Don’t blame claims - It’s more about hiring

- "Although loss of jobs, as reflected in initial jobless claims, remains at elevated levels, it is the other side of the labor market coin - the lack of hiring - that largely accounts for the “recession feeling” in the job market."
- "Initial claims peaked in March 2009 and have been trending down gradually since then. Compared to the experience following two earlier severe recessions (1973-75 and 1981-82), the current pace of decline has been near enough to the speed recorded in the 1973-75 recession, but moving much slower than that experienced in the 1981-82 recession. Compared to the two jobless recoveries in the early 1990s and 2000s, initial claims have declined at a faster pace."
- "This is further confirmed by the June Job Openings and Labor Turnover Survey released yesterday. Although the layoff and discharge rates edged up slightly in June, they are not that far from the pre-crisis levels. In contrast, the hires rate remains at depressed levels and is much lower than the average rate recorded in the expansion between December 2001 and December 2007 (4.4%)."
- "In short, businesses need to hire more boldly to make the recovery self-sustaining and to bring the jobless rate down at anything near a satisfactory pace."

CreditSuisse US Economics Digest 20100812

Inflation inflection

- Inflation trending up in China "The consumer price index (CPI) in China has been positive from Nov 2009, and has been trending up since. More recently, in July 2010 it was 3.3%, accelerating from 2.9% in June. We believe the recent surge in agricultural products and pig prices following the most severe flooding in China in the past decade may have pushed up the index. China previously had experienced high inflation in 2003-04 and 2007-08. The July 2010 CPI of 3.3% is still lower compared to previous peak CPI of 5.3% in April 2004 and 8.7% in Feb 2008. Our economic team forecasts China CPI to hit 3.5% in 3Q10, before slowing down to 3.2% in 4Q10. After that, Nomura forecasts CPI will pick up again from 1Q11, and will reach 3.8% by 4Q11."
- Inflation impacts consumers, producers and investors "The increased goods and services (food, pork, shoes, wages, etc) prices and decrease in cash value during inflation could result in higher holding cost for cash, and hence investors’ higher required return for their investments. Sales of goods that are able to preserve value (property, luxury items, wine, money market products, arts etc) tend to be strong, while retail sales of those whose value depreciates quickly (automobile, time deposit, mobile handset, PC, etc) may slow down."
- Policy reaction could have further market consequences "Prolonged high inflation will also likely cause policy makers to eventually react with tightening measures, causing equity market to perform negatively. China’s equity market plunged 75% over one and half years ending mid-1994 as the CPI surged to 24% (July 2009) from 11% at beginning of 1993. Despite high July CPI data, according to our Economic team, other July economic numbers released show the economy is slowing, but entering a stage of more sustainable and solid expansion. We believe as a result policy outlook in the near term will be mixed."

Nomura Strategy China 20100813

Senior Loan Officer Opinion Survey

- "The Fed's Senior Loan Opinion Survey for July (Q3) was generally encouraging as credit standards in most sectors were eased."
- "Following the very abrupt change in tone in the previous Fed statement (where the survey was available for the members) there had been some speculation that credit survey had deteriorated. This was not the case."
- "Further we had been fearing that the turmoil from the euro debt crisis in the spring, might have led to some tightening - but there is no evidence of this."
- "However, a special question revealed that lending to European banks had been tightened."
- "Generally, the survey brings good news, which indicates that headwinds from the credit tightening to the recovery is fading - and in some sectors credit is even about to turn into tailwind according to these data."
- "The lack of credit growth is now mainly attributable to slow demand rather than tighter credit."

