Fri, 20th January 2017

Anirudh Sethi Report


Archives of “Economy” Category

Emerging Markets: An Update

China reported lower than expected September reserve figures.
Polish central bank Governor Glapinski adjusted the forward guidance.
Brazil will open up development of its so-called pre-salt oil fields to foreign companies.
Colombia’s referendum on the FARC peace agreement failed by a razor-thin 50.2% to 49.8% margin.

In the EM equity space as measured by MSCI, Brazil (+5.3%), Czech Republic (+4.4%), and Hungary (+3.0%) have outperformed this week, while Peru (-3.3%), UAE (-2.2%), and South Africa (-1.4%) have underperformed.  To put this in better context, MSCI EM rose 1.4% this week while MSCI DM fell -0.7%.

In the EM local currency bond space, Brazil (10-year yield -23 bp), India (-8 bp), and Turkey (-4 bp) have outperformed this week, while the Philippines (10-year yield +38 bp), Colombia (+19 bp), and Poland (+11 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 14 bp this week to 1.73%.

In the EM FX space, BRL (+1.7% vs. USD), HUF (+1.4% vs. EUR), and RUB (+1.3% vs. USD) have outperformed this week, while TRY (-1.5% vs. USD), KRW (-1.3% vs. USD), and CLP (-1.3% vs. USD) have underperformed.

Although Chinese markets are still closed for the national holiday, lower than expected September reserve figures were reported.  They fell to $3.166 trillion from $3.185 trillion.  This is a new five-year low.  This was also a somewhat larger drawdown than surveys anticipated, which when coupled with the softening yuan suggests that capital outflows from China may be picking up again.

Polish central bank Governor Glapinski said he expects the next move to be a hike, but adjusted the forward guidance.  He now sees the likely start of the tightening cycle in early 2018 instead of late 2017.  Deflation appears to be easing, while the economy rebounded in August after a weak July.

France industrial production Aug mm +2.1% vs +0.6% exp

France Aug industrial & mftg production report 7 Oct

  • -0.5% prev revised up from -0.6%
  • yy +0.5% vs -1.3% exp vs -0.1% prev
  • mftg prod mm +2.2% vs +0.3% exp vs -0.2% prev revised up from -0.3%
  • yy +0.7% vs -1.4% exp vs +0.4% prev

Also out :

  • August current account balance EUR -2.1bln vs -2.9bln revised down from -2.6bln
  • budget balance ytd EUR -96.0bln vs -80.8bln

EURUSD 1.1114 near session lows shrugging off the better data


Pakistan dips back into the bond market

Pakistan is making its first foray into international bond markets in almost a year as the country’s three-year, $6.6bn bailout programme from the International Monetary Fund draws to a close.

 Citi, Deutsche Bank, Dubai Islamic Bank, Noor Bank and Standard Chartered have been hired to arrange the sale of a new 5-year sukuk – or Islamic bond – which will price later today.

The issuance marks Pakistan’s first appearance on international debt markets since a disappointing sale in late 2015, when the government’s hopes of borrowing $1bn were scuppered by high rates – forcing it to limit the sale of $500m.

According to the World Bank’s latest report, Pakistan has achieved greater macroeconomic stability in the last year, primarily due to fiscal discipline and a reduction in the current account deficit due to falling global commodity prices and the economy is forecast to grow by 4.7 per cent, up from 3.7 per cent three years ago. This has been reflected in higher prices for Pakistan’s existing bonds, which has pushed the yield on a 2024 bond down 2 percentage points since the start of the year to 6.4 per cent.

However the country faces a number of risks including deteriorating relations with India following an attack on Indian army base at Uri last month in which militants killed 17 soldiers. Indian officials claim the attack was perpetrated by Pakistan-based terrorist group, Jaish-e-Mohammad, and have vowed tough action in response.

IMF revises India’s GDP forecast to 7.6% on robust growth momentum

Less than three months after trimming its India growth forecast, the International Monetary Fund (IMF) on Tuesday raised it by a tad, citing the resilience of its economy and robust growth momentum.

The IMF now expects the economy, Asia’s third largest, to expand 7.6% in 2016-17, up from its earlier projection of 7.4%.

“India’s economy continued to recover strongly, benefiting from a large improvement in the terms of trade, effective policy actions, and stronger external buffers, which have helped boost sentiment,” the IMF said in its World Economic Outlook (WEO).

In its WEO update in July, the IMF pared India’s gross domestic product (GDP) growth forecast to 7.4% from the 7.5% projected in April, citing sluggish recovery in private investment.

