A tumultuous week has just swept the US political economic landscape and metals market since my last write up of 15 October 2010 Update 7, Global economies heading for turbulence, renewed risks of sovereign debt crisis, currency “war” risking double dip recession & massive damage to economies as gold keeps heading up north. A flood of uninspiring costs saving-inspired corporate results came in EU and US, mostly above analysts’ expectations but demonstrated puny sequential growths and almost glaringly and disappointingly, no headline turnover gains. Deutsche Bank, Germany’s largest bank, reported a third-quarter net loss of 1.21 billion Euros and reported difficult ongoing macro-economic and market conditions." It is not a surprise, given persistent fall in German’s retail sales as consumers faced continuing strong headwinds in EU’s strongest economy.
http://news.xinhuanet.com/english2010/business/2010-10/28/c_13578719.htm
Top 6 US banks were also NOT smiling at their September quarterly results despite improved earnings from lower accounting provisions. Headline revenues dipped underwater - indicating slower economic growth ahead. Contrary to media reads, all those “rebounding” October PMI reads in EU, USA and China are NOT positive signals of good times coming back – they are partly SEASONAL inventory production for Christmas shopping. Retail sales are spiraling downwards in Germany, depressed in Japan and patchy at best in USA. The two-month consecutive decline in the electronic index of Singapore’s manufacturing sector tells of the same dismal story as the steep falls in Japanese and Korean manufacturing PMI reads of the global weak consumer electronics sector. Intel, the foremost manufacturer of integrated circuits for computers, saw its revenue base of $11.1 billion grew by 2.34 % in third quarter, slower than its 4.5% gain achieved in the June quarter over March. Earnings per share stalled at 53 cents per share as corporate customers barely sustained weak consumer market. AMD, Intel’s closest competitor, suffered the indignity of 2% sequential revenue decline attributed to weaker than expected consumer demand. Discretionary consumer demand is still weak even as US auto sales performed better and closer to replacement rate of 12 million units per year. September durable goods order actually fell by 0.8% - a surprised second consecutive monthly decline. A couple of sparks, however, were seen in US retail sales with across the board gains in much of the sector in same-store sales in September and early October. Inventory build-up in September eased slightly in October. The question is – will this spending last or is this pre-Christmas rush to take advantage of promotional stock clearance deals leaving Christmas to the cold of winter chill? There are some warning signs emerging.
http://www.marketwatch.com/story/buried-by-inventories-2010-10-28
Most troubling was the number of cancelled orders they received from retailers during the third quarter. That doesn’t bode well for the make-or-break holiday season. Wesley Card, CEO of Jones Apparel Group said the uphill struggle against inventories had forced them to cart truckloads of unsold items to discounters to clear some space in their warehouses. It’s a growing problem throughout the industry. Appliance giant Whirlpool Corp is struggling with the same problem. Rising material and production costs are exceedingly hard to pass on to US consumers. The result is discounting, shrinking margins and a growing pile of unsold stuff. A good cross-section of US and global corporate giants has warned of tough conditions in the holiday Christmas spending season including Samsung, Microsoft, Wal-Mart and Target Corp.
Even Tupperware reported shrinkage in developed markets in local currency terms including US. In contrast, the consumer “spending down” from expensive restaurant meals continue to add traffic and sparkle to McDonald’s sales revenue and accelerating profits. Beige book reported US economy trawling along on a modest growth path as this author forecast on 15 October 2010. That at least partially explains the urgent necessity of the Fed’s FOMC November 3 meeting to another round of quantitative easing of US$600 billion of longer-term Treasury bonds, even though that is likely to be inflationary of impact. The Fed has already pushed short-term interest rates to zero. And its remaining option -- buying Treasury bonds to pump cash into the economy -- is risky and unproven. At this critical juncture, Obama stumbled politically when Democrats lost majority control of the House of Representatives, governorships and a whole swathe of state legislatures across the US. This mid-term election outcome is pivotal because of all of the economic and policy issues that remain uncertain". INFLATION WILL REAR ITS UGLY HEAD AS COMMODITIES PRICES SURGE. The tide of investors rush is into gold as the value of the US dollar faded faster. And in trigger of that QE2, the punished dollar wobbles. US dollar Index future fell to an intra-day low of 75.82 last Friday – that is roughly 6.8% decline compared to 81.4 close as of 16 September, itself a 2.4% fall from 82.7 as at end of August.
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=dxy&sid=0&o_symb=dxy
This author had forewarned of fast sliding US dollar since mid-September, Update 5 – Global Economies heading for turbulence, watch out the falling US Dollar The fall of US dollar has been unrelenting downwards with little breather in between forcing the Japanese and emerging currencies to appreciate upwards and destabilizing their economies particularly Japan and South Korea. With Hong Kong de-facto peg to US dollar, a lot of hot near-zero interest rate money will flow in without exchange rate risks likely to fuel assets bubbles and speculative attacks on currency in fast growing East Asian economies and driving up commodity prices and inflation globally.
