Economy Archives - Page 56 of 137 - the patient investor

February 27, 2016

Citi: Brace for global recession | MacroBusiness

David Llewellyn-Smith quotes Willem Buiter at Citi:

….The main ‘game changers’ in our view are the emerging belief that even the US economy is no longer bullet-proof and that policymakers (in the US and elsewhere) may not be there to come to the rescue of their own economies, let alone the world economy, by propping up asset prices and aggregate demand. It is likely, in our view, that global growth will this year once again underperform (against long-term trends and previous year forecasts). Citi’s latest forecasts are for global growth of 2.5% in 2016 (based on market exchange rates and official statistics) and around 2.2% (adjusted for probable Chinese mismeasurement). But in our view, the risk of a global growth recession (growth below 2%) is high and rising.

…..even though monetary policy is at the point of strongly diminishing returns, it is likely to remain the principal instrument through which authorities in a range of countries will try to boost growth and inflation.

…..In most countries, the hurdles for a major fiscal stimulus remain high.

There are no free lunches: “propping up asset prices and aggregate demand” reduces the severity of recessions but inhibits the recovery, leading to prolonged periods of low growth. The further asset prices are allowed to fall, the stronger the recovery as investors (eventually) snap up ‘cheap’ assets. Maintaining high prices is sometimes necessary, as in 2009, to prevent a 1930s-style collapse of the banking system but we may pay the price for another decade.

Source: Citi: Brace for global recession – MacroBusiness

February 22, 2016

S&P 500 still flaky

From Howard Silverblatt at S&P Indices:

“With almost 90% of the Q4 2015 earnings reported, 67.6% of the issues are beating estimates (the historical rate is two-thirds), but only 36.8% beat As Reported GAAP rule based earnings estimates and less than half, 46.8%, beat sales estimates.

Explained ‘responsibility’ for any short fall on the cost side includes currency costs and a growing list of special one-time items (never to be repeated, of course). On the income side, helping earnings, are the ‘difficult decisions made’ by companies under the heading of cost-cutting (as layoffs and location changes appear to be on the rise).”

As Reported 12-Month Earnings Per Share (EPS) for the S&P 500 has fallen 12.5% from its Q3 2014 high, with 88.5% of companies having reported.

S&P 500 EPS

While same-quarter sales will fall an estimated 2.6% in December 2015.

S&P 500 Quarterly Sales

Manufacturing activity is declining, with the PMI Composite index below 50 signaling contraction.

PMI Composite index

Growth in the Freight Transportation Services Index has also slowed.

Freight Transportation Services Index

But electricity production recovered from its alarming downward spike in December last year.

Freight Transport Index

The jobs market remains bouyant, with annual manufacturing earnings growth rising 2.5%.

Annual Change in Hourly Earnings

Inflation has kicked upwards as a result.

CPI and Core CPI

While profit margins are likely to remain under pressure.

Nonfinancial Profit Margins

Light vehicle and retail sales are holding their own.

Light Vehicle Sales

Retail Sales (ex-Gas and Automobiles)

And bank lending continues to post steady growth.

Bank Loans and Leases

But net interest margins have fallen below their 2007 lows.

Bank Interest Margins

With rising spreads warning of a credit squeeze.

10-year Baa minus Treasury Spreads

Conclusion

Sales levels are reasonably healthy, but rising wages and competition from imports is putting pressure on profits. Rising credit spreads and falling margins suggest all is not well in the banking sector, which could impact on broader economic activity.

Housing starts remain slow.

Housing Activity

Only when this sector (housing) eventually revives can we expect to see a full recovery.

Cement and Concrete Production

February 10, 2016

Janet Yellen on financial market turmoil

Federal Reserve chair Janet Yellen before the House Financial Services Committee:

Janet Yellen

“…..As is always the case, the economic outlook is uncertain. Foreign economic
developments, in particular, pose risks to U.S. economic growth. Most notably,
although recent economic indicators do not suggest a sharp slowdown in
Chinese growth, declines in the foreign exchange value of the renminbi have
intensified uncertainty about China’s exchange rate policy and the prospects for
its economy.

This uncertainty led to increased volatility in global financial markets and, against the
background of persistent weakness abroad, exacerbated concerns about the outlook for
global growth. These growth concerns, along with strong supply conditions and high
inventories, contributed to the recent fall in the prices of oil and other commodities. In
turn, low commodity prices could trigger financial stresses in commodity-exporting
economies, particularly in vulnerable emerging market economies, and for commodity-
producing firms in many countries. Should any of these downside risks materialize,
foreign activity and demand for U.S. exports could weaken and financial market
conditions could tighten further…..”

…No rate rises any time soon.

February 4, 2016

Gold rallies but how long?

We are witnessing a flight to safety as money flows out of stocks and into bonds, driving 10-year Treasury yields as low as 1.88 percent. Breach of support at 2.0 percent suggests that another test of primary support at 1.5 percent lies ahead.

