Profiting in a Low Rate Environment

- Macro Trends — "The global economy seems to be entering an era of low interest rates and slow growth as the recovery loses steam. This will likely be positive for China’s equity market because: 1) China will also maintain its policy rates at historic low levels for longer; 2) weak dollar traditionally favors EM equities; and 3) capital inflows would rise when investors chase higher growth, a stronger currency and better returns."
- Policy and Market Update — "China’s tightening cycle has probably bottomed though policy overhangs remain a risk. Lower real interest rates in general indicate buying opportunities. Barring no double dip in the developed world, we continue to believe that downside risk in the market is rather limited."
- Sector Preference — "We upgrade the property and materials sectors to neutral from underweight to take advantage of an extended period of low interest rates. Meanwhile, we are still cautious about the banking sector as we see a lack of positive catalysts in the near term."
- Stock Picks — "High beta and high dividend yield are two key criteria for stock picks amid low interest rates. CNOOC and Maanshan Iron are two relatively high beta and high yield plays. In the category of high beta and low yield, we favor Nine Dragons, Dongfeng Motor; Agile Property; and PICC. On the other end, Jiangsu Exp, CCB and ACC Acoustic belong to the low beta and high yield league."
- Multi-Strategy: Add Risk — "Multi-Asset points toward continued stabilization. Slowing US economy points to weaker USD, which helps Chinese equities. 1) Buy Cyclicals Basket, 2) Futures Pair: Long HSCEI, Short SPX, 3) Long Outperformance Call Option (HSCEI – SPX), and 4) Buy HSCEI calls outright."

Citigroup_China_Equity_Strategy_20100820

Is real estate a good hedge against inflation?

- "Many institutional investors have increased their (residential and commercial) property portfolios, partly because of the relatively high returns currently offered by real estate, but also because they think that real estate is a hedge against inflation, which could return in the long term. We examine the effectiveness of real estate as a hedge against inflation, and we ask several questions: • is protection provided by real estate prices or by rents?
• do residential and commercial real estate provide the same protection?
• is the situation identical in the case of domestic inflation and imported inflation?"
- "We find that investors should be very cautious, because:
1. residential real estate prices have been correlated to credit and no longer to inflation since the 1990s;
2. residential real estate prices are now correlated to inflation only in the United States and Germany; moreover, they are correlated to employment, and therefore provide no protection against inflation in an inflationary recession (e.g. an oil shock);
3. commercial rents are not at all correlated to inflation;
4. only rents paid by households are universally correlated to inflation;
5. there is no apparent difference between headline inflation and underlying inflation."

Natixis Flash Economics 400 20100819

Demographic Blues

- "Significant changes in demographic trends are about to occur in the euro area, especially in those countries, like Ireland and Spain, where labour growth has been a key determinant of strong economic performance in the decade before the recession. Less room for rising labour force participation rates will probably also reduce the labour growth contribution to trend GDP growth."
- "More adverse demographic and labour market dynamics are likely to significantly reduce trend growth in these peripheral countries. And this may translate into an impact on aggregate euro area annual trend growth of ¼-½pp."

Citigroup_Euro_Weekly_20100820

The long run, the short run and the in between: “How does the global economy rebalance itself?”

- Questions to be answered
• "What is the impact for the financial markets if the US ‘double dips’?"
• "Is the global economy headed for inflation/deflation or stagnation?"
• "Will the European economy face another financial crisis?"
• "Will emerging markets be able to de-couple?"
• "What is the future for China and Thailand over the next 5 years?"

