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Thu, 11th February 2016

Anirudh Sethi Report

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Archives of “Economy” Tag

US jobs report: the good and the bad

It’s not as bad as it looks. That’s the instant verdict from economists as they rapidly dig beneath a headline number showing a sharp slowing in US jobs growth in January.

Although the overall jobs tally fell to 151,000 from 262,000 in December ( a total that was revised lower from 292,000), the details, economists say, were brighter.

Manufacturing

The sector, which has been hobbled by lack of overseas demand and the stronger dollar, surprisingly created 29,000 jobs in the month. That’s almost as many as it managed in the whole of 2015. Analysts at Brown Brothers Harriman said the rise “bodes well for manufacturing output.”

Wage growth

Payrolls Preview: What Wall Street Expects

In just over half an hour, the BLS will report the latest, January jobs report which is expected to see a steep drop from December’s 292K job gain, to just 190K, the lowest print since September, following a spike in poor economic data in recent weeks most notably the lousy employment prints in the latest ISM reports. This, together with the Fed’s recent hint at relenting at hiking rates in 2016, is why according to DB, the whisper number for today is well lower, and “probably closer to 150k.” To be sure, the market would love nothing more than a very low payrolls number as that would assure no rate hikes until well in the second half, if ever.

Here are Wall Street’s official consensus predictions of what to expect today:

  • US Change in Nonfarm Payrolls (Jan) M/M Exp. 190K (Low 142K, High 260K), Prey. 292K, Nov. 211K
  • US Unemployment Rate (Jan) M/M Exp. 5.0% (Low 4.8%, High 5.1%), Prey. 5.0%, Nov. 5.0%
  • US Average Hourly Earnings (Jan) M/M Exp. 0.3% (Low 0.1%, High 0.4%), Prey. 0.0%, Nov. 0.2%

Broken down by bank:

  • JPMorgan:175K
  • Deutsche Bank: 175K
  • BNP Paribas: 175K
  • Morgan Stanley: 180K
  • Goldman Sachs: 190K
  • UBS: 190K
  • HSBC: 214K
  • Citi: 225K
  • SocGen: 245K

The Chinese Economy Is Sinking, Not Transitioning

It makes for quite the juxtaposition, though perhaps not so jarring given that global banks are still enormous and disparate operations. On the one hand, Citigroup’s CEO was eminently confident from within the confines of Davos and the status quo

The market is “adjusting” to a series of headwinds that can be overcome, Citigroup CEO Michael Corbat said Thursday, a day after theS&P 500 fell to its lowest level in nearly two years.

“We view what’s going on really as more a repricing than any big fundamental shift,” he told CNBC’s “Squawk Box” at the World Economic Forum in Davos, Switzerland.

The question is who is the “we” to which he is referring? It was just a year ago that no bank would even contemplate the possibility of recession entering Janet Yellen’s perfect year, especially as it was setup by “unquestionable” growth in the middle of 2014 (best jobs market in decades). This January, however, while Citi’s CEO downplays recent turmoil, the staff inside his very own bank is thinking very much otherwise:  

The global economy is on the brink of a recession, with central bank stimulus less forthcoming and growth weakened by the slowdown in China, Citigroup warned on Thursday.

The bank cut its 2016 global growth forecast to 2.7 percent from 2.8 percent and slashed its outlook for the U.S., U.K. and Canada, plus several emerging markets including Russia, South Africa, Brazil and Mexico. [emphasis added]

Raghuram Rajan for GDP maths review

RBI governor Raghuram Rajan today said there was a need for the better computation of GDP numbers as it should capture the net gains to the economy.

“There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth,” Rajan told students of Indira Gandhi Institute of Development Research here today. He said there were many suggestions from various quarters on the ways to calculate GDP in a better way and they should be taken seriously.

In his address, citing the example of two mothers who babysit each other’s kids, he said there is a rise in economic activity as each pays the other, but the net effect on the economy is questionable.

 “We have to be a little careful about how we count GDP because sometimes we get growth because of people moving into different areas. It is important that when they move into newer areas, they are doing something which is adding value. We do lose some, we gain some and what is the net, let us be careful about how we count that,” he said.

Some analysts have questioned the new GDP computation methodology, which has been in effect for a year. The critics point to the divergence in the mood of the economic growth data and other indicators such as factory output to question the veracity of the new series.

Rajan also spoke about the need to focus on employment creation and took a middle line to say that policies need to be geared up to face the onslaught of technological innovations.

$29 Trln in Corporate Debt Weighs as Earnings Fade

The steady appreciation of the US dollar which coincided with the Federal Reserve’s tightening of monetary conditions in late 2013 might have brought the overall economy to the verge of a recession, contributing significantly to the decline in corporate earnings. Meanwhile, as the burden of corporate debt lingers, the debt-to-earnings ratio hit a 12-year high in early 2016. Coupled with the negative effect the global headwinds have had on the overseas revenues of US enterprises, high corporate debt figures, which were never a major issue before, are becoming a cause for rising concern among investors. Wall Street has responded by urging policymakers in Washington to reconsider their approach to monetary policy.

