Cargo ship embarks on historic Arctic passage - Reuters
Breaking the Guild of Macroeconomists - Psy-Fi Blog
Number of the Week: Safer Banks Without Sacrificing Growth - Real Time Economics
1938 in 2010 - New York Times
The ECB’s Role in Shaping the Future of EMU Policy Coordination
- "The Euro-zone crisis has illustrated that the existing policy coordination framework is insufficient."
- "We argue that, short of fiscal federalism, the ECB needs to play a greater role in enforcing policy rules."
- "We propose a simple system that would enable the ECB to adjust its haircuts on sovereign securities depending on the size of emerging imbalances."
- "Had such a system been in place, it would have raised funding costs and triggered warning signs for the crisis countries as early as in 2004, which could have led to earlier—and hence less severe—policy adjustment."
- "We argue that, short of fiscal federalism, the ECB needs to play a greater role in enforcing policy rules."
- "We propose a simple system that would enable the ECB to adjust its haircuts on sovereign securities depending on the size of emerging imbalances."
- "Had such a system been in place, it would have raised funding costs and triggered warning signs for the crisis countries as early as in 2004, which could have led to earlier—and hence less severe—policy adjustment."
GoldmanSachs Global Economics Paper 20100831
The End Of A Cult
- Equity Cult — "Global pension funds spent the second half of the 20th century raising their equity weightings to well over 50%, mostly at the expense of bonds."
- Cult Reversed — "It has taken 10 years, and two 50% bear markets, to reverse this cult. European and Japanese equities are already trading on dividend yields above government bond yields. US equities are almost there as well. An immediate reincarnation of the equity cult seems unlikely."
- Equity Overhang — "Global corporates, especially the mega-caps, rushed to exploit cheap financing as the equity cult inflated. They have been slow to redeem equity now that the cult has deflated. Equity oversupply remains a drag on share prices."
- De-equitisation The Answer — "As conventional investors sell, so corporates have stepped in as the marginal buyer of global equities. Investors should tilt portfolios to exploit de-equitisation themes such as M&A and share buy-backs."
- Emerging Markets The Exception — "The Emerging Markets equity culture remains robust. Companies can issue equity, capex is booming, and large-cap stocks are not under shareholder pressure to break up. Enjoy it while it lasts."
Citigroup_Global_Equity_Strategist_20100901
- Cult Reversed — "It has taken 10 years, and two 50% bear markets, to reverse this cult. European and Japanese equities are already trading on dividend yields above government bond yields. US equities are almost there as well. An immediate reincarnation of the equity cult seems unlikely."
- Equity Overhang — "Global corporates, especially the mega-caps, rushed to exploit cheap financing as the equity cult inflated. They have been slow to redeem equity now that the cult has deflated. Equity oversupply remains a drag on share prices."
- De-equitisation The Answer — "As conventional investors sell, so corporates have stepped in as the marginal buyer of global equities. Investors should tilt portfolios to exploit de-equitisation themes such as M&A and share buy-backs."
- Emerging Markets The Exception — "The Emerging Markets equity culture remains robust. Companies can issue equity, capex is booming, and large-cap stocks are not under shareholder pressure to break up. Enjoy it while it lasts."
Citigroup_Global_Equity_Strategist_20100901
Growth recession
- Macro viewpoint: Growth recession "The slowdown in the job market and the coming fiscal tightening suggest weak growth is here to stay. However, we still see only a 25% probability of an outright recession in the next year, which is slightly above the historical average."
- Fed watch: Hawks squawk, Big Ben tolls "The difference between Bernanke and the more hawkish regional Fed Presidents has to do with flexibility. The Chairman does not have a dogmatic leaning for or against asset purchases and his threshold to launch QE II, while high, is likely to be much lower than his more hawkish colleagues."
- Housing watch: On the brink "The June S&P Case Shiller home price report showed a gain in home prices in June, but it may be the last in awhile. Similar to Loan Performance and FHFA, we expect Case Shiller to turn lower amid a growing imbalance between housing demand and supply."
- The week ahead: Data takes a week off "It will be a relatively light week on the economic calendar. Markets are closed on Monday for the Labor Day holiday. The main event comes Wednesday, when the Fed releases their Beige Book. The report will provide us with anecdotal evidence on the state of the economy from the 12 regional Fed districts and should highlight the sluggishness of the economy. On the data front, we receive the July trade balance on Thursday and wholesale inventories on Friday."
