Just three days after my grim warning of 1 October 2010, Saturday, October 2, 2010 - Update 6 - Global Economies Heading for Turbulence, US stock market and US Dollar heading in divergent directions. Watch out for gold, of the threats of continuing European sovereign and banking woes, Nobel laureate economist, Joseph Stiglitz, warned a "wave of austerity" is sweeping across Europe could trigger a new recession.
http://sg.news.yahoo.com/afp/20101004/tts-finance-economy-stiglitz-c1b2fc3.html
But despite Stiglitz’s warning and somewhat “relaxed” banking regulations, the truth remains that EU’s inchoate recovery, rising from sovereign debt swamp, is faltering.
S & P already downgraded Ireland’s long-term sovereign debt rating to AA-minus on 25 August, 2010 raising its Government’s cost of borrowing money. Its severe recession induced by huge investment property bubble proved intractable to sustained recovery.
http://www.earthtimes.org/articles/news/340889,rating-irelands-sovereign-debt.html
Fitch Ratings lowered Ireland’s credit risks from A+ to AA- on 6 October 2010, citing bailout costs of its banking system.
http://www.bloomberg.com/news/2010-10-06/ireland-sovereign-debt-rating-cut-one-level-by-fitch-outlook-is-negative.html
Moody’s Investors Service is again reviewing Ireland’s Aa2 credit rating, so soon again after downgrading it from Aa1 on 19 July 2010 - citing the rising cost of recapitalizing the nation’s crippled banking sector, as well as an uncertain domestic outlook and rising borrowing costs.
http://www.marketwatch.com/story/moodys-puts-ireland-on-review-for-rating-cut-2010-10-05
Spain ( to AA from AAA) , Portugal ( to A minus ) and Greece ( to BB plus) – all last downgraded by S & P in late April 2010, are most likely to be on close watch list again – given how fast the situation deteriorates in Ireland, particularly if economic conditions worsen in the third- quarter. Current indications are NOT PRETTY. Spain and Ireland economies showed contraction in September according to Markit composite PMI read.
http://www.theaustralian.com.au/business/markets/sp-downgrades-spains-sovereign-debt/story-e6frg91o-1225859714169
Spanish gross domestic product grew at a slightly faster pace in the second quarter, expanding by 0.2% compared to the first three months of 2010.
http://www.marketwatch.com/story/spain-second-quarter-gdp-grew-02-bank-of-spain-2010-08-06
Portugal's economic growth slowed down sharply in the second quarter to just 0.2 percent from the preceding three-month period when gross domestic product grew 1.1 percent.
http://uk.reuters.com/article/idUKTRE67C1E520100813
Greece gross domestic product contracted by a downwardly revised 1.8% in the second quarter compared to previous quarter 2010.
http://www.marketwatch.com/story/greece-second-quarter-gdp-revised-down-to-18-2010-09-08
Stiglitz cautioned on Spain in particular, warning that deep spending cuts being introduced could prompt the country's economy to slow down and enter a "death spiral." similar to Argentina a decade ago. At present, Spain has not been attacked by speculators, but it may be only a matter of time."
http://www.hurriyetdailynews.com/n.php?n=top-economist-warns-of-european-wave-of-austerity-2010-10-04
Euro Zone – risks on the downside
Retail sales volumes fell 0.4% in the 16-nation euro zone in August, according to figures released by the European Union statistics agency Eurostat.
http://www.marketwatch.com/story/euro-zone-retail-sales-fall-04-in-august-2010-10-05
Euro-zone September composite private sector activity PMI slips to 7-month low according to the final reading of the Markit composite purchasing managers. The composite PMI fell to 54.1 from 56.2 in August.
http://www.marketwatch.com/story/euro-zone-sept-composite-pmi-slips-to-7-month-low-2010-10-05
The slowdown was broad-based, with growth easing in Germany, France and Italy, while Spain and Ireland saw renewed contractions.
Germany's industrial production rose 1.7% in August from the previous month.
http://www.marketwatch.com/story/german-industrial-production-up-17-in-august-2010-10-07
International demand orders, particularly from Euro area countries, rose 3.4% underpinned by unusual big contract orders for transportation equipment. These add to fluctuations in month-to-month industrial orders but unlikely to be repeated.
http://sg.news.yahoo.com/afp/20101006/tts-germany-economy-industry-orders-509a08e.html
Germany's August exports dropped 0.4%. It is the second consecutive drop in German exports supporting skepticism about the durability of its export-led recovery.
http://www.marketwatch.com/story/germanys-exports-drop-04-in-august-2010-10-08
British retail sales values rose 0.5% in September compared to the same month last year, the British Retail Consortium reported.
http://www.marketwatch.com/story/uk-sept-same-store-sales-up-05-brc-2010-10-11
British house prices continued to fall in September, according to the Royal Institution of Chartered Surveyors' monthly survey released Tuesday.
http://www.marketwatch.com/story/british-house-prices-fall-in-september-rics-2010-10-11
US Economy - Corporate results points to sluggish conditions
U.S. factory orders falling 0.5% in August offset 4.3% improvement in pending home sales. US stocks meander as concerns about European fiscal woes overhanged the market. There were strong autos sales in September and strength of aircraft sales was notable at Boeing in the September quarter when it delivered 124 commercial airplanes.
http://www.marketwatch.com/story/boeing-delivers-124-passenger-jets-in-3rd-quarter-2010-10-07?tool=1&dist=bigcharts
Despite these strong downstream demand, Alcoa reported steep fall, though much-better-than-expected, September quarter. Margins have been squeezed even as Alcoa remains upbeat of global aluminum consumption to rise 13% in 2010 over 2009, citing growing demand for the metal in countries such as Brazil, India and Russia and particularly Chinese auto sector.
http://www.reuters.com/article/idAF0717101720101007?rpc=44
Alcoa reported revenue raise of 2 percent to $5.287 billion from June qtr of $5.187 billion on higher volumes in aerospace sector and increased market share in the building and construction market. Net income was $61 million, or 6 cents per share was mean and lean, compared with $136 million or 13 cents per share in the June quarter when it eliminated $311 million in overhead costs. It also compared unfavorably with $77 million or 8c per share in the same qtr last year despite significantly higher throughput volume sales to third parties by some 15%.
Alcoa results, in the view of this author, are disastrous. It was lower than September qtr in 2009! And despite weaker dollar advantage in overseas market – which was the strength of its previous qtr’s strong performance - earnings tumbled substantially and contrary to bullish forecast by its management. Over the one year interval, though fluctuating between the ranges of US$0.82 per lb to US$1.10 per lb, aluminum price actually rose from US$0.87 to US$1.04 per lbs in the 2010 September qtr in contrast to the opposite direction in June qtr. Factoring that into account, Alcoa’s performance is rather disappointing.
http://www.kitcometals.com/charts/aluminum_historical.html
Notwithstanding the impact of adjustment to derivatives contracts marked-to-market, these results indicate tougher trading conditions in global market and competitive pressures of market share build at home. Strong demand, increased market share and falling earnings collectively adds to illogic of earnings calculus and positive outlook ahead for Alcoa and bode ill for global economy ahead.
In retailing sector, one positive development is the pick-up in apparel and footwear “necessities” retail sales in September identical store sales.
http://www.marketwatch.com/story/september-retail-sales-better-than-expected-2010-10-07
Looking further out from a year-on-year comparison, the underlying trend did showed marked improvement in the all-important holiday shopping season rise of nearly 2.3% in 2010 from ” from last year’s tepid 0.4% rise and the 3.9% decline of 2008”.
http://www.marketwatch.com/story/sept-retail-sales-look-to-be-positive-2010-10-06?link=MW_related_stories
September same store sales were up 5.1% in J.C. Penny, 4% in Kohl,7.5% in Nordstrom, 2% in Ross Stores, 6.5% in Saks, 3% in Dillards, 1.3% in Target, 4.8% in Macy’s and down 1.3% in Walgreen and 2% fall in Gap. US retail sales increased by 0.6% over August’s revised growth of 0.7% (from 0.4% earlier estimate) to make it three consecutive months of gain.
But the big supermarket food retailing deteriorated on a sequential quarterly basis. Kroger Co, US largest supermarket chain, first quarter sales of $24.8 billion returned a net income of $373 million saw a steep decline in its second quarter performance, which ended 14 August 2010, of $18.8 billion which earned $261.6 million.
http://www.marketwatch.com/story/lower-costs-solid-sales-boost-kroger-profit-2010-09-14
Safeway, the third largest US supermarket chain, reported June quarter sales of $9.52 billion and net income of $141.3 million were better than its September quarter’s reported sales of $9.44 billion and net income of $122.8 million.
http://www.marketwatch.com/story/us-stocks-drop-after-rise-in-joblessness-2010-10-14
Safeway Chief Executive Steve Burd said ““Deflation has been extraordinarily stubborn,” although price declines in Safeway’s sales at existing stores are abating at lower than the HUGE 2%. It is now closer to the 1.5% range as was also reported by Kroger Co. This is big margin difference because supermarket operation typically earns 3c to 4c per dollar of sales in good times. Americans are cutting down their grocery and personal care expenditures indicating consumption spending in US continue to decline.
