- "Some economists believe there will be a gradual recovery in growth in OECD countries, as the causes of the crisis are disappearing (excess indebtedness, holding of "rotten" assets) and due to the economic recovery in emerging countries."
- "Others believe there will be a renewed slump in the economies due to the excessively rapid disappearance of the stimulus provided by economic policies (reduction in fiscal deficits, especially in Europe; gradual withdrawal of unconventional monetary policies)."
- "It is certain that fiscal and monetary policies will become more restrictive. To ascertain whether this development will lead to a second dip in the economies, we have to determine whether the balance sheets of economic agents have improved enough. The crisis is actually a result of the deterioration in the balance sheets of households, banks and companies in some countries."
- "What is the situation with regard to balance sheet improvement?
• There are few countries (France, Italy) where households’ balance sheets are good enough to enable household indebtedness to (slowly) pick up again;
• Companies continue to deleverage everywhere, due to their determination to reduce their dependency on external funding;
• The banks’ situation is difficult to assess, in the absence of transparency about the value of the assets held. In several countries (United States, United Kingdom, Spain) borrower defaults are at a very high level, which points to the conclusion that many banks are still facing problems. On top of this, there is the problem of European banks’ holding of public debt."
- "All in all, it seems that it is too early in the process of improving the balance
sheets of private economic agents to bring counter-cyclical policies back to
normal."
Natixis Flash Economics 360 20100713
Could the crisis, paradoxically, have accelerated emerging countries' growth ?
- "In early 2010 there has been very robust growth in emerging countries (except in Central Europe), while the economies of OECD countries are weaker, hence also normally emerging-country exports."
- "By what mechanisms could the crisis, paradoxically, have increased
emerging countries' growth? It could be imagined that:
• faced with the crisis in OECD countries, the emerging countries have stepped up strategies of stimulation of domestic demand;
• the crisis has led to transfers of productive investment from OECD countries to emerging countries;
• the crisis has halted the appreciation of emerging countries' currencies, due to the safe haven role of the dollar;
• or simply that increasingly significant trade between emerging countries
generates a multiplier effect which is sufficient to accelerate these countries' growth or else that the first quarter of 2010 was temporarily strong in OECD countries."
- "In fact, all these explanations are valid and played a role. Even though growth is slowing in OECD countries, the fact that the emerging countries stimulate their domestic demand, benefit from investment transfers, no longer have appreciating currencies and increasingly trade with one another, will maintain high growth in emerging countries."
Natixis Flash Economics 359 20100713
- "By what mechanisms could the crisis, paradoxically, have increased
emerging countries' growth? It could be imagined that:
• faced with the crisis in OECD countries, the emerging countries have stepped up strategies of stimulation of domestic demand;
• the crisis has led to transfers of productive investment from OECD countries to emerging countries;
• the crisis has halted the appreciation of emerging countries' currencies, due to the safe haven role of the dollar;
• or simply that increasingly significant trade between emerging countries
generates a multiplier effect which is sufficient to accelerate these countries' growth or else that the first quarter of 2010 was temporarily strong in OECD countries."
- "In fact, all these explanations are valid and played a role. Even though growth is slowing in OECD countries, the fact that the emerging countries stimulate their domestic demand, benefit from investment transfers, no longer have appreciating currencies and increasingly trade with one another, will maintain high growth in emerging countries."
Natixis Flash Economics 359 20100713
United Kingdom: back to the eighties
- "It’s hard not to compare what is happening now in the UK to the 80s, considering all the glaring similarities:
- the conservatives are back in power with the economy and public finances in shambles;
• the Tory leader’s speeches calling for renewal based on determination, a renewal that requires paying the price for past mistakes;
• policies challenging the principle of the welfare State."
- "The solutions proposed by David Cameron’s government are also reminiscent of those implemented by Margaret Thatcher, where drastic cuts were made in public spending and the economy was liberalized through the introduction of supply-side policies."
- "The UK is the only country that has clearly chosen this path. Has it made the right choice? The answer is double-sided. In the short term, yes, since the budget announcements of David Cameron’s government has helped to dispel the risks weighing on public finances. In the long term, the structural characteristics indicate that return to strong growth could take longer than expected by the government."
Natixis Flash Economics 354 20100708
- the conservatives are back in power with the economy and public finances in shambles;
• the Tory leader’s speeches calling for renewal based on determination, a renewal that requires paying the price for past mistakes;
• policies challenging the principle of the welfare State."
- "The solutions proposed by David Cameron’s government are also reminiscent of those implemented by Margaret Thatcher, where drastic cuts were made in public spending and the economy was liberalized through the introduction of supply-side policies."
- "The UK is the only country that has clearly chosen this path. Has it made the right choice? The answer is double-sided. In the short term, yes, since the budget announcements of David Cameron’s government has helped to dispel the risks weighing on public finances. In the long term, the structural characteristics indicate that return to strong growth could take longer than expected by the government."
Natixis Flash Economics 354 20100708
The double-dip risk and its market implications
- "Market participants face seriously limited visibility on the pace of near-term growth,
particularly for the advanced economies."
