- Reviewing our views: "In our report entitled, “Running Low on Fuel,” we noted that: (1) China’s passenger vehicle sector’s (PV) FY10E earnings may surprise on the upside due to stronger-than-expected sales volume and bigger-than-expected operating leverage; (2) China’s passenger vehicle sector boasts of a medium-term secular growth story due to low penetration rate and rising disposable income; (3) in FY10, we favor foreign JVs focusing on the medium-end and above segments over China’s localbranded vehicle producers dominating China’s small car segment because the small car segment may suffer from oversupply risks as early as FY10. Three months later, we find that: (1) the industry profitability in 1H10 is better than expected; and (2) local-branded vehicle producers focusing on the small car segment are suffering from rising inventory and price erosion."
- Key investment risks: "(1) The industry’s fundamentals should worsen on rising oversupply risks in FY11, with China passenger vehicle sector’s demand supply ratio likely to drop from 94% this year to 85% next year. That said, we see a moderation in China PVs’ profitability in FY11, not a collapse in the sector’s margins, which was the case during the 2004/05 downturn because: (a) the government is more strict with the approval of new auto expansion projects; (b) auto producers are more disciplined in terms of producing cars based on market demand; (2) the industry may suffer from rising royalty fee, and the possible introduction of trademark fee as of FY11 by Honda Motor-led foreign OEMs; and (3) possible negative sales growth in 1Q FY10 due to the possible negative wealth effect arising from the slump in China’s property and stock market."
- Earnings, PT and rating changes: "We raise our earnings forecast for DongFeng/Great Wall/Brilliance by 18%/10%/12% for FY10, and raise our Dec-FY10 PT for Great Wall and Brilliance from HK$15.6 and HK$2.8 to HK$16.8 and HK$3.3 respectively. Despite our earnings upgrade, we now apply a 20% discount to our revised DCF value of HK$16.9 to arrive at our Dec FY10E PT for DongFeng of HK$13.5, given the worsening industry fundamentals. We maintain OW on Minth, with a sticky growth track record, and upside from potential M&A activities, and keep Neutral on Great Wall, Brilliance China, but upgrade China PV sectors’ leader DongFeng Motor from Neutral to OW because: (1) its valuation is now more appealing after the correction and earnings upgrade; (2) it has a proven track record in
consistently growing its core earnings during both the upturn and downturn of the cycle; and (3) its defensive growth feature due to its wide range of competitive product flow from its three different strategic partners."
JPMorgan China Autos 20100730
Zero interest rates and liquidity injections
- "Central banks are keeping key intervention rates very low and continuing to buy assets by injecting liquidity."
- "There are two clashing views about the central banks’ stance on this issue:
• a positive view: this policy facilitates the balance sheet restructuring of private economic agents (deleveraging, sales of risky assets, raising capital, etc.), and therefore the return to a normal financial situation;
• a negative view: this policy artificially keeps alive borrowers that in reality are insolvent - and which will become insolvent again as soon as monetary policies are normalised. Moreover, it leads to continued inefficient investments."
- "It is difficult to decide which view is right, as the two types of situation can be seen:
• actual improvement in the balance sheets of companies, households and some countries (Greece, Ireland, etc.); bank provisioning and recapitalisation;
• insolvency situation for some banks, masked by monetary policy (particularly in Spain and the United States). Moreover, the whole banking sector - and perhaps also some countries (United Kingdom) - benefit from the slope of the yield curve; accumulation of bonds at abnormally low interest rates by banks and institutional investors."
- "There are two clashing views about the central banks’ stance on this issue:
• a positive view: this policy facilitates the balance sheet restructuring of private economic agents (deleveraging, sales of risky assets, raising capital, etc.), and therefore the return to a normal financial situation;
• a negative view: this policy artificially keeps alive borrowers that in reality are insolvent - and which will become insolvent again as soon as monetary policies are normalised. Moreover, it leads to continued inefficient investments."
- "It is difficult to decide which view is right, as the two types of situation can be seen:
• actual improvement in the balance sheets of companies, households and some countries (Greece, Ireland, etc.); bank provisioning and recapitalisation;
• insolvency situation for some banks, masked by monetary policy (particularly in Spain and the United States). Moreover, the whole banking sector - and perhaps also some countries (United Kingdom) - benefit from the slope of the yield curve; accumulation of bonds at abnormally low interest rates by banks and institutional investors."
Natixis Flash Economics 375 20100722
Different collective preferences: Maintaining a large industrial base in Germany; consuming more in many other euro-zone countries
- "In our opinion, the differences in economic policy options between Germany and other euro-zone countries are understandable, considering that Germany and the other countries have different objectives, related to different collective preferences:
• in Germany, do everything to maintain a large industrial base, exporting and paying high wages;
• in many other countries, try to maintain high growth in consumption, hence in wage income and employment, of whatsoever kind."
- "The wage, fiscal, budget and credit policies of Germany are therefore inevitably different from those in other European countries."
• in Germany, do everything to maintain a large industrial base, exporting and paying high wages;
• in many other countries, try to maintain high growth in consumption, hence in wage income and employment, of whatsoever kind."
- "The wage, fiscal, budget and credit policies of Germany are therefore inevitably different from those in other European countries."
Natixis Flash Economics 374 20100722
How can potential growth be increased in the euro zone?
- "In this Flash we will look at the long-term problem - and not the cyclical problem - of shortfall in potential growth in the euro zone, which is spectacular in a period of population ageing."
- "If long-term growth is to be increased in the euro zone, a number of structural economic policies must be implemented:
• despite the high risk aversion among savers, regulators and wage earners, ensuring that:
1) savings are used for financing of long-term investments, and not "wasted";
2) the financing of social welfare does not choke off growth and investment;
3) wage earners head into the most efficient jobs and sectors;
• reindustrialisation, and development of sophisticated services, to prevent jobs from moving downmarket into unsophisticated services; this raises the issues of the most pertinent sectors, the most efficient methods and countries’ comparative advantages;
• not implementing a "macro-prudential supervision" that kills off growth by imposing useless constraints that eliminate the advantages of monetary and economic unification."
- "If long-term growth is to be increased in the euro zone, a number of structural economic policies must be implemented:
• despite the high risk aversion among savers, regulators and wage earners, ensuring that:
1) savings are used for financing of long-term investments, and not "wasted";
2) the financing of social welfare does not choke off growth and investment;
3) wage earners head into the most efficient jobs and sectors;
• reindustrialisation, and development of sophisticated services, to prevent jobs from moving downmarket into unsophisticated services; this raises the issues of the most pertinent sectors, the most efficient methods and countries’ comparative advantages;
• not implementing a "macro-prudential supervision" that kills off growth by imposing useless constraints that eliminate the advantages of monetary and economic unification."