Nomura Strategy Research August 2010

Erratum: The changing landscape of Asian markets – a quantitative view

- Action "The credit crisis that originated in the US has generated a rebalancing of global investments from the West towards the East. Over the past year, we see a growing impact from Asia on the rest of the world. On quant factor investing, we highlight the performance differences between developed and emerging markets in Asia."
- Recent market specifics "The credit crisis that originated in the US has generated a rebalancing of global investments from the West towards the East. Since October 2008, the MSCI AC Asia Pacific ex-Japan index has outperformed the MSCI regional indices in the US and Europe, and there has been a growing impact from Asia on the rest of the world. Over the past year, we have seen the continuation of the uptrend in weights of Asian markets, impressive fund inflows to the region, and increased fund-raising activities by IPO. These all reflect a shifting investment preference to Asian markets."
- Changes in return attributions "We extend our return attribution analysis for Asia Pacific equities and estimate changes in the stock returns attributable to four factors: the global market, country-, sector- and stock-specific factors, over the past year. We see the continuation of the rising global factor effect on Asia equities when the global market recovered from the previous recessionary trough. Meanwhile, there is a significant decrease in the spread between country factor and sector factor effect in emerging Asia, signalling a converging characteristic of emerging Asia to the developed markets. Our analysis also suggests that the performance impact from Asia on the US/European markets has grown over the past few years, and it is almost the same level as that from US/Europe on the Asian markets."
- Investment factors that work "Developments in financial market infrastructure, together with improved market depth, provide opportunities to invest in the region using quantitative approaches, in our view. We look at the factor performances in developed and emerging Asia, respectively. In the long run, the factor effectiveness in emerging Asia has been
more consistent than that in developed Asia, especially for value investing and earnings-revision indicators. The differences are more evident when we look at different market cycles. After the credit crisis, the utility of quant factors for investing continues look more promising in emerging Asia than that in developed Asia, with significant alphas generated from valuation devices such as E/P and B/P, and earnings revision indicators such as normalised earnings yield and revision index in emerging Asia."

Nomura Quantitative Landscape 20100818

Watch out for the Fed backtracking

- "US jobless claims data were weak, but incoming data suggest a double dip is still unlikely. The US economic slowdown is certainly not due to malfunctioning credit markets. Mortgage yields are at all-time lows, and corporate debt yields are also very low."
- "We believe the data need to turn significantly worse than what we and the consensus expect for the Fed to decide to step up QE; if and when it does, it will need to be overwhelming, probably accompanied by an inflation target."
- "Beyond the US, disinflationary forces appear to be over globally, particularly as there is upward pressure on food prices."
- "In China, we expect authorities to remain on hold to balance risks, but even if they ease policy, we expect them to keep measures aimed at lowering housing prices."

Barclays Global Economics Weekly 20100820

Commodity review

- "Price moves remain diverse across the commodities complex. Market concerns on recent softer macro-economic data have pressured crude oil prices, while agricultural commodities – grains and cotton in particular – have been relatively immune after witnessing recent supply-side production downgrades on adverse weather conditions. We dissect commodity investment trends in this month’s Commodity Investor with commodity investments passing an important milestone in July with AUM surpassing $300bn for the first time, as commodity inflows bounced back and prices strengthened"

Barclays Commodities Weekly 20100820

75 Years of Social Security – Happy Anniversary?

- "Social Security has provided at least some measure of economic security to those who pay into the system, much as President Roosevelt envisioned when he signed the Social Security Act into law 75 years ago."
- "At the time of Social Security’s inception in 1935, there existed very few public programs to provide Americans insurance against old age or disability. Only about 3% of the elderly were receiving benefits under state plans, and only about 5% were receiving company retirement pensions."
- "Social Security has always been a pay-as-you-go system – the US Treasury can’t tell the difference between a dollar of Social Security tax revenue and a dollar from any other tax. The accounting convention of a Trust Fund reflects the fact that Social Security tax revenues have exceeded contemporaneous benefit payments, with the excess funding other government spending."
- "This year, however, Social Security is expected to fall into deficit, and it is likely to remain in the red through 2011, mainly because of high unemployment curtailing tax inflows. The Social Security Administration then expects three years of renewed surpluses (i.e., it assumes significant renewed job growth)."
- "In a few years, the program goes into deficit for the foreseeable future, mainly because of the surge in benefit payments to retiring (but not shy) baby boomers."
- "To cover these structural shortfalls, higher payroll taxes, reduced benefits, increased retirement ages, or some combination will be required. And in the aftermath of the 2007-09 financial crisis, it is hard to envision a groundswell of support for the George W. Bush-era privatization option."