- "However, we do not believe that the global economy is about to fall back into a recession."
- "A double-dip – which is not the central scenario we choose – would most likely drive
rates even lower, but bond price upside is fairly limited, particularly at the front end."
- "In the event that the US did become the first to slide back into recession, the USD would be
hard pushed to find any support, at least initially. As the downturn shifts from local to global, it would become clear that there is nowhere to hide from a double-dip scenario. Against this backdrop, the USD would likely regain its status as a safe-haven play."
CreditAgricole Eco News 20100719
particularly for the advanced economies."
- "However, we do not believe that the global economy is about to fall back into a recession."
- "A double-dip – which is not the central scenario we choose – would most likely drive
rates even lower, but bond price upside is fairly limited, particularly at the front end."
- "In the event that the US did become the first to slide back into recession, the USD would be
hard pushed to find any support, at least initially. As the downturn shifts from local to global, it would become clear that there is nowhere to hide from a double-dip scenario. Against this backdrop, the USD would likely regain its status as a safe-haven play."
CreditAgricole Eco News 20100719
Views from the Bund
• Key investment theme: "We believe MSCI China may see a near-term rebound because: (1) MSCI China’s weak performance YTD may have factored in some bad news about the economic slowdown; (2) China’s liquidity situation has started to see some improvements; (3) the Ministry of Agricultural index fell for the second straight month by 1.4% in June, which
could give governing authorities more leeway in their adjustment of monetary policies when needed. However, we stay cautious on MSCI-China because: (1) we see continued downward earnings revision risk as China’s economic slowdown ripples through from macro-sensitive sectors, such as steel, to more downstream sectors such as property, industrials, capital
goods, and airlines, etc; (2) a number of sector-specific policy risks to hurt earnings of and to de-rate multiples of related companies; and (3) banks’ fund-raising activities are only half-way through. Amid market volatilities, we identify investment opportunities from China’s economic rebalancing: (1) China’s consumer staple and low- and medium-end consumer
discretionary sectors, given (a) these sectors’ sticky growth track record both in upturns and downturns of the economic cycle; (b) China’s ongoing wage hikes; (c) the urbanization trend in central and western China; (d) the fact that these sectors are already subject to complete market competition, and are subject to the least policy risk; (e) the emerging consumer finance industry in China to boost consumption. Based on case studies of Hengan and Changyu Wine, we hold our view that quality mid-cap (US$1-3B) names in consumer staple and low- and medium-end consumer discretionary sectors that are trading at teens’ multiples may offer the best opportunity to repeat Hengan’s and Changyu’s very high share price increase of 50x over 10 years. (2) Investment opportunities arising from the Western China Development strategy. (3) Investment opportunities from the railway sector’s visible capex, such as China Railway Group."
• What is changing: "China has released policies such as: (a) introducing the new resource tax charged at 5% of the revenue for coal, natural gas and oil companies; (b) putting price caps for coal companies; and (c) requiring a real name registration system for the online gaming sector."
• China model portfolio adjustment: "We are bullish on consumer staples low- and medium-end consumer discretionary, expressways, IPPs, banks, and insurance, while we are bearish on commodities, property, energy, paper, and airlines."
JPMorgan China Equity Strategy Economics 20100716
could give governing authorities more leeway in their adjustment of monetary policies when needed. However, we stay cautious on MSCI-China because: (1) we see continued downward earnings revision risk as China’s economic slowdown ripples through from macro-sensitive sectors, such as steel, to more downstream sectors such as property, industrials, capital
goods, and airlines, etc; (2) a number of sector-specific policy risks to hurt earnings of and to de-rate multiples of related companies; and (3) banks’ fund-raising activities are only half-way through. Amid market volatilities, we identify investment opportunities from China’s economic rebalancing: (1) China’s consumer staple and low- and medium-end consumer
discretionary sectors, given (a) these sectors’ sticky growth track record both in upturns and downturns of the economic cycle; (b) China’s ongoing wage hikes; (c) the urbanization trend in central and western China; (d) the fact that these sectors are already subject to complete market competition, and are subject to the least policy risk; (e) the emerging consumer finance industry in China to boost consumption. Based on case studies of Hengan and Changyu Wine, we hold our view that quality mid-cap (US$1-3B) names in consumer staple and low- and medium-end consumer discretionary sectors that are trading at teens’ multiples may offer the best opportunity to repeat Hengan’s and Changyu’s very high share price increase of 50x over 10 years. (2) Investment opportunities arising from the Western China Development strategy. (3) Investment opportunities from the railway sector’s visible capex, such as China Railway Group."
• What is changing: "China has released policies such as: (a) introducing the new resource tax charged at 5% of the revenue for coal, natural gas and oil companies; (b) putting price caps for coal companies; and (c) requiring a real name registration system for the online gaming sector."
• China model portfolio adjustment: "We are bullish on consumer staples low- and medium-end consumer discretionary, expressways, IPPs, banks, and insurance, while we are bearish on commodities, property, energy, paper, and airlines."
