2015.03.06 News



– Brazil’s real tests 3 per dollar mark as woes deepen
– Brazil raises benchmark interest rate to 12.75%
– China lowers GDP target to “around 7%”
– Australia’s trade deficit widens to A$980m
– Aussie retail sales suggest healthy wallets
– Philippines’ CPI: don’t expect monetary easing
– German industrial orders drop more than expected
– Italian economy stagnates in fourth quarter

– UK car market roars ahead for 36th month
“The UK’s vehicle market has registered its first ever 36 month period of consecutive growth, according to an industry body, with the rise driven by corporate purchasers in a sign that business confidence has improved.”
– US dollar holds at 11-year high ahead of payrolls
– German industrial output inches higher
– Spanish industrial output jumps 0.4% in January
– Eurozone Q4 GDP growth confirmed at 0.3 %

2015.03.04 News


– Canada grew faster than expected in Q4
– Australian Q4 GDP slows to 2.5%
– Aussie purchases of SUVs jumped 24% last month
– Japan’s services sector shrank last month
– China’s services sector grew in February: HSBC
– RBI’s Rajan surprises with another rate cut
– Q4 Aussie GDP recap: tough times ahead
“Housing prices continue higher, spending continues to be strong, however business sector already cutting on investments and spending. Mining boom is seem to be faltering. Are regular people stepping into financial trap?”

2015.03.02 News

Tonight let’s begin with China where the central bank followed up with a second rate cut this year. While many believe this is a step in the right direction, the move alone will do little to reduce high real rates and tight effective monetary policy.

In fact money market rates in China have been rising – here is the one-week interbank rate (SHIBOR).

At the same time inflation has been moving lower, with CPI hitting 0.8% YoY in the last report. This results in real rates that are are multi-year highs (chart below) in a slowing economy. The situation in the repo markets is similar. The effective monetary policy is just too tight and these real rates are not sustainable – many more cuts will be needed.

The PBoC pointed out that the reason for the cut was to achieve “real interest rate levels suitable for fundamental trends in economic growth, prices and employment”. Market participants and economists remain a skeptical.

Deutsche Bank: – The rate cut is not enough to stabilize the economy. We believe growth will continue to weaken in March and Q1 GDP will drop to 6.8% (consensus 7.2%). The key issue is whether the central government will loosen fiscal policy significantly and quickly enough to offset the slide of fiscal spending on local government side. We do not see signal of such easing yet. Without meaningful pickup of fiscal spending, growth momentum will likely weaken further.

With recent talk of a US rate hike in 2015, this puts the Fed and the PBoC on a diverging policy trajectories. That exerts further downward pressure on the yuan which now trades at the lowest levels since 2012. The chart below shows USD appreciating against CNY.

Many now believe that Beijing will soon let the USD/CNY peg go. With rate cuts alone insufficient to stabilize growth, weaker currency may be just the medicine China’s economy needs.

One of the reasons Beijing may drop the peg to the dolar is the fact that USD continues to rally and China does not want to ride along. It was easy when the dollar was weakening, but no more …

That’s why Turkey for example is informally pegging the lira to the euro to ride along with the Eurozone. Makes sense.

Israel’s central bank cuts interest rates to 10bp as deflation sets in.

In fact the nation’s core CPI has collapsed and negative rates and QE may be required.

Israel’s 10-year government bond yield hit new lows as a result.

Brazil’s economy remains vulnerable as the country faces stagflation and the government deals with weakening fiscal situation. Sovereign CDS spreads remain elevated –

Now let’s take another look at US equities. Once again, valuations are now highly vulnerable to rate increases.

Based on the so-called “risk premium” valuations look attractive. But the main reason for this elevated risk premium is due to low interest rates. And that’s what has provided support to valuations.