Samsung Electronics, the world’s largest technology company by sales, issued earnings warning past week. It forewarned slowing European and US demand for consumer electronics goods. Instead of a traditionally strong third quarter selling season for the tech sector, the slowdown is a rude shock that consumers are withdrawing purchases sooner than expected. This is a warning of possible bleak Christmas.
http://www.theaustralian.com.au/business/news/samsung-electronics-earnings-warning-fuels-demand-concerns/story-e6frg90o-1225935486738
Intel Corp’s September quarterly results are equally disappointing. Intel reported strong corporate demand but it is believed increased sales there were due to businesses continuing to replace aging PCs and servers and embrace new more power-efficient data-center technologies.
http://www.marketwatch.com/story/intel-shares-rally-as-investors-embrace-results-2010-07-14
Sequentially, Intel struck a 3.1% top line revenue gain over the June quarter to reach $11.1 billion which itself registered a higher 4.5% jump over the March quarter. Net income growth of 3.4% in September quarter compared most unfavorably with 18% achieved in the June quarter over March quarterly results. This indicates clearly stress on margin as Intel struggles to push corporate sales volume on thin margin. Earnings per share of 52c in September were almost flat in comparison to 51c in June. The distress in pressure threw up a marginal increment in net earnings of $3 billion when compared to June quarter net income of $2.9 billion. Taking into account the fall of US dollar adding to competitiveness and pricing strength, the 3.8% gain in Asia Pacific ex- Japan, 2.4% rise in Europe of its revenue base and a flat sale growth in Japan, the reported results are disappointing. It points to very tough external trading conditions in hard sell and stagnating profits. Analysts have been pointing to signs of a weakening PC market amid concerns of another major economic downturn.
http://www.marketwatch.com/story/intel-profit-surges-on-solid-corporate-demand-2010-10-12
In conference call with analysts post the release of its June quarterly result, Paul Tortellini, Intel’s CEO, painted an upbeat picture of the global economy, saying "the economies of the world continue to reflect renewed economic momentum."
http://www.marketwatch.com/story/intel-shares-rally-as-investors-embrace-results-2010-07-14?pagenumber=1
Well, he is WRONG on both counts. Global economies were slipping and Intel fumbled badly in the September quarter.
Advanced Micro Devices Inc, competing in the same line at Intel, posted a poor set of results in the third quarter. Its most recent quarterly sales of $1.62 billion is sequentially down 2% from June quarter and net loss of $118 million is a huge jump from the June quarterly net loss reported of $43 million same year. AMD cited lower consumer demand and has forecast forward revenue to be flat sequentially.
http://www.marketwatch.com/story/amd-posts-narrower-loss-as-sales-rise-2010-10-14
Taiwan’s statistic bureau is already forecasting a very steep fall in December Quarter GDP growth to a mere 1.4% after registering a phenomenal GDP growth of 13.1% in the first half of 2010.
http://noir.bloomberg.com/apps/news?pid=20601068&sid=aK0tMx1WQ0Yw
Analysts spoke of semiconductors are at the end of the electronics food chain and thus are the last to feel any inflection in demand. It is some indications of how badly the electronic export-dependent industry in Taiwan had been hit by slumped demand; expecting to hurt Taiwan’s final quarter GDP growth. And Singapore won’t be any different.
JP Morgan Chase & Co September quarterly results came in higher than analysts’ expectations which itself is nothing much to crow about. A profit of $4.42 billion, or $1.01 a share, in the quarter, was the outcome of “credit costs continued to fall, mortgage-delinquency rates held steady and credit-card chargeoffs dropped.” In the year-earlier period comparison, revenue actually dropped to $23.8 billion from $26.6 billion, indicating the continuing trend of shrinking organic growth in business volumes, deleveraging by consumers and deleveraging of financial institutions.
http://www.marketwatch.com/story/jp-morgan-profit-jumps-23-2010-10-13
“Our mortgage-delinquency trends remained relatively flat compared with the prior quarter, and we expect mortgage credit losses to remain at these high levels for the next several quarters,” Chief Executive Jamie Dimon said. “If economic conditions worsen, mortgage credit losses could trend higher.” J.P. Morgan said its provision for credit losses in the third quarter was $3.22 billion, compared with $8.10 billion a year earlier - a drop of $4.88 billion. Yet a posted profit of $4.42 billion this current quarter compared with $3.55 billion in the quarter prior showed only a $0.87 billion jump in net earnings on an after tax basis.
In other words, the 23% “improvement” in September quarter earnings compared to same period last year is due to prior period’s aggressive accounting in writing off credit card charge-offs, with no underlying growth in business top-line revenue. The US economy, by JP Morgan’s results indications, is NOT improving.
On quarter-over-quarter comparison, General Electric Co 3Q 2010 results also disappointed badly. Revenue of $35.9 billion struck was 4% lower than June quarter sales of $37.4 billion. Net attributable earnings to the company were $2.05 billion in September quarter as compared to $3.1 billion in June quarter. Translated on per share basis, GE’s earnings per share fell to 18c, down from 28c per share achieved in the quarter prior. Consensus analysts’ expectation was 27c per share.
http://www.marketwatch.com/story/ges-third-quarter-net-profit-sales-drop-2010-10-15
GE Capital, its sore thumb, did showed some healing – thanks to hollow log accounting in prior quarters, it turnaround to show a net earnings of $0.9 billion even though GE Capital’s revenue base declined 4.6% to $12.5 billion from the quarter prior of $13.1 billion. Net losses from discontinued operations were $1.1 billion following disposition of its former Japan consumer finance business. The results reflect no growth in GE core business including GE Capital where earning volatility encapsulate the flow of write-off of possible loan losses. Overall backlog remained flat at $172 billion compared to September 2009.
General Electric Co, Intel and JP Morgan Chase & Co’s share prices dipped on result announcements – the market was NOT impressed despite strong self-praises.
Elsewhere, U.S. factory orders declined 0.5% in August and pending home sales increased by 4.3% in the same month.
http://www.marketwatch.com/story/us-stocks-drop-on-eurozone-concerns-2010-10-04
Institute for Supply Management's non-manufacturing index climbed to 53.2 in September from 51.5 in August.
http://www.marketwatch.com/story/dollar-down-treasurys-up-after-ism-services-2010-10-05-109180?tool=1&dist=bigcharts&symb=DXY&sid=3044712
U.S. wholesale inventories rose 0.8% in September and the inventory-to-sales ratio was 1.24.
http://www.marketwatch.com/story/us-wholesale-inventories-rise-08-in-august-2010-10-08
Auto sales in September were strong despite cutback in incentives among domestic manufacturers and importers alike. A bullish stock market helps.
http://www.marketwatch.com/story/us-car-makers-slash-deals-and-still-log-sales-2010-10-07.
The economy lost more jobs in the September.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=aKpc.UqcvLt0
Fiscal deficits forced Government to cut more jobs, by 95,000 workers after a revised 57,000 decrease in August, according to Labor Department figures in Washington. Private payroll added 64,000 incremental jobs demonstrating the adverse impact of fiscal austerity.
The Fed Reserve forecast is for a “modest” growth in the coming months. Growth, while clearly still unsatisfactory, is positive according to Larry Summers. Most recent indications showed US manufacturing expanded at a slower pace while consumer spending increased slightly.
UK Economy – unstable, risks on downside & easier monetary policy
The PMI for the services sector, which accounts for more than 70% of the nation’s economic output, rose to 52.8 in September from a 16-month low of 51.3 in August, according to the Chartered Institute of Purchasing and Supply and Markit.
http://www.marketwatch.com/story/services-pmi-eases-uk-double-dip-fears-2010-10-05
Stronger PMI read in September help easing fears of a double dip recession for now. Tesco’s Chief Executive, Terry Leahy said improving sentiment in slightly higher sales of upscale fine food, urging similar positive outlook for non-food sales going into Christmas
http://www.marketwatch.com/story/uk-consumer-in-recovery-mode-tesco-ceo-2010-10-05
British industrial production rose 0.3% in August from July 2010.
http://www.marketwatch.com/story/british-industrial-output-up-03-in-august-2010-10-07
Britain Conservative-Liberal Democrat Government will scale back public spending cuts aimed at reining in a record deficit if the economy starts to deteriorate. Its Energy Minister, Chris Hulne warned that “a double-dip recession is not impossibility”
http://sg.news.yahoo.com/afp/20101009/tts-britain-politics-economy-cac1e9b.html
Staggering out the austerity cuts in Government’s spending over 4 years might be the only option available.
