Wed, 22nd February 2017

Anirudh Sethi Report


Archives of “Economy” Category

Japan Overtakes China as Biggest Overseas US Debt Holder as Renminbi Drops

Mainland China has lost its status as the largest overseas holder of the US debt to Japan as the recent decline in the renminbi’s FX rate and the strengthening yen have affected the value of the two nations’ respective Treasury note portfolios.

The yen’s status as safe haven asset as fiscal stimulus effort have attracted investment capital to Japan, resulting in stronger yen, whilst China, struggling with low factory-gate inflation and weak international demand for manufactured goods, had to decrease its holdings of the US debt. Japan, now the biggest foreign holder of US Treasury debt, held $1.13 trln worth of US bonds in October, whilst China’s holdings shrank to their six-year lowest at $1.12 trln, according to the data from the US Department of the Treasury. Beijing has been selling US bonds in order to alleviate the downward pressure on the renminbi’s FX rate stemming from lingering economic turmoil. Mainland China uses the dollars obtained from selling the Treasuries to buyback the renminbi, currently at its 8-year lowest in offshore trading.

Japan, however, had been selling Treasuries in early autumn, too, due to the uncertainty surrounding the US presidential election. The subsequent developments in the form of the election of Donald Trump and the plunge in Treasury bond value accompanied by the rising benchmark 10-year yield have proven selling Treasuries the right move, but the yen’s ongoing appreciation has made Japan the largest international US bond holder.

The BOJ is considering an upgrade of its economic outlook

The Bank of Japan may deliver a sunnier view of the country’s economy when its policy board meets next week, optimistic over steadying foreign economies boosting exports and production, as well as recovering consumption at home.

The central bank sees improvements in exports and production of automobiles and smartphone parts. It would mark the first upgrade in 19 months.

 Since its March report, the BOJ has asserted that “Japan’s economy has continued its moderate recovery trend, although exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies.” This time, it may alter or strike the “exports and production have been sluggish” language. Some at the bank have suggested removing the “trend” in “moderate recovery trend” to emphasize that the economy’s recovery is ongoing.
 In addition to the bullish American economy, the deceleration in emerging economies has slowed since the summer. As the BOJ sees it, combined with the effect of the Trump rally in the stock market, the real economy is headed toward recovery. Exports to China such as smartphone components continue to grow, while at home, consumers are opening their wallets for fall-winter clothes. 

“Income is increasingly going toward consumption,” said a BOJ official.

JP Morgan downgrades US Q4 GDP forecast to 1.5% from 2.0%

Weaker Retail sales cited

JP Morgan is out with their forecast for 4Q GDP after the wweaker than expected Retail Sales today and it is not a good one. They now see US GDP tracking at 1.5% vs 2.0% previously. That is not the type of growth that inspires, is it.  
The Fed will still hike by 25 basis points. The weaker data might soften the Chairs tone a bit but at the same time, she probably does not want to appear like she is react to one piece of data (and the most recent). 

China Launches Case Against US & EU With WTO Tribunal Over ‘Market Economy’ Row

This picture taken on March 7, 2014 shows a man working beside a cargo ship in Qingdao port in Qingdao, east China's Shandong provinceOn Monday China followed through a warning to “take further measures” against WTO members which continue to impose tariffs on its goods 15 years after Beijing’s accession to the organization.

On Monday the Commerce Ministry said that China has launched a dispute resolution case at the WTO, demanding that all WTO members, particularly the US and EU, stop using the “surrogate country approach” to impose higher tariffs against Chinese goods, which they claim to be exported at artificially low prices. “Regretfully, the US and EU have yet to fulfil this obligation,” the ministry wrote on its website. Sunday December 11 marked the 15th anniversary of China’s WTO accession, and China expects governments which have not already done so, to lift anti-dumping tariffs against its exports and treat Beijing like a fully-fledged member of the organization. The WTO and China agreed an accession protocol when Beijing joined the organization in 2001. Article 15 of this protocol dictates the terms which importing WTO members can use to compare their prices with those of Chinese producers, to determine if that producer is competing fairly with the domestic producers in the importing country. Some WTO members including the US and EU want to reserve the right to restrict Chinese imports with higher tariffs, in order to protect their manufacturers against “dumping,” the process by which a manufacturer exports a product to another country at a price below that charged in its home market, or at a price lower than the cost of production.

In order to investigate whether China is dumping goods, for the first 15 years of WTO membership Beijing was subject to the “surrogate country approach,” as laid out in Article 15. 

With 65% of ATMs Non operational, Goldman Warns India Is “Returning To Barter System”

India continues to stagger from bad to worse followinhg Modi’s demonetization. With just 35% of ATMs nationwide operational, Goldman warns the shortage of cash continues to incentivize the use of alternate payments, including extension of informal credit and a return to barter systems. Addtionally, the slowdown in activity is dramatically reflected in lower tax collections and discounts offered by luxury car companies.

Goldman Sachs  recently introduced their India ‘De-monetization dashboard’ in which they track the progress of the Indian government’s recent currency reform announced on November 8 via a variety of high-frequency data, including money supply, credit/deposit, interest rates, physical asset premia, real economic activity, price indicators and capital flows.