CreditSuisse US Economics Digest 20100819

Keep calm and carry on

- Overview: "We are oozing with bond bullishness. Nothing has changed. The cycle is playing out exactly as we expected. If (a big if) it continues to do so, we have high confidence that 10-yr bunds will be the first non-Japan major to have a 1.xx% handle in a very few weeks. Leg one of the rally is done with shorts exited. If data continues to be weaker than the strangely buoyant consensus predicts, watch out for leg two: longs established & equity->FI reallocation, making for violent yield lurches lower. If this plays out, we can easy see 10-yr bunds as the first non-Japan major market to have a 1.xx% handle in a very few weeks."
- Euro Area: "Deteriorating US lead indicators can take us through our longheld 2¼% 10y Bund target. Ignore German strength and trade a test of 2.0%. The curve mechanics to get to this level on a recession are not that challenging given that the liquidity trap becomes more embedded."
- UK: "There’s a new target for the rolling flattening of the curve; 5s10s. On a variety of measures 5s10s looks too steep, and should flatten in around 40bp from here as the lower for longer themes meet the duration grab."
- Scandinavia: "the Swedish recovery is steaming on at this point in time and this will probably be reflected in another set of strong confidence figures from Swedish households and corporates."
- Inflation-Linked: "The question of whether we are heading toward a Japanese liquidity trap or just back to a 2004-5 style European slump is a crucial decision for the economy bears. We suggest a strategy of longs in inflation hedged with longs in real yields (overweighting linkers in a breakeven trade). Italy now looks rich against France on breakeven and we think that a cheapening into supply makes a sensible play."
- Volatility: "The bullish flattening 2y forward 10s30s is our proposed trade to benefit from expected flattening of GBP curve. We expect this trade pays off well if the BOE initiate the second round of QE and follow the tradition of buying Gilts all through the curve."

RBS European Rates Weekly 20100820

Bringing Leases on Balance Sheet

- Proposed new accounting rules — "The IASB yesterday published an Exposure Draft on Leases, which would eliminate the current operating/financing lease distinction and bring all leases on balance sheet. The final IFRS is due in Q2 2011, with the new standard planned to take effect no earlier than 2013."
- Bigger balance sheets — "The ED proposes that lessees should report the present value of expected lease payments as an asset and liability on the balance sheet. Operating lease expense would be replaced by amortisation of the asset and an interest charge on the liability. Lease cash flows would be reclassified in the cash flow statement."
- Effect on key metrics — "For many companies using leased assets, the proposed change would increase reported debt and gearing, increase Enterprise Value/Sales multiples, increase operating cash flow, and affect other valuation multiples. It would also reduce EPS of many companies on initial adoption of the new rules."
- Sector impact — "Retail, transport and leisure sectors would be particularly affected by the new rules."
- Company impact — "UK companies with significant operating lease exposure include Regus, Debenhams, DSG, Home Retail Group, Tui Travel, Kingfisher and Sainsbury. In the MSCI Europe ex UK index, the most affected companies include Iberia, Autogrill, Kesko, Accor, JCDecaux, Tui and Air France."
Citigroup_Valuation_&_Accounting_20100818

Decline in unit wage costs: What effects?

- "There has been a fall in unit wage costs due to the slowdown in wages and companies’ efforts to improve productivity in Japan and the United States, and we are starting to see the same development in the euro zone."
- "A fall in unit wage costs can have two effects:
• if profit margins do not change, there will be a fall in prices, leading to a rise in real interest rates;
• but there may also be a continued rise in prices and in company earnings; companies can deleverage, but also end up accumulating financial (or real estate) assets."
- "In the first case (seen more in Japan), this development is negative for asset prices and investment; in the second case (seen in the United States currently, but also partially in Japan and in the future in the euro zone), it is positive (asset purchases by companies)."
- "In the first case, the fall in prices curbs the fall in real wages and improves competitiveness, but not in the second case: the consequences on asset prices and demand are therefore opposite, but for each there is a negative consequence."