Natixis Flash Economics 373 20100722
Spring Breezes Turn to Summer Doldrums
- "In much of the United States, the refreshing breezes of spring gave way some time ago to
stifling summer heat and humidity. So it is with the economy, as the twin boosts from early-cycle inventory accumulation and fiscal stimulus have begun to fade, taking growth with them. Real GDP growth decelerated to a 2.4% annual pace in the second quarter, from 3.7% in Q1 and 5.0% in Q4 2009. Revisions to 2007-2009 data took down growth by 0.2 percentage point on average."
- "Although the second-quarter GDP report featured a number of minor surprises, final demand continues to expand at the sluggish pace of the past year—only 1.3%. This is close to our 1.5% expectation for secondhalf GDP growth."
- "The inventory cycle continues to run its course, with signs from various surveys that it was starting to weigh on growth in July. We think the ISM manufacturing index fell to 54.5 in July (from 56.1), and a move to 50 by yearend would be fairly typical given the extent of the recent upswing."
- "This week we trimmed our expectations of fiscal outlays in 2011, based on what appears to be limited appetite for further stimulus. Folding in the impact of state and local budget cutbacks, we estimate the net impact of fiscal policy will swing from a 1.3-percentage point boost to GDP in early 2010 to a 1.7-point drag next year."
- "Monetary stimulus also does not appear to be forthcoming in the near term, though the
deterioration in economic data has clearly weighed on the confidence of at least a few Fed officials."
stifling summer heat and humidity. So it is with the economy, as the twin boosts from early-cycle inventory accumulation and fiscal stimulus have begun to fade, taking growth with them. Real GDP growth decelerated to a 2.4% annual pace in the second quarter, from 3.7% in Q1 and 5.0% in Q4 2009. Revisions to 2007-2009 data took down growth by 0.2 percentage point on average."
- "Although the second-quarter GDP report featured a number of minor surprises, final demand continues to expand at the sluggish pace of the past year—only 1.3%. This is close to our 1.5% expectation for secondhalf GDP growth."
- "The inventory cycle continues to run its course, with signs from various surveys that it was starting to weigh on growth in July. We think the ISM manufacturing index fell to 54.5 in July (from 56.1), and a move to 50 by yearend would be fairly typical given the extent of the recent upswing."
- "This week we trimmed our expectations of fiscal outlays in 2011, based on what appears to be limited appetite for further stimulus. Folding in the impact of state and local budget cutbacks, we estimate the net impact of fiscal policy will swing from a 1.3-percentage point boost to GDP in early 2010 to a 1.7-point drag next year."
- "Monetary stimulus also does not appear to be forthcoming in the near term, though the
deterioration in economic data has clearly weighed on the confidence of at least a few Fed officials."
GoldmanSachs US Economics Analyst 20100730
A Half-Pint Recovery, One Year On
- "While the official business cycle dating authorities at the National Bureau of Economic Research have yet to render a judgment on the matter, the Great Recession ended approximately one year ago. That’s when real GDP and other measures of general economic activity stopped shrinking. How does Year 1 of the recovery measure up against prior cyclical experience?"
- "In the following charts, we compare the current recovery against recoveries following the two recent, mild, recessions (1990-1991, and 2001) and recoveries following two earlier severe recessions (1973-75 and 1981-82). This cyclically adjusts for the stylized fact that applies to most of business cycle history - “the harder the fall, the faster the rebound.”"
- "If such history were any guide, the current recovery should be as powerful, or
more so, than the recoveries following the severe recessions. But it’s only half as powerful measured in units of GDP – an unsatisfying result considering the sheer volume of stimulus thrown at the problem. Still, today’s recovery is beating the recoveries following the mild recessions - hence, we are clearly on a better path than the more pessimistic “U-shaped” or “L-shaped” forecasts."
- "Highlights include satisfying outperformance by business equipment and software purchases as well as exports; the rest of the economy’s sectors are disappointing by historical standards to greater or lesser degrees."
- "In the following charts, we compare the current recovery against recoveries following the two recent, mild, recessions (1990-1991, and 2001) and recoveries following two earlier severe recessions (1973-75 and 1981-82). This cyclically adjusts for the stylized fact that applies to most of business cycle history - “the harder the fall, the faster the rebound.”"
- "If such history were any guide, the current recovery should be as powerful, or
more so, than the recoveries following the severe recessions. But it’s only half as powerful measured in units of GDP – an unsatisfying result considering the sheer volume of stimulus thrown at the problem. Still, today’s recovery is beating the recoveries following the mild recessions - hence, we are clearly on a better path than the more pessimistic “U-shaped” or “L-shaped” forecasts."
- "Highlights include satisfying outperformance by business equipment and software purchases as well as exports; the rest of the economy’s sectors are disappointing by historical standards to greater or lesser degrees."
CreditSuisse US Economic Digest 20100730
Financial crises, deflation and the Japan analogy
- Both upside and downside surprises to inflation drive up the ERP "Historically, surprises to inflation have been associated with a high equity risk premium being priced by the market. This is true for both upside and downside surprises. Recent history suggests that risk aversion may be more sensitive to downside surprises in inflation when the level of inflation
and rates are themselves low."
- We analyze theoretical implications of deflation on sectors & styles "In a deflationary scenario we believe defensives would outperform cyclicals. Strong balance sheets would outperform weak balance sheets. Companies with large pension obligations, financials and companies with wage intensive cost structures would all underperform the market. Sectors used to deflation, such as technology, and companies exposed to areas of the world without deflation, would outperform."
- …and confirm that the conclusions held up in the case of Japan "In Japan, export oriented sectors outperformed domestically exposed sectors for more than 20 years. Financials underperformed the market, as did sectors with weak balance sheets."
- The aftermath of financial crises: Binary outcomes "We analyze the aftermath of financial crises in Sweden, Finland and Japan. The outcomes are binary. In the case of Sweden and Finland, earnings growth and ROE rebounded quickly, whereas they remained depressed in Japan. The outcome in terms of market prices was dramatically better in
Sweden and Finland. So far, the outcome in Europe looks more like the Swedish and Finnish cases. This supports our positive view on earnings and our 12-month price target of 300 for the Stoxx Europe 600."
and rates are themselves low."
- We analyze theoretical implications of deflation on sectors & styles "In a deflationary scenario we believe defensives would outperform cyclicals. Strong balance sheets would outperform weak balance sheets. Companies with large pension obligations, financials and companies with wage intensive cost structures would all underperform the market. Sectors used to deflation, such as technology, and companies exposed to areas of the world without deflation, would outperform."