JPMorgan China Equity Strategy Economics 20100716
The last defence against a sharp contraction in activity: The monetary defence
- "Globalisation and competition from emerging countries are likely to lead to a sharp contraction in activity in most OECD countries."
- "In order to withstand this development, these countries have used:
• first private-sector indebtedness, which had to be interrupted in 2007-2008, and which caused the banking crisis;
• then government indebtedness, which had to be interrupted in 2010."
- "The only remaining defence against a drop in activity is currently the monetary defence."
- "Due to the very low interest rates and the abundance of liquidity, central
banks are enabling:
• the private sector to deleverage more easily;
• banks to finance the low-quality assets and loans they still have in their balance sheets;
• some over-indebted countries to obtain refinancing."
- "The "monetary defence" is thus preventing a surge in household and corporate bankruptcies, a fresh banking crisis and certain countries from defaulting. Removing the monetary defence would lead to a new and drastic crisis and a collapse in activity."
Natixis Flash Economics 356 20100712
- "In order to withstand this development, these countries have used:
• first private-sector indebtedness, which had to be interrupted in 2007-2008, and which caused the banking crisis;
• then government indebtedness, which had to be interrupted in 2010."
- "The only remaining defence against a drop in activity is currently the monetary defence."
- "Due to the very low interest rates and the abundance of liquidity, central
banks are enabling:
• the private sector to deleverage more easily;
• banks to finance the low-quality assets and loans they still have in their balance sheets;
• some over-indebted countries to obtain refinancing."
- "The "monetary defence" is thus preventing a surge in household and corporate bankruptcies, a fresh banking crisis and certain countries from defaulting. Removing the monetary defence would lead to a new and drastic crisis and a collapse in activity."
Natixis Flash Economics 356 20100712
Non-commercial investors turn short USD
- "The latest IMM data covers the week from 6 July to 13 July."
- "Following the USD peak in early June (since which the USD has corrected 5%
lower), speculative investors have gradually reduced their long positions and have
now once again turned net short USD. This shift partly reflects an unwinding of short
EUR positions, but also the build-up in long AUD, CAD, CHF and JPY positions."
- "Positioning risk has become more two-sided in EUR/USD. Since net short EUR
positions peaked at 40% of open interest in early May (a 3 sigma event), threequarters
of these have been unwound. This implies that the upside risk on EUR/USD,
all other things equal, has been reduced. The latest move in EUR/USD towards 1.30
after the IMM data was collected is likely to have seen EUR shorts further reduced."
- "The JPY has been on a bullish trend since May (appreciating close to 10% in effective
terms) coinciding with a 180-degree turnaround in speculative positioning. After
being net short JPY to the tune of 45% of open interest in early May, non-commercial
investors are now net long with 35% of open interest. As the JPY rises, however, so
does the probability of intervention by the Bank of Japan, which only amplifies the
downside risk on JPY that already exists from positioning."
DenDanske IMM Positioning 20100719
- "Following the USD peak in early June (since which the USD has corrected 5%
lower), speculative investors have gradually reduced their long positions and have
now once again turned net short USD. This shift partly reflects an unwinding of short
EUR positions, but also the build-up in long AUD, CAD, CHF and JPY positions."
- "Positioning risk has become more two-sided in EUR/USD. Since net short EUR
positions peaked at 40% of open interest in early May (a 3 sigma event), threequarters
of these have been unwound. This implies that the upside risk on EUR/USD,
all other things equal, has been reduced. The latest move in EUR/USD towards 1.30
after the IMM data was collected is likely to have seen EUR shorts further reduced."
- "The JPY has been on a bullish trend since May (appreciating close to 10% in effective
terms) coinciding with a 180-degree turnaround in speculative positioning. After
being net short JPY to the tune of 45% of open interest in early May, non-commercial
investors are now net long with 35% of open interest. As the JPY rises, however, so
does the probability of intervention by the Bank of Japan, which only amplifies the
downside risk on JPY that already exists from positioning."
DenDanske IMM Positioning 20100719
Asian growth stays strong, with signs of a soft-landing
- Asian growth stays strong, with signs of a soft-landing "The key data releases over the past week were China and Singapore second quarter GDP. Markets generally reacted positively to signs of a soft-landing in China and continued robust growth in Singapore,
despite expectations of a weaker second half as global demand declines."
- China’s second quarter GDP growth eases… "Recent tightening measures appear to be working, as China’s Q2 GDP growth came in slightly lower-than expected at 10.3% y/y, in line with other slowing indicators such as industrial production, M2, retails sales, and fixed assets (see Highlight). Inflation for June came in much lower than expected (2.9% y/y), helping to ease concerns of overheating, and reducing the likelihood of additional tightening measures in
the near term. Other export-oriented economies in the region are still booming, such as Singapore which posted another quarter of rapid GDP growth (see Highlight). Both Singapore and Japan raised their official economic growth forecasts for 2010 to 13-15% (from 7-9%) and 2.6% (from 1.8%), respectively. India posted an inflation outturn of 10.55% in June, rising expectations of further interest rates hikes in the next monetary policy meeting scheduled on July 27th."
