2011 july-17


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2011 july-17

  1. 1. MACROCOMMENTARY Stalos Capital For independent investors 2011, n°36 July 15This week…. Moody’s put the US triple A ranking on review EQ3 as the last resort weapon to save the US economy Greece and Ireland sovereign debt cut again by rating agency Chinese GDP in Q2 beat the estimates to 9.5% but inflation increases to 6.4% Indian inflation accelerates to 9.44% BOJ left interest rates unchanged to 0.10% Macroeconomic analysis  United States  Euro Area  Other countries
  2. 2. United States The Federal Reserve may keep interest The minutes from the FOMC meeting on rates at record lows for the longest period 22nd June reveal that, despite the evident since World War II. The 3 percentage point slowdown in GDP growth, there is little ap- gap between yields for three-month and 10- petite among Fed officials for a third round year Treasuries indicates the economy may of quantitative easing (QE3), at least not in grow 1.1% in the 12 months ending June the short term. It is not really surprising 2012, according to a study by the Fed Bank considering the US situation. Even if some of Cleveland. That’s less than half the cen- members like the ideas, they cannot afford tral bank’s current forecast. The last time it. According to the minutes only some par- the Fed maintained such prolonged mone- ticipants thought it would be appropriate to tary support for the economy was from provide additional stimulus in the medium 1937 to 1947. From 1941 to 1951 the cen- term if the unemployment rate remained tral bank also bought Treasuries as America elevated, and even then not unless inflation grappled with the need to fund World War had fallen back. Fed Chairman Ben Bernan- II, convert the U.S. back to a peacetime kes written semi-annual testimony repeats economy, and pay for the Marshall Plan to the main message . QE3 would be a possibil- rebuild Western Europe. Slower expansion ity, but only if deflationary risks re-emerge. means the Fed is unlikely to tighten credit In other words, it is a possibility next year if until June 2012, the longest static period inflation drops back, but not in the short since the government forced the central term. bank to buy Treasuries during the 1940s. Import price index dropped minus 0.5% Any spending cuts agreed by President (less than the consensus –0.6%) in June for Barack Obama and Congress before the the first time in a year as oil and food ex- Aug. 2 deadline to raise the $14.3 trillion penses retreated. Prices excluding petrole- debt limit may restrain the economy. um fell 0.2%, the first decline since July The economy’s inability to produce jobs 2010. Compared with a year earlier, import may be the biggest obstacle for the Fed be- prices rose 13.9%, the biggest 12-month fore it can remove the support it has provid- advance since August 2008. The cost of im- ed with purchases of $2.3 trillion in assets ported petroleum fell 1.6% m/m. Even with and the reduction of its overnight lending the decrease, the cost was still up 50% from rate to near zero. The U.S. has added 1.7 a year earlier. Imported food was 1.9% million jobs since the start of 2010, after cheaper last month, the largest decline losing 8.7 million in 2008 and 2009. The since February 2009. Companies are, none- unemployment rate stands at 9.2% against theless, feeling the effects of more expen- 4.4 % in 2007. sive goods. Input cost inflation and air freight expenses will reduce gross margins The Fed completed its $600 billion of pur- by at least 300 basis points for the first chases of Treasury debt on June 30, though quarter of fiscal year 2012, according to it could continue to reinvest about $300 Donald Blair, chief financial officer of the billion of proceeds from maturing mortgage Nike. -related assets and government securities into U.S. government debt in order not to contract the supply of money. 2 - Stalos Capital 2011
