By Shant Movsesian and Rajan Dhall MSTA Coming off a mixed week for the USD, traders focus their attention on the Jackson Hole symposium which starts on Thursday, running through to Saturday. Within this, Friday's address by the Fed chair will take centre stage, and for all the 'will she, won't she' talk about monetary policy, the market will be hanging on Janet Yellen's words, as the third rate hike for 2017 remains in the balance. As it stands, ECB sources (always an interesting one that) report that president Draghi will refrain from covering policy matters when he takes to the stand, and we saw this hit the EUR, helping to stabilise the USD index in the process. Since then, political shenanigans at the White House have again undermined the greenback, with the past week see the manufacturing council disbanded by Donald Trump after a series of resignations prompted by his public address in response to the Charlottesville attack. We then saw rumours hitting social media that Gary Cohn had resigned, but despite being dismissed, cast doubt over the chief economic adviser's advocacy of the current administration. Ending the week we saw chief strategist Stephen Bannon removed (in whatever manner this entailed), and through all the above, risk sentiment wobbled (at best) again, and the funding currencies and safe havens led by the JPY and CHF regaining ground. Gold also pushed above $1300, but failed to maintain this key level into the weekend. Consequently, there will be little focus on the data this week, and to that end we see little on the schedule of note anyway. Markit release their version of manufacturing and services PMIs (Wednesday) which have been at odds with the ISM data lately, and the Jul readings for existing home sales are released on Thursday. Friday's volatile Durable goods orders will naturally be overshadowed by Yellen's address, but through the week, economic activity indices from Chicago, Richmond and Kansas are also out. In Europe, we get the national and composite PMI numbers midweek. On Monday, the German ZEW release their survey results, for comparison with the IFO institute who report on Friday along with the Q2 German GDP data early on in the European session. In all cases, the data will have to be pretty underwhelming to dent the bullish sentiment in the EUR. We saw 1.1700 giving way when the ECB minutes divulged the governing council's concern over the FX overshoot, and while this may have been addressed vs the CHF and JPY, both the spot and GBP rates continue to find strong demand on dips. EUR/USD managed to push down to 1.1660, but was swiftly back above 1.1700 again. Liquidity in the summer markets overemphasise the larger orders, with more buying interest noted here down to 1.1610. For EUR/CHF, 1.1225 is the first major support point to note, with much of the latest weakness down to broader risk factors which have naturally pulled USD/CHF back to 0.9600 (and lower) again. 0.9770-75 still the level to overcome for those looking for a more meaningful correction and/or recovery in the USD. We saw EUR/JPY also giving back early week gains, which saw the 128.00 handle briefly surrendered, but as noted above, the JPY is quick to react to negative risk factors these days, and this is down to the net short positioning in the market. According to the representative CFTC data however, this has been trimmed by some 20% this past week. EUR longs have also contracted, but as above, there are plenty waiting to get back in at lower levels, and impulsively so. USD/JPY remains well placed to push lower again and retest the new August base at 108.60, through which lie the 2017 lows around 108.15. Fresh demand seen all the way into the low 107.00's if we do break lower, with the constant stream of surprises coming out of Capital Hill more than capable of seeing this achieved. This should be a broader JPY move however, with the likes of GBP/JPY also showing signs that the upturn has run its course. The commodity Dollars also looked to have topped out vs JPY, with the weekly charts on AUD, NZD and CAD near identical. Out of Japan, we get the latest CPI stats out on Thursday, and a continuation of a slow pick up will add to some of the more encouraging domestic growth signals we have been receiving of late. Manufacturing PMIs here are out on Tuesday. The China data slate is empty next week, as is that of Australia, so the AUD will be at the mercy of external factors which are split between the USD and general risk appetite. Hitting the low 0.7800's this week, we expect the market will be looking for a deeper retrace based on the technical breach of 0.7835-50, but closing well above here on the weekly charts puts this in the balance for now. Trade data in NZ offers a chance of some differentiation among the 'Antipodeans', with NZD tracking the AUD spot for the most part, and keeping AUD/NZD inside a 1.0650-1.0850 range; the upside does look more likely to give way. The recent NZ numbers have not been great, namely jobs growth in Q2. The fiscal clout from the budget surpluses has faded into the background also, though many anticipated this as much of this was fed back into social investment more than business. Gains above 0.7300 look tenuous for now, but demand ahead of 0.7200 sets up a near term stalemate. One of the more positive developments this week was the cordial start to the NAFTA talks, and although this may sound naive, did give the CAD some relief - as it did the MXN, which both ended the week up on both the USD and the JPY. As noted before, the greater risks lie at Mexico's door, but for the US, a positive outcome - for all - would temper some of the negative factors hitting USD sentiment at the moment. Nb, Mexican Q2 GDP on Tuesday for those who monitor levels in the current tri party accord. Canadian inflation on Friday drew an odd response from the CAD as yoy CPI up from 1.0% to 1.2% is little cause for excitement. Given pricing for another BoC rate hike this year is up around 80%, we see the risk to the downside on this basis alone, with some of the more recent domestic readings (trade and manufacturing sales) perhaps reflective of the aggressive CAD appreciation seen in the last few months. We still look for an eventual test of 1.2200-1.2000 lower down, but not 'all in one go'! 1.2750-1.2800 as expected has contained the upside, and next week will see whether the support just under 1.2600 will hold up for a more significant correction. Wholesale sales, retail sales (both for Jun) and corporate profits due for consideration next week. GDP for Q2 is the major event in the UK ahead; this released on Thursday along with the business investment levels as the CBI distributive trades survey. Last week, the focus was on the jobs report where we saw wage growth improving, but with the bears gaining the upper hand, GBP relief was short lived, with a deeper probe into the numbers showing real earnings down - as you would expect given the exchange rate fed rise in inflation. Jul PSNB and CBI industrial trends orders are out on the Tuesday. It took the BoE's highlighting of their concerns over the Brexit process ahead to curtail Cable strength towards the 1.3300 level, and now the market has been 'directed' towards this key and ever-present (!) factor, rebounds see the market jumping in to sell quickly and 1.2900+ being given short shrift. There is no disputing the fact that we tread cautiously from here, and especially so given the EU talks have stalled, with the UK keen to press ahead with transitional agreements, but Europe equally keen to resolve withdrawal terms first. The low 1.2800's are providing some strong support in the meantime, but we should all now be familiar with current market persistence in maintaining well established themes. We still expect GBP to push lower, and it is now all about how much breathing space we get between down-legs. Expect very little of this against the EUR as we continue to grind up towards the resistance zone in the 0.9150-0.9250 area. We also get Q2 growth in Norway on the Thursday, which is the stand out release in Scandinavia. Just as we see in AUD/NZD, there is little to differentiate between the NOK and SEK at the present time, with steadfast parameters in NOK/SEK at 1.0120 and 1.0360 having noticeably contained trade in the past 5 weeks. Parity was momentarily breached at the start of Jul, but strong GDP numbers in Sweden could not generate a fresh move to test these levels. NOK - and CAD - correlations with Oil price have faded at these generally more comfortable levels.
Authored by Shannara Johnson via Hard Assets Alliance, Take it from “Dr. Doom”: own some physical gold and keep it out of the banking system. Dr. Marc Faber, a legendary investor and the editor/publisher of the Gloom, Boom & Doom Report, is well known for his contrarian investing style. In a recent Metal Masters interview with the Hard Assets Alliance, he noted that the biggest geopolitical risk for Americans today is not a conventional war but rather cyber-attacks that could take down the US power grid. In such a scenario, gold would become an irreplaceable medium of exchange. But it’s not the only reason to own gold today. Diversified Assets Outside the Banking System Faber grew up in Switzerland right after World War II, a tough time that caused his family to distrust paper money and taught him the importance of precious metals as a safety net. Faber remembers how his father talked about rich people as millionaires. “That, in the ‘50s and ‘60s and ‘70s, was a lot of money. Today, a million is nothing at all—small change. Unfortunately. When people talk about, ‘Oh, there is no inflation in the system,’ this is nonsense. Compared to assets, money has lost a tremendous amount of purchasing power.” After working on Wall Street for over two decades, Faber’s assets consisted mainly of bonds, equities, and real estate. He says it was in the 1990s when he realized that “it’s good to have a diversified asset outside the banking system and not financially related” and began to purchase some physical gold every month. The Fed largely ignores gold as an asset, he says, because “gold is an embarrassment to central banks.” When the Lights Go Out, Bitcoin Goes Too Regarding a possible war, Faber believes it’s unlikely that anyone will ever invade China or the United States. He thinks the true vulnerability lies in “wars that are fought not with tanks—they are fought by, say, somebody could switch off the light in New York, or the electricity, or the Internet. If you switched off the Internet, what would happen?” This is where the merits of gold bullion become obvious, he says: “In these times, you actually want to have access to something physical that is a recognized medium of exchange.” “Gold Is Driven by Money Printing” When the Fed pursues loose monetary policies, Faber states, the people who benefit the most are the super-elite, the 0.01%. They have been moving ahead while the average American suffers: “50% of American people have no assets. … They don’t benefit from money printing. Actually, they’re hurt because their cost of living is going up, and it’s going up more than the CPI would indicate.” He believes “that the recovery, globally, is very weak” and the rapidly growing unfunded liabilities are a clear threat that could lead to another financial collapse. “By being in equities and by being in gold, and also having some exposure to bonds, you have some diversification,” he says. “Then you can hope when the hour of truth occurs, you will only lose, say, 50% of your assets, but your neighbor loses everything. So relatively speaking, you will have done very well.” Click here to watch the full interview with Marc Faber for more advice on how to weather a crisis.
