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Tue, 30th August 2016

Anirudh Sethi Report

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Archives of “Economy” Tag

Morgan Stanley: “This Is The Most Dangerous Time As Hope And Greed Overtake Fear And Loathing”

Over the past several months, Morgan Stanley – together with the sellside strategists at Goldman, JPM, BofA and most other banks – has had a rather bleak view of not only the economy, but also the ongoing market rally (which as we showed earlier has climbed a fascinating wall of hedge fund worry). The latest weekend comments by the bank’s head of European Strategy, Graham Secker, confirm that despite the market hitting nearly daily record highs on negligible volume, the brokerage refuses to throw in the towel on its cautious outlook despite admitting that the bear capitulation has arrived and warns that “this is potentially the most dangerous time for investors as hope and greed overtake fear and loathing.

From the Sunday Start column by Morgan Stanley’s Graham Secker, head of European Equity Strategy

Is the Tide Rising?

It is often said that a rising tide lifts all boats, but perhaps the more pertinent question just now is whether this logic works in reverse. July saw over 80% of European companies post a rise in their share price, and performance has remained strong so far this month. This breadth of positive returns has been a rare occurrence in Europe in recent years, but does this augur an upturn in economic activity ahead or is it a sign that investor optimism has overreached?

6 Key points in the FOMC Minutes

Verbatim on the key parts of the Fed Minutes

1) “Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity.”

2)  “A couple of [participants] advocating an increase at this meeting

3) “Some participants noted that recent signs of a moderate step-up in wage increases provided further evidence of improving labor market conditions. Al­though most participants judged that labor market conditions were at or approaching those consistent with maximum employment, their views on the implications for progress on the Committee’s policy objectives varied. Some of them believed that a convergence to a more moderate, sustainable pace of job gains would soon be necessary to prevent an unwanted increase in inflationary pressures. Other participants continued to judge that labor utilization remained below that consistent with the Committee’s maximum-employment objective.”

4) “The expected policy path implied by market quotes fell further in the aftermath of the Brexit vote, but it later retraced most of the earlier declines, supported by better-than-expected domestic data releases–particularly the employment and retail sales reports for June–as well as improved sentiment regarding the possible near-term implications of Brexit.”

5) “Several noted that while the outlook for consumer spending remained positive, continued weakness in business investment and the possibility of slower improvement in the housing sector posed some downside risks to their forecasts.”

6) Several headlines note a “split” in the FOMC but that’s an interpretation. The word “split” isn’t used in the Minutes.

Monetary easing row reveals divisions within Beijing

The public drama played out between Beijing’s top economic planning agency and the central bank over monetary policy highlighted rifts within China’s government that could affect the ruling Communist Party’s personnel affairs.

The National Development and Reform Commission issued recommendations that day for boosting investment in China, including cutting interest rates and lowering banks’ reserve requirements at an appropriate time. Chinese stock prices jumped after the statement was published.

 The People’s Bank of China and the NDRC, whose duties include investment authorizations, are both part of the government — but neither has power over the other. It is rare for another government agency to push the central bank toward monetary easing, and even less common for such comments to be made in public.

Lu Zhengwei, chief economist of the Industrial Bank, said the NDRC statement contains a political signal. Many viewed it as a sign of the growing pressure the central bank faces calls grow within the government for monetary easing.

But the central bank, which announced in the afternoon that it held a meeting with the heads of local branches, made no mention of monetary easing and simply said it planned to maintain a prudent policy for the rest of the year.

US private sector adds 179,000 jobs in July

The US private sector tacked on more jobs than economists forecast last month, payroll processor ADP said ahead of Friday’s closely-watched monthly employment report.

The private sector added 179,000 jobs in July, topping Wall Street estimates of 170,000. The pace was also faster than the 176,000 increase in June, ADP said.

It comes come ahead of a key jobs report from the US Labor Department due on Friday. Economists expect the economy to have added 180,000 jobs in July, down from 287,000 the month prior – a pace that is set to put further downward pressure on the unemployment rate.

July’s upbeat jobs data are a key indicator that the economy is bouncing back from a weak start to the year.

Brazilian Economic Conditions to Remain Weak Until 2017 – Moody’s

The economic conditions in Brazil have stabilized but will remain weak until 2017 due to economic decline and political uncertainty, Moody’s Investors Service said in a statement Monday.

“Despite the recent improvement in market sentiment… Brazil is still grappling with a range of problems. Slowing investment, rising household debt, accelerating inflation and high unemployment are all weighing on the economy… The ongoing political turmoil complicates the government’s fiscal repairs and delays structural reforms to support growth and curb the government’s debt burden,” the statement read.

Moody’s added that the country’s economy is unlikely to get relief as commodity prices will probably stay weak.

The Brazilian economy has continued down the path of recession for the fifth consecutive quarter as oil prices stay low. Brazil has also been hurt by a continuing corruption scandal involving the nation’s energy giant Petrobras and its former bossDilma Rousseff, who was suspended as president earlier this year.

Japanese Prime Minister Shinzo Abe goes all in with $266 Billion stimulus package

Japanese Prime Minister Shinzo Abe unveiled plans Wednesday for an economic package topping 28 trillion yen ($266 billion), putting every option on the table to breathe new life into his signature Abenomics policies.

