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Uncertainties Cloud Investing Outlook for Europe, America

Uncertainties Cloud Investing Outlook for Europe, America

(Dollar Photo Club)

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Tuesday, 06 December 2016 07:57 AM Current | Bio | Archive

 

Reuters commented that Fed officials cautioned that the incoming Trump administration's economic plans should not be cast as if the economy is in crisis as they worry there is risk that overly aggressive fiscal, tax and other changes could become inflationary given the economy's current strength. And if that would be the case, that could force the Fed into more rapid interest rate increases and possibly raise the risk of recession.

The U.S. is offering us some interesting data and, of course, there is always the prospect of something crossing the Trump Twitter feed.

The interesting data is unit labor cost and productivity figures, and durable goods and capital spending figures.

The unit labor costs data is relevant because it is a signal of the inflation pressures that existed “pre-Trump.”

The labor costs in the United States are the main driver of the genuine inflation that we’ll get in 2017. Oil base effects simply add a false inflation picture. The real breath of inflation is a labor cost story.  

The durable goods and capital spending data is more suspect because the distinction between investment and consumer spending is increasingly blurred, especially with the areas of technology.

A growing chorus of economists are suggesting that investment data should not be considered to represent investment anymore and a broader definition of investment that incorporates consumer spending is needed to get a true picture of a country’s investment in its capital stock.  

And then we have the euro that has rallied in the wake of the Italian referendum result yesterday, which may seem somewhat peculiar on an initial interpretation and that has been for many international investors a surprising development.

Now, that move is actually not that surprising. The Italian no-vote had clear signs that it was not an anti-establishment cry protest alone, and that it should not be taken entirely as part of a grander trend. There were populist elements to be sure, but there was more to this vote than just populism.

Besides that and that is perhaps more important, the move up of the euro should be a reminder to all investors that the Euro area is a current account surplus bloc, which is by the way exactly the opposite of the U.S. situation and that the price of the euro is for a very important part by caused by the inclination by the Europeans not to sell their euros.

I don’t especially say that Europeans are better placed to understand the nuances of their own politics overall and especially those of Italy, but they are perhaps less inclined to overreact to the news that another Italian government has departed office, which makes it the 41st since 1945.

The fact that most Europeans don’t have to face this new Italian government crisis means they are not especially induced to sell their euros as a result of this development, be it because they don’t understand what’s really going on in Italy and what this could imply financially for Italy and the euro area as well, or be it because of their unfortunate euro ignorance, and so, in all logic, the euro rises in value.

The just released the Euro area GDP shows a 0.3 percent increase in Q3, which corresponds with a 1.7 percent increase on a yearly basis.

Please take note that this is just a revision to the data and there will be many more revisions in the future. However, the number shows that the Euro area is performing adequately in aggregate. In this circumstance one might question why the ECB will contemplate on Thursday printing even more money, especially at a time when inflation in the Euro area is pretty much a one-way bet, but print, they probably will.

The ECB’s Draghi gives the impression of a man addicted to easing, and a little thing like reasonable growth accompanied by rising inflation will not, in all probability, deter him.

Over in the UK we have a reprise of its political drama with the Supreme Court hearing the case of whether or not the UK government must get parliamentary approval to invoke article 50 and start the exit from the European Union.

There is a growing consensus that the UK government will lose its appeal and will have to get parliamentary approval, but if that is the case, parliamentary approval will be given.

The debate is about whether the approval will be granted with conditions attached, but the government can use parliamentary procedure to minimize that risk in all probability.

In the meantime and notwithstanding all the uncertainties that are present, markets remain complacent. Question is, ‘For how long?”

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

 

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HansParisis
There is always the prospect of something crossing the Trump Twitter feed.
trump, italy, america, invest
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2016-57-06
Tuesday, 06 December 2016 07:57 AM
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