- Fed watch: Hawks squawk, Big Ben tolls "The difference between Bernanke and the more hawkish regional Fed Presidents has to do with flexibility. The Chairman does not have a dogmatic leaning for or against asset purchases and his threshold to launch QE II, while high, is likely to be much lower than his more hawkish colleagues."
- Housing watch: On the brink "The June S&P Case Shiller home price report showed a gain in home prices in June, but it may be the last in awhile. Similar to Loan Performance and FHFA, we expect Case Shiller to turn lower amid a growing imbalance between housing demand and supply."
- The week ahead: Data takes a week off "It will be a relatively light week on the economic calendar. Markets are closed on Monday for the Labor Day holiday. The main event comes Wednesday, when the Fed releases their Beige Book. The report will provide us with anecdotal evidence on the state of the economy from the 12 regional Fed districts and should highlight the sluggishness of the economy. On the data front, we receive the July trade balance on Thursday and wholesale inventories on Friday."
Merrill Lynch US Economic Weekly 20100903
Back-Door Bearish
- Neutral Duration — 10yr Treasury yields are more than 30bp below our view of fair value, but we are cautious due to strong momentum.
- Bearish Bias — We are long TIPS breakevens and short the 5yr Treasury fly, trades we expect to perform best in a move higher in Treasury yields.
- 10-30 Treasury Curve Volatile, but Fair — Despite high volatility, the 10yr-30yr Treasury curve appears fair given changing Fed expectations and moves in implied volatility.
- Strong Yen, Limited Rate Effect — Japanese insurance and pension funds will likely increase their foreign securities holding due to the strengthening Yen versus the US dollar. However, the move should not have any significant effect on US Treasury yields.
- Sell Fannie 4.5 Fly — We recommend selling the Fannie 30yr 4.5 fly as we expect prepayment speeds on Fannie 4.5s to increase substantially over the next few months. In our view, this large increase is not priced in.
- Agency Debt — With high negative convexity and tight yield spreads to bullets, investors should seek quality yields in the callable agency sector. 4nc1 and 5nc1 callable agencies provide a good balance between reduced negative convexity, reasonable OAS and yield.
- US Rate Strategy Model Portfolio — The portfolio is down 0.1% month-to-date.
Citigroup_US_Rate_&_MBS_Strategy_20100902
- Bearish Bias — We are long TIPS breakevens and short the 5yr Treasury fly, trades we expect to perform best in a move higher in Treasury yields.
- 10-30 Treasury Curve Volatile, but Fair — Despite high volatility, the 10yr-30yr Treasury curve appears fair given changing Fed expectations and moves in implied volatility.
- Strong Yen, Limited Rate Effect — Japanese insurance and pension funds will likely increase their foreign securities holding due to the strengthening Yen versus the US dollar. However, the move should not have any significant effect on US Treasury yields.
- Sell Fannie 4.5 Fly — We recommend selling the Fannie 30yr 4.5 fly as we expect prepayment speeds on Fannie 4.5s to increase substantially over the next few months. In our view, this large increase is not priced in.
- Agency Debt — With high negative convexity and tight yield spreads to bullets, investors should seek quality yields in the callable agency sector. 4nc1 and 5nc1 callable agencies provide a good balance between reduced negative convexity, reasonable OAS and yield.
- US Rate Strategy Model Portfolio — The portfolio is down 0.1% month-to-date.
Citigroup_US_Rate_&_MBS_Strategy_20100902
The DPJ leadership election and economic policy
- "Ichiro Ozawa, former secretary-general of the Democratic Party of Japan (DPJ), last week declared that he would stand as a candidate in the party’s leadership election on 14 September. In the case of a victory for Ozawa, who is strongly backing full implementation of the party’s Lower House election manifesto, our rough estimates indicate that the fiscal deficit would increase by ¥3trn in FY11 and real GDP would be boosted by 0.3% compared with if Naoto Kan remained party leader and prime minister. With Ozawa also taking a more cautious stance than Kan on raising the consumption tax rate, it is only natural that the markets have become concerned that an Ozawa win would see fiscal discipline slip. However, given the very fluid political situation at present, including the possibility of political realignment, it is difficult to forecast just what impact the outcome of the leadership election will have on the direction of longer-term economic policy."
• DPJ adjusted thrust of economic policy with Upper House election manifesto: "It appears likely that the upcoming DPJ leadership election will be a two-horse race between Kan and Ozawa and the debate about economic and fiscal policy looks set to be characterized as a battle between the party’s manifestos for the Lower House and Upper House elections. Economic policy in the manifesto for the Lower House election in August last year was heavily influenced by Ozawa, while the Upper House election manifesto, created after Kan became prime minister, left some ambiguity but adjusted the thrust of economic policy in three main respects: (1) emphasis on simultaneous growth and fiscal rebuilding, (2) a greater focus on tax reform, with clear indications that corporation tax and the consumption tax would be reformed, and (3) cuts to childcare allowances and support for farmers’ incomes from the levels in the Lower House election manifesto."
