Haiya is the name for the biggest hurricane ever which was heading towards Filipinas this week. According to experts there is not almost nothing built on the Philippines that can withstand winds like that. We know natural disasters very well but do we heading into the some which are caused by men? Very probably yes. Monetary policies are the best example of these days’ potential catastrophes for human mankind. They are direct proof that nothing has changed since 2008. Otherwise we would have higher rates. As we wrote last week ECB finally cut the basic rates by 25 bps to historic lows and they will keep them unchanged for a longer period of time. The reasons behind were according to president Draghi low inflation expectations, risk of the growth remain downside as well as unemployment rate and ECB expects that Euro area will face prolonged period of low inflation if not deflation. The Bank of England unchanged its policy but surprisingly our brothers Czechs entered currency wars. Although CNB decided to keep interest rates unchanged it decides on interventions on the foreign exchange market to weaken the koruna so that the exchange rate of the koruna against the euro is hold close to CZK 27.
“Today there is only one country and only one in command: Germany” said Romano Prodi last week. What Europe needs is according to him that ECB should fulfill its inflationary targets by 2 %. Prodi said that Italy is in trouble because of low inflation and that it is trapped in deflationary spiral. Italy has primary budget surplus but its debt to GDP ratio is still climbing due to the unsatisfactory nominal GDP growth. Prodi also urged for creation of “Latin front” against Germany. He claims that Germany is obsessed by low inflation as teenagers are obsessed by sex. There is nothing strange that some Italians claim for lowering of purchasing power of Euro. They did it with their currency before Euro all the time. But as we have emphasized many times these opinions are still stronger and I think that higher inflation times is slowly coming into the Europe; hopefully not end by the word “hyper”.
We had another whole country protests in Greece for 24 hours. Protests were taking place as Greece holds talks with its ‘troika’ of creditors. Labor unions were fear that politicians will impose another wage and pension cuts to meet the terms of the bailout and that they introduce more job cuts in the public sector, as well as privatization. But we are accustomed with these news and we will see more strikes in the near future. That is for sure.
China´s Premier Li Keqiang declared last week that China needs grow at least 7.2 percent annually to create 10 million jobs a year which is necessary for employment as one of the country´s priorities. His remarks were made at a union meeting two weeks ago but were only published in full this week, just days before a pivotal Communist Party plenum to set policy opens. He also warned on easy credit supply, which is about 100 trillion yuan ($16.4 trillion) what means that is already twice the size of China´s GDP. And new credit could cause inflation which is for Chines leaders’ dangerous game in one billion men country. Growth at the peace of 7.2 percent is quite ambitious plan because as we informed you many times China is suspicious to adjust official economic data. There is also news from time to time which supports this theory as for example the one from the last week. Chinese leaders called for stopping expanding industries such as steel and cement in which supply outstrips demand to cut overcapacity of these industries. And as data shows cement manufacturers use only 71.9 percent of their capacity from 2012 and the steel industry use only 72 percent. So as you can see the situation around the growth of GDP is at least cloudy. On the other hand everybody expects introduction of some reforms on their Third Plenum meeting in terms of industry deregulation, financial liberalization, and reforms to land titles, state-owned enterprises and social security. We will see what this meeting brings to the globe.
The most important data for this week from the US were non-farm payrolls. So October nonfarm payrolls soar to 204,000. It was a nearly double digit contrary to the expectations on 120,000. Unemployment rate in the US is at 7.3%, a little bit up from 7.2% in September. Does it mean that FED changes its policy in the near future? It is difficult to tell. But as the UBS warns FED is trapped. According to the UBS the Fed is facing two major risks. First is that premature tapering could disrupt markets and triggers global turmoil across all assets classes with consequence of weakening already weak economy. Second is that if FED delays tapering of its policy of 85 billion purchase program it will fuels creating of asset price bubbles, which could burst eventually and do major damage as well. So you can choose as usually what really happens. Maybe we will witness no tapering at all but increasing of QE. Who knows?