- …and confirm that the conclusions held up in the case of Japan "In Japan, export oriented sectors outperformed domestically exposed sectors for more than 20 years. Financials underperformed the market, as did sectors with weak balance sheets."
- The aftermath of financial crises: Binary outcomes "We analyze the aftermath of financial crises in Sweden, Finland and Japan. The outcomes are binary. In the case of Sweden and Finland, earnings growth and ROE rebounded quickly, whereas they remained depressed in Japan. The outcome in terms of market prices was dramatically better in
Sweden and Finland. So far, the outcome in Europe looks more like the Swedish and Finnish cases. This supports our positive view on earnings and our 12-month price target of 300 for the Stoxx Europe 600."
GoldmanSachs Europe Portfolio Strategy 20100729
The Fed’s Options for Further Monetary Stimulus
- Hardening extended period commitment is an attractive option for the Fed: "A
commitment to keep rates unchanged until the end of 2011 could yield a 20 bp to 30 bp shift lower in yields without any further balance sheet commitment. 5s could richen another 10 bp on the curve."
- Neutral on Duration: "Increased discussion of a revival of QE offsets our view that Treasury yields are below what is justified by recent growth."
- Treasury Auctions Mixed, End With a Weak 7-yr: "The 2-yr, 5-yr and 7-yr auction
results were mixed this week, with the worst result coming in Thursday’s 7-yr."
- Attractive Carry Trade in Vol: "We recommend buying gamma on 5y tails and selling gamma on 30y tails in a box trade, for attractive carry."
- The Case for The Up-in-Coupon, Against the Insta-Refi: "We find the current environment to be the perfect storm for MBS up-in-coupon. We think the “freelunch” government induced refi program is anything but and unlikely to occur."
- Agency Debt: "A covered bond bill is making its way quickly through Congress and seems to have strong bi-partisan support. We summarize the salient points of the current bill."
- US Rate Strategy Model Portfolio: "The portfolio is up 1.3% month-to-date."
Citigroup US Rate MBS Strategy Weekly 20100730
commitment to keep rates unchanged until the end of 2011 could yield a 20 bp to 30 bp shift lower in yields without any further balance sheet commitment. 5s could richen another 10 bp on the curve."
- Neutral on Duration: "Increased discussion of a revival of QE offsets our view that Treasury yields are below what is justified by recent growth."
- Treasury Auctions Mixed, End With a Weak 7-yr: "The 2-yr, 5-yr and 7-yr auction
results were mixed this week, with the worst result coming in Thursday’s 7-yr."
- Attractive Carry Trade in Vol: "We recommend buying gamma on 5y tails and selling gamma on 30y tails in a box trade, for attractive carry."
- The Case for The Up-in-Coupon, Against the Insta-Refi: "We find the current environment to be the perfect storm for MBS up-in-coupon. We think the “freelunch” government induced refi program is anything but and unlikely to occur."
- Agency Debt: "A covered bond bill is making its way quickly through Congress and seems to have strong bi-partisan support. We summarize the salient points of the current bill."
- US Rate Strategy Model Portfolio: "The portfolio is up 1.3% month-to-date."
Citigroup US Rate MBS Strategy Weekly 20100730
Russia: Renewed privatization drive will bring benefits
- Government assets for sale — "The Russian government has announced its intention to sell government stakes in a number of Russian companies for around $30bn. The list of companies for sale is likely to include stakes in oil giant Rosneft, banks Sberbank and VTB, and other state-controlled companies, including Transneft and RusHydro. In addition, several fully state-owned companies may be partially privatized."
- More supply should bring benefits… eventually — "Although the Russian equity market is relatively liquid, trading is concentrated in a handful of shares, primarily commodity stocks and banks. Any action to increase the supply of companies outside the extractive industries is likely to be taken well by the market."
- Could also encourage “best behavior” from government — "Another prospective benefit of privatization would be to encourage greater disclosure by the government and a more investor-friendly approach in the run-up to major asset sales. Hopefully this would result in greater clarity on issues such as tax policy."
- However the sales, if they happen, will take time — "Recent comments from the
Finance Ministry and other government agencies indicate that the plans are still evolving, and that in any case completing the proposed sales could take years. This is likely to be particularly true for the fully government-owned companies being brought to market for the first time."
- Market likely to absorb new supply — "$30bn would represent about 15% of Russian equity free float. While not an insignificant amount, this is likely to be absorbed by the market over time. The pipeline of other planned IPOs over the next two years is around $8bn."
- More interesting government sales: less liquid stocks, consumer, infrastructure — "Less liquid stocks such as Transneft are likely to benefit from privatization sales, as should consumer and infrastructure-related stocks."
- More supply should bring benefits… eventually — "Although the Russian equity market is relatively liquid, trading is concentrated in a handful of shares, primarily commodity stocks and banks. Any action to increase the supply of companies outside the extractive industries is likely to be taken well by the market."
- Could also encourage “best behavior” from government — "Another prospective benefit of privatization would be to encourage greater disclosure by the government and a more investor-friendly approach in the run-up to major asset sales. Hopefully this would result in greater clarity on issues such as tax policy."
- However the sales, if they happen, will take time — "Recent comments from the
Finance Ministry and other government agencies indicate that the plans are still evolving, and that in any case completing the proposed sales could take years. This is likely to be particularly true for the fully government-owned companies being brought to market for the first time."
- Market likely to absorb new supply — "$30bn would represent about 15% of Russian equity free float. While not an insignificant amount, this is likely to be absorbed by the market over time. The pipeline of other planned IPOs over the next two years is around $8bn."
- More interesting government sales: less liquid stocks, consumer, infrastructure — "Less liquid stocks such as Transneft are likely to benefit from privatization sales, as should consumer and infrastructure-related stocks."
Citigroup Russia Strategy 20100730
FX Strategy Weekly
- "Dollar weakness coloured G10 fx markets in July but a stabilisation in speculative positioning begs the question if the currency is due for some reprieve in August. The path to a USD bounce remains uneven at best, but as the tide of positive Q2 corporate earnings subsides
and scepticism surrounding EU peripheral spreads lingers, we wonder if safe haven flows could make a surprise return. Dovish statements by the BoE have so far been disregarded by GBP bulls but as the policy stakes are gradually raised, we think there is a possibility that GBP exposure is gradually reduced from technically overbought levels. The week ahead is dominated by the PMIs and US non-farm payrolls. Holiday disrupted trading conditions are likely to characterise daily flows. Demand for carry may keep the AUD underpinned even assuming for no change in RBA policy."
