ECB dissent in the collateral/cover/credit rating ranks - FT Alphaville
From Disinflation to Deflation? - Econbrowser
Debt and growth revisited - VoxEu
Reinhart And Rogoff Are Confusing Me - Paul Krugman
Irish debt under fire on fresh bank jitters - Telegraph
Trade Gap Expands As Economy Underperforms Low Expectations - Planet Money
Fed Inaction - Modeled Behavior
Structural unemployment is a new problem, needing new solutions - Gavyn Davies
Chinese consumption and the Japanese “sorpasso” - China Financial Markets

No Russian wheat (inflation) exports

- Export ban contains inflation impact in Russia "We expect a smaller inflation impact of the wheat shortage than widely believed. The export ban more than offsets the 25% shortfall in the harvest. Moreover, the government is tapping into its reserves, while producers will be nudged to absorb some of the price increases. We revise our inflation forecast up by only 0.8ppts for end-year (to 7.8%) and 0.7ppts for the 2010 average (to 6.7%). However, we still think this will prevent the further rate cuts we had expected until now."
- CEE floods do not change our dovish bias "Also in Hungary and Poland, where floods have been severe, and harvests are expected to be 7-15% down relative to 2009, we maintain our dovish bias. In both cases, food price inflation is very low, and core inflation remains (or is expected to come soon) under control. Pricing power remains weak—clearly in Hungary but also in Poland where productivity is growing well in excess of wages. We expect inflation to remain within the target corridor despite the food price shock in Poland and to return to close to the target in Hungary. We recommend receiving 1y IRS in Hungary and see the risk to our 25bp hike in Poland this year to the downside."
- Another reason for Turkey linkers; Egypt’s budget hit hard "Ironically, Turkey linkers may be the best way to position for higher wheat prices in Russia, in our view. Yes, Turkey is a net exporter of wheat, but higher world prices will likely affect domestic prices. And Turkey is most prone to second round effects, with inflation expectations above target and credit and wage growth also pointing towards higher inflation. Egypt, in turn, will be hit hard fiscally due to the wheat subsidies; these, however, should contain the inflationary impact."
- The week behind & week ahead "July CPI surprised to the downside in Russia and Turkey, but food price inflation is around the corner the former, while the upcoming Ramadan effects together with solid domestic demand look set to exert upward pressure for the latter. Meanwhile, the CNB kept rates steady but struck a dovish tone. The central bank explicitly warned of possible actions (ie, intervention or rate cuts) should the rapid pace of CZK appreciation continue. Still, EUR-CZK only moved 0.3% higher. A busy data calendar in the week ahead with a slew of data on inflation and output. The base effects should subtract from inflation in Hungary, Poland and possibly Egypt, but are less supportive for the Czech R. In Romania, the VAT hike will likely see a spike in inflation last month. Meanwhile, GDP growth likely accelerated in Q2 across CEE (Czech R, Hungary, Romania), driven mainly by external demand – downside risks from here though. In Russia, we also expect GDP growth to accelerate in Q2 on the back improving domestic demand and net exports. Separately, we expect IP growth to slow in Turkey and South Africa."

Merrill Lynch Emerging EMEA Macro Weekly 20100806

Getting stressed out

- Stress testing 60% drop in home prices – negative for banks "Media reported that the Chinese banking regulator has required banks to stress test for 60% property price drop. While the magnitude of correction sounds quite unlikely, it has nonetheless caused lots of concerns and confusion among investors. People are asking “why another round of stress test”, “why 60%”, and “what is the outcome”. In our view, either from a political posturing or real earnings impact perspective, this is negative for the banks. It reinforced our cautious stance on the bank sector this year."
- Our interpretation of regulators’ intention "1. Signaling continued tightening: the regulators are determined to deflate the property price bubble. In light of the market speculation of policy loosening, PBOC recently reiterated the differentiated mortgage policies, and CBRC Beijing also banned mortgages to 3rd homes again. This may be another political posture. 2. A real concern: regulators may believe the tightening policies so far have been ineffective. Second hand market prices are higher than April levels in many cases, and mortgage loan volume remained strong in June. Regulators may see the property prices bubble lasting longer than expected, and are truly concerned that the correction, when it comes, will be deeper than expected. 3. An excuse to push for more provisions: LGFV and property are the top two concerns for CBRC. The regulators have been pushing banks to “front-load the pains”, downgrade loans, and increase provisions, but have encountered strong resistance from banks. This may be another effort to raise the sense of urgency for provisioning and “counter-cycle management” while earnings growth is strong."
- Why 60%? – it’s needed for a true “stress” scenario "Mortgage loan-value ratio is around 60% at sector level (without MTM), based on our estimation, and ~50% at large banks, according to management. Thus, most loans are still in positive equity when the price drop 30%. Banks only expect ~2.2ppt rise in property NPLs in such a scenario, even taking into consideration 108bp of rate hikes. However, as we highlighted in the May report, “the rise in property loan NPL will be exponential as property prices fall”. To find out a true “stress” scenario, a >50% correction is warranted."
- The result and impact on banks "We would downplay any outcome of such stress tests, because: 1) there is no precedence to refer to, and 2) default is influenced by a lot of "soft" factors other than the home prices (eg confidence in job security, confidence in long term property prices, the “cost” of default, etc). We reiterate our view that any sharp correction in property prices may lead to significant earnings hit on banks, but the impact on balance sheet and book value is limited (unless it turns into a broadbased economic crisis). Among the H-share banks, CMB and MSB are more vulnerable due to their relatively high exposure to mortgage and developer loans."