Natixis Flash Economics 399 20100818

An Old Conundrum

- De-coupling — "Global government bond yields have fallen to multi-decade lows but equity markets don’t seem to care. While global stock prices have rallied 8% over the last few weeks, global bond yields have fallen 25 basis points."
- Equities Winning 6-2 — "Over the last 11 years, there have been 10 occasions when global bond yields and stock prices have diverged. Equities have been proven ‘right’ six times versus bonds two times. Divergence was unresolved twice."
- Bond Yields Expected to Rise — "This time, we expect the conundrum to be resolved through rising bond yields. Citi rate strategists suggest that a sustained global economic recovery and gloomy fiscal outlook should push yields up from their current historically low levels."
- What Should Equity Investors Do? — "Falling bond yields didn’t help stock prices rise so rising yields shouldn’t be a major headwind for equity investors. We think those expecting a rise in bond yields should consider buying Japanese equities (local currency) and global cyclicals like Diversified Financials, and consider selling global defensives like Telecoms."
Citigroup_Global_Equity_Strategist_20100818

EM capital markets growth prospects after the global crisis

- "The global crisis has further enhanced the relative growth prospects of emerging markets (EM) capital markets. Advanced economies’ capital markets will continue to make up the bulk of global financial assets, developed markets (DM) deleveraging and EM leveraging notwithstanding. Emerging Asia has not only the largest capital markets, but also the most developed markets in the EM space. From the perspective of global investors and, even more so, financial services providers, some (segments) of the rapidly growing EM financial markets can only be accessed with some difficulty and tapping into their growth requires a well-thought-out, focused strategy. This fact notwithstanding, the “opportunity costs” of not building exposure to – or a platform in – the EM will be increasing over time."

DeutscheBank Talking Point 20100820

Near-term setbacks in store

- Short view: Running ahead of fundamentals "We look for Q3 to be relatively weak and stress that (further) setbacks in prices should be expected; price rises could be seen toward year-end as markets realise that the global economy is not heading for a worst-case scenario. Also, a weaker dollar and positive sentiment in equity markets should provide support to commodities."
- Energy: Demand recovery fizzling out "We are increasingly worried about oil demand in the near term and with Opec slipping further on compliance only a small deficit to be seen this year. This should leave forward demand cover at elevated levels and we expect oil to test the lower end of the USD70-80/barrel range in Q3. Brent to average USD79 this year and USD87 in 2011."
- Base metals: Look for Q3 correction "Base metals are highly sensitive to the business cycle and vulnerable to focus on a likely bubble in the Chinese construction sector. We have left our longer-term base metals forecasts largely unchanged but now pencil in marked softness in Q3. We see aluminium and copper going below USD2,000 and USD7,000 per tonne, respectively. Further out, we continue to see value in base metals, notably copper."
- Grains: Wheat spike but spill-over to be limited "Within grains, the recent wheat spike has surprised us but we highlight still huge stocks and that spill-over to soybeans and corn should be limited. Correction in store and limited potential for prices to rise in 2011."
- Hedging recommendations: Consumers should await correction "We recommend that clients on the consumer side should wait for a setback in industrial metals before locking in prices of copper and aluminium. Clients who are net sellers of wheat could in our view do well in fixing current price levels in the grain. On oil, we suggest awaiting a decline to below USD74/barrel for Brent before locking in expenses."

DenDanske Commodities Monthly 20100819

EUR/GBP: return to June low?