Must See Charts – Gold Hedges USD Devaluation, Rise in Oil, Food and Cost of Living Since "Tricky Dicky"
Must See Charts – Gold Hedges USD Devaluation, Rise in Oil, Food and Cost of Living Since "Tricky Dicky" - Gold hedges massive ongoing devaluation of U.S. Dollar- 46th anniversary of 'Tricky Dicky' ending Gold Standard (see video)- Savings destroyed by currency creation and now negative interest rates- Long-term inflation figures show gold a hedge against rising cost of fuel, food and cost of living- $20 food and beverages basket of 1971 cost $120.17 in 2017- Household items increased by average of 2000% and oil by 5,373% since 1913- Gold gained 5,669% since 1913; by nearly 3,000% since 1971- Dollar has been reserve currency of world in the period and most other currencies have seen greater devaluation- Evidence of gold’s role as inflation and currency devaluation hedge Editor: Mark O'Byrne ‘US dollar Purchasing Power As measured By Gold’Source: Goldchartsrus You don’t need 'Tricky Trump' to devalue the dollar, it’s been doing that since 1913 and 'Tricky Dicky' in 1971 In 2015 President Donald Trump made headlines when he told a town hall event in Atkinson, New Hampshire about how his father had once given him a ‘small loan of a million dollars.’ Outcry swept around the media who asked how much the future President was really in touch with the common voter. Whilst Trump’s reference to ‘small’ was in relation to the (apparent) size of the empire he subsequently built he may as well have been referring to the value of a million dollars now and how small it is compared to in 1975 when he was lent the money. $1 million dollars was a lot of currency in 1975. Today it will barely buy you a nice house in a nice city. Using today’s CPI data Trump Sr’s $1 million loan would today be equivalent to $4.4 million. The purchasing power of a 1975 US dollar has fallen by over 400%. It has fallen a lot more since 1971. In this week 46 years ago on August 15 1971, President Nixon announced the U.S. Dollar would completely cut ties with sound money gold (see video below). Without gold backing and gold as a monetary anchor, we can now see just how much the purchasing power of the consumer dollar has declined since 1971. You can see an even better example of the dollar’s collapse in purchasing power when measured in gold ounces (see charts above). Prices climb by over 2000% since 1913 and creation of the Fed ‘[Since 1913] the general public and policymakers have focused almost constantly on inflation; they have feared it, bemoaned it, sought it, and even tried to whip it.’ Bureau of Labour Statistics. In 1970, after many decades of dollar devaluation, Herbert W. Armstrong quoted the Labor Department’s figures for how much $5 would have purchased in 1913: "15 pounds of potatoes, 10 pounds of flour, 5 pounds of sugar, 5 pounds of chuck roast, 3 pounds of round steak, 3 pounds of rice, 2 pounds each of cheese and bacon, and a pound each of butter and coffee; that money would also get you two loaves of bread, 4 quarts of milk and a dozen eggs. This would leave you with 2 cents for candy.” Percent (%) change in US prices (1913 - 2017) What changed in 1913? The US adopted the Federal Reserve Banking System and the journey towards dismantling the gold standard and currency debasement began. In the same year the United States government started tracking prices. This was thanks to President William Howard Taft who signed a bill promoting the Department of Labor to a Cabinet-level Department. Following this move the Consumer Price Index (CPI) was created in 1921 and backdated to 1913. Many things have changed since 1913, the most obvious is that the US Dollar is no longer backed by gold and that inflation has been slowly destroying wealth. Despite government efforts to track prices, little has been done about the impact of inflation and our loss of purchasing power. This is best illustrated not just with gold but through day-to-day items that we can all relate to. Below it is clear to see that since before the beginning of the World War I prices of everyday items have climbed by over 2,000%, on average. We can also appreciate how much the U.S. Dollar has depreciated in value when we consider that a $100 bill at the end of the First World War has the equivalent purchasing power of $1,196, today. This is in significant contrast to the price and purchasing power of store of value gold. We often talk about the role of gold during times of war and upheaval. This seems particularly relevant today as Trump and North Korea engage in saber-rattling. The table above shows just how important gold was during war time for the millions of people who were uprooted in the run up to and in 1914 and found themselves refugees, without a country to call home and in need of a borderless currency which would serve them wherever they found themselves. The children or grandchildren of those who escaped with gold would own as asset which has protected and grown their wealth and is today worth over 5,000% more than it was in 1913. CPI measure, questionable but available When we complain that food and other household items are becoming more expensive what we are usually experiencing is the devaluation in the US dollar and impact on inflation. To give you an idea of how much the dollar has fallen in value since the removal of the gold standard in 1971, the purchasing power of $100 then would be equivalent to $616.65 today. By comparison, $100 worth of gold in 1971 is now worth nearly $3,700. Today the CPI is the fiat-centric world’s way of tracking consumer prices and, therefore, inflation. We rarely hear about the depreciation of our currencies, instead we are bamboozled with odd figures which rarely translate into our every day life. Despite this, we are still able to use CPI as real evidence of the rising cost of living over time. This is particularly interesting when you look at the change in food prices using 1971 as a base year. We use 1971 as since then the US currency has not been tied to or associated with gold. In the period since then we have seen a slow but damaging impact on the value of people’s wealth and the purchasing power of their earnings. As with our piece on British food prices, British inflation and rising cost of living, we would have preferred to have used actual price information in order to look at the depreciation of the U.S. Dollar. Unfortunately individual price information isn’t readily available for the periods of most interest. Below you can see how much the CPI numbers have increased for items which are considered key in an household’s food basket. When you consider 1971 = 100 as the base year and price, you can see the dramatic changes in prices. The CPI can be misleading and confusing. When looking at the CPI data for the last 46 years it was interesting to note that halfway through the years the BLS decided to change the base year, thus making it appear as though inflation had not increased at quite the rate it had been. The numbers above have been adjusted to the best of our ability. One thing we also noticed when gathering the data was the climb in price of unprocessed foods, look at potatoes, carrots and apples as an example of freshly grown produce. As we looked deeper into data between 1971 and 2017 the list of foods included in the CPI basket grew, thanks to the advent of processed and unhealthy food all of which appear to be more affordable and suffering less from price climbs. As our currency has been debased so has our food. For those who are interested in actual prices, rather than the CPI data, we were only able to gather certain figures from the earliest point of 1980. Here you can see that on average the price of food has risen sharply. % change in (US) prices 1980 - 2017 This is quite a powerful indication of how gold has acted as a hedge against inflation. Even for those who bought gold, nine years into the bull market and near the top in 1980, gold protected their purchasing power. Not just about food As we mentioned when we looked at the depreciation of the British pound, the price of food is not the only thing to hurt the average consumer. Fuel is the backbone of any economy, it affects the price of living both directly and indirectly. It affects the price of your food through to the cost of the journey from the farm to the fork. The price of oil, fuel and energy related items have increased massively since 1971. The graph above, courtesy of the St Louis FRED database, shows just how much the price of fuel items have increased since 1971. The depreciation of the dollar, just a myth? A couple of years ago Business Insider 'Stalwart' Joe Weisenthal, now Bloomberg presenter and host wrote about how the depreciation of the US Dollar was a ‘myth’. He based this on the logic that hardly anyone keeps their cash in a box or 'under the mattress' anymore, but (he conceded): ‘Yes, if someone had a bunch of cash in 1959 and literally put it in a shoebox, they'd have lost a lot of money over the last several decades" But what happens when you don’t keep your money to yourself? You have to put it in a bank account or invest it in stocks, bonds, IRAs etc. All of those things come with counterparty risk. For some of us, it makes sense to hold a percentage of our wealth outside of the banking and financial system. However we cannot do this with paper bank notes as, as Mr Weisenthal reminds us, it just loses its value over time. This is why we recommend clients hold some of their savings in gold and silver. You are not keeping it in the banking system, you do not need to ‘fear’ the impact of inflation and you certainly do not need to worry about counterparties either devaluing it or trying to confiscate it - if owned in safer jurisdictions such as Singapore and Switzerland. Gold has acted as hedge against inflation and a financial insurance against the tyranny of central bank policies, throughout history but no more so than in the last century. No matter banking system, measure of inflation or government your country has, one ounce of gold remains one ounce of gold. It is the same and is recognised everywhere which confers vitally important liquidity. It is clear to see from the charts above that the fiat currency system works against the long-term desire to protect and grow our wealth. This is thanks to both the fractional reserve banking system but also thanks to the confiscatory practices of governments and powerful the financial industry and the currency debasement of central banks. As former Federal Reserve Chairman Alan Greenspan said himself “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.” We are no longer on a gold standard, nor are we likely to be on one for the foreseeable future. But this does not mean savers cannot implement their own version in their portfolios. We all need to eat and we all need to use fuel, but we must learn to protect ourselves from the ongoing devaluation of the dollar and all fiat currencies in order to ensure we can keep doing what we need to do before our savings are destroyed by the fiat monetary system. News and Commentary Gold, silver soar after US Fed minutes; palladium hits over 16-year high (IndiaTimes.com) Gold ends higher as Trump disbands 2 White House advisory groups (MarketWatch.com) Gold edges up after gaining on softer dollar (Reuters.com) Unlike Bitcoin - "Gold has demonstrated ability to preserve value under all circumstances " - Morgan Stanley (Bloomberg.com) Bitcoin Is Literally Soaring Into Space After Rocket-Like Surge (Bloomberg.com) Source: David Stockman via Daily Reckoning 5 Charts Prove Market A Bubble (DailyReckoning.com) Bitcoin is a bubble – but bubbles change the world (MoneyWeek.com) Corporate Employers Flee Pensions With Gap Topping $375 Billion (Bloomberg.com) This is what every ETF investor needs to know today (StansBerryChurcHouse.com) What's so special about gold? - Lundin (PeakProsperity.com) Gold Prices (LBMA AM) 17 Aug: USD 1,285.90, GBP 998.12 & EUR 1,096.74 per ounce16 Aug: USD 1,270.15, GBP 985.13 & EUR 1,082.29 per ounce15 Aug: USD 1,274.60, GBP 986.92 & EUR 1,084.05 per ounce14 Aug: USD 1,281.10, GBP 987.34 & EUR 1,085.48 per ounce11 Aug: USD 1,288.30, GBP 993.67 & EUR 1,096.47 per ounce10 Aug: USD 1,278.90, GBP 985.39 & EUR 1,091.67 per ounce09 Aug: USD 1,267.95, GBP 974.80 & EUR 1,079.79 per ounce Silver Prices (LBMA) 17 Aug: USD 17.02, GBP 13.23 & EUR 14.55 per ounce16 Aug: USD 16.68, GBP 12.96 & EUR 14.25 per ounce15 Aug: USD 16.89, GBP 13.12 & EUR 14.38 per ounce14 Aug: USD 16.97, GBP 13.09 & EUR 14.39 per ounce11 Aug: USD 17.09, GBP 13.18 & EUR 14.53 per ounce10 Aug: USD 17.08, GBP 13.14 & EUR 14.57 per ounce09 Aug: USD 16.59, GBP 12.76 & EUR 14.14 per ounce Recent Market Updates - World’s Largest Hedge Fund Bridgewater Buys $68 Million of Gold ETF In Q2- Diversify Into Gold Urges Dalio on Linkedin – “Militaristic Leaders Playing Chicken Risks Hellacious War”- Gold Has Yet Another Purpose – Help Fight Cancer- Gold Up 2%, Silver 5% In Week – Gundlach, Gartman and Dalio Positive On Gold- Great Disaster Looms as Technology Disrupts White Collar Workers- Gold Sees Safe Haven Gains On Trump “Fire and Fury” Threat- Silver Mining Production Plummets 27% At Top Four Silver Miners- Gold Consolidates On 2.5% Gain In July After Dollar Has 5th Monthly Decline- Gold Coins and Bars See Demand Rise of 11% in H2, 2017- Greenspan Warns Stagflation Like 1970s “Not Good For Asset Prices”- What Investors Can Learn From the Japanese Art of Kintsukuroi- Bitcoin, ICO Risk Versus Immutable Gold and Silver- This Is Why Shrinkflation Is Making You Poor Important Guides For your perusal, below are our most popular guides in 2017: Essential Guide To Storing Gold In Switzerland Essential Guide To Storing Gold In Singapore Essential Guide to Tax Free Gold Sovereigns (UK) Please share our research with family, friends and colleagues who you think would benefit from being informed by it.
S&P futures, European stocks and bond yields all fell in early trade alongside oil and the euro after the latest Fed minutes expressed concern over weak U.S. inflation, while Asian equities rose overnight ahead of WalMart earnings and the latest ECB minutes. Gold rose as high as $1,290 before fading most gains as the USDJPY rebounded. Fund futures are now pricing in about a 40% chance the Fed will raise rates by December, compared to 50% before the Fed's minutes. Last week's market turmoil and resultant near record jump in volatility in the wake of heightened tensions between the U.S. and North Korea has continued to ease, bringing down gauges of equity and bond volatility and repairing most of the damage done to stock markets, in fact as Bank of America showed, the retracement in the VIX on Monday was among the fastest on record. But political angst isn’t over; investors continue to watch the political trainwreck in Washington where President Trump disbanded two high-profile business advisory councils amid the fallout from his response to the weekend violence in Virginia. "Trump dissolving his major business groups makes the investment community even more pessimistic because this sets the stage for even more failure for him," Naeem Aslam, chief market analyst at Think Markets in London, wrote in a note. Lost in the political noise was the July FOMC minutes, where the most notable takeaway was the reference to “most participants expected inflation to pick up over the next couple of years….and to stabilize around the 2% objective over the medium term”. However, many participants “saw some likelihood that inflation might remain below 2% for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.” The debate on inflation echoed recent comments made public by various Fed presidents, while some members noted the “committee could afford to be patient….in deciding when to increase the rates further and argued against additional adjustments until incoming information confirmed that the recent low inflation were not likely to persist”. However, those comments were balanced by the observation that “…some other participants were more worried about risks arising from a labour market that had already reached full employment and was projected to tighten further from the easing in financial conditions”. Elsewhere, on the balance sheet unwind topic, “several” members favoured an announcement in the July meeting, but most preferred to defer that decision to the next meeting in September. With concerns about weak inflation in the air, the Stoxx 600 Index was down 0.1%, with declines in banking shares offsetting advances in healthcare stocks. Germany's DAX, France's CAC 40 and the UK's FTSE 100 all fell 0.1%. Yesterday's Reuters' trial balloon, according to which Mario Draghi would not say anything of note next week during the Jackson Hole conference, weakened the euro, which traded as low at 1.1700 this morning and gave support to fixed income assets with European government bond yields dropping, and the 10Y Bund yield down nearly 2 bps to 0.42%, down from Wednesday's high of 0.47%. Most other euro zone yields fell 1-2 basis points. In currencies, in addition to the euro sliding before the ECB minutes release, most Asian currencies rose overnight, with the Korean won up 0.3% after tensions over North Korea continued to ease. Overnight, the yen gained for a second day as the dollar decline on declining US rate hike expectations. The Australian dollar rose a second day against the U.S. dollar to reach the highest in nearly 2 weeks after July employment