- …monetary tightening continues "As expected, Thailand raised its policy rate by 25bps to 1.50% last week, following similar moves in recent weeks by Korea, Malaysia, Taiwan, and India. On the other hand, Japan and Philippines remained on hold. Tightening measures reveal the region’s confidence in the growth outlook (see IMF Hightlight)."
- In the coming week…. "The coming week is relatively light on data releases. Markets will focus on June’s CPI inflation for Hong Kong, Singapore and Malaysia, and exports orders for June in Taiwan."
BBVA Asia Weekly Watch 20100719
despite expectations of a weaker second half as global demand declines."
- China’s second quarter GDP growth eases… "Recent tightening measures appear to be working, as China’s Q2 GDP growth came in slightly lower-than expected at 10.3% y/y, in line with other slowing indicators such as industrial production, M2, retails sales, and fixed assets (see Highlight). Inflation for June came in much lower than expected (2.9% y/y), helping to ease concerns of overheating, and reducing the likelihood of additional tightening measures in
the near term. Other export-oriented economies in the region are still booming, such as Singapore which posted another quarter of rapid GDP growth (see Highlight). Both Singapore and Japan raised their official economic growth forecasts for 2010 to 13-15% (from 7-9%) and 2.6% (from 1.8%), respectively. India posted an inflation outturn of 10.55% in June, rising expectations of further interest rates hikes in the next monetary policy meeting scheduled on July 27th."
- …monetary tightening continues "As expected, Thailand raised its policy rate by 25bps to 1.50% last week, following similar moves in recent weeks by Korea, Malaysia, Taiwan, and India. On the other hand, Japan and Philippines remained on hold. Tightening measures reveal the region’s confidence in the growth outlook (see IMF Hightlight)."
- In the coming week…. "The coming week is relatively light on data releases. Markets will focus on June’s CPI inflation for Hong Kong, Singapore and Malaysia, and exports orders for June in Taiwan."
BBVA Asia Weekly Watch 20100719
The Hesitation Blues
- "Recovery’s apparent loss of momentum stops well short of signaling an economywide decline in activity. Barring a further breakdown in financial conditions, we anticipate second half growth in a range of 2% to 2½%."
- "Fed officials revised down their own growth and inflation forecasts but remained more upbeat than our own projections. Officials have deemphasized exit strategy discussions and acknowledged the revival of downside risks. But their baseline view does not support active consideration of new policy options."
- "Unconventional monetary policy proved highly effective in restoring key elements of financial stability. While conditions have weakened again somewhat, policymakers’ near-term message likely will reaffirm a readiness to support recovery."
- "Core retail sales rose in June but downward revisions to previous levels reveal greater hesitancy to spend among consumers despite solid income gains. A parallel retreat in business confidence underscores the importance of securing a more supportive financial setting."
Citigroup Comments on Credit 20100716
- "Fed officials revised down their own growth and inflation forecasts but remained more upbeat than our own projections. Officials have deemphasized exit strategy discussions and acknowledged the revival of downside risks. But their baseline view does not support active consideration of new policy options."
- "Unconventional monetary policy proved highly effective in restoring key elements of financial stability. While conditions have weakened again somewhat, policymakers’ near-term message likely will reaffirm a readiness to support recovery."
- "Core retail sales rose in June but downward revisions to previous levels reveal greater hesitancy to spend among consumers despite solid income gains. A parallel retreat in business confidence underscores the importance of securing a more supportive financial setting."
Citigroup Comments on Credit 20100716
White biotech: Revolution in instalments
- "Industrial biotechnology offers huge development opportunities for the chemicals industry, enabling more efficient processes, innovative products and reduced dependence on the raw material oil. However, there is still a long way to go in building a chemicals industry geared to biomass. The main obstacles are price competition from established value chains based on oil and rivalry between medical and industrial biotech in the race for R&D funds."
DeutscheBank Talking Point 20100719
DeutscheBank Talking Point 20100719
Top 10 Questions for 2H10
- Will There Be a Double-Dip Recession?
- Will Sovereign Balance Sheets Turn into a Global Crisis?
- Can Emerging Markets Drive Global Growth?
- Is the Treasury Rally Sustainable?
- Where to Invest in a Rising Rate Environment?
- Are Corrections a Buying Opportunity?
- Why is Selectivity Important?
- Is Investor Demand Enough to Support Gold?
- What Will Drive Oil and Grains Higher in the Near-Term?
- How Important are Asset Allocation Principles?
DeutscheBank Global Outlook July2010
- Will Sovereign Balance Sheets Turn into a Global Crisis?
- Can Emerging Markets Drive Global Growth?
- Is the Treasury Rally Sustainable?
- Where to Invest in a Rising Rate Environment?
- Are Corrections a Buying Opportunity?
- Why is Selectivity Important?
- Is Investor Demand Enough to Support Gold?
- What Will Drive Oil and Grains Higher in the Near-Term?
- How Important are Asset Allocation Principles?
