Fri, 30th September 2016

Anirudh Sethi Report


Archives of “Economy” Tag

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.

El-Erian says Fed Sept. rate hike chance goes to 80% if the NFP shows these 3 things

Mohamed El-Erian is chief economic adviser at Allianz and a very smart chap indeed

He currently sees a 60% probability of a fed funds rate hike in September.  BUT ….The chance could rise as high as 80%: “What makes that probability go a lot higher a Friday report that has three things:
  1. Job creation in excess of 180,000
  2. Wage growth going up
  3. And no significant move in the participation rate that pushes the unemployment rate up”
If Friday’s jobs report meets all three of those conditions, “the case for not hiking would weaken tremendously” El-Erian said.

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.