Fri, 24th March 2017

Anirudh Sethi Report


Archives of “Economy” Category

Negative rates put corporate Japan in a spending mood

The introduction of negative interest rates a year ago by the Bank of Japan is prompting listed companies here to funnel the money they save on borrowing costs toward takeovers and capital investment.

The average borrowing rate of 1,387 nonfinancial companies listed on the first section of the Tokyo Stock Exchange and which released their third-quarter results by December 2016 has shrunk to an estimated 1.06%, down 0.11 percentage point from a year earlier. Interest-bearing debt has increased nearly 1 trillion yen ($8.84 billion) to about 207 trillion yen, while interest payment costs have fallen 10% to about 1.63 trillion yen. Some 30% of the companies have increased their borrowings.

 Telecommunications giant SoftBank Group is one of the companies that has benefited the most from negative interest rates. Chairman and CEO Masayoshi Son bought British chip designer ARM Holdings for about 24 billion pounds ($29.8 billion) at the current rate in 2016 and has announced other bold global plans.

SoftBank’s interest-bearing debt has jumped 16%, or about 1.9 trillion yen, to a little more than 14 trillion yen over the past year. However, its average borrowing rate — obtained by dividing interest payment costs by average interest-bearing debt — was 3.53%, down 0.18 percentage point.

Negative interest rates have also lowered borrowing costs for corporate bonds. Borrowing costs for SoftBank seven-year bonds issued in April 2016 were 1.94% per annum, 0.19 percentage point lower than the cost for the seven-year bonds it issued six months earlier.

Merkel Says There Is A “Problem” With The Euro, Blames Mario Draghi

Two weeks ago, German finance minister Wolfgang Schauble confirmed Donald Trump’s charge that the Euro is far “too low” for Germany, but said he is unable to do anything about it and instead blamed Mario Draghi. “The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position,” he told Tagesspiegel on February 5. “When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticized for the consequences of this policy.”

Then, on Saturday, his boss German Chancellor Angela Merkel echoed her finance minister, and also admitted that the euro is indeed “too low” for Germany, but once again made clear that Berlin had no power to address this “problem” because monetary policy was set by the independent European Central Bank.

“We have at the moment in the euro zone of course a problem with the
value of the euro,
” Merkel said in an unusual foray into foreign

exchange rate policy.

Merkel also confirmed that Germany benefits from not having the Deutsche Mark, whose value would be far higher, and instead piggybacks on the weakness of other European nations, implicitly confirming recurring allegations that Germany benefits from the misery of Europe’s periphery.

“The ECB has a monetary policy that is not geared to Germany, rather it is tailored (to countries) from Portugal to Slovenia or Slovakia. If we still had the (German) D-Mark it would surely have a different value than the euro does at the moment. But this is an independent monetary policy over which I have no influence as German chancellor.”

We showed this :fair value” divergence two weeks ago in the following chart:

Eurozone current account surplus hits all-time record high

The eurozone current account surplus has hit its highest level since the start of economic and monetary union in 1999, likely emboldening critics who have accused the bloc’s largest economy of “exploiting” a weak exchange rate.

Latest figures from the European Central Bank estimate the surplus hit 3.4 per cent of GDP in 2016 – a climb from around 3.1 per cent from 2015. The current account, which measures the eurozone’s balance in goods and income, has swung dramatically into surplus since the eurozone’s sovereign debt crisis calmed around 2012 (see chart above).

Emerging Markets :An Update

EM FX ended last week on a firm note.  Falling US rates allowed many foreign currencies to gain some traction.  This week, a heavy US data slate is likely to test the market’s convictions on the Fed, with January PPI, CPI, IP, and retail sales all being reported.  Yellen also testifies before Congress on Tuesday and Wednesday.    

India reports January CPI Monday, which is expected to rise 3.24% y/y vs. 3.41% in December.  It then reports January WPI Tuesday, which is expected to rise 4.35% y/y vs. 3.39% in December.  The RBI left rates steady last week and moved to a neutral stance.  Price pressures are likely to pick up this year, as the acceleration in WPI inflation suggests.

Poland reports January CPI Monday, which is expected to rise 1.7% y/y vs. 0.8% in December.  If so, this would be the highest since January 2013 and back within the 1.5-3.5% target range.  It then reports Q4 GDP Tuesday, with growth expected to remain steady at 2.5% y/y.  January industrial and construction output, retail sales, and PPI will be reported Friday.  The central bank will find it hard to wait until 2018 to start tightening.
Mexico reports January ANTAD retail sales Monday.  Despite tighter monetary policy and rising inflation, retail sales have remained fairly robust, rising 5.3% y/y in December.  With another 50 bp hike last week, we think it unlikely that consumption can remain firm in 2017.  The next policy meeting is March 30 and it’s too early to say what’s likely to happen then.  

Japan government debt hits record-high 1,066tn yen ($9.4 trillion) at end of December

Japan’s government debt stood at a record 1,066.42 trillion yen ($9.4 trillion) as of Dec. 31, highlighting the difficulty of restoring the country’s fiscal health, data by the Finance Ministry showed Friday.

Per capita debt, the amount owed per person, came to around 8.40 million yen, based on the country’s total population estimated at around 126.86 million as of Jan. 1.

 The central government’s debt marked an increase of 3.85 trillion yen compared with the end of September, due to the issuance of “zaito” debt to finance projects such as the construction of a magnetically levitated high-speed train line in central Japan as well as ballooning social security costs.

By the end of the current fiscal year through March, the government’s debt is projected to grow further to 1,116.4 trillion yen.

According to the ministry, the debt total as of December consisted of a record-high 928.91 trillion yen in government bonds, 54.26 trillion yen in borrowing mainly from financial institutions and 83.25 trillion yen in financing bills or short-term government notes of up to one year.

BlackRock CEO: US economy in slowdown, fin mkts could see a significant setback

Chief Executive of BlackRock Larry Fink spoke on Wednesday (US time):

  • “I see a lot of dark shadows”
  • “The markets are probably ahead of themselves”
  • U.S. economy is in the middle of a slowdown
  • Financial markets could see a significant setback
  • Cites uncertainty over global trade and the Trump administration’s plan to cut taxes
  • Trade disruptions a possibility
  • US 10-yr yield could fall below 2%
  • …  or rise above 4%
  • But says the greater possibility is of rates falling
  • Thinks the Fed hikes in June & possibly once more this year
BlackRock is a huge fund manager, the firm manages $5.1 trillion in assets