DeutscheBank Global Outlook July2010
The Global FX Monthly Analyst
- "In recent weeks the US growth outlook has deteriorated again, which translates into weaker USD forecasts."
- "Some fiscal/political worst-case scenarios in the Euro-zone have not materialised, although near-term risks remain.""
- "Talk about reserve diversification into JPY and reduced scope for intervention create JPY upside risks."
- "The CHF may strengthen further, linked to sticky safe-haven flows, strong growth and unwinding risks for CHF funding trades."
GoldmanSachs Global FX Monthly Analyst July2010
- "Some fiscal/political worst-case scenarios in the Euro-zone have not materialised, although near-term risks remain.""
- "Talk about reserve diversification into JPY and reduced scope for intervention create JPY upside risks."
- "The CHF may strengthen further, linked to sticky safe-haven flows, strong growth and unwinding risks for CHF funding trades."
GoldmanSachs Global FX Monthly Analyst July2010
Chips, Double-Dips, and a Bullish Bias
- Risk aversion migrates to overstated double-dip concerns — "Sovereign sensitivity has diminished, but the ongoing downward revision to growth expectations is weighing on the markets. The negative momentum probably isn’t over, but an increasing part of the market is discounting the full doubledip and this isn’t reflected in the forward-looking data."
- Expect mixed messages in 2Q earnings — "Strong earnings momentum will be hard to maintain. Our economists expect a meager 2% earnings beat in 2Q. Outlook statements are likely to reflect weaker economic sentiment, though we believe the downside is largely priced in."
- Maintaining a long bias in credit — "The resilience of credit spreads over the last month suggests positioning is now much more balanced. Against attractive valuations and our impression that cash holdings have been built up, we continue to believe that credit spreads can perform despite the challenging backdrop."
- Bonds over CDS — "Derivatives and CDS indexes have outperformed in the rally. Our preference is for adding to cash positions."
- Pockets of value — "Basic materials, energy, financials and TMT are still our favorites. We also see good value in tobacco post-DOJ. Add exposure to highcoupon bank TruPS, which are likely candidates for take-out in 2013."
Citigroup US Credit Outlook 20100716
- Expect mixed messages in 2Q earnings — "Strong earnings momentum will be hard to maintain. Our economists expect a meager 2% earnings beat in 2Q. Outlook statements are likely to reflect weaker economic sentiment, though we believe the downside is largely priced in."
- Maintaining a long bias in credit — "The resilience of credit spreads over the last month suggests positioning is now much more balanced. Against attractive valuations and our impression that cash holdings have been built up, we continue to believe that credit spreads can perform despite the challenging backdrop."
- Bonds over CDS — "Derivatives and CDS indexes have outperformed in the rally. Our preference is for adding to cash positions."
- Pockets of value — "Basic materials, energy, financials and TMT are still our favorites. We also see good value in tobacco post-DOJ. Add exposure to highcoupon bank TruPS, which are likely candidates for take-out in 2013."
Citigroup US Credit Outlook 20100716
Yuan as a reserve currency: Likely prospects & possible implications
— "Rising US indebtedness combined with China’s rising economic and financial prowess have led some analysts to forecast the decline of the dollar and the rise of the yuan as the dominant reserve currency. While the macro-conditions such as economic size and trade openess will soon be in place, China will need to make the yuan convertible, create deep and liquid domestic bond markets and improve the rule of law. However, even then, network externalities, political obstacles and peer competitors do not make it a foregone conclusion that the yuan will emerge as the dominant reserve currency."
— "It will take China 15-20 years to put in place the conditions necessary for the yuan to emerge as an important reserve currency and even longer to rival the dollar as the dominant reserve currency. The yuan is set to become one of the major reserve currencies sometime after 2030. By then, three reserve currencies (dollar, euro, yuan) are likely to co-exist, reflecting the underlying tripolar structure of the international economic system."
— "The emergence of the yuan as a reserve currency would confer moderate financial and significant non-financial benefits on China. More significantly, the decline of the dollar would impose tangible constraints on US economic and financial flexibility. In addition to rising financing costs and lower seigniorage revenues, a declining dollar would lead to a hardening of the balance-of-payments constraint. This would have wider geo-political repercussions and affect the political standing of the US in the world."
DeutscheBank Research Briefing 20100716
— "It will take China 15-20 years to put in place the conditions necessary for the yuan to emerge as an important reserve currency and even longer to rival the dollar as the dominant reserve currency. The yuan is set to become one of the major reserve currencies sometime after 2030. By then, three reserve currencies (dollar, euro, yuan) are likely to co-exist, reflecting the underlying tripolar structure of the international economic system."
— "The emergence of the yuan as a reserve currency would confer moderate financial and significant non-financial benefits on China. More significantly, the decline of the dollar would impose tangible constraints on US economic and financial flexibility. In addition to rising financing costs and lower seigniorage revenues, a declining dollar would lead to a hardening of the balance-of-payments constraint. This would have wider geo-political repercussions and affect the political standing of the US in the world."
