G20 issues a grab bag of hopes and promises

Monday, November 17, 2008

G20 issues a grab bag of hopes and promises, and pushes real decision making out to the spring of 2009 and an Obama presidency.

Japan slips into recession. Currencies relatively calm after last minute meltdown in Friday's North American session.


  • Japan Q3 GDP out at -0.1% QoQ vs. 0.0% expected and Q2 growth revised down to -0.9%
  • Japan Q3 GDP Deflator out at -1.6% YoY vs. -1.7% expected
  • UK Nov. Rightmove House Prices fell -7.1% YoY vs. -4.9% in Oct.
  • Australia Q3 Retail Sales out at +0.1% YoY vs. +0.4% expected

Events Today:

  • Norway Oct. Trade Balance (0900)
  • EuroZone Sep. Trade Balance (1000)
  • US Nov. Empire Manufacturing (1330)
  • US Fed's Hoenig to Speak (1400)
  • US Oct. Industrial Production and Capacity Utilization (1415)
  • US Treasury Secretary Paulson to Speak (2330)
  • Australia RBA November Meeting Minutes (0030)
  • Japan Oct. Department Store Sales (0530)

Market Comments:

The market action on Friday was clearly all about nervousness ahead of the weekend's G20 meeting, with US equities rising sharply to new highs late in the afternoon, only to hit an air pocket and fall an astounding 6% in the final hour of trading. Currencies followed suit, with EURUSD again knocking on the 21-day moving average resistance up around 1.2800 only to close the day at 1.2600. Liquidity must have been awful for such moves to have taken place.

The G20 outcome was largely as expected: lots of talk and little action. Any major decision, should it come, will have to wait until after Mr. Obama is sworn into office in two months time. The G20 is set to reconvene on April 30 of next year, though the G20 statement discussed March 31 as a deadline for policy recommendations - this is a date to mark in our calendars. Still, there were a few points of interest from the meeting. Perhaps most interest for the future of international banking regulation was a reference to a new "college of supervisors", basically a group of bank regulators from the major economies that would monitor banks and meet regularly to perhaps recommend coordinated policy. Interestingly, and addressing one of the great risks to the global economy going forward, the G20 made a very clear statement on the perils of protectionism and set the goal of resuming the Doha round of WTO trade talks - let's all hope that this effort bears fruit.

Most of the very long G20 statement and measures are focused on the problems that got us here in the first place, which isn't of much help at the present time. The market was perhaps hoping for concrete stimulus measures to prop up growth, but these will clearly have to wait until spring, as will any major reform of the IMF, another focus for EM country stability. Japan offered to help the IMF with funds ahead of the weekend, raising hopes of more international coordination, but of the other countries with the biggest reserves, like China, Russia and Saudi Arabia, their focus will be domestic stimulus above all else as these three countries have regime legitimacy issues should their economies spiral out of control. All in all, the G20 has done little to alter the global landscape and is perhaps a mild disappointment at best, as no stimulus action plan is on the table at this time. This raises the risk that the USD and JPY continue to strengthen, though with momentum coming out of the market lately, we'd like to see, for example, EURUSD breaking below 1.2400 again for proof that we have more wood to chop in the near term on the risk aversion theme.

The economic calendar this week is rather lightly populated. We've got quite a bit of inflation data on tap, both from the UK (UK CPI/RPI tomorrow), from the US (PPI tomorrow, CPI on Wed.), and from Germany (Producer Prices on Thu.) though this is not much of a focus at present. A few articles are out talking up the prospect of deflation and potentially the sharpest fall in monthly CPI since 1949. The BOE Minutes are out on Wednesday. We have two of the regional US manufacturing indices out this week, and any ability to post new lows would be remarkable as these surveys tend to bounce sharply higher once they have gone super-negative due to the comparative nature (so November relative to October has to be worse than October relative to September, etc.. for the index to be able to post new lows). The BoJ is out on Friday, but there is little excitement there, with virtually nothing left to cut from the 0.30% overnight rate.

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