This document provides a summary of weekly economic headlines and insights from June 2015. It discusses the Greek debt crisis and referendum rejecting austerity measures, the ongoing recoveries in the Eurozone and Japan, and factors that could lead to faster US growth in the second half of the year. It also covers recent stock market turmoil in China, fluctuations in global bond yields, the likelihood the US Federal Reserve will begin raising interest rates in September, and trends in asset allocation.
All eyes on the Fed, but what sort of cut?Hantec Markets
It is an incredibly important week for markets with the big focus on the monetary policy meeting of the Federal Reserve. A rate cut is guaranteed, but what will forward guidance bring? We look at the impact on forex, equities and commodities.
Bond markets remain in focus after recent curve inversionHantec Markets
Economic data for the US is key to how bond yields respond and how this impacts across major markets. The first week of the month is always jam packed with tier one data and this one could be key for the dollar. We look at the impact on forex, equities and commodities.
Olivier DEsbarres: What to expect in 2016 – same, same, but worseOlivier Desbarres
It is clear that markets so far this year are trading on sentiment, more specifically fear, with hard-data playing second fiddle. Or more accurately, price action suggests that markets are focusing on disappointing December numbers (e.g. US ISM) or even reasonably uneventful data (Chinese manufacturing PMI) and ignoring strong data such as U.S non-farm payrolls, Chinese services PMI and exports (see Figure 1). The hit-and-miss approach of Chinese policy-makers to stabilise equity markets (and ultimately growth) have done little to restore confidence. I nevertheless flag in Figure 37 some of the key data and events to focus on this year.
« Market Perspectives » est notre revue mensuelle des marchés. Elle présente de la façon la plus synthétique possible :
- notre analyse des principaux faits marquants et indicateurs macro susceptibles de dessiner les marchés sur le mois.
- notre vision sur les différentes classes d’actifs
Cette revue sera continument enrichie avec nos indicateurs quantitatifs.
La plupart de nos analyses sont disponibles sur www.finlightresearch.com
Our monthly publication “Market Perspectives” presents a synthetic view of all the asset classes we cover.
The report is composed of six sections covering Macro, Equities, FI & credit, FX, Commodities and Alternatives.
Each section is preceded by a summary of our views on the related asset class.
Most of our publications are available on our web site www.finlightresearch.com
All eyes on the Fed, but what sort of cut?Hantec Markets
It is an incredibly important week for markets with the big focus on the monetary policy meeting of the Federal Reserve. A rate cut is guaranteed, but what will forward guidance bring? We look at the impact on forex, equities and commodities.
Bond markets remain in focus after recent curve inversionHantec Markets
Economic data for the US is key to how bond yields respond and how this impacts across major markets. The first week of the month is always jam packed with tier one data and this one could be key for the dollar. We look at the impact on forex, equities and commodities.
Olivier DEsbarres: What to expect in 2016 – same, same, but worseOlivier Desbarres
It is clear that markets so far this year are trading on sentiment, more specifically fear, with hard-data playing second fiddle. Or more accurately, price action suggests that markets are focusing on disappointing December numbers (e.g. US ISM) or even reasonably uneventful data (Chinese manufacturing PMI) and ignoring strong data such as U.S non-farm payrolls, Chinese services PMI and exports (see Figure 1). The hit-and-miss approach of Chinese policy-makers to stabilise equity markets (and ultimately growth) have done little to restore confidence. I nevertheless flag in Figure 37 some of the key data and events to focus on this year.
« Market Perspectives » est notre revue mensuelle des marchés. Elle présente de la façon la plus synthétique possible :
- notre analyse des principaux faits marquants et indicateurs macro susceptibles de dessiner les marchés sur le mois.
- notre vision sur les différentes classes d’actifs
Cette revue sera continument enrichie avec nos indicateurs quantitatifs.
La plupart de nos analyses sont disponibles sur www.finlightresearch.com
Our monthly publication “Market Perspectives” presents a synthetic view of all the asset classes we cover.
The report is composed of six sections covering Macro, Equities, FI & credit, FX, Commodities and Alternatives.
Each section is preceded by a summary of our views on the related asset class.
Most of our publications are available on our web site www.finlightresearch.com
Swedbank's Global Economic Outlook, 2010 March 18Swedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Olivier desbarres what you may have missed and why it mattersOlivier Desbarres
Financial Expert Olivier Desbarres looks back at the financial news from the 2014 Christmas period. Highlighting the important snippets of worldwide news, Olivier discusses what implications these financial news could mean for the global economies.
