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Thu, 19th January 2017

Anirudh Sethi Report

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Archives of “Economy” Tag

10 takeaways from Xi’s Davos speech

Chinese President Xi Jinping delivered a keynote speech on Tuesday at the opening plenary of the 2017 annual meeting of the World Economic Forum in the Swiss town of Davos.

Here are 10 quick takeaways from the 50-minute address, which touched upon globalization, protectionism, world economy and China’s development among other subjects.

1. Many of the problems troubling the world are not caused by economic globalization. Just blaming economic globalization for the world’s problems is inconsistent with reality, and it will not help solve the problems.

2. Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks is simply not possible. Indeed, it runs counter to the historical trend.

3. At present, the most pressing task before us is to steer the global economy out of difficulty.

4. Lack of robust driving forces for global growth makes it difficult to sustain the steady growth of the global economy; inadequate global economic governance makes it difficult to adapt to new developments in the global economy; uneven global development makes it difficult to meet people’s expectations for better lives.

5. The world should develop a dynamic, innovation-driven growth model; pursue a well-coordinated and inter-connected approach to develop a model of open and win-win cooperation; develop a model of fair and equitable governance in keeping with the trend of the times; and develop a balanced, equitable and inclusive development model.

6. Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war.

7. The Paris Agreement is a hard-won achievement which is in keeping with the underlying trend of global development. All signatories should stick to it instead of walking away from it as this is a responsibility we must assume for future generations.

Brazil slashes rates by 75bps to 13% in surprise move

Don’t anyone accuse Brazil’s central bank of not being bold.

In a unanimous decision, the bank cut its policy interest rate by 75 basis points on Wednesday, exceeding the consensus call for a 50bps cut and sharply picking up the pace on an easing cycle it began with two back-to-back cuts of 25bps each in October and November

In a statement, the bank said economic activity had fallen below expectations and that a recovery would take longer than previously anticipated.

The size of the cut will be welcomed by many, given the economy’s stubborn refusal to return to growth. The rebound expected by many when congress ditched president Dilma Rousseff last year has failed to happen. GDP contracted by 8 per cent over the past two years under Rousseff’s watch; her pro-growth, market-friendly successor, Michel Temer, was expected to turn things round quickly.

PM Modi likely to address nation on New Year eve

Prime Minister Narendra Modi is likely to address the nation on December 31 evening, a day after his 50-day deadline for the completion of the demonetisation process draws to a close. “Prime Minister Narendra Modi is likely to address the nation before dawn of the New Year,” news agency PTI reported.

However, it was not clear as to whether he would address the nation on Friday or Saturday. In his address, the Prime Minister may speak about the roadmap post the demonetisation period especially on the steps likely to be taken to ease cash flow that has been a major problem ever since demonetisation took place.

He may also speak on the steps to deal with the problems the economy faces after the demonetisation was announced on November 8. The Prime Minister in his public meetings in the last few weeks has been urging the people to bear with the pain following the government’s decision and that it would start easing gradually once the 50-day period is over. On Tuesday, Modi met economists and experts at a meeting in Niti Aayog to discuss the current economic situation

BOJ taking ‘a step forward,’ says Kuroda

The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.

“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.

 During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.

“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.

Latest Atlanta Fed GDPNow down to 2.4% from 3.6% on November 23

Trade and inventories cited

As per the Atlanta Fed:
“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2016 is 2.4 percent on November 30, down from 3.6 percent on November 23. The forecast of the combined contributions of real net exports and real inventory investment to fourth-quarter growth fell from 0.61 percentage points to 0.18 percentage points after last Friday’s advance economic indicators report from the U.S. Census Bureau. The forecast of fourth-quarter real consumer spending growth fell from 3.0 percent to 2.2 percent after this morning’s personal income and outlays release from the U.S. Bureau of Economic Analysis.”
 
 That is a pretty hefty drop.  
 

 

Fitch cuts India’s FY17 growth forecast to 6.9%

Fitch Ratings today lowered India’s GDP growth forecast for this fiscal to 6.9 per cent from 7.4 per cent, saying there will be “temporary disruptions” to economic activity post demonetisation.

It said economic activity will be hit in the October- December quarter because of the cash crunch created by withdrawal and replacement of 500 and 1000 rupee notes that accounted for 86 per cent of the value of currency in circulation.

“Indian growth has also been revised down to reflect temporary disruptions to activity related to the RBI’s surprise demonetisation of large-denomination bank notes,” Fitch said, as it revised real GDP growth forecast down to 6.9 per cent for 2016-17, from 7.4 per cent projected earlier.

The US-based ratings agency also revised GDP growth forecast for 2017-18 and 2018-19 lower to 7.7 per cent from 8 per cent earlier.

“Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 per cent hike in civil servants’ wages.

“But the anticipated recovery in investment looks a bit less certain in light of ongoing weakness in the data,” Fitch said in its ‘Global Economic Outlook – November’ report.