Merrill Lynch Banks China 20100805

Out of office: Gone to the beach!

- "The summer holiday season is upon us and many investors will recover from peripheryrelated stress on periphery beaches. Chances are good that during this summer investors can safely enjoy some relaxing days without being concerned about short-term risks too much. Major sources of potential headline risks – the stress test and the 2Q10 earnings season – are already behind us (or will end soon). While macroeconomic risk factors are on the horizon, we do not see catalysts in the short term that could trigger a change in the current more positive market perception. Nevertheless, many investors might still have the "summer lull 2008" in mind, which brought a major catalyst for a downturn – the Lehman default. Hence, we provide our priority list of "things that shouldn't happen in order not to spoil your summer holidays"."
- Macro Outlook: "While the bank stress test results led to some relief in the valuation of eurozone financials' risk, latest macroeconomic data suggest a deceleration of economic activity in the major economies may lead to more soberness in credit markets."
- Micro Fundamentals: "The European earnings season – consistent with the one in the US – currently fuels the positive momentum in equity markets as well as in credit spreads."
- Debt-Equity-Linkage: "Stock markets performed well during July, posting their strongest gains in a single month since July 2009. Credit markets rallied even stronger, to the tightest levels since May 2010. Hence it is worthwhile assessing where we stand in terms of valuations."
- Credit Quality Trend: "As authorities implement new rules for credit rating agencies (CRA) we assess their new role in light of changed regulation."
- Market Technicals: "Primary markets are already in summer lull mode."
- Valuation & Timing: "The end of the banking crisis. Sounds pathetic, but it isn't. While pressure from the slowdown will persist, what will be different is the role of the banks: Instead of being the major culprit during a crisis, they will rather become a victim during a crisis."
- Other Credit Markets: "Credit derivatives at the crossroads – an update on central clearing of CDS. Securitization: News on the new ECB haircuts for repo-collateral posted by banks in order to obtain liquidity. EEMEA Credits: Chinese banks back in the limelight."
- Allocation: "We upgrade the financials sector to MW from UW, while non-financials remain UW. Within the financials sector, we put bank and insurance senior on UW (from OW), LT2 on MW (from OW), and all other sub categories on OW (from UW), as we think that subs will outperform seniors."
- Model Portfolio: "Our financials portfolio outperformed the benchmark by 100bp, while the non-financials portfolio outperformed by 9bp."

Unicredit Euro Credit Pilot Aug2010

The Services Story

- A big opportunity — "The number of middle income consumers will increase by over 800 million by 2030, according to World Bank projections. Half of these new consumers will be located in China and India."
- Changing consumer behavior — "As income levels increase, spending patterns will also shift. In China and India, consumers are increasingly shifting consumption from basic food and clothing to other goods and services."
- The services story — "The share of services consumption in GDP is relatively low in China and India, and should rise significantly. This growth has implications for financial services companies, healthcare providers, and education companies."
- Investment implications — "We highlight 29 emerging and developed market companies that are well-positioned to benefit from the services story in China and India. These companies are forecast to grow EPS by 47% in 2010 and 27% in 2011. They are trading on a 2011 P/E multiple of 19x."

Citigroup Emerging Market Consumerism 20100804

What growth rate meets the balance of payments constraint?

- "Growth in certain euro-zone countries is currently limited by the current account deficit. The remedy they are forced to use is to reduce their external borrowing requirement, and therefore to save and curb growth. But to what extent must growth slow down for the external balance to improve? The answer depends not only on the elasticity of imports to domestic growth, but also on the elasticity of exports and the vigour of foreign demand."
- "We therefore calculate the critical threshold of growth for which a country’s current-account balance does not deteriorate, given its specialisation and growth among the main trading partners (Thirlwall model):
• in Greece, Ireland, Finland, Slovakia and Slovenia, domestic growth may be twice as high or even more in comparison to growth of their main trading partners;
• in the Netherlands, Belgium, Austria and Spain, growth must be proportional;
• in Germany, France, Portugal, but above all in Italy, domestic growth must be markedly lower than that of the main partners to meet the balance of payments-constrained growth rate."
- "Over the past fifteen years, this growth threshold was 6.3% annually for Ireland, 4.8% for Greece, 2.6% for Spain, 2% for Germany, 1.8% for France and 0.9% for Italy."
- "Currently, the growth regime suggests that the external borrowing requirements are increasing further - slightly - only in France and Belgium."
- "By applying this model to our growth forecasts, we conclude that the differentials in current-account balances between EMU countries will tend to shrink by 2011. The euro zone’s external position will improve as a whole, which points to a fundamental appreciation of the euro."

