Today episode is about the EU's emissions trading scheme. This is the sort of mess you thought you didn't need to know about. But now the way it has pushed up the price of CO2 for EU companies by approximately 150% yoy  means you do need to know about it, because the jolt in Co2 pricing will simultaneously push up Eurozone inflation, and retard its recovery. In short, its the sort of mess which needs watching. 

To understand what's happening now, we need to know the history of the project. The details will probably bog us down, but the fundamental story is much the same as you find almost every time you get governments target a crucial economic input and end up trying to fix prices by using a 'stabilization fund'. You can be pretty certain that whatever it achieves, 'stabilization' will be elusive in the long run.

The history is long and messy, but the result is this: by committing to a visible long-term tightening of supply at without actually knowing how, if at all, CO2 emissions really can be cut to near-zero in the medium term, the EU's scheme has created the sort of market dynamic which will be familiar to those who've looked at Bitcoin's supply-side fundamentals.  Far from stabilizing the market, they have created a classic 'bankers ramp'. 

The market has cottoned on, and the price is absolutely soaring, from an average of Eu7.60 per ton during 2012 to 2018, to Eu 42.3 a ton earlier this week.  What does this mean?  Well,  a barrel of crude is estimated in use to produce 317kg of CO2.  With the ETS price at Eu42.3 a ton, that adds about Eu13.5 to the EU effective price of a barrel of oil.  At current exchange rates, that comes to an extra $16 a barrel. Currently Brent crude is selling at US$69.4 a barrel, which is bad enough, but add on the ETS price and the price is up to $85.4 in the EU.  In yoy terms, these calculations tell us the effective price is up 137% yoy.

There seems no good reason to believe that the EU CO2 price will top out anywhere neare Eu42.3 a ton, or top out any time soon.  In short, its a broad-based tax rise on EU industry which will be past on to the consumer at just the time when its not needed. Worse, there's no knowing how high this tax will rise, nor who, if anyone can stop it. 

There are a number of prices I check daily, and run simple technicals to identify  trends. These include all the major currencies and some minor ones, commodity signals, major crypto values and US bond market signals. The metrics I use are actually quite simple, but easier to explain with a worksheet going than not.  But the signals have a pretty good track-record, if you view their purpose as correctly naming trends, rather than catching the first or last few percentage points of a move. 

What they signalled last week is that the dollar has established a strengthening trend against the SDR - no surprises there - but that the key currency mover which pushed it over the edge was China's Rmb, which broke from the strengthening trend we'd picked up in July last year when it was over 7 to the dollar (it was 6.50 when we called it) and established a weakening trend. 

This raises important issues, which I raise in today's edition. But the crucial thing to notice is that that it has happened: one way or another, this is a regime-change moment. 

This episode looks at the UK's trade data for January, to take a first measure of the impact of the new UK-EU trade barriers which went up in January. 

This is hazardous, since the UK's monthly trade numbers are about as unreliable a series as I know of. That's simply because they so often get major revisions on a scale which you just don't see in other countries. You can take two view on this. Either it suggests unique incompetence, or, just as plausibly, a uniquely scrupulous approach to getting it right, even if it takes far longer than can be achieved in the six weeks it takes to produce the first estimate.  But the upshot is dramatic: the revisions to monthly exports and imports data can come to literally to tens of billions, so we cannot, we must not, take January's numbers at face value. 

And of course, there are other complicating issues just now: the impact of renewed lockdown, the aggravated frictions on the EU borders, and also the probably big inventory swings built up in the months before January's new EU borders kicked in.  

Still, exports of goods and services fell 11.2% mom, and fell 26.5% yoy.  Goods fell 18.3% mom and services fell 0.9%.  And it's all to do with the EU trade: exports to EU fell 40.5% mom, with Eurozone down 38.5% and non-Eurozone down 53.6%. But exports to the rest of the world actually rose 3.6% mom.  That's fairly unambiguous: in January 2020 the EU accounted for 44% of UK's goods exports, but this was down to 36% in January 2021.  

For all the reasons I've mentioned, its impossible to draw long-term conclusions from today's data. All we can say is that one month on, trade volumes with the EU collapsed in a way they didn't with the rest of the world. Whether this is the start of a longer-term re-structuring of UK trade will only be visible much later in the year. 

Confused about the US labour market numbers? You should be.

Every Thursday I track the US jobless insurance claims - initial claims and continuing claims. Historically these have been pretty useful. But these are strange days for the indicator.

Take this week's numbers: initial jobless claims fell 42k to just 712k, and continuing claims fell 193k to 4.144mn. That sounds pretty good. But look down at the bottom of the report and you'll find a quite different set of numbers. The total number of people claiming benefits jumped 2.087mn on the week to reach a staggering 20.116mn. This time last year it was 2.137mn. And whilst the total number of claimants fell fairly consistently until the end of October, they've since stabilized, and since January they've been quietly and gently rising.

What's did the damage this week is Pandemic Unemployment Assistance, which jumped 1.058mn on the week to 8.387m, and Pandemic Emergency Unemployment Compensation rose 986k on the week to 5.455mn.

Since the Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation numbers are more than three times as many as those formally claiming unemployment benefit, we need to know what's happening. Which is what today's edition looks at.