DenDanske Senior Loan Officer Opinion Survey July2010

Extending the Easing Cycle

- "The FOMC this week signaled a reenergized commitment to low interest rates and more supportive financial conditions. Officials have downgraded forecasts of nearterm economic growth, while reinvestment of proceeds from redeemed securities will buoy expectations of more substantive easing ahead."
- "The combination of the Fed's message, downward revisions to recovery's recent path and lingering financial headwinds suggests that policy will remain focused on accommodation efforts through all of 2011. Until recovery has demonstrated greater self-sustaining momentum and a solid stretch of accommodating financial conditions is reestablished, monetary policy will need to err on the side of ease."
- "The reinvestment plan likely will be enhanced by more active balance sheet expansion or perhaps new efforts to unblock credit. In particular, borrowing conditions for creditworthy small businesses remain strained and could be a targeted focus of policy ahead."
Citigroup Comments on Credit 20100813

A new phase for the US dollar

- "The last two months have seen the dollar decline significantly on a global basis. Declining expectations for US growth relative to global growth have been a key driver. But the market is now pricing in a fairly meaningful degree of global growth decoupling, and further dollar downside from this source may be limited in the near term. Consistent with what we have seen in the last few days, we expect more two-way volatility in key dollar crosses in the next 1-2 months. As a result, we are looking more at relative value opportunities in FX rather than outright USD exposure."

Nomura FX Insights 20100812

Hard Rocks and Heavy Metals

- "Steel long products continue to rise while flat prices languish. Shanghai long steel products –rebar/wire rod rose 1.3%/1.4% w/w respectively while flat products - HRC/CRC dipped 0.2% and unchanged. We continue to see the environment for long products in China slightly better than that for flat products. Inventory at traders’ level edged up 0.2% w/w to 15.0mt."
- "We believe the Chinese steel industry is at a positive inflection point as 40% of the mills have cut production, and both macro and targeted economic policies that have hurt steel demand appear to be on the verge of abating or possibly reversing, which we believe will help demand. After a very painful 1H10, as elevated iron ore prices, macro tightening policies and measures targeted at the property sector in China have left many steel industry executives (and investors) feeling like they have been trapped, we believe China’s steel industry, like a trooper, is ready to storm back. (pls see our initiation report of Angang/Maanshan/Basoteel dated on Aug10 )."
- "Chinese port coal stockpiles cause concern. Chinese thermal coal buyers are seeking to defer the delivery of prompt thermal coal shipments by at least a month. According to a Reuters report, sources from three effected trading firms say that some requests to postpone shipments have come in very late, resulting in a growing number of “distressed” South African and Colombian cargoes being offered in the market. Calls by some Chinese firms to postpone shipments have grown over the past two weeks, a development that is set to hit feeble market
sentiment and potentially push Asian prices lower."
- "Strong July operation production of Shenhua and China Coal Energy. Shenhua produced 18.3mt coal in July, up 2.8% y/y and YTD growth of 3.2% y/y, while its sales volume rose 15% y/y to 25.3 mt with YTD growth of 12% y/y. China coal's July coal production and sales volume rose 7%/4% y/y to 9.9mt/8.9mt and YTD growth of 24% and 38% y/y respectively."
- "QHD coal prices slipped for a third week with port stocks still at a high level of over 7.1mt. Datong mix (5500 calorific value) prices dropped by another Rmb10/t last week to Rmb730/t while the QHD port inventory slipped 3% but still as high as 7.1mt which is c.30% above its "normal” level which could indicate the more downside risk to coal spot prices in the near term."

JPMorgan Asia Pacific Equity Research 20100815

Tired trade

- Global: Tired trade "The growth in global trade continues to slow, but we expect a soft landing in the year ahead. We are less sanguine about global imbalances: much of the improvement in the US trade balance appears to be cyclical."
-United States: To QE or not to QE, that is the question "The Fed’s decision to stop the run down of its portfolio has prompted a chorus of questions. We argue that the odds of another round of full-blown quantitative easing (QE2) have risen to 35%."
- Canada: Inflation on the horizon "With the output gap nearly closed, we continue to believe inflationary forces are building and a significant breach of the 2% target lies in the not-too-distant future. Euro area: Stunning differences in 2Q growth in Europe Eurozone 2Q GDP rose by 1.0% qoq, exceeding the 0.7% qoq consensus forecast. There were dramatic divergences, with Germany expanding by 2.2% qoq (9.0% annualized) while Greece contracted by 1.5% qoq (5.8% annualized)."
- UK: Slower growth, higher inflation once again "The BoE continues to expect inflation to fall back below target in the medium term, but with upside risks and unusually large uncertainties."
- Japan: Testing time for policy response to strong yen "In case the yen continues to appreciate, some options the BoJ could take include: (1) steps to reduce the term premium, (2) gearing up commitment and (3) formal quantitative easing."
- Australia: AUD – Parity or paucity? "The June quarter export surge and further rise in commodity export prices in July has revived interest in where the Aussie dollar will end up."
- Emerging Asia: Will China’s wheat prices follow suit? "A global wheat price surge should have limited impact on inflation in China."
- Emerging EMEA: "We review the Russia budget and conclude that the government forecasts mask two key underlying risks."
- Latin America: LatAm inflation: not concerned yet "The current grain supply shock is nothing like the global food crisis of 2007-2008 a nd as a result, the effects on inflation, rates and FX in LatAm should be marginal."

