It’s not that the euro is weak, it’s that the dollar is strong. That was the message this morning from François Villeroy de Galhau, France’s central bank chief and a member of the European Central Bank Governing Council. Gaslighting has become normal these days it seems…It’s fuzzy thinking for sure, no doubt trying to mask the calamity the ECB faces, but he’s not entirely wrong. It’s true that the dollar has been on the rampage this year, rising to a 20-year high against a basket of major peers, and on a trade-weighted basis against a basket of other currencies the euro is trading close to where it has been for the last 17 years. The nominal effective exchange rate (NEER) for the euro is around 114, according to the ECB, much closer to the peak of 124.7 struck in Dec 2018 than the low around 83 since the euro’s inception.
So, is it all the dollar’s fault? Well, a bit. Sterling has also plunged against the dollar and has been pretty steady against the euro. The single currency rose to its strongest against the Japanese yen since 2015 earlier this year. The BoJ doesn’t really face the same inflation problem and has keep monetary policy at max accommodation. On the other hand, the euro has slipped its parity anchor versus the Swiss franc. So, not entirely wrong as such, but this misses the point: the euro has cratered against the dollar and this matters since commodities are priced in dollars. And is largely down to the ECB’s inaction. The ECB is importing dollar-led inflation to the Eurozone, which is making the currency less valuable and people poorer. The ECB’s mandate is price stability, not FX rates, but it should be mindful the role the currency has in the inflation dynamic. It clearly does not.
EUR/USD sits at 1 this morning after briefly but importantly breaching this level yesterday. No love for the euro until the ECB gets control of it (they won’t and can’t) or the war in Ukraine ends and inflation comes back down. Sterling trades a bit firmer with GBP/USD at 1.19 as UK economic data defied the gloom and GDP expanded 0.5% between April and May.
European stocks moved lower in early trade on Wednesday, the major bourses all more than 1% lower though well within recent ranges. It follows a downbeat session on Wall Street that left the Nasdaq and S&P 500 both decline almost 1% as investors displayed some caution ahead of today’s inflation data.
All eyes on the US inflation print today, with CPI expected at +8.8%, with the month-on-month likely above 1%. Make no mistake this will be a super-hot reading, though not as toasty as the +10.2% that a fake report indicated yesterday. Core CPI will be a tad lower, which could support risk, but is totally insignificant longer term since – as I said before – consumers don’t pay core, particularly due to the relatively inelastic demand for items that are not in the core reading: energy and food.
A good example of how ongoing supply side constraints can lower demand but also keep inflation high: Heathrow asks airlines to stop selling tickets as it placed an effective cap on the number of daily passengers it could handle this summer at 100,000.
The Reserve Bank of New Zealand hiked 50bps as expected to take interest rate to a six-year high of 2.5%, saying it's "broadly comfortable" with its hiking path. South Korea’s central bank did the same.
Oil tracked back a bit higher this morning after a steep decline on Tuesday. Front month WTI slid under $94 to test its 200-day moving average where it has found support, corresponding roughly to a couple of swing lows from March and April. Citi: "We’re still watching support at 92.93 (Apr 2022 low), and a close below that level, if seen, could suggest a push lower to horizontal support between 85.41-88.48 (Oct 2021 high & 55-week-MA respectively)."
Musk things...Twitter (NYSE:TWTR) is pressing ahead and suing Musk to force him to complete the deal. The complaint pulls no punches and makes the same points I have made here on several occasions. There are some real zingers.
"Musk apparently believes that he - unlike every other party subject to Delaware contract law - is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away," the complaint states.
Hard to argue with this. Nor is it easy to argue against Twitter’s complaint that Musk was “secretly” accumulating stock between January and March – if you recall Musk’s original filing, when it eventually came, said the stake was passive. Musk already faces legal action for not disclosing his material stake within the mandated timeframe.
The lawsuit also points out that Musk was clearly worried about the cost of the transaction. “The value of Musk's stake in Tesla, the anchor of his personal wealth, has declined by more than $100bn from its November 2021 peak. So Musk wants out," it said. “Rather than bear the cost of the market downturn, as the merger agreement requires, Musk wants to shift it to Twitter's stockholders," it added.
Twitter’s complaint uses Musk’s various tweets against him. This is one of the aspects of the case that intrigues and makes it so difficult for Musk – he's made it all so obvious it would hard to side with him.
Twitter also made the point we have made here – that Musk’s ploy was ask enough questions that he can argue they breached covenants by not furnishing him with information. “From the outset, defendants’ information requests were designed to try to tank the deal. Musk’s increasingly outlandish requests reflect not a genuine examination of Twitter’s processes but a litigation-driven campaign to try to create a record of non-cooperation on Twitter’s part,” the letter says.
I noted that Musk’s position was that ‘the bots numbers must be wrong and until you furnish me with information supporting this assertion, you must be hiding important information from me’. Twitter’s lawsuit notes that Musk has no right to “hunt for evidence supporting a bogus misrepresentation theory developed to try to torpedo the deal”. I think this is an important part of the case since Musk’s main reason for pulling out rests on the bots and Twitter not giving him enough information. The law, Twitter’s lawyers argue (correctly in my view) provides “reasonable access to information necessary to close the merger. It does not give him [Musk] a broad right to conduct post-signing due diligence of a kind he specifically foreswore pre-signing".
The letter paints Musk as totally unserious. I fail to see how anyone could disagree. And it points out that Musk did not fulfil his obligation to do everything to close the deal...which is impossible to disagree with - the guy was publicly trashing the company he’d just bought (Twitter) on Twitter...it was all just too obvious.
No honour among thieves, either. Donald Trump trashed Musk in a post on Truth Social, talking about Musk coming to the White House for help on “his many subsidized projects” such as "driverless cars that crash" and "rocketships to nowhere," while calling Twitter "perhaps worthless." Trump signed it off with: “I could have said ‘drop to your knees and beg’, and he would have done it.” Trump then said it was time for Musk to get out of the Twitter deal. LOL – pls bring these two together on Twitter!