Financial Wealth Management benefits a basic knowledge of the current economic climate. Download this free report on the state of the economy, government, and how they affect YOU.
Fasanara Capital Investment Outlook | February 1st 2015
1. Seismic Activity On The Rise
2. No Volatility No Gain
3. The Role Of Optionality
4. Crystal Ball
5. Deflation Is A Multi-Year Process
6. Three Big Trades for 2015
US inflation in focus with bond markets increasingly keyHantec Markets
There has been a significant shift in the outlook on bond markets and this is impacting across asset classes. How this plays out in the coming days could be key for the medium term outlook. Focus is on US inflation data this week. We consider the outlook on forex, equities and commodities markets.
Will US stronger US relative economic performance continue? Hantec Markets
With the US Government shutdown coming to an end, delayed US data will begin to filter through and after the dovish shift from the Fed it will be interesting to see if US economic outperformance continues to show and how this impacts on the dollar. We look at the key factors impacting on forex, equities and commodities this week.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Greece negotiations and tier one US data key for traders this weekHantec Markets
Negotiations between Greece and its creditors (the IMF and the EU) continue, but as yet there is no deal. Greek claims
that a deal was close were swiftly rebuffed by the IMF, leaving Greece still without the final €7.2bn bailout tranche it
needs to pay €1.6bn of debt repayments owed to the IMF in June. However, it would appear a 5th June deadline (for a €300m repayment) is not actually a deadline at all. There is an IMF technicality that allows a lumping together of all
payments, to then be paid at the end of the month.
I wanted to pass along our 4th quarter Economic Insights piece that we have just put together. This is a 15 page chart book that reviews market performance and looks at the various events that will impact the markets in the coming months. Of particular note, I think you will find the correlation of the markets and the U.S. election interesting (page 8). We also point out a number of themes (on pages 4-5) that could affect all of our client portfolios. As always, we use a lot of graphs and pictures to try and paint a simple story.
The rise in bond yields in developed economies in the past 6 weeks remains one of the over-riding themes as we head into the last seven days of the US presidential campaigns.
Markets are now fretting about the implications for global growth and asset valuations and ultimately whether elevated global risk appetite will correct more forcefully.
Higher international commodity prices, a pick-up in global GDP growth in Q3 and early Q4 and easing deflation fears suggest that interest rate policies in developed economies may have reached an important inflexion point – in line with the view I expressed six weeks ago.
Developed central banks may refrain from loosening monetary policy further near-term, with the exception of the RBNZ and possibly ECB. At the very least, policy-makers will tweak a discourse which has largely focused on doing “whatever it takes”.
Recent US data have paved the paved the way for a 14th December Fed hike, conditional on Democrat candidate Hilary Clinton wining the 8th November US presidential elections.
But with the exception of the Fed and possibly a handful of EM central banks, rate hikes are a story for the latter part of 2017 (perhaps) while further rate cuts remain on the cards in Brazil, Russia, Indonesia and India.
Higher global yields and still uncertain US election outcome are taming global equities and volatility has spiked but EM currencies have still managed to eek out modest gains.
Assuming Hilary Clinton wins next week, I would expect the initial reaction to be a rally in global equities, EM currencies and Dollar and an underperformance of safe-haven assets.
But I would also expect market pricing for a December Fed hike to rise a little further, which could in turn eventually curtail any rally in global equities and EM currencies.
In this scenario, the Dollar would likely end the year stronger, as per my January forecast of a third consecutive year of albeit more modest Dollar gains.
Whether global risk appetite avoids its early 2016 fate will depend on the interconnected factors of underlying macro data and the Fed’s credibility. In any case, market volatility could spike in the run-up to March 2017.
The self-reinforcing sell-off in Sterling and UK bonds has only very recently abated, with markets seemingly taken some comfort from a number of factors including the only modest slowdown in UK GDP growth to 0.5% qoq in Q3.
But optimism over UK GDP data is not warranted as growth has become more unbalanced and slowed in August-September despite a significant easing in UK monetary policy.
1. Reflation Phase To Be Temporary, More Downside Ahead
Earlier on in 2016, ‘random and violent markets’ went off to panic mode out of (i) fears over China’s messy stock market and devaluing currency, (ii) plummeting oil price, (iii) strong US Dollar. Today, we believe complacent markets are similarly illogical and over-shooting, this time on the way up. As we re-assess the validity of the underlying risks, we expect a shift in narrative in the few months ahead and a sizeable sell-off for risk assets.
