Housing hangover

- Macro viewpoint: Housing hangover "The housing data continues to suffer a “hangover” after the expiration of the homebuyer tax credit. More broadly, the data remain consistent with a slowing in growth."
- Fed watch: Land of confusion "One of our key themes has been the challenge the Fed faces in communicating with the markets. This past week’s Monetary Policy Report before the Congress could be Exhibit A in that discussion. These “Fed fakes” are only likely to continue
while policy remains on hold for an extended period."
- The week ahead: Hard and soft "We'll get a sense of the big picture next week with both hard and soft data. On Friday, we'll get the hard data when the Bureau of Economic Analysis releases its second quarter GDP report. We are expecting growth to advance at a 2.5%
annualized rate. The forward-looking data actually comes in on Wednesday, when the Fed releases its Beige Book economic report. This report is filled with anecdotal information on the state of the economy and the outlook across the 12 Fed Districts. Our expectation is that we will continue to see signs of an ongoing, albeit moderating, economic recovery across the country."
Merrill Lynch US Economic Weekly 20100723

Not Turning Japanese

- Bear Markets — "Japanese equities are still down 69% from their December 1989 peak. World ex-Japan equities are down 29% since their March 2000 peak."
- Is this Japan? — "Many investors remain concerned that the Japanese experience for two lost decades will be repeated in other developed markets. Stagnant economies could produce a second decade of negative equity returns."
- A Repeat Unlikely — "The 20-year Japanese bear market reflects the impact of a de-rating, weak economic growth, poor earnings, and shareholder dilution. We do not expect any of these to be repeated from here for other major developed markets."
- Focus On Dilution — "Much of the drop in Japanese equities since the initial 1990-92 de-rating can be attributed to EPS dilution. A focus on shareholder returns elsewhere should make similar mistakes unlikely."
- De-Equitisation Needed — "We screen for global companies that have looked to enhance EPS through share buybacks. US IT companies feature strongly."
Citigroup Global Equity Strategist 20100721

Russia: recessionary pressures fade out

- "The Russian economy is gradually picking up, after going through its deepest recession in 16 years. The oil windfall accumulated between 2003 and mid- 2008 has helped the country to avoid a macro-financial nightmare."
- "Today, recessionary pressures fade out thanks to the conjunction of several factors:
• An aggressive contra-cyclical policy based on a combination of fiscal and monetary measures. The first is reflected in higher social transfers and the introduction of a scrapping premium. The second by cuts in key interest rates, recapitalization of banks, the acceptance of
a larger variety of collateral in repo and the introduction of stronger guarantees on deposits.
• A reduction of tensions on banking liquidity, capital flight, the confidence crisis on the ruble, a rebound of order backlogs, of export prices and finally, indications of recovering banking credit."
- "Nevertheless, several dark spots still exist such as the symptoms of the Dutch disease, dissuasive oil taxes, demographic decline, fragile business climate and structurally high inflation."
Natixis Flash Economics 369 20100720

Where should swap spreads be?

- Swap spreads: "We review several structural factors that should impact swap spreads in the coming years, and look at fair value in 10yr, 5yr, and 2yr spreads. The steep inversion in
the spread curve is currently between the 5-year and 10-year point—we think that inversion should be concentrated in the 2-year to 5-year segment."
- Zero rates: "Chairman Bernanke highlighted lowering interest on reserves as one of the
options for stimulating the economy. We think the most likely outcome is that a lower IOR
would do very little to increase economic activity, with the other outcome being a major
structural change to US markets that could severely hurt liquidity."
- Munis: "State economic indices measuring employment and earnings have been improving
in recent months. However, this trend may stall or perhaps change course somewhat, as
stimulus funds fade, census hiring ends, and state and local governments scale back payrolls."
- Treasuries: "We believe 2s, 3s, 5s and 7s will likely be reduced by another $1b in each of the next two months but from that point onward, all nominal coupons are likely to hold steady through at least the end of the year. More aggressive cuts in shorter maturities has pushed total issuance of 5s nearly on top of issuance of 2s, helping keep the average maturity of outstanding Treasuries at a relatively high level. However, we do not expect 2-year auction sizes will ever fall below 5-year auction sizes, limiting the scope for further extension of the average maturity of the debt."
RBC US Fixed Income Weekly 20100723

Japan: Credit demand has kept contracting

- Credit demand has kept contracting
• Pace of growth in money stock has been firming, while for bank loans it has decelerated
• Widening of the gap between the two is a reflection of weakened demand for loans by companies, savings of which are increasing
• We remain doubtful about a scenario in which the BoJ’s new fund supply scheme could boost bank lending
- Improvement in consumer sentiment slows down
• Consumer sentiment index rose for the sixth consecutive month by 0.7pts mom to 43.5 in June; improvement pace has slowed down
• Consumer perception of “the value of property (asset) growth” also worsened for the second consecutive month
• Industrial production was revised up 0.2pts to +0.1% mom in May. Manufacturing sector capital utilization also rose 0.8% mom to 72.5%
- Demand for loans remains weak
According to the Senior Loan Officer Opinion Survey on Bank Lending Practice in July, the DI for demand for loans among firms worsened 7pts from the previous survey to -17
CreditSuisse Japan Economics Weekly 20100722