  3. 3. The 0.4% decline in the producer-price in- outstanding bonds and notes even thoughdex followed a 0.2% gain in May. The core the risk remains low. It is unthinkable thatmeasure, which excludes volatile food and Democrats and Republican do not find anenergy costs, increased 0.3%, more than agreement about the debt. But this will notprojected. The rise in commodities prices changes the issue of the American debts.this year, which prompted some U.S. com- Taking in considerations different agenciespanies to pass them along to customers, is the total US debt amount is around 130% ofstarting to ease for the moment. Fuel costs GDP. The triple A ratings of financial institu-dropped 2.8%, the most since July 2009. tions directly linked to the U.S. government,Residential electric prices fell by a record 2% including Fannie Mae, Freddie Mac, the Fed-in June. eral Home Loan Banks, and the Federal Farm Credit Banks, were also put on reviewConsumer price index inflation peaked at for cuts.. Moody’s also placed 7,000 munici-3.6% in June, but core inflation edged up to pal (equivalent of $130 billion) ratings on1.6% last month, from 1.5%, and will contin- review for possible downgrade.ue to climb over the next few months. Over-all consumer prices fell by 0.2% m/m in The 0.1% m/m increase in retail sales inJune, thanks mainly to a 6.8% m/m decline June was a bit better than expected. But thein gasoline prices. In contrast, excluding key point is that the level of sales has beenfood and energy, core prices increased by pretty much unchanged for the last three0.3% m/m. At 1.6%, the annual core rate is months and annualised real consumptionstill below the Feds target of about 2%, but growth in the second quarter as a wholethe three-month annualised rate shot up to was probably around 0.6%, down from 2.2%a worrying 2.9%. Junes increase was re- in the first. As the number of manufacturesmarkably similar to May, in that it was driv- auto sales fell, that suggests either used caren principally by a surge in clothing prices, sales shot up, vehicle prices rose sharply orhotel room rates and vehicle prices. The there was a collapse in business purchases.1.2% m/m jump in clothing prices is a reac- Sales were also boosted by a 1.3% m/m gaintion to the massive spike in cotton prices in sales of building materials, as the cleanover the past year. More recently, however, up after the severe tornadoes and floods incotton prices have plummeted by 30% over April and May continued. These gains werethe past month alone, so we should see offset by a 1.3% m/m decline in gasolineclothing prices eventually come back down station sales. Sales excluding auto, buildinga bit, although not until 2012. This latest materials and gas up by only 0.1% m/m. Thisstrong rise in core prices will make Ben is the best measure of underlying salesBernanke and his Fed colleagues even more growth and suggests that households arereluctant to countenance and new quantita- hardly increasing their spending at all. In-tive easing in the second half of this year. deed, spending on discretionary goods such as furniture and electronics in June fell forThe U.S rated triple A since 1917, was put the third month in a row. Clearly the recenton review by Moody’s for the first time stalling in employment growth has forcedsince 1995 on concern the debt threshold households to be a bit more careful withwill not be raised in time to prevent a their cash. With no light coming, the situa-missed payment of interest or principal on tion looks like blacker than ever. 3 - Stalos Capital 2011
  4. 4. The trade deficit widened in May to the the supply disruptions following the Japa-highest level in almost three years to $50.2 nese earthquake in late March are still hav-billion (+15%), reflecting a surge in crude oil ing a restraining effect. In addition, the 0.4%imports. After eliminating the influence of m/m gain in May was revised down to aprices, which renders the figures used to 0.1% increase. Motor vehicle output de-calculate GDP, the trade deficit rose to clined by a further 2.0% m/m last month.$47.8 billion from $43.9 billion. The second- Nevertheless, even outside the vehicle sec-quarter average so far remains lower than tor, output only increased by a lacklustre$50.4 billion average in the first three 0.2% and barely increased over the secondmonths of the year, indicating trade will quarter as a whole. The knock-on impactprobably contribute to growth for the April from Japan undoubtedly explains some ofthrough June period. Trade helped damp this lethargy, but there also seems to havethe first quarter’s economic slowdown, con- been a more general slowdown in thetributing 0.14% point to GDP. Imports rose growth rate that might not be fully reversed2.6% to $225.1 billion, second only to the in the third quarter. Looking at the productrecord $231.6 billion reached in July 2008. A breakdown, business equipment productionbarrel of crude oil cost an average $108.70 fell by 0.7% m/m, which is a discouragingin May, the Commerce Department said, sign as far as business investment in ma-the most since August 2008. The petroleum chinery and equipment is concerned. Over-gap for the month was the biggest since all, add this report to the disappointing em-October 2008. Excluding petroleum, the ployment figures released a week ago andtrade gap rose to $19.8 billion from $17.5 its pretty clear that the economy had notbillion in April. Exports decreased 0.5% to started to pull out of its soft patch in June.