- "A strong week for the pound capped the month of July, with GBP taking weak consumer
confidence and housing data in its stride. GBP rallied vs its G10 peers with the exception of the JPY and CHF, netting gains of 2% vs the NZ$, 1.9% vs the USD (topping 1.57), and 0.6% vs the EUR. The NZ$ underperformed the G10 after the RBNZ raised interest rates to 3% but warned of a slower pace of policy tightening in the months ahead. The rally in EUR/USD ran out of steam at 1.3107 and a negative report by Moody’s on Spain caused profit taking to set in, dragging the cross back below 1.30 into Friday’s close."
- "US Q2 GDP was in line with forecast at 2.4% annualised. An upward revision for Q1 to 3.7% vs 2.7% previously on the back of stronger inventories highlighted scepticism surrounding the durability of the recovery. The core PCE index accelerated to 1.1% vs 0.7%.
In the UK, data confirmed the recent slowdown in housing market activity with prices dropping 0.5% m/m in July (Nationwide) and an easing in mortgage approvals to 47,600 from 49,500. The CBI reported a surge in reported retail sales to +33 in July from -5 in June,
marking the biggest gain in three years. The MPC testimony to the TSC brought no change in
policy perceptions and means next week should see the BoE keep BR and the APF unchanged."
- "Gilt yields and swaps shot up to one-month highs over the first part of the week but dovish
MPC commentary on growth and month-end extension buying drove yields back down with the breach of key support levels triggering additional support. 10y yields hit a 3.52% high but ended the week at 3.33%, after piercing support levels and 3.45% and 3.40%. 5y swaps initially firmed to 2.62% but three days of lower rates followed and led swaps to close at 2.41%. The 3mth Libor/Ois spread widened 2bp to 25bp, the highest since last September. The 2y/10y swap curve ended the week close to flat at 200bp after having widened at 204bp. The 10y swap spread rose 3bp to 5bp. A £6.0bln syndicated 2040 IL auction was sold at a yield of 1.02%"
and scepticism surrounding EU peripheral spreads lingers, we wonder if safe haven flows could make a surprise return. Dovish statements by the BoE have so far been disregarded by GBP bulls but as the policy stakes are gradually raised, we think there is a possibility that GBP exposure is gradually reduced from technically overbought levels. The week ahead is dominated by the PMIs and US non-farm payrolls. Holiday disrupted trading conditions are likely to characterise daily flows. Demand for carry may keep the AUD underpinned even assuming for no change in RBA policy."
- "A strong week for the pound capped the month of July, with GBP taking weak consumer
confidence and housing data in its stride. GBP rallied vs its G10 peers with the exception of the JPY and CHF, netting gains of 2% vs the NZ$, 1.9% vs the USD (topping 1.57), and 0.6% vs the EUR. The NZ$ underperformed the G10 after the RBNZ raised interest rates to 3% but warned of a slower pace of policy tightening in the months ahead. The rally in EUR/USD ran out of steam at 1.3107 and a negative report by Moody’s on Spain caused profit taking to set in, dragging the cross back below 1.30 into Friday’s close."
- "US Q2 GDP was in line with forecast at 2.4% annualised. An upward revision for Q1 to 3.7% vs 2.7% previously on the back of stronger inventories highlighted scepticism surrounding the durability of the recovery. The core PCE index accelerated to 1.1% vs 0.7%.
In the UK, data confirmed the recent slowdown in housing market activity with prices dropping 0.5% m/m in July (Nationwide) and an easing in mortgage approvals to 47,600 from 49,500. The CBI reported a surge in reported retail sales to +33 in July from -5 in June,
marking the biggest gain in three years. The MPC testimony to the TSC brought no change in
policy perceptions and means next week should see the BoE keep BR and the APF unchanged."
- "Gilt yields and swaps shot up to one-month highs over the first part of the week but dovish
MPC commentary on growth and month-end extension buying drove yields back down with the breach of key support levels triggering additional support. 10y yields hit a 3.52% high but ended the week at 3.33%, after piercing support levels and 3.45% and 3.40%. 5y swaps initially firmed to 2.62% but three days of lower rates followed and led swaps to close at 2.41%. The 3mth Libor/Ois spread widened 2bp to 25bp, the highest since last September. The 2y/10y swap curve ended the week close to flat at 200bp after having widened at 204bp. The 10y swap spread rose 3bp to 5bp. A £6.0bln syndicated 2040 IL auction was sold at a yield of 1.02%"
LloydsTSB FX Strategy Weekly 20100730
Non-commercial investors reduce long JPY and CHF positions
- "The latest IMM data cover the week from 20 to 27 July."
- "Speculative investors have recently reduced net long JPY and CHF positions. The moves
occurred in a week with strong gains in the equity market where the safe-haven currencies
underperformed."
- "Net short GBP positions have been reduced while short EUR positions have been unchanged. Both are well below the panic levels observed earlier this year."
- "Net long non-commercial NZD, MXN an AUD positions remain at stretched levels and have been extended further. Risk of a ‘long squeeze’ remains."
- "Speculative investors have recently reduced net long JPY and CHF positions. The moves
occurred in a week with strong gains in the equity market where the safe-haven currencies
underperformed."
- "Net short GBP positions have been reduced while short EUR positions have been unchanged. Both are well below the panic levels observed earlier this year."
- "Net long non-commercial NZD, MXN an AUD positions remain at stretched levels and have been extended further. Risk of a ‘long squeeze’ remains."
DenDanske IMM Positioning 20100802
The dog days of summer
- Macro viewpoint: The dog days of summer "High levels of regulatory and economic uncertainty are an important headwind to the recovery. We expect these headwinds to ease over time."
- Fed watch: Bullard in a china shop "St. Louis Fed President Jim Bullard offered a trenchant critique of current Fed policy, and proposed a return to “quantitative easing” by the Fed. Wading through his self-described “geeky” paper, however, suggests more a series of probing questions than a sudden call for a policy reversal."
- The week ahead: All eyes on payrolls "The first week of each month is always important, but we view next week as especially important since we will get our first look at the third quarter. We expect to see signs of a slowing in sequential growth against an improving labor market backdrop. All eyes will be watching Friday’s employment report. We are expecting private payrolls to rise 125,000 in July, which is consistent with the “gradual” labor market recovery we heard repeatedly in this week’s Beige Book report from the
Fed."
- Fed watch: Bullard in a china shop "St. Louis Fed President Jim Bullard offered a trenchant critique of current Fed policy, and proposed a return to “quantitative easing” by the Fed. Wading through his self-described “geeky” paper, however, suggests more a series of probing questions than a sudden call for a policy reversal."