DeutscheBank Research Briefing 20100716
Readings
More On Deficit Limits - Paul Krugman
Misunderstanding Modern Monetary Theory - Credit Writedowns
Do sovereign debt ratios matter? - China Financial Markets
Is Galbraith Right that Deficits are Never a Problem? - Economist's View
Fighting deflation - Econbrowser
Hungary Resists New Budget Cuts Despite Pressure - New York Times
Print job - Free Exchange
The question is: Is the era of cheap Chinese labour over? - Economist
Hungary's IMF revolt augurs ill for Greece - Telegraph
Laurence Kotlikoff replies to Lord Turner: Part 1 - FT Economist's Forum
Germany's New Economic Miracle - Spiegel
Misunderstanding Modern Monetary Theory - Credit Writedowns
Do sovereign debt ratios matter? - China Financial Markets
Is Galbraith Right that Deficits are Never a Problem? - Economist's View
Fighting deflation - Econbrowser
Hungary Resists New Budget Cuts Despite Pressure - New York Times
Print job - Free Exchange
The question is: Is the era of cheap Chinese labour over? - Economist
Hungary's IMF revolt augurs ill for Greece - Telegraph
Laurence Kotlikoff replies to Lord Turner: Part 1 - FT Economist's Forum
Germany's New Economic Miracle - Spiegel
The Lowdown on the Slowdown
- "Real GDP growth appears to have dropped below its 2½%-3% long-term potential range last quarter, judging from the latest data on retail sales and foreign trade. We have cut our estimate for second-quarter growth from 3% to 2% (annual rate)."
- "This slowdown is occurring just ahead of the loss of growth support from fiscal stimulus and the inventory cycle that we have been anticipating would occur at midyear. With the various headwinds to private-sector growth (excess vacant housing, state and local budget stresses, lack of lending, reluctance to hire) still firmly in place, we reaffirm our view that real GDP will grow at only a 1½% rate during the second half of 2010, and we worry that eacceleration in 2011 will not occur as now projected."
- "Despite these growing downside risks, US authorities do not exhibit much urgency to apply more policy stimulus. For example, the FOMC made only brief reference to this possibility in he minutes of its June 22-23 meeting and that was heavily qualified. The data have been lmost uniformly weaker than expected since then. This may prompt Chairman Bernanke to express more concern at next week’s monetary policy hearings, though all indications are that stimulus is not being actively considered."
- "What could the FOMC do given that the funds rate is already at the zero bound? The most likely option is to resume asset purchases in some fashion. Treasuries would be more effective than MBS in lowering real longer-term interest rates, but Fed officials may resist in fear of charges of monetization. Raising the inflation objective is even more unlikely, though it could be quite effective."
- "For its part, Congress can and should extend unemployment benefits, provide more aid to state and local governments, and extend some of the tax cuts due to expire at yearend."
GoldmanSachs US Economics Analyst 20100716
- "This slowdown is occurring just ahead of the loss of growth support from fiscal stimulus and the inventory cycle that we have been anticipating would occur at midyear. With the various headwinds to private-sector growth (excess vacant housing, state and local budget stresses, lack of lending, reluctance to hire) still firmly in place, we reaffirm our view that real GDP will grow at only a 1½% rate during the second half of 2010, and we worry that eacceleration in 2011 will not occur as now projected."
- "Despite these growing downside risks, US authorities do not exhibit much urgency to apply more policy stimulus. For example, the FOMC made only brief reference to this possibility in he minutes of its June 22-23 meeting and that was heavily qualified. The data have been lmost uniformly weaker than expected since then. This may prompt Chairman Bernanke to express more concern at next week’s monetary policy hearings, though all indications are that stimulus is not being actively considered."
- "What could the FOMC do given that the funds rate is already at the zero bound? The most likely option is to resume asset purchases in some fashion. Treasuries would be more effective than MBS in lowering real longer-term interest rates, but Fed officials may resist in fear of charges of monetization. Raising the inflation objective is even more unlikely, though it could be quite effective."
- "For its part, Congress can and should extend unemployment benefits, provide more aid to state and local governments, and extend some of the tax cuts due to expire at yearend."
GoldmanSachs US Economics Analyst 20100716
Stress test: no stairway to heaven
- FI Strategizer: "Next week, many factors will be bond-friendly: macroeconomic data should come in on the soft side both in the EU and in US, while the message in Bernanke’s testimony should be cautious, in line with the recent FOMC Minutes. Only positive US 2Q earnings releases could support risky assets. In the EU, focus will be on the stress test results."
- EU banks stress test: "On 23 July, only consolidated results at country level will be published. Market reaction will depend on the disclosure and credibility of hypothesis and on the relative weakness of EU countries."
- EU Portfolio Strategy: "We increase holdings of Germany, which would benefit from a rise in market tensions. On the peripheral side, we did not make any major changes."
- Trade Idea: "Germany will issue the new Bund Jul42, which will be the longest 30Y on the eurozone curve. The coupon should be 3.25%. A first calculation suggests that the fair value of the new Bund Jul42 should be SW+14bp, 4bp more expensive than DSL Jan42."
