First World Problems

Predictably, the euro pulled back Wednesday after Philip Lane emphasized that the currency “does matter” to the ECB, even if they aren’t targeting any specific level.

The push back from the central bank’s chief economist came as EUR/USD breached 1.20 and European inflation fell below zero for the first time in four years. The common currency is still “expensive”, though, and markets will be keen on any explicit references to the drag from the exchange rate on Europe’s fledgling recovery when the ECB meets this month.

“If there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting”, Lane said Tuesday, knocking the currency off its perch. Most see the euro’s run higher as at least partially an expression of confidence instilled by the establishment of the European recovery fund, but recent strength was widely flagged as “too far, too fast”, especially as positioning became stretched.

The further it runs, the more downward pressure on inflation expectations. Effectively, a stronger currency exerts a tightening impulse, and it weighs on exports. Europe can afford exactly none of that right now. The 21-day moving average may serve as support on any pullback, and some believe further gains are just a matter of time, even if the next leg higher is more “grind” than “surge”.

Whatever the case, European equities rose Wednesday, helped along no doubt by the euro’s weakness — however fleeting it may prove to be. “The timing is good – intervention, verbal or otherwise, works best when the market is over-positioned, which is definitely the case today”, SocGen’s Kit Juckes remarked. “But, the implicit threat is empty, partly because EUR/USD is merely back to its average level since 1999, so it’s only over-stretched, in the short term, and because the ECB may not be able to ease in a way that weakens it”.

European bonds were buoyant Wednesday on the back of Lane’s remarks, as additional asset purchases are pretty much the only tool at the Governing Council’s disposal (it’s not exactly like they’ve got much scope to cut the depo rate further). Germany’s first green bond was five times oversubscribed, apparently.

Meanwhile, Australia confirmed its first recession in nearly three decades. At the risk of dismissing a (dubious) milestone as meaningless, Q2 GDP reports are now the very definition of “stale” given the rapidly evolving macro backdrop. What happened last week barely matters, let alone what happened last quarter, although it goes without saying that the tragic collapse of the global economy in Q2 will echo for years and may well have caused structural damage that no one fully appreciates — yet.

Obviously, the 7% decline was the largest on record going back seven decades, and it was wide of estimates. Rabobank’s Michael Every adopted his signature cadence in a Wednesday note documenting the prospects for World War III. “Consider Australia, who is increasing its defense budget by 40% over the next decade to prepare for a ‘poorer, more dangerous world'”, he wrote, adding that the country “just saw Q2 GDP collapse 7.0% QoQ [and while] Bloomberg notes Bloomberg-ily that ‘the recovery is already underway’ [it may] be complicated by the viral resurgence and the lockdown in Victoria, a trade war, no Chinese tourists, and a wobbly housing market”.

Stateside, Steve Mnuchin and Nancy Pelosi are negotiating or, at the least, talking. The two sides remain far apart on key stimulus sticking points, and Mitch McConnell appears poised to double down on his strategy of low-balling Democrats in order to pacify the 20 (!) GOPers who are refusing to support any further stimulus whatsoever. That, against calls from the Fed, The White House, and, of course, Democrats, for more spending.

“Mitch is down to $500 billion — what we have heard again and again is that [he] can’t figure out a package that he can put in that would pass his Republican caucus”, Virginia Democrat Don Beyer told Bloomberg Radio.

Remember, this is going on in the only country in the world that can legally print USDs.

Again we see that America’s system of checks of balances has failed on two fronts. It’s made it impossible to get anything done expeditiously, which has been a feature of American political decay for years, and it’s also proven inadequate to protect the country from taking a turn for the authoritarian. So much for the Founders’ “genius”.

I suppose all’s well that ends with higher US equity futures, though.