With Congress in a stalemate and if US economy fails to recover next year and considering the escalating fiscal deficits and public debt to increasingly unsustainable proportions, there must be rising concerns of the US ability to repay the Chinese investors of US Treasury among gold speculators. Falling US dollar speaks volume of that as gold price surges to record levels persistently after short dips. Right now, a lot of gold speculation is NOT yet mainstream but physical off-take among retail investors is sustaining gold prices. Despite recent intense volatility, gold has caught the imagination of high net worth individuals like George Soros and Jim Rogers who invested heavily in SPDR Gold Trust as the US dollar rapidly loses its value. Warren Buffet, of course, distastes gold investment as he is much more economy focused in his investment outlook. And talk of Blackrock and JP Morgan Chase eyeing to set up a physical copper ETF despite gloomy weak economy evidenced by a weak global steel sector are not developments to be sneered at. The implied converse is that US dollar decline still got some way more to go, maybe even more significantly and at an accelerated rate. Yet the paradox is that the US dollar will remain the world’s sole reserve currency and remains practically impossible to change now, the dramatic problems confronting the US dollar on world trade and investment is locked in cold freezer to finally implode later as painful consistent adjustments creep in. Open economies like Singapore without strong domestic fundamentals are at big risks. As a harbinger of shifting dollar and gold as a “liquid” currency, Korea’s Central Bank is now seriously considering diversifying part of its foreign reserves into gold instead of the US dollar.
http://sg.news.yahoo.com/rtrs/20101018/tbs-korea-economy-cbank-gold-b8dd11d.html
This author believes that the change in political landscape in US might motivate a faster move in that direction.
Meanwhile major stock markets globally, especially the US surged ahead in apparent huge vote of disconnect to underlying economic fundamentals and growing political uncertainty. It is the cash flood driving the market, not the slow US consumer nor corporate. The big cash rush for bond sales by US corporate displacing equities is telling of how perversely “confident” that equities (as a proxy of economy) will perform instead of financial engineering (swapping cheap debt bond issues for dividend liability payment by share buyback). Real investment in hard assets to grow the business and economy seems the missing link as of now. US corporate are staring at consumers’ confidence and consumers are staring back at corporate investments and hiring – a locked stalemate.
The US is entering the second year of fragile recovery – either the consumer accepts and carry forward the baton of recovery or it tipped over into a brutal recession with little expectation of big Government spending rescue. Voter’s backlash was most virulent, unprecedented against an incumbent strongly favored Presidency not seen since 1930 – the disenchantment with the economy was paramount but equally no one is embracing with passionate love for Republicans who failed to translate the landslide into the Senate. The political quagmire is imminently displayed in the fate of Nancy Pelosi, the most powerful woman in US political history, now faced the prospect of mulling her future forward after the Congressional mauling. The US political economy landscape morphed beyond recognition of its previous overpowering legislative sway and in place of that a stalemate and probably a gridlock of brutally bitter fights waiting. The most and best likely scenario seems now is a continuing slow growth protracted recovery and the worst is a double dip with little hope of immediate respite.
As Obama feels the intense heat of voter desertion, anxiety is also everywhere over the size of America’s debt. The election brought a lot more uncertainty and in today’s uncertain fast moving environment, inaction of any gridlock stalemate is dangerous not just for America but the world.
http://finance.yahoo.com/news/Likely-gridlock-in-Congress-apf-3958821672.html?x=0&sec=topStories&pos=8&asset=&ccode=
Republicans know also that little cooperation and confrontation would be a folly and political suicide if the economic ship is let off to drift in fragile unsustainability. While the President’s veto still overrides, it is one of a “negative” contribution, not a positive impetus of agenda setting of difficult economic reforms from banking regulations to taxation to clean energy and most critically, desperate urgent need of monetary stimulus if the economic stalled. In this dangerous drift to possible political gridlock, there is intense pressure on the Fed Reserve to respond swiftly and decisively in any unfolding crisis. What does that mean? Maybe another round of QE3 money-printing and distribution by “Helicopter “ Ben Bernanke and all the complications that must bring, of havoc of destabilization of the global economy now seen unfolding?
US CORPORATE RESULTS - STRONGER BUT CONSUMER SPENDING LAGGING
Citigroup reported weakened lending revenues, no quality improvement on total allowances for loan losses or consumer loan loans sequentially. Third quarter revenues of $20.7 billion, is 6% down from second quarter. Net income was $2.2 billion, down $529 million or 20% from prior quarter.
http://www.citigroup.com/citi/press/2010/101018a.htm
Goldman Sach $1.74 billion was sequentially much better than the $453 million second quarter earnings – thanks to a 17.5% sequential reduction in net operating expenses from $7.4 billion in the June quarter to $6.1 billion. Net revenues, including interest income, were flat at $8.9 billion compared to $8.84 billion in the prior quarter but down nearly 28% on year earlier comparison despite a more bullish equity market conditions. Quarterly profit of nearly $1.9 billion was 40% lighter than prior year same quarter of $3 billion weighed down by slower investment banking activities. Goldman's Viniar noted challenging environment but cited there are signs that some improvements in client activity could be on the way. It remains to be seen if that persists and sustainable.
http://www.marketwatch.com/story/goldman-sachs-quarterly-profit-falls-40-2010-10-19
Rival Morgan Stanley also suffered steep revenue and net income falls from trading bonds, stocks, currencies and commodities on behalf of institutional clients. It posts an after-adjusted loss for the third quarter.
http://www.marketwatch.com/story/morgan-stanley-reports-third-quarter-2010-2010-10-20?reflink=MW_news_stmp
Wells Fargo reported better results with record net income of $3.34 billion but this is due to lower provisioning. Wells said its allowance for credit losses fell to $24.4 billion at the end of September from $25.1 billion on June 30. Nonaccrual loans and other nonperforming assets totaled $34.57 billion at the end of September, up from $32.94 billion at the end of June.