- "Comments by ECB council member and 2011 candidate president Weber on the possible extension of unlimited liquidity until year-end have not gone unnoticed, casting a shadow of the ST outlook for the EUR. In a market short of liquidity and marked by a retreat of risk, Weber’s comments may hasten the decline in EUR/USD from the August highs. With risk beating a retreat, the success of Japanese officials to temper the decline in USD/JPY can be questioned and indicates that the cross may be settling in a range around 85.0. The perceptible weakening of the US economy in Q2 is showing signs of spilling over in Q3 and means the USD is set to remain a safe haven magnet along with the CHF. Unrevised UK Q2 GDP data next week may add fuel for a return in EUR/GBP to the June lows."
- "UK macro data continued to impress but ran into aversion for risk, resulting in a mixed performance for GBP vs other G10 currencies. GBP/USD fell 0.4% to 1.5532, having slipped below 1.55 for the first time since July 27. GBP/EUR ended the week virtually flat at 1.2226, but potential for a move to the upside appears to be building. EUR/USD dropped 0.4% and USD/JPY stalled above 85.50, logging a drop of 0.65%. A test of the Nov-09 low still looms, though reluctance to push the cross lower on a sell-off in stocks indicates that investors have become more wary of intervention ahead of the next BoJ meeting. The CHF topped the G10 table with solid gains vs the USD and EUR."
- "Early indications show that momentum from UK Q2 GDP is carried over into Q3 at least on the consumer spending side. Retail sales rose a stronger than forecast 0.9% m/m in July, posting a third successive gain. June data were revised upwards. This will dampen speculation of the MPC soon resuming its asset purchase programme. The MPC minutes showed the committee voted 8-1 in August to keep BR and the APF on hold. Discussions included both an easing and modest tightening in policy. ECB member Weber stated his preference to extend unlimited liquidity until year-end. US economic data continued to disappoint. Reports of a jump in weekly claims to 500k and a fall in the Philly Fed survey to -7.7 mean additional Fed measures and stimulus spending cannot be ruled out."
- "No change in theme. Bullish seasonals and weak US macro data helped gilts to extend their stellar performance, with 10y gilt yields dropping below 3% and EU 30y yields falling below 3%. For 10y gilts, the 2.93% low of 2009 is now within striking distance. Even as investors question bond valuations, there could be further downside for yields and swaps if UK data sours. 5y swaps dropped to 2.07%. The 2y/10y swap spread tightened to 182bp, with cash compressing to 234bp. The 10y swap spread held at +5."

LLoydsTSB FX Strategy Weekly 20100820

Readings

Creating liquidity out of illiquidity - FT Alphaville
Why Bond Volatility Is Acting Abnormally - Minyanville
How Scary Are Municipal Finances? - Morningstar
The Baltic Dry Index Has Exploded Higher- Money Game
Pressed to Act, Bank of Japan Sees Few Ways to Lift Demand - New York Times
The Taylor Rule And The “Bond Bubble” - Paul Krugman

Potential Secondary Effects of QE

- The QE Effect on Spreads: "The dramatic rise of Treasuries as a percentage of total US Fixed income will slow because of QE Treasury purchases – but it would take a larger program to reverse the growth."
- Indirect Duration Shorts: "Paying in 5y5y and 2s-10s steepeners are the best ways to express a short duration position without explicitly being short. We favor the 2s-10s steepener given the positive carry."
- Duration Supply, Issuance and Fed Purchases: "The supply of duration in the belly is estimated to be $600 billion less in 2010 compared to 2009. We estimate that the Treasury will issue slightly less than $2 trillion in 2011."
- Think 10s will lead 30s?: "Buy low strike 10y receivers and sell low strike 2y and 30y receivers to express the view that 10s will lead 30s in any large rally."
- It's Time to Buy the MBS Basis: "We recommend buying Fannie 4.5s versus paying on 5 yr swaps DV01 neutral; money managers and banks should support MBS at current valuations."
- Agency Debt: "Rolldown returns rule. We recommend that clients swap 8/2017 Treasuries and buy 2/2017 off-the-run agency bullets."
- US Rate Strategy Model Portfolio: "The portfolio is up 0.7% month-to-date."

Citigroup_US_Rate_&_MBS_Strategy_20100819

Is All the Good News for Bonds in the Price?

