The investment climate rests on three legs:  the divergence that is characterized by the de-synchronized business cycle, the decline in commodity prices and a slowing of China. Data that underscores these factors appear to have stopped having much significance for investors.

At the same time, small changes to perceptions, like the downtick in the University of Michigan survey’s inflation expectations, can have seemingly out-sized market impact. Before the weekend, it reported that the five-year inflation expectation slipped through the 2.7%-3.0% range that has confined expectations over the past year or two.  It now stands at 2.6%, the same the as the one-year expectation, which eased from 2.9%.  It was sufficient to push US 10-year Treasury yields back to the lower end of their recent range (~2.30%), and sparked a pullback of the dollar.  

The flash euro area PMI and ZEW survey, on the other hand, are most unlikely to change perceptions of the near stagnant economies.  It will not alter ideas that policy makers have to do more to get back to a meaningful growth path. Some observers are emphasizing the possibility that the ECB announces some measures to increase the participation of the second TLTRO next month. And despite our claim that there is no agreed upon definition of quantitative easing, many say the ECB is slowly moving toward it. By that they mean the purchase of sovereign bonds.  

The technical, legal and political obstacles remain formidable.  There are several other classes of assets that the ECB can buy, including supra-nationals, corporates and non-covered bank bonds that are less cumbersome.  Moreover, it is possible that the low point of inflation is at hand, and the second TLTRO will be considerably more successful than the first. Together they could be worth about 250 bln euros.  Some of the second TLTRO may be used to pay back part of the LTRO funds outstanding, especially among Italian banks.  

Despite some journalists and pundits, arguing that ECB and BOJ actions are shots in a currency war, it seems like hyperbole to us.     Leaving aside confusing a metaphor with the real thing, there is no sign that other high-income countries see this as a currency war. In fact, the US (and IMF) are pressing European officials to do more.  US Treasury Secretary Lew was clear: “Resolute action by national authorities, and other European bodies are needed to reduce the risk that the region could fall into a deeper slump.” 

The weekend G20 meeting was an ideal forum for countries to push back against the “currency warfare”, but this did not appear to be a salient issue, formally or informally.   Russia was center stage, and Putin was so criticized that he left the forum early. Despite Putin’s denials, there seems to be little doubt that Russia has tanks, artillery and combat troops in east Ukraine. Russia also sent a large navy armada toward Australia (where the G20 meeting was held) and announced the resumption of long-range air patrols as far as the Gulf of Mexico and the East Pacific Ocean.  Its submarines have also been chased from Swedish waters.