http://www.marketwatch.com/story/wells-fargo-reports-3-rise-in-quarterly-profit-2010-10-20
Bank of America’s September quarter came in better-than-expected. Excluding goodwill-impairment charge of $10.4 billion, it earned $3.1 billion. Whilst optimistic about long-term prospects, it remain conscious of “short-term challenges”
http://www.marketwatch.com/story/bank-of-americas-loss-widens-on-big-charge-2010-10-19
Shrinking revenues at US top 6 banks may continue as economy heads for slower growth ahead. Tighter credit and derivative rules restrict the growth in banking revenues after a record 2009. A weaker housing sector within a weaker economy did not help loans growth as banks have become more risks averse. Consumer and commercial loans at U.S. banks climbed 0.6 percent in September to $6.8 trillion from a year earlier, the first rise in 15 months, according to data from the Federal Reserve Bank of St. Louis. That provides a faint glimmer of hope.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=aNRltv1bCTT0
At $24.27 billion, IBM demonstrated a marginal 2.3% gain on quarterly sales turnover in September over June sales of $23.72 billion. Earnings per share sequentially grew by 8% over the June quarter. June quarter sales were better than sequential proceeding by 3.7% indicating tougher trading conditions.
http://www.marketwatch.com/story/ibm-shares-drop-following-earnings-report-2010-10-19
Tupperware Brands Corp had a dismal September quarterly with sales turnover actually declined by 7.5% to $523 million. Net earnings were $39.9 million and on per share basis slipped by 30% to 64c in the same quarter-over-quarter comparison to June. Emerging markets such as Brazil, India, Indonesia, Korea, Malaysia/Singapore, Philippines comprised 59% of sales in the quarter delivered a 9% sales increase. Established markets sales were down 5% in local currency terms. Tighter margin due to higher product and increased marketing costs eroded net earnings. This is in line with management earlier forecast of weak second half.
http://files.shareholder.com/downloads/TUP/1046163149x0x410812/131d4a3b-3336-4565-8636-648f41f6daa8/3Q_10_Earnings_Release_Complete.pdf
McDonald Corp continues to outperform. Global sales grew by 6% over second-quarter to reach $6.3 billion driving in a net income of $1.39 billion or $1.29 per share. Dividend was lifted higher by 11% to 61c per share.
http://phoenix.corporate-ir.net/phoenix.zhtml?c=97876&p=irol-newsarticle&ID=1485461
U.S. consumer-confidence gauge rises slightly higher to 50.2 in October from September's 48.6 , the Conference Board reported.
http://www.marketwatch.com/story/october-consumer-confidence-rises-to-502-2010-10-26
The surprise is September US durable-goods orders. The Commerce Department data showed US-durable goods orders declined by 0.8% excluding transportation, the second consecutive decline in 3 months. The revised August durable-goods order decline is 1% instead of 1.5% previously estimated. Shipments fell 0.4% in September. Inventories rose 0.5%.
http://www.marketwatch.com/story/us-sept-durable-goods-orders-up-33-2010-10-27-830330
New orders for core investment goods (excluding aircraft and defense goods) fell 0.6% in September after a nice 4.8% gain in August, according to the Commerce Department. The boom in business investment is slowing, suggesting that the manufacturing sector may not be able to keep leading the economy forward.
http://www.marketwatch.com/story/investment-boom-is-fading-2010-10-27
September same store sales in retail look healthier generally - 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. Apple Inc, Tiffany & Co, Nordstrom Inc reported better sales. This could be the first spark that the consumer is taking the baton as the driver of economic expansion.
http://noir.bloomberg.com/apps/news?pid=20601103&sid=aeHtFBP8UI1M
October retail sales appear to show signs of further consolidation of these gains. Macy’s Inc upped its second-half profit forecast and said its same-store sales rose 2.5%. Target Corp October same-store sales rose 1.7% while J.C Penny reporting that its same-store sales fell 1.9%. Most retailers did better-than-expected previously revised downwards by analysts after a hot summer. So was it better or worse? The month was very promotional. Traditionally, October is also a period when stores clear out goods to make room for the Christmas holiday merchandise. It is not known better sales figures were due to price discounting.
http://www.marketwatch.com/story/retail-stocks-rise-on-october-sales-results-2010-11-04
Existing-home sales in September climbed 10% to a seasonally adjusted annual rate of 4.53 million, the National Association of Realtors (NAR). That makes 3 consecutive gains in existing home sales but the association’s pending-home-sales index fell to 80.9 from a slightly upwardly revised 82.4 in August. Pending sales reflect contracts signed between home buyers and sellers, and closing a sale usually takes a few months. The latest NRA’s September pending home sales index, signals an “uneven recovery entering 2011,”
http://www.marketwatch.com/story/pending-home-sales-fall-18-in-september-2010-11-05-1244130
Prices fell by 3.2% in August over July according to the Case-Shiller home price index. Pending home sales has been on an uptrend since July when it rose by 5.2% followed by 4.3% in August. Housing market is still very soft even as activity level picked up.
http://www.marketwatch.com/story/sept-existing-home-sales-climb-10-2010-10-25
Sales of new homes climbed 6.6% in September, figures released by the federal government, representing the second straight months of gain. Though lower than 2009, it may signal housing demand may have hit the bottom in the last summer.
http://www.marketwatch.com/story/new-home-sales-climb-66-in-september-2010-10-27
Housing, banking loans and employment could be the tail end of economic recovery.