- The week ahead: All eyes on payrolls "The first week of each month is always important, but we view next week as especially important since we will get our first look at the third quarter. We expect to see signs of a slowing in sequential growth against an improving labor market backdrop. All eyes will be watching Friday’s employment report. We are expecting private payrolls to rise 125,000 in July, which is consistent with the “gradual” labor market recovery we heard repeatedly in this week’s Beige Book report from the
Fed."
Merrill Lynch US Economic Weekly 20100730
Italy: Jobs, more work needs to be done
- "While industrial production increased at a strong pace in 2Q, the end of the car-scrapping scheme is likely to have weighed on overall GDP. In 2Q, we expect economic growth to have slowed to 0.2% qoq, which should be followed by still modest growth in the following quarters."
- "While the pace of increase in the number of inactive people keeps moderating and the growth rate of the labor force steadily increased, monthly employment figures and signals from business surveys show that a real turning point in the labor market has not yet occurred."
- "In May, bank lending continued to gain a stronger foothold, although the rate of growth remains modest. Still, it is encouraging that the increase in household lending was accompanied by a return on an upward trend of corporate lending, although the latter is still in negative territory."
- "Inflation kept easing in June, following the drop in gasoline prices. In July, we expect inflation to resume its upward trend. The Italy-EMU inflation gap has closed, mainly on the back of non-core components, while the differential on core prices remained relatively stable."
- "In the Focus section we analyze the impact of the recession on the labor market. While the unemployment rate has increased less than in the eurozone, reforms are needed to foster new hiring, and prevent that a dual labor market leads to a jobless recovery."
Unicredit Italy Monitor 20100726
- "While the pace of increase in the number of inactive people keeps moderating and the growth rate of the labor force steadily increased, monthly employment figures and signals from business surveys show that a real turning point in the labor market has not yet occurred."
- "In May, bank lending continued to gain a stronger foothold, although the rate of growth remains modest. Still, it is encouraging that the increase in household lending was accompanied by a return on an upward trend of corporate lending, although the latter is still in negative territory."
- "Inflation kept easing in June, following the drop in gasoline prices. In July, we expect inflation to resume its upward trend. The Italy-EMU inflation gap has closed, mainly on the back of non-core components, while the differential on core prices remained relatively stable."
- "In the Focus section we analyze the impact of the recession on the labor market. While the unemployment rate has increased less than in the eurozone, reforms are needed to foster new hiring, and prevent that a dual labor market leads to a jobless recovery."
Unicredit Italy Monitor 20100726
Public savings, household savings and corporate savings: Where are the anomalies, what would international coordination of economic policies entail?
- "We look at the situation in major OECD countries. Some of them (Germany and Japan) are in an overall situation of excess savings even when there is a fiscal deficit: in Germany above all for households and also corporate savings; in Japan, corporate savings. Others (United States, United Kingdom, France, Spain, Italy) face an overall situation of a shortfall in
savings, but for very different reasons than prevailed before the crisis: shortfall in household savings with substantial corporate savings in the United States and in the United Kingdom; shortfall in corporate savings in France, in corporate and household savings in Spain and in Italy; since the crisis, moreover fiscal deficits have appeared, and household savings have
risen in certain countries (Spain)."
- "International coordination of economic policies would entail policies aimed at reducing savings in Germany and in Japan, as the Americans are calling for, while stimulating savings in the United States, the United Kingdom, France, Spain, and Italy. However, according to the composition of savings (households, companies, and central government) these policies are very different: modification in one direction or another of income sharing, change in financial incentives to save via tax and fiscal policy."
savings, but for very different reasons than prevailed before the crisis: shortfall in household savings with substantial corporate savings in the United States and in the United Kingdom; shortfall in corporate savings in France, in corporate and household savings in Spain and in Italy; since the crisis, moreover fiscal deficits have appeared, and household savings have
risen in certain countries (Spain)."
- "International coordination of economic policies would entail policies aimed at reducing savings in Germany and in Japan, as the Americans are calling for, while stimulating savings in the United States, the United Kingdom, France, Spain, and Italy. However, according to the composition of savings (households, companies, and central government) these policies are very different: modification in one direction or another of income sharing, change in financial incentives to save via tax and fiscal policy."
Natixis Flash Economics 372 20100721
Tighter monetary policies: are Asian central banks reading the bussiness cycle properly?
- "After India, Taiwan, Malaysia and Korea, it is now Thailand’s turn to raise its key interest rates by 25 bp mid July. There seems to be a widespread exit from accommodating monetary policies in nearly all emerging Asian countries."
- "But while monetary authorities (specifically, Korea and Thailand) indicate that monetary tightening should continue in a strong growth environment, we wonder about the benefit of further tightening."
- "While monetary tightening seems justified in India where inflation keeps on rising, it seems more debatable in other countries where growth is still fragile and any swift action to tighten monetary policy while the economic cycle is at inflection point could lead to future regrets."
Natixis Flash Economics 371 20100725
- "But while monetary authorities (specifically, Korea and Thailand) indicate that monetary tightening should continue in a strong growth environment, we wonder about the benefit of further tightening."
- "While monetary tightening seems justified in India where inflation keeps on rising, it seems more debatable in other countries where growth is still fragile and any swift action to tighten monetary policy while the economic cycle is at inflection point could lead to future regrets."
Natixis Flash Economics 371 20100725
The destruction of bad debts
- "In the past, bad debts were destroyed via inflation: when (public or private) debt ratios were too high, the central bank would increase the money supply and this led to the appearance of inflation, resulted in negative real interest rates, and lowered debt ratios. Currently, central banks have monetised public (or private) debts, but this operation has not created any inflation because of the environment (unemployment, globalisation, distortion of
income sharing at the expense of wage earners)."
- "Monetisation has transferred (public or private) debts to the central bank’s balance sheet, and this reduces the quantity of debt private investors have to hold and, therefore, drives down risk premia, but does not destroy debts. Borrowers still have to ensure debt servicing, and this is a problem if debts are substantial since this entails allocating significant income to this purpose. To destroy bad debts, in this environment, central banks would have to destroy the ones they hold. This amounts to a default, but without any negative effect on the private holders of bad debts. It is, moreover, less serious to fleece in this manner the central bank than to fleece savers via inflation."
Natixis Flash Economics 370 20100721
income sharing at the expense of wage earners)."