- MM: "This week, ECB borrowing has fallen further by EUR 16bn, bringing excess liquidity to around EUR 115bn (a lower level than during the first months of this year). Banks tried to lengthen maturity, bidding more at the 1M LTRO and less at the 1W MRO."
- Supply Corner: "Next week, gross supply should be EUR 6/6.5bn, almost all coming from Germany with the new 30Y, Bund Jul42, and the rest from Ireland. Liquidity will come from France, with the redemption of BTAN-ei Jul25 (EUR 9.3bn). Greece will issue EUR 1.5bn of 13W T-bills."
- FX Strategizer: "Market perspectives may easily become much cloudier, as signs that the global economic cycle is cooling down have increased further. Risk lovers may easily find a less smooth road from now on."
- EUR: "As long as the mix of healthy US stock markets and poor US data releases persist, a EUR-USD rally up to 1.32-1.33 may be in the offing. Yet, we would not bet again on a sustained rise well beyond that area."
- JPY: "Risks of less "brilliant" global economic growth should offer the JPY an extended period of relative strength: USD-JPY is set to test 86.50 at least, locking EUR-JPY further in the 110/114 band."
- CHF: "We still warn to handle with care any EUR-CHF bounce, as global uncertainty will keep demand for the Swiss franc high, paving the way for a EUR-CHF retreat towards and below 1.30 in the medium term."
- GBP: "Next week, UK retail sales for June and the advance GDP for 2Q10 should come in firm enough, both to take cable above April’s highs at 1.5525 and to drag EUR-GBP again towards the edge of 0.83."
- Pacific Rim & CAD: "The three dollars should be handled with caution at present due to risk of large swings. USD-CAD will be also influenced by the BoC meeting outcome on Tuesday that has become a close call."
- Nordics: "The full break of 9.40 and 7.90 won’t be immediate, thus exposing both EUR-SEK and EUR-NOK to big swings ahead, but selling these two EUR crosses above 9.45 and 8.00 is still recommended."
Unicredit Curves & Crosses 20100716
- EU banks stress test: "On 23 July, only consolidated results at country level will be published. Market reaction will depend on the disclosure and credibility of hypothesis and on the relative weakness of EU countries."
- EU Portfolio Strategy: "We increase holdings of Germany, which would benefit from a rise in market tensions. On the peripheral side, we did not make any major changes."
- Trade Idea: "Germany will issue the new Bund Jul42, which will be the longest 30Y on the eurozone curve. The coupon should be 3.25%. A first calculation suggests that the fair value of the new Bund Jul42 should be SW+14bp, 4bp more expensive than DSL Jan42."
- MM: "This week, ECB borrowing has fallen further by EUR 16bn, bringing excess liquidity to around EUR 115bn (a lower level than during the first months of this year). Banks tried to lengthen maturity, bidding more at the 1M LTRO and less at the 1W MRO."
- Supply Corner: "Next week, gross supply should be EUR 6/6.5bn, almost all coming from Germany with the new 30Y, Bund Jul42, and the rest from Ireland. Liquidity will come from France, with the redemption of BTAN-ei Jul25 (EUR 9.3bn). Greece will issue EUR 1.5bn of 13W T-bills."
- FX Strategizer: "Market perspectives may easily become much cloudier, as signs that the global economic cycle is cooling down have increased further. Risk lovers may easily find a less smooth road from now on."
- EUR: "As long as the mix of healthy US stock markets and poor US data releases persist, a EUR-USD rally up to 1.32-1.33 may be in the offing. Yet, we would not bet again on a sustained rise well beyond that area."
- JPY: "Risks of less "brilliant" global economic growth should offer the JPY an extended period of relative strength: USD-JPY is set to test 86.50 at least, locking EUR-JPY further in the 110/114 band."
- CHF: "We still warn to handle with care any EUR-CHF bounce, as global uncertainty will keep demand for the Swiss franc high, paving the way for a EUR-CHF retreat towards and below 1.30 in the medium term."
- GBP: "Next week, UK retail sales for June and the advance GDP for 2Q10 should come in firm enough, both to take cable above April’s highs at 1.5525 and to drag EUR-GBP again towards the edge of 0.83."
- Pacific Rim & CAD: "The three dollars should be handled with caution at present due to risk of large swings. USD-CAD will be also influenced by the BoC meeting outcome on Tuesday that has become a close call."
- Nordics: "The full break of 9.40 and 7.90 won’t be immediate, thus exposing both EUR-SEK and EUR-NOK to big swings ahead, but selling these two EUR crosses above 9.45 and 8.00 is still recommended."
Unicredit Curves & Crosses 20100716
What 2Q Earnings Will Tell Us:… Ugh .. Quarter Past Wasn’t Bad
- "Corporate profits likely grew sequentially in the second quarter with both GDP and total hours worked growing about 3 ¼%. Late quarter weakness and strong 3Q consensus estimates should limit potential for positive guidance."
- "While we might be too pessimistic, our sitting 2Q estimate for S&P 500 operating EPS is just 2% above bottom-up consensus estimates. This is our least robust “beat forecast” of the past five quarters. We still see S&P 500 operating EPS 25% above a year ago and up about 7% in 2011."