The Federal Reserve latest Beige Report showed the US economy growing, on balance, at a modest pace.
http://www.marketwatch.com/story/feds-beige-book-sees-modest-us-growth-2010-10-20
Manufacturing, the only bright spot in this recovery, has lifted again in October. The Institute of Supply Management’s manufacturing purchasing managers’ index increased to 56.9 last month, up from 54.4 in September. It was 56.3 in August and 55.5 in July. The average PMI for January through August was 57.8%.
http://www.ism.ws/ISMReport/MfgROB.cfm
New orders were up 7.8% to 58.9 compared to September figure of 51.1. Likewise production in October rose to 62.7 sequentially from September’s 56.5. Inventories were lower at 53.9 in October as compared to 55.6 a month earlier indicating faster shipment from higher production ahead of Christmas. Exports gained 6% to 60.5 in October from September 54.5. In contrast, imports fell 5% to 51.5 in October, down from 56.5. This is a hint that the falling US dollar has some positive impact on US GDP leakage. Overall, the manufacturing is growing faster than the month preceding and it could be a seasonal factor.
BRITISH ECONOMY – GROWING STRONGER BUT AUSTERITY WAITING
After increasing 1.2% in the previous quarter, British GDP grew by 0.8% in the September quarter – significantly higher than the 0.4% predicted by economist. A 0.6% gain in services sector, which make up 76% of the GDP, accounted for most of the growth. Industrial production, aided by 1% improvement in manufacturing component, was up 0.6% and construction increased by 4%.
http://noir.bloomberg.com/apps/news?pid=20601087&sid=abBPvDpjW_cY
The slowing pace of economic upturn came after UK Chancellor of the Exchequer had committed to stick to its planned June emergency budget spending cut by 83 billion pounds ($130.4 billion) between 2011 and 2015 – the largest Government spending cut in decades. It threatens to send the economy back into recession, just as a recovery is losing steam. Defence took a big hit.
http://www.marketwatch.com/story/britain-will-stick-to-deficit-reduction-timetable-2010-10-20
The cuts are aimed at narrowing the deficit to 2.1 percent of GDP in the 2014-15 fiscal year from the government forecast of 10.1 percent this year.
http://noir.bloomberg.com/apps/news?pid=20601109&sid=a2KqPZNRjxN0
With inflation running above the government’s 3% upper limit since March, there is little chance of Britain going into quantitative easing. Home prices fall the most since January 2009 as housing sector weakens. They are forecast to continue into 2011. There is “growing uncertainty” about the economy and the impact of the fiscal squeeze “at a time when we have seen an increase in the supply of new housing.”
http://noir.bloomberg.com/apps/news?pid=20601068&sid=apnlajrBBiCg
The Pound edged weaker as the currency market focus on the downside of fiscal tightening. As a warning sign of more headwinds ahead, Royal Bank of Scotland (RBS) plunged back into the red in the third quarter with a net loss of 1.146 billion pounds (1.3 billion) after a profit return of 257 million pound in the previous quarter.
http://www.google.com/hostednews/afp/article/ALeqM5hZoPo1zOTmCTv8zPCzQHcXCDjXuQ?docId=CNG.14a15ebfb0dc0cab49f38b324429877c.2f1
EURO ZONE ECONOMIES – INDUSTRIAL STRONGER BUT SOVEREIGN DEBT WORRIES PERSIST
Industrial orders in the 16-nation euro zone saw a 5.3% monthly rise in August.
http://www.marketwatch.com/story/euro-zone-august-industrial-orders-jump-53-2010-10-25
But the pain of sovereign debt crisis came back to haunt Portugal, Italy, Ireland, Greece and Spain as forewarned on 1 October 2010, Update 6 – Global Economies Heading for Turbulence, US stock market and US Dollar heading in divergent directions. Watch out for gold. The average price of credit-default swaps rose recently as governments of these Europe’s so-called peripheral nations are struggling to lower their budget deficits even as they impose public spending cuts and increase taxes. Greece’s 2009 budget showed the deficit was above 15 percent of gross domestic product, higher than previously estimated. They have urgent compelling need to get out of this deficit spiral – without which they risks spread contagion to the rest of EU forcing them also to austerity drive inhibiting and endangering their own economic recovery as well. As said Tim Brunne, a Munich-based strategist at UniCredit SpA. “It becomes increasingly difficult if you have high debt, and that feeds back again into your deficit and that’s a very difficult spiral to get out of.”
http://noir.bloomberg.com/apps/news?pid=20601109&sid=aLL.RNL5YXY8
“Sovereign issues are likely to be with us for most of the next decade until we see a combination of further unparalleled interventions, big currency moves, inflation, restructurings and/or defaults,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “We are not close to any of these at the moment but over time we’ll likely see these themes re-emerge. History would have to be re- written if we don’t.” AND THAT IS EXACTLY RIGHT.
German retail sales dropped steeply by 2.3% in September from August. Germany, EU strongest economy, experienced 4 consecutive months of decline in retail sales – 0.3% in June, 0.4% in July and a revised 0.4% in August.
http://www.marketwatch.com/story/german-retail-sales-drop-23-in-september-2010-10-29
There is yet no stabilization of private consumption demand and any expectation of a stronger September quarter GDP growth for Germany is reminded of being on the knife’s edge.