This week’s update shows that cash availability at ATMs is still low. On real economic activity, there were no major data releases this week. However, PMIs and auto sales data released last week suggested a significant slowdown in activity. Separately, anecdotal evidence suggested continued weakness in activity as shown in the lower indirect tax collections and various discounts given by luxury car companies.

Monetary infrastructure

According to Livemint, 95% of ATMs (out of 200,000 in the country) have been re-calibrated to accept new notes but only 35% of the re-calibrated ATMs are operational. Banks are preferring to make cash available in their own branches instead of making cash available at ATMs. Daily data from ATMs in the four key metro cities – namely Bengaluru, Delhi, Kolkata and Mumbai – show that people are still facing a ‘cash crunch’ in about half of the ATMs. The shortage of cash continues to incentivize the use of alternate payments including electronic payment systems, extension of informal credit and a return to barter systems. The government has further announced various measures to promote digital and non-cash transactions including discounts on digital purchase of fuel, suburban train tickets, and service tax exemptions on transaction charges up to INR 2000 on December 8.
Exhibit 1: Shortage of cash in ATMs continues

October 2016 UK industrial production -1.3% vs 0.2% exp m/m

Details of the October 2016 UK industrial and manufacturing production data report 7 December 2016

  • Prior -0.4%.
  • -1.1% vs 0.5% exp y/y. Prior 0.3%. Revised to 0.4%
  • Manufacturing production -0.9% vs 0.2% exp m/m. Prior 0.6%
  • -0.4% vs 0.8% exp y/y. Prior 0.2%. Revised to 0.1%

The ONS continued with last month’s excuses that oil field shutdowns were to blame but also note that manufacturing was hit by small falls across a range of sectors. The revisions to Sep do nothing for Q3 GDP.

Whatever the reasons, it’s not a good report. GBPUSD has ducked under 1.2600 to 1.2592.

UK house price growth slows – Halifax

UK house price growth slowed significantly in November after an unexpected jump the previous month, according to Halifax’s latest monthly survey.

Prices increased 0.2 per cent in the month, compared to 1.4 per cent in October. On an annual basis, growth rebounded from last month’s record low with prices 6 per cent higher than the same month a year ago, but Halifax warned that the pickup may only be temporary.

Martin Ellis, housing economist at Halifax, said:

Despite November’s pick-up, the annual rate has been on a steady downward trend in recent months since reaching a peak of 10.0 per cent in March.

Heightened affordability pressures, resulting from a sustained period of house price growth in excess of earnings rises, appear to have dampened housing demand, contributing to the slowdown in house price inflation. Very low mortgage rates and an ongoing, and acute, shortage of properties available for sale should help support price levels although annual house price growth may slow over the coming months.

Japan – Reuters Tankan: Manufacturing index +16 in Dec. (+14 in Nov.)

Both are surveys of manufacturing and service companies designed to assess business conditions in Japan. The BOJ Tankan is conducted quarterly, the Reuters Tankan is monthly.
  • Manufacturers index +16 in December vs +14 in November, up 11 points from three months ago
  • Manufacturers index hits highest level since August 2015
  • Japan non-manufacturers index +19 in December vs +15 in November, up 5 points from three months ago
  • Non-manufacturers index hits highest level since May 2016
  • Manufacturers March index seen at +10, non-manufacturers +20

Headlines via Reuters

German factory orders jump in October

German factory orders for October 2016

  • Factory orders 4.9% vs 0.6% exp m/m. Prior -0.6%. Revised to -0.3%
  • 6.3% vs 1.6% exp y/y WDA. Prior 2.6%. Revised to 2.9%
  • Domestic orders 6.3% vs -1.0% prior m/m
  • Export 3.9% vs 0.2% prior m/m

A very good jump in orders to the highest in over a year.

German factory orders y/y

A Banana Republic In The Making – “The Glue Of Reason In India Is Flaking” -by Jayant Bhandari

A Brief Recap

India’s Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes will no longer be legal tender. Linked are Part-I, Part-II, Part-III, and Part-IV , which provide updates on the rapidly encroaching police state

Expect a continuation of new social engineering notifications, each sabotaging wealth-creation, confiscating people’s wealth, and tyrannizing those who refuse to be a part of the herd, in the process destroying the very backbone of the economy and civilization.

There are clear signs that in a very convoluted way, possession of gold for investment purposes will be made illegal. Expect capital controls to follow.   Chaos from people’s inability to access the money in their bank accounts is now spreading to the people who have so far been unaffected: the middle class.

This is a completely unnecessary man-made disaster, with the single aim of glorifying  Narendra Modi.

Fracturing Institutions

Several petitions in various courts across India were immediately filed against the central bank, the Reserve Bank of India (RBI), for repudiating its IOU obligation which the currency bills represent, after Modi’s announcement on 8th November.

Several postponements later, the first hearing at the Supreme Court will likely take place on 5th December 2016, almost a month after the announcement of the ban. That does not mean that the court did not deliberate over “more important issues” affecting this wretched poor country.

It inter alia heard a petition and passed a judgment that makes playing the national anthem compulsory at cinema halls before the start of every movie, to promote nationalism. It also decreed that people have to stand up while the anthem is played. Henceforth one can be charged with sedition for not actively showing proper respect to the flag and the anthem.

Only someone very numb can avoid being horrified by this.