$174.9 billion, also the second-highest on The sharp fall in the University of Michiganrecord and depressed by a drop in foreign measure of consumer confidence, to 63.8 indemand for industrial supplies like fuel oil July from 71.5 in June, casts doubt over ourand cotton. Purchases of American-made hope of a rebound in consumption growthcapital equipment was the strongest ever. in the third quarter. On this measure, confi-Goods shipped into the U.S. may receive a dence is now back at the level last seen intemporary boost in coming months as Japa- January 2009 when the US was still in reces-nese suppliers recover from disruptions sion.caused by the natural disaster in March.Imports from Japan dropped by $500 mil-lion. The trade gap with China, on the otherhand, climbed to $25 billion from $21.6 bil-lion in April.The Empire State manufacturing index im-proved modestly to -3.8 in July, from -7.8,suggesting that things are getting a littlebetter in the factory sector. However, thefigure remain negative. Manufacturing out-put was unchanged in June suggesting that 4 - Stalos Capital 2011
  5. 5. Euro area Ireland joined Portugal and Greece as the recovery in the wider euro-zone economy third euro-area nation to have its credit may soon grind to a near halt. rating reduced to below investment grade. Moody’s Investors Service cut Ireland to Ba1 from Baa3, citing the probability that Ireland will need additional official financing and for investors to share in losses before it can return to the private market to borrow. The downgrade underlines the need for some- thing more radical in terms of a European solution as the creation of the euro bond market. We really need European leaders taking responsibilities to come up with a solution rather than pushing it into the fu- ture. Indeed, Irish government criticized the Moody’s downgrade, argued that Ireland has met the targets so far under its bailout program. It is true in term of cut but unfor- tunately we are far away from 2.5% annual growth forecasted to put Ireland out the problem. At the best this year, Ireland will grow by 1%, likely at zero. Ireland’s debt will rise to 118% of GDP in 2012 from 25% at the end of 2007. Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any coun- try in the world to CCC, as the absence of credible program by the International Mon- etary Fund and the European Union dark the outlook. Euro-zone industrial production data con- firm that growth in the economy as a whole slowed pretty sharply in the second quarter. The 0.1% monthly increase was weaker than the consensus forecast of a 0.4% gain and particularly disappointing after earlier data revealed sharp increases in Germany and France (1.2% and 2.0% respectively). Indus- try remains very weak in the periphery. Giv- en this and the fact that tight fiscal policy will keep domestic spending subdued, the 5 - Stalos Capital 2011
  6. 6. Other countries China: trade surplus widened more than climbed 3%, the biggest gain since at least forecast to $22.3 billion in June, the highest 2005. level in seven months, as imports grew at GDP rose 9.5% (above the consensus 9.3%) the slowest pace since 2009. The surplus in Q2 from a year earlier, after a 9.7% gain adds to the cash flooding the economy and in the previous three months. Industrial complicates Premier Wen Jiabao’s efforts to output advanced 15.1% in June, the most cool the fastest inflation in three years. Poli- since May 2010. Demand is holding up in cy makers are seeking to rein in price gains the fastest-growing major economy even that are stoking social discontent without after the central bank boosted lending rates choking off growth that’s already showing five times since mid-October and lifted bank signs of slowing. Exports climbed 17.9%, the reserve requirements to a record. The In- least since December after excluding sea- ternational Monetary Fund forecasts that sonal distortions from the Chinese New Year China’s economy will expand 9.6% this year. holiday, to a record $162 billion. Imports Fixed-asset investment, excluding rural jumped 19.3% to $139.7 billion, the customs households, rose 25.6% in the first half from bureau said, the weakest expansion since a year