- Overview: "Lower yields have not yet deterred investors from buying bonds; however, the pace of buying seems to be slowing. We look to fade the rally in Bunds."
- "We retain our medium-term short US versus Europe recommendation despite the latest wave of pessimism over the US outlook."
- US Rates Strategy: "The rising amount of Treasuries as a percentage of total US fixed income will slow because of QE Treasury purchases."
- "We expect that a return of significant convexity hedging in the US rates markets will take several years."
- Euro Rates Strategy: "Recent curve flattening dynamics have focused on 2s-10s segments, leaving 10s-30s curves looking historically steep. The Bund curve is a possible exception. We examine the outlook for different curve segments in a prolonged period of policy status quo."
- Sterling Rates Strategy: "We expect gilts and swap spreads to benefit from ongoing above consensus improvements in the UK fiscal situation."
- Global Inflation Strategy: "We continue to find BTPei rich versus OATei. We also suggest it is too early to fade the flattening of the 10s30s euro break-even inflation curve. The 20yr sector of the UK real yield curve offers good value."
- Index-linked Index Projections: "We project a large duration extension in the US ILSI at the end of August. Projected duration changes should also be supportive of UK linkers."
- APAC Rates Strategy: "The current 10-yr JGB yield reached our target of 0.9%. However, we expect the bull trend to last until the end of this month."
- "We recommend long 10yr CGS as the RBA is likely to be on hold for an extended period."
- Month-end Index Projections: "Small projected increase in the EGBI but changes should be supportive of Germany and Italy."
- Flow Analysis: "Signs that buyers of fixed income are becoming more circumspect."

Citigroup_International_Interest_Rate_Strategist_20100819

Richard Koo: Global economic slowdown grows more pronounced

- "Signs of a slowdown in the global economy have become more prominent over the last two weeks. The deceleration in economic activity was reflected in the US jobs report and new unemployment claims, European industrial output, and Japanese consumer confidence. It was also reported on Monday that Japan’s inflation-adjusted GDP grew only 0.4% y-y in the Apr–Jun quarter, confirming that the recent slowdown actually began this spring."
- "This string of weak data led to a further correction in equities and pushed bond prices higher (and yields lower). Strong demand for government debt was underlined by yields of substantially less than 3% for the 10-year Treasury note and less than 1% for the 10-year Japanese government bond."
- "In Ireland and some other countries in the eurozone, meanwhile, marked economic weakness fanned concerns about the future, leading investors to sell bonds and send interest rates higher."
- "In the currency markets, the narrowing yield differential between Japan and other nations prompted further buying of the yen, which set a new post-Lehman high of 84.72 against the US dollar."

Nomura Flash Report 20100817

No place to hide when rates are (near) zero

- "EM markets have benefited from the sustained bull-flattening in US Treasuries and calm global equities and commodity prices. This suggests investors have adjusted their view on global growth down, but have not made ‘recession’ their baseline scenario. Flows to EM have been sticky, underscoring a point we have made before: that low core market rates are a powerful floor for asset prices where there is no structural fault line, ie, in a large part of EM. We are not advocating a break of the range, but note that there is still room for selective receivers, constructive credit views and RV."

Barclays Emerging Markets Weekly 20100819

Near-term woes to be followed by long-term improvement in fundamentals

- "In this week’s Oil Insights, we revisit the near- and long-term prospects for the seismic sub-sector. Since the Gulf of Mexico Oil Spill began, both PGS and CGG Veritas have lost over a third of their market cap, underperforming the rest of the sector by 20%. While the market is correct to be concerned by the near-term woes of the seismic operators, we look beyond 2010 and see light at the end of the tunnel, expecting material improvement in both the level of multi-client spend as well as the supply/demand dynamics in the contract market. As a result, we believe that the seismic market is likely to show the greatest incremental improvement of any sub-sector within oil services over the next 12-18 months. We reiterate our Buy on PGS, with the view that it offers the best leverage to this more favourable longer-term trend."
- New capacity and Gulf spill continue to depress market "We expect that 2010 will end up being the most significant year of new vessel supply in recent history, with a 30% y-o-y net increase in streamer count. In a period of relatively stable demand, it is no surprise that contract margins have been depressed and are likely to continue to remain low until at least end-2010, a situation further exacerbated by the Gulf spill."
- But we expect supply/demand to improve in 2011+ "Beyond 2010, the supply growth impacting the contract market should begin to slow dramatically. Over the course of 2011-12, the current plans of seismic companies imply at most a 5% pa increase in the new streamer count. Hence, 2011 is likely to see the seismic contract market driven far more by demand than supply, suggesting the potential for margin improvement."
- Multi-client sales delayed but not disappeared "Multi-client sales have always been very volatile and difficult to predict. But given the number of licensing rounds that are open today and expected in coming months, we take the view that it is difficult for the level of multi-client late sales to become materially worse from here and that a gradual improvement is more than likely."