• Differences on economic and fiscal policy: "We calculate that full implementation of the Lower House election manifesto would require an increase of ¥5.5trn in government spending in FY11. Kan’s stance is to control this spending by reviewing the commitments made in the manifesto. He is aiming to implement policy based on the assumption that budget request guidelines for the next fiscal year for roughly ¥24trn in government expenditure in the general account will be cut 10% across all ministries. He could use this savings of ¥2.4trn to increase spending in other areas. A victory for Ozawa, on the other hand, could see spending increase by ¥5.5trn to fulfill the commitments in the Lower House election manifesto, giving a difference of ¥3.1trn between the two candidates. We estimate that this would equate to a boost of roughly 0.3% to real GDP in FY11 and would see the fiscal deficit expand by the difference (¥3.1trn)."
• Direction of longer-term economic and fiscal policy is difficult to read: "Ozawa has also taken a more cautious stance than Kan on raising the consumption tax and it is only natural that the markets have become concerned that an Ozawa win would see fiscal discipline slip. However, given the very fluid political situation at present, including the possibility of political realignment, it is difficult to forecast just what impact the outcome of the DPJ leadership election will have on the direction of longerterm economic policy."
• Impact of outcome on financial markets: "We found no record of past comments by Ozawa on monetary policy. However, given that he appears to favor expansionary economic policy in the near term, from the perspective of fiscal discipline, we think that it could become difficult for the BOJ to implement aggressive measures such as increased purchases of long-term JGBs."
• DPJ adjusted thrust of economic policy with Upper House election manifesto: "It appears likely that the upcoming DPJ leadership election will be a two-horse race between Kan and Ozawa and the debate about economic and fiscal policy looks set to be characterized as a battle between the party’s manifestos for the Lower House and Upper House elections. Economic policy in the manifesto for the Lower House election in August last year was heavily influenced by Ozawa, while the Upper House election manifesto, created after Kan became prime minister, left some ambiguity but adjusted the thrust of economic policy in three main respects: (1) emphasis on simultaneous growth and fiscal rebuilding, (2) a greater focus on tax reform, with clear indications that corporation tax and the consumption tax would be reformed, and (3) cuts to childcare allowances and support for farmers’ incomes from the levels in the Lower House election manifesto."
• Differences on economic and fiscal policy: "We calculate that full implementation of the Lower House election manifesto would require an increase of ¥5.5trn in government spending in FY11. Kan’s stance is to control this spending by reviewing the commitments made in the manifesto. He is aiming to implement policy based on the assumption that budget request guidelines for the next fiscal year for roughly ¥24trn in government expenditure in the general account will be cut 10% across all ministries. He could use this savings of ¥2.4trn to increase spending in other areas. A victory for Ozawa, on the other hand, could see spending increase by ¥5.5trn to fulfill the commitments in the Lower House election manifesto, giving a difference of ¥3.1trn between the two candidates. We estimate that this would equate to a boost of roughly 0.3% to real GDP in FY11 and would see the fiscal deficit expand by the difference (¥3.1trn)."
• Direction of longer-term economic and fiscal policy is difficult to read: "Ozawa has also taken a more cautious stance than Kan on raising the consumption tax and it is only natural that the markets have become concerned that an Ozawa win would see fiscal discipline slip. However, given the very fluid political situation at present, including the possibility of political realignment, it is difficult to forecast just what impact the outcome of the DPJ leadership election will have on the direction of longerterm economic policy."
• Impact of outcome on financial markets: "We found no record of past comments by Ozawa on monetary policy. However, given that he appears to favor expansionary economic policy in the near term, from the perspective of fiscal discipline, we think that it could become difficult for the BOJ to implement aggressive measures such as increased purchases of long-term JGBs."
Nomura Japan Economic Overview 20100901
A Sense of relief
- Market movers ahead
• "There is little in the way of US events or data that can seriously be expected to move markets, partly because Monday is Labor Day."
• "Can the German upswing continue despite the problems stateside? There is much speculation about this at present, so it will be worth keeping an eye on the figures for German manufacturing orders and output. The UK and Japanese central banks are holding rate-setting meetings, but we do not see either being particularly exciting."