2. Four Key Conviction Ideas
We analyze below our key ideas for the next 12 months:
Short Chinese Renminbi Thesis. In Q1, China only managed to keep GDP in shape by means of graciously expanding credit by a monumental 1 trn $. Unsurprisingly, at 250% total debt on GDP, you cannot borrow 10% of GDP per quarter for long, without a currency adjustment, whether desired or not.
Short Oil Thesis. Long-term, we believe Oil will follow a volatile path around a declining trend-line, which will take it one day to sub-10$. Within 2016, we expect global aggregate demand to stay anemic and supply to surprise on the upside, inventories to grow, primarily due to the accelerating speed of technological progress.
Short S&P Thesis. To us, the S&P is priced to perfection, despite a most cloudy environment for growth and risk assets, thus representing a good value short, for limited upside is combined with the risk of a sizeable sell-off in the months ahead.
Short European Banks Thesis. We believe that micro policies at the local level, while valid, are impotent against heavy structural macro headwinds, and only the macro environment can save the banking sector in its current form in the longer-term. Macro structural headwinds for banks these days are too heavy a burden (negative sloped interest rate curves, deeply negative interest rates, deflationary economy, depressed GDP growth, over-regulation, Fintech), and will likely push valuations to new lows in the months/years ahead.
Swedbank's Global Economic Outlook, 2010 March 18Swedbank
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Olivier desbarres what you may have missed and why it mattersOlivier Desbarres
Financial Expert Olivier Desbarres looks back at the financial news from the 2014 Christmas period. Highlighting the important snippets of worldwide news, Olivier discusses what implications these financial news could mean for the global economies.
Financial Wealth Management benefits a basic knowledge of the current economic climate. Download this free report on the state of the economy, government, and how they affect YOU.
Fasanara Capital Investment Outlook | February 1st 2015
1. Seismic Activity On The Rise
2. No Volatility No Gain
3. The Role Of Optionality
4. Crystal Ball
5. Deflation Is A Multi-Year Process
6. Three Big Trades for 2015
US inflation in focus with bond markets increasingly keyHantec Markets
There has been a significant shift in the outlook on bond markets and this is impacting across asset classes. How this plays out in the coming days could be key for the medium term outlook. Focus is on US inflation data this week. We consider the outlook on forex, equities and commodities markets.
Will US stronger US relative economic performance continue? Hantec Markets
With the US Government shutdown coming to an end, delayed US data will begin to filter through and after the dovish shift from the Fed it will be interesting to see if US economic outperformance continues to show and how this impacts on the dollar. We look at the key factors impacting on forex, equities and commodities this week.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Greece negotiations and tier one US data key for traders this weekHantec Markets
Negotiations between Greece and its creditors (the IMF and the EU) continue, but as yet there is no deal. Greek claims
that a deal was close were swiftly rebuffed by the IMF, leaving Greece still without the final €7.2bn bailout tranche it
needs to pay €1.6bn of debt repayments owed to the IMF in June. However, it would appear a 5th June deadline (for a €300m repayment) is not actually a deadline at all. There is an IMF technicality that allows a lumping together of all
payments, to then be paid at the end of the month.
I wanted to pass along our 4th quarter Economic Insights piece that we have just put together. This is a 15 page chart book that reviews market performance and looks at the various events that will impact the markets in the coming months. Of particular note, I think you will find the correlation of the markets and the U.S. election interesting (page 8). We also point out a number of themes (on pages 4-5) that could affect all of our client portfolios. As always, we use a lot of graphs and pictures to try and paint a simple story.
The rise in bond yields in developed economies in the past 6 weeks remains one of the over-riding themes as we head into the last seven days of the US presidential campaigns.
Markets are now fretting about the implications for global growth and asset valuations and ultimately whether elevated global risk appetite will correct more forcefully.
Higher international commodity prices, a pick-up in global GDP growth in Q3 and early Q4 and easing deflation fears suggest that interest rate policies in developed economies may have reached an important inflexion point – in line with the view I expressed six weeks ago.
Developed central banks may refrain from loosening monetary policy further near-term, with the exception of the RBNZ and possibly ECB. At the very least, policy-makers will tweak a discourse which has largely focused on doing “whatever it takes”.
Recent US data have paved the paved the way for a 14th December Fed hike, conditional on Democrat candidate Hilary Clinton wining the 8th November US presidential elections.
But with the exception of the Fed and possibly a handful of EM central banks, rate hikes are a story for the latter part of 2017 (perhaps) while further rate cuts remain on the cards in Brazil, Russia, Indonesia and India.
Higher global yields and still uncertain US election outcome are taming global equities and volatility has spiked but EM currencies have still managed to eek out modest gains.