Bank of England Governor, Mervyn King, is also less optimistic. There are some signs that the recovery in June quarter growth – the fastest pace in 9 years of June quarterly performance – is cooling off. House prices has cooled off 3.6% in September from a month earlier and jobless claims increased for the first time in 7 months this year. Easing by US and Japanese Central Banks is likely to strengthen the British Pound, eroding the UK’s competitiveness and undermining its recovery. Britain is now leaning toward monetary easing as well given increasing concern of downside possibility ahead.
http://noir.bloomberg.com/apps/news?pid=20601085&sid=aMhEFAi0zvOA
In a similar vein, ECB meeting, President Jean-Claude Trichet said on the 7 October 2010, economic risks for the euro area are still to the downside, but that the monetary stance was “accommodative.”
http://www.marketwatch.com/story/european-stocks-drop-renault-shares-rally-2010-10-07
Japan Economy – rising Yen & losing steam
A recent economic panel warned that Japan’s economy will worsen through next year, as benefits from the government stimulus program fade, and as the U.S. economy continues to languish.
http://www.marketwatch.com/story/japan-experts-see-economy-worsening-report-2010-10-05
As the Yen head for a 15-year high against the US dollar in August, Japan's export growth slowed for a sixth straight month in August, in a sign that the recovery is losing steam.
http://www.bbc.co.uk/news/business-11416470
Yen has headed higher since despite BOJ recent failed intervention.
China’s GDP – renewed threats of bubble & slower growth pace
Meanwhile, the Chinese Government continues to pile downward pressure on property bubble. The latest move involves banning ownership of more than one residential accommodation per family for those living in metropolitan Shanghai as a way of curbing what the authorities called “irrational demand”. This is the same as the restriction imposed in Beijing since April 2010.
http://www.theaustralian.com.au/news/world/shanghai-imposes-one-home-per-family-policy/story-e6frg6so-1225935995572
The September trade figures just released showed China is slowing down with both exports and import growth slowing sequentially from August. Imports rose 24.1 percent on-year in September to a record high of 128.11 billion dollars, but slower than the 35.2 percent growth recorded in August. China's exports rose by 25.1 percent in September year-on-year to 144.99 billion dollars, compared with an increase of 34.4 percent in August.
http://sg.news.yahoo.com/afp/20101013/tts-china-economy-exports-a73cdd6.html
Overall – currency war damaging, big risks for all but options limited
The silent currency “war” now underway underscores the global economic imbalance. The global economy needs to be rebalanced, Larry Summers warns. “It can’t have the United States consumer being the single engine of global economic growth.”
http://noir.bloomberg.com/apps/news?pid=20601109&sid=aZ5qJB8WRSIk
But this won’t be easy. Japan is grinding to a slowing halt. Under pressure to shore up its economy hard hit by deflationary consumer spending at home and adverse impact of strong Yen rapidly slowing Japanese exports, Japanese Cabinet on 8 October 2010 approved a new 5.05 trillion Yen (US$ 61.3 billion) emergency stimulus package. When implemented, it will add 0.6% boost to Japan GDP.
http://www.france24.com/en/20101008-cabinet-approves-billion-dollar-stimulus-package-naoto-kan-japan-yen
Likewise, not much compensating uplift can be expected from Chinese economy. A decade of emphasis on exports and investments have pared down domestic consumption to 35 percent of gross domestic product from 45% ten years ago, the lowest of any major economy, Societe Generale AG says.
http://noir.bloomberg.com/apps/news?pid=20601068&sid=agagn6YHRQiA
That is about US$1 trillion. As a relative comparison, US private consumption is around US$10 trillion – that is 10-folds higher.
http://seekingalpha.com/article/195410-nouriel-roubini-on-the-coming-commodities-correction
It is therefore unrealistic to expect any significant increase in Chinese consumption to be capable of offset even a small fall-off in US aggregate demand. China cannot be the engine of growth either replacing any slackening of US demand.
The ratio of consumption to Japanese and European economies is around 60% but retail spending in both is pretty sick. Germany, EU strongest economy, experienced 3 consecutive months of decline in retail sales – 0.3% in June, 0 4% in July and 0.2% in August.
Retail sales volumes in the 16-nation euro zone fell 0.4% in August after 0.1%, 0.2% 0.4% rises in July, June and May respectively – the declining positive momentum of retail sales faded into negative as austerity drive bites. Euro zone recovering is heading southwards.
August retail sales declined 0.5% over July in Britain – the first since January 2010 and a warning sign that consumer spending may be slipping just as spending cuts is about to take effect.
http://www.irishtimes.com/newspaper/breaking/2010/0916/breaking23.html
On a month-to-month basis, Japanese retail sales increase 1.4% in August, 0.7% in July 0.4% in June - after huge 2% decline in May. Consumer spending in September will see the beneficial lift of the Government’s US$10.9 billion stimulus spending impact approved in early September.
http://www.moneynews.com/Headline/japanstimulus/2010/09/10/id/369796
The evidences point to declining consumption spending in EU/Britain matched by modest gains in consumption in US, Japan and China. There should be modest, but much more subdued rate of growth in Britain, Germany, the rest of EU and US and a slight fall in Chinese GDP growth numbers in the September quarter.
Looking forward, the major key challenges now would be currency market discipline, the rebalance of austerity pressures and further stimulus spending in all major developed economies – is much harder to achieve. The global structural imbalance of trade and fiscal surplus enjoyed by developing economies and China in contrast with massive fiscal and trade deficits in EU, US and Japan will take much longer to rework if ever.
Japan had reverted back to stimulus spending since August 2010 posts the Toronto G20 meeting of June. Britain is also swinging back to stimulus from austerity bringing all major economies into alignment with the US and China for the first time whilst much of the rest of EU members struggles on with austerity discipline.
The IMF meeting in Washington last weekend failed to eliminate the spectre of a damaging global “currency war” derailing recovery. It was almost theatrical. China just won’t budge to US pressure but were more visible making their case in media conferences, speeches and public seminars – sorts of playing to the public gallery. Whilst this visibility sought to ease tensions, the Chinese were careful not to venture beyond the promised undefined “gradual” ascent of the Yuan. The only thing US succeeded was to keep the burning issue of the Yuan’s exchange rate policies alive in the next G20 meeting in Seoul this November.
http://www.theaustralian.com.au/business/news/us-to-turn-up-currency-pressure-on-china/story-e6frg90x-1225937139306
That failure in Washington is not totally unexpected. IMF has been notoriously failing of encouraging China’s Yuan appreciation since 2006 when it was arguing for “gradual” Yuan appreciation in Tokyo instead of a free float.
http://www.thefreelibrary.com/IMF+adviser+calls+for+gradual+yuan+flexibility.-a0109331963
''No, we are not arguing for a free-float Renminbi (Yuan), I think that would be a big mistake in China's circumstances, it doesn't have the infrastructure to deal with that,'' That position has not changed now, so how is it going to be any different in Washington over the failed past weekend meeting? The Chinese exploited that to advantage making it a theatrics rather than engaging in politics or economy, leaving the US to either pursue its agenda unilaterally or multi-laterally via G20 in Seoul this November. China is now really too big and dangerous to offend unless US wants to provoke a trade war when its economy is weakest to confront and neither side can afford one. The Chinese also know that playing the hard ball risk the trade and currency issues might move these US domestic politics beyond the deft handling of the President’s hand in the US Congress, making future resolutions even more difficult. Even in amicable times, we see the unilateral initiatives in US often fell on their own political weight with Congressional wrangling and fearful reactions, combining often both. Congressional findings on “China issue” of trade and currency issues often find it too difficult a hot potato to handle for both past Democrat and Republican administrations and mostly got nowhere. This is real politics. The unspoken fear is full-scale trade war escalating into the UNLIKELY Chinese “nuclear option” retaliatory dumping on US Treasury bonds, rushing yields and interest rates up, deflating US economy. A massive sudden sell-off and/or a steep fall in the US Dollar will greatly diminish the value of its remaining holdings for China. Obama is left with no cards to play and the Chinese walking on egg shells knowing it cannot sustain the twin impacts of stronger Yuan and the risks of a double dip recession EU ravaging its European export market at the same time.
The only other route available to the US is the multi-lateral option via G20 and even that route found little appetite for the Chinese palate. Treasury Secretary, Mr. Timothy Geithner, actually suggested a Chinese currency boost reciprocated by other Asian currencies found Yi Gang, deputy governor of China's central bank, dismissed that notion out of hand as "very unlikely.” The presumption, rejected by the Chinese, is that China fears rising Yuan without matching Asian currency appreciation, could attract American investments to re-locate elsewhere in Asia competing against Chinese exports into US.
http://www.theaustralian.com.au/business/news/us-to-turn-up-currency-pressure-on-china/story-e6frg90x-1225937139306
Lost in the midst of these political posturing is economic rationality. Joseph Stiglitz, Nobel Prize economist, warned of perverse negative risks of forcing the Yuan up actually aggravating the US/China trade imbalance
http://www.marketwatch.com/video/asset/economist-joseph-stiglitzs-take-on-china-2010-10-09/C3577DCF-EA87-4F29-883E-471C27AB65BE
Stiglitz argued correctly that if the actual US demand for Chinese goods are relatively inelastic, rising Yuan merely forced the quantity demanded down at a SLOWER pace than price rise with the net effect of Americans paying more for Chinese goods and aggravating US trade deficits vis-à-vis China. When Chinese goods are so “cheap” and the ease of counterfeit as substitutes, the rising Yuan may found its perversity imploding to full effects hostile American Congressmen may soon discover to their regret.
http://www.cnbc.com/id/38504275
EU, whilst dissatisfied with both US and Chinese intransigence, are less confrontational. The EU see a twinning of interlocked problems – US internal and external deficit reduction pressures and Chinese needing to boost internal consumption to be less dependent on EU and US export markets and a rising Yuan is a necessary component instrument of reaching that goal. THE CRUNCH IS SPEED – the Americans desperate to speed up this process and the Chinese recalcitrant of pacing faster than economically feasible of adjustment pains and risks of internal unrest of massive Chinese unemployment.