Nomura Oil Insights 20100816

AUD: Seeing Green

- AUD: Seeing Green "National elections typically have little effect on the AUD, but a high probability of a hung parliament and a potentially important role for minority parties in the government have raised the level of uncertainty about this Saturday’s election. We discuss the potential implications for the AUD."
- EMEA FX: Picking your location carefully "EMEA currencies are being supported by inflows to local bond markets, but we feel that this support will be more selective in the future."
- VND: Vietnam weakens the dong to support growth "The State Bank of Vietnam weakened its currency against a backdrop of easing inflation. We expect a balance of payments surplus, allowing the build-up of FX reserves."
- MYR: A positive, albeit modest, step to improve FX spot convertibility "We expect USD/MYR to drift towards 3.05 in 12m, driven by the government’s divestment plans and the potential FTSE upgrade."

Barclays FX Weekly Brief 20100819

Yes we can

- "We are again being asked whether, and for how long, Europe can continue to grow if the US is slowing. It’s a familiar question, albeit very different from the one that we were being asked until relatively recently, in which Europe was supposed to be the cause of whatever slowdown was going on rather than the victim of someone else’s. Never mind – it’s instructive that both concerns involve doubts about the recovery."
- "The starting point for the current concern is that the second quarter was the strongest in the recovery so far in the euro area and the UK with growth running at an annualised rate of 4% or more. Remarkably, it ran at more than twice that rate in Germany. Meanwhile, it was the weakest in the recovery so far in the US with, on our estimates, growth running at about half the rate seen in the euro area and the UK and about a quarter of the rate seen in Germany."
- "So, where do we go from here? Our analysis suggests that US slowdowns needn’t be associated with any change in European growth, but US recessions typically are. Trade exposures matter, but are not overwhelming. The higher correlations and larger multipliers are associated with financial shocks and common shocks. That is what causes US recessions and also what leads them to be associated with something similar elsewhere."
- "From our perspective, the key issue is to assess what sort of slowdown it is that the US seems to be experiencing. For now, it looks like the sort of slowdown that needn’t be associated with a large change in European growth. The multiplier could be closer to zero than one. It doesn’t help that other economies such as China also appear to be slowing and neither does it help that stock markets have been volatile. Those are the downside risks."
- "The upside risks have more to do with domestic demand. There is no breakdown of the second quarter numbers yet, but domestic demand is likely to have made a large contribution. For now, monetary policy remains exceptionally accommodating and sentiment and cash flow remain strong in some of the larger European economies. We continue to expect them to grow steadily over the coming year."

CreditSuisse European Economics 20100818

Brazil’s China connection

- "Brazil, with its big exposure to commodities, would not be as insulated from a slowdown in Chinese growth as many seem to think."
- The Fed: from credit easing to quantitative easing "By growing its Treasury holdings, the Fed’s policy is set to resemble conventional QE."
- United States:The Fed introduces a new target "The aim is to stem any deterioration in expectations for growth and inflation."
- Europe: Weak credit growth but not too bad "Credit conditions in the second half of 2010 have tightened less than feared."
- Japan: Possible temporary fall in industrial production "It would be the first in six quarters, driven by a modest correction in inventories."
- EEMEA: Wheat a minute "Recent global wheat price increases will have an effect via several channels."
- India: The liquidity outlook and its implications "An insufficient rise in foreign assets could add to downside risks to growth."
- Brazil: How vulnerable is Brazil to China? "More than many people think. We explain why."
- Bahrain: Slowly recovering "The recovery and a net creditor position support a more positive outlook."
- Norway: Not ready for a rate hike yet "We expect the Norges Bank to hike rates next in December."

