Mon, 05th December 2016

Anirudh Sethi Report


Archives of “Economy” Tag

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.

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.