The Markit final euro-zone manufacturing purchasing managers' index of 54.6 for October is the first rebound in three months from a revised 7-months September of 53.7.
http://www.marketwatch.com/story/euro-zone-man-pmi-rises-to-546-in-october-2010-11-02
CHINESE AND EAST ASIAN ECONOMIES - WEAKER
China sudden interest rates hike on 20 October 2010 – first since December 2007 - caught financial markets by surprise. It is a significant adjustment backward from stimulus spending which had been fueling real-estate prices fanning inflation. China's national property-price index, which covers 70 large and medium-sized cities, rose 0.5 per cent in September from August, the first month-to-month increase since May. China's consumer price index rose 3.6 per cent from a year earlier in September, faster than a 3.5 per cent rise in August
http://www.theaustralian.com.au/business/markets/china-surprises-with-hike-in-interest-rates/story-e6frg926-1225940971812
Inflation is expected to accelerate in October according to Chinese Government media source. People’s Bank of China governor Zhou Xiaochuan has warned that the risks of excessive liquidity, inflation, asset bubbles and bad loans will “increase significantly”.
http://www.theaustralian.com.au/business/markets/chinas-purchasing-manager-index-jumps-in-october/story-e6frg926-1225946227958
The Central bank warned that more quantitative easing by developed economies will drive up gains in staple food items.
http://www.marketwatch.com/story/china-plans-more-steps-against-inflation-2010-10-28
China’s Cabinet warned last week that it will take additional action to curb property prices and do what it can to foster stability in commodity prices.
http://www.marketwatch.com/story/chinas-inflation-to-accelerate-in-october-report-2010-10-24
China’s economy is still growing too fast at 9.6% in the September quarter. The growth rate slowed down from 11.9 percent in the first quarter and 10.3 percent in the second quarter. The power cut and production curtailment in the last quarter seems to have little impact on industrial production and GDP growth.
http://www.chinadaily.com.cn/china/201010/21/content_11439504.htm
China Federation of Logistics and Purchasing has just announced this week its official Purchasing Manager’s Index rose to 54.7 from 53.8 in September and 51.7 in August, indicating strong CONSECUTIVE growths in spite of Beijing's efforts to slow the economy to avoid asset bubbles.
http://www.theaustralian.com.au/news/breaking-news/dollar-closes-higher-after-chinese-manufacturing-data/story-fn3dxity-1225946275072
The Chinese numbers contrasted sharply with PMI reports for South Korea, Taiwan and Japan, all of which showed a continuing slowdown.
Nomura Japan manufacturing purchasing managers' index fell to 47.2 from 49.5, the second monthly contraction in a row, indicating that slowing forward economic conditions and the strong yen are hurting most Japanese manufacturers.
http://edition.cnn.com/2010/BUSINESS/11/01/china.pmi.output.ft/index.html?hpt=Sbin
Japanese industrial output fell in September and deepening price deflation points to increased risks of an economic slump. Industrial output declined 1.9% from August when it dropped 0.5% adding signs to stronger Yen is causing the recovery to losing momentum.
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ah40ayfreaUM
To boost retail sales, Japanese retailers are cutting prices passing some of the lower costs of imports to consumers.
http://noir.bloomberg.com/apps/news?pid=20601080&sid=aiGd5N9pmSLA
Core CPI fell 1.1% from September year-earlier. Deflation points to the likelihood that the Japanese economy contracted this quarter. Companies reported planned production cut as Yen surged to a 15-year high of 80.4 Yen to a US Dollar. Toyota, for example, reported an 11% decrease in export shipment in August and official statistic showed September export growth was the slowest since beginning of 2010. The evidence points to rising Yen/US Dollar parity is sucking life out of Japanese exports and economic recovery momentum. The worsening economic conditions is pressuring the Bank of Japan to further quantitative easing and that also depending on how other developed economies moving along the same path.
South Korea’s economy slowed sharply to 0.7% growth in September quarter – half of the 1.4% GDP growth in the June quarter, amid weaker exports and manufacturing as global economic recovery turns cloudy. It was the second straight quarter that growth slowed.
http://finance.yahoo.com/news/SKoreas-economic-growth-slows-apf-237679402.html?x=0&sec=topStories&pos=main&asset=&ccode=
The HSBC October PMI for South Korea fell to 46.7 from 48.8, the second successive monthly number below 50. The HSBC Taiwan index fell to 48.6 from 49 in September, the third successive monthly number suggesting a contraction.
South Korea’s CPI increased by 4.1% in October to a 20-month high as compared to year earlier and quickening from the 3.6% advance in September. Inflation exceeded the central bank’s 4 percent ceiling even after the pace of economic expansion halved last quarter.
http://noir.bloomberg.com/apps/news?pid=20601068&sid=ajqfrIcOf34o
As Korean exports benefited from and demand picked up in October as the faster rising Japanese Yen struggles to restrain further rises, there is now pressure to raise interest rate after a three-month pause.
Singapore’s economy is also slowing down. Preliminary GDP figures for the third quarter showed a contraction of 19.8 per cent, quarter-o- quarter. That compared with growth of 24 per cent on the same basis in the second quarter. Released in October, it is the first sign that Asia’s economy is slowing down. Six-month forward manufacturing outlook for Singapore’s economy till March 2011 is more pessimistic according to the country’s Economic Development Board recent survey. Only 3% of those surveyed expected increased orders. The softer outlook cited weaker order, seasonal factors and the generally sluggish business conditions prevailing in Europe and US.
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1090208/1/.html
Since that survey, major events have occurred to add gloom. Singapore’s sudden exchange rate policy reversal of 14 October met with grim warnings of possible technical recession by MITI of 18 October. That hit the rocker of China’s surprise rise in interest rates on 19 October 2010. Asian countries use an array of fiscal as well as monetary policy via interest rate adjustments to curb speculative spending. In Singapore, it relied on exchange rate adjustment to curb inflationary pressure from abroad.