- "Monetisation has transferred (public or private) debts to the central bank’s balance sheet, and this reduces the quantity of debt private investors have to hold and, therefore, drives down risk premia, but does not destroy debts. Borrowers still have to ensure debt servicing, and this is a problem if debts are substantial since this entails allocating significant income to this purpose. To destroy bad debts, in this environment, central banks would have to destroy the ones they hold. This amounts to a default, but without any negative effect on the private holders of bad debts. It is, moreover, less serious to fleece in this manner the central bank than to fleece savers via inflation."
Natixis Flash Economics 370 20100721
Readings
Within the Fed, Worries of Deflation - New York Times
The job machine grinds to a halt - Washington Post
Volatility Trade Buffett Embraced Backfires for Wall Street... - Bloomberg
The low-growth threshold - Free Exchange
The Volt Jolt: Electric cars like Chevy's new Volt are too expensive today... - Slate
Don’t hold your breath waiting for electric cars - Smart Planet
Top Hedge Funds That Dodged Crash, Rode Market Back Turn Gloomy - Bloomberg
BIS gold swaps mystery is unravelled - Financial Times
Cities threaten to cut 500,000 jobs - CNN Money
Anatomy of Lehman's Failure - Economics of Contempt
Russia economy: Privatisation with a twist - ViewsWire
The rising power of the Chinese worker - Economist
Whatever happened to the rebalancing act? - Telegraph
The New Abnormal - BusinessWeek
What I Told Obama’s Fiscal Commission About Social Security - IBD
The deficit terrorists have found a new hero. Not!- Billy Blog
The job machine grinds to a halt - Washington Post
Volatility Trade Buffett Embraced Backfires for Wall Street... - Bloomberg
The low-growth threshold - Free Exchange
The Volt Jolt: Electric cars like Chevy's new Volt are too expensive today... - Slate
Don’t hold your breath waiting for electric cars - Smart Planet
Top Hedge Funds That Dodged Crash, Rode Market Back Turn Gloomy - Bloomberg
BIS gold swaps mystery is unravelled - Financial Times
Cities threaten to cut 500,000 jobs - CNN Money
Anatomy of Lehman's Failure - Economics of Contempt
Russia economy: Privatisation with a twist - ViewsWire
The rising power of the Chinese worker - Economist
Whatever happened to the rebalancing act? - Telegraph
The New Abnormal - BusinessWeek
What I Told Obama’s Fiscal Commission About Social Security - IBD
The deficit terrorists have found a new hero. Not!- Billy Blog
De-stressing
- Overview: "The results of the bank stress tests may be insufficient to quell fears about the European banking system but markets breathed a sigh of relief and reacted strongly. If bank stocks and CDS levels continue to trade well, that should give more confidence to the sector than any stress test ever could."
- US Rates Strategy: "We examine the Fed’s options to provide further monetary stimulus should growth disappoint and the likely effect on the curve: lowering interest on reserves primarily affects the 2yr point but a commitment to keep rates unchanged for a specified period should have the largest curve effect."
- Euro Rates Strategy: "EMU spreads are tightening in a more benign risk environment. However, we advise being selective with non-core longs as some peripheral markets already look extended on fundamentals. Cross market box trades offer some interesting alternatives to outright spread exposures."
- Sterling Rates Strategy: "The long-end of the gilt curve looks too steep. We suggest looking to scale into 10s-30s gilt flatteners post this week’s supply pressures. Alternatively, the 10s-30s gilt-Bund box has reached even more attractive entry levels week."
- Global Inflation Strategy: "The 30yr IL gilt syndication met with strong demand. We see value in 30yr UK real yields versus 30yr TIPS. Euro break-evens have bounced strongly from their lows, but we remain neutral. BTPei41 offers value."
- APAC Rates Strategy: "We like buying 10yr JGBs on dips. Large depreciation of AUDJPY may trigger 30y receiving. We recommend hedging 10yr JGB longs with 10s30s flatteners in swaps."
- Global Flow Analysis: "Strong and increasing demand for European government bonds and duration. Any worries about higher yields seem to be absent in both Europe and the US."
- August European Supply Outlook: "The strong support for Europe from the excess of coupons and redemptions over issuance in July disappears in August when supply is very light. We expect downward pressure on Italian yields and upward pressure on German yields from changes in their respective NCRs."
- Relative Value: "We suggest switches on the German, French, and Dutch curves."
Citigroup International Interest Rate Strategist 20100729
- US Rates Strategy: "We examine the Fed’s options to provide further monetary stimulus should growth disappoint and the likely effect on the curve: lowering interest on reserves primarily affects the 2yr point but a commitment to keep rates unchanged for a specified period should have the largest curve effect."
- Euro Rates Strategy: "EMU spreads are tightening in a more benign risk environment. However, we advise being selective with non-core longs as some peripheral markets already look extended on fundamentals. Cross market box trades offer some interesting alternatives to outright spread exposures."
- Sterling Rates Strategy: "The long-end of the gilt curve looks too steep. We suggest looking to scale into 10s-30s gilt flatteners post this week’s supply pressures. Alternatively, the 10s-30s gilt-Bund box has reached even more attractive entry levels week."
- Global Inflation Strategy: "The 30yr IL gilt syndication met with strong demand. We see value in 30yr UK real yields versus 30yr TIPS. Euro break-evens have bounced strongly from their lows, but we remain neutral. BTPei41 offers value."
- APAC Rates Strategy: "We like buying 10yr JGBs on dips. Large depreciation of AUDJPY may trigger 30y receiving. We recommend hedging 10yr JGB longs with 10s30s flatteners in swaps."
- Global Flow Analysis: "Strong and increasing demand for European government bonds and duration. Any worries about higher yields seem to be absent in both Europe and the US."
- August European Supply Outlook: "The strong support for Europe from the excess of coupons and redemptions over issuance in July disappears in August when supply is very light. We expect downward pressure on Italian yields and upward pressure on German yields from changes in their respective NCRs."
- Relative Value: "We suggest switches on the German, French, and Dutch curves."
Citigroup International Interest Rate Strategist 20100729
Pan-European:Campeones - UK:Pension Problems Haven’t Gone Away
- Pan-European — Campeones
• Quality — We expect quality will continue to outperform over the medium-term due to growth and balance sheet advantages.
• World champions — We look for world leaders in Europe, where the domicile has impacted the rating. Antofagasta, Inditex, Nestle and Novo Nordisk feature.
- UK — Pension Problems Haven’t Gone Away
• Valuation & Accounting — We feature Sarah Deans’, our new Valuation and Accounting analyst, note on UK pensions in our UK note.
• Potential positives — Proposed changes to pension indexation may reduce liabilities significantly. Many companies have also reduced benefits.