On the way, a trade/currency clash seems inevitable and each country has become more and more nationalistic and less of emphasis on multi-lateral cooperation as the currency battles spreads globally. Wen Jiaobao warned EU in Brussels, against pushing China harder to raise the Yuan ahead of the IMF Washington last week reminding all that Chinese exporters operate on very thin margin and unable to cope with Yuan appreciation nor a tariff imposition.
http://www.marketwatch.com/story/chinas-wen-warns-europe-not-to-push-on-yuan-2010-10-07
Undue pressure on Yuan, he warned, could sink Chinese manufacturing sector “bringing disaster to China and the world.” In fact, Chinese manufacturing sector is facing tremendous wage costs escalation lately, leaving China lesser scope to flexibility on the Yuan appreciation going forward. And there is no general consensus among economists if a rapid appreciation of the Yuan is a cure-all of US/China trade deficit and unemployment problems. At a consumption ratio of mere 35% of the GDP, China can hardly lift that ratio or its aggregate consumption higher especially if bankruptcies and unemployment rise accompany a Yuan appreciation decimating part of its industrial base. Unlike US, wages are low in China and savings rate – a lifelong habit of low demand elasticity – do NOT change overnight. American politicians, in my judgment, simplistically, way over-estimate the potential for Chinese consumption uplift via a rapid shift in Yuan appreciation on Chinese domestic consumption.
European countries are equally not extremely sanguine of American’s position of Chinese Yuan exchange rate policy. They too had been hard hit by rapid fall in US dollar as evident from the drastic fall in US Dollar Index Future (DXY). Americans are looking for one-way adjustment from everyone else except themselves. Currently at an eight-month high of 1.4 US dollar, European Union Economic Affairs Commissioner Olli Rehn complained that "the euro is currently bearing a disproportionate burden in the adjustment of the global exchange rate,"
http://sg.news.yahoo.com/afp/20101008/tts-eu-economy-forex-currency-c1b2fc3.html
EU sees China's export strength was underpinned "much more than the currency "but aided by massive subsidies and other "unfair trade practices." Checking these subsidies and unfair trade practices are more cumbersome and even harder of substantiation whilst the US is clearly looking at a more simplistic, even outcome-doubtful faster solution of pressuring China on lifting its Yuan.
http://sg.news.yahoo.com/afp/20101008/tts-eu-economy-forex-currency-c1b2fc3.html
Chinese, of course, can play the game sweet and dirty, making some adjustment on ‘subsidies” like export rebates as pressures mounting in Europe, soothing anger and resorting back to protectionism again when the protests die down. The complaints of “undervalued” Yuan, whilst most vocal amongst US politicians, have found some sympathetic echoes - in Europe, East Asian and BRIC countries. China cannot remain completely oblivious to these international pressures. Bogged down by a sickly domestic economy, Japan’s growth now depends more than ever on exports. Face is so important in Chinese politics – China cannot be seen as bowing to international pressure and Chinese President have made it amply clear its gradual currency reform will be “under the principle of independent decision-making” i.e. don’t tell us what to do!
http://www.bbc.co.uk/news/10150810
Chinese negotiation tactics tends to do nothing from the beginning until forced into making last-minute changes but that pushes both sides into very difficult position and narrowed perspectives of limited achievable outcome possibilities.
http://www.marketwatch.com/story/how-china-can-manage-yuan-exchange-rate-pressure-2010-10-06
The Chinese are also smart in playing the exchange rate outside the realm of DIRECT exchange rate manipulation. We see that happening before our eyes. Besides pledges of expanded trade and investment ties, China recently provided a $5 billion credit facility to enable Greek shipping companies buy Chinese ships – playing the role of paid banker and trade partner, earnings on two streams.
http://seekingalpha.com/article/228480-china-shows-its-currency-hand?source=dashboard_macro-view
The Chinese has plenty of financial power to fulfill that role, circumventing European acrimonious accusation of “unfair trade practices”. “We hope that by intensifying cooperation with you, we can be of some help in your endeavor to tide over difficulties at an early date,” Wen told Greek lawmakers recently. By buying EU bonds issued by Greece and other sovereign debt members, the Chinese are shoring up the Euro relative to the Yuan. It all looks very neat, generous yet cunning but the intended outcome isn’t too far from close scrutiny - a higher Euro to benefit Chinese exports. Here is the simple mathematics.
For the People’s Bank of China, China’s Central Bank, to diversify away from the dollar by selling rapidly its holdings of US Treasuries, it will create a self-reinforcing decline in the US currency, resulting in it suffering enormous losses. The best strategy is by slow measured liquidation and in line with this touted “diversification” moves, instead buy EU and Japanese sovereign debt, boosting their currencies upwards. It is killing two birds with one stone – all above board, legitimate even respectable.
Latest US data shows China’s holdings of US Treasury bonds to be to $846.7 billion – a decline of about 10 percent from a peak of $939.9 billion in July 2009. It is simple risk “DIVERSIFICATION” moves – so what the Chinese wants the world to believe.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=aY_hBy23fRJ4
A “gradual” rise in Yuan tied to a weak US Dollar against a strong Euro favored Chinese exporters into EU market in the same way as its “diversification moves” buying into Japanese sovereign debt places Japanese exporters at an elevated Yen exchange rate disadvantage in overseas markets. THE CHINESE ARE WAITING FOR US DOLLAR to decline rather than appreciating its own currency sharply against all currencies – that perhaps explains why China refused a regional currency appreciation with its Asian trade partners proposed by the US in Washington last week.
The US is momentarily checked in the currency chess board stalemate as the Chinese has a lot of ammunition to play this hardball over the long haul. In the short term, massive quantitative easing from Japan, US (and any sudden roundabout turn in EU) could have strong inflationary impact on China undermining its own ability to control interest rate and liquidity policies. Chinese capital controls too, may not be effective in stalling inflow of excess hot money as China is now also an open economy. What could happen to its own property bubble if it escalates further from this point?
A currency war is “not for the good of the global economy," IMF managing director Dominique Strauss-Kahn and There's no domestic or national solution to global problem,” The IMF is understandably very concerned at the spectre of an escalating currency war. IMF’s managing director spoke at Yalta on 3 October 2010 also commented on troubling developments in a dozen of countries as far apart as Singapore and Columbia admitted to buying domestic currencies to make export cheaper. Japan last month intervened for the first time in six years to restrain the yen but Yen has now risen above the pre-intervention level. South Korea, Brazil and Switzerland are among the countries that have also acted this year.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=awefq0OGcPhc
"Most countries in Asia are moving in the direction of capital controls," said Dariusz Kowalczyk, a strategist at Crédit Agricole. Analysts do not think it will work successfully either – the incoming tide of capital inflow of “hot money” is too high.
http://edition.cnn.com/2010/BUSINESS/10/12/currency.wars.latest.ft/index.html?hpt=Sbin
Willingness for international consensus and cooperation for fiscal and monetary policies among major economies have decreased, making the sustenance of the “very uneven recovery’ difficult to hold.
http://sg.news.yahoo.com/afp/20101002/tts-imf-economy-finance-forex-ukraine-509a08e.html
These disturbing developments underscore my earlier warning 3 weeks earlier of the inherent “difficulty of coordinating fiscal and monetary policies adjustments globally is proving hard of achieving results” on 16 September 2010, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar. The disintegration of discipline has its root in the Toronto G20 meeting in June 2010. Ni Sha Ju Xia – analogous Chinese proverb, fluid downhill wasting of mudslides brings with it both mud and sand together – combination of both negatives and positives – necessarily brings with it both positive recovery and negative imbalanced outcomes that is unsustainable.
http://www.independent.co.uk/news/world/politics/g20-applauds-fiscal-austerity-but-allows-for-national-discretion-2012292.html
In that meeting, the G20 applauded austerity but allowed national discretion in preference of austerity to reduce their deficits at different paces according to their national circumstances or further stimulus as each nation sees fit. Different countries will be able to phase in the tough new international banking regulations at different times according to their economies' needs and countries should continue fiscal stimulus measures to boost economic recovery, or make moves to cut ballooning public deficits.
http://www.independent.co.uk/news/business/news/g20-compromises-on-plans-for-tougher-banking-rules-2012247.html
Britain along with EU nations, including Germany opted for steep spending cuts after sovereign debt crisis spooked financial markets whilst understanding that "synchronized fiscal adjustment across several major economies could adversely impact the recovery". China along with US favored additional stimulus fearing that the stampede to cut state spending in Europe could choke off a global recovery. The end result is an economic recovery neither “strong” nor “balanced” and maybe unsustainable. The United States, Europe and Japan continue to struggle and China remains overly dependent on exports to Europe, Japan and USA.
http://sg.news.yahoo.com/afp/20101007/tts-imf-economy-outlook-world-c1b2fc3.html
The irony is that India, China and East Asian robust economies cannot sustain their rebound unless US private consumption picked up and US is now relying on “cheaper” dollar strategy to suck out growth in these heavily-export dependent countries to sustain and boost its own recovery. The “outlook forecast can be described as “Mei Kuang Yu Xia ( to get worse and worse) is the most likely outcome going forward” as I did cautioned last mid September, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar.