Singapore dollar is now prime easy target of speculative attack from the QE2s around the world. Such attack could drive up real-estate prices fueling inflation – exactly the same effects of rising Singdollar intends to curb.
The IMF latest pronouncement deems the US Dollar as overvalued “on the strong side of fundamental” despite the big fall since year to date. That implies it has substantial room to fall.
http://uk.finance.yahoo.com/news/imf-says-dollar-overvalued-afp-e4b33372b282.html?x=0
The net results for consumer might be neutral to negative but definitely negative for Singapore businesses going forward if the US Dollar depreciates significantly from here whilst the Chinese Yuan tagging on in tow. The competitive costs pressures within the manufacturing sector could well threaten the sector’s continued viability.
All regional Asian economies are troubled by hot capital inflows. Investors are sending more capital into higher-yielding assets in developing nations as monetary easing kept interest rates in the U.S., Japan and Europe near record lows.
http://noir.bloomberg.com/apps/news?pid=20601080&sid=a7s_XlpWb7lw
The Bank of Japan on October 5 cut its policy rate to “virtually zero” and announced a 5 trillion yen ($62 billion) bond-buying program. South Korea is contemplating taxes on foreign purchase of its bonds whilst India is resorting to adjusting exchange rate to counter this influx. Cheaper US dollar also pushes up Asian currencies, eroding competitiveness and threatening to stifle their economic recoveries as US attempts to export its way back to economic prosperity.
http://sg.finance.yahoo.com/news/Asian-central-banks-warn-rsg-3863251927.html?x=0
Summing up Asia, strong Chinese manufacturing growth in October is matched by weaker Japanese, Taiwanese, South Korean and Singapore’s industrial performance. These are anecdotal evidence that the weaker US Dollar is sucking growth out of Asia with Japan most hardly hit.
OVERALL – CORPORATE STRONGER BUT CONSUMER SPENDING PATCHY
European and US corporate results have been better than expected with few negative surprises. In this earnings season, most US firms posted upside surprises, but failed to provide impressive revenue results. Costs cutting were the norm. US auto manufacturing could turn in profits below the sub-12 million replacement sales, all thanks to generous discount and leaner operations. Even with strength of generally “improved” results, corporate forward guidance were also mixed. Global conglomerate, 3M, right into its final quarter cut its 2010 full year’s earnings by 6 cents per share despite three-consecutive quarters of revenue growth.
http://www.marketwatch.com/story/shares-of-3m-fall-5-on-softer-2010-guidance-2010-10-28
Toyota warned of gloomy outlook given threat of rising Yen. Globally consumer electronic is bracing for tougher times of falling prices. Panasonic, the world’s biggest maker of plasma TVs, lamented falling prices, the stronger yen and more expensive raw materials.
http://noir.bloomberg.com/apps/news?pid=20601080&sid=aXREhnF96a4A
South Korea’s Samsung and LG, the world’s two-biggest TV makers, have voiced similar concerns as rising won is dissipating the currency advantage over the Yen which had a larger jump on the US Dollar.
http://noir.bloomberg.com/apps/news?pid=20601068&sid=ajqfrIcOf34o
Samsung Electronics Co., the world's largest manufacturer of computer memory chips, cautioned that business conditions are deteriorating due to anemic recoveries in advanced economies even as it reported a 17 percent jump in third quarter profit to a record high. Samsung warned of difficult conditions in the final quarter due to weakening consumer confidence amid the slow economic recovery in the United States and Europe."
http://finance.yahoo.com/news/Samsung-3Q-profit-at-record-apf-4246308810.html?x=0&sec=topStories&pos=1&asset=&ccode=
Companies from Microsoft Corp. to Intel Corp. are increasingly counting on corporate demand as waiting consumers are reluctant to shop or pay higher premium for quality. U.S. retailers such as Target Corp. and Wal-Mart Stores Inc. are sweetening discounts ahead of the holiday season.
Companies are doing very well but instead of investing their profits and creating economic growth they are hoarding money and consolidating their financial position. In recent months, US corporations are leveraging up at record pace having sold more than $125 billion in bonds in September alone, the highest amount of the year, according to Informa Global Markets.
http://www.marketwatch.com/story/corporate-debt-binge-accelerates-as-yields-dive-2010-09-30
The acceleration of their bond issuance of debt is driven by hunger for bonds and the lowest yields since at least the early 1990s. NBC Universal (G.E. unit – $5.1 billion), Wal-Mart Stores Inc ($5 billion) Microsoft ($4.8 billion) GE Capital ($4 billion), Hewlett-Packard ( $ 3 billion), American Express Credit ( $2 billion), TransOcean ($2 billion), EI du Pont de Nemours ( $2 billion) are among big names taking advantage of low yields.
These companies with high ratings and strong balance sheets are locking in cheap funding using the proceeds they raised to pay for acquisitions, stock buybacks and even dividends. Other entities planning the same are Citigroup ($4.5 billion) after already sold $15.7 billion debt so far this year, BNP Paribas (2 billion), Codelco ($1 billion) Goldman Sach ($1.3 billion), Rio Tinto ($2 billion), Morgan Stanley ($1.5 billion) etc. They are doing it from a position of strength.
Like investors and consumers, American businesses are behaving very cautiously and are reluctant to invest in growth. They are selling debt to pay for dividends and buybacks thereby improving shareholders’ equity future return even though it increases leverage without providing any cash for organic growth in new business. They add nothing to the economy in short term but merely reducing their costs of capital and maybe reducing their long-term dividend payout if tough conditions continue to prevail.