India’s economy grew 7.6% in 2015-16 and the government expects it to grow close to 8% in 2016-17.

In the latest WEO, IMF projected India’s consumer price inflation to accelerate to 5.5% in 2016-17 from an average of 4.9% a year ago. It expects the current account deficit to widen to 1.4% of GDP in 2016-17 from 1.1% in 2015-16.

IMF’s Obstfeld: The global economy is going sideways

Maurice Obstfeld speeks after the IMF’s latest World Economic Outlook

  • A return to strong growth still eludes us
  • Poor growth mean investment lags
  • Depressed growth makes globalism a scapegoat
  • Monetary policy needs help from fiscal stimulus
  • The Fed’s caution is very appropriate while inflation lags
  • We’re seeing a milder scenario in Brexit
  • The FX moves are a mixed bag for the UK
  • We’re worried about China in the medium-term but near-term things are favourable
  • China’s shift to services should speed up
  • It’s a good time for infrastructure investment in the Eurozone
  • The ECB is stretched and needs help from fiscal policy

This lot have also been on the structural and fiscal bandwagon for a while but they we’re also telling central banks to pump hell for leather too,

IMF lowers growth forecast for US and other advanced economies

The International Monetary Fund has lowered its growth forecasts for the US and other advanced economies, warning that the UK’s decision to leave the EU, the US presidential elections and rising protectionism are dragging on a world economy where politics now present the biggest risks.

Updating its semi-annual forecasts for the global economy on Tuesday, the IMF sharply lowered its 2016 growth forecast for the US to 1.6 per cent from the 2.2 per cent it predicted in July, and for advanced economies as a whole to 1.6 per cent

However, it said a rebound in emerging and developing economies, which the IMF now expects to grow by 4.2 per cent this year as group, would offset that figure, resulting in its forecast for global growth remaining steady at 3.1 per cent this year.

Maurice Obstfeld, the IMF’s chief economist, said the move “sideways” for the global economy hid what were still significant risks fed by a “cocktail of interacting legacies” from the 2008 global financial crisis. These included high debt overhangs, bad loans on banks’ books and moribund investment, which were continuing to depress the global economy’s potential output, he said.

Moreover, he said, low growth and a slow recovery from the 2008 crisis in advanced economies had fuelled “political tensions have now made advanced economies a major locus of policy uncertainty”.

Emerging Markets -An Update

EM ended the week on a firmer note, with risk sentiment boosted by press reports that the German bank had negotiated a penalty of $5.4 bln vs. $14 bln originally announced by the US Department of Justice.  The main event this week is Friday’s US jobs report.  A strong number is needed to help chip away at the dovish market take on the Fed.  
China is closed all week on holiday.  Many EM countries will report September CPI data, with most likely to show accelerating inflation.  This is similar to what we’re seeing in DM as well.  The Indian and Polish central banks meet, with neither expected to change policy.  We think EM will be driven in large part by political developments.
Turkey reports September CPI Monday, which is expected to rise 7.90% y/y vs. 8.05% in August.  This would still be above the 3-7% target range and should limit further easing.  Central Bank of Turkey next meets October 20.  While another 25 bp cut in the overnight lending rate is likely, the benchmark rate is likely to be kept steady at 7.5%.
Brazil reports September trade Monday.  It then reports August IP Tuesday.  It then reports September IPCA inflation Friday, which is expected to rise 8.6% y/y vs. 8.97% in August.  COPOM next meets October 19, and is widely expected to start the easing cycle then.  Yet August fiscal data was horrible.  The government needs to make some good progress on fiscal reforms before the central bank eases.
Reserve Bank of India meets Tuesday and is expected to keep rates steady.  This will be the first meeting under new Governor.  CPI rose 5.1% y/y in August, which is near the top of the 2-6% target range.  This should prevent any near-term easing, especially if the rupee remains under pressure due to increased tensions with Pakistan.  It’s been on hold since the last 25 bp cut back in April.

Italy Markit mftg PMI Sept 51.0 vs 50.3 exp ,France Markit mftg PMI Sept final 49.7 vs 49.5 exp

Italian Sept Markit mftg PMI report 3 Oct

The positive data tones continue.

France Sept Markit mftg PMI  final reading 3 Oct

  • 49.5 flash

Germany and EZ following shortly with UK mftg PMI at 08.30 GMT

GBPUSD currently 1.2860 but EURGBP still bid at 0.8734 as Euro remains bid on the better data.