– Tens of thousands of people marched through Moscow yesterday inmemory of Boris Nemtsov, the slain liberal politician. In the largest opposition demonstration the city has seen in three years, people marched towards the spot where he was murdered on Friday on his way home from a restaurant near the Kremlin. Marchers held placards saying, “Boris, I’m not afraid” and “They killed you, they are killing freedom”. (FT)
– Markets galvanised by Chinese rate cut The Chinese central bank cut interest rates for the second time in three months in an effort to prop up the slowing economy and stave off the threat of deflation. The decision spurred an equity rally across the Asia-Pacific region. (FT)
– Greece warned to hurry up Jeroen Dijsselbloem, Dutch finance minister and the eurozone’s chief negotiator, said emergency funds could be transferred to the Greek government as early as this month so long as it immediately adopts some of the economic reforms demanded by its creditors. In an interview with the FT, he explains how a deal was done to extend the Greek bailout.(FT)
– European and US data We’ll get a last look at unemployment and consumer prices in the eurozone before the ECB starts its bond-buying programme. The jobless rate is expected to stay at 11.4 per cent and core inflation is expected to stay near zero. Meanwhile, US personal incomes are expected to have risen in January. (NYT$)

Fast FT
– German inflation beats gloomy forecast
– US GDP revised down less than expected to 2.2%
– US pending home sales hit 18-month high
– Winter takes the rap for US confidence drop
– Relief rally can’t hide Brazil’s real woes
– Fall in Aussie inflation supports further easing
– Australia new home sales grow in January
Australia’s housing market is booming, but there are concerns that soaring house prices cannot last. The Reserve Bank of Australia, which recently cut rates to stimulate the economy, has expressed concern over the issue.
– Eurozone manufacturing barely expands in February
– UK manufacturing PMI powers to seven-month high
– UK mortgage approvals steady says BoE
– Fed’s Williams Sees Full U.S. Employment by Year End
– Fischer: Fed Closer to Rate Rises, But Exact Timing Remains Unclear
– Economists React to the Fourth-Quarter GDP Report: ‘The Underlying Picture Remains Good’

2015.02.27 News

We start with the Eurozone where credit and economic conditions continue to improve.

1. The broad money supply growth has moved decisively higher – exceeding forecasts. This is a definite sign of the conclusion of the banking sector deleveraging. Clearly there is more to do on the recapitalization of some of the area’s banks, but the worst is over.

2. Growth in the Eurozone’s private sector loans also exceeded estimates and is about to turn positive.

Here is the breakdown between corporate and household loan growth.

3. Sentiment is gradually improving as well. Below is consumer confidence across the area as well as Spain’s business sentiment (both figures were released today).

4. Rates continue to fall. German, French, Portuguese, and other government bond yields hit record lows last morning.

5. The euro is near multi-year lows again, which should help the area’s exporters as well as soften deflationary pressures.

6. European stock markets are on fire as a result of these developments and the ECB stimulus. Below is the Dow Euro STOXX 50 (red) vs. the Dow Jones (blue) YTD (ignoring the currency component here).

Greece however remains the Eurozone’s potential Achilles heel. Greek depositors withdrew €12bn in January and probably continued to take cash out in February as well. This means that in order to replace this lost financing, Greek banks will need to tap more of central bank loans via the emergency liquidity assistance (ELA). That makes the Bank of Greece more indebted to the Eurosystem via Target2. Grexit is therefore becoming an increasingly expensive option for the EMU.

The US dollar resumed its rally in the last few days as expectations of a 2015 rate hike in the US increase.

As a result, vulnerable emerging markets currencies came under pressure again. BRL, TRY, IDR hit multi-year or record lows against the dollar. This is one of the dangers of the Fed’s potential early rate hike – it could significantly destabilize a number of nations.

Speaking of the USD rally, I am not sure Beijing can handle letting the yuan continue rising with the dollar for much longer because it makes China’s exporters less competitive. The yuan weakened again today and is now at the lowest level against USD since 2012. Is Beijing about to let the peg go?

Japan’s retail sales and household spending have never recovered from the consumption tax hike. It’s a good thing Abe’s administration did not hike the tax again last fall – that would have been a disaster.

Baltic Dry index is down 55% over the past year as demand for raw materials shipping, such as iron ore, declines.