Citigroup European Portfolio Strategist 20100729
• Quality — We expect quality will continue to outperform over the medium-term due to growth and balance sheet advantages.
• World champions — We look for world leaders in Europe, where the domicile has impacted the rating. Antofagasta, Inditex, Nestle and Novo Nordisk feature.
- UK — Pension Problems Haven’t Gone Away
• Valuation & Accounting — We feature Sarah Deans’, our new Valuation and Accounting analyst, note on UK pensions in our UK note.
• Potential positives — Proposed changes to pension indexation may reduce liabilities significantly. Many companies have also reduced benefits.
Citigroup European Portfolio Strategist 20100729
Diverging labor market trends
- US. "It is primarily the weak labor market that is causing Americans to worry and fueling the fear of a double-dip recession. 8½ million people lost their job during the "Great Recession". And a growing population means a further 2½ million entered the labor market (cf. chart below)."
- Vicious circle. "The economic recovery created only a few new jobs, and above all few permanent jobs. Government and temporary-help agencies are responsible for most of the new jobs. And the further weakening of the dynamic in the economy as a whole means that the current development will continue to lag behind earlier labor market cycles for some time to come. This is slowing growth, which in turn is hurting hiring plans."
- Increase. "On top of that, there is the structural change that is making it increasingly difficult for those seeking employment. Jobs in the producing sector are disappearing forever. Job openings will be almost exclusively in the services sector. The prospects for inflexible and poorly-educated applicants are virtually non existent. There is the threat of permanently
higher long-term and core unemployment (pages 2-5)."
- Germany. "The perception is, in contrast, quite different in Germany. Some are even talking about the job miracle. In July, unemployment fell for the 13th consecutive month to the level prior to the Lehman collapse. Even during the crisis, unemployment was with 3¼ mn much lower than had been feared (5 mn) since management and labor agreed on shorter
working hours and the government promoted short-time work massively.
- Forecast. In the short term, the prospects remain favorable. Nevertheless, too many hopes should not be pinned on the creation of new, permanent jobs. In fact, employees will work longer hours again. And companies are focusing more on temporary staff in any case (page 14)."
Unicredit Friday Notes 20100730
- Vicious circle. "The economic recovery created only a few new jobs, and above all few permanent jobs. Government and temporary-help agencies are responsible for most of the new jobs. And the further weakening of the dynamic in the economy as a whole means that the current development will continue to lag behind earlier labor market cycles for some time to come. This is slowing growth, which in turn is hurting hiring plans."
- Increase. "On top of that, there is the structural change that is making it increasingly difficult for those seeking employment. Jobs in the producing sector are disappearing forever. Job openings will be almost exclusively in the services sector. The prospects for inflexible and poorly-educated applicants are virtually non existent. There is the threat of permanently
higher long-term and core unemployment (pages 2-5)."
- Germany. "The perception is, in contrast, quite different in Germany. Some are even talking about the job miracle. In July, unemployment fell for the 13th consecutive month to the level prior to the Lehman collapse. Even during the crisis, unemployment was with 3¼ mn much lower than had been feared (5 mn) since management and labor agreed on shorter
working hours and the government promoted short-time work massively.
- Forecast. In the short term, the prospects remain favorable. Nevertheless, too many hopes should not be pinned on the creation of new, permanent jobs. In fact, employees will work longer hours again. And companies are focusing more on temporary staff in any case (page 14)."
Unicredit Friday Notes 20100730
Japan: Some upside risk to our 2Q real GDP growth forecast
- Some upside risk to our 2Q real GDP growth forecast
• 2Q real GDP growth could possibly reach mid-2% qoq annualized (our current estimate is +0.9%)
• The main factor that could push up real GDP growth is net exports, which grew more strongly than anticipated, as suggested by monthly trade data
• On the outlook for exports, we remain cautiously optimistic over the medium term, as we expect Asian economies will continue to grow
• Yet, we are not confident of a robust positive feedback effect on domestic demand, as the level of economic activity is unlikely to recover enough to promote business fixed investment
- Nominal trade suplus dropped in April-June for the first time in five quarters
• Nominal trade surplus dropped in April-June for the first time in five quarters on the decline in exports
• Prices in transportation, real estate services, etc. continued to fall on weak domestic demand and the cautious stance among corporations for increasing capex spending.
- Demand for loans remains weak
According to the Senior Loan Officer Opinion Survey on Bank Lending Practice in July, the DI for demand for loans among firms worsened 7pts from the previous survey to -17
CreditSuisse Japan Economics Weekly 20100729
• 2Q real GDP growth could possibly reach mid-2% qoq annualized (our current estimate is +0.9%)
• The main factor that could push up real GDP growth is net exports, which grew more strongly than anticipated, as suggested by monthly trade data
• On the outlook for exports, we remain cautiously optimistic over the medium term, as we expect Asian economies will continue to grow
• Yet, we are not confident of a robust positive feedback effect on domestic demand, as the level of economic activity is unlikely to recover enough to promote business fixed investment
- Nominal trade suplus dropped in April-June for the first time in five quarters
• Nominal trade surplus dropped in April-June for the first time in five quarters on the decline in exports
• Prices in transportation, real estate services, etc. continued to fall on weak domestic demand and the cautious stance among corporations for increasing capex spending.
- Demand for loans remains weak
According to the Senior Loan Officer Opinion Survey on Bank Lending Practice in July, the DI for demand for loans among firms worsened 7pts from the previous survey to -17
CreditSuisse Japan Economics Weekly 20100729
Return of double-dip fears
- Market movers: A busy week ahead "Several important economic releases are on the agenda for next week. On Monday we are due to get data on July‟s PMIs for the entire EMEA region. Overall, we expect the PMIs to drop slightly compared with last month‟s figures. On Tuesday we are scheduled to receive numbers on Turkish inflation in July. We expect the numbers to show that Turkish inflation has eased slightly. On Wednesday there is a rate decision in Romania. We expect the central bank to keep rates unchanged. This is also the case for the Czech rate decision on Thursday."
- Fixed income outlook: Keep an eye on Turkish inflation "On Wednesday next week we get data on Turkish inflation. This figure will reveal if the dovish stance from the Turkish central bank (TCMB) is justifiable or not. We expect inflation to have dropped to 8.3% y/y in July, down from 8.4% y/y in June. Hence, this reading should give TCMB – and maybe also the market – some confidence that inflation is no longer accelerating up."
- FX outlook: Will macro momentum continue to fall? "According to the signals from our EMEA FX Scorecard the macro sub-scores have trended down in recent weeks. This is an indication that the macro momentum in the EMEA region is losing steam and that the currencies therefore can no longer find much support in accelerating growth. Next week we are due to receive data on PMIs in the entire region, but also data on industrial production and retail sales in some countries. It will be quite interesting to follow these releases as they will give a clear indication as to whether macro momentum in the EMEA region will continue down."
