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Tue, 17th January 2017

Anirudh Sethi Report

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Archives of “macroeconomics” Tag

Brazil slashes rates by 75bps to 13% in surprise move

Don’t anyone accuse Brazil’s central bank of not being bold.

In a unanimous decision, the bank cut its policy interest rate by 75 basis points on Wednesday, exceeding the consensus call for a 50bps cut and sharply picking up the pace on an easing cycle it began with two back-to-back cuts of 25bps each in October and November

In a statement, the bank said economic activity had fallen below expectations and that a recovery would take longer than previously anticipated.

The size of the cut will be welcomed by many, given the economy’s stubborn refusal to return to growth. The rebound expected by many when congress ditched president Dilma Rousseff last year has failed to happen. GDP contracted by 8 per cent over the past two years under Rousseff’s watch; her pro-growth, market-friendly successor, Michel Temer, was expected to turn things round quickly.

India : Forex Reserves Fall By $935.2 Million To $359.67 Billion

India’s foreign exchange reserves declined by $935.2 million to $359.671 billion in the week to December 23 on account of fall in foreign currency assets, the Reserve Bank said on Friday.

In the previous week, the reserves had fallen by $2.380 billion to $360.606 billion.

They had touched a life-time high of $371.99 billion in the week to September 30, 2016.

Foreign currency assets (FCAs), a major component of the overall reserves, dipped by $933.2 million to $335.970 billion in the reporting week.

FCAs, expressed in US dollar terms, include the effects of appreciation/depreciation of non-US currencies such as the euro, pound and the yen held in the reserves.

Gold reserves remained steady at $19.982 billion in the reporting week, the RBI said.

The special drawing rights with the International Monetary Fund decreased by $0.9 million to $1.427 billion, while India’s reserve position with the Fund too declined by $1.1 million to $2.290 billion, the data showed.

The life of EURUSD in 2017 by Danske Bank

The jolly chaps and chapesses at Danske Bank have the euro all mapped out for next year

Danske see EURUSD bottoming at 1.0200 in their 1 month forecast.

“In the short term, on the one hand there will be downward pressure on the US monetary base from the higher federal funds target and from the impact of new banking regulation with US banks set to be required to have an LCR of 100% by 1 January 2017. On the other hand, deposits on the US treasury account may fall at the beginning of next year after a resuspension of the debt ceiling, which will tend to increase the monetary base. Overall, this is likely to be marginally positive for USD and weigh on USD FX forward points vis- à-vis EUR and the Scandinavian currencies on top of the impact of the repricing of the path of Federal Reserve rate hikes, e.g. keeping the 3M EUR/USD basis spread around the present 70-80bp, and thus maintaining a significant negative carry on short USD positions.”

In 12m they see the euro at 1.1200.

BOJ taking ‘a step forward,’ says Kuroda

The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.

“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.

 During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.

“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.

World braces as US monetary policy turns

Wednesday’s U.S. rate hike has caused ripples through global markets, as investors began to contemplate the impact of American monetary tightening and beefed-up fiscal spending under a President Donald Trump.  

Turning point

 Many traders at a stock brokerage here described comments by Federal Reserve Chair Janet Yellen Wednesday as more hawkish than expected.

A 25-basis-point increase in the federal funds rate was announced at 2 p.m., following a two-day meeting of the Federal Open Market Committee. The first hike in a year, which lifted the benchmark rate to a range of 0.5% and 0.75%, was largely expected. But Yellen also revealed that the Fed was now looking at raising the rate three times in 2017, instead of the two hikes that had been indicated before.

Yellen also cautioned against guessing President-elect Donald Trump’s intentions regarding fiscal spending. “We’re operating under a cloud of uncertainty at the moment and we have time to wait and see what changes occur and factor those into our decision-making as we gain greater clarity.”

Fed watchers took this as an indication that the pace of rate hikes could hasten to more than the three estimated for 2017 as Trump’s policies are implemented.