Assuming Hilary Clinton wins next week, I would expect the initial reaction to be a rally in global equities, EM currencies and Dollar and an underperformance of safe-haven assets.
But I would also expect market pricing for a December Fed hike to rise a little further, which could in turn eventually curtail any rally in global equities and EM currencies.
In this scenario, the Dollar would likely end the year stronger, as per my January forecast of a third consecutive year of albeit more modest Dollar gains.
Whether global risk appetite avoids its early 2016 fate will depend on the interconnected factors of underlying macro data and the Fed’s credibility. In any case, market volatility could spike in the run-up to March 2017.
The self-reinforcing sell-off in Sterling and UK bonds has only very recently abated, with markets seemingly taken some comfort from a number of factors including the only modest slowdown in UK GDP growth to 0.5% qoq in Q3.
But optimism over UK GDP data is not warranted as growth has become more unbalanced and slowed in August-September despite a significant easing in UK monetary policy.
1. Reflation Phase To Be Temporary, More Downside Ahead
Earlier on in 2016, ‘random and violent markets’ went off to panic mode out of (i) fears over China’s messy stock market and devaluing currency, (ii) plummeting oil price, (iii) strong US Dollar. Today, we believe complacent markets are similarly illogical and over-shooting, this time on the way up. As we re-assess the validity of the underlying risks, we expect a shift in narrative in the few months ahead and a sizeable sell-off for risk assets.
2. Four Key Conviction Ideas
We analyze below our key ideas for the next 12 months:
Short Chinese Renminbi Thesis. In Q1, China only managed to keep GDP in shape by means of graciously expanding credit by a monumental 1 trn $. Unsurprisingly, at 250% total debt on GDP, you cannot borrow 10% of GDP per quarter for long, without a currency adjustment, whether desired or not.
Short Oil Thesis. Long-term, we believe Oil will follow a volatile path around a declining trend-line, which will take it one day to sub-10$. Within 2016, we expect global aggregate demand to stay anemic and supply to surprise on the upside, inventories to grow, primarily due to the accelerating speed of technological progress.
Short S&P Thesis. To us, the S&P is priced to perfection, despite a most cloudy environment for growth and risk assets, thus representing a good value short, for limited upside is combined with the risk of a sizeable sell-off in the months ahead.
Short European Banks Thesis. We believe that micro policies at the local level, while valid, are impotent against heavy structural macro headwinds, and only the macro environment can save the banking sector in its current form in the longer-term. Macro structural headwinds for banks these days are too heavy a burden (negative sloped interest rate curves, deeply negative interest rates, deflationary economy, depressed GDP growth, over-regulation, Fintech), and will likely push valuations to new lows in the months/years ahead.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.
1. Global activity easing
2. Slowdown most apparent in euro area
3. China transitioning to slower growth, service economy
4. Central banks pulling back from tightening
5. UK growth dependent on Brexit: exit deal could see GDP growth > 1.0% this year, no deal growth could be < 0.5%
6. Risks to global growth tilting to downside
Markets coming to terms with Greek deal this week Hantec Markets
That noise you can hear is the sound of a collective sigh of relief. But maybe it’s as much one of relief for the avoidance of a Grexit, as it is relief that the whole sorry episode is coming to an end. The whole lot of them should hang their heads in shame. No-one has come out well from this.
Cover Story End to QE: Not a great idea for Asia?
Outlook Chinese Yuan
Stats India Gloom on GDP, Fiscal Deficit and Mining and Manufacturing output
Emerging Country Nigeria
In Focus Facts on Food Security Bill
« Market Perspectives » est notre revue mensuelle des marchés. Elle présente de la façon la plus synthétique possible :
- notre analyse des principaux faits marquants et indicateurs macro susceptibles de dessiner les marchés sur le mois.
- notre vision sur les différentes classes d’actifs
Cette revue sera continument enrichie avec nos indicateurs quantitatifs.
La plupart de nos analyses sont disponibles sur www.finlightresearch.com
Our monthly publication “Market Perspectives” presents a synthetic view of all the asset classes we cover.
The report is composed of six sections covering Macro, Equities, FI & credit, FX, Commodities and Alternatives.
Each section is preceded by a summary of our views on the related asset class.
Most of our publications are available on our web site www.finlightresearch.com
http://pwc.to/1cpYR81
En octobre, les décideurs de partout dans le monde se sont réunis à Washington DC pour faire le bilan des perspectives économiques mondiales. Pour la première fois depuis 2010, le pronostic d’une reprise soutenue pour les économies développées devrait être positif.