Stiglitz warned in early September that if Germany, France and Britain maintained its spending cuts, it will have slower growth impact in the European zone and contagious to the strength of US recovery.
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aKQ.X9YAxId4
That prognosis seems to be emerging of current evidence – European sovereign debt and banking crisis have re-ignited in Ireland and German Deutsche Bank needing additional recapitalization despite the acclaimed success of banking “stress” test now proven weak of quality control as suspected all along for Ireland at least.
http://www.theaustralian.com.au/business/news/did-irelands-banks-lie-over-losses/story-e6frg90o-1225935307475
The IMF GDP figures and forecast below show it.
ACTUAL FORECAST
2009 2010 2011
Global growth -0.6% 4.8% 4.2%
Advanced economies -3.2% 2.7% 2.2%
United States -2.6% 2.6% 2.3%
Euro zone -4.1% 1.7% 1.5%
United Kingdom -4.9% 1.7% 2.0%
Japan -5.2% 2.8% 1.5%
All advanced economies have NOT recovered from their GDP downturn of 2009 despite talk of global “recovery”. Even the “strong” first half growth of 3.5% for developed countries was “low” given they are emerging from the deepest recession. The IMF statement of 6 October 2010 warned that economies in developed countries such as the United States and Europe will slow during the second half of 2010 and the first half of next year and in this period, there is of “downside” risks of not being sustained.
http://www.marketwatch.com/story/developed-economies-to-slow-imf-says-2010-10-06
The OECD is also predicting slower growth and downside risks. Economic momentum in the world's leading industrialized countries slowed in August when a key index showed "negligible or negative growth," Its composite leading indicators (CLI) for August 2010 reinforce signals of slowing economic expansion already seen" in July noting further that CLI indices for Canada, France, Italy, Britain, Brazil, China and India pointed "strongly to a downturn."
http://www.oecd.org/document/40/0,3343,en_2649_34349_46166824_1_1_1_1,00.html
Economic expansion was continuing in Germany, Japan and Russia and stronger signals of a peak are emerging in the United States.
Impacts & implications
The renewed quantitative easing, nicknamed QE2, will not resolve the slowing pace of US economic expansion. There are many reasons. The most intractable causes, of course, are what Ben Bernanke called “poor demography” liability impacting inescapably on recovery. Tax revenues declined sharply confronting ballooning fiscal demand. In both US and EU, it is the baby boomers who got badly hit. The unemployed among them cannot survive with massive benefit cuts and the rests are adverse to further consumption binge based on property bubble, credit easing or spending incentives. They are de-leveraging, busy building their banking account because they know very well they don’t have time to make up lost grounds. Analyst often forgot that the US stimulus package is flawed because it is mostly tax-cut, unemployment relief, TARP bailing out banks and autos, housing purchase incentives and “Cash-for-Clunkers”. It is all what Chinese would call “fire-cracker” treatment of a big bang and impact is extinguished from the moment of explosion. Chinese strategy is based on different mindset- you build infrastructures and support facilities to outreach economic opportunities and sustaining it over the long haul.
The US stimulus spending transform long-term problems into short-term perspectives and US consumers behave exactly in induced response. You see that exactly in US September retail sales statistics and JP Morgan Chase & Co results. The up market “The Gap” reported lower same store sales sequentially while the necessities cheaper end of retail shows up with higher same-store sales results. JP Morgan headline revenue fell consecutively and fell off in delinquency of credit card demonstrate ample proof of consumer spending retrenching as time prolongs. The US consumer is unable to undertake the consumption boost filling the void to uplift the economy as the fiscal stimulus and fast diminishing restocking cycle of the big 2008/2009 downturn driving the economy are coming to an end. The “lazy consumer” is painting a faltering economic expansion story in all major economies, except China, as businesses struggle to pick up where Government sector is phasing out.
The transition from stimulus to the needed austerity now looks increasingly distant of achievable outcomes. But the impending QE2 in US, China, Japan and leaning backwards from austerity in Britain and Europe (except PIIGS) is not and cannot possibly a solution when the current stimulus is demonstrably failing. Extremely loose monetary policies have very limited impact on sustaining economic development except in the very short-term but flood global economies with unwanted speculative liquidities – the major effects of which roil currency and financial markets.
Businesses have all to find exports to take up slack demand but aggregate global demand is slow to quantitatively respond. Having all but exhausted traditional monetary and fiscal policies, industrial nations are looking for new ways to spark growth amid subdued domestic demand, best achieved for depreciating one’s currency.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=awefq0OGcPhc
It is the “beggar-thy-neighbor” politics and economic strategy. US Treasury Secretary Timothy F. Geithner warned of a “damaging dynamic” of competitive weakening that could limit global growth
http://noir.bloomberg.com/apps/news?pid=20601103&sid=a8QzC3V7wC_k
While pointing fingers at China, “Helicopter” Ben Bernanke conveniently forgot that he is also dumping cash all over America’s countryside by the QE2 with newly minted cash straight from the hot printing press of heaps of US dollar which investment guru, Jim Rogers, described as money printing by developed economies until all the trees are gone! This loose monetary stimulus starts with a big flood will soon build into a tsunami tide swarming all economies around the world with cheap, near zero interest costs, in search of economic opportunities or merely seeking short-term speculative risks in property, commodity or currency speculation – all unhealthy of bubble forming wreaking destructive havoc once they reversed the flow.
We already have seen massive havoc of that already. The incoming flood tide lifted currencies across the world, hitting export-dependent Asian economies particularly hard. Asian currencies rose for a sixth week, the longest winning streak in a year, on speculation the Federal Reserve will pump more money into its economy, increasing funds available to invest in higher-yielding assets.
http://noir.bloomberg.com/apps/news?pid=20601080&sid=aVHuQ_bbpEeU
And the same is happening in the commodities market. The fast depreciating US dollar and currency fears globally is driving commodity prices varying from 8% to 12 % up north, notably hard metals and most soft agricultural produce even as economies around the world is fast losing steam. NOW THAT FUELS INFLATION GLOBALLY AND DRIVING UP SPOT GOLD PRICE relentlessly.
http://money.cnn.com/2010/10/05/markets/dollar_gold_oil/index.htm?cnn=yes
Inflation is above target in Britain, Germany, China, USA, Australia, South Korea and the last two have raised interest rate to cool of inflationary threats while China raised its banking reserves ratio recently to 17.5% and banning those living in Shanghai from owning a second property regardless of financial affordability just like in Beijing. Contrary of all others countries putting up capital controls, selling dollars in the forex market or engaged in their own stimulus QE2 like Japan and maybe shortly UK as well, Singapore did an about turn this week. It will move up the bandwidth of Singapore dollar relative to US dollar to contain inflation even as rising domestic currency must hurt Singapore’s external competitiveness as the economy shrank in the September quarter and gloomy conditions prevailing forward.
http://noir.bloomberg.com/apps/news?pid=20601087&sid=aQ09wYmg5R0o&pos=1
There is no domestic solution of global economic imbalance. The shadowy currency war in competitive devaluations is risking triggering a major European sovereign debt and banking crisis at any moment now. As Timothy Geithner put it correctly, “I think you have to distinguish the challenges faced by Greece, by Spain, Portugal, Ireland,” Those countries need “to move very, very aggressively to bring their commitments more in line with their resources. In other words, these weakest economies in EU has NO CAPACITY for a QE2 without endangering their sovereign debt rating downgrading triggering yet another bigger banking crisis and a meltdown of financial market confidence that potentially could wreck the entire global economic recovery.
The IMF is now tasked with the responsibility of watching supervision that this “damaging dynamics” do not escalate further and to developing rules of the road or guidelines with respect to how countries deal with their currencies.”
http://noir.bloomberg.com/apps/news?pid=20601085&sid=a6oYjItJmDZE
Bernanke himself also warned that surging annual deficits presented a "real and growing threat" to the US economy as tax revenues dried up and the government splurged on economic bailouts and stimulus spending.
http://www.cbsnews.com/stories/2010/10/04/politics/main6927476.shtml
The assumptions are that borrower might suddenly require higher rate of interest making borrowing unsustainable – confidence issue here of borrowers. Bernanke said, “"The only real question is whether these adjustments will take place through a careful and deliberative process... or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis." Two creatures are involved here – the “sweetness” fiscal stimulus spending and the other is the “bitterness” austerity creature. Like the Chinese saying, sweetness preceding must bring long-term bitterness or short-term bitterness precedes the long-term sweetness. This dilemma of difficult policy choice is increasing coming into sharp focus now than ever for Obama and the Federal Reserve.
In the interim, the pressure is enormous for the US to reduce its trade deficits by a cheaper dollar policy – even it is unofficial and has damaging consequences for the US and the rest of the world.
