Fri, 28th October 2016

Anirudh Sethi Report


Archives of “Economy” Tag

As US Corporate Debt Soars, Earnings Suggest Dim Outlook on Growth

$10 and the US TreasuryKristian Rouz – Capital expenditures on investment and dividend payments in the US corporate sector have been outpacing the total cash flow, or earnings, since mid-2015, stirring worry regarding the sector’s lack of profitability. Meanwhile, the total volume of expenses has been above cash flow since mid-2011, resulting in the currently mounting concern that this will result in underinvestment, an accelerated slowdown or a recession. The rising amount of corporate debt in one of the main concerns, and the broader demand-side policies’ failure to revive private sector growth has only added to the economic dismay.

The year-on-year pace of economic expansion has slowed to roughly 1pc in the past quarter, and while the figures for 3Q16 are being prepared for release later this month, the New York Fed has lowered its projections for the quarter. Having previously expected an acceleration in growth to above 3pc annualized, the New York Fed is currently expecting growth of 2.22pc year-on-year, with the growth projection for the year of 2016 lowered to just 1.40pc at best. The “Nowcast” model, used by the regional regulator, takes multiple broader economic parameters into account, including business sentiment, manufacturing activity, and consumption, among others. The slowdown in economic activity in October and September’s slump in housing starts have resulted in the lowered forecast.

The deceleration in the economy is mainly attributed to mounting disinvestment pressures, even though base interest rates are ultra-accommodative. The overregulated economy is losing momentum, and the lack of funds readily available for investment and reinvestment in the corporate sector is another concern.

5 Main Things To Watch In Today’s Chinese GDP Report

There is one simple reason why when the Chinese Q3 GDP print is revealed shortly, it will be an utterly meaningless indicator – the number, as not only traders but the general public know, is a goalseeked, arbitrary political construct meant to convey not information about the economy, but – at best – about Beijing’s intentions what it may or may not do in the future regarding future monetary or fiscal (which as we showed just hit an all time high) stimulus.

In fact, as Evercore ISI said in the company’s latest look at China, “China’s Real GDP data is opaque; Nearly invariant at 7 – 7.5%; No real, nominal, deflator detail; no income-expenditure cross check, etc. No data pros will answer questions.” In short: it is useless. An alternative, and much more informative index created by ISI, is shown by the red line in the chart below – unlike the blue line, or China’s official GDP data, it reflect the real twists and turns in China’s economy.

Clueless: IMF Wonders Why the World Is Resisting Globalization

IMF Managing Director Christine Lagarde arrives for the IMFC Plenary Session during the IMF and World Bank Group 2016 Spring Meetings on April 16, 2016 in Washington, DCSpeaking during the October 6 opening ceremony, IMF Managing Director Christine Lagarde referred to the global economy as “weak and fragile.”

Radio Sputnik’s Loud & Clear producer Walter Smolarek noted that, on one hand, the economy of the West has not completely recovered from the recession of 2008-2009, despite significant measures taken by financial regulators. These measures have resulted in only temporary fixes that have failed to return the global economy to where it was prior to the recession.

Those countries, such as BRICS members, that could count as real engines of post-crisis world economic growth have had a “very rough few years,” Smolarek says, due, in part, to low commodity prices. A dramatic oil-price drop caused a cascade of other negative economic effects in those countries.

Smolarek notes, however, that when Lagarde speaks about a “weak and fragile” economy, she is speaking about the top of the economic food chain, primarily the largest financial institutions and multinational corporations. But these entities, when faced with challenges, simply divert the negative economic impact down the chain, where the working class suffers the effects. For the working class, however, the IMF offers no solutions and, indeed, hardly addresses the issue as relevant to their message.

Overnight US Market :Dow up 113 points.S&P 500 up 9 points

The Dow Jones industrial average notched a gain of more than 100 points Wednesday as Wall Street saw its first positive day of the fourth quarter after back-to-back losses to kick off the final three-month stretch of 2016.

The Dow climbed 113 points, or 0.6%, after dropping 85 points Tuesday and sliding 54 points Monday. The Dow entered Wednesday’s session down 0.8% in the fourth quarter.

The broad Standard & Poor’s 500 stock index ended 0.4% higher and the Nasdaq composite gained 0.5%.

Wednesday’s gains were driven by a strong rally in the oil patch. The price of U.S.-produced crude gained more than 2% and was getting close to breaking the $50 per barrel level.

A spate of solid economic news also got investors in a buying mood. A key measure of the U.S. services sector of the economy shot up more than expected in September, signaling the U.S. economy remains healthy. Barclays now sees the U.S. economy growing at a 2.7% clip on the just-ended third quarter, up from the slow 1% pace in the first half of 2016.

Global economic growth ‘sliding back into the morass’

The global economy is faltering again with growth rates “sliding back into the morass [they have] been stuck in for some time”, according to the Brookings Institution-Financial Times tracking index.

In a publication ahead of this week’s annual meetings of the International Monetary Fund and World Bank, the results will reinforce fears that many countries have become caught in a vicious circle of low growth, popular discontent and a backlash against trade and openness, resulting in more economic weakness.

