Category: Economy

Analysis of the global economy

Posted on

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

Posted on

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

Posted on

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.

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

Posted on

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

Posted on

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

Posted on

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

Posted on

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.

Read more at Northern Exposure: October payrolls justifies December move

Posted on

US: Robust underlying GDP growth trend

From Elliot Clarke at Westpac:

In assessing the strength and persistence of US growth, it is important to recognise the impact that inventories and net exports continue to have on headline results. Inventories added significantly to growth through the first half of 2015 on rapid inventory accrual; but a more modest pace of stocking in Q3 resulted in a 1.4ppt subtraction from quarterly GDP growth. Similarly, while net exports reduced the annualised Q1 headline outcome by 1.9ppts, it subsequently added modestly to growth in Q2, circa 0.2ppts. If we omit both factors from our assessment (and thereby focus on domestic final demand, DFD), we see a robust, enduring underlying growth trend. Annualised DFD growth in 2015 averages out at 2.7% – or 3.3% if we focus solely on the past six months, when the weather was more favourable.

On the whole, stripping away the impact of inventories and net exports, the past two years have seen a material improvement in the growth trend. This acceleration has primarily been the result of stronger consumption growth, particularly within the services sub-sector and in housing construction. Given the ongoing improvement in the labour market and credit availability as well as robust consumer confidence, this trend should endure into 2016.

Construction spending is the key.

Construction Spending

Posted on

Low inflation and a stronger dollar indicate weak gold

Growth in hourly manufacturing earnings has climbed above the Fed target of 2.0 percent, while core CPI continues to track near the target. But the 5-year breakeven rate (5-year Treasury minus TIPS yield) is close to 1.0 percent. The market expects inflation to fall over the next few years.

5-Year Breakeven Rate, Core CPI and Growth in Hourly Manufacturing Earnings

The reasoning is straight-forward: the end of the infrastructure boom in China and slowing economic growth means low energy and commodity prices for the foreseeable future. Slow credit growth in the West will also act as a brake on aggregate demand, maintaining downward pressure on CPI.

CPI:US and EU

Long-term interest rates are low, with 10-year Treasury yields testing support at 2.0 percent. Declining 13-week Twiggs Momentum, below zero, suggests further weakness.

10-Year Treasury Yields

The Dollar Index rallied off support at 93. A higher trough indicates buying pressure. Breakout above 98 would suggest another advance.

Dollar Index

Gold

A strong dollar and low inflation would weaken demand for gold. Spot gold is testing medium-term support at $1150/ounce. Breach would warn of a test of the primary level at $1100. 13-Week Twiggs Momentum is rising, but a peak below zero would signal continuation of the primary down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Powered by WordPress / WordPress Maintenance Service By Website Helper