Today I'm turning the spotlight on the surge in sales of heavy trucks in the US in October - up 8.3% mom to 38.95k. Just as the slump of late last year once again heralded trouble to come, now the recovery in sales suggests robust economic growth ahead. The 6m deflection above trend is now up to 0.7SDs, which is the highest since the recovery of 2010!

A slightly strange one today, looking at recent movements in Bank of Japan's ETF buying and the Bundesbank's Target 2 lending to the ECB to help explain the fundamental overvaluation of the TOPIX and DAX respectively.

Spoiled for choice, but I return today to Japan's machinery industry.  Yesterday's Japanese wholesale and retail sales numbers posed a real question. Retail sales of machinery were up 17.2% yoy; wholesale sales of the same were up 36.8% yoy, with industrial equipt up 82.1% and electrical equipt up 26.1%.  Is this a signal of a major upturn in capital goods demand, or are Japan's machinery makes simply stuffing the distribution channels?

It's an important question, given that Japan is one of the world's biggest capital goods suppliers.

Today we had September's industrial production numbers, which showed output up 4% mom sa and down 9% yoy, but with a monthly movt which was 2.4SDs above historic seasonal trends. Within that, production machinery was up 11.1% mom,  shipments were up 11.8% , inventories up 1.5% and the inventory/shipment ratio down 11%. That inventory/shipment ratio was the lowest since February, but also still 19% higher than last year's average. So although September showed dramatic progress, it was from a poor starting position.    Still, on the face of it, it isn't channel stuffing which is driving production, or wholesale sales for that matter.  It's demand.

Three stories to chase up today: 

First, the 33.1% annualized rise in US 3Q GDP - this is what full-throated and unconstrained fiscal and monetary stimulus can do;

Second, the unexpectedly sanguine results of the Eurozone's confidence and sentiment indexes for October.  The survey period ended on Oct 22nd, so these surveys may just have missed, or disbelieved, news of the new European lockdowns;

Third,  there's the divergence in Japan between retail sales (down 4% yoy) and wholesale sales (+14.9%).  In both, the star performers are capital goods: so are producers simply stuffing the channels, or is there a genuine capital goods resurgence around the corner? 

Towards the end of the month, not only do we get a whole raft of hard economic data, we also get a bunch of confidence indicators, tracking consumers, business and investors. On a global scale, my global confidence shocks & surprises is still slightly positive, but has been in very steep decline since late September.  That global signal, however, isn't really showing up how regional confidence indicators are now moving in different directions.

We got a significant foretaste today, from State Street's global investor confidence index, which tracks risk appetite by what investors are actually buying The global signal fell 3.8pts to 80.1, which was the weakest since May.  There are distinctly opposite trends coming from Asia and Europe. Asia's confidence rose 7.2pts to 91.7,  which is just very slightly higher than 2019's average; but Europe's dropped 17.4pts to 92.8, which is weaker even than the lowest points of the initial lockdown,m and in fact the weakest since August 2019.  The US indicator, too, showed a modest 2pt decline in risk appetite to 76.8, which remains higher than pandemic levels, and quite significantly higher than the 2019 average of 71.9. 

The recovery of confidence in Asia was confirmed by S Korea's Oct consumer confidence index, which rose 12.2pts to 91.6, which was the best since March, and was almost a return to pre-Covid normality. The details suggest a powerful return of optimism: readings of current economic conditions were up 16pts to 58, and economic expectations rose 17pts to 83. 

France's Oct onsumer confidence dipped only 1pt to 94, but that's pretty grim: even at the worst of the initial coronvairus wave,m the index only sank to 92. And when you look at the details, the index is being supported by improved reviews of the last 12 months, whilst expectations were falling quite hard. 

Many more confidence reports coming over the next two days.

Today we had the first glimpse of Markit's October PMIs for Japan, Germany, France, UK and US, with prelimninary reading for both manufacturing and services sectors. 

As always with the Markit's PMIs, its a struggle to drag anything of genuine substance out of them, but maybe there is some genuine information hiding in the broad sweep of the conclusions.   Anyway, averaging the movements in all these economies, there was a very slight acceleration in manufacturing expansion in October vs September, with the average rising to 52.7 from 52.4 in September. But the divergence between countries widened a bit, with the standard deviation rising to 3.7pts from 3.4.  The main reason for both those features is an acceleration in Germany, where the PMI rose 1.6pts to 58, with the output index up at 64.9, the best since Feb 2011!  Elsewhere, there's no change in pattern: Japan is still contracting but we've got mild expansions elsewhere. 

For services, there's a slight slowdown with the average falling 0.3pts to 50.9 - a much more fractional expansion than manufacturers are having. Once again, there is a greater divergence between economies, and once again, it's Germany that's responsible.  It's services PMI fell 1.7pts to 48.9, the weakest since June. Germany fared unusually well in the first wave of Covid, but seems to be sharing the same panic as the rest of Europe this time round.  

The other thing that stands out is there's a clear split between on the one hand Japan and continental Europe, which are all showing service sector contraction, and the US and UK, where servies are not only expanding, but actually accelerated slightly in October.