- "Overall, macro concerns considered by anticipatory financial markets – some already evident in the very latest data – are unlikely to be fully reflected in the current views of company managements. The selloff in financial markets suggests lowered expectations both long-run and short-run, which could be helpful for markets."
Citigroup Portfolio Economics 20100715
- "While we might be too pessimistic, our sitting 2Q estimate for S&P 500 operating EPS is just 2% above bottom-up consensus estimates. This is our least robust “beat forecast” of the past five quarters. We still see S&P 500 operating EPS 25% above a year ago and up about 7% in 2011."
- "Overall, macro concerns considered by anticipatory financial markets – some already evident in the very latest data – are unlikely to be fully reflected in the current views of company managements. The selloff in financial markets suggests lowered expectations both long-run and short-run, which could be helpful for markets."
Citigroup Portfolio Economics 20100715
Doubting deflation
- Macro viewpoint: Doubting deflation "While deflation, which we define as a YoY decline in prices, is a possibility, what is needed to trigger a policy response and more relevant to the broader economy is the prospect of a general and sustained deflation. General in that the decline in prices is widespread, and sustained in that these declines persist for a protracted
period of time. If the economy evolves roughly according to our expectations, the risk of a sustained price deflation remains unlikely."
- Fed watch: Avant le déluge "Next week’s semiannual testimony by Fed Chairman Bernanke should address a number of issues raised by the June FOMC minutes."
- The week ahead: Housing to remain weak "The housing market takes center stage next week: builder sentiment, housing starts and existing home sales are all released. With the homebuyer tax credit pulling sales forward into the spring, we expect the general tone of the data to be weak. While the data calendar is light, the Fed calendar heats up. Chairman
Bernanke heads to Capitol Hill to deliver his semi-annual monetary policy report to both houses of Congress. On Wednesday, he testifies before the Senate and on Thursday before the House."
Merrill Lynch US Economic Weekly 20100716
period of time. If the economy evolves roughly according to our expectations, the risk of a sustained price deflation remains unlikely."
- Fed watch: Avant le déluge "Next week’s semiannual testimony by Fed Chairman Bernanke should address a number of issues raised by the June FOMC minutes."
- The week ahead: Housing to remain weak "The housing market takes center stage next week: builder sentiment, housing starts and existing home sales are all released. With the homebuyer tax credit pulling sales forward into the spring, we expect the general tone of the data to be weak. While the data calendar is light, the Fed calendar heats up. Chairman
Bernanke heads to Capitol Hill to deliver his semi-annual monetary policy report to both houses of Congress. On Wednesday, he testifies before the Senate and on Thursday before the House."
Merrill Lynch US Economic Weekly 20100716
US Rate & MBS Strategy Weekly
- Treasuries decouple from risk assets: "Over the past six weeks treasury yields have declined sharply even as risk conditions improved, reflecting a growth slowdown even as tail risks recede."
- Neutral on Duration: "Lingering concerns around the Euro area and talk of unconventional easing should keep Treasuries rich to macro-fundamentals."
- QE Redux or QE Unwind: "Implications of the Fed’s gradual portfolio unwind."
- Primary Dealers are Becoming Less Active in Treasury Auctions: "Direct bidder
participation is on the rise. As customer flows through dealers decrease, primary dealers will demand higher yields at auctions to compensate for this increased uncertainty."
- Wait to go long 1y10y vol: "We recommend turning neutral to those that are currently long. We look to go long in the 95-100bp/annum area."
- Stay in up-in-coupon and Ginnie/Fannie MBS: "supply, convexity, investor demand, and carry remain favorable in higher coupons and Ginnies"
- Agency Debt: "We recommend extending from 2-yr to 3-yr bullets to pick up yield and return. 3-mo options look unattractive given high negative convexity."
- US Rate Strategy Model Portfolio: "The portfolio is up 1.0% month-to-date."
Citigroup US Rate MBS Strategy Weekly 20100716
- Neutral on Duration: "Lingering concerns around the Euro area and talk of unconventional easing should keep Treasuries rich to macro-fundamentals."
- QE Redux or QE Unwind: "Implications of the Fed’s gradual portfolio unwind."
- Primary Dealers are Becoming Less Active in Treasury Auctions: "Direct bidder
participation is on the rise. As customer flows through dealers decrease, primary dealers will demand higher yields at auctions to compensate for this increased uncertainty."
- Wait to go long 1y10y vol: "We recommend turning neutral to those that are currently long. We look to go long in the 95-100bp/annum area."
- Stay in up-in-coupon and Ginnie/Fannie MBS: "supply, convexity, investor demand, and carry remain favorable in higher coupons and Ginnies"
- Agency Debt: "We recommend extending from 2-yr to 3-yr bullets to pick up yield and return. 3-mo options look unattractive given high negative convexity."
- US Rate Strategy Model Portfolio: "The portfolio is up 1.0% month-to-date."
Citigroup US Rate MBS Strategy Weekly 20100716
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