data beat estimates while prior month data was revised higher and iron ore prices erase week-to-date losses. In Europe, the pound rose against the euro after strong U.K. retail sales data. In commodities, London copper, aluminum and zinc hit multi-year highs on expectation China's reform of its metals industry will curb supply against a backdrop of robust demand. Gold and tin were among the best performing metals, and zinc traded near a 10-year high. Oil prices edged higher after new data showed U.S. crude stocks have fallen by 13 percent from a peak in March. Brent crude futures were at $50.36 per barrel, up 0.2 percent from their last close. Today's data include jobless claims, Philadelphia Fed Business Outlook and industrial production. Wal-Mart, Gap, Ross Stores and Madison Square Garden are among companies reporting earnings. Bulletin Headline Summary from RanSquawk Choppy GBP reaction to UK retail sales Financial leading the declines in Europe post last night's FOMC minutes Looking ahead, highlights include ECB minutes, US Philly Fed and jobless claims Market Snapshot S&P 500 futures down 0.1% to 2,465 STOXX Europe 600 down 0.1% to 378.62 MSCI Asia up 0.5% to 159.86 MSCI Asia ex Japan up 0.5% to 526.58 Nikkei down 0.1% to 19,702.63 Topix down 0.07% to 1,614.82 Hang Seng Index down 0.2% to 27,344.22 Shanghai Composite up 0.7% to 3,268.43 Sensex up 0.4% to 31,888.42 Australia S&P/ASX 200 down 0.1% to 5,779.21 Kospi up 0.6% to 2,361.67 German 10Y yield fell 1.0 bps to 0.435% Euro down 0.3% to $1.1738 Italian 10Y yield unchanged at 1.755% Spanish 10Y yield fell 1.0 bps to 1.454% Brent futures down 0.2% to $50.17/bbl Gold spot up 0.3% to $1,287.08 U.S. Dollar Index up 0.2% to 93.70 Top Overnight News Alibaba, Wal-Mart Report Earnings; ECB Minutes Watched for Taper Clues The U.S.’s top general declined to comment on South Korean leader Moon Jae-in’s assertion that he needed to sign off on a war against North Korea, saying President Donald Trump had the final say on a unilateral military strike Trump’s pro-business image tarnished as CEOs abandon president China believes the Korean Peninsula issue can only be solved via dialogue and negotiations, Fan Changlong, Vice Chairman of Central Military Commission said Saudi Arabia shipped the least oil in almost three years in June, just as domestic stockpiles are dwindling. U.K. retail sales rose 0.3% m/m in July, exceeding the median estimate of +0.2%, driven by the biggest jump in purchases of food in almost two years President Donald Trump waded into a longstanding scrap between online retailers and their brick- and-mortar rivals with a Twitter posting Wednesday about Amazon.com Inc. and taxes Fed officials are looking under the hood of their most basic inflation models and starting to ask if something is wrong Investors are about to get their first look at Bill Ackman’s plans for improving the performance of Automatic Data Processing Inc., which the activist investor contends is losing ground to smaller rivals Credit Suisse, JPMorgan and Citigroup have struck the first deals on a new structured debt platform amid a boom in repackaged note transactions Most industrial metals eased back after a rally that took zinc to the highest level in almost 10 years on signs of supply curbs and faster economic growth around the world U.K. consumers are flagging, stripping the economy of its most consistent and important support over the past two years. Air Berlin Plc’s insolvency could open the way for Deutsche Lufthansa AG to add new hubs for inter-continental flights while allowing short-haul discount specialist EasyJet Plc to boost its presence in the German capital South Korea’s Moon says will be no war again on the peninsula Japan July trade 418.8b yen vs 327.1b est; exports 13.4% vs 13.2% est Australia July jobs 27.9k vs 20.0k est; unempl rate 5.6% vs 5.6% est New Zealand Aug ANZ consumer confidence 126.2 vs 125.4; +0.6% m/m Elliott Is Said to Buy Debt in Move to Block Berkshire Oncor Bid For Bull Market in U.S. Stocks, You’re Only as Young as You Feel Credit Suisse’s London Sublease to WeWork Said to Be Blocked Trump’s Pro-Business Image Tarnished as CEOs Abandon President Republican Leaders Duck for Cover After Trump’s Race Remarks Asia equity markets traded indecisive following a relatively tepid close in the US where basic materials outperformed as zinc rose above USD 3000/ton to a decade high, while energy and financials declined on oil weakness and after US yields were pressured post¬FOMC minutes. ASX 200 (-0.10%) was choppy with miners underpinned by strength across the metals complex and as a slew of earnings releases also drove individual stocks, while Nikkei 225 (-0.14%)was subdued by a firmer currency. Shanghai Comp (+0.68%) and Hang Seng (-0.24%) were both initially higher, although the latter then pared gains on profit taking and amid an increase in money market rates. 10yr JGBs traded flat amid an indecisive risk tone in Japan, while the 5yr auction also failed to spur price action as the results were mixed. PBoC injected CNY 60bln in 7-day reverse repos and CNY 40bln in 14-day reverse repos. (Newswires) PBoC set CNY mid-point at 6.6709 (Prey. 6.6779). Japanese Trade Balance (Jul) JPY 418.8bln vs. Exp. JPY 327.1b1n (Prey. JPY 439.9b1n); Exports (Jul) Y/Y 13.4% vs. Exp. 13.2% (Prey. 9.7%);Imports (Jul) Y/Y 16.3% vs. Exp. 17.0% (Prey. 15.5%) Top Asian News Economic Growth in the Philippines Exceeds 6% for Eighth Quarter Casino Giants Look for Clarity as Japan Begins Public Debate Series of Gaffes Taint Unicom’s $11.7 Billion Sale Announcement Gemadept Seeks $125M From Stake Sales in 2 Units: CEO Minh Tokyo Stocks Slip as Yen Strengthens After Dovish Fed Minutes Taiwan Blackout Seen Pressuring Tsai to Reconsider Energy Policy BOJ Seen Trimming Bond Purchases Further If Yields Extend Slide China Kickstarts Privatization Push With Unicom Share Sale Tencent’s Appetite for AI Sends Sector Stocks Surging in China European equities trade modestly lower (Eurostoxx 50 -0.2%) with financials underperforming in the wake of yesterday's FOMC minutes which received a somewhat dovish response given concerns at the Fed regarding inflation. To the upside, material names outperform in response to the gains seen overnight in the metals complex with Dalian iron ore prices up over 6% during Asia-Pac trade. In fixed income markets, prices were originally supported by the softness seen in European equities and the fallout of yesterday's FOMC minutes with the 10yr Bund approaching 164.00 to the upside. Looking ahead, investors will likely turn towards today's ECB minutes release for any views on concerns surrounding scarcity of core paper and any potential biases the central bank could have in purchasing paper from across the continent. Top European News U.K. Said to Plan Visa-Free Travel for Europeans After Brexit U.K. July Retail Sales Rise, Led by Surge in Demand for Food Nets CEO Opens Door to European Expansion Amid Deals Speculation Axa, NN Are Said to Near Deal for Billionaire March’s Encampus Seadrill Shields Seadrill Partners From Impact of Chapter 11 Novo’s Diabetes Drug Bests Lilly’s in Aiding on Weight Loss Vestas Maintains Outlook, Begins $706 Million Share Buy Back Lufthansa Swoop for Air Berlin Would Add Lower-Cost U.S. Routes In currencies, sterling was once again a key focus for FX markets amid further tier 1 data from the region, this time with retail sales on the data slate. Upon the release, GBP/USD saw a spike higher after 3/4 headline metrics exceeded expectations before prices were dragged lower to pre-announced levels with all 4 components revised lower. USD has regained some ground against its major counterparts following the losses seen last night in the wake of the FOMC minutes. USD has particularly out-muscled EUR with participants looking for further insight via the ECB minutes into the current train of thought at the central bank given yesterday's source reports. AUD has regained some ground amid firmer metals prices, subsequently shrugging off the domestic jobs data overnight. In commodities, the metals complex traded higher overnight with gold prices extending on gains seen following the FOMC minutes. Elsewhere, Copper traded higher alongside broad strength across basic materials with Dalian iron ore prices up nearly 6%, while WTI traded quiet overnight and failed to make any significant recovery from yesterday's post-DoE declines. Saudi Arabia June output rose 190K bpd M/M to10.07mln bpd, while Saudi Arabia June crude exports fell 40K bpd M/M to 6.889mn bpd, according to JODI data. Libya's NOC said that the Sharara oil field is "working normally and the situation is currently stable" following recent security breaches. Looking at the day ahead, we’ve got a fair bit of data due today including July IP (0.3% mom expected), capacity utilisation, conference board US leading index (0.3% expected), the Philadelphia Fed business outlook survey (19 expected), initial jobless claims and continuing claims stats. Away from the data, the ECB will publish the account of its July policy meeting and the Fed’ Kaplan will also speak. Further, Wal-Mart will report its results today. US Event Calendar 8:30am: Initial Jobless Claims, est. 240,000, prior 244,000; Continuing Claims, est. 1.96m, prior 1.95m 8:30am: Philadelphia Fed Business Outlook, est. 18, prior 19.5 9:15am: Industrial Production MoM, est. 0.3%, prior 0.4%; Capacity Utilization, est. 76.7%, prior 76.6% 9:45am: Bloomberg Consumer Comfort, prior 51.4, Bloomberg Economic Expectations, prior 47 10am: Leading Index, est. 0.3%, prior 0.6% 1pm: Fed’s Kaplan Speaks in Lubbock, Texas DB's Jim Reid - or in this case not - concludes the overnight wrap Don't panic. Jim's absence today isn't because his twins have arrived early. Although we're not totally sure which of the following shocks he's getting over this morning. The fact that it's 25 years today since his A-Level results, his 4th wedding anniversary today or being told last night by the consultant that the twins will be coming a little earlier than planned and to expect to be called in anytime in the next 10 days. Luckily we haven’t had to alert him to any super important market related news this morning although things did get a bit more interesting towards the end of the US session last night. Initially the news that one of President Trump’s business advisory groups was disbanding in reaction to events in Virginia over the weekend saw risk assets initially pare some gains. Then after that we got the release of the FOMC minutes which showed a relatively healthy debate amongst policy makers about inflation and which the market appeared to take slightly dovishly given the decent rally for Treasuries into the close. We’ll jump into both of events those shortly. Prior to that the lack of any more updates or news on the North Korea/US front seemed to be helping keep things fairly calm overall and in fact after all the excitement of last week the S&P 500 and Stoxx 600 have clawed back nearly three-quarters of last week’s moves lower after ticking up another +0.14% and +0.69% yesterday. The VIX is also back down to 11.74 after nudging down another -2.5% yesterday and having peaked at just over 16 last week. We’ve been saying for a while that we are likely in for a quiet spell although after Amazon’s $16bn bond deal attracted orders equivalent to the GDP of Belarus ($47bn) it seems that markets are still some way from a taking a full holiday just yet. Back to the FOMC minutes, the most notable takeaway was the reference to “most participants expected inflation to pick up over the next couple of years….and to stabilize around the 2% objective over the medium term”. However, many participants “saw some likelihood that inflation might remain below 2% for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.” The debate on inflation echoed recent comments made public by various Fed presidents, while some members noted the “committee could afford to be patient….in deciding when to increase the rates further and argued against additional adjustments until incoming information confirmed that the recent low inflation were not likely to persist”. However, those comments were balanced by the observation that “…some other participants were more worried about risks arising from a labour market that had already reached full employment and was projected to tighten further from the easing in financial conditions”. Elsewhere, on the balance sheet unwind topic, “several” members favoured an announcement in the July meeting, but most preferred to defer that decision to the next meeting in September. So while the tone of the minutes was actually fairly balanced much of the focus was on the inflation references and particularly the dovish elements. Treasuries were a bit stronger heading into the minutes although yields nosedived a bit further after the text was digested and we saw 10y yields end 5bps lower at 2.223%. 2y yields were also a couple of basis points lower, while the USD (-0.33%) ended weaker for the first time this week. Gold also rallied +0.90% along with the wider precious metals space while EM currencies also benefited from the weaker Greenback (South African Rand +1.08%, Mexican Peso +0.85%, Ruble +0.58%). That was interestingly also in the context of a weaker day for Oil with WTI falling -1.62% following the latest US crude production data. Staying with the US, President Trump’s political agenda appeared to take another blow yesterday, as he was effectively forced to disband two of his business advisory councils pre-emptively, given reports (per Bloomberg) that one of the groups, led by the Blackstone CEO is planning to quit. The story is taking up plenty of column space in the papers this morning and while the impact on markets wasn’t huge the S&P 500 did end up paring a gain of closer to +0.50% just before the headlines broke with some suggestion that this might make fiscal progress more difficult. It feels like one to keep an eye on. Closer to home yesterday, European govies had a very very brief moment of excitement too at the open when a Reuters report hit the wires suggesting that President Draghi won’t deliver any new messages at the Jackson Hole conference next week on 25th. Instead the article quoted an ECB spokesman as saying that the focus will be on the “theme of the symposium, fostering a dynamic global economy”. That sounds about as vague as you can get which probably fits the bill that he’s looking for. There had been a fairly decent buzz building around the event although in fairness the ECB did suggest that the debate over tapering was more likely to take place at the September council meeting so it probably would have been a big surprise to hear anything prior to this of any substance. In terms of the moves for rates, as we noted it was very brief with Bunds at best 2bps stronger in a short period of time, only then to completely reverse and edge a little higher in the mid-morning which is roughly where they held into the close to finish up 1.2bps at 0.439%. The Euro also mostly recovered a temporary dip lower to end just +0.3% on the day. Jumping over to the latest in Asia this morning, markets are broadly speaking flat to slightly firmer. The Nikkei is back to unchanged following a weak start, while the ASX and Hang Seng are also little changed. China bourses are up around +0.35% and the Kospi is +0.6%. US equity futures are slightly in the red however. Away from markets, Sky news reported late last night that the next phrase of Brexit talks are likely to be delayed until December (from October), in part driven by the challenge and timing of getting a more formal engagement from a new German government as federal elections will occur in September. However, it does mean leaving less than a year for talks on the future trading relationship between the UK and the EU, and another two months of the two-year Article 50 timetable being used up. The reaction for Sterling has been fairly subdued however and if anything it’s a little stronger this morning. Moving on. In terms of data yesterday most of the focus was on GDP numbers in Europe. The eurozone print of +0.6% qoq was in line while the annual rate pushed up one-tenth to +2.2% yoy, which is the highest since March 2011. The Netherlands (+3.3% yoy vs. +2.3% expected) and Italy (+1.5% yoy vs. +1.4% expected) in particular stood in some of the details after coming in stronger than expected. This follows decent GDP data in Germany on Tuesday too. In the US yesterday the July housing data were a tad lower than expected, with housing starts falling 4.8% mom to 1.16m (vs. 1.22m expected), largely due to a 15.3% mom decline in the multi-unit sector. Building permits fell 4.1% in July to 1.22m (vs. 1.25m expected), but this follows an upward revision to the prior month, leaving a still solid annual growth of 4.1%. Elsewhere, MBA mortgage applications dipped 0.1%. Looking at the day ahead, the Eurozone’s July CPI came in as expected (-0.5% mom) while UK July retail sales ex fuel printed at 0.5%, above the 0.2% expected. In the US we’ve got a fair bit of data due today including July IP (0.3% mom expected), capacity utilisation, conference board US leading index (0.3% expected), the Philadelphia Fed business outlook survey (19 expected), initial jobless claims and continuing claims stats. Away from the data, the ECB will publish the account of its July policy meeting and the Fed’ Kaplan will also speak. Further, Wal-Mart will report its results today.