I guess it is the perception out there that we don’t see things changing for some time to come when the necessary balance-sheet repair still has a long way to go for government, businesses and consumers. With the government taking the lead, each one, between business and consumers, are waiting for the other to take on the spending spree and the baton of growth. And that is imminently evident for American business in the US September quarter GDP figures at least.
Flash advance estimate of September quarterly GDP growth announced by the Bureau of Economic Analysis (BEA) shows the US economy grew at a slightly faster pace than the June Quarter of 1.7%. It grew by 2% in the current quarter.
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Contrary to media headline read, much of the gain in September quarter GDP growth had NOT been derived from increase in consumption spending. Relative to June quarter, growth in private consumption spending in the September quarter was slightly slower for both consumer durable and also consumer non-durable goods. Much of the increase was due to INVENTORY RESTOCKING AND DECELERATION IN TRADE LEAKAGE of strong export growth accompanied by slower gain in imports.
BEA reported the “small acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment”. The change in real private inventories added 1.44 percentage points to the third-quarter change in real GDP after adding 0.82 percentage point to the second-quarter change.
Real nonresidential (business) fixed investment increased 9.7 percent in the third quarter, compared with an increase of 17.2 percent in the second. After 3 consecutive quarters of growth in business spending in software, demand from that sector is wearing of
The biggest disappointment is the missing housing boost – delayed consumption reflecting the deleveraging although some signs of stabilization now. Modest and gradual gain in consumer’s income is stalling recovery in housing commitments.
FORWARD – POLITICAL QUAGMIRE, SLUMPING DOLLAR & STALLED ECONOMIC AGENDA.
American voters gave President Barack Obama a good round of “shellacking” in the mid-term Congressional election, Democrats lost control of the Congress although survived a slim majority in the Senate. That must place Obama’s economy agenda forward in a difficult gridlock of political hostage – even much tougher than the Obamacare health reform. It is a landscape change of Obama’s political platform. Republicans have already vowed to roll back Obama’s agenda.
In the best of political fortune, prior to the mid-term Congressional election, the US can’t even spend on infrastructure waiting for industry to grow. It will take time and incentivized efforts to get high tech industries or green industries of any degree to populate new industrial development nearby to pay for these infrastructures let alone the debt to pay for its construction. China is in a far more fortuitous circumstance. It has already the industries in place and to add new ones to fully utilize and to pay for all these infrastructural development costs.
With a hamstrung political maneuverability, Obama is practically reduced to a cheap dollar strategy – lower dollar cut livings standards, lift corporate earnings and export back to prosperity. He can forget about fiscal stimulus as Republicans are hostile to “BIG” government. Neither is there any leeway available via monetary policy as US interest rate is near zero. Neither would EU consort with the QE2 type stimulus as Europeans are headed in the direction of fiscal austerity.
http://www.marketwatch.com/story/gold-rallies-as-price-drop-lures-investors-2010-11-03
As the Fed unleashed another US$600 billion quantitative easing program, gold and metals rallied strongly in the wake of sharply declining US dollar as the EU, in sharply contrasting stance, stay unmoved. The ECB’s key lending rate was left unchanged at a record low of 1%. The Fed move succeeded in punishing the dollar.
The G20 finance ministers Seoul meeting of 23 October concluded that the global recovery is underway, albeit fragile and uneven. Growth has been strong in many emerging-market economies, but the pace of activity remains modest in many advanced economies as noted in my earlier writings.
http://www.marketwatch.com/story/g20-recovery-under-way-but-uneven-2010-10-23
They warned advanced economies needs to be more “vigilant against excess volatility and disorderly movements in exchange rates” in order to “help mitigate the risk of excessive volatility in capital flows facing some emerging countries.” The Fed Reserve manipulation of the fast depreciating US dollar was what the G20 impliedly critical of. Geithner , US Treasury Secretary, spoke of world’s economy “is going through a necessary, but complicated process of adjustment” following “large financial imbalances” that include excess borrowing, overinvestment in real estate and “unsustainable leverage in the financial sector.” That should have been referred to the developed economies except China.
This author asserts that it is concomitant that economic reality dictates financial market bubbles taking a long time to burst and it also take an even longer time to heal. The continuing “sick-recovery-sick-relapse” syndrome of RBS proves that.
And this is very threatening of emergent economies at this moment as US floods the global financial system with liquidity not justified either by economic fundamental relevance nor has tangible asset backing. In blunt terms, US is printing money and “Helicopter” Ben Bernanke is early “Father Christmas” bringing cheers today and possibly a lot of tears of inflation in the future. All these were calculated unilateral bullying move to force the unwilling appreciation of emerging currencies which China won’t come to the party. This was despite an “uneasy truce” of no competitive devaluations by all G20 members based on fragile trusts averting a crisis of confidence in financial markets momentarily.
In truth, the US urge for faster steep appreciation of Chinese Yuan met with stiff resistance and that found a surprise accord of agreement in support from unlikely Germany which pointed fingers at US as “the” currency manipulator. The Chinese, quite rightly saw, that decisions of monetary policy and macro- economic aggregates are of domestic legitimate economic interest and therefore of necessity one of its own “sovereign” determination not available to US-instigated or any foreign pressures.
http://www.reuters.com/article/idUSTRE69N0QZ20101024
So the bottom-line still is a free-for-all despite the hypocritical smiles for photo shoots in the G20 Seoul meeting. The Fed’s FOMC meeting of 3 November started the ball rolling. The full impact is yet to be evident on financial markets. Small and open economies like Singapore are most vulnerable. As UBS Bank currency strategist Nizam Idris ( ST 3 November 2010, S$ powers to new high against US$) said correctly, the MAS monetary policy statement of 14 October 2010, of allowing Singdollar to rise uninhibited, made investors look the Singdollar as a “one-way-bet” betting it will only rise against the US dollar. The damaging implication of that on our industries and competitive position is still waiting to see outcomes ahead.
