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Whoops. Try again. Chinese cement production. (From Capital Economics this AM) pic.twitter.com/k5W7pdRR2c
— A Evans-Pritchard (@AmbroseEP) May 13, 2015
Lowest cement production in more than 10 years reflects the decline in infrastructure investment. Not good news for Australian resources stocks. Where cement production goes, iron ore and coal are likely to follow.
I originally got this from Matt Busigin (I think). Average Hourly Earnings multiplied by Average Weekly Hours (Total Private: Nonfarm) gives a pretty good indication of where GDP is headed, well ahead of the BEA accounts.
Remember this is nominal GDP, so the latest (April 2015) figure of 4.38% would need to be adjusted for inflation. Inflation is somewhere between 0.5% and 1.75% depending on how you measure it. The GDP deflator looks like it will come in below 1.0% which would leave us with real GDP of at least 3.38% p.a.
Chris Joye (AFR) on the budget deficit:
There are two critical differences in 2015 that make Australia’s current debt burden [42.2% of GDP] much more troubling than that serviced by previous generations. Back in the 1977 and 1983 recessions, the household debt-to-income ratio was only 34 per cent and 37 per cent, respectively. Even in the 1991 recession, it was just 48 per cent, which is one reason why home loan arrears were so benign. Yet by 2015, the household debt-to-income ratio had jumped 3.2 times to an incredible 154 per cent, which is above its pre-GFC climax because families haven’t deleveraged….
Public and private debt levels are important to our economic health, but where the money is borrowed domestically it is far less serious than when it is borrowed offshore. In the former case, net debt in the economy is effectively zero — one sector runs a surplus while the other runs a deficit — but where money is borrowed offshore, the nation as a whole becomes a net debtor. Which is why short-term borrowing in international markets by Australian banks — used to fund the housing bubble in the run up to the GFC — was so dangerous.
From Greg McKenna (House & Holes) at Macrobusiness:
“….The funding gap is estimated to be $600 billion. In a speech on Friday, Westpac deputy chief executive Phil Coffey cited research from PwC which estimated the gap could grow to $1.325 trillion if there was a pick-up in credit growth.”
Here is the latest chart from the RBA showing the rising borrowing, it’s quarterly and likely lagging:
Notice how the article is focused entirely upon the “funding gap” as a tactical challenge in which the banks are innocent players. In reality there is no “funding gap”. Rather, our financial system is addicted to unproductive mortgage-lending and that crowds out the kind of business lending that would generate income growth and local savings. The “funding gap” is created by the banks not serviced by them.
International borrowing to fund a domestic property bubble is double trouble.
Read more at Federal budget 2015: worst cumulative deficits in 60 years | afr.com.
And at Macrobusiness: Australia ramps the risk as banks borrow abroad
The S&P 500 has struggled to break resistance at 2120 since February, but weekly Ichimoku Cloud continues to show a strong primary up-trend, with Tenkan-sen (blue) and Kijun-sen (red) above a long green cloud and Tenkan-sen respecting Kijun-sen since December 2012.
Long tails on the last two completed candles suggest short-term support, while 13-Week Twiggs Money Flow floating above the zero line indicates strong long-term buying pressure.
Interesting to see how Treasury yields and the Dollar reacted — or failed to react — to the sharp fall in first quarter GDP growth. But first a great summary by Matt Phillips at Quartz:
Move along. There’s nothing to see here.
Well, if you must know, US GDP growth fell to a 0.2% annualized rate, which looks pretty bad.
We told you it would be bad. How did we know? Windows. If you looked out any of them between January and March you were treated to a slush-bound hellscape of icy misery. Thankfully, spring has sprung. And there are all sorts of indications that US growth is bouncing back.
…interpreting the numbers rather than simply informing readers of the latest “bad news”. Good journalism.
Ten-year Treasury Note yields broke resistance at 2.00%. Not what one would expect if the economy was slowing and the Fed planned to sit on its hands rather than raise interest rates. Breakout above resistance indicates an advance to 2.25%. Recovery of long-term yields, however, is likely to be gradual, with much testing of support before we see a breakout above long-term resistance at 3.00%.
The Dollar Index surprised in the opposite direction, breaking support at 96. Not what one would expect if yields are rising. Breach of support suggests a test of the primary trendline at 92.
Further to last week’s post on the US-Asia trade imbalance, here is the impact on the US current account (seasonally adjusted annual rate) over the last two decades. The last quarter shows reversal to an annual deficit greater than $500 billion.
The deficit remains at 3 percent of nominal GDP. This is clearly unsustainable.
Interesting graph from RBA governor Glenn Stevens.
A striking feature of the global economy, according to World Bank and OECD data, is the low rate of capital investment spending by businesses. In fact, the rate of investment to GDP seems to have had a downward trend for a long time.
One potential explanation is that there is a dearth of profitable investment opportunities. But another feature that catches one’s eye is that, post-crisis, the earnings yield on listed companies seems to have remained where it has historically been for a long time, even as the return on safe assets has collapsed to be close to zero …..
Perhaps this is partly explained by more sense of risk attached to future earnings, and/or a lower expected growth rate of future earnings.
Or it might be explained simply by stickiness in the sorts of “hurdle rates” that decision makers expect investments to clear. I cannot speak about US corporates, but this would seem to be consistent with the observation that we tend to hear from Australian liaison contacts that the hurdle rates of return that boards of directors apply to investment propositions have not shifted, despite the exceptionally low returns available on low-risk assets.
What this illustrates is the limits of monetary policy to restore economic growth.
Such [monetary] policies are, then, working through the channels available to them to support demand. But these channels are financial in nature. They don’t directly create demand in the way that, for example, government fiscal actions do……
Westpac produce a very detailed chart pack on the US economy called Northern Exposure. One item that stands out like a sore thumb is the trade imbalance between the US and Asia:
The trade balance between most countries and the US is close to equilibrium, where imports match exports:
But there are three notable exceptions:
Any large trade imbalance should cause the exchange rate between the two countries to rise or fall, making the exports of the net exporter more expensive and imports from the net importer cheaper, until balance is restored. But this has not happened with China and Japan. They are manipulating the system: investing a large portion of their trade surplus back in the US through the financial account, so that trade flows in one direction are offset by capital flows in the other. Their actions are clearly visible in the growth of Rest of World investment in US Treasury securities.
That is the reason why the US consistently runs massive trade deficits and why the manufacturing sector has been shedding jobs for the last two decades. This could be prevented if the US was willing to regulate capital flows on the financial account: “we will open our capital markets to you if you open yours to US investors”.
Long-term Treasury yields remain in a bear trend, with 10-year yields holding below resistance at 2.00%. Breach of support at 1.85% would signal another test of the primary level at 1.65%. A lower inflation outlook is translating into lower interest rate expectations.
The Dollar Index is likewise encountering resistance at 100. Breakout would signal an advance to 104*. Reversal below 96, however, would test primary support at 94.
* Target calculation: 100 + ( 100 – 96 ) = 104
Gold is also consolidating, ranging between $1180 and $1220/ounce. Reversal below $1180 would signal a decline to $1000/ounce*, while breakout above $1220 would indicate a rally to $1300/ounce.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
March consumer price index (CPI) is due for release on Friday. Producer prices, released Tuesday, ticked upwards after a sharp December/January fall on the back of plunging crude oil prices.
Average hourly earnings growth (non-supervisory manufacturing jobs), however, retreated below 1.0%.
CPI is likely to remain heavily affected by oil prices, but core CPI (excluding food and energy) is expected to remain close to the Fed’s target of 2.0%.