The annual meetings will encourage policymakers to pursue inclusive and faster global growth as international organisations, finance ministers and central bank governors seek to reassure the public they can co-operate and that they have the necessary tools to break five years of economic disappointments.

Hanging over the meetings is the fear that the failure to improve living standards in advanced and emerging economies was important in the UK’s vote to leave the EU, may propel Donald Trump to the US presidency and will strengthen the hands of populists such as Marine Le Pen in France.

China’s richest man warns of biggest bubble in history in Chinese real estate

Chinese billionaire Wang Jianlin warns of economic weakness

Chinese mogul Wang Jianlin warned that China’s economy will struggle for another two years and that China’s real estate market is the “biggest bubble in history.” He also said the economy hasn’t bottomed out yet.

Wang is ranked by Forbes as China’s richest man. His company has developed malls and office space across the company but has been cutting back on real estate.

More broadly, he said the US is his favorite place to invest.

CNN spoke with him:

The big problem, according to Wang, is that prices keep rising in major Chinese metropolises like Shanghai but are falling in thousands of smaller cities where huge numbers of properties lie empty.

“I don’t see a good solution to this problem,” he said. “The government has come up with all sorts of measures — limiting purchase or credit — but none have worked.”

BOJ Minutes for July out now (also, Japan Service PPI for August +0.2% y/y)

Bank of Japan Minutes for the July meeting

  • Members shared the view that inflation expectations had weakened recently
  • Members shared recognition that risks to Japan’s economic activity and prices remained skewed to downside
  • Some members said Japan’s inflation expectations were vulnerable to external shocks like oil price falls, slowdown in overseas economies
  • Many members said the Bank of Japan should expand ETF buying given the risk overseas economies uncertainties might affect business, consumer sentiment
  • One member said while expansion of ETF buying was necessary, attention should be paid to impact on BOJ’s financial soundness
  • One member said expanding ETF purchases would be viewed as indicating monetary easing was approaching its limit
  • One member said expanding ETF buying could be regarded as incremental approach to easing, might trigger endless expectations for further easing
  • One member said BOJ must thoroughly explain that its policy mix with govt was different from ‘helicopter money’
  • One member said BOJ should reject the idea that monetary easing had its limits and side effects

Headlines via Reuters

(You’ll recall that the major announcement from the July meeting of the BOJ monetary policy board was the comprehensive review they’d do for the September meeting. So these Minutes are not very interesting, unless you find “BRB” interesting I suppose).
Also, Services PPI for August: +0.2 % y/y
  • expected +0.3%, prior +0.4%

“Mr. Yen” Sakakibara says USD/JPY slowly to 90 in 2017

Bloomberg carrying some headline remarks from Eisuke Sakakibara, ex of the MoF and once known as Mr. Yen

  • USD/JPY between 95 to 100 is OK for Japan’s economy
  • BOJ curve strategy is appropriate
  • Yen will probably see a slow gain to 90 in 2017
  • 1% economic growth is sufficient
  • The Bank of Japan has not lost control of the exchange rate
  • It will be time to talk with the US on intervention if USD/JPY at 80

Commodities attract record $54bn of inflows

Is the sun shining again on commodity investments? With inflows of $54bn during January and August, investment flows into the asset class are at an all-time high for the first eight months of any year, according to Barclays.

In its latest report on investment flows into commodities, the bank says investments into commodities are supported by three factors: Worries about global economic growth have fuelled money into gold, the desire of investors to benefit from volatility in individual commodities, and lastly, the revival of commodities as a diversification and inflation hedging tool

Gold, especially, has regained its sparkle among investors says Barclays. As the report noted:

Indeed, gold has been by far the single most popular commodity investment in 2016, with flows into physically backed ETPs at a net $27bn, accounting for half of all flows into commodities. This year’s inflow comes after three consecutive years of net outflows from gold ETPs and is already far ahead of the previous record set in 2009, which saw a total net inflow of $19bn.

This year could see the first year of net inflows to commodities indices linked investments for the first time since 2012, says the report. Pension funds and other long-term investors typically buy exposure to the sector through swaps on commodity indices that cover oil, agriculture and metals. That allows them to get broad exposure in one stroke. One of the most popular is the Bloomberg Commodity Index.

The report is optimistic that investment flows will continue “for some years to come”.
It explains:

CCI imposes Rs6,715 crore fine on 11 cement companies

The Competition Commission on Wednesday imposed Rs6,715 crore penalty on 11 cement companies, including ACC and Binani, for cartelisation.

Apart from penalising the Cement Manufacturers Association (CMA), the fair trade regulator has directed all the entities to “cease and desist” from indulging in any activity relating to agreement, understanding or arrangement on prices, production and supply of cement in the market.

In a release, Competition Commission of India (CCI) said Rs6,715-crore penalty has been imposed on 11 cement companies and the CMA. The latest order has been passed by the watchdog following directions issued by the Competition Appellate Tribunal (Compat), which had remanded the matter involving the cement companies to CCI for passing fresh order.

The tribunal had also set aside fine on the 10 cement firms imposed earlier. A fine of Rs1,147.59 crore has been imposed on ACC, while penalties on Jaiprakash Associates Ltd and Ultratech are Rs1,323.60 crore and Rs1,175.49 crore, respectively.