earlier. Retail sales expanded 17.7% gains resumed in November 2009 after a last month from a year before, exceeding year-long decline. China, the world’s biggest also he consensus. The global economy is consumer of energy, iron ore and soybeans, increasingly dependent on China’s demand has seen its import bill surge over the past as the U.S. labour market deteriorates, and year as commodity costs climbed. Higher investors have been concerned that tighten- global prices are increasing inflationary ing measures will choke off growth. Signs of pressure in China, and led to a 14.7% in- a slowdown have spanned weakness in im- crease in the overall price of imported com- ports, a manufacturing index falling in June modities in the first half. Exports to the Eu- to the lowest level since February 2009, and ropean Union and U.S., the two biggest carmaker General Motors Co. (GM) saying trading partners, rose 16.9% in the first half, that sales may be at the low end of a fore- compared with overall export growth of cast. At the same time, lending exceeded 24%. forecasts last month and growth in M2, the Inflation accelerated to the fastest pace in broadest measure of money supply, re- three years to 6.4%, highlighting the chal- bounded. So, even if figures from Q2 are lenge for policy makers of sustaining growth positive, Chinese economy will continue to while taming prices. The government slow in the coming months. If the world curbed lending by boosting lenders’ reserve needs a strong Chinese economy, China requirements to a record and raised interest does not need a strong growth but cooling rates five times since September. Inflation inflation, more particularly food inflation. was mainly driven by a 14% gain in food UK: house-price gauge showed little im- costs and also pushed up by an unfavoura- provement in June as a subdued economic ble base for comparison a year earlier, an outlook hampered demand for property, effect that will diminish in the second half. according to the Royal Institution of Char- Producer prices rose 7.1% in June from a tered Surveyors . The number of real-estate year earlier. Non-food consumer prices agents and surveyors saying prices fell 6 - Stalos Capital 2011
  7. 7. exceeded those seeing gains by 27%, com- India: inflation accelerated to 9.44% inpared with 28% points in May. In separate June, adding pressure on the central bank toreports, PricewaterhouseCoopers predicted extend its longest stretch of interest-ratethat the average U.K. home price is unlikely increases in a decade. The benchmarkto return to a 2007 peak until about 2020. wholesale-price index rose 9.06% in May from a year earlier, according to the com-Unexpectedly, consumer price index merce ministry. Food-price inflation quick-dropped in the headline rate from 4.5% to ened to a three-week high of 8.31% in the4.2% reflected the unwinding of temporary week ended July 2. The Reserve Bank offactors which have exacerbated the upward India may raise rates this month even aftertrend over the last month or two. It gives Mumbai was hit this week by the biggestsome breath to BOE. But the fall in the core terrorist attack since November 2008. Therate from 3.3% to 2.8% might be the first Reserve Bank has raised borrowing costs 10real sign that the weakness of households’ times since the start of 2010. Inflation accel-spending power is starting to bear down on erated in June because of an increase inunderlying price pressures in the high diesel costs and higher prices of mineralsstreet. That does not mean that inflation and manufactured products. Curbing infla-has now peaked, due to the impact of com- tion is the top agenda for India’s policy mak-modity prices, particularly food, inflation is ers as price gains erode spending power in alikely to continue rising in the coming quar- nation where the World Bank estimatester. more than three-quarters of the people liveMay’s dreadful trade figures , showing a rise on less than $2 a day.in the trade deficit from 7.6 billion pounds South Korea: Bank of Korea kept interestto 8.5 billion, look like another blow to rates at 3.25% unchanged after an increasehopes of a strong boost to growth from net in June as policy makers monitor the threattrade. posed by Europe’s sovereign debt crisis.The labour market figures continue to give With inflation exceeding its 2%-4% targeta bit of a mixed picture about the strength limit every month this year, the central bankof the jobs recovery. On the one hand, the will probably boost borrowing costs twicewidest ILO measure of unemployment