Since the July 26th 'nothingburger' FOMC statement, Nasdaq is down but bonds and bullion are higher as domestic politics and global war have trumped monetary machinations. All eyes in today's Minutes will be on any mention of inflation and the balance sheet. The Fed sees inflation "picking up over the next couple years" but this came before last week's dismal CPI/PPI data (and they noted "downside risks"), and confirmed that they will make a balance sheet move "at upcoming meeting." Additional headlines: *MOST FED OFFICIALS SAW INFLATION PICK-UP OVER NEXT COUPLE YEARS *MOST FED OFFICIALS BACKED B/SHEET MOVE AT `AN UPCOMING MEETING' However, The Fed is worried about inflation: MANY FED OFFICIALS SAW WEAK INFLATION DUE IDIOSYNCRATIC FACTORS SOME OFFICIALS CONCERNED BY WEAK INFLATION, ARGUE FOR PATIENCE The key segments, courtesy of Bloomberg: On the start of balance sheet unwind: "Although several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets." More on timing: "Participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets. Many noted that the program was expected to contribute only modestly to the reduction in policy accommodation." On inflation: "Most participants indicated that they expected inflation to pick up over the next couple of years from its current low level and to stabilize around the Committee’s 2 percent objective over the medium term." "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside." "Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors." "Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored." "A few participants cited evidence suggesting that this framework was not particularly useful in forecasting inflation. However, most participants thought that the framework remained valid, notwithstanding the recent absence of a pickup in inflation in the face of a tightening labor market and real GDP growth in excess of their estimates of its potential rate." "Some participants expressed concern about the recent decline in inflation, which had occurred even as resource utilization had tightened, and noted their increased uncertainty about the outlook for inflation." On a possible overshoot in the labor market: "A few participants expressed concerns about the possibility of substantially overshooting full employment, with one citing past difficulties in achieving a soft landing." On rising lending risks: "A couple of participants expressed concern that smaller banks could be assuming significant risks in efforts to expand their CRE lending." On policy uncertainty: "Several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms’ spending and hiring plans." "It was also observed that the budgets of some state and local governments were under strain, limiting growth in their expenditures. In contrast, the prospects for U.S. exports had been boosted by a brighter international economic outlook." The now traditional commentary on equity markets and financial conditions. Several participants noted that the further increases in equity prices, together with continued low longer-term interest rates, had led to an easing of financial conditions. However, different assessments were expressed about the implications of this development for the outlook for aggregate demand and, consequently, appropriate monetary policy. According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services. On equity valuations: "Participants also considered equity valuations in their discussion of financial stability. A couple of participants noted that favorable macroeconomic factors provided backing for current equity valuations; in addition, as recent equity price increases did not seem to stem importantly from greater use of leverage by investors, these increases might not pose appreciable risks to financial stability." And the punchline as regards to stocks, confirming that the Fed may have to hike just to burst the stock bubble: According to one view, the easing of financial conditions meant that the economic effects of the Committee's actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted. Of course, any confusion in these minutes can always be cleaned up next week at Jackson Hole. * * * Key conclusions: As expected, September remains in play for balance-sheet announcement, though no specific timetable mentioned Most FOMC participants preferred to announce the start of the balance-sheet runoff at "an upcoming meeting," while "several" were ready to go in July Inflation debate deepens. Most officials expected inflation to pick up next couple years and stabilize around 2%; many saw chances inflation may stay below that level for longer than expected Some Fed officials see scope for rate-hike patience, others caution a delay could lead to inflation overshoot FOMC united against a loosening of financial regulations that would allow for risky practices; The Fed is concerned about policy uncertainty hurting investment FOMC discussed equities, agreed to monitor bank behavior; some concern expressed about small-banks' risk in commercial real-estate lending * * * Rate hike odds for December are around 42% - unchanged from the FOMC Statement in July... Not what The Fed was hoping for... The dollar is unchanged but bonds are bid... Why is the FOMC considering raising rates again this year? Bloomberg notes one reason is concern about asset prices and the potential from the unwinding of a bubble. This could well have been debated, with, for example, Eric Rosengren of Boston particularly worried about commercial real estate, while Yellen has cited stock prices as being elevated. Of course, that's not how the market sees it... Full FOMC Minutes below:
There are two, also known as non-GAAP four, things to look forward to in today's FOMC Minutes: inflation, and balance sheet, balance sheet, balance sheet. At 2pm, the FOMC will release the minutes of the July 25-26 meeting when, as expected, the Fed left its rate unchanged and gave few surprises in its characterization of the outlook. It did surprise many, however, by noting that it expects to begin implementing balance sheet normalization "relatively soon", language which most had not expected to be introduced until September; this, as UBS notes, is the condition the FOMC set for unwinding its balance sheet, so we now see the Fed announcing its balance sheet normalization policy in September. While there will be no earthshattering revelations, look to the Minutes to shed additional light on the Committee's debate on this timing and views on the outlook for inflation, which will determine future rate hikes. Going back to the July 26 statement, the FOMC's characterization of inflation was uninformative, merely reflecting the softness in the last several prints. In the minutes, some hope to find if the language reflects strongly held views that the softness is transitory, or if there were participants that wanted to raise more alarm about the inflationary outlook, but were outnumbered. Chair Yellen has been explicit that the outlook for inflation will determine the timing of future rate hikes. Leading up to the meeting, Fed officials were explicit that they believe that inflation weakness is transitory but that they need to see evidence that inflation is rising before hiking again. Further complicating matters, the July CPI print - the fifth miss in a row - did not provide sufficient evidence. As a result, the breadth of inflation views within the Committee should inform the sellside's calls on the next hike. As for the Fed's balance sheet "normalization", the Fed has made a distinction between announcing and implementing the balance sheet runoff. The new "relatively soon" language represents a marker that the announcement is forthcoming, according to UBS. As a result, the FOMC will likely make that announcement at the September meeting, with runoff commencing in October. The Minutes need to clarify the Committee's communication plans and the gap between announcement and implementation. There is more ambiguity regarding whether the Fed will again raise rates: while many still hold out hope for a third hike in December, inflation has to accelerate. Still, the Committee likely desires some time between the announcement of balance sheet runoff and its next hike. Three months should be sufficient for the Committee to assess the market reaction, but the Minutes may indicate otherwise so this too will be closely parsed for any indication of a longer pause. Finally, two areas demand more information. First, how will the Fed time the unwind? The MBS market has a different cycle than the Treasury market. The Fed needs to clarify operational details around their monthly caps. Second, there is little information from the Fed on its long-term framework for the balance sheet, which will determine the terminal size of the balance sheet. We expect the minutes to address the operational details, but not the terminal size of the balance sheet. We expect a terminal balance sheet of $3.3 trillion reached in 2¾ years. Not enough? Here is RanSquawk's detailed preview of what to expect in today's Minutes: FOMC’s July 2017 Meeting Minutes Preview, Due For Release At 19:00 London, 14:00 New York On Wednesday 16th August 2017 The July meeting saw the Federal Reserve leave it Federal Funds target range unchanged at 1.00-1.25%, with a 9-0 vote. Heading into the decision focus was on the rhetoric surrounding the normalisation of the FOMC’s balance sheet, and the policy statement (full version available here) noted that the Committee expects to begin shrinking its balance sheet "relatively soon." The statement also saw the Fed highlight that it expected inflation on a “12-month basis” to remain below 2% in the near-term (which was deemed dovish), although the statement did go on to highlight that the FOMC expects inflation to stabilise around 2% over the medium term. The language surrounding these two areas will once again garner the most attention in the upcoming release. Barclays expect the minutes of the July FOMC meeting to “provide further information regarding the timing of balance sheet normalisation and the degree of consensus within the committee.” While HSBC believe that “the July minutes are likely to show extensive discussion about the slowdown in inflation over the past several months. Some of the policymakers likely held to the view that diminishing labour market slack should eventually put upward pressure on inflation. Others may have argued the FOMC should be cautious with respect to additional policy rate hikes unless the inflation data start to pick up.” Since the statement various FOMC voters, namely Dudley, Kashkari, Evans and Kaplan, have indicated that they would be comfortable with an announcement regarding balance sheet normalisation being made at the September meeting, while non-voters (including Bullard) have also backed such a move. In terms of broader policy issues, the most recent US CPI release (for July) was soft and saw CME Fed Fund futures pricing in a sub 35% chance of one further 25bps hike in 2017, with Kashkari (a noted dove) arguing that the release gave the FOMC more scope to “wait and see” before hiking rates again. This was before permanent Fed voter, Bill Dudley, suggested that “if the economy evolves in line with expectations, I would expect to be in favour of doing another rate hike later this year.” This was followed by a strong retail sales dataset (with upwards revisions), which has led to CME Fed Fund futures pricing a circa 50% chance of a 25bps hike by year end (at the time of writing). Barclays believe that “balance sheet normalization will likely start in September and the hurdle is quite high for the FOMC to deviate from what it has been signalling so far. We will also look for more detail on how concerned the FOMC is with the incoming data on inflation. Although we think concern has risen, we do not believe there is sufficient worry yet to derail a likely December rate hike. Source: UBS, RanSquawk
European markets continued their risk-on mood in early trading for the third day, rising to the highest in over a week and rallying from the open led by mining stocks as industrial metals spike higher after zinc forwards hit highest level since 2007, lifting copper and nickel. The EUR sold off sharply, boosting local bond and risk prices after the previously discussed Reuters "trial balloon" report that Draghi's speech at Jackson Hole would not announce the start of the ECB's taper. The EURUSD has found support at yesterdays session low. Bunds have rallied in tandem before gilts drag core fixed income markets lower after U.K. wages data surprises to the upside. Early EUR/JPY push higher through 130.00 supports USD/JPY to come within range of 111.00. In Asia, Japan’s JGB curve was mildly steeper after the BOJ continued to reduce its purchases of 5-to-10-yr JGBs; the move was consistent with the BOJ's desire to cut back whenever markets stabilize, according to Takenobu Nakashima, strategist at Nomura Securities Co. in Tokyo. The yen is little changed after rising just shy of 111 overnight. The S.Korean Kospi is back from holiday with gains; The PBOC weakened daily yuan fixing; injects a net 180 billion yuan with reverse repos; the Hang Seng index rose 0.9%, while the Shanghai Composite closed -0.2% lower. Dalian iron ore declines one percent. Japan’s Topix index closed little changed. South Korea’s Kospi index rose 0.6 percent, reopening after a holiday. The Hang Seng Index added 0.8 percent in Hong Kong, while the Shanghai Composite Index fell 0.2 percent. Australia’s S&P/ASX 200 Index advanced 0.5 percent. Singapore’s Straits Times Index was Asia’s worst performer on Wednesday, falling as much as 1.1 percent, as banks and interest-rate sensitive stocks dropped. The Stoxx Europe 600 Index rose 0.7%, the highest in a week. The MSCI All-Country World Index increased 0.3%. The U.K.’s FTSE 100 Index gained 0.6%. Germany’s DAX Index jumped 0.8% to the highest in more than a week. Futures on the S&P 500 Index climbed 0.2% to the highest in a week. Global markets are finally settling down after a tumultuous few days spurred by heightened tensions between the U.S. and North Korea. Miners and construction companies led the way as every sector of the Stoxx Europe 600 advanced as core bonds across the region declined. Crude gained for the first time in three days after industry data was said to show U.S. inventories tumbled 9.2 million barrels last week. U.S. stock-index futures rise slightly with European and Asian equities and oil. Data include MBA mortgage applications and housing starts. Cisco, Target, L Brands and NetApp are among companies reporting earnings. Italian banks also outperform after HSBC make positive comments on Intesa Sanpaolo and Unicredit. In overnight macro, the Bloomberg Dollar Spot Index was unchanged after two days of gains and Treasury yields edged higher as European stocks rose and