“We will take the fruits of Abenomics and mobilize the entire society to create a strong and positive economic cycle,” Abe said in a speech in the city of Fukuoka. “We will make every effort to protect the Japanese economy from global economic risks,” he added, stressing the need for quick stimulus to underpin domestic demand.

 The stimulus, which the cabinet is expected to approve Tuesday, includes 6 trillion yen in direct cash injections and another 6 trillion yen in fiscal lending and investment.

Responding to criticism that Abenomics has failed to produce the intended boost in consumer spending, the government will roll out 15,000 yen in payouts to low-income individuals. The roughly 22 million people exempt from resident taxes are expected to qualify. For single-person households, an annual income of 1 million yen will be the threshold. 

Federal Reserve holds interest rates unchanged, says near-term risks have diminished

Highlights of the FOMC decision on July 27, 2016

  • FOMC leaves fed funds rate in range from 0.25% to 0.50%, as expected
  • Near term risks to economic outlook have diminished
  • George dissented again in favor of a hike (after removing dissent last month)
  • Economic activity has been expanding at a moderate rate
  • Near-term risks to the economic outlook have diminished.
  • The labor market strengthened
  • Household spending has been growing strongly but business fixed investment has been soft
  • No change in inflation rhetoric

Some hawkish details at first blush, although there is no timeframe of future action.

Reforms in India not fast enough, says IMF

IMF flags decelerating pace of reforms in IndiaListing out as many as six core areas that need further reforms in India, International Monetary Fund (IMF) said in a ‘Note on Global Prospects and Policy Challenges’ that headwinds from weaknesses in the country’s corporate and bank balance sheets, decelerating pace of reforms and sluggish exports may weigh on its economic growth.

The IMF, which recently lowered its gross domestic product growth projection for India to 7.4% in the current financial year, said the country’s economy is on a recovery path, helped by lower oil prices, positive policy actions and improved confidence.

The note has been prepared for the two-day meeting, ending on Sunday, of the G20 Finance Ministers and Central Bank Governors’ Meetings being held in Chengdu, China.

The IMF, which has also lowered its global economic growth forecast for 2016 and 2017 by a marginal 0.1% to 3.1 and 3.4% respectively, recommended six ‘reform priorities’ for India, which is higher than the same for several other emerging markets including China, Brazil and South Africa.

Forget 7-8-9 % Growth ! Irish tell a tale of 26.3% growth spurt

The Irish have written some notable works of fiction — James Joyce and Flann O’Brien produced imperishable classics. Now there is a new addition to the national oeuvre — the official narrative of the country’s economy. According to data released on Tuesday, it grew by 26.3 per cent last year.

That is the highest level of growth for decades and far outstrips the original estimate of Irish economic activity last year, which the official Central Statistics Office had put at 7.8 per cent. A growth rate of more than 26 per cent is nearly three times the highest level recorded during Ireland’s Celtic Tiger boom years in the early 2000s

The figures were met with a mix of bafflement and scorn. “Leprechaun economics,” tweeted Paul Krugman, the Nobel Prize-winning economist. Tom Healy, director of the Nevin Economic Research Institute think-tank, said: “I don’t know if even Soviet Russia in the 1930s exceeded these figures.”

The official explanation was that the surge in gross domestic product was caused by “inversions”, in which companies move their assets or their domicile to Ireland to avail of its super-low 12.5 per cent corporate tax rate; companies moving intellectual property to Ireland for the same reason; and corporate restructurings. In other words, it has only a tenuous relation to activity in the real economy and tangible things such as the creation of jobs.

Irish economic data are volatile because of the nature of the economy — small, open, dominated by foreign direct investment — particularly from Silicon Valley and global pharmaceutical companies — and influenced to a greater or lesser extent by its tax regime, which attracts that multinational activity. That leads to constant revisions of official data, to the frustration of economists and investors.

This latest revision is the most extreme by far. “This revision primarily reflects statistical reclassifications relating to the treatment of inversion deals involving US multinationals, purchases by aircraft leasing firms and companies relocating assets to Ireland,” said Philip O’Sullivan, an economist at Investec Ireland.

The data are likely to reinforce Irish cynicism about its much-touted recovery from the worst financial crisis in the country’s history. If that recovery exists, it is concentrated mainly in Dublin, and even there mainly in the FDI sector rather than in domestic industries such as services, agriculture and small and medium enterprises.

Moody’s: Political contagion across European Union is greatest Brexit risk

The British electorate’s vote to leave the European Union (Aaa stable) will likely result in a shock to confidence that will curb UK (Aa1 negative) economic growth. Nevertheless, absent political contagion, global spillovers are likely to be limited.

Moody’s has reduced its growth expectation for the UK to 1.5% in 2016 and 1.2% in 2017, from 1.8% and 2.1% previously, according to the report, “EU Political Contagion Represents the Greatest Risk to Otherwise Muted Global Impact from Brexit.”

Moody’s has also lowered its euro area growth expectations to 1.5% for 2016 and 1.3% for 2017, from 1.7% and 1.6% previously, reflecting country-specific developments combined with limited spillovers from Brexit.

Uncertainty around the future of the UK outside of Europe’s common market will likely dampen business investment and consumer spending in the UK, as companies hold back on hiring and long-term investments and consumers postpone large spending decisions. The direct impact on growth in the EU will be less significant, due to limited EU exposure to direct economic and trade linkages.