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Sun, 25th June 2017

Anirudh Sethi Report

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Archives of “economics” Tag

Charles Evans Flips From Hawkish To Dovish, Says Fed “Could Wait Until December” Before Next Hike

Earlier today, NY Fed president Bill Dudley sparked a hawkish storm in the markets, when in a bizarre statement he doubled down on the Yellen’s “hawkish hike” rhetoric, and  made it seem that easing is now perceived by the Fed as a bad thing:

  • FED’S DUDLEY: HALTING TIGHTENING CYCLE NOW WOULD IMPERIL ECONOMY

Then moments ago, today’s second Fed speaker of the day, Chicago Fed’s dovish, FOMC voter Charles Evans delivered a Dr. Jekyll and Mr. Hyde statement, where first, in his prepared remarks and during the subsequent Q&A in New York he sounded rather hawkish, while speaking to reporters after the event he flipped at emerged as his usual old dovish self.

First, here are the highlights from the dovish Evans:

  • “I think where we are with the funds rate right now is kind of in line with my outlook.”
  • “US fundamentals are good, no reason this won’t continue”
  • Evans sees a “high threshold to change the Fed’s balance sheet unwind plan”
  • Evans said there are only “small differences” in whether the FOMC hiked rates 2, 3, or 4 times in 2017.
  • Evans says he didn’t dissent last week because “we’re at a point where the real economy is really doing quite well”
  • Evans agreed with Yellen and others that the reductions in the balance sheet should gradual and like “watching paint dry”.
  • “I can’t just sort of say, it’s without risk to continue with very accommodative low interest rates”
  • “Beginning to adjust the balance sheet is one of the easier, more natural things to do, soon, sometime this year”

IMF’s new program to preapprove emergency access to dollars

The International Monetary Fund will introduce a framework to mitigate currency crises by ensuring easy access to dollars without requiring the onerous structural reforms that have marked past rescue programs.

This arrangement is intended mainly to deal with capital-account crises — currency collapses triggered by severe capital flight. With money likely starting to return to the U.S. as the Federal Reserve pivots from monetary easing, the IMF worries that corresponding outflows from emerging economies could drag down their currencies. Collapsing currencies can give rise to financial crises as foreign-debt loads soar. The situation could be made worse, if speculators take advantage of the situation to make quick profits.

 A country dealing with a capital-account crisis must intervene frequently in foreign exchange markets to prop up its currency by selling dollars. The new arrangement being developed by the IMF will help countries borrow greenbacks, mainly via short-term loans maturing in a year or less.

The IMF will evaluate potential borrowers under normal conditions, looking at such data as their current-account and fiscal balances, and let them join the framework if they are deemed sufficiently healthy. Loans will be limited based on each country’s capital contribution to the fund, among other factors.

Bill Gross: “Market Risk Is Highest Since Before The 2008 Crisis”

Speaking at the Bloomberg Invest summit in New York, Bill Gross (of the recently merged Janus Henderson) who may or may not have been talking his bond book, issued a loud warning to traders saying U.S. markets are at their highest risk levels since before the 2008 financial crisis “because investors are paying a high price for the chances they’re taking.” Well, either that, or simply ignoring the possibility of all ETFs having to sell at once.

“Instead of buying low and selling high, you’re buying high and crossing your fingers,” Gross said Wednesday quoted by Bloomberg.

Central Banks Now Own A Third Of The Entire $54 Trillion Global Bond Market

Two weeks ago we asked a question: maybe behind all the rhetoric and constant (ab)use of sophisticated terms like “gamma”, “vega”, CTAs, risk-parity, vol-neutral, central bank vol-suppression, (inverse) VIX ETFs and so forth to explain why despite the surging political uncertainty in recent years, and especially since the US election…

… global equity volatility, both implied and realized, has tumbled to record lows, sliding below levels not even seen before the 2008 financial crisis, there was a far simpler reason for the plunge in vol: trading was slowly grinding to a halt.

That’s what Goldman Sachs found when looking at 13F filings in Q1, when it emerged that the gross portfolio turnover of hedge funds had retreated to a record low of just 28%. In other words, few if any of the “smart money” was actually trading in size.

China debt ‘could prompt $7.7 trillion asset sale’

China’s mounting bad debts might constitute a nightmare for Beijing as it tries to ensure more stable growth. But they are also fueling an emerging market that could be worth at least $3 trillion for foreign buyers of distressed assets.

Key sources feeding the growth of this market are state–owned enterprises, privatization of which is necessary to put China back on a sustainable growth path, according to Citigroup’s chief China economist Li-Gang Liu.

 Liu believes the process, if carried out seriously, will unleash 52 trillion yuan ($7.7 trillion) of assets into the market, assuming state ownership were to be sold down to between 40% and 50% in exchange for fresh funds needed for debt repayment.