The dollar index has lost 7.8% since the end of August and the euro is almost 11% higher.
http://www.marketwatch.com/story/dollar-pressured-by-singapore-tightening-2010-10-
There are signs that even a weaker dollar does NOT alleviate US trade imbalances. As its trade deficits deepened to $46.3 billion, China is running a record surplus in August.
http://money.cnn.com/2010/10/14/news/economy/trade_balance/
The deficit with China widened to a record $US28bn in August from $US25.9bn in July WHEN THE YUAN/USD EXCHANGE RATE HARDLY MOVED in that interval. American propensity to imports of Chinese goods had other market dynamics beyond simplistic assumed exchange rate differential.
http://www.theaustralian.com.au/business/news/soaring-us-trade-deficit-adds-fuels-to-china-trade-tensions/story-e6frg90x-1225939032957
Obama hopes to double exports in the next five years, creating an estimated two million jobs domestically. As the economic momentum weakens, renewed splurge on QE2 spending heighten risks of inflation as Government has no option of stimulating the bubble but printing money. Printing money equals cheaper dollars as supply increased. The danger risks of no action are if you slow down too much, free-fall is next.
For now, the dollar violent decline could help US avoid a double dip recession by simply sucking out growth from China, East Asia, and the EU economies. The rest of the world will now swim in asset inflation, rising food and commodities prices, currency markets roil whilst US stock market kept bubbly effervescent driven by influx of massive liquidity injection with no investable home otherwise and gold price heading higher in conspiracy as QE2 risks creating permanent damage to all devalued currency and inflationary economy.
Anyone disagreeing?
Zhen He
15 October 2010
Friday, October 15, 2010
Saturday, October 2, 2010
Update 6 – Global Economies Heading for Turbulence, US stock market and US Dollar heading in divergent directions. Watch out for gold.
As illuminated in my last blog’s forecast - Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar dated 16 September 2010, the US dollar weakens further. Against 6 major currencies, the US Dollar Future Index (DXY) spot price traded lower at $78.18 tonight. That was nearly 4 % lower as compared to $81.40 on 16 September 2010, or 5.5 % lower compared to $82.74 at end August. In one month elapsed, this is substantial decline of the US Dollar. The U.S. dollar had the worst quarterly loss in more than eight years falling to 6-month low against the Euro.
Against the Bloomberg-JP Morgan Asia Dollar Index,( ADXY) which tracks the region’s 10 most used currencies excluding the Yen, the US Dollar the gauge rose relentlessly from 112.09 to 115.02 since 1 September 2010 . For the year 2010 till end September, the greenback has lost 7.7% against the Baht, 10% against Ringgit and 5.6% against the Singapore Dollar and roughly 6.5% against the Aussie Dollar.
Gold and equities continue to uptrend. December delivery contract for spot gold breached the US$1,317 level for the week ended 1 October 2010 whilst equities had its dream run up north, consolidated further by better-than-expected August durable goods order announcement by the US Commerce Department on 24 September 2010.
Excluding transportation equipment, a 2% gain in improved reading of capital goods order re-ignited the fireworks of US stock market rebound - after a slow downward drift since that week beginning, amid sluggish volumes. Mr. Henry McVey, Morgan Stanley Investment Management’s head of global macro and asset allocation, was looking to cut exposure to equities.
Until the Commerce Department’s announcement, the US stock market had been dogged all week by the Fed’s FOMC warning that it will act if the “modest” economic recovery stalled, sparking fears of renewed deflationary threats.
The Fed openly warned of recovery pace having “slowed in recent months” and would remain “modest near term”, even hinting of deflationary trend of “inflation rates below target levels.” Exacerbated by lending contraction, albeit at a reduced rate in recent months, FOMC noted that “business spending on equipment and software is rising, though less rapidly than earlier in the year”
It was the Fed’s last meeting before the November’s mid-term Congressional election, the FOMC shied from taking a stance of vigorous stimulus spending initiative. That practically left the economy to drift along the path of continuing modest growth.
Threats from the Fed of impending “quantitative easing” weaken the dollar as forex market views that as printing of greenback. It is indicative that the US economy needs the support of both the Fed and the weaker dollar lifting exports
A pair of high-level departures from the government’s economic team, Wall Street bailout figures Herbert Allison and Lawrence Summers, weighs only briefly on US stock market sentiment. Other heavyweight economic advisors who have left include Budget Director, Peter Orszaq and Christina Romer. Tonight saw the resignation of Rahm Emanuel, White House chief of staff, forcing the Obama Administration to make some strategic choices in the likely wake of ascendant Republican Party post the Congressional mid-term election.
Instead of market glum, it was the Commerce Department’s announcement of higher durable August capital goods order which cheered economists and stock investors.
Excluding transportation equipment, durable goods order gain of 2% mainly in steel, heavy machinery and computers suggests that manufacturing is regaining traction. It was viewed as a healthy rebound after a worrying massive decline of 3.8% in July following a tepid 0.2% gain in June.
After two months of consecutive increases of 0.2 percent in June and 2.5 percent in July, August shipments of manufactured durable goods, however, slipped 1.5 percent – this suggests a lagged measure of July’s weak durable goods order. SEPTEMBER’S DURABLE GOODS SHIPMENT WOULD BE A GOOD CONFIRMATION OR OTHERWISE OF AUGUST MANUFACTURING REBOUND.
Non-defence capital goods order, excluding aircraft, gained 4.1% ALSO PERFORMED VERY WELL comparing most favorably against July’s 5.3% decline. Core capital goods shipment was up 1.6% in August – a key indicator of business spending - was a big jump from July’s 0.1% gain. This is a FIRST strong hint that business spending has taken hold, AFTER RECENT MONTHS OF WEAKNESS, elevating prospects of the US economy gaining some sparkle. US stock market rallied to close the week ending 24 September 2010 on a strong note.
Durable goods inventory rose 0.4% in August (8 consecutive months of increase) following a positive 1.3% and 0.6% gain in June and July respectively – INDICATING INVENTORY BUILD-UP IS SLOWING. This could be the bottleneck which is what Lawrence Summers warned of the end of inventory cycle limiting growth forward.
Stocks will not fly off the shelves unless consumer confidence picks up and this is NOT happening.
Near Tuesday September month end, the US Conference Board reported consumer confidence in the U.S. economy remains “quite grim,” with its gauge fell to 48.5, the lowest reading since February. It is a shocker considering the strongest September stock market sentiments prevailing but there were many reasons as well. September’s pullback in confidence cited “less favorable business and labor market conditions, coupled with a more pessimistic short-term outlook”.
For the month of September, US stock market performed brilliantly, apparently disregarding the much-unchanged gloomy economic outlook persisting. The Dow Jones Industrial Average is now up 8.44 percent, Nasdaq up 10.5 percent and the S&P 500, up 9.5 percent, ahead of the corporate results season. Corporate takeovers, threat of quantitative easing, gain on durable capital goods order and no doubt the falling US Dollar were the main drivers of the market.
What the market is now keenly awaiting is the earnings reports and the revisions – either upwards or downwards accompanying it. This author is betting of more upwards than downward revisions – thanks to the two-track US economy, supported more from off-shore stronger performance of US corporations, obviously benefiting from the declining US dollar. As forewarned in my last write-up of 16 September of 2010 of a “TECTONIC USD/EURO,USD/YEN AND USD/YUAN SHIFT MAY ALREADY BEEN UNDERWAY”, the Brazilian finance Minister , Guido Mantega 10 days later spoke of an “international currency war” has broken out as governments around the globe compete to lower their exchange rates to boost competitiveness.
Indeed, the central banks in Japan, South Korea, Taiwan, Brazil, Colombia and Peru intervened in the forex market, buying dollar to make their own currencies cheaper. History has shown that the effect of this kind of intervention doesn't last for very long." Despite strong US Congressional pressure, China has continued to suppress the value of the Yuan, while monetary officials from around the world including Singapore and Colombia issued warnings over their currencies’ strength.
The author believes that the trend of falling US dollar will continue into the last quarter of 2010, perhaps, even faster than currently seen.
BNP Paribas is also forecasting further decline before calendar year end in the US dollar from present level against all major currencies including the Australian dollar.
Part of the reasons is that emergent economies are attracting capital flow from developed economies and that drives up demand for local currencies. And as long as “quantitative easing” continues in the US at zero to near zero interest rates, the capital outflow from developed economies to emerging economies will continue. The negative downside of this currency appreciation is the erosion of trade competitiveness of export dependent economies like Japan, Brazil, South Korea and Taiwan.
US Economy – conflicting signals fading weaker and crawling along the bottom
Overall there is not much noticeable improvement in the state of the US economy apart from a brighter blip in autos manufacturing. The Conference Board says its August leading economic index was up 0.3%, after a 0.1% increase in July.
Most recent data, however, suggests an improving manufacturing upturn in autos. The Chicago PMI staged an unexpectedly spectacularly strong climb in September to 60.4%, a big jump from 56.7% in August.
US car makers reported relatively strong month – no surprises there, given the upswing in the US stock market. Chrysler reported car sales surged 61%, Ford jumped 46% and GM posted 10.5% hike over a depressed 2009 year-on-year comparisons.
