Wed, 25th May 2016

Anirudh Sethi Report


Archives of “Economy” Tag

G7 Summit: Japanese summary says uncertainties in global outlook have increased

Hosts Japan with their G7 summary from Sendai meeting 21 May 2016

  • shock of potential Brexit could complicate global economic environment
  • G7 discussed how to employ balanced policy mix of mon pol, fiscal structural steps to strengthen global demand, address supply constraints
  • mon pol will continue to support economic activity and ensure price stability consistent with central bank mandates
  • important to implement our fiscal strategies flexibly, advance structural reforms to boost productivity
  • G7 re-affirmed its existing exchange rate agreements inc not to target FX rates and that excess volatility  and disorderly FX moves can have negative effect on economy
  • G7 underscored importance of all countries to refrain from competitive devaluation

Footnote: Reuters also report that this summary was prepared by Japan to facilitate media and does not officially represent G7 consensus.

ALERT : Moody’s lowers its 2016 growth forecast for the US to 2% (from 2.3%)

The latest from Moody’s Global Credit Research: Global growth to remain muted as emerging markets weigh on US, advanced economies

Moody’s has lowered its growth projection for the US to 2.0% from 2.3% for 2016
  • To reflect weakness in the first quarter
  • Forecast 2.3% growth in 2017
  • The strong recent pick-up in consumer confidence and spending, and the continued strength of the services industry underlines the resilience of the US economy.
  • “Consumption should pick up through the remainder of the year as the labor market continues to improve and wages rise”
  • “Nonetheless, the drag on the US economy exerted by the combination of subdued global demand and weak business investment is likely to remain.”
Moody’s currently forecasts G20 emerging markets growth at 4.2% for 2016 (compared to 4.4% in 2015)
  • For G20 advanced markets growth is predicted to slide to 1.7% for 2016 from 1.9% in 2015
Outlook for growth:
  • … remains uneven and largely weaker than over the past two decades
  • Global trade remains subdued
  • Spillovers from emerging markets shocks to financial markets globally have increased substantially

14 suddenly-key events ahead of the June 15 FOMC decision

The Fed wants to gauge the economy, here’s what they will be watching

The Minutes of the April 26-27 FOMC meeting make it clear that a June hike is on the table but the condition is that the economy needs to continue to improve.

Or more specifically, “most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective,” the Minutes said.

The main problem with the growth caveat is that we won’t get Q2 data until the end of July. Here are the releases the Fed will be watching:

  1. May 19 – Dudley and Fischer speak
  2. May 23 – Markit prelim manufacturing PMI
  3. May 25 – Advance goods trade balance
  4. May 26 – Durable goods orders (the prior was revised lower today)
  5. May 27 – Q1 GDP, second estimate (currently expected to be revised to +0.8% from +0.5%)
  6. May 27 – Yellen speech
  7. May 31 – PCE inflation, income and spending data
  8. May 31 – Consumer confidence (retail sales and the U Mich survey were both weak)
  9. June 1 – ISM manufacturing and the Beige Book
  10. June 3 – Non-farm payrolls and ISM non-manufacturing
  11. June 6 – Yellen speaks
  12. June 8 – April JOLTS
  13. June 10 – U Mich sentiment
  14. June 14 – Retail sales (if it’s close, this will decide it)

Fed won’t hikes rates this year or next – BNP Paribas

Mediocre conditions will keep the Fed sidelined

The April employment report provides further evidence that the economy is showing clear signs of slowing and supports our view for no rate hikes this year.

The monthly print was in line with our view that we would see a slowing in hiring on the back of the recent drop in economic activity.

Just 160,000 jobs were added in the month of April with a net 20k downward revision to the previous two months. The monthly print was a hefty 40k miss from the Bloomberg consensus and more in line with our view of 175,000 — with highlighted downside risks.

China’s Liaoning lurches into negative growth

The heavy-industry-driven economy of China’s Liaoning Province contracted in the first quarter of 2016 under the stress of structural adjustments meant to relieve overcapacity and other ills.

     Liaoning’s output shrank by 1.3% in real terms compared with the January-March quarter last year — an unusual setback for a local economy in China. 

     The province has not suffered a full year of negative growth since 1981. But it expanded only 1.9% in the year-earlier quarter and 3% in all of 2015, logging the slowest pace in the country.

     Liaoning aims for 6% growth this year, the same target as in 2015, but will likely struggle even harder to get there.

     The smokestack industries that constitute much of the province’s economic activity — coal, steel, shipbuilding and others, many run by state-owned enterprises — were the first to lose steam as China’s economic growth slowed. A depressed property market adds to Liaoning’s troubles.