• "The US, China and big European economies will be releasing foreign trade data during the week, which could also say something about whether the familiar pattern is persisting, with Asia as growth engine and Europe as its big supplier."
- Global update
• "The sense of relief was tangible as incoming data painted a slightly brighter picture than in previous weeks. The strong ISM figures in particular confirm that the risk of a really hard landing in the US is relatively small."
• "In Europe, we had evidence that the upswing is becoming broader-based, and the PMI data from China indicates that the recent downturn in manufacturing there is over. On the other hand, the Bank of Japan disappointed with its not particularly ambitious easing of monetary conditions."
- Focus
• "Markets have interpreted statements from the Fed as signalling further easing of monetary policy. Reading its statements closely, however, this easing will only come if the economy deteriorates further. That is a realistic possibility, but we reckon that there is ‘only’ a 40% chance of further easing."
• "There is little in the way of US events or data that can seriously be expected to move markets, partly because Monday is Labor Day."
• "Can the German upswing continue despite the problems stateside? There is much speculation about this at present, so it will be worth keeping an eye on the figures for German manufacturing orders and output. The UK and Japanese central banks are holding rate-setting meetings, but we do not see either being particularly exciting."
• "The US, China and big European economies will be releasing foreign trade data during the week, which could also say something about whether the familiar pattern is persisting, with Asia as growth engine and Europe as its big supplier."
- Global update
• "The sense of relief was tangible as incoming data painted a slightly brighter picture than in previous weeks. The strong ISM figures in particular confirm that the risk of a really hard landing in the US is relatively small."
• "In Europe, we had evidence that the upswing is becoming broader-based, and the PMI data from China indicates that the recent downturn in manufacturing there is over. On the other hand, the Bank of Japan disappointed with its not particularly ambitious easing of monetary conditions."
- Focus
• "Markets have interpreted statements from the Fed as signalling further easing of monetary policy. Reading its statements closely, however, this easing will only come if the economy deteriorates further. That is a realistic possibility, but we reckon that there is ‘only’ a 40% chance of further easing."
DenDanske Weekly Focus 20100903
Ain't no sunshine
- "August was a poor month for all risk assets. Equity markets declined as the slowdown in global growth raised concerns over the sustainability of the recovery. Economic activity was particularly weak in the US. High unemployment claims, extreme weakness in housing activity and lackluster consumer demand intensified fears of a contraction in US growth. But not all news was bad. The flurry of private sector M&A activity was a sign of cash rich corporates and strong balance sheets."
- "MSCI APxJ declined 2% outperforming MSCI World by 2%. Economic activity in EM Asia held up well. Domestic demand remained resilient and monetary policy largely accommodative. However, headline GDP growth slowed reflecting the weakness in external trade."
- "The ASEAN region continued its outperformance with Thailand, Malaysia and the Philippines the best performing markets. Strong economic growth combined with positive earnings revisions and low ownership (ex Indonesia), continue to drive these markets higher. Australia, Indonesia and China were the worst performers."
- "Sector performance reversed from July. The downshift in global manufacturing and the search for yield caused cyclical sectors to underperform; IT (-5%), Financials (-3%) and Materials (-2%) were the worst performers within APxJ. Consumer staples were up 2.6% largely driven by staples in China, India and Korea."
- "The Thai Baht and the Japanese Yen were the best performing currencies. The Yen appreciated 3% against the US dollar to 84.2, the largest gain in 15 years, as investors sought safety against a poor outlook for the US economy. The euro was the worst performer depreciating 3%."
- "Credit markets rallied. The J.P. Morgan’s CEMBI yield was at 5.7% on 20 August, the lowest level since early 2005."
- "MSCI APxJ declined 2% outperforming MSCI World by 2%. Economic activity in EM Asia held up well. Domestic demand remained resilient and monetary policy largely accommodative. However, headline GDP growth slowed reflecting the weakness in external trade."
- "The ASEAN region continued its outperformance with Thailand, Malaysia and the Philippines the best performing markets. Strong economic growth combined with positive earnings revisions and low ownership (ex Indonesia), continue to drive these markets higher. Australia, Indonesia and China were the worst performers."
- "Sector performance reversed from July. The downshift in global manufacturing and the search for yield caused cyclical sectors to underperform; IT (-5%), Financials (-3%) and Materials (-2%) were the worst performers within APxJ. Consumer staples were up 2.6% largely driven by staples in China, India and Korea."
- "The Thai Baht and the Japanese Yen were the best performing currencies. The Yen appreciated 3% against the US dollar to 84.2, the largest gain in 15 years, as investors sought safety against a poor outlook for the US economy. The euro was the worst performer depreciating 3%."