fell more in 2011, according to the median fore-by 26,000 in the three months to May, driv- cast of economists in a Bloomberg Newsen by a decent rise in employment. But the survey. Consumer prices rose 4.4% in June50,000 increase in employment was none- from a year earlier. Core prices, which ex-theless a bit weaker than the increases seen clude energy and food, advanced 3.7% lastin the last few months. And the 22,500 rise month, the fastest gain in two years. With ain the claimant count measure of unemploy- pending increase in electricity rates andment in June was the biggest increase since relatively low prices a year earlier to com-March 2010. Besides, average earnings pare with, inflation, prices will likely staygrowth remains very low. The headline rate high above 4% at least until Q4. Inflation ispicked up from 2% to 2.3% in May. So, real becoming a political issue with parliamen-pay is still falling by over 2% a year. tary election scheduled for nest spring while presidential election coming up next year. 7 - Stalos Capital 2011
  8. 8. South Korea’s economy expanded 1.3% in shrank 1.2% in Q1, the biggest contractionthe three months through March from the in two decades, as floods and a cyclone dis-previous quarter. rupted farming and mineral shipments from Queensland, the nation’s biggest coking coalJapan: Governor Masaaki Shirakawa left -producing state. A net loss of 5,400 jobsthe benchmark lending rate between zero from April to June was the weakest quarterand 0.1%. The central bank said in a state- for Australia’s labour market since the firstment. They also kept unchanged a $125 three months of 2001, when a U.S. reces-billion) fund to buy assets such as corporate sion began. Retail sales unexpectedly fellbonds and exchange-traded funds. The BOJ 0.6% in May, the steepest drop since Octo-cut its growth forecast for the year ending ber.March 2012 to 0.4% from an April estimateof 0.6%. It kept its predictions for a 2.9% Singapore: economy shrank for the firstexpansion in the following year and inflation time in three quarters to minus 7.8% annu-of 0.7% for both fiscal 2011 and fiscal 2012. alised as manufacturing slumped, adding toManufacturers see business prospects im- evidence the slowdowns in Europe and theproving later this year and plan to spend U.S. are curbing growth in Asia. The Singa-more on plant and equipment while also pore dollar, the best performing Asian cur-stepping up hiring of workers, the central rency after the South Korean won in thebank’s Tankan survey showed. Conditions past year, weakened from a record. Thefor service providers have also been improv- government forecasts an expansion of 5% toing. Retail sales fell at the slowest pace in 7% this year after a record 14.5% pace inMay since the disaster and wages rose for 2010. The central bank, which tightenedthe first time since the temblor. Japan’s gov- monetary policy for the third time in a yearernment yesterday pledged to keep all nu- in April, guides the local dollar against aclear reactors halted by the accident idle basket of currencies within an undiscloseduntil it completes safety tests. Almost two- band. Consumer prices rose 4.5% in Maythirds of the nation’s 54 reactors have been compared with a 5.5% gain in January, anshut by the earthquake or taken offline be- easing that may encourage policy makers tocause of regular checks. Prime Minister hold off on allowing faster currency gains inNaoto Kan has proposed a 2 trillion yen se- the October review. The city state, home tocond extra budget for rebuilding after the the world’s second-busiest container port,quake. The disaster has left more than has remained vulnerable to fluctuations in22,000 people dead or missing, and the gov- overseas demand for manufactured goodsernment estimates it caused 16.9 trillion even as the government boosts financialyen in damage. services and tourism to reduce its reliance on exports. Manufacturing fell 5.5% from aAustralia: consumer confidence fell by the year earlier in the three months ended Junemost since Lehman Brothers collapsed in 30, after gaining 16.4% in previous period.2008 as concern intensified about the Euro- Services industry grew 3.3% last quarterpean debt crisis. The sentiment index from a year earlier, after climbing a revisedplunged 8.3% to 92.8 from a month earlier, 7.6%in the previous three months. The con-the biggest decline since October 2008 and struction industry grew 1.6%, comparedthe lowest level since May 2009. Economy with a 2.4% increase in the first quarter. 8 - Stalos Capital 2011