In the United States the headline CPI (red) went negative for the first time since the Great Recession. However the core CPI rate (blue) remains resilient. Still, the Fed will have to wait for the headline figure to recover substantially before hiking rates.

With inflation collapsing, US real wages have moved higher – materially above consensus.

Investors poured $11 billion into HY funds/ETFs so far this year.

This has resulted in a spectacular rally in HY bonds as chase for yield resumes. Once again, an early Fed hike could “dampen” this enthusiasm.
– The US approved the biggest government intervention in the way the internet is run in almost two decades. The telecoms regulator adopted new “net neutrality” powers to ensure that broadband is treated as a public utility and all traffic is treated equally. (FT)
– A positive start for Asian equities Most Asian stocks were up this morning but emerging market indices slipped after US economic data added weight to the view that the Federal Reserve could raise rates by the summer. Tokyo’s Nikkei 225 added to the 15-year high it reached on Thursday in spite of weak economic data showing that the economy is flirting with deflation again. (FT)
– Isis released a video that appeared to show the destruction of rare and ancient artefacts from the Iraqi city of Mosul. This came after the Washington Post identified Jihadi John, the masked figure responsible for some of the most barbaric murders by Isis, asMohammed Emwazi, a Briton from west London. (FT, WaPo$)
– Plunging oil prices push idle rigs to 20-year high Oil drillers say the number of scrapped deepwater rigs will hit a two-decade high and the industry slump could last another two years. (FT)

Fast FT
– US inflation records annual drop on oil drag
– Loonie rises as core Canadian inflation holds up
– US annual inflation rate drops; Wall St shrugs
– Japanese consumption slumps, inflation slows
– Japan’s retail sales add to disappointment
– French consumer spending bounces strongly
– Danish economy basks in buoyant fourth quarter
– Spanish deflation eases as economy recovers
– Sweden serves up growth surprise
– Italian, German state inflation edges higher
– Bank of Japan’s Kuroda Still Seeking Blastoff
– Why the Dip Into Deflation Should Be Short-Lived

2015.02.26 News

Let’s begin with some recent trends in the US housing market.

1. New home sales came in stronger than consensus – up 5.3% from a year earlier.

2. But the buyers increasing seem to be wealthier individuals. US new homes are consistently getting larger as builders focus on “luxury homes”.

Another way to analyse this trend is by looking at the difference between new and existing home prices.

In fact, according to the WSJ for the first time “builders have sold more homes priced above $400K than those below $200K.” Once again, the lack of affordable housing – both for purchase and rent – will become an increasing problem in the US.

3. The 30-year mortgage rates have risen back to 4%.

As a result mortgage refinance activity slowed.

4. Longer dated lumber futures (Sep-2015 shown below) have turned decisively lower. Markets seem to be anticipating soft construction demand this summer. Note that some of this may be driven by the housing market in Canada, which is about to undergo a correction.

Now let’s take a look at a couple of updates in the energy markets.

1. The steep futures curve (contango), cold weather in some parts of the US, and refinery outages are pushing US crude in storage to new highs.

2. At the same time US crude production shows no signs of slowing. The fundamentals remain quite bearish for crude.

A number of analysts and investors continue to suggest that the US equity market looks increasingly overextended. Here are two indicators.

1. From the technical perspective we see bearish investors disappearing.

2. From the fundamental perspective here is the median price/cash flow ratio. One could justify these valuations as long as rates stay at current levels. But if the Fed decides to hike this summer – as a number of economists believe – things could quickly turn ugly for the stock market.

Switching to the Eurozone for a moment, here are some trends to watch.

1. Expectations for economic growth diverge sharply between Spain and the rest of the Eurozone, particularly Italy.

2. French consumer confidence is recovering quickly.

3. The ECB (as well as the National Central Banks) will find it increasingly difficult to find enough debt to buy, as net issuance turns negative.

4. That’s why yields on government paper remain at or near record lows. Here are the yields on the 5-year French bonds and the 10-year Irish bonds for example.

Economic reports out of Brazil continue to be abysmal. Here is the FGV consumer confidence indicator.