ECB leaves interest rates on hold – Extends QE but lowers buying rate

Details of the December 2016 ECB governing council meeting 8 December 2016

  • Main refi rate 0.0%
  • Dep rate -0.4%
  • Marginal lending facility 0.25%
  • QE kept at €80bn until April 2017 then will continue at €60bn until the end of Dec 2017, or beyond if necessary
  • Will comment further at the presser

PRESS RELEASE

Monetary Policy Decisions

8 December 2016

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Goldman Raises S&P Target To 2,400 On “Trump Hope”

Having warned for nearly all of 2016 that the market is getting ahead of itself on the back of median P/E multiples that are higher than 99% of all historical reading, Goldman chief strategist David Kostin stubbornly kept his year end S&P target at 2,100 on valuation concerns.

Today, however, with oil soaring and the S&P at all time highs, he finally threw in the towel as a result of the Trump victory, and in a report Kostin writes that the Trump “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400.  However, at that point, “less-than-expected tax cuts and higher inflation and interest rates will limit both upward EPS revisions and any P/E multiple expansion. S&P 500 will end next year at 2300, reflecting a price gain of 5% and a total return of 7% including dividends.”

Here is the summary from Goldman:

  • US equity investors have focused “more on hope than n fear” since Donald Trump’s election. Ironically, many commentators believe his campaign rhetoric focused “more on fear than hope.” In 2017, we expect the stock market will be animated by competing views of whether economic policies and actions of President Trump and a Republican Congress instill hope or fear.
  • “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400. The inauguration occurs on January 20 and our Washington economist expects much legislation will be proposed during the first 100 days. The prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions. Instead of our baseline adjusted EPS growth of 5% to $123, growth could accelerate to 11% and reach $130, which would support a P/E multiple above 18x. Top “Hope” investment recommendations: (1) Cyclicals vs. Defensives; (2) Stocks with high US versus foreign sales exposure; and (3) High tax rate companies.
  • “Fear” is likely to pervade during 2H and S&P 500 will end 2017 at 2300, roughly 5% above the current level. Our economists expect inflation will reach the Fed’s 2% target, labor costs will be accelerating at an even faster pace, and policy rates will be 100 bp higher than today. Rising inflation and bond yields typically lead to a falling P/E multiple. Congressional deficit hawks may constrain Mr. Trump’s tax reform plans and the EPS boost investors expect may not materialize. Potential tariffs and uncertainty around other policy positions may raise the equity risk premium and lead to lower stock valuations in 2H. The median stock trades at the 98th percentile of historical valuation based on an array of metrics. Top “Fear” investment recommendations: (1) Low vs. High labor cost companies; and (2) Strong vs. Weak Balance Sheet stocks.
  • Money flow represents a potential upside to our baseline forecast. Equity mutual fund and ETF inflows may benefit as investors lose money owning bonds. After years of active management underperformance and outflows, higher return dispersion will increase the alpha opportunity for investors skilled enough to capture it. Economic policy uncertainty and the later stages of the economic cycle are typically associated with higher stock return dispersion

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.

Pronab Sen: Demonetisation could knock 40bps off GDP in India

As the government firefights to contain damages from its demonetisation move, Pronab Sen, the country’s former chief statistician as well as the chairman of the National Statistical Commission, says more liquidity should be released towards production than consumption to maintain a balance in the economy.

In an interview, Sen also says given the current disruptions in the economy, the CSO’s decision to issue the advance estimate of the country’s GDP growth for the entire 2016-17 fiscal a month earlier than its usual schedule (in view of the advancement of the Budget date) will be a tough task. Also, such an advance estimate will be pure guesswork. Excerpts:

How much of a decline do you see in the GDP growth for 2016-17 due to demonetisation?

It is too early to give a precise forecast, but I think the negative impact on GDP could be to the tune of 40 basis points this fiscal (the GDP grew 7.6% in the last fiscal and 7.1% in the first quarter of 2016-17, the slowest in six quarters). But this forecast doesn’t factor in any damage to the production side. The overall impact will be spread over both the third and the fourth quarters of 2016-17. A key factor will be how quickly demand is restored in the economy. Since consumer demand will take some time to recover fully, there could be some adverse impact on investments. But small industries will be hit harder by a potential slowdown in both demand and supply.