- "Credit markets rallied. The J.P. Morgan’s CEMBI yield was at 5.7% on 20 August, the lowest level since early 2005."
JPMorgan Asia Pacific Equity Research 20100901
Widening peripheral bond spreads: Is this time different?
- "Although peripheral euro area sovereign yield spreads have widened to levels last reached at the peak of the fiscal crisis earlier this year, the EUR has not weakened significantly. In our view, the banking stress tests are the main reason why this time is different."
- "The BIS’s triennial survey of FX markets allows a comparison of the pre- and post-crisis world. FX markets seem unchanged, but there are early signs of some new trends."
- "The BIS’s triennial survey of FX markets allows a comparison of the pre- and post-crisis world. FX markets seem unchanged, but there are early signs of some new trends."
Barclays FX Weekly Brief 20100902
The US administration refuses to accept a structural adjustment: What will the effects be?
- "Prior to the crisis, growth in the United States was sustained by household demand and indebtedness and by wealth effects, especially property wealth."
- "The crisis resulted from the end of this growth model: debt ratios could no longer increase, and the real estate bubble burst."
- "Household demand then has to decline and the household savings rate has to rise to stabilise indebtedness and gradually correct the wealth loss. This is what we call a structural adjustment. This means that a serious recession (amplified by companies' reaction) cannot be avoided. But the US administration and the Federal Reserve do not want to accept this recession."
- "This means that the fiscal deficits will not be reduced in a hurry and that monetary policy will become even more expansionary. This desperate attempt to avoid the structural adjustment can eventually only lead to a sharp depreciation of the dollar."
- "The crisis resulted from the end of this growth model: debt ratios could no longer increase, and the real estate bubble burst."
- "Household demand then has to decline and the household savings rate has to rise to stabilise indebtedness and gradually correct the wealth loss. This is what we call a structural adjustment. This means that a serious recession (amplified by companies' reaction) cannot be avoided. But the US administration and the Federal Reserve do not want to accept this recession."
- "This means that the fiscal deficits will not be reduced in a hurry and that monetary policy will become even more expansionary. This desperate attempt to avoid the structural adjustment can eventually only lead to a sharp depreciation of the dollar."
Natixis Flash Economics 415 20100826
The very significant heterogeneity to be expected in the euro zone: What consequences?
- "In the euro zone, there are currently:
• on the one hand, countries that hardly benefit from the growth in global trade and in emerging countries, and where, moreover, corporate profitability is insufficient, which forces them to squeeze wages (France, Spain, Italy, Portugal);
• on the other hand, countries that benefit from the growth in emerging countries and where the improvement in profitability (in self-financing) already undertaken is favourable both for the prospects for corporate investment and for the possibility to see increasing wages (Germany, Netherlands, Finland, Belgium, Ireland)."
- "This means that the euro zone will probably be split in two groups of countries, some with sluggish growth, others with "decent" growth."
- "The first countries will find it difficult to reduce their fiscal deficits, while the second - which will reduce them to a lesser extent - will require the first countries to do likewise. The first countries will want to keep a highly expansionary monetary policy, the second could favour a gradual return towards more neutrality in monetary policy and a reduction in liquidity."
- "A significant conflict around the guidelines of economic policies is in all likelihood looming between these groups of countries. Moreover, the presence of these two different groups of countries will make it difficult for investors to assess the euro zone’s situation, leading to ambiguity about financial market trends."
• on the one hand, countries that hardly benefit from the growth in global trade and in emerging countries, and where, moreover, corporate profitability is insufficient, which forces them to squeeze wages (France, Spain, Italy, Portugal);
• on the other hand, countries that benefit from the growth in emerging countries and where the improvement in profitability (in self-financing) already undertaken is favourable both for the prospects for corporate investment and for the possibility to see increasing wages (Germany, Netherlands, Finland, Belgium, Ireland)."
- "This means that the euro zone will probably be split in two groups of countries, some with sluggish growth, others with "decent" growth."
- "The first countries will find it difficult to reduce their fiscal deficits, while the second - which will reduce them to a lesser extent - will require the first countries to do likewise. The first countries will want to keep a highly expansionary monetary policy, the second could favour a gradual return towards more neutrality in monetary policy and a reduction in liquidity."
- "A significant conflict around the guidelines of economic policies is in all likelihood looming between these groups of countries. Moreover, the presence of these two different groups of countries will make it difficult for investors to assess the euro zone’s situation, leading to ambiguity about financial market trends."
Natixis Flash Economics 414 20100825
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