10-Year Treasury Yields

What makes this even more significant is that it occurred while China is depleting foreign reserves — quite likely selling Treasuries — to support the Yuan. Heavy intervention in the past few weeks to prevent further CNY depreciation against the Dollar may well show recent estimates of a further $0.5 Trillion outflow in 2016 to be on the light side.

USDCNY

China is caught in a cleft stick: either deplete foreign reserves to support the Yuan, or allow the Yuan to weaken which would fuel further selling and risk a downward spiral. Regulations to restrict capital outflows may ease pressure but are unlikely to stem the flow.

Chinese sales of Dollar reserves have slowed appreciation of the Dollar Index. Cessation of support for the Yuan would cause breakout above 100 and an advance to at least 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Gold

Gold has also benefited from the flight to safety, rallying to $1150/ounce. The rally may well test $1200 but resistance is expected to hold. Respect would suggest a decline to $1000/ounce*; confirmed if support at $1050 is broken. Continued oscillation of 13-Week Twiggs Momentum below zero flags a strong primary down-trend.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

January 11, 2016

Fedex warns of slowing economy

Bellwether transport stock Fedex, in a primary down-trend, warns of slowing economic activity in the US. The 6-month Twiggs Momentum peak below zero flags a strong down-trend. Breach of support at 130.00 would warn of another decline — and worsening economic climate.

Fedex

European equivalent Deutsche Post AG (DPW.DE), owner of DHL, also warns of declining economic activity. Breach of support at 23.00 would warn of another decline.

Deutsche Post AG

December 18, 2015

CBA: big four to raise another $32 billion of equity | afr.com

From Chris Joye at AFR:

On the question of whether the majors are done and dusted on capital raising, investors need go no further than CBA’s chief credit strategist, Scott Rundell, and CBA’s head of fixed-income strategy, Adam Donaldson, who on Thursday published a report arguing the big four are short $32 billion of CET1 capital.

“Capitalisation [is] likely to be a source of credit strength for banks as they build toward meeting APRA’s expected ‘unquestionably strong’ capital requirements,” Rundell and Donaldson said. The authors reiterated previous analysis that suggested the majors’ target CET1 ratios will settle at “around 10 per cent to 10.5 per cent”, which “would put the majors at the bottom of the top quartile” of global competitors.

November 23, 2015

Fed: Who Is Holding All the Excess Reserves?

Ben Craig and Sara Millington at FRB Cleveland say “liquidity is not diffusing through the banking system, but is instead staying concentrated on the balance sheets of the largest banks.” Banks from the European Union (EU) have also substantially increased their holdings of excess reserves at the Fed.

Hat tip to Barry Ritholz

November 17, 2015

Gold breaks support

Gold fell to $1070/ounce, breaching the band of primary support between $1080 and $1100 per ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. The next level of support is $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

Inflation

Core CPI is close to the Fed target of 2.0 percent but inflation expectations continue to fall, with the 5-year breakeven rate (5-year Treasury minus 5-year TIPS yield) as low as 1.2 percent.

5-Year Breakeven Rate

Interest Rates and the Dollar

Long-term interest rates are rising, anticipating a Fed rate hike. 10-Year Treasury yields retraced to test the new support level after breaking through 2.25 percent. Respect of support is likely and will signal an advance to 2.50 percent. Recovery of 13-week Twiggs Momentum above zero suggests an up-trend. Breakout above 2.50 percent would confirm.

10-Year Treasury Yields

Low inflation and a stronger Dollar are weakening demand for gold. The Dollar Index is testing resistance at 100. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 is likely and would signal an advance to 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

November 9, 2015

Gold testing $1100/ounce

Solid job numbers have boosted the prospects for an interest rate hike before the end of the year. Employment is growing steadily, having exceeded its 2008 high by more than 4.2 million new jobs.

Employment and Unemployment

Unemployment is falling as job growth holds above 2.0 percent a year.

Interest Rates and the Dollar

Long-term interest rates are rising, with 10-year Treasury yields headed for a test of resistance at 2.50 percent after breaking through 2.25 percent. Recovery of 13-week Twiggs Momentum above zero indicates an up-trend. Breakout above 2.50 percent would confirm.

10-Year Treasury Yields

The Dollar strengthened in response to rising yields, the Dollar Index breaking resistance at 98. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 would confirm another advance, with a target of 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Gold

Gold fell as the Dollar strengthened, testing primary support at $1100/ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong (primary) down-trend. Follow-through below $1080 would signal another decline, with a target of $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

November 8, 2015

US October payrolls justifies December move

From Elliot Clarke at Westpac:

Recent softer gains for nonfarm payrolls cast doubt over labour market momentum, giving cause for some to question whether the FOMC would be able to deliver a first hike before the year is out.

The October report changed that view, with the 271k gain for payrolls taking the month-average pace back up to 206k as the unemployment rate declined to 5.0%.

There is certainly more room for improvement in the US labour market. But subsequent gains need to come at a more measured pace.

We continue to anticipate that a first rate hike will be delivered at the December FOMC meeting.