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10 principal economic insights june 2015
1. WEEKLY HEADLINES
MEET THE AUTHORS
ECONOMIC INSIGHTS
BY BOB BAUR, ROBIN ANDERSON, AND THE ECONOMIC COMMITTEE / JUNE 2015
GREECE: JUST SAY NO:
No more taxes; no more austerity; no
more demands; maybe no more euro.
EUROZONE, JAPAN
RECOVERIES ON TRACK:
Recent data has improved; unless derailed
by the Greek crisis, positive earnings and
growth surprises will continue.
. 7 REASONS FOR FASTER U.S.
GROWTH:
Find out what could spell faster U.S.
growth in the second half.
. PANIC IN BEIJING, WHAT
REFORMS? The recent nosedive in
Chinese stock indices has unnerved
officials who have unleashed an almost
daily campaign of public statements
and easier policy to stem the carnage.
YIELDS: UP, DOWN, AND ALL
AROUND:
Eight reasons why the Fed will begin its
interest-rate normalization in September
. ASSET ALLOCATION TRENDS
June was a tough month for both
stocks and bonds; seven reasons one
could stay positive on equities.
No more taxes; no more austerity; no more debt payments; no more
creditor demands; perhaps no more euro. The “no” votes totaled over
60%, a huge win for Prime Minister Tsipras. The vote was unexpected
because most Greeks want to stay in the euro; however, voters appeared
to believe Tsipras’ protestations that the referendum was not a vote on
euro membership. Surprise; it may have been.
The “no” voters rejoiced in the streets, but, there may be little to celebrate.
If young Greek voters read the question as, “Do want more economic
pain?” and voted “Of course not,” they may be disappointed. Greek
banks are closed to prevent deposit flight and may remain shuttered. The
emergency funds provided by the European Central Bank (ECB) will run
out shortly and the Council will meet Monday to decide whether to keep
funding withdrawals. ATMs are out of funds; businesses have little way to
finance imported goods. A rumor sweeping the blogs over the weekend,
swiftly denied by officials, about a “bail-in” of bank deposits that was
coming; it happened in Cyprus.
STALEMATE:
The range of possible but unpredictable outcomes has widened including
Greece’s exit from the Eurozone; a quick resolution may not happen. The
vote strengthened the Prime Minister in negotiations, but creditors say it’s
up to him to chart the way forward. For their side, the creditors cannot be
seen to be caving; otherwise, demands for debt relief and restructuring
will spread to Spain and Portugal; left-leaning political parties could gain
broad ascendance.
FOREIGN POLICY PROBLEMS:
The biggest long-term risk for Europe and perhaps the United States is
the possible opening a Greece exit from the Eurozone offers Russia and/
or China. Greece joined NATO, a military alliance for the collective defense
of member countries, in 1952. Many associated with the far-left Syriza
party may identify as much with Russia as with Europe. So, if Greece exits
the currency union, it could align with Russia, and potentially create real
political turmoil within NATO.
GREECE: JUST SAY NO
ECONOMIC INSIGHTS / JUNE 2015 1
Robert F. Baur, Ph.D.
Chief Global Economist
Robin Anderson, Ph.D.
Senior Economist
2. ECONOMIC INSIGHTS / JUNE 2015 2
LIMITED CONTAGION:
As noted last week, financial contagion beyond
Greece should be modest. The Eurozone economy,
ex Greece, is in much better shape: Spain and
Portugal are growing nicely; Italy and France are
exiting the doldrums; and unemployment is falling.
Lower oil prices, a weaker currency, cheap interest,
and banks willing to lend are behind the progress.
Second, most Greek sovereign debt is in official
hands; only 10% or so is held by the private sector,
so Euro-area banks are not heavily exposed. Most
of the remaining 10% is held within Greece, so the
broader Eurozone is not imperiled. Third, Greece
only accounts for about 2% of Eurozone GDP and
exports to Greece from within the union are small.
DRAGHI, ONCE MORE WITH FEELING:
Further, the ECB is fully prepared and Draghi’s
“whatever it takes” to keep the euro intact
comments still apply. The ECB is buying bonds and
can tailor its purchases as necessary. In an interview
with Les Echos, ECB Council member Benoit Coeure
stated that the ECB has “broad discretion” with its
current instruments and could develop new ones
to dampen spread widening. If liquidity becomes
an issue, the ECB can restart its targeted lending
program. Uncertainty about Greece’s status within
the Eurozone will remain for some time, but the
risks of contagion are much less than earlier.