investors awaited minutes of the Fed’s July 25-26 meeting. As shown in the chart below, after "Long USD" was seen as the "most crowded traded" for months until the start of Q2, the BofA Fund Manager Survey respondents now "Short USD" as the second most crowded trade. In Asia The yen slid a third day against the dollar as market participants positioned themselves ahead of the FOMC minutes and as geopolitical tensions on North Korea abated; Australia’s dollar gained for the first time in three days as traders covered short positions after second-quarter wage data matched estimates, boosting prospects of an upbeat July employment print this week. The pound rose against the dollar as a U.K. labor-market report showed wage growth exceeded the median estimate of economists and unemployment unexpectedly dropped to the lowest since 1975. The latest European data released overnight showed more nations joined the recovery as the euro-area economy gathers pace. Italy’s economy expanded for a 10th straight quarter, matching estimates of a 0.4% increase while growth in the Netherlands beat economists’ estimates. Eastern European economies including Romania, the Czech Republic and Poland also exceeded expectations, confirming that a broad-based recovery is taking hold. In rates, the yield on 10-year Treasuries climbed one basis point to 2.28 percent, the highest in more than two weeks. Germany’s 10-year yield increased three basis points to 0.46 percent, the highest in more than a week. Britain’s 10-year yield gained four basis points to 1.121 percent, the highest in more than a week. In today's key event, minutes from the Fed meeting will be parsed closely; policy makers have indicated they may announce plans to reduce the central bank’s balance sheet in September and then potentially raise interest rates again this year. Global Market Snapshot S&P 500 futures up 0.2% to 2,468.90 STOXX Europe 600 up 0.8% to 379.51 MSCI Asia up 0.2% to 158.83 MSCI Asia ex Japan up 0.5% to 523.28 Nikkei down 0.1% to 19,729.28 Topix down 0.01% to 1,616.00 Hang Seng Index up 0.9% to 27,409.07 Shanghai Composite down 0.2% to 3,246.45 Sensex up 0.7% to 31,664.31 Australia S&P/ASX 200 up 0.5% to 5,785.10 Kospi up 0.6% to 2,348.26 German 10Y yield rose 1.5 bps to 0.448% Euro down 0.2% to $1.1717 Italian 10Y yield rose 2.5 bps to 1.756% Spanish 10Y yield fell 0.4 bps to 1.469% Brent futures up 0.7% to $51.16/bbl Gold spot down 0.06% to $1,270.71 U.S. Dollar Index up 0.09% to 93.94 Overnight Top News The FOMC minutes may provide a better feel for how many policy makers remain resolved to raise interest rates again this year, and how many are wavering amid a five-month stretch of soft inflation reports Akzo Nobel NV and activist investor Elliott Management agreed to end their legal skirmishes that had dragged the two parties into acrimonious confrontations, giving new Chief Executive Officer Thierry Vanlancker some breathing space to proceed with a planned split of the Dutch paint-and-chemicals maker Uber Technologies Inc. is in exclusive talks to line up funding from four investors, but a deal, which could reach as much as $12 billion, hangs on the outcome of a courtroom brawl between two board members Apollo sweetened terms on nearly $1.8 billion of financing for its buyout of a golf country-club operator after investors pushed back on some of its plans The main derivatives trade group is considering industrywide fixes for the disarray that the demise of Libor could bring to more than $350 trillion of markets China reclaimed its position as the top foreign owner of U.S. Treasuries after increasing its holdings for the fifth straight month UBS Group AG is proposing to charge clients about $40,000 a year to access basic equity research once new regulations known as MiFID II come into effect in January Fed’s Fischer: Will probably be a break between announcement of unwinding of QE and the start of the process; Fed could always press pause if unanticipated circumstances arise: FT ECB President Mario Draghi will not deliver a new policy message at the Fed’s Jackson Hole conference, Reuters reports, citing two unidentified people familiar with the situation Efforts to loosen constraints on banks 10 years after financial crisis are "dangerous and extremely short-sighted," Fed Vice Chairman Stanley Fischer says in FT interview Kaplan repeats Fed should be patient on timing of next hike; should start balance sheet unwind very soon ECB’s Hansson: Wage pressures are beginning to emerge despite low inflation in the euro area but are “very uneven” across the bloc Trump Again Drags GOP Onto Dangerous Ground, This Time Over Race Euro-area GDP rose 0.6% q/q in 2Q, in line with the median estimate of economists, and was supported by continued growth in Germany, the region’s largest economy, and the strongest Spanish performance in almost two years Holders of credit-default swaps in Banco Popular Espanol SA still haven’t been compensated after the bank’s junior notes were wiped out in Europe’s first forced sale of a failing lender under its new resolution regime German Finance Minister Wolfgang Schaeuble doesn’t share opinion of German Federal Constitutional Court about ECB policy, Handelsblatt reports Bank of Japan cut purchases of bonds maturing in five to 10 years by 30 billion yen ($270 million) to 440 billion yen at its regular debt-buying operations on Wednesday The 220 billion-krone ($28 billion) Government Pension Fund Norway, the domestic counterpart of the country’s sovereign wealth fund, is cutting risk as big active bets have lost their luster API inventories according to people familiar w/data: Crude -9.2m; Cushing +1.7m; Gasoline +0.3m; Distillates -2.1m BOJ cuts purchases of 5-to-10 year bonds by 30 billion yen Urban Outfitters Gains After Smaller Chains Prop Up Results Netflix Co-Founder to Sell Ads to Pay for $10 Movie Pass Italian Economy Expands, Boosting Optimism on Recovery Asia equity markets followed from the indecisive tone seen on Wall Street where quiet newsflow kept stocks rangebound. This resulted to a mixed picture in Asia with the ASX 200 (+0.48%) subdued by several earnings releases, while Nikkei 225 (-0.12%) traded choppy amid a lack of drivers. KOSPI (+0.60%) welcomed the reduced geopolitical tensions on return from holiday, while Shanghai Comp (-0.15%) and Hang Seng (+0.86%) were mixed after lending declined from the prior month and although still surpassed estimates, it was another notch to add to the recent slew of softer Chinese data releases. 10yr JGBs were marginally higher amid an indecisive risk tone in the region, although gains were capped amid a reserved Rinban announcement in which the BoJ continued to reduce its purchases of 5yr-10yr maturities.PBoC injected CNY 150bln in 7-day reverse repos and CNY 130bln in 14-day reverse repos. PBoC set CNY mid-point at 6.6779 (Prey. 6.6689). Top Asian News Thailand Keeps Key Rate Unchanged as It Warns of Baht Risk Taiwan President Apologizes for Blackout Affecting Millions Ex-Nomura Man Exiled in Chicago Goes Hostile at Tiny Japan Firms As Good as It Gets: Iron Ore Risks a Reversal as China Cools China Honqqiao Seals Citic Stake and Confirms Capacity Cuts Institutional Investors Oppose Hong Kong’s Dual-Class Share Plan Vietnam Rubber Group Expects to Hold IPO in Dec. European equities have traded higher across the board (Eurostoxx 50 +0.8%) since the get-go despite a quiet start to the session with sentiment later bolstered by the latest ECB source reports. Gains on a sector specific stand-point have been relatively broad-based with materials recovering from recent losses. The most notable individual mover has been AP Moller Maersk (+2%) who initially opened lower amid disappointing earnings before reversing course after the CEO managed to provide an upbeat commentary on the Co. Source reports indicate that ECB Draghi will not deliver fresh policy message at Jackson Hole and wants to hold off on debate until Autumn. Paper was initially hampered by the modest upside in European equities before European bonds were supported by the aforementioned ECB source reports. Peripheral bonds used the source reports as an opportunity to tighten to their core counterparts given the potential for more accommodative monetary policy. However, prices overall then began to reverse once again as UK Gilts dragged paper lower in the wake of the promising UK jobs report. Top European News Euro Whipsaws on Report Draghi May Hold Off at Jackson Hole Aviva, China Resources Are Said to Mull U.K. Wind Farm Bids Derivatives Group Looks at Industrywide Cure for Libor’s Demise U.K. Wage Growth Beats Forecasts But Still Lags Inflation Zinc Smashes Through $3,000 Barrier as Metals Rally Gathers Pace Danone ‘Extreme’ Cost Actions May Hamper Volume Recovery: Citi In overnight currency markets, the GBP has once again been a key source of focus for markets amid the latest UK jobs report. GBP was bolstered and approached 1.2900 to the upside amid the firmer than expected earnings numbers, unexpected fall in unemployment rate and fall in the claimant count rates; albeit wages still lag inflation by quite a distance. Elsewhere, EUR has faced some selling-pressure (EUR/USD back below 1.1750) in the wake of the latest ECB source comments with sources suggesting that Draghi will not use next week's Jackson Hole Symposium to communicate a change in stance with markets and will instead hold-off until the Autumn. Elsewhere, the USD remains relatively steady with markets awaiting the latest FOMC minutes release. Yesterday saw the greenback outperform after strong retail sales data, which took the spot rate above 94.00 briefly. This morning, the USD-index is relatively flat, which may well be the case for much of the day ahead of the FOMC minutes later this evening. AUD firmer amid cross related buying AUD/NZD which broke back above 1.08, subsequently taking the spot above 0.7850. Wage price index remaining firm, which also comes ahead of tonight's employment figures, of note, large options are keeping AUD anchored with 1.86b1n at 0.7830 and 910mln at 0.7875. Attention will be placed on both CAD and MXN as NAFTA renegotiations get underway, as it stands the Trump administration aim to shrink the rising trade deficit with Mexico and tighten the rules of origin for cars and parts. Elsewhere, CAD is slightly firmer as oil prices stabilise following last night's sizeable drawdown in the API report. Commodity markets have seen WTI and Brent crude futures hold onto gains seen in the wake of last night's API report which revealed a notable 9.155m1n draw (and came in the context of last week's 7.839m1n draw). Elsewhere, Gold has been modestly hampered by the broad risk-sentiment with markets also keeping half an eye out for tonight's FOMC minutes release. Overnight, mild short-covering helped copper pare some of yesterday's losses. Looking at the day ahead, preliminary 2Q GDP stats for the Eurozone (0.6% qoq, 2.1% yoy expected) and Italy (0.4% qoq and 1.5% yoy expected) are due this morning. Then for UK, we have the July jobless claims and claimant count rate and the June ILO unemployment data (4.5% expected). Across the pond, we get the FOMC meeting minutes along with the July housing starts (1,225k expected) and MBA mortgage applications stats. Onto other events, the NAFTA talks between US, Canada and Mexico kicks off in Washington today. Furthermore, Target and Cisco will report their results today. Looking at the day ahead, we get the FOMC meeting minutes along with the July housing starts (1,225k expected) and MBA mortgage applications stats. Onto other events, the NAFTA talks between US, Canada and Mexico kicks off in Washington today. Furthermore, Target and Cisco will report their results today. US Event Calendar 7am: MBA Mortgage Applications, prior 3.0% 8:30am: Housing Starts, est. 1.22m, prior 1.22m; Housing Starts MoM, est. 0.41%, prior 8.3% 8:30am: Building Permits, est. 1.25m, prior 1.25m; Building Permits MoM, est. -1.96%, prior 7.4% 2pm: FOMC Meeting Minutes DB's Jim Reid concludes the overnight wrap Although I'm generally a bit more relaxed about the UK's future post Brexit than most of my colleagues in research, I was amused at a comment on twitter yesterday in light of the UK's decision to silence London's iconic Big Ben for 4 years as of next Monday as repairs are made. The comment suggested that how could the UK Parliament expect repairs of a clock to take 4 years while expecting whole Brexit negotiations to be done in 18 months? A fair point. So if you're a regular visitor to London don't expect to hear any bongs for the next few years. Apparently it's all about health and safety for the ears of the repairers. Thankfully after last night, hopefully Liverpool will still be in Europe for a few more weeks and months whatever happens with our negotiations. Talking of Brexit and DB research, yesterday Oliver Harvey updated his thoughts after the UK government released a position paper on customs arrangements after Brexit. The paper clarifies that UK intends to remain part of the EU customs union in all but name after March 2019 for a time-limited transitional period. Further, it sets out two potential options for the UK’s future customs relationship with the EU27, one involving a hard border and the other proposing a new and untested customs partnership arrangement. Harvey notes the paper fails to address future trade in services, or the apparent contradiction between desire for unchanged customs arrangements during a transitional deal and PM May’s stated red line on ECJ jurisdiction after March 2019. Moreover, he argues that the absence of any mention of legal enforceability and product standards is particularly puzzling as non-tariff barriers are typically a larger obstacle to trade than tariffs and the need to ensure harmonized regulatory standards during a transitional deal and afterwards will be one of the key challenges for policymaking. More details here The fact that we haven't yet mentioned North Korea suggests that it was another day of no news which is obviously good for markets. The unpredictability of the main players in this stand-off mean that markets will likely want a fair few days of more calm before they return markets back to their pre "fire and fury" tweet levels. Having said that we saw equities generally edge higher yesterday with larger increases in bond yields. The UST 10y was up 5bps overnight, following the higher than expected retail sales data (discussed later). Core European government bond yields also increased c3bps at the longer end of the curve, with Bunds (2Y: +1bp; 10Y: +3bps) and OATs (2Y: +2bps; 10Y: +3bps) reversing some of the recent safe haven move. Gilts outperformed a little (2Y: +1bp; 10Y: +1bps), following the lower than expected July inflation data (discussed later). Elsewhere, peripheral bond yields also increased with Italian