“More than half of the funds could be supplied by China’s own savings. The remaining [funding] probably will have to rely on foreign investors,” said Liu, speaking at a Thursday conference in Hong Kong organized by market intelligence provider Debtwire. He noted that China’s saving ratio currently stood at 47% of the country’s gross domestic product.

“China will have to either open up its equity and capital markets for foreign participation … or continue with the old ways to allow their enterprises to list in Hong Kong, Singapore, New York and elsewhere,” he added.

 

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Brazil’s central bank cuts benchmark interest rate by 100bps

Banco Central do Brasil pulls out the big knife

  • Cuts benchmark interest rate to 10.25 percent (The latest Reuters poll showed a consensus expectation for the cut to 10.25 pct)
  • Says interest rate decision was unanimous
  • Says moderate reduction of easing pace will probably be adequate at next meeting
  • Easing pace will depend on activity, balance of risks
  • Rising uncertainty over reforms hinders faster drop in estimates of structural rate and makes them more uncertain
  • Main risk to scenario is uncertainty over speed of reform process and economic adjustment
  • Forecasts 2017 inflation at around 4.0 pct vs 4.1 pct in previous meeting
  • Sees 2018 inflation at around 4.6 pct vs 4.5 pct in previous meeting
  • To monitor possible impact of heightened uncertainty over inflation expectations
  • Data continue to show economy stabilizing in the short term
  • prolonged uncertainty could have negative impact over economic activity
  • International scenario has been favourable

Quick headlines via Reuters

When Economists get news they don’t want to hear

The problem with predictions and ego

Pickup and economists research note from the past month and it’s likely to say the same thing — the Fed is going to hike in June.

Everyone is singing from the same hymnbook. The problem is that the Fed is the piano player and yesterday changed its tune. This is the line in the FOMC Minutes:

“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.”

That can’t be misunderstood.

What it says is that if economic data continues to be soft, they’re not hiking in June.

That doesn’t mean that a hike is off the table but it certainly means that it’s not a sure thing.

Here are a few data points since the May 3 meeting:

  • Q1 nonfarm productivity -0.6% vs -0.1% exp
  • Factory orders +0.2% vs +0.4% exp
  • Nonfarm payrolls 211K vs 190K exp
  • Avg hourly earnings 2.5% vs 2.7% y/y exp
  • JOLTS 5743K vs 5725K exp
  • Core PPI +0.7% vs +0.2% exp
  • CPI +2.2% y/y vs +2.3% exp
  • Retail sales control group +0.2% vs +0.4%
  • Empire Fed -1.0 vs +7.5 exp
  • NAHB housing market index 70 vs 68 exp
  • Housing starts 1172K vs 1260K exp
  • Building permits 1229K vs 1270K exp
  • Industrial production +1.0% vs +0.4%

Moody’s downgrades China’s rating to A1 from Aa3 and changes outlook to stable from negative -Full Text

Moody’s Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.

China’s local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.

China’s local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China’s short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1).

RATINGS RATIONALE

Oil Market to Balance at Around $55-60/Bbl as Deeper OPEC Output Cuts Expected

Despite the rise in US shale oil production, the expected extension of the OPEC oil extraction caps will provide a moderate support to global oil prices in the near-term, with boom or bust scenarios almost ruled out as the global energy market balances gradually.

Kristian Rouz – OPEC member-states and other oil-producing nations are meeting on May 25 to discuss, among other things, the extension and deepening of oil extraction caps in order to support crude prices and ease the supply-side glut issue.

An oversupply of oil has been affecting the global oil producers since the second half of 2014, when US shale production skyrocketed, proving disruptive to the existing structure of global oil trading.

Even though, according to the Saudi Energy Minister Khalid Al-Falih, all oil producers have agreed to extend oil caps by nine months, also possibly decreasing the current levels of extraction, global oil prices are not expected to post a significant rally in the near-term. The main reason is that the OPEC and non-OPEC oil cuts might be effectively offset by an increase in US shale oil production.

Last year, the US lifted a 40-year oil export embargo, and this February, the US shipped record-high volumes of crude overseas. While OPEC oil cuts have resulted in a decrease in the global market share occupied by members of the energy cartel (most notably Saudi Arabia), US oil started to fill this niche.

IEA maintains global oil demand growth forecast for 2017 at 1.3mln bpd

International Energy Agency out with their latest market report 16 May

  • brings demand to 97.9m bpd
  • global oil supply fell 140k bpd in April to 96.17mn bpd,
  • output 90k bpd
  • raises f/cast for non-OPEC supply growth by 100k bpd to 600k bpd for 2017
  • raises US crude output f/cast by 100k to 510k bpd. largest source of supply growth
  • Oil market is rebalancing and “essentially here”, accelerating in the short term

Let’s see what the 25 May meeting brings re output cut deal extension. 9 months now the favoured period by Saudis and Russia

Full report here