Imports also joined the industry’s barrage of improved numbers – Toyota was up 16.8% and Hyundai up 47.7%. Overall, the seasonally adjusted annual rate of sales came in at 11.76 million cars and trucks, according to Autodata, below the annual replacement rate of 14 million vehicles going to the scrap yards. Total US auto sales for the year-to-date were up 10.3 percent at 7.8 million vehicles.
Whilst autos did relatively well in September, the optimistic manufacturing outlook does NOT spread evenly across the rest of US. Although manufacturing activity was still expanding in September, it is tapering off and signs are pointing to a slower final quarter of 2010. The Institute for Supply Management index of factory activity fell to 54.4% in September from 56.3% in August. It is a long way from 60.4% in April 2010 when US companies restocked inventories or made purchases delayed during the recession.
Other sub-sector ISM indices point to growing but slower pace of economic activity.
New orders in September were barely expanding, down to 51.1 compared to 53.1 in August. Inventories grew faster to 55.6 in September on the heels of 51.4 in August and backlog of orders contracting in September to 46.5 from a positive 51.5 in August. Overall, the US manufacturing sector is growing but decelerating closer to contraction.
Sales of existing single-family homes and condos rebounded 7.6% in August, showing a steadily gradual improvement trend - from July’s 5.2% gain, June’s 2.8% gain after a massive 29.9% steep decline in May.
But home prices have not picked up beyond a token since May. Case-Shiller home-price index showed prices of single-family homes in 20 large cities rose by 0.6% in July compared to June. Demand for homes has plunged since a federal tax break for buyers ended, and foreclosures continue.
Economists are already forecasting falling year-on-year comparison of September and October home prices.
By and large, the US economic recovery remains uncertain with far more confidence displayed by corporate sector in M & A activities than consumer spending on goods and services. In fact, US consumer spending rose by a tepid 0.2% in August over July.
Amongst major M & A moves hogging the headlines were Hewlett Packard’s hotly-contested successful US$3.25 acquisition of 3 Par, Wal-Mart’s proposed $4.25 billion takeover of South Africa ‘s Massmart Holdings, Unilever’s US$3.7 billion acquisition of American Alberto Culver Co and Cisco acquisition of ExtendMedia and AOL’s bid for TechCrunch
The leaders of America’s largest companies are, however less optimistic on economy for the next 6 months at least. The response of 125 out of the 160 members Business Roundtable said its latest quarterly report cut its forecast for annual growth to 1.9% in 2010 from its earlier target of 2.7%. This consensus forecast, if eventuated, averages around 1.1% for the September and December quarters – well below the annualized trend average of 2.7% to June 2010.
AXA Investment Managers in Paris is also bearish on the US economy. Franz Wenzel, its Deputy Director of Investment Strategy, while discounting the possibility of U.S. economy tipping back into recession, cautioned that macroeconomic data would remain lackluster over the next six months on sub-trend growth rate, with a chance that the recovery will stall.
EUROPEAN ECONOMY – still fragile but limited signs of improvement
Economies in Europe were a mixed bag of performance in September. Germany fared best with unemployment fell faster-than-expected by 40,000 additional jobs in September.
Germany's retail sales dropped 0.2% in August compared after the 0.4% fall in July and 0.3% in June – that is three consecutive months of decline despite other resurgent economic numbers.
But German retail sales – the dog in the Germany’s recovery story – are highly volatile. It is poised to turnaround, given stronger labor market conditions now prevailing. Anecdotal evidences available and continued trend of a stronger labor market bodes well for private consumption increase forward.
Business and consumer confidence in Euro zone also picked up in September, though uneven – strongest in Germany, gains achieved in Spain, Netherland and Poland, remaining stable in France but weaker in Italy
Other official data showed that new industrial orders in the currency area posted their sharpest monthly drop in 19 months in July.
Industrial orders in the 16-nation euro zone fell 2.4% in July compared to a revised similar percentage increase in June order.
It must be remembered that industrial production in 16-member EU rose 0.5% in May for the first time since August 2009 after a 1.4% decline in month preceding.
The uptrend of industrial production recovery within EU nations since May 2010, therefore, has not yet been firmly established.
Final Markit PMI index showed manufacturing activity in the 16-nation euro zone advanced at its slowest pace in eight months in September. The PMI fell to 53.7, down from 55.1 in August.
The unemployment rate in the 16-nation euro zone stood at 10.1% in August, unchanged from an upwardly revised July figure.
Falling PMI reading, fluctuating levels of new industrial orders, slow retail sales and static employment data point to slower growth ahead in the currency area.
British Economy – struggling to hold and reversal back to stimulus spending leanings
Outside the 16-member Euro zone, the British economy seems to be struggling to hold. Latest Markit/CIPS manufacturing PMI shows Britain's manufacturing activity grew at its slowest pace in 10 months in September. The index fell to 53.4, down from a revised 53.7 in August.
Despite the austerity-driven VAT increased to 20% from 17.5% by the new Government, thriftier UK consumers are gradually increasing their spending as labor market shows some improvement of late.
August retail sales declined 0.5% over July, according to the UK Office of National Statistics, against a forecast rise of 0.3% disappointed economists.
But retail sales rebounded in September, according to preliminary survey of British Confederation of Industry, bringing some relief.
Incidentally, the Bank of England last week signaled a subtle shift moving closer to stimulus as growth has been slower than anticipated. The Monetary Policy Committee, led by Governor Mervyn King, voted 8-1 to keep the benchmark interest rate at 0.5 percent record low since March 2009 and the bond-purchase plan at 200 billion pounds ($313 billion).
This stimulus move brought the BOE closer in alignment with the US Federal Reserve of quantitative easing and it highlights the difficult tightrope balance in many central bank monetary policies attempting to revive flagging recovery and fiscal responsibility needed for austerity in debt-ridden developed economies.
Likewise, the US Federal Reserve mulls flexible bond strategy amid uncertain recovery
http://www.theaustralian.com.au/business/news/federal-reserve-mulls-flexible-bond-strategy-amid-uncertain-recovery/story-e6frg90x-1225930759420While the economic statistics coming out of EU and Britain appear to have stabilized to a certain degree, and not dipping now into another recession, the same stability cannot be said of its banking and financial sector. European debt crisis flared-up again last week to cause instability to global stock markets. Despite the “successful” European banking stress test completed, Deutsche Bank needed to raise another 10 billion Euros in its balance sheet recapitalization. Of this amount, it expects to apply 7.7 billion Euros to buy and recapitalize its 30% owned Deutsche PostBank, Germany’s largest retail bank, which in a multi-staged rescue deal, will ultimately delivers it majority control.
Spain’s public debt rating was downgraded by Moody’s Investor Services and Ireland found itself needing to rescue its nationalized beleaguered Allied Irish Bank – the final costs could come to a staggering US$46.6 billion.
Sovereign debt and banking worries is expected to continue to haunt the European economic recovery trail.
Asian economies
China – stronger stabilized growth
Manufacturing activity in China staged a surprise rebound in September, despite the shutdowns in steel and other construction-related and energy-intensive sectors. According to HSBC’s survey, China’s PMI rose to 52.9 in September from 51.9 in August after a brief contraction 49.4 in July.
China's official purchasing managers' index jumped to 53.8 in September from 51.7 recorded in the previous month, recapturing acceleration in the nation's manufacturing activity. It is a pleasing rebound after two consecutive monthly declines in June and July. Analysts, however, noted a seasonal play in Christmas demand order underlying the September improved PMI data.
Retail sales in China also picked up strongly in September.
That improved manufacturing performance to a 5-month high coupled with sharp gains in domestic retail sales help to allay fears that China is heading for a rapid slowdown. A Merrill Lynch survey of 215 of its fund managers saw sentiment swung from underweight rating in August to overweight of China’s economy outlook in September.
On the negative side, inflationary trends continue of both import and output prices. China remains worried over the risk of property price bubble. Ahead an extended closure for week of holidays, Beijing announced fresh measures to cool the property market. China ordered banks nationwide to halt mortgage lending to individuals who already have loans on two properties, and raise down payment requirements for first-time buyers to 30% from 20% previously. Down payments on second-home purchases will rise to 50% from 40%. It also plans to introduce a trial property tax in some cities, with Shanghai, Shenzhen, Beijing and Chongqing before a nationwide rollout. China Daily also reported on last Monday the enactment of new administrative supply adding measures such as anti-land hoarding rules and new zoning rules aimed at curbing rising house prices.
The slew of new measures showed the credit tightening measures introduced in April 2010 has not had its desired impact as yet. That means also that China has not yet successfully “soft-landed” its slowing of a runaway economy partly fueled by residential property asset inflation bubble.
Strong US Congressional pressure on significant Yuan appreciation is likely to add inflationary import but not many realize that a higher Yuan may positively advantage competitiveness of other Asian exporting nations rather than benefiting the US trade imbalance, economy and employment as Chinese manufacture do NOT compete directly with US manufactured exports or imports into US market. The end negative impact of any sharp rise in Yuan could destabilize the prospects of soft Chinese landing and resolution of its property bubble.