As the global economy struggles amid slow, inadequate expansion, with demand for manufactured good s and raw materials at a multi-year low and weak inflation across the advanced economies, the risk of a new recession has prompted wider speculation. The latest developments in the US, including the Third Avenue crash in high-yield debt (which was prompted by plunging oil prices), a prominent decline in the stock market and a slowdown in GDP expansion, have stirred a debate about whether the rather high level of corporate indebtedness might trigger a capsizing of the entire economy.

The total volume of corporate bonds reached a record high in January at $29 trln, according to S&P data, although that is hardly a major concern by itself, as multinationals are usually sustainable enough to serve their obligations, while the robust expansion in bonds dealing provides substantial support to the broader financial market and the overall economy. The risk is, while US corporate earnings are being slashed by the dollar’s FX rate strength, on the ond hand, and international economic deceleration on the other, the debt-to-earnings ratio in the corporate sector is rising, undermining the very stability of the entire structure.

Warning :The world will stay gloomy for a while longer says Caterpillar

Latest earnings from Caterpillar sum up the global economy

Caterpillar is big global group dealing in machinery for the resource and construction industries (among others) and it’s a good bellwether for the state of the global economy. They haven’t been upbeat for quite some time and their latest earnings report says they won’t be for 2016 either

  • Q4 sales were $11.03bn vs $11.43bn exp
  • Outlook for 2016 sales and revenues do not anticipate an improvement in global growth or commodity prices
  • 2016 sales in resource industries expected to be 15-20% lower than 2015, mainly due to mining firms continuing to cut capex and falls in mining related commod prices
  • Additional restructuring likely in 2016
  • Outlook reflects struggling oil and other commod markets and continued weakness in developing countries
  • Dealer inventories decreased around $1n in Q4 vs $600m in Q3, expects similar inventory reductions in 2016
  • Expects similar global growth to 2015 at around 2.5%
  • While us and European economies show signs of stability, global economy remains under pressure
  • Expects general and heavy construction activity to increase in the US
  • US monetary policy could temper business confidence
  • China’s push for structural reforms has slowed growth and increased volatility

That pretty much sums things up right now. There’s unlikely to be any growth records broken this year

China Says Soros “Hasn’t Done His Homework,” May Be “Partially Blind”

From Xinhua

China has ample reasons to stay confident in face of speculators. Far from some speculators’ claims, China is not a source of trouble but an important engine of global economic growth with its growing demand and investment.

Here are the numbers. China registered a growth rate of 6.9 percent last year amid a sluggish global economy, contributing more than 25 percent of global economic growth.

Chinese tourists spent 1.2 trillion yuan (182.4 billion U.S. dollars) overseas, while the country’s investors pumped 735 billion yuan (111.7 billion dollars) into other economies.

Speculators claimed they see a hard landing for China. It is true that the growth of the world’s second largest economy is experiencing a relative slowdown compared with the blistering growth of the past decade. But as we know, decision makers have now opted for a slower pace in order to make the country’s growth more sustainable in the future.

Moreover, a growth rate of 6.9 percent is the envy of most other economies. China’s added economic output last year was more than the GDP of Sweden or Argentina.

PMIs: Eurozone growth catches a chill -Jan flash 52.3 vs 53.0 exp

Purchasing managers’ indices for the euro area – a measure of the health of the manufacturing and services industries – have “cooled” at the start of this year, Markit says. But it “would be wrong to get too worried,” Markit’s chief economist Chris Williamson added.

The preliminary reading of the region’s services sector sank to 53.6 from 54.2 in December, to reach a 12-month low. For manufacturing, the index hit a three-month low of 52.3 from 53.2. That took the composite number to 53.5 from 54.3, an 11-month low.

These numbers are far from disastrous; anything over 50 shows that a sector is expanding. Still, Markit says growth has “slackened”.

On the plus side, it added (our highlights):

The service sector created new jobs at a pace beaten only once since 2008, and the manufacturing sector maintained the robust rate of hiring seen late last year. The improved hiring trend could be linked to an upturn in business confidence, with expectations of future activity levels in the service sector hitting the highest since May 2011.

Firms also benefitted from lower oil prices, which proved a key contributor to average input costs across the two sectors holding steady for the first time in a year. Manufacturers’ input prices showed the second-largest decline since July 2009, while service sector input cost inflation slowed to an 11- month low.

RBI Governor Says -‘FALL IN MARKETS’ MKT’S PROBLEM NOT OF ECONOMY

With Indian and some other emerging markets witnessing a major plunge on global growth headwinds, RBI Governor Raghuram Rajan on Wednesday said these falls are actually ‘markets’ problem’ and not of the economy.

However, the “problem in markets can hit the real economy also,” Rajan said here at World Economic Forum (WEF) Annual Meeting.

Rajan said there have been huge flows in emerging markets but one should also understand that tremendous changes are taking place in emerging markets.

“For example in India there is a massive online market which allows people in small towns and villages to buy things online. Real  estate growth has been huge. A trader from Kashmir can sell his carpets to customers anywhere in the world,” he said.

Rejecting the suggestions that the fall in various emerging markets were due to weakness in their economies, Rajan said, “I think it is markets problem and the market problem can hit the real economy too”.

Speaking at a session on ‘The Growth Illusion’, the RBI Governor said, “We are in a world (where) we are not quite sure (what) the fundamental value of an asset is”.