Fri, 01st July 2016

Anirudh Sethi Report


Archives of “Economy” Tag

US Treasuries Near Historic Highs as Investors Run for Safety

Investors are buying into US governmental bonds, pushing their value up and depressing the yield, resulting in lower market volatility and profitability, with the yield curve showing pre-recession dynamics for the first time since late 2007.

 The US Treasury

Amid the post-Brexit turmoil in global markets, investors have been overwhelmingly putting their capital in haven assets, including US governmental bonds. This has the effect of pushing the value of Treasury notes up, whilst at the same time pushing the yield down, which then renders market volatility lower. As the $13.4 trln Treasury market rallies, the profitability of investments in financial assets is declining. However, after the initial shock triggered by Britain’s parting ways with the EU, oil prices and FX rates of sterling and emerging market currencies have stabilized, easing Brexit concerns somewhat.

Whilst Treasury notes are expected to extend gains above their historic highs, it is a broader economic uncertainty and the closing business cycle in the US which are pushing haven assets higher rather than the effects of Brexit.

UK growth could cool to 0.2% amid Brexit jitters – Markit

Britain’s services sector recovered slightly last month after an index measuring activity hit a 38-month low in April but the rate of growth was still one of the weakest seen over the last three years, according to a closely-watched survey.

The latest purchasing managers’ index for the UK’s dominant services industry edged up to 53.5 from 52.3 the previous month, which was the lowest reading since February 2013. May’s outcome was also better than the forecast of 52.5 expected by economists.

But Markit, which produces PMI survey, said the pace of growth remained “subdued” and provides further evidence that economic growth in the UK is likely to have cooled significantly in the second quarter, to just 0.2 per cent, as uncertainty around the outcome of the EU membership referendum puts the brakes on investment. The UK economy expanded by 0.4 per cent in the first quarter, which was itself a slowdown in growth from the pace of 0.6 per cent recorded in the final three months of last year.

Tokyo’s plan to spark growth could prove a flash in the pan

The government’s plan to kick-start Japan’s sputtering economy by using stimulus and delaying a tax hike is expected to provide a short-term boost, but the effort is less likely to change a consumer tendency to save that has intensified amid worries over the nation’s finances.

Smoothing out growth 

 SMBC Nikko Securities forecasts passage of a 5 trillion yen ($45.6 billion) supplementary budget that will lower real economic growth by 0.4 percentage point this fiscal year but lift it by 0.8 point in fiscal 2017. The brokerage expects Japan’s economy to recover gradually into next fiscal year.

The postponement of the consumption tax increase slated for April 2017 means that demand will not swell in the preceding months as had been expected. And with the supplementary budget seen doing little this fiscal year, growth likely will fall short of current estimates.

The full impact of the tax-hike delay will be evident in fiscal 2017. Households will not be burdened by the higher levy, and demand will not drop off without the previously expected surge. The economy also will start to derive benefits from the stimulus measures to be laid out this fall.

The size of the stimulus has not been settled, with views in the government ranging from 5 trillion yen to 10 trillion yen. A 10 trillion yen package likely would lift growth in fiscal 2017 by as much as 1.5 percentage points, according to the Dai-ichi Life Research Institute.

Japan, US reaffirm G-7 role in driving global economy

Japan and the U.S. agreed Wednesday to strive for an early ratification of the Trans-Pacific Partnership regional trade pact while emphasizing the need for the Group of Seven to spearhead strong, sustained growth in the global economy.

“I will take responsibility for getting the TPP ratified this fall or thereafter,” Japanese Prime Minister Shinzo Abe said in a meeting with U.S. President Barack Obama. Obama also vowed to reach a domestic conclusion for the deal by the end of his term. 

Japan and the U.S. account for roughly 80% of the total gross domestic product of the 12 TPP signatories. It is imperative that the two countries ratify the deal in order to put the trade pact into effect.

But Tokyo decided to shelve TPP-related legislation this Diet session amid a gridlock over disclosing information on the negotiation process, among other issues. There is even more uncertainty in Washington, where Obama aims to clear the deal through Congress immediately after the U.S. presidential election in November. Presumptive Republican nominee Donald Trump has slammed the TPP, and other candidates may also turn their backs on the deal if they win the race.

Despite such odds, Abe and Obama agreed to get the TPP ratified as soon as possible. They are likely hoping to build momentum toward an early implementation of the trade pact during the two-day G-7 summit starting here Thursday, while stressing how major trade deals involving G-7 members can strengthen the global economy.

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)

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.