Finally, a note on Ukraine where the CDS-implied probability of default is approaching 100%. According to Bloomberg, “Ukraine risks losing IMF support for aid if war escalates”. And Moscow is more than happy to make sure there is no end to hostilities.

– Morgan Stanley will pay $2.6bn to settle claims that it mis-sold mortgage-backed securities in the run-up to the financial crisis. The US Department of Justice had charged half a dozen banks with mis-selling – this settlement brings the total of mortgage-relatedpenalties to about $40bn. Goldman Sachs is likely to be the last of the banks to settle its case. (FT)
– Chinese cyber security alarm European and US companies have asked their governments to help stop the implementation of new Chinese regulations, which will force local and foreign banks to use only IT equipment deemed “secure and controllable” by Beijing. The groups warned that the rules would “hurt the development and integration of the Chinese banking sector in the global market”. (FT)
– Lenovo hacked after adware blunder Less than a week after being criticised for pre-installing advertising software on consumer laptops that exposed users to hacking, Lenovo’s website was hacked. Customers reported seeing videos of young people looking into web cameras and employee emails were leaked. (Bloomberg)
– Budget reprieve for France and Italy The European Commission decided not to fine France for failing to bring its budget deficit under the EU limit of 3 per cent of GDP in time. Italy also got a pass for not cutting its debt level because more leeway is given to countries facing recession. (FT)
– Paying for the privilege of lending Germany sold five-year debt at a negative yield for the first time . Negative-yielding bonds mean investors pay more than the face value of a bond plus interest payments and accept a guaranteed loss if they hold it to maturity. These securities are becoming more common and reflect a demand for haven investments. In Germany’s case, the ECB’s quantitative easing programme was seen as the main catalyst. (FT)

Fast FT

– US mortgage applications fizzle for third week
– US home sales fare better than expected
– France, Italy spared fine over budget breach
– Venezuela’s bolívar tumbles beyond 200 mark
– Aussie business spending numbers underscore gloom
After adjusting for the typical bias in firms’ investment intentions, the survey suggests that non-mining investment is likely to contract by around 7% over 2015-16 in year-average terms. This result suggests that firms remain very gloomy about the outlook and are unwilling to commit to lifting investment spending.”
– BoJ’s Ishida favours stable yen “the government appears to be less welcoming of further yen depreciation at this moment and is accordingly toning down its rhetoric on the need for additional QE.”
– Spanish Q4 GDP growth confirmed at 0.7%
– German unemployment falls by 20,000 in February “A strong start to the year for Germany’s jobs market.”
– UK GDP growth confirmed at 0.5% for Q4
– Eurozone economic confidence rises

2015.02.25 News

Let’s begin with the United States where house price appreciation (per Case Shiller index) seems to have leveled off above 4% per year. Both the National Association of Realtors (NAR) and Case Shiller seem to indicate a more even price growth across the various regions than in the past.

US house price appreciation continues to trend significantly above wage growth – which has been around 2%. This tells me that homes are becoming increasingly unaffordable for a large portion of the population. With rents also rising faster than wages and new construction remaining subdued, lack of affordable housing may become a serious issue for the US in years to come.

The media has been buzzing about the growth of treasury and agency MBS holdings (“safe bonds”) at banks. Indeed the absolute levels have risen above $2 trillion

What do these banks know that we don’t Why are they hoarding safe bonds?

This is absolute hype. Yes, banks are holding more treasuries and agencies in order to comply with regulatory liquidity ratios. These bonds are also exempt from the Volcker rule unlike corporate debt. But whatever the case, “safe bond” holdings as a percentage of total bank assets are not that extraordinary. But the headlines sure get the website clicks, etc.

According to the latest report from Markit, the US service sector has regained momentum in February. Markit’s economists are quite positive about an early Fed hike.

Now a few developments in emerging markets:

1. Turkey cut its benchmark interest rate today. It’s a dangerous move with lira trading near record lows. This could get really ugly if the Fed were to hike rates later this year and we get a repeat of “taper tantrum”.