Despite the “no” vote and Greek debt uncertainty,
recent Eurozone data suggest the recovery
continues. The manufacturing business survey hit a
14-month high of 52.5 in June. Ex-Greece, surveys of
peripheral countries remained robust, Spain’s index
softened to a still strong 54.5 and Italy’s ticked
down to 54.1 from 54.8. The European Commission’s
sentiment index declined slightly from the recent
high of 103.9 in March to 103.5. Deflation fears are
receding as the headline consumer price index was
down slightly, but stayed positive, at a 0.2% gain
year-over-year versus a 0.3% gain in May.
Japan continues to recover from last year’s
weakness, but progress is halting. As noted in the
past, first-quarter GDP growth was upwardly revised
strongly to 3.9%; and high-frequency data suggests
growth was at least positive last quarter. The Tankan
survey of business conditions picked up broadly
in the second quarter and capex plans improved.
Retail sales rose robustly in May, up 1.7% over the
prior month. Industrial output fell sharply, down
2.2% in the month after a nice 1.2% rise in April.
Financial markets may stumble or even stagger
some until there is more clarity around Greece. But,
overall, the developed world is becoming the driver
of global growth, even more so than emerging
markets, which are struggling with the fading of
China’s two-decade investment boom. We look for
more, positive growth and earnings surprises in
both the Eurozone and Japan in coming months.
The rebound from a tepid first quarter is under way;
there are several reasons why second half growth
could be an upside surprise.
1. Housing is picking up steam: homebuilder
confidence is the best since 2005; housing
starts and pending sales are well over a million
annual rate; household formation is surging;
inventories of homes for sale are very low.
Housing activity is a powerful economic
tailwind as furniture and appliance sales rise.
2. Consumer and small business confidence
are near the highest since 2006 and 2007,
respectively. Households and business leaders
are shedding the caution so ingrained by the
severity of the financial crisis. PCRD, Post Crisis
Relapse Disorder where you wake up every day
EUROZONE,JAPAN
RECOVERIESSTILL
INFORCE
SEVENREASONS
FORFASTERU.S.
GROWTH
3. ECONOMIC INSIGHTS / JUNE 2015 3
thinking you’re still in a recession, is fading.
3. Wages are set to accelerate. Yes, growth in
average hourly earnings has been muted, but
most other wage-tracking series show faster
gains. Low inflation improves real income.
4. Consumer spending is back in style; car sales
are surging; and retail sales are strong.
5. Job gains have exceeded 100,000 per month
for 36 straight months, one of the best records
ever. Future new hires may slow some as the
labor market tightens, making wage gains more
likely.
6. Improved capital spending may result from
subpar productivity growth. Rising wages
should encourage businesses to invest to
improve worker efficiency. Faster sales and
revenue growth may also spur capex.
7. The capex and layoff drag related to the oil
price plunge may be diminishing. Jobless claims
in Texas and North Dakota have quit rising
and the drop in the oil rig count appears to be
bottoming.
Baseline forecasts for U.S. growth for 2015 and 2016
are in the tables at the end of the commentary;
selected estimates of U.S. data are below.
WHATREFORMS?
PANICINBEIJING
U.S. Forecast Table 2014 (A) 2015 (E) 2016 (E)
Real GDP +2.4% +2.3% +2.9%
Domestic Final Sales +2.5% +2.8% +2.8%
U.S. Auto Sales (units) 16.5m (5.9%) 17.2m (4.0%) 17.5m (2.0%)
Industrial Production +4.2% +2.1% +2.4%
Housing Starts 1.003 (8.5%) 1.100 (10.0%) 1.200 (10.7%)
After Tax Corporate Profits (National
Income and Products Accounts)
+3.8% +5.0% +5.0%
Federal Budget Balance (Fiscal Years) -$0.5T -$0.5T -$0.5T
Civilian Unemployment Rate 6.2% 5.4% 5.0%
CPI – Overall +1.6% +0.2% +2.1%
CPI – ex Food & Energy +1.7% +1.7% +2.0%
GDP Price Index +1.5% +0.8% +1.8%
Sources are in the tables at the end of the commentary
A - Actual
E - Estimated
Panic may be too strong a word for the official
attitude in Beijing after the collapse in equity
markets there the last three weeks, but, it’s not far
off. The 28.6% crash in the Shanghai Composite
and the 33.2% nosedive in the Shenzhen Composite
from the June 12th peak through July 3rd trimmed
trillions of yuan market value. So unnerving was
the plunge, officials unleashed a torrent of hasty
measures almost every day to support the market.
Last weekend, cuts to interest rates and reserve
requirements; Monday, official news articles
suggested that Chinese stocks were in for a 30-year
Golden Age, that investors should relax as margin
trading was under control; that pension funds would
soon be investing in stocks.