BTPs (2Y: +2bps; 10Y: +4bps) and Portugal (2Y: +1bps; 10Y: +4bps) slightly under performing. This morning in Asia, markets are generally slightly higher with China underperforming. The Nikkei (+0.02%), Kospi (+0.5%), Hang Seng (+0.4%) are higher with Chinese bourses ranging from -0.3% to +0.2% as we type. Back to the markets yesterday, US equities were broadly unchanged, with the S&P (-0.1%), the Dow (+0.02%) and the Nasdaq (-0.1%) taking a breather after yesterday's rally. Within the S&P, modest gains in the utilities and consumer staples sector were broadly offset by losses in Telco (-1%) and consumer discretionary (-0.9%) names. European markets were slightly higher, with the Stoxx 600 up 0.1%, the DAX (+0.1%) and both the FTSE and CAC up 0.4%. Within the Stoxx, modest gains in utilities (+0.5%) and health care were largely offset by losses in energy and materials. Turning to currency, the USD dollar index gained 0.5%, following the stronger than expected retail sales data. Conversely, the Euro/USD fell 0.4%, but Sterling/ USD fell a bit more (-0.7%), impacted by the UK’s inflation data. Elsewhere, Euro/Sterling continues to gain (+0.4%), up for the fourth consecutive day and edging higher again this morning, effectively marking the highest point since November 09. In commodities, WTI oil was broadly flat yesterday but is up 0.4% this morning following API reporting lower US crude inventories. Elsewhere, gold fell 0.8% and silver was down 2.6%, while the industrial metals were little changed (Copper -0.1%; Aluminium -1.3%). Agricultural commodities were broadly softer this morning, with corn (-0.1%), wheat and soybeans (-0.2%), cotton (-0.9%), sugar (-2.7%) and coffee (-3.5%). Away from markets, the IMF has revised up China’s growth outlook compared to last year’s report, now expecting the growth between 2017 and 2021 to average 6.4% (vs. 6% previous), partly given that China continues to transition to a more sustainable growth path and reforms have advanced across a wide domain. The paper also noted that given the solid growth momentum, now is the time to intensify deleveraging efforts and boost domestic consumption. The report expects non-financial sector debt (includes household, corporate and government) to continue to rise strongly, up from 242% of GDP in 2016 to ~300% by 2022, which raises concerns for a possible sharp decline in growth in the medium term. The minutes for the July FOMC meeting will be out later today, our US economists expect the Committee to remain on course to announce the commencement of its balance sheet unwind at the September 20 meeting. However, there is likely to be a healthy debate regarding the inflation outlook as several policymakers have indicated that improvement in near-term inflation trends will be crucial to the prospects of another interest rate hike by year end. Elsewhere, the Trump administration has made no decision yet to stop or continue making payments to insurers (cost sharing reduction) to help lowincome people to afford their Obamacare plans. That said, the Congressional budget office did indicate that ending such payments could raise billions of dollars over the next decade for the government. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, macro data were broadly stronger than expected. The July retail sales were materially higher than expected, both at the headline and core level. Headline was 0.6% mom (vs. 0.3% consensus, but in line with DB’s forecast) and ex-auto was 0.5% mom (vs. 0.3% expected). Notably, these readings also follow positive revisions to the prior month. The July result together with revisions means that through-year growth improved across all aggregates, with ex-auto spending up 3.8% yoy. Elsewhere, the empire manufacturing survey came in at 25.2 (vs. 10.0 expected), the best reading since September 2014, the NAHB housing market index was 68 (vs. 64 expected). The June business inventories was slightly higher than expected at 0.5% mom (vs. 0.4%) and July import price index was in line at 0.1% mom. Over in Germany, the preliminary 2Q GDP was lower than expected at 0.6% qoq (vs. 0.7% expected). However, this follows a positive +0.1% revision to the 1Q reading, leaving a solid annual growth reading of 2.1% yoy (vs. 1.9% expected). According to DB’s Schneider, both the 1Q and 2Q 2017 readings and the data revisions confirm our story that overheating risks in Germany are on the rise in 2018 and that recent confidence data does not suggest that the German economy will decelerate much in 3Q. In the UK, July inflation data was slightly lower than expected, dampening concerns that high inflation readings might cause the BoE to soon tighten monetary policy settings. CPI was -0.1% mom (vs. 0% expected) and 2.4% yoy for core inflation (vs. 2.5%). However, the July retail price index was slightly ahead at 0.2% mom (vs. 0.1% expected) and 3.6% yoy (vs. 3.5%). Meanwhile pipeline inflation appears to have peaked, with the core PPI outputs index rising 2.4% yoy in July (vs. 2.5% expected), the least since February. Looking at the day ahead, preliminary 2Q GDP stats for the Eurozone (0.6% qoq, 2.1% yoy expected) and Italy (0.4% qoq and 1.5% yoy expected) are due this morning. Then for UK, we have the July jobless claims and claimant count rate and the June ILO unemployment data (4.5% expected). Across the pond, we get the FOMC meeting minutes along with the July housing starts (1,225k expected) and MBA mortgage applications stats. Onto other events, the NAFTA talks between US, Canada and Mexico kicks off in Washington today. Furthermore, Target and Cisco will report their results today.
Authored by Gail Tverberg via Our Finite World blog, World GDP in current US dollars is in some sense the simplest world GDP calculation that a person might make. It is calculated by taking the GDP for each year for each country in the local currency (for example, yen) and converting these GDP amounts to US dollars using the then-current relativity between the local currency and the US dollar. To get a world total, all a person needs to do is add together the GDP amounts for all of the individual countries. There is no inflation adjustment, so comparing GDP growth amounts calculated on this basis gives an indication regarding how the world economy is growing, inclusive of inflation. Calculation of GDP on this basis is also inclusive of changes in relativities to the US dollar. What has been concerning for the last couple of years is that World GDP on this basis is no longer growing robustly. In fact, it may even have started shrinking, with 2014 being the peak year. Figure 1 shows world GDP on a current US dollar basis, in a chart produced by the World Bank. Figure 1. World GDP in “Current US Dollars,” in chart from World Bank website. Since the concept of GDP in current US dollars is not a topic that most of us are very familiar with, this post, in part, is an exploration of how GDP and inflation calculations on this basis fit in with other concepts we are more familiar with. As I look at the data, it becomes clear that the reason for the downturn in Current US$ GDP is very much related to topics that I have been writing about. In particular, it is related to the fall in oil prices since mid-2014 and to the problems that oil producers have been having since that time, earning too little profit on the oil they sell. A similar problem is affecting natural gas and coal, as well as some other commodities. These low prices, and the deflation that they are causing, seem to be flowing through to cause low world GDP in current US dollars. Figure 2. Average per capita wages computed by dividing total “Wages and Salaries” as reported by US BEA by total US population, and adjusting to 2016 price level using CPI-Urban. Average inflation adjusted oil price is based primarily on Brent oil historical oil price as reported by BP, also adjusted by CPI-urban to 2016 price level. While energy products seem to be relatively small compared to world GDP, in fact, they play an outsized role. This is the case partly because the use of energy products makes GDP growth possible (energy provides heat and movement needed for industrial processes), and partly because an increase in the price of energy products indirectly causes an increase in the price of other goods and services. This growth in prices makes it possible to use debt to finance goods and services of all types. A decrease in the price of energy products has both positive and negative impacts. The major favorable effect is that the lower prices allow the GDPs of oil importers, such as the United States, European Union, Japan, and China, to grow more rapidly. This is the effect that has predominated so far. The negative impacts appear more slowly, so we have seen less of them so far. One such negative impact is the fact that these lower prices tend to produce deflation rather than inflation, making debt harder to repay. Another negative impact is that lower prices (slowly) push companies producing energy products toward bankruptcy, disrupting debt in a different way. A third negative impact is layoffs in affected industries. A fourth negative impact is lower tax revenue, particularly for oil exporting countries. This lower revenue tends to lead to cutbacks in governmental programs and to disruptions similar to those seen in Venezuela. In this post, I try to connect what I am seeing in the new data (GDP in current US$) with issues I have been writing about in previous posts. It seems to me that there is no way that oil and other energy prices can be brought to an adequate price level because we are reaching an affordability limit with respect to energy products. Thus, world GDP in current dollars can be expected to stay low, and eventually decline to a lower level. Thus, we seem to be encountering peak GDP in current dollars. Furthermore, in the years ahead the negative impacts of lower oil and other energy prices can be expected to start predominating over the positive impacts. This change can be expected to lead to debt-related financial problems, instability of governments of oil exporters, and falling energy consumption of all kinds. Peak Per Capita Energy Consumption Is Part of the Problem, Too One problem that makes our current situation much worse than it might otherwise be is the fact that world per capita energy consumption seems to have hit a maximum in 2013 (Figure 3). Figure 3. World Daily Per Capita Energy Consumption, based on primary energy consumption from BP Statistical Review of World Energy and 2017 United Nations population estimates. Surprisingly, this peak in consumption occurred before oil and other energy prices collapsed, starting in mid-2014. At these lower prices, a person would think that consumers could afford to buy more energy goods per person, not fewer. Per capita energy consumption should be rising with lower prices, unless the reason for the fall in prices is an affordability problem. If the drop in prices reflects an affordability problem (wages of most workers are not high enough to buy the goods and services made with energy products, such as homes and cars), then we would expect the pattern we are seeing today–low oil and other energy prices, together with falling per capita consumption. If the reason for falling per capita energy consumption is an affordability problem, then there is little hope that prices will rise sufficiently to fix our current problem. One consideration supporting the hypothesis that we are really facing an affordability problem is the fact that in recent years, energy prices have been too low for companies producing oil and other energy products. Since 2015, hundreds of oil, natural gas, and coal companies have gone bankrupt. Saudi Arabia has had to borrow large amounts of money to fund its budget, because at current prices, tax revenues are too low to fund it. In the United States, investors are cutting back on their support for oil investment, because of the continued financial losses of the companies and evidence that approaches for mitigating these losses are not really working. Which Countries Are Suffering Falling GDP in Current US Dollars? With lower oil prices, Saudi Arabia is one of the countries with falling GDP in Current US$. Figure 4. Increase in GDP since 1990 for Saudi Arabia in current US dollars, based on World Bank Data. Saudi Arabia pegs its currency to the dollar, so its lower GDP is not because its currency has fallen relative to the US dollar; instead, it reflects a situation in which fewer goods and services of all kinds are being produced, as measured in US dollars. GDP calculations do not consider debt, so Figure 4 indicates that even with all of Saudi Arabia’s borrowing to offset falling oil revenue, the quantity of goods and services it was able to produce fell in both 2015 and 2016. Other oil-producing countries are clearly having problems as well, but data is often missing from the World Bank database for these countries. For example, Venezuela is clearly having problems with low oil prices, but GDP amounts for the country are missing for 2014, 2015, and 2016. (Somehow, world totals seem to include estimates of the total omitted amounts, however.) Figure 5 shows similar ratios to Figure 4 for a number of other commodity producing countries. Figure 5. GDP patterns, in US current dollars, for selected resource exporting countries, based on World Bank data. A comparison of Figures 4 and 5 shows that the GDP patterns for these countries are similar to that of Saudi Arabia. Because resources (including oil) do not account for as large a share of GDP for these countries as for Saudi Arabia, the peak as a percentage of 1990 GDP isn’t quite as high as for Saudi Arabia. But the trend is still downward, with 2014 typically the peak year. We can also look at similar information for the historically big consumers of oil, coal and natural gas, namely the United States, the European Union, and Japan. Figure 6. Increase in GDP since 1990 for the United States, the European Union, and Japan, in current US dollars, based on World Bank data. Here, we find the growth trend is much more subdued than for the countries shown in the previous two charts. I have purposely put the upper limit of the scale of this chart at 6 times the 1990 GDP level. This limit is similar to the upper limit on earlier charts, to emphasize how much more slowly these countries have been growing, compared to the countries shown in Figures 4 and 5. In fact, for the European Union and Japan, GDP in current US$ is now lower than it has been in recent years. Figure 6 is telling us that the goods and services produced in these countries are now lower in US dollar value than they were a few years ago. Since part of the cost of goods and services is used to pay wages, this lower relativity indirectly implies that the wages of workers in the EU and