Japan – weaker outlook forward
Although the Bank of Japan Qtrly “tankan” business sentiment index showed improvement but waning forward, that optimism did NOT reflect itself in industrial production statistics.
Japan’s Ministry of Economy, Trade and Industry data showed the country’s industrial production in August fell 0.3% from July, slightly accelerating from July’s 0.2% decrease and it is the third consecutive decline.
In downgrading its assessment of industrial output from up trending, it says that the trend is now flattening and outlook is weakening forward. Expiration of Japanese government incentives for consumers to purchase fuel-efficient vehicles is forecast to drive down auto production in September and even greater extent in October.
Disappointing industrial production data for August, waning outlook forecast in September quarter’s tankan survey and increasingly challenging export sector hamstrung by the fast appreciating yen paint a gloomy picture of Japan’s September quarter’s GDP outlook.
Japan’s August trade surplus fell 37.5% lower from year-earlier levels.
Rising Yen is increasing a cause for concern. Governor Masaaki Shirakawa said that the Bank of Japan needs to monitor risks to Japan’s economy, exports, and corporate profitability. As US expressed its willingness to extend its monetary stimulus, BOJ board member Ryuzo Miyao, warned “We’re entering a situation where we need to pay more attention to downside risks,”
Growth in exports which decelerated to 23.5 percent in July, the slowest this year, has deteriorated further. Japan's annual export growth slowed for a sixth straight month in August, is yet another sign that a strong yen and moderating overseas demand could hurt the economy's export-led recovery
The overall economy grew at a 1.5 percent annual rate in the second quarter, less than half the pace of the previous period.
"We still face the risk of a double-dip recession," said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo.
The BOJ is under pressure to pursue “strong monetary easing” but this action is unlikely to stimulate demand nor is it likely to have significant banking impact of arresting declining banking loans in the dearth of consumer confidence and corporate borrowings. Some direct intervention in the forex market by the BOJ to sell down the Yen might be necessary from time to time to slow the upsurge in Yen.
The softness of the Japanese economy can be seen in the marginal fall in the August jobless rate to 5.1% and extended consumer prices drop by 1% from a year earlier.
Miyao warned of the risks that the US economy may fall into a protected period of slow growth.
South Korea – steep rise in Korean Won may slow export and economy forward
South Korea’s economy continued to chart a strong growth path. Its June qtr 1.4% GDP growth ( roughly in parity with March qtr 1.5% growth) fueled by demand for the nation’s exports of semi-conductor and electronic goods. Industrial production expanded for the 14th straight month in July, exports advanced, albeit slower, for the 11th consecutive month.
The trade surplus will reach $32 billion in 2010, a long climb from earlier estimate of $20 billion.
Exports are equivalent to about half the economy. September’s 4.4% accelerated appreciation in Korean Won is a “critical factor” edging adversely its forward trade outlook as global demand weakens in semi-conductors and electronic sector. S. Korea August exports growth slows to key markets of China, US and EU.
http://www.reuters.com/article/idUSBJL00206620100915
Interest rate is slowly rising as signs of inflation are emerging on the horizon. Latest IMF forecast in early September says its GDP is still expected to grow by 6.1% in 2010.
Taiwan – strong economic outlook fast fading forward
Taiwan is another bright spot among East Asian economies but its outlook is also fading fast. The island’s economy expanded by 13.1 percent in the first half with exports accounting for more than half its economy. Taiwan’s statistics bureau forecasts economic growth will slow to a paltry 1.37 percent in the fourth quarter compared with a year earlier
Forward forecast – confused stock markets & watch out for gold
The biggest unknowns are, of course, the outcome of the upcoming US Congressional election on 2 November and its impact on future policy choices within the realm of political realities of constraints. Recent high level departures within the Obama’s administration will, most likely, exacerbate the risks to robust cohesion and integration in all policy advice, formulation and implementation including economic issues. The hard-fought health care reform’s passage through Congress showed how difficult it was in making its way though the US legislative process. Beyond the political arena, there are big deeply embedded economic issues of banking reform and economic revitalization remaining yet unresolved.
While the September stock prices rally in the US seems wildly optimistic, they lacked conviction in volumes traded. Stocks prices ran up strongly alongside gold price, and belatedly oil as well, but not nearly so pronounced of base metals. US 10-year bond yield rose initially then fell back and gold-mining shares in Australia have eased back even as spot gold prices surged repeatedly to new records. Either the debt market or equities are lying – a question which I raised in my last write up.
Gary Schlossberg, Wells Capital Management offered these explanations for the triumvirate rise together of stocks, bonds and equities together.
Mr. Schlossberg is right of assertions that the Fed’s promise easing of monetary policy has no impact on the economy except lowering the dollar which must favored commodities including gold. Stocks are the odd man out being attracted to bottom fishing from investors. Money inflow, nevertheless, adds to investors’ optimism. Those investors dissatisfied with low bond yields looking for higher yields in more risky investments will invest part of their funds in equities.
This author now believes that EU and US stock market investors are confused of economic fundamentals with some periodic sparkles of positive news within conflicting signals, against a backdrop of unyielding conditions of damaged economies. Plenty of anecdotal evidences exist to support this view.
- European sovereign debt and banking crisis have NOT been resolved. Irish Allied banking woes, the downgrade of Spain’s public debt ratings and the recapitalization of Deutsche Bank are prime examples of unyielding conditions prevailing despite the recent much-acclaimed “success” of European banking “stress” tests. INTERESTING ENOUGH, THE CONFLUENCE OF THESE ERUPTIONS LAST WEEK HAS ONLY SMALL IMPACT ON STOCK PRICES IN EUROPE
- US and EU stock markets reacted STRONGLY POSITIVE to a mere 2% increase in August durable goods order, excluding transportation equipment, many wildly bullish investors seems to have FORGOTTEN about the 3.8% decline in relevant July comparison and a tepid 0.2% increase in June. Likewise, positive reactions to stronger official Chinese PMI manufacturing read for September has a seasonal relevance seems to have also gone unnoticed.
- the rapidly falling US dollar is stalling export market reach of countries like Japan, South Korea and Taiwan into the US market – meaning that cheaper dollar is sucking out the growth in otherwise strongly performing heavily export-dependent Asian economies also has risks of its negative impact, potentially squeezing out US exports opportunities in these slowing economies.
- financial markets are NOT convinced as yet that the double-dip risks of deflation are behind us. Manufacturing is weaker not only in US but also in Europe, Japan, Taiwan, South Korea and Singapore - all pointers that the fragile global recovery is slipping. Britain is moving closer to monetary stimulus and consumers worldwide are still retrenching, even in brightly-lit German economy, except China. Western economies are confronted with the grim realities that the closing end of stimulus spending trail saw no pick-up by consumers of the economic baton in support of sustaining growth, forcing Governments’ back on the tightrope of re-balancing stimulus withdrawal and extending stimulus support instead including that of China. FALLING US DOLLAR ABETTING FINANCIAL MARKETS’ PERCEPTION THAT DEFLATION RISK IS JUST PROLONGED and delayed, not punctured of eventuality in its likely avoidance.
- all the financial engineering at the corporate level of takeovers does NOT add to income generation, economic growth or employment. It is asset shuffling, headline hogging, definitely, and some confidence building among equities investors which may or may not inspire consumer confidence forward and it won’t do so unless it is (unlikely to be so) sustained for significant stretch of time to buoy investors beyond the US Congressional 2 November election.
- the “perverse” of massive debt “capitalization” of balance sheets among US corporations seems to have investors’ irrational liking and bullish sentiment approval. Debt financing even by cash-rich corporations, very cheaply in current very low interest rate environment, evaporates part of the “cost of capital” by substitution effects as interest payments on bond financing, unlike dividend payout, are tax deductible. The funds thus raised is used in share buybacks, pay dividend or simply return a portion of capital back to equity holders but it adds nothing to sales headline nor corporate bottom-line. This should give hint to shareholders that corporations are unable to find attractive investment opportunity to deploy ‘cheap” and/or “excess” capital and bodes nothing forward of future prospects. General Electric Inc. for example, changed its mind on dividend payout after conference calls to analysts in its previous quarterly earnings briefing. Why should investors cheer dividend paid out of “debt” bond issues merely because it is cheaper?
- quantitative easing is unlikely to positively impact on the level of economic activity. Corporations, unlike consumers, are cash rich and banking system is flushed with cash but either slow to lend or borrowers find little or no viable justification for increased loan demand in the fragile weak recovery. For recovery to find its grip and spread through the economy, corporations must increase capital spending a lot more intensively than current and that is NOT happening in US, EU or Japan.
- so global economy is still stuck in the gridlock of sagging recovery and gold prices rising despite equities also oddly rising – each is waiting for the other to fall when realities hit home.
My view is that gold will continue to rise. Quantitative easing – the only option seemingly available of economic lever left to Obama , in a political gridlock on Capitol Hill post-November Congressional election, will weaken US dollar further, and if the economy slips from a low base into recession, stock prices will head the direction of Antarctic. Barring major Central Bank or IMF selling, gold will head for Arctic as US dollar heads in the opposite direction.
Anyone disagreeing?
Zhen He
1 October 2010
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