CHINA’S VERSION OF “WHATEVER IT
TAKES”:
On Tuesday, the China Securities Journal said that
an improving economy and easy policy would
support the market. Transaction fees were lowered
4. ECONOMIC INSIGHTS / JUNE 2015 4
on Wednesday. Margin rules were loosened on
Friday so investors can underwrite their margin
borrowing with real estate, i.e., they now can
“bet the house” on stocks. They also have longer
to satisfy margin calls. Initial public offerings
have been suspended and investors will have
cash subscriptions returned. Over the weekend, 21
brokers pledged to use 15% of their net assets to
support the market with no sales taking place when
the Shanghai Composite is below 4,500, currently
about 3,800. Past pledges for market reforms go
by the wayside when emergencies happen.
ECONOMY NOT SUPPORTING STOCKS:
China’s business surveys hovered around 50 once
again, with the government PMI slightly above
and the HSBC survey slightly below. May hard
data such as retail sales and industrial production
suggested growth was stabilizing at a slower
pace. The Keqiang Index (named after the current
Premier), which pulls together easy to interpret
activity numbers of rail freight, bank loans, and
electricity consumption, slowed to a smoothed 1.6%
year-over-year pace, nearing lows last seen in the
financial crisis. The NBS business cycle indicator fell
to an all-time low. The fading investment boom will
not support a strong rally.
Developed-country sovereign yields were volatile
the first half of 2015; rates on 10-year U.S. Treasury
bonds peaked at 2.49% in early June after hitting
a 12-month low of 1.64% in January. Low growth
expectations, deflation worries in the Eurozone,
the announcement of large ECB bond purchases,
sluggish data from China, and shockingly weak
first-quarter U.S. reports pushed yields to the
lowest in recorded history in Europe. Aggressive
traders jumped on the trends to buy dollars, U.S.
Treasurys and Bunds, sell euros, and borrow cheap
euros to buy higher-yielding U.S. bonds, reinforcing
the momentum.
Then, whoosh, the bond party was over. Deflation
concerns vanished, investors assumed Greece
and its creditors would reach some resolution and
growth reports improved. As signals switched,
the U.S. dollar peaked, oil prices troughed, the
momentum tide turned, and safe-haven yields
soared. U.S. rate trends are in the table below.
Interest Rates 12/31/2012 12/31/2013 12/31/2014
07/03/2014
(High)*
01/30/2015
(Low)*
06/30/2015
Current
2-year 0.26% 0.38% 0.66% 0.51% 0.45% 0.64%
10-year 1.76% 3.03% 2.17% 2.64% 1.64% 2.35%
10-2 spread 1.50% 2.65% 1.51% 2.13% 1.19% 1.71%
30-year 2.95% 3.97% 2.75% 3.47% 2.22% 3.12%
*Twelve month high and low, based on the 10-year Treasury bond over the prior 12 months
Source: Bloomberg
YIELDS:UP,DOWN
ANDALLAROUND
WHAT DOES THE FED THINK?
The policy statement after the June meeting
contained an upgraded economic assessment in
line with better data and signaled that, while Fed
funds liftoff would come this year, the trajectory of
hikes would be slow. The market assumes an even
slower normalization and the Fed is moving that
way: seven of the 17 federal open market committee
(FOMC) members indicated they would favor one or
no rate hikes this year, up from only two in March.
WILL GREECE MATTER?
New York Fed President Dudley suggested it might.
In a recent speech, he prepared investors for a
September liftoff saying a rate hike at that time
was “very much in play.” But, he then warned that
even though the direct impact of a Greek default on
the United States would be minimal, Greece was a
“wild card” and that the “market implications of a
Greek exit from the euro could be graver than many
investors seem to believe.” He went on to observe
that “people underestimate the different channels
5. ECONOMIC INSIGHTS / JUNE 2015 5
YEAREND RATES YE 2015 2016
Federal Funds 0.625%-0.75% 1.25%-1.5%
2-Year UST Yield 0.75%-1.0% 1.5%-1.75%
10-Year UST Yield 2.5% 3.0%
2-10 Year Spread 1.25%-1.5% 1.25%-1.5%
ASSET
ALLOCATION
TRENDS
in terms of how contagion works,” and compared
the Greek turmoil to the 2008 Lehman failure and its
unanticipated impacts.