Top 5 Events For This Week

For the week starting November 28, 2016

  1. US Employment.  Friday December 2, 2016 at 8:30 AM ET/1330 GMT.  The monthly US employment numbers for the US will be the top economic release for the week. The estimate is for a gain of 165K vs 161K last month. The unemployment rate is expected to stay unchanged at 4.9%. Average hourly earnings are expected to rise by 0.2% vs +0.4% last month.
  2. US GDP for the 3Q. Tuesday November 29, 2016 at 8:30 AM ET/1330 GMT.  This is the 2nd estimate for the 3Q ending September 30, 2016. The first release came in at 2.9% annualized (the US takes the QoQ change and annualizes that value – i.e. 4x).
  3. OPEC meeting.  Wednesday, November 30, 2016.  The long awaited OPEC meeting will be held in Vienna with production cuts the focus.  Expect officials to talk to reporters throughout the day with a formal statement released after the meetings are complete
  4. China Manufacturing PMI and Caixin Manufacturing PMI.  Wednesday, November 30, 2016 at 8 PM ET/ 0100 GMT on Thursday, and at 8:45 PM ET/0145 GMT (for Caixin). The Manufacturing PMI (survey of about 3000 purchasing managers) will be released with expectations of 51.0 vs 51.2 last month. The smaller Caixin survey (about 430 purchasing manufacturing managers) is also expected to fall from 51.2 to 50.9.
  5. Canada Employment.  Friday December 2, 2016, 8:30 AM ET/1330 GMT.  The monthly employment report from Canada will be released along with the US employment report. The expectations is for the unemployment rate to come in at 7.0%. The Employment change is expected to come in unchanged vs. +43.9K increase last month.
Other noted releases/events:
  • UK bank stress test results. Wednesday November 30 at 2 AM ET. 0700 GMT
  • ADP non farm payroll.  Wednesday, November 30 at 8;15 AM ET/1315 GMT. Estimate 161K vs 147K last month
  • Canada GDP MoM, Wednesday, November 30 at 8:30 AM ET/1330 GMT. Estimate +0.1% vs +0.2% last
  • Australia Private Capital Expenditures QoQ  Wednesday 7:30 PM ET/0030 GMT (Thursday) Est -2.8% vs -5.4% last.
  • US ISM Manufacturing Thursday December 1, 2016 10:00 AM ET/ 1500 GMT.  Est. 52.1 vs 51.9 last.
Noted central banker speeches and testimonies
  • ECB Draghi (Monday November 28th at 9 AM ET/1400 GMT) is due to testify on economic and monetary developments and the consequences of Brexit before the European Parliamentary Committee in Brussels
  • RBNZ Financial Stability Report.  Tuesday November 29th at 3 PM ET/2000 GMT.  A media conference call is scheduled to take place at 7:10 PM ET/0010 GMT with RBNZ Governor Wheeler
  • BOC Gov Poloz speaks.  Monday, November 28th, 8 PM ET/0100 GMT (Tuesday).  Bank of Canada Governor Poloz is due to speak titled “The Role of Services in Canada’s Economy”. Poloz will hold a press conference after the speech.

Goldman Sachs Top Ten Market Themes for 2017

Chief Credit Strategist Charles Himmelberg says 2017 will be “High growth, higher risk, slightly higher returns”

  1. Slightly higher returns relative to 2016. “Best improvement in the opportunity in global equities is in Asia ex-Japan.”
  2. Fiscal stimulus in the U.S. will help reflate the economy
  3. No imminent trade war on the horizon, any re-negotiation of agreements currently in place (like NAFTA) to focus on attempts to improve the prospects for the U.S. manufacturing
  4. The Emerging Markets risk ‘Trump tantrum’ is temporary
  5. Forecasts ($/CNY at 7.30 in 12 months) a depreciation for yuan well beyond forward market pricing
  6. Monetary policy will increasingly focus on credit creation
  7. 2017 will confirm that the U.S. corporate sector has emerged from its recent ‘revenue recession’
  8. Forecasting large boosts to public spending in Japan, China, the U.S., and Europe, which should fuel inflationary pressures in those economies
  9. Commodity-sensitive segments of the credit market have suffered pain in 2016, there hasn’t been much in the way of contagion… expect more of the same in 2017, with the credit cycle not making a turn for the worse
  10. Conditional on a large fiscal stimulus in 2017, the FOMC will be obliged to respond more aggressively to an easing of financial conditions, all else equal … cautions that it’s no sure bet that financial conditions will ease in the year ahead, noting the recent rise in bond yields and the U.S. dollar

Commodity prices show global recovery may be on the horizon

In a major shift in economic trends, prices of raw materials started surging in October, possibly signaling that emerging economies are finally regaining strength after going through a distinctly rough patch.

The shift may be behind the recent stock market rally and the jump in long-term interest rates in the U.S.

 While the surprise outcome of the U.S. presidential election triggered wild movement in stock, bond and currency markets, commodities have been mostly insulated from its impact.
 The CRB BLS Raw Industrial Sub-index, which traces the overall direction of commodity prices, took an upturn early this year after plunging until the end of 2015. The index, a measure of nearly two dozen basic commodities excluding precious metals and crude oil, then began soaring in late October.

Meanwhile, U.S. long-term interest rates shot up after Donald Trump’s unexpected win in last week’s presidential election.

The upswing in interest rates has been attributed by many to concerns over an increase in the U.S. budget deficit due to the president-elect’s campaign promises to both cut taxes and increase public spending.

While such concerns may very well be a factor contributing to higher long-term rates, they do not paint the entire picture. A “bad rise” in the cost of borrowing due to expectations of a government spending spree is not entirely consistent with the rally in the U.S. stock market.

Yields on 10-year treasurys appear to be following the CRB index. The main factor pushing up the CRB commodity prices yardstick is the apparent bottoming-out of key emerging economies.

In China, for instance, investment in electric machinery, publicservice, construction and other sectors is rebounding, shored up by massive government spending on infrastructure.

Full statement from the November 2016 FOMC

For release at 2:00 p.m. EDT

Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.