Fiscal consolidation won’t kill the recovery

- "Conventional economics inspired by the simple Keynes-Hicks IS-LM model assumes that cuts in government budget deficits, especially when they are achieved through government spending reductions, exert contractionary effects on aggregate demand and hence GDP. This
relationship has inspired a number of observers to warn that plans to start reining in deficits in major countries could jeopardise economic recovery and trigger a “double-dip” recession."
- "A closer look at the relationship between changes in the fiscal stance and economic activity raises serious doubts about the validity of the IS-LM model. Correlations between changes of cyclically adjusted primary budget balances and GDP growth for the US, Japan, and the euro area calculated over the last few decades are zero or positive, suggesting that improving structural balances (i.e., a contraction of the fiscal stance) are unrelated to growth or associated with rising growth."
- "Recent economic research offers an explanation for this seemingly counterintuitive result: positive confidence and interest rate effects on private demand triggered especially by government spending cuts can offset or even exceed the direct effect of lower government deficits on aggregate demand."
- "We expect the planned reduction in structural deficits in major countries to be measured. Moreover, fiscal adjustment on balance seems to rely more on reductions in government spending than on tax increases (which should be positive for growth). As a result, we do not expect the economic recovery to be jeopardised by the planned fiscal adjustment. To the contrary, we believe there is a good chance that fiscal adjustment may even bolster the recovery."
- How big is the “Greece premium” in US Treasuries "Uncertainty about the situation in Europe has generated a substantial flow of “safe haven” money into US Treasuries. In this piece we estimate a weekly and a quarterly model of 10-year treasuries and find that the “Greece premium” is between 60bps to 100bps. In other words, 10-year treasuries are 60bps to 100bps lower than what is predicted by short rates, the business cycle, the fiscal stance, and inflation expectations. As the worries about Europe start fading among global
investors – including later this week when the stress tests are released – we would expect the Greece premium in 10-year Treasuries to start shrinking."
DeutscheBank Global Economic Perspectives 20100721

Slowdown ahead

- Turning. "While global GDP growth accelerated up until recently, there is now mounting evidence pointing to a tangible slowdown. The OECD leading economic indicators, one of the most reliable and most forwardlooking yardsticks for the global economy, are already heading clearly south (cf. chart below). Their still high level does, however, argue against
a double-dip recession."
- US. "The slowdown is already evident in the hard numbers. Recent economic indicators were generally weaker than expected. In the second quarter, real GDP probably grew at an annual rate of only 2¼% (IV/09: +5.6%). For the first half of 2011, we expect only 2%."
- Fed. "The central bank is also becoming increasingly concerned about the economy, since the retarding effects of the inventory cycle and the expiring fiscal programs will soon be joined by the headwind from higher taxes. There is, therefore, a growing risk that the Fed will initiate its tightening cycle later than projected so far. It may possibly wait until summer next year."
- EMU. "In Europe, the spring quarter should have still been pretty good. That, however, is attributable solely to a technical reaction to the poor start to the year because of the cold winter weather and not to the recovery of final domestic demand. But GDP growth is set to slow down, although maybe not as pronounced or as early as projected given the recent upbeat readings of PMIs as well as the German Ifo climate index."
- ECB. "The retarding effects of the inventory cycle and fiscal policy measures are being joined by external strains. This is increasing the risk that the ECB will also have to postpone the first rate hike, especially if today's bank stress test results disappoint investors."
Unicredit Friday Notes 20100723

Four Wobbly Legs Beneath the Throne of Economic Growth

- "Public policy has elevated the goal of jobs (with economic growth) to the throne of the economic kingdom and the benchmark for political success in this election year. Yet, four issues among the business leaders at my presentation yesterday at Cornell’s School of Hotel Administration drove home the point that the support to the economy from these four wobbly legs remains uncertain at best. Our outlook is for a growth slowdown in the second half of this year even after go the stimulus and all those special programs have passed. Federal spending has been easy, but the real work of setting up conditions to move the economy forward has not been done. There has not been significant follow-through. Why?"
Wells Fargo Special Commentary 20100721

EMEA Weekly: Hungarian foot-in-mouth politics

- Market Movers ahead: South African inflation coming up "Next week is relatively light in terms of economic releases. A couple of interesting numbers are due out on Wednesday though. We are due for preliminary data on Lithuanian Q2 GDP growth. We expect the recovery of the Lithuanian economy to continue and forecast GDP to have contracted by 1.7% y/y in Q2. Also on Wednesday we are due for data on South African inflation in June. This number could get some attention following this week’s decision by the South African central bank to keep rates unchanged."
- Fixed Income Outlook: More Hungarian mess next week? "Looking into next week we have relatively little on the agenda in terms of macroeconomic data releases, so the markets could continue to focus on the Hungarian situation and we fear that we could be heading for more volatility in the Hungarian fixed income markets."
- FX Outlook: CZK stays on top "CZK continues to be the top performer in our EMEA FX Scorecard and the only real bright spot in the EMEA FX markets. The Scorecard remains relatively negative on the rest of the EMEA currencies and the most negative on the South African rand. The rand is the currency that we are the most worried about. It looks fundamentally overvalued and short-term indicators point toward a rand sell-off."
- Scorecard-based trade of the week Buy CZK/ZAR "Last week we recommended that investors Buy CZK/ZAR based on our EMEA FX Scorecard. We are happy to maintain this recommendation going into next week and the Czech koruna is still the high scoring currency in our EMEA FX Scorecard, while the rand remains the lowest scoring currency. Over the past week CZK/ZAR has been more or less flat."
DenDanske EMEA Weekly 20100723

Weekly Credit Update

- "Limited activity in the credit markets"
- "Moody’s harsh on Danish subordinated debt"
- "EU stress tests to be published tonight"
DenDanske Weekly Credit Update 20100723