Merrill Lynch Global Economic Weekly 20100813

FOMC Recap: Now That the Dust Has Settled …

- The big news at Tuesday’s FOMC meeting was a change in the reinvestment policy for the Fed’s portfolio of MBS. "The Fed will begin to reinvest the cash flows associated with principal repayments of MBS and agency debt into Treasuries instead of letting the portfolio run off. We view this decision as a form of double-dip/deflation insurance."
- Decision to buy “longer-term” Treasuries was a surprise. "We had thought that the Fed would focus any buying on short-dated Treasuries, since the program was being advertised as a “symbolic” change without much economic significance. Instead, the Fed appears to want the program to have greater economic significance by buying across a broader maturity spectrum."
- Is the Fed running out of ammunition? "Some investors are skeptical of the impact of the Fed’s policy change. We point them to Bernanke’s 2002 speech on what the Fed can do to prevent deflation, which outlines a number of additional steps that the Fed can take to spur aggregate demand."

JPMorgan US Economics 20100813

German Growth Engine Keeps Running

- "After the record large gain in GDP in 2Q, we revise up our GDP forecast for Germany to 3.4% for 2010 and 2.4% for 2011."
- "A likely slowdown in export growth and — from 2011 onwards — tighter fiscal policy probably will lead to GDP growth moderation in our view. However, in an environment of improving financing conditions and decent profits, capital expenditures should continue to expand at a decent pace and we expect accelerating housing investment and consumption."
- "In our view, the current political stalemate is one of the biggest downside risks for the longer-term growth outlook in Germany."
Citigroup Euro Weekly 20100813

Demographic Dynamics: A case study for equity investors

- Demographic shifts offer robust investment opportunities "With the macroeconomic outlook still clouded, we turn investor attention to one of our core long-term departmental themes – namely, identifying and investing across demographic trends. We believe that we are sitting at the intersection of three powerful, once-in-a-lifetime population shifts, each of which holds material investment implications."
- Baby Boomers begin to retire "The approaching retirement of the Baby Boomers (born 1946-1964) will significantly alter the spending, saving and leisure patterns of the largest generational cohort in US history. The economic and financial effects will be far-ranging; we examine the investable consequences across the healthcare, financial and consumer sectors. We pay special attention to Allergan, Ameriprise, Brookdale Senior Living, Express Scripts, Financial Engines, McKesson, Mylan, Pfizer, T. Rowe Price and Zimmer."
- Investing in the “middle” "The Goldman Sachs economics team coined the notion of the “expanding middle” to describe both a global shift toward middle-income economies and the growth of the middle-class population within these economies. We see continued growth in consumer and infrastructure demand driven by the expanding middle and highlight, Banco Bradesco, Bucyrus, Citigroup, Hypermarcas, Monsanto, News Corp., Petrobras, Teck Resources and Visa as key beneficiaries."
- Generational waves after the Baby Boom "As Baby Boomers begin to exit the US labor force, generational dominance will shift in the United States for the first time in forty years. The rise of two under-30 generational waves—the “Millennials” and “Generation Z”—to
economic prominence will have significant consequences, particularly within the Consumer and TMT sectors. Companies exposed include AT&T, Crown Castle International, Disney, Hasbro, Juniper, Mead Johnson Nutrition, Progressive, Qualcomm and Urban Outfitters."