Natixis Flash Economics 383 20100728

The "Anglo-Saxon" view of the euro zone is deeply mistaken

- "For several months, investors have been inundated with research from London and New York, explaining them that:
1) the peripheral euro-zone countries will default on their public debts;
2) the euro will disappear, as some countries want to regain their monetary freedom."
- "These arguments may seem rational:
1) some euro-zone countries’ debt ratios will be stabilised at very high levels, hence the need for large primary budget surpluses, which are detrimental for the economy. A partial default would prevent this;
2) some countries will have anaemic growth, or have worsened their industrial competitiveness significantly. A depreciation of their currency thus could be attractive;
3) the countries’ productive specialisations are very different, and this makes their membership of a currency area difficult in the absence of federalism."
- "However, the proponents of these arguments forget:
1) the Europeans’ political will to prevent a default and any development that would threaten the euro’s credibility and stability;
2) the massive costs that would be associated with
• any type of country pulling out of the euro;
• a sovereign debt default, given the structure of holding of these debts and the risk of contagion."
- "The "Anglo-Saxons" view of the euro is not sufficiently political and pragmatic to be correct."

Natixis Flash Economics 382 20100727

China's choice of exchange rate regime: What is in the interest of the euro zone?

- "China has a choice between several exchange rate regimes for the renminbi:
• pegged to the dollar, as before the summer of 2005 and between the summer of 2008 and the spring of 2010;
• with managed appreciation against the dollar alone, as between the summer of 2005 and the summer of 2008;
• pegged to a currency basket (dollar, euro, possibly also the yen), as has probably been the case since May 2010;
• with managed appreciation against a currency basket;
• much later, given the under-development of China's financial markets and the need to remove currency controls, flexibility."
- "We seek to determine which system is most in the interest of the euro zone:
• a fixed RMB/USD exchange rate leads the People’s Bank of China to buy dollars to prevent an appreciation of the renminbi, which pushes up the dollar against the euro and is favourable to the euro zone;
• a managed appreciation of the renminbi against the dollar is disastrous for the euro zone, because it causes China to stop buying dollars, thus resulting in an appreciation of the euro against the dollar;
• a fixed exchange rate between the renminbi and a currency basket normally results in China buying the currencies in the basket to prevent the renminbi from appreciating against the basket. If the basket is weak relative to the renminbi, there is buying of dollars and euros, which does not prevent a depreciation of the dollar against the euro, unlike in the case of the peg against the dollar alone;
• if the renminbi appreciates against a basket, China will stop buying dollars and euros, which does not cause a fall in the dollar against the euro, unlike in the case of a gradual appreciation against the dollar."
- "From a perspective of gradual appreciation of the renminbi against the currencies of OECD countries, it is therefore in the interest of the euro zone to ask that China take a currency basket as reference."
- "Moreover, in the near term, if this basket includes other currencies (yen), the fact that China starts to buy the other currencies will drive down the euro against those currencies."
- "The question of the renminbi becoming a trade currency (which the Chinese government is trying to promote in Asia) may also arise. If the renminbi is substituted for the dollar, the demand for dollars will decrease, which is bad for the euro zone."

Natixis Flash Economics 381 20100727

China Property: Grey income-who benefits if the wealth gap narrows?

- "Based on the grey income research sponsored by Credit Suisse, we conclude that China will not only increase wages, but also optimise its tax system – developers that focus on mass market products and high asset turns, such as China Vanke, should stand to win."
- Grey income improved affordability, but only for the rich: "The wealth gap skews housing affordability more significantly than indicated by the official data."
- Wealth gap led to a housing mix mismatch in major cities – time to change: "In metropolitan areas such as Hong Kong, the widening wealth gap has created social issues. However, public housing took up around 45% of Hong Kong’s total housing stock, and only less than 6% in China. Therefore, we expect the government to use tax, among other things, to improve affordability, and continue to suppress investment-purpose housing demand."
- Asset turns will become more important for developers: "We expect that the pace of land price appreciation will slow in China, and that the prevailing business model of land hoarding for developers will no longer work. China Vanke, COLI, and KWG remain our top picks in the sector."

CreditSuisse China Property Policy Outlook 20100810

China port sector: July throughput beat expectations

- "China’s container throughput gained further ground in June, 6% ahead of our expectations, though leading indicators are pointing to softer growth ahead: June’s throughput growth further advanced to 23% Y/Y, possibly driven by inventory re-stocking. With an average run rate of 371K TEUs per day, the month’s volume was 8% above the run rate in 1H10 and 15% above 2H09. Key highlights: 1) By region, PRD recorded the strongest gains, +28% Y/Y. 2) Among the top 8 ports, Shenzhen surged the most on a sequential basis, +9% M/M. On the other hand, new order growth momentum under China PMI continued softening, possibly pointing to softer growth ahead."

JPMorgan China Port Sector 20100810

Is patience a virtue?

- No FOMC action expected, but statement should express shift in risk bias
- BoE leaves QE door open as UK expansion lags Western European lift
- BoJ unlikely to act to try and stem upward pressure on yen
- After strong first quarter, global consumer spending gains moderate
- Brazilian soft patch prompts dovish shift from COPOM