Japan are falling, relative to the cost of buying goods and services priced in US dollars. Thus, even apart from taxes added by these countries, consumers in the EU and Japan have been falling behind in their ability to buy energy products priced in US dollars. Figure 6 indicates that the United States has been doing relatively better than the European Union and Japan, in terms of the value of goods and services produced each year continuing to grow. If we look back at Figure 2, however, we see that even in the US, wage growth has lagged far behind oil price increases. Thus, the US was also likely headed toward an affordability problem relating to goods and services made with oil. The Asian exporting nations have been doing relatively better in keeping their economies growing, despite the downward pressure on energy prices. Figure 7. Increase in GDP since 1990 for selected rapidly growing Asian exporting countries in current US dollars, based on World Bank data. The two most rapidly growing countries are China and Vietnam. There seems to be a recent slowing of their growth rates, but no actual downturn. India, Pakistan, and the Philippines are growing less rapidly. They do not seem to be experiencing any downturn at all. Considering the indications of Figure 4 through 7, it appears that only a relatively small share of countries have experienced rising GDP in current US dollars. Although we have not looked at all possible groupings, the countries that seem to be doing best in terms of rising current US$ GDP are countries that are exporters of manufactured goods, including the Asian countries shown. Countries that derive significant GDP from producing energy products and other commodities seem to be experiencing falling GDP in current US dollars. To fix the problems shown here, we would need to get prices of oil and other energy products back up again. This would indirectly raise prices of many other products as well, including food, new vehicles, and new homes. With lagging wages in many countries, this would seem to be virtually impossible to accomplish. The Wide Range of GDP Indications We See In this post, I am talking about GDP of various countries, converted to a US$ basis. This is not quite the same as the GDP that we normally read about. It is not until a person starts working with world data that a person appreciates how different the various GDP and inflation calculations are. GDP in US dollars is very important because energy products, including oil, are generally priced in US$. This seems to be true, whether or not the currency used in the actual transaction is US$. See Appendix A for charts showing the close connection between these two items. The type of GDP is generally reported is inflation-adjusted (also called “real”) GDP. The assumption is made that no one will care (very much) about inflation rates. In general, inflation-adjusted GDP figures are much more stable than those in Current US$. This can be seen by comparing world GDP in Figure 8 with that shown in Figure 1. Figure 8. GDP in 2010 US dollars, for the world and for the United States, based on World Bank data. Using inflation-adjusted world GDP data, there doesn’t seem to be any kind of crisis ahead. The last major problem was in the 2008-2009 period. Even the impact of this crisis appears to be fairly small. The 2008-2009 crisis shows up more distinctly in the Current US$ amounts plotted in Figure 1. World GDP growth figures that are published by the World Bank and others combine country by country data using some type of weighting approach. Economists tend to use an approach called Purchasing Power Parity (PPP). This approach gives a great deal more weight to developing nations than the US dollar weighted approach used elsewhere in this post. For example, under the PPP approach, China seems to get a weighting of about 1.9 times its GDP in US$; India seems to get a weighting of about 3.8 times its GDP in US$. The United States gets a weight of 1.0 times its GDP in US$, and the weights for developed nations tend to be fairly close to 1.0 times their GDP in US$. The world GDP we see published regularly should be called “inflation-adjusted world GDP, calculated with PPP weights.” The relationship among the three types of GDP can be seen in Figure 9. It is clear that GDP growth in Current US$ is far more variable than the inflation-adjusted growth rate (in 2010 US$). PPP inflation-adjusted GDP growth is consistently higher than GDP growth with US dollar weighting. Figure 9. World GDP Growth in three alternative measures: Current dollars, Inflation-adjusted GDP is in 2010 US$ and adjusted to purchasing power parity (PPP). It is also clear from Figure 9 that there is also a big “Whoops” in the most recent years. Economic growth is at a record low level, as calculated in Current US$. World “Inflation” Indications The typical way of calculating inflation is by looking at prices of a basket of goods in a particular currency, such as the yen, and seeing how the prices change over a period of time. To get an inflation rate for a group of countries (such as the G-20), inflation rates of various countries are weighted together using some set of weights. My guess is that these weights might be the PPP weights used in calculating world GDP. In Figure 10, I calculate implied world inflation using a different approach. Since the World Bank publishes World GDP both in 2010 US$ and in Current US$, I calculate the implied world inflation rate by comparing these two sets of values. (Some people might call what I am calculating the implicit price deflator for GDP, rather than an inflation rate.) I use three-year averages to smooth out year-to-year variability in these amounts. Figure 10. World inflation rate calculated by comparing reported World GDP in Current US$ to reported World GDP in 2010 US$. Both of these amounts are available at the World Bank website. The implied world inflation rates using this approach are fairly different from published inflation rates. In part, this is because the calculations take into account changing relativities of currencies. There may be other factors as well, such as the inclusion of countries that would not normally be included in aggregations. Inflation rates tend to be high when demand for energy products is high, and low when demand for energy products is low. Figure 10 shows that, on a world basis, there have been negative inflation rates three times since 1963–in approximately 1983-1984; in the late 1990s to early 2000s; and since about 2014. If we compare these dates to the oil price and energy consumption data on Figures 2 and 3, we see that these time periods are ones that are marked by falling per capita energy consumption and by low oil prices. In some sense, these are the time periods when the economy is/was trying to stall, for lack of adequate demand for oil. The workaround used to “fix” the lack of demand in the late 1990s to early 2000s seems to have been an increased focus on globalization. China’s growth in particular was very important, because it added both a rapidly growing supply of cheap energy from coal and a great deal of demand for energy products. The addition of coal effectively lowered the average price of energy products so that they were again affordable by a large share of the world population. The availability of debt to pull the Chinese and other Asian economies forward was no doubt of importance as well. The United States has been fairly protected from much of what has happened because its currency, the US Dollar, is the world’s reserve currency. If we look at the inflation rate of the United States using data of the US Bureau of Economic Analysis, the last time the United States had a substantial period of contracting prices was in the US Depression of the 1930s. It is quite possible that such a situation existed worldwide, but I do not have world data for that period. Figure 11. US inflation rate (really “GDP Deflator”) obtained by comparing US GDP in 2009 US$ to GDP in Current US $, based on US Bureau of Economic Analysis data. It was during the Depression of the 1930s that debt defaults became widespread. It was only through deficit spending, including the significant debt-based funding for World War II, that the problem of inadequate demand for goods and services was completely eliminated. How Do We Solve Our World Deflation Crisis This Time There seem to be three ways of creating demand for goods and services.  A growing supply of cheap-to-produce energy products is really the basic way of increasing demand through economic growth. If there are cheap-to-produce energy products available, a growing supply of these energy products can be used to increasingly leverage human labor, through the use of more and better “tools” for the workers. When workers become increasingly more productive, their wages naturally rise. It is this growing productivity of human labor that generally produces the rising demand needed to maintain the economic growth cycle. As growth in energy consumption slows and then declines (Figure 3), this productivity growth tends to disappear. This seems to be part of today’s problem.  Increasing the amount of debt outstanding can work to make the energy extraction system work more effectively, by raising the price that consumers can afford to pay for high-priced goods. This increasing ability to pay for high-priced goods seems to come in two ways: (a) The debt itself can be used to pay for goods, making these goods more affordable on a month-to-month or year-to-year basis. (b) Increased debt can lead to increased wages for wage earners, because some of the increased debt ultimately goes to create new jobs and to pay workers. Figure 12 shows the positive association that increasing debt seems to have with inflation-adjusted wages in the United States. Figure 12. Growth in US Wages vs. Growth in Non-Financial Debt. Wages from US Bureau of Economics “Wages and Salaries.” Non-Financial Debt is discontinued series from St. Louis Federal Reserve. (Note chart does not show a value for 2016.) Both sets of numbers have been adjusted for growth in US population and for growth in CPI Urban. Debt is, in effect, the promise of future goods and services made with energy products. These promises are often helpful in allowing an economy to expand. For example, businesses can issue bonds to provide funds to expand their operations. Selling shares of stock acts in a manner similar to adding debt, with repayment coming from future operations. In both cases, the payback can occur, if energy consumption is in fact growing, allowing the output of the business to expand as planned. Once world leaders decide that debt levels are too high, or need to be controlled better, we are likely headed for trouble, because debt can be very helpful in “pulling the economy forward.” This is especially the case if productivity growth is low because per capita energy consumption is falling.  Rebalancing of currency relativities to the US dollar. Rebalancing currencies to different levels relative to the dollar seems to play a major role in determining the “inflation rate” calculated in Figure 10. Currency rebalancing also plays a major role in determining the shape of the GDP graph in current US$, as shown in Figure 1. In general, the higher the average relativity of other currencies to the US$, the higher the demand for goods and services of all kinds, and thus the higher the demand for energy products. One problem in recent years is that, in some sense, the average relativity of other currencies to the US dollar has fallen too low. The fall in relativities took place when the US discontinued its use of Quantitative Easing in late 2014. Figure 13. Monthly Brent oil prices with dates of US beginning and ending QE. The price of oil and of other energy products dropped steeply at that time. In fact, in inflation-adjusted terms, oil prices had been falling even prior to the end of QE. (See Figure 2, above.) The shift in the currency relativities made oil and other energy products more expensive for citizens of the European Union, Japan, and most of the commodity producing countries shown in Figures 4 and 5. The ultimate problem underlying this fall in average relativities to the US dollar is that there is now a disparity between the prices that consumers around the world can afford to pay for energy products, and the prices that businesses producing energy products really need. I have written about this problem in the past, for example in Why Energy-Economy Models Produce Overly Optimistic Indications. At this point, none of the three approaches for solving the world’s deflation problem seem to be working:  Increasing the supply of oil and other energy products is not working well, because diminishing returns has led to a situation where if prices are high enough for producers, they are too high for consumers to afford the finished goods made with the energy products.  World leaders have decided that we have too much debt and, indeed, debt levels are very high. In fact, if energy prices continue to be low, a significant amount of debt currently outstanding will probably be defaulted on.  Countries generally don’t want to raise the exchange rates of their currencies to the dollar, because lower exchange rates tend to encourage exports. If the United States raises its interest rates, either directly or by selling its QE bonds, the level of the US dollar can be expected to rise relative to other currencies. Thus, other currencies are likely to fall even lower than they are today, relative to the US dollar. This will tend to make the problem with low oil prices (and other energy prices) even worse than today. Thus, there seems to be no way out of our current predicament. Conclusion The world economy is in a very precarious situation. Many of the world’s economies have found that, measured in current US$, the goods and services they are producing are less valuable than they were in 2013 and 2014. In particular, all of the oil exporting nations have this problem. Many other countries that are producing commodities have the same problem. Governments around the world do not seem to understand the situation we are facing. In large part, this is happening because economists have built models based on their view of how the world works. Their models tend to leave out the important role energy plays. GDP growth and inflation estimates based on PPP calculations give a misleading view of how the economy is actually operating. We seem to be sleepwalking into an even worse version of the Depression of the 1930s. Even if economists were able to figure out what is happening, it is not clear that there would be a good way out. Higher energy prices would aid energy producers, but would push energy importing nations into recession. We seem to be facing a predicament with no solution.