Dudley’s comparison of Greece with Lehman was
poorly drawn and highly gratuitous. As noted above,
Greece is pretty well ringfenced: Euro area growth
is improving, few private investors own Greek
bonds, and the ECB has wide discretion in monetary
policy to halt Greek contagion. We’d view another
downdraft on the “no” vote as a buying opportunity.
EIGHT REASONS FOR SEPTEMBER:
Why is a fall liftoff coming?
1. It can’t be December; would the Fed put a lump
of coal in Christmas stockings? Surely not.
2. The Committee badly wants to get off zero:
ultra-low rates are distorting capital markets;
they need bullets for the next recession; to
answer why raise rates, the Fed’s Fisher said, “It’s
about time.”
3. Labor market slack is rapidly shrinking; the
unemployment rate is close to equilibrium; the
number of unemployed per job opening is near
prior-expansion peaks; and layoffs are negligible.
4. All wage series except average hourly earnings
(in the payroll report) show acceleration.
5. With wages picking up, the Fed can be confident
inflation is heading toward target.
6. Commodity prices are no longer plunging, so
deflation is not an issue.
7. U.S. economic data are rebounding; job growth is
still on track; and housing activity is surging.
8. Consumer confidence is near cycle highs and
close to averages of prior expansions. For the
Fed, what’s not to like? Our estimates of future
yields are in the table below.
June was an ugly month for investors and
diversification offered no gains or solace. Greece,
lackluster global growth, slowdowns in China and
the developing world, spikes in long-term interest
rates, and queasiness over potential Fed rate hikes, all
kept markets uneasy. Unless one owned Mongolian,
Russian, and Icelandic stocks or corn, wheat, and
soybeans, none of which were high on any asset
allocator’s list, returns were in the red. Equities were
broadly lower in June: the S&P 500 Index fell 2.1%;
MSCI Europe and MSCI Emerging Market indices
were both off 3.2%. Stocks plunged in China as the
Shanghai and Shenzhen Composites dropped 7.2%
and 11.8%, respectively. Even MSCI Japan, a strong
year-to-date performer up 15.0%, fell 3.2% in June,
but was still up 5% for the quarter.
Neither REIT nor bond investors fared any better.
MSCI US and MSCI Global REIT indices fell 5.1% and
4.6% in June and 11.3% and 8.6% for the second
quarter, respectively. Most Barclays bond indices
were in the red for both the month and quarter; the
index for U.S. long Treasurys dropped 3.8% in June
and 8.3% in the quarter as 10-year yields rose from
1.92% to 2.35% from the end of March through June.
SEVEN REASONS TO STAY EQUITY POSITIVE:
At least for a while.
1. The U.S. expansion is one of the most
underappreciated in history. Private-sector GDP
has grown 3.25% annually for five-and-a-half
years, an excellent performance. It’s only because
government spending (as accounted for in the
National Income and Product Accounts) has
shrunk 1.2% each of those five-and-a-half years
that real U.S. GDP, at 2.3% annually, is thought
anemic.
2. No recession signs on the horizon. None of the
typical harbingers of a downturn are visible: oil
price shock; aggressive Fed rate hikes; rising
6. ECONOMIC INSIGHTS / JUNE 2015 6
inflation; increasing defaults; widening credit
spreads; slow job growth; or higher jobless
claims; none are in view.
3. Sentiment stays very cautious. Bullish fever
is near record lows and flows have left equity
mutual funds for most of the rally. Pundits worry
about an overvalued market, Greece and Fed
rate hikes.
4. The Fed is about to raise rates. Yes, but, the
market should be okay with that; it’s the real,
final, official recognition that the U.S. economy is
actually, really, honestly healthy.
5. Global growth is picking up. Unless
bushwhacked by Greece, economies in the
Euro area and Japan should improve. Growth in
China appears to be stabilizing, which will keep
the rest of emerging markets from crises. The
economic cycle is not over.
6. The financial sector has had good returns.
Higher long-term interest rates, within reason,
help banks as net-interest margin rises. Weak
financial stocks can be an early indicator of a
slump and it’s not happening.
7. Lots of stimulus is still in the pipeline. Monetary
easing continues around the world with lower
rates most recently in Serbia, New Zealand,
South Korea, India, and Sweden. Even after a
couple of rate hikes, Fed policy will still be ultra-
accommodative.
There certainly are risks to equity markets and some
of the worst fears could surely be realized. U.S.
stocks are fully valued and future returns will likely
be limited to earnings gains plus dividends. However,
with interest rates still very low, equities seem to
offer more value than bonds at least for a while
yet. We also expect positive earnings and growth
surprises yet in the Euro area and Japan.
7. ECONOMIC INSIGHTS / JUNE 2015 7
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