- Scorecard-based trade of the week Buy CZK/ZAR "For a third week in a row trade Scorecard based trade of the week is CZK/ZAR and the Czech koruna is still the highest scoring currency in our EMEA FX Scorecard and the rand is the lowest scoring currency in the Scorecard. Over the past couple of weeks this cross has been remarkably stable, but the trend remains upward, with CZK continuing to outperform ZAR over the past week."
DenDanske EMEA Weekly 20100730
- Fixed income outlook: Keep an eye on Turkish inflation "On Wednesday next week we get data on Turkish inflation. This figure will reveal if the dovish stance from the Turkish central bank (TCMB) is justifiable or not. We expect inflation to have dropped to 8.3% y/y in July, down from 8.4% y/y in June. Hence, this reading should give TCMB – and maybe also the market – some confidence that inflation is no longer accelerating up."
- FX outlook: Will macro momentum continue to fall? "According to the signals from our EMEA FX Scorecard the macro sub-scores have trended down in recent weeks. This is an indication that the macro momentum in the EMEA region is losing steam and that the currencies therefore can no longer find much support in accelerating growth. Next week we are due to receive data on PMIs in the entire region, but also data on industrial production and retail sales in some countries. It will be quite interesting to follow these releases as they will give a clear indication as to whether macro momentum in the EMEA region will continue down."
- Scorecard-based trade of the week Buy CZK/ZAR "For a third week in a row trade Scorecard based trade of the week is CZK/ZAR and the Czech koruna is still the highest scoring currency in our EMEA FX Scorecard and the rand is the lowest scoring currency in the Scorecard. Over the past couple of weeks this cross has been remarkably stable, but the trend remains upward, with CZK continuing to outperform ZAR over the past week."
DenDanske EMEA Weekly 20100730
Weekly Credit Update
- "Credit spreads continue to move tighter"
- "Bank spreads have outperformed on the back of Basel 3 amendments"
DenDanske Weekly Credit Update 20100730
- "Bank spreads have outperformed on the back of Basel 3 amendments"
DenDanske Weekly Credit Update 20100730
What if the euro zone’s problem was risk aversion?
- "There have been many attempts to explain the low long-term growth (productivity gains) in the euro zone:
• specialisation in unsophisticated services, where productivity is low, and deindustrialisation;
• shortfall in the innovation, R&D and higher education drive;
• labour market rigidity, which prevents the necessary adjustments in employment;
• distortion of income sharing at the expense of wage earners."
- "However, another explanation can be imagined, i.e. excessive risk aversion, which would explain:
• the high level of government expenditure and social welfare, and hence the high tax burden, which discourages corporate investment;
• the small number of innovative companies that become large corporations;
• the preference for risk-free savings (reinforced by financial regulation);
• the high level of precautionary household savings;
• the problem in terms of reallocating employment into more productive sectors."
- "If this is the right explanation, the governments would have to try to help the Europeans overcome their risk aversion (by tax incentives, public equity investors, "flex security" in the labour market, etc.)."
Natixis Flash Economics 368 20100720
• specialisation in unsophisticated services, where productivity is low, and deindustrialisation;
• shortfall in the innovation, R&D and higher education drive;
• labour market rigidity, which prevents the necessary adjustments in employment;
• distortion of income sharing at the expense of wage earners."
- "However, another explanation can be imagined, i.e. excessive risk aversion, which would explain:
• the high level of government expenditure and social welfare, and hence the high tax burden, which discourages corporate investment;
• the small number of innovative companies that become large corporations;
• the preference for risk-free savings (reinforced by financial regulation);
• the high level of precautionary household savings;
• the problem in terms of reallocating employment into more productive sectors."
- "If this is the right explanation, the governments would have to try to help the Europeans overcome their risk aversion (by tax incentives, public equity investors, "flex security" in the labour market, etc.)."
Natixis Flash Economics 368 20100720
The only way to reduce fiscal deficits without killing growth is to offer prospects of an acceleration in long-term growth
- "All OECD countries will have to reduce their fiscal deficits significantly over the next few years. If nothing bolsters the economy, this will lead to a marked reduction in growth, with, moreover, the slowdown in activity being amplified by foreign trade between these countries."
- ""Ricardian neutrality" gives a very partial view of what may be a compensatory mechanism: if there is a reduction in government expenditure, private economic agents expect a reduction in taxes - and hence additional income - in the future, and they accordingly spend more in the short term. However, more generally speaking, what is needed when fiscal deficits are reduced is the expectation that growth will accelerate in the future: governments must show why and how growth will become more robust in the long term than today. This generates expectations about higher incomes in the future (i.e. beyond the short-term effects of fiscal policies)."
- "This has a number of important implications for the fiscal deficit reduction programmes:
• if a hike in certain taxes (welfare contributions, taxes on corporate earnings in countries where profitability is low) would reduce potential growth, these specific taxes should not be increased;
• likewise, government expenditure that is favourable for long-term growth should not be cut (on the contrary, in fact);
• an economic strategy leading to higher growth with quality jobs in the medium term must be established (for example, maintaining a large sophisticated industry in Germany; development of green industries in the United States, etc.). Focusing economic policies on obtaining short-term results (Spain, France, United Kingdom, etc.) may have disastrous results."
Natixis Flash Economics 367 20100716
- ""Ricardian neutrality" gives a very partial view of what may be a compensatory mechanism: if there is a reduction in government expenditure, private economic agents expect a reduction in taxes - and hence additional income - in the future, and they accordingly spend more in the short term. However, more generally speaking, what is needed when fiscal deficits are reduced is the expectation that growth will accelerate in the future: governments must show why and how growth will become more robust in the long term than today. This generates expectations about higher incomes in the future (i.e. beyond the short-term effects of fiscal policies)."
- "This has a number of important implications for the fiscal deficit reduction programmes:
• if a hike in certain taxes (welfare contributions, taxes on corporate earnings in countries where profitability is low) would reduce potential growth, these specific taxes should not be increased;
• likewise, government expenditure that is favourable for long-term growth should not be cut (on the contrary, in fact);
• an economic strategy leading to higher growth with quality jobs in the medium term must be established (for example, maintaining a large sophisticated industry in Germany; development of green industries in the United States, etc.). Focusing economic policies on obtaining short-term results (Spain, France, United Kingdom, etc.) may have disastrous results."
Natixis Flash Economics 367 20100716
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