‘India to clock nearly 8 per cent GDP growth in 2016-17’ (If this speed continues than in next 2-3 years :10-12 % or more ? )

BLA BLAIndia’s economy is likely to clock nearly 8 per cent growth in the current fiscal on the back of robust private consumption, which has benefited from lower energy prices and higher real incomes, according to PHD Chamber of Commerce.

The Reserve Bank had retained its growth projection for 2016-17 at 7.6 per cent.

“Going ahead, growth in India is projected to notch up to 8 per cent in 2016-17. Growth will continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes.

“Further, with the revival of sentiment and pick-up in industrial activity, a recovery of private investment is expected to strengthen growth in the coming times,” it said.

The chamber also estimated that India’s share in world GDP has doubled from 1.43 per cent in 2000 to 2.86 per cent in 2015.

German government leaves 2016 GDP forecast unchanged at +1.7%

German economic ministry out with their latest review 20 April

  • pvt consumption up 2% in 2016 vs +1.9% in Jan
  • 2016 exports up +2.9% vs +3.2% prev
  • 2016 imports +5.2% vs +4.8% prev
  • domestic demand +2.6% in 2016 vs +2.3% prev
  • equipment investment up 2.6% in 2016 vs +2.25 prev forecast
  • construction investment +2.7% in 2016 vs +2.35 prev

Econ minister Gabriel says economic upswing upturn will continue this year and next. Domestic growth drivers have become more important.

PIMCO: “Markets have been over-anticipating recession risk”

From PIMCO’s quarterly Cyclical Forum “to deliberate and update our economic and market outlook for the next six to 12 months”

A useful read, if quite long.
In (very, very) brief:
  • Do not expect a recession in the U.S. or the global economy over the cyclical horizon
  • Financial markets have been over-anticipating recession risk
  • A number of key uncertainties and challenges that call for conservative portfolio positioning
  • Market valuations in general look fair to full
  • Still pockets of value
  • Valuations should be underpinned by central banks … there are valid questions about the declining effectiveness of their interventions
Here’s the link for (much) more – worth a read.

UK services suffer weakest quarter since 2013 – PMI 53.7 vs 53.7 exp

Growth in the UK economy is expected to cool to 0.4 per cent in the first quarter after a closely-watched survey of activity in Britain’s dominant services sector indicated the industry suffered its weakest quarter of output in the first quarter for six years.

The UK services purchasing managers’ index, produced by research group Markit, came in at 53.7 for March, after staging a surprise drop to 52.7 in February. Economists had been expecting an improvement in the March reading to 53.5. But despite the better than expected outcome, Markit said the performance over the first quarter as a whole indicated the weakest quarter of output growth in services since the first quarter of 2013

Chris Williamson, chief economist at Markit, which compiles the survey, said:

An upturn in the pace of service sector growth in March was insufficient to prevent the PMI surveys from collectively indicating a slowdown in economic growth in the first quarter. The surveys point to a 0.4% increase in GDP, down from 0.6% in the closing quarter of last year.

Across the three main sectors of the economy, firms reported the smallest increase in demand for just over three years, which in turn fed through to a reluctance to take on new staff. March saw the weakest rate of job creation for over two-and-a-half years.

Structural Inefficiency: Trump Warns of ‘Very Massive Recession’ Up Ahead

GOP frontrunner in the US presidential election Donald Trump spoke out on the state of the US economy in a recent interview, expressing concern of the dominance of the financial services sector and Wall Street, whilst the real economy is under pressure due to an inefficient job market structure and overall governmental mismanagement. Trump warned of the looming ‘very massive recession’ up ahead as the overpriced stock market, combined with a significant share of workforce not involved in productive activity, bears hazards of a financial bubble worse than the 2008 meltdown.

The real estate mogul, representing America’s businesses involved in the non-financial sector of the US economy, claimed “it’s a terrible time right now” in his 96 minute-long interview with Washington Post’s Robert Costa and Bob Woodward, the latter known as the reporter who broke Watergate, spurring President Richard Milhous Nixon’s downfall.

“I think we’re sitting on an economic bubble. A financial bubble,” Trump said.

Indeed, the US real sector is on the brink of underinvestment as lion’s share of privately-owned capital funds have been withdrawn in favor of stocks and bond market over the course of the past four years. The US government has been steadily increasing their investment in non-financial sector during the same period, providing a very moderate acceleration of the US economy to an annualized 2.2% in 2015. Yet, the acceleration came at a price: while growth is still below historic average of 3.3%, the abundance of government-provided fixed investment, poorly managed more often than not, effectively pushed private incentive into the financial sector.