The FOMC minute confirms
- the slow pace of recovery
- gradual rise in consumer spending
- easing of corporate investment spending
- and a subdued underlying inflation trending lower in recent quarters i.e. an implied threat of deflationary environment risk forward
- its intention to purchase a further $600 billion of longer-term Treasury securities dubbed QE2.
http://www.bondsquawk.com/2010/11/fomc-november-2-3-meeting-official-statement/
It is a high risks decision – either it lift the economic recovery onto a steeper trajectory via depression of interest rates in the US or it fails, the excess liquidity flood globally will drive and add substantially to inflationary pressures, not only for the US but the world.
Asian Central bankers whose economies are enjoying higher rates of growth are naturally wary of this opening of liquidity floodgates. The influx of cash has already put pressure on currencies in Asia and other emerging markets to rise as added money supply will mostly serve to depress the value of the US dollar. With the exception of Singapore, most export-dependent Asian countries have either taken capital control measures, supplement it further or are contemplating such a move to contain the rise of domestic currency damaging its export competitiveness. Against the US dollar to date this year, the Thai Baht is up more than 11%, the Korean Won more than 6% and the humble Philippine Peso more than 8%. Market talk has it that Korea is likely to restrict foreign access to buy Won-based derivatives or re-imposition of tax on foreign investment in Korean Government bonds. Japan’s BOJ might expand its own quantitative easing measures watching closely the impact of US move. Hong Kong which maintains a de facto peg with the US dollar and therefore its currency does not fluctuate versus the US dollar will naturally “import” cheap US interest rates.
http://www.theaustralian.com.au/business/news/asian-officials-warn-qe2-will-open-liquidity-floodgatesa/story-e6frg90x-1225948139564
That makes it easy for Hong Kong consumers and businesses to borrow cheaply and bid up the prices of everything from real estate to fine art to businesses from China to Singapore – all of that short-term speculation on asset pricing and exchange rate appreciation as the US dollar meltdown. Chinese Government is obviously very concerned that the Fed's quantitative-easing program wouldn't stimulate the US economy but would boost the country's fund outflows, "affecting the stability of the global economy."
With many Asian economies seeking to impose varying capital controls, the flight out of weaker US dollar finds refuge in gold and base metals. Gold, in particular, benefited from a confused market of political and economic uncertainty with December gold hitting record high last week, almost a whisker from US$1,400 per ounce as Obama emerged shell shocked from the mid-term Congressional election which he received a nasty “shellacking”. Higher metal and oil prices spell inflationary pressure alongside other commodity prices. Stock prices rallied solely on liquidity influx but further disconnect with economic and political fundamentals. All asset prices have now lifted off onto a higher trajectory of higher treacherous volatility as US dollar and bond prices heading down south.
Intense voter backlash have reduced Obama grip on Congress to rubble. From a comfortable majority in House of Representatives, Senate and Governorships previously, the Democrats is now minority (185 vs 239 seats) in the House of Representative and retains only 15 to 28 Republican governorships though retaining a 52 to 46 seats majority in the US Senate. There must be uncertainty ahead as the results mean political stalemate over economic agenda is likely to eventuate. Even Ben Bernanke faces the prospect of greater scrutiny from resurgent, confident Republican lawmakers. The composition of lawmakers including so many “Tea Party” candidates who are NOT necessarily Republicans of political agenda further confused the intricate political landscape. The message is clear. Voters angry over the economy have abandoned Obama in the House of Representatives but NOT in this desperate desertion flocking to embrace the Republicans with any loving passion in the US Senate. Tea Party elected lawmakers are the “independents” policy voting bloc within the Republican ambit – the approximation of a “hung” Parliament similar to the UK and Australia. Exit poll showed American voters are angry with Obama’s slow-to-rise reduction in employment hopes BUT FEW COMPREHEND OR EVEN AWARE THAT without those fiscal stimulus, the unemployment would have been a lot higher and in any case, the tax receipt in that depressed state of economy would have compelled even steeper cuts in Government spending adding grievously to elevated unemployment level than current.
With so many “elephants” in his “democratic” bedroom, we are unlikely to hear Obama talking a lot about “change” mantra, lest he wants to smell more of elephant’s excrement attack. The hard grind of jobs, taxes, the budget deficit and national debt will be his nightly nightmare comes bedtime after inheriting the worst economic downturn since the Great Depression.
http://www.theaustralian.com.au/news/world/struggling-barack-obama-to-ditch-hope/story-e6frg6so-1225947492341
The passage of healthcare reform took a heavy toll on his Presidential divided time, energy and distracted his focus on the economy and employment generation. The journey ahead for Obama promises to be a lot tougher as the emotional Republican elephant, John Boehner, threatens the political gridlock of his demand in favour of “small” government ahead. There will have to be tough choices and compromises as Obama would foist budgetary responsibilities onto the Republican lawmakers
BUMBY ROLLER-COASTER RIDE FOR ALL IN THE GLOBAL ECONOMY AHEAD. It will most likely be a swim or sink knife's edge post-Christmas. Anyone disagreeing?
Zhen He
7 November 2010
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