Highlights of the Fed’s Beige Book released Sept 2, 2015:
- 11 districts reported moderate to modest growth
- 6 districts reported ‘moderate’ growth, 5 reported modest expansion, 1 ‘only slight growth’
- Reports of higher wages especially in New York, Cleveland, St Louis and San Francisco
- Tighter jobs market pushing up wages slightly in some industries and occupations
- Dallas Fed said outlook for loan demand more cautious due to low oil and China worries
- Credit quality improving in most districts
- District reports on manufacturing were mostly positive
In the previous Beige Book it noted that all 12 Fed districts reported expanded activity. Three grew at a modest pace, 7 grew at a moderate pace and two were “stable or improving.” It also noted that the strong dollar was hurting spending in some districts.
Early in July, Sweden’s Riksbank proved its dedication to the post-crisis central bank mantra of “if it’s broken, break it some more” when, after becoming the first country to witness observable, indisputable evidence of QE’s failure, the central bank pushed rates further into negative territory and expanded QE.
Of course as we’ve seen, things can always get NIRP-er-er in the new paranormal which is why the market is pricing in a 50% chance of more easing from the Riksbank at tomorrow’s meeting.
The problem is that if you go NIRP and still are not able to achieve the kind of economic outcomes you were looking for by essentially forcing depositors to choose between a tax on their savings and pulling money out and spending it, well then the next logical thing to do is to stop accepting deposits, which is apparently what it’s come to in Sweden.Here’s more from Radio Sweeden:
Richard Landén from Helsingborg, southwest Sweden, tried to open a simple savings account at Swedbank. But the bank wanted him to move over his entire account, including his monthly salary deposits and any savings he had.
So in other words Mr. Landén from Helsingborg, either give the bank enough of your business to matter or else go do your patriotic duty and spend whatever you had planned to save. The Riksbank will thank you for it.
The latest oil output survey from Reuters:
- OPEC output down 170,000 bpd to 31.71 mbpd
- July production wsa highs in recent history
- Fall in Aug led by Iraq due to reduced exports
- Saudi Arabia pumps 10.43 mbpd virtually unchanged from 10.45 mbpd in July
There’s nothing much to take away from this data. WTI crude last at $44.22 after a brief dip to a session low at $43.71.
EIA crude oil inventories for the week ended Aug 28:
- The ‘consensus’ was undoubtedly higher than +444K, probably closer to +4440K
- API reported a 7600K barrel increase in its latest report
- Gasoline inventories -271K vs -2000K expected
- Distillate inventories +115K vs +1000K exp
- Cushing inventories -388K vs +400K exp
- Production -1.3% to 9.218 mbpd vs 9.337 mbpd
Oil quickly down to $44.27 from $45.08 ahead of the report. I’m not convinced this is terribly bearish news. The reading was more bullish than API signalled and right around where I expected. In addition, the production numbers (which aren’t well publicized) are bullish.
I think crude will hold the lows but given how wildly emotional this market is; expecting it to react to purely fundamentals is a dangerous assumption.
US oil production is at the lowest since Feb
Morgan Stanley has set a bear case Sensex target of 22,800 which is 10% lower from current levels. The US-based investment bank, however, has assigned just 10% probability for the 30-share blue chip index slipping to that level.
Morgan Stanley says Sensex could go that low if “policy response is tepid and, more crucially, global conditions deteriorate”. Also, if FY16 and FY17 earnings growth is just 10% and 15% the market could see that kind of a downside.
Morgan Stanley’s base case scenario (50% probability) is the index going to 28,800 by August 2016 – that’s a 13% upside from the current levels. “Growth will slowly accelerate, and we expect Sensex earnings growth of 14.6% and 20.1% in FY16 and FY17, respectively.
Broad market earnings growth will likely be at 13% in FY16 and 15% in FY17. Morgan Stanley says that Indian market’s further performance could depend on policy action.
“Outperformance since May makes relative valuations rich but until global low inflation persists this outperformance could continue if India’s policy makers can transition from caring for macro stability to pursuing growth,” Ridham Desai and Sheela Rathi, analysts at Morgan Stanley said in a note.
Goldman Sachs macro strategist Francesco Garzarelli is very much chiming with that view.
The rise in foreign FX reserves held by non-G-7 countries that started around 2003-04 (at around $1trn) appears to have ended for good – particularly if our ‘new oil order’ template holds, keeping crude oil prices around current levels.
Reserves peaked around a year ago, he says, with a reduction led by China. All things being equal, this points to weaker bonds over the coming years.
But, Mr Garzarelli says, private investors shouldn’t be too quick to adapt. Bond-buying programmes at the Bank of Japan and the European Central Bank mean that the supply of bonds available to private hands is lower, Mr Garzarelli says. China could also switch direction, he adds.
How much further pressure on Chinese FX reserves lies ahead of us from potential capital outflows is a vexed issue, even within areas of our research group.
And anyway, the macroeconomic backdrop could get really very supportive for assets such as bonds that are sought as safe retreats.
A bigger slowdown in China, or an even larger fall in oil prices – of which larger capital outflows and FX reserve depletion could be a symptom – would likely be associated with deeper revisions in prospective nominal growth in the developed world. This would lower our sights for bond yields, not lift them.
Janus Capital bond maestro Bill Gross is out with his latest Investment Outlook:
The latest missive from Gross touches on themes he’s emphasized before. He writes that the Fed seems intent on raising the Fed funds rate if only to prove they can begin the journey to ‘normalization’.
The Fed ‘should’ raise rates in September, he says, but it might be a “one and done” hike, at least for the next six months.
The larger problem, he warns, is that low rates are no longer conducive to saving and investment while governments continue to push austerity rather than stimulation.
Global fiscal (and monetary) policy is not now constructive nor growth enhancing, nor is it likely to be. If that be the case, then equity market capital gains and future returns are likely to be limited if not downward sloping. High quality global bond markets offer little reward relative to durational risk.
Read the full report.