GoldmanSachs Portfolio Manager 20100804

Wheat it

- "The rise in wheat prices in the last few weeks has raised concerns about renewed upward pressure on European inflation. In 2007-08, strong food price inflation, accompanied by sharp increases in energy prices, pushed euro area and UK inflation rates to extremely high levels. That high inflation almost certainly kept monetary policy tighter than it otherwise would have been and the pressure it put on real incomes probably contributed to the slide into recession."
- "So is there a risk this happens again? At present, we think that’s unlikely. The rise in wheat and soft commodity prices in the last few weeks is significant, but so far it is not as large, or as broad-based, as the rise seen in 2007-08. So, for now, the rise in wheat prices isn’t enough to suggest food price inflation rates of close to 10% as we saw then."
- "That said, in the past year or so food price inflation has subsided to very low levels in the euro area and is currently close to zero. It has also fallen in the UK and is currently running at around 2%. Some upwards drift in food price inflation from these levels was to be expected in the coming year, and the rise in wheat prices makes that even more likely."
- "Following on from the analysis done by our Emerging Market colleagues, we take a look at the potential impact of the rise in wheat prices on inflation in Europe. A modest rise in food price inflation – by around two percentage points or so – may well be on the cards. With a weight of roughly 10% in the CPI in the euro area and the UK, that could have a small but noticeable effect on headline inflation. We’ve raised our inflation forecasts accordingly. But, given its starting point and the behaviour of other components of inflation, such a rise may prove to be more problematic for the UK than for the euro area."

CreditSuisse European Economics 20100812

What normally happens when debt ratios are higher?

- "We look at the world as a whole. It will now be characterised by a higher private sector and public sector debt ratio, due to:
• the increase in private debts in OECD countries prior to the crisis;
• the fiscal deficits created during the crisis;
• the rapid increase in credit in most emerging countries."
- "What consequences can normally be expected from a high public and private debt ratio?
• an effort to reduce debts (rise in household savings, increase in profits and decline in corporate investments, primary budget surpluses), leading to a weakening in demand for goods and services;
• a distortion of income sharing at the expense of wage earners, due to companies’ efforts to reduce their indebtedness;
• a fall in inflation and risk-free interest rates;
• a rise in risk premia priced into interest rates."

Natixis Flash Economics 394 20100806

LatAm: acceleration under control

- "The data released this week shows divergent movements between countries. On the one hand, Peru and Colombia continued to show signs of growth with positive expectations and confidence, while growth in Brazil stabilized despite the support provided by domestic demand and in Mexico industrial output showed signs of stagnation. Central banks continued to control appreciation pressures and overheating: in Chile the CB once again raised its policy rate by 50 bps to 2%, while in Peru the CB again increased reserve requirements. The new Colombian president re-established commercial relations between Colombia and Venezuela, although political tensions over bilateral trade remain."
- "Renewed fears over global cycles, with divergent effects on assets of the region's countries."
- "Events in the US and China have renewed appetite for safe assets. However, the credit market remained open for the region's issuers, as did the appeal of the currencies of economies with a higher growth profile. In spite of this, technical corrections in the region's currencies against the US dollar during the week cannot be ruled out."

BBVA Latin Weekly Observatory 20100813

Where is the savings equilibrium in the euro zone heading?

- "We can imagine the following developments as regards the savings equilibrium in the euro zone:
• fiscal deficits are reduced, but this reduction does not lead to a fall in the household savings rate;
• the reduction in fiscal deficits also takes place before corporate and household investment picks up again;
• corporate savings (profits) improve due to the distortion of income sharing at the expense of wage earners."
- "So there will be a savings glut in the euro zone, leading to:
• an external surplus, which is likely to contribute to an appreciation of the euro;
• an additional fall in risk-free long-term interest rates (long-term interest rates on Bunds, OATs, swaps, etc.)."

Natixis Flash Economics 393 20100806