2. Nomura points out that foreign currency denominated debt across emerging markets is actually much higher than typically reported because of offshore bond issuance. This will also quickly become problematic should the Fed decide to move on rates and the US dollar appreciates further.

3. A number of emerging market nations are entering deflation as falling prices spread from the wholesale level to the consumer. I discussed Singapore yesterday – here is more.

4. Venezuela continues to unravel as violent protests spread.

5.The Ukrainian currency (hryvnia) shed another 16% today. What a disaster.

Here is the timing expectation for the next rate hike for the US, the UK, and the Eurozone (as expectations evolved over time). As I said before the timing for the US looks a bit aggressive, but the policy divergence is impressive: Sep-2015 for the US, Feb-2016 for the UK, 2019 for the Eurozone (from Charlie Bilello).

Easy monetary policy works well in boosting stock markets. YTD top 10 best DM performers are all in nations where central banks have eased. What does it mean for US equities when the Fed decides to initiate liftoff?

Now a couple of notes on the energy markets.

1. There is an argument to be made that a good portion of the collapse in crude can be explained by stronger dollar. The dollar explains half the variance in crude oil price movements. Quite surprising actually.

2. Wind power capacity and generation has been rising significantly in Texas. Two questions:
A. How much of this is driven by tax credits?
B. What will happen to this trend given persistently low natural gas prices?

For those who love stock picking, consider the following chart showing the percentage of shares beating the market. When you make you selection, you better be right or your portfolio will underperform. This certainly argues for index investing.

– US Fed chairwoman Janet Yellen laid the groundwork for the end of zero interest rates yesterday. She said the labour market had improved and the central bank will start tightening monetary policy when it is “reasonably confident” that inflation will move back to its 2 per cent objective. US stocks rose to record highs after her comments, while Treasury bonds and the dollar saw some choppy trading. The momentum did not carry over into the Asia-Pacific region, where bourses weremuted this morning. (FT)
– Greek reforms approved Eurozone finance ministers approved Greece’s proposed economic reforms. Parliaments now have to approve the bailout extension before it expires on Saturday. Kerin Hope examines the key pledges to see where Greek finance minister Yanis Varoufakis has room for manoeuvre. (FT)
– Eurozone banks need better capital Daniele Nouy, the ECB’s chief banking supervisor, said some of the bloc’s biggest banks will need to raise more and better-quality capital because of the clampdown on national exceptions to capital rules. She said fresh legislation from Brussels was likely to be necessary. (FT)

Fast FT

– Turkish central bank cuts interest rate again
– US housing rebound “faltering,” Case-Shiller warns
– Eurozone approves Greek reform proposals
– IMF, ECB voice concern at Greek reform proposals
– Yellen seeks wiggle room on patience pledge
– BoC’s Poloz hits Loonie before blackout
– HSBC China manufacturing PMI beats expectations
– Janet Yellen’s testimony: key extracts

On the labour market

Long-term unemployment has declined substantially, fewer workers are reporting that they can find only part-time work when they would prefer full-time employment, and the pace of quits–often regarded as a barometer of worker confidence in labor market opportunities–has recovered nearly to its pre-recession level.

However, the labor force participation rate is lower than most estimates of its trend, and wage growth remains sluggish, suggesting that some cyclical weakness persists. In short, considerable progress has been achieved in the recovery of the labor market, though room for further improvement remains.

On the drop in oil prices

The bulk of this decline appears to reflect increased global supply rather than weaker global demand. While the drop in oil prices will have negative effects on energy producers and will probably result in job losses in this sector, causing hardship for affected workers and their families, it will likely be a significant overall plus, on net, for our economy.

Primarily, that boost will arise from U.S. households having the wherewithal to increase their spending on other goods and services as they spend less on gasoline.

On the global economic backdrop

Foreign economic developments, however, could pose risks to the outlook for U.S. economic growth. Although the pace of growth abroad appears to have stepped up slightly in the second half of last year, foreign economies are confronting a number of challenges that could restrain economic activity.

On inflation

The Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate, but we will continue to monitor inflation developments closely.

On when raising interest rates

The FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.

If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.

Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.

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