakness in overall prices. When annualized, the energy index and gasoline index fell 19.6% and 35.4% respectively. Staggering figures!

Europe On The Brink: €1.1 Trillion Bazooka & Greek Elections

Europe On The Brink: €1.1 Trillion Bazooka & Greek Elections
  • ECB to buy €60bn/month in assets
  • Purchases will be conducted "until we see a sustained adjustment to path of inflation"
  • Purchases to last until September 2016
  • ECB rates have reached lower bound
  • Sees sizable increase in ECB's balance sheet
  • Eurozone risks on the downside
  • Annual inflation is expected to remain very low or negative in months ahead
  • Volume of QE is in ballpark of getting ECB's balance sheet ti levels of early 2012
  • There has to be a program to buy GGBs; there is also an issuer limit
  • Don't have any special rule for Greece
  • Will buy bonds with negative yield

A quick take: Slightly more than expected per month, with a slightly shorter duration than expected, amounting to just about €1.1 trillion over 16 months, which is a tad on the low side to the super-aggressive expectations of €1 trillion per year. Furthermore, as expected there will be partial risk-sharing. It is still unclear what are the embedded conditions regarding purchasing Greek or other "risky" bonds.

1-7 January: Oil & Euro Lowest Since Lehman As Grexit Fears Loom, EU In Deflation

1-7 January: Oil & Euro Lowest Since Lehman As Grexit Fears Loom, EU In Deflation

What a way to start 2015. The first deflation in the EU since 2009, record low yields on German sovereign debt, global energy prices keep tanking, US equities down for 5 consecutive days, and the news (or not) keeps flowing. For the record, major equity indices have started 2015 with the worst performance since the financial crisis of 2008. Whatever remnant of the 2014 "Santa Rally" turned out to be a ghost in a shell, and has now spooked global market participants.

The past week has been all about ratcheting up the "Grexit" rhetoric across the markets. Readers should be no stranger to the situation in Greece and the entire periphery of the Euro Union, which we touched upon in our last update preceding the New Year. The risk has indeed never been greater as it seems Germany has openly voiced that it won't be blackmailed by a Greek plunger. Remember, Greece is bounded by €240bn to the Troika under the various bailout packages extended to her.

19-22 December: Reeling From Russia's Pain, Belarus Implodes; Global Markets Rebound Sharply; Sony Hacking Satire

19-22 December: Reeling From Russia's Pain, Belarus Implodes; Global Markets Rebound Sharply; Sony Hacking Satire

The overnight night unsecured deposit rate on BYR has exploded north of 30% as the national bank has made it too expensive to lend BYR even amongst banks. As we learned from the bank's press release, it wants to halt sales of BYR by as much as possible though pseudo and conventional capital controls. The interest on commercial and retail deposits at local banks has also spiked to encourage individuals and businesses to leave their currency in their banks. Apparently enough, we know this is not working one bit and the run on banks continues and will probably extend all the way to Christmas Eve before there is any easing of tensions.

Indeed, just a few hours after AFP broke this news, the overnight interbank BYR deposit rate has surged past 50% as the fire intensifies.

10 December 2014: China Rubs Salt Into Weak Oil Wound

10 December 2014: China Rubs Salt Into Weak Oil Wound

China's Securities Depository Corporation announced (CSDC) Tuesday that they would no longer accept non AAA-rated corporate debt securities as collateral in repurchase transactions, essentially raising the cost of short term collateralized borrowing in the private sector. AAA-rated corporate debt securities to be pledged as collateral must also originate from AA-rated issuers.

China has hinted rather overtly it wants to drastically reduce leverage in its stock and bond markets, and is partially working on this goal by tightening monetary policy through indirect tools; fixing Yuan higher and raising collateral standards and reducing availability.