Nomura Global Weekly Economic Monitor 20100813

Speculative investors add to EUR shorts, reduce JPY longs

- "The latest IMM data covers the week August 10-17."
- "With risk aversion taking hold of financial markets again, speculative investors shunned positions in pro-cyclical currencies, seeking the defensive characteristics of the US dollar. Thus, US dollar shorts were reduced and long positions were added versus the euro, reflecting the collapse in EUR/USD following the downbeat FOMC statement."
- "USD/JPY breached below 85 during the period covered by the data. Nevertheless, speculative investors trimmed their yen longs somewhat, perhaps seeing the downside in USD/JPY as being curbed by intervention risk with Japanese policymakers seeming increasingly worried about the recent yen strength."
- "The Canadian economy is highly exposed in the event of a US slowdown and recent US economic underperformance coupled with abating risk appetite may therefore explain the sharp reduction in Canadian dollar long positions. Somewhat surprisingly, however, speculative investors added to long positions in the Australian dollar."

DenDanske IMM Positioning 20100823

What BEA revisions mean for Fed

- "The Q2 real GDP data published this past July 30 came with a major revision of historical data by the Bureau of Economic Analysis (BEA)."
- "The economic analysts of the world were left slack-jawed by the disappearance of $100 billion from U.S. GDP for 2010Q1. Consumption alone was revised down $134 billion. As a result, instead of being in expansion territory, it turns out consumption is actually only midway up the recovery curve."
- "The labour market must begin creating enough private-sector jobs to bring down the unemployment rate. Otherwise, the Federal Reserve will not be able to tolerate the situation, as it would ultimately constitute a disinflationary environment."
- "On a more positive note, the level of labour productivity in the United States seems to have hit a wall in the short term. For the first time since the start of the recession, the composition of GDP growth has been geared towards employment rather than productivity."
- "This said, as the level of resource utilization in the economy has been pegged back, this implicitly modifies the impact of past monetary easing by the Federal Reserve."
- "If the unemployment rate does not begin to trend down, the Fed will have no choice but to step in once again."

NBC Weekly Economic Letter 20100820

The combination that is weakening the US economy to a dangerous extent: Household insolvency and companies’ quest for huge profits

- "In the aftermath of the crisis, many US households are insolvent; overall, households continue to deleverage, and their demand is therefore weak."
- "At the same time, companies are seeking to generate huge profits, hence the downward pressure on wages and the drive to increase productivity. This is weakening employment and wage incomes at the worst possible time, since household demand is already sluggish, and it is generating profits that exceed the investment requirements (which have been reduced by the sluggishness of household demand). These profits are being hoarded."
- "This perverse dynamics is self-sustaining: the weakness of the economy worsens the labour market and maintains the problem of household solvency; against a backdrop of sluggish growth, the only way for companies to meet their profit targets is to distort income sharing at the expense of wage earners. A stimulus via wages - even though it is very unlikely - would be the only method to pull out of this trap, which resembles that seen in Japan in the late 1990s."

Natixis Flash Economics 398 20100818

Germany: Increase in capacity utilisation drives up producer prices

- "Germany’s manufacturing industry was heavily burdened by the recession. The capacity utilisation rate declined by 17 pp within two years, the largest drop since this data has been collected. However, it recovered just as rapidly: within one year the capacity utilisation rate rose by 11 pp, an extraordinary development as well. As a result, producer prices will also rise considerably, at least temporarily."

DeutscheBank Talking Point 20100819

US: deeper slowdown, but no recession

- "We revise our forecast to reflect a deeper slowdown than previously expected. GDP growth is now anticipated to dip below trend in the coming three quarters."
- "Payrolls will be averaging below 100k for H2. The decline in the unemployment rate will stall and should not resume its gradual fall before 2011."
- "The manufacturing ISM is expected to decline faster than suggested by our fundamental analysis. We expect it to reach 50 by year-end."
- "The risk of outright recession is limited. Our main scenario is that the economy will resume above-trend growth during 2011, but the risk of a more prolonged slowdown has increased."
- "The change in the growth outlook increases the likelihood of further Fed QE, as the central bank will find it hard to accept high and stable unemployment. We postpone Fed hikes to 2012."

DenDanske Research 20100820