Overnight bulletin summary Global equities trade higher amid easing geopolitical tensions Pound tumbles on weaker than expected inflation data Today's calendar includes US retail sales, Empire Fed, import prices, NAHB, and API crude oil inventories Global stocks and US futures are up for a second day, with the VIX sliding 0.65 vols to 11.68 (-5.2%) and haven assets dropping, after a KCNA report report suggested North Korea had pulled back its threat to attack Guam after days of increasingly bellicose "fire and fury" rhetoric with President Trump, and hours after China took its toughest steps to support U.N. sanctions against Pyongyang, while the possibility of a Sino-American trade war was played down. The report, from KCNA on Tuesday, said Kim praised the military for drawing up a “careful plan” to fire missiles toward Guam. Kim was cited by KCNA saying he would watch the U.S.’s conduct “a little more.” "There is a more relaxed attitude being taken towards the Korean situation in markets. With the report North Korea has put its plans on hold, there is a sense of stepping back from the brink," Rabobank analyst Lyn Graham-Taylor said. Notably, risk aversion has not totally gone away, as Defence secretary Mattis also warned earlier that if NK fired missiles at Guam, it would be “game on” and “could escalate into war quickly”. That said, he was vague about what would happen if missiles splashed into the sea near Guam. The result was a continuation of yesterday's "risk-on" sentiment: the USD bounced, the USDJPY spiked as hugh as 110.45, while the pound tumbled on poor UK inflation data, while the EUR was dragged lower on what is a holiday across continental Europe. However, as some trading desks warn, this return of risk appetite may be temporary as the US and South Korea have joint military exercises scheduled for next week, which could spark things off again. For now however, traditional haven assets including gold and core bonds across Europe and TSYs slumped. Global stocks were roughly unchanged, with the MSCI All-Country World Index declined less than 0.05 percent, while Europe was broadly if modestly higher with the Stoxx Europe 600 Index up 0.1%. Germany’s DAX Index jumped 0.3 percent, as did the U.K.’s FTSE 100 Index. S&P Futures are up 0.2%. In Asia, Japan’s Topix index finished the day 1.1% higher driven by the sharp drop in the Yen, and Australia’s S&P/ASX 200 Index gained 0.5% at the close. Hong Kong’s Hang Seng index dropped 0.3% following a bout of last hour selling, even as the Shanghai Composite Index rose 0.4%. Markets in South Korea and India are closed Tuesday for holidays. The yen fell 0.7% to 110.41 per dollar, the biggest drop in three weeks. While the overnight session was generally quiet, aside from the previously noted UK inflation miss which sent sterling tumbling, another indication that Europe may be rolling over was German Q2 GDP data, which missed at 0.6%, below the 0.7% expected, as imports outpaced exports following the recent surge in the Euro. After hawkish comments from Dudley and UST yields doing well, there is a broad USD bid, even though South Korean markets was closed for national holiday. As noted above, the yen dropped on easing of N.Korean tensions, while the pound weakened after U.K. inflation data missed estimates, and Sweden’s krona gained as headline inflation reached the highest level since 2011. "We have North Korea saying they will wait, and Trump not saying anything at all, compared to his past promise of 'fire and fury,'" said Mitsuo Imaizumi, chief FX strategist at Daiwa Securities. "That added up to good news for the dollar, bad news for the yen," he said. Also overnight, China's credit growth came in higher than expected even as broad M2 plunged to a new all time low of 9.2% (exp. 9.4%): new yuan loans printed 825bn vs 800bn expected while aggregate financing came in at 1220bn vs 1000bn. However both measures of credit growth decreased sharply from June, where aggregate financing was 1776bn and new yuan loans increasing 1540bn. In rates, the yield on 10-year Treasuries advanced three basis points to 2.25 percent. Germany’s 10-year yield gained two basis points to 0.43 percent. Britain’s 10-year yield climbed three basis points to 1.01 percent. Gold fell 0.6 percent to $1,274 an ounce. Oil prices steadied somewhat after falling more than 2.5 percent on Monday to its lowest in about three weeks on the strength of the dollar and reduced refining in China. Brent was last down 2 cents at $50.71 a barrel. Market Snapshot S&P 500 futures up 0.2% to 2,467.25 U.S. 10Y Treasury yield: +3bps to 2.25% EUR/USD: -0.2% to 1.1758 USD/JPY: +0.7% at 110.40 GBP/USD: -0.5% at 1.2901 STOXX Europe 600 up 0.07% to 376.41 MSCI Asia up 0.2% to 158.72 MSCI Asia ex Japan up 0.07% to 520.98 Nikkei up 1.1% to 19,753.31 Topix up 1.1% to 1,616.21 Hang Seng Index down 0.3% to 27,174.96 Shanghai Composite up 0.4% to 3,251.26 Sensex up 0.8% to 31,449.03 Australia S&P/ASX 200 up 0.5% to 5,757.48 Kospi up 0.6% to 2,334.22 German 10Y yield rose 1.5 bps to 0.421% Euro down 0.2% to $1.1752 Italian 10Y yield fell 0.9 bps to 1.73% Spanish 10Y yield rose 0.2 bps to 1.44% Brent futures down 0.1% to $50.68/bbl Gold spot down 0.6% to $1,274.68 U.S. Dollar Index up 0.3% to 93.68 Top Overnight News South Korean President Moon Jae-in said that any military action against Kim Jong Un’s regime requires his nation’s approval, and vowed to prevent war at all costs EU says frictionless trade with the U.K. is not possible outside the Single Market and Customs Union U.K. Brexit Secretary David Davis says he won’t give a figure for Britain’s divorce bill by October Germany’s top judges have put the legality of the European Central Bank’s 2.3 trillion euros ($2.7 trillion) bond-buying program in doubt in a ruling that asks the European Court of Justice for guidance in five cases targeting the policy Intel CEO Becomes Third Chief to Quit Trump Business Council Trump Denounces White Supremacists Amid Backlash to Response Mattis Warns It’s ‘Game On’ If North Korea Strikes Guam U.K. Seeks Interim Customs Union With EU to Smooth Brexit New McDonald’s China Owners to Speed Up Expansion to Catch KFC Danone Is Said to Be Targeted by Activist Investor Corvex Transocean Agrees to Acquire Songa Offshore for $1.2 Billion Wrangler Jeans Owner Will Buy Dickies Maker for $820 Million WebMD Sued by Investor Seeking to Block $2.8 Bln KKR Sale Paulson And Other Hedge Funds Rewarded as Angst Fuels Gold Teva Cedes Spot as Israel’s Biggest Firm in Blow to Prestige ECB’s QE Questioned by German Judges Asking for EU Court Review Asian stock markets traded higher following the gains in US where the NASDAQ led the advances on continued tech outperformance, while global sentiment was also lifted as geopolitical concerns abated after comments from North Korean leader Kim that they will not strike Guam yet. ASX 200 (+0.47%) and Nikkei 225 (+1.11%) were boosted as tensions de-escalated, with markets in Japan the biggest gainer on JPY weakness. KOSPI is shut for holiday while Hang Seng (-0.28%) and Shanghai Comp (+0.43%) for the majority of the session conformed to the upbeat tone after the PBoC released around CNY 400b1n in MLF loans. Top Asian News South Korea to Prevent War at All Costs, President Moon Says Hedge Fund Betting on 70% Yuan Devaluation Digs In Amid Gain China Money Supply Growth Slips Again as Leverage Crunch Goes On China’s Economic Speed Bump May Reignite Bond Default Wave Fund Managers’ Positioning Remains Pro-Risk, BofAML Survey Shows Unmarried Indonesians Happier Than Those in Wedlock, Index Shows Modi Says More Indians Paying Tax After Cash Ban, GST Regime European equities have started the session off strongly (Eurostoxx +0.3%), as geopolitical tensions appear to have abated from the escalation seen last week. More specifically, North Korean leader Kim Jong Un discussed the Guam strike plan with officers and said they will not attack Guam yet, but could have a change of mind based on US actions. On a sector specific basis, energy and material names are the only sectors in the red with WTI back below USD 48.00 and gold losing ground amid the return of risk appetite. To the upside, Danone (+1.8%) are one of the notable gainers in Europe amid Corvex building a USD 400mln stake in the company. In fixed income, price action has largely been dictated by the broader risk-sentiment in the market in what is a week particularly void of EU sovereign supply amid summer-thinned trading conditions. More specifically, core paper is trading circa higher by 1.5bps with peripheral spreads higher by between 0.5-1.0bps. Note: the German Constitutional Court has declined to hear challenge of ECB's QE programme and will refer case to the European Court of Justice Top European News German Economy Extends Growth Spurt as Nation Heads for Election Merkel Jeered on Campaign Trail as Refugee Tensions Boil Up Swedish Inflation Hits Target for First Time in Almost Six Years U.K. Inflation Unexpectedly Holds Steady as Pound Drop Unwinds U.K. Growth, Inflation Outlook Cut, Weakening BOE Rate- Hike Case Schibsted Plunges to 8-Month Low as Facebook Expands Marketplace Bank of Russia Sells All 150b Rubles of 3-Month Bills Danone Undervalued, Scope for Margin Improvement, Bernstein Says Next Falls as Berenberg Says Rally Provides Shorting Opportunity In currency markets, the main data release this morning has come in the form of the latest UK inflation report. Despite expectations for Y/Y CPI to edge towards 3.0% by the year-end, today's metric fell short of consensus (2.6% vs. Exp. 2.7%) and saw GBP/USD fall circa 40 pips from 1.2950 to 1.2910 with the metric possibly dampening some expectations for a rate hike by the BoE in the short-term. Elsewhere, the USD remains firm against its major counterparts amid hawkish rhetoric yesterday from Fed's Dudley as well as gaining ground against JPY as JPY suffered from safe-haven outflows. Going forward, focus will likely be on NZD with the upcoming NZ dairy auction (futures pricing in a 4% increase in WMP). In commodities, metals markets have seen a mixed performance with gold (-0.5%) pressured amid safe-haven outflows as geopolitical concerns subsided while Copper benefited from the upbeat risk tone. WTI failed to make any significant recovery from yesterday's losses in which prices languished below USD 48/bbl after a bearish Genscape report, OPEC sources and comments from the EIA. Looking at the day ahead, there will be quite a lot of data, including: July retail sales, import / export price index for July (0.1% mom and 0.3% mom expected respectively), empire manufacturing stats (10 expected), the NAHB housing market index and US foreign net transactions for June. Further, Home depot will report its results today. US Event Calendar 8:30am: Import Price Index MoM, est. 0.1%, prior -0.2%; 8:30am: Import Price Index YoY, est. 1.5%, prior 1.5% Export Price Index MoM, est. 0.2%, prior -0.2%; 8:30am: Export Price Index YoY, prior 0.6% 8:30am: Empire Manufacturing, est. 10, prior 9.8 8:30am: Retail Sales Advance MoM, est. 0.3%, prior -0.2%; Retail Sales Ex Auto MoM, est. 0.3%, prior -0.2% Retail Sales Ex Auto and Gas, est. 0.4%, prior -0.1%; Retail Sales Control Group, est. 0.4%, prior -0.1% 10am: NAHB Housing Market Index, est. 64, prior 64 10am: Business Inventories, est. 0.4%, prior 0.3% 4pm: Total Net TIC Flows, prior $57.3b; Net Long-term TIC Flows, prior $91.9b DB's Jim Reid concludes the overnight wrap Can we get back to August yet? Unless you are well connected to Kim Jong-un or to a lesser extent Mr Trump then it’s impossible to answer. However a lack of escalation over the weekend and more reassuring words from a top US general has been a big relief for markets. As it’s the 15th today we're clearly at the midmonth point that the North Korean leader previously suggested was his timetable to potentially launch missiles at Guam although as we'll see below NK state media has suggested overnight that he is reviewing his plans and will watch the US first. It will be difficult for markets to fully recover their poise until we're out of this mid-month window with no new provocations (or worse). However every day that no news breaks should help markets recover to where they were before last Monday evening's "fire and fury' tweet after the earlier Washington Post story that Pyongyang has produced a nuclear warhead small enough to fit inside one of its missiles. Following the calmer words from Defence Secretary Mattis and CIA’s director Pompeo over the weekend talkshows, US’s Marine General, Chairman of the Joint Chief of Staff Dunford followed up and told South Korean President Moon that “…everyone hopes to resolve the current situation without going to war…”. Today, President Moon spoke at a separate function and said “there will be no war repeated on the Korean peninsula” and emphasised the need for diplomatic efforts. The reduced prospect of a US-NK conflict boosted US markets overnight with Asian markets broadly higher this morning. The Kospi (+0.6%), Nikkei (+1.3%), Hang Seng (+0.3%) and Chinese bourses (+0.2%-0.7%) are all higher as we type. Elsewhere, the Korean Won is up 0.5%. Notably, risk aversion has not totally gone away, as Defence secretary Mattis also warned earlier that if NK fired missiles at Guam, it would be “game on” and “could escalate into war quickly”. That said, he was vague about what would happen if missiles splashed into the sea near Guam. On the other side of the fence, according to the Korean central news agency, Kim Jong-Un has reviewed his missile strike plans and will watch what the US is doing “a little more”. Looking away from geopolitics, the US’s July retail sales will be out later today. DB’s economist Brett Ryan expect sturdy gains on both headline (+0.6% forecast vs. -0.2% previously) and ex-automobile sales (+0.6% vs. -0.2%) following two consecutive monthly declines. Note that there has been only one other occasion in the current business cycle when ex-auto sales fell for three consecutive months and that was due to unusually harsh winter weather in late 2014 / early 2015. Elsewhere, US data on June business inventories (+0.4% expected), US foreign net transaction, empire manufacturing (10 expected) and the NAHB housing market index are also due today, all of which should provide us with some clues on the US’s 2H GDP outlook. Moving back to markets. Remember that steady increase in the S&P we talked about a couple of weeks back. Well before yesterday, it was 77 trading days since the S&P increased by more than 1% in any one day. Clearly the +1.00% S&P gain overnight has just prevented this run continuing. All we needed was 3 more days to beat the prior record set back between November 06 and March 07 (79 trading days). Perhaps we'll now wait another 10 years before the record is threatened again. In terms of markets performance, lower risk aversion was evident across the board yesterday with the Vix down 21% to 12.3, gold falling 0.6% and the Swiss franc -0.2%. US equities strengthened, with the S&P up 1%, the Dow (+0.6%) and the Nasdaq (+1.3%). Within the S&P, only the energy sector was in the red (-0.3%), while all other sectors rose, particularly real estate (+1.7%) and IT (+1.6%). European markets were also up, with the Stoxx 600 +1.1% higher, with gains in every sector, particularly real estate and utilities (both +1.8%). Elsewhere, the DAX (+1.3%), FTSE 100 (+0.6%), CAC (+1.2%) and FTSE MIB (+1.7%) were also up. Government bond yields rose modestly reflecting lower risk aversion, with core yields up 1-3bp at the longer end of the curve, including: German bunds (2Y: unch; 10Y: +2bps), Gilts (2Y: +1bp; 10Y: +1bps) and French OATs (2Y: +2bp; 10Y: +3bps). Peripheral bond yields outperformed as tensions eased with Italian BTPs (2Y: -1bp; 10Y: -1bp) and Portugal (2Y: +2bp; 10Y: -4bp) generally rallying. Across the pond, UST 10Y has increased 3bps this morning to 2.25%. Turning to the currency markets, the USD dollar index gained 0.4% yesterday, supported by the Fed Dudley’s comments on rates outlook (discussed later). Conversely, both the Euro and Sterling dipped 0.4% versus the USD, while the Euro/Sterling was broadly flat. In commodities, WTI oil fell 2.5% following concerns for slowing Chinese demand (softer IP data) and EIA raising forecasts that US shale output will reach an all-time high in September. Elsewhere, precious metals were slightly lower (Gold -0.6%; Silver -0.2%), while base metals were broadly unchanged, with Copper (+0.2%), Zinc (-0.4%), although aluminium fell -1.6% after a strong 9% rise in the prior week. Away from the markets, NY Fed president Dudley told the AP he expects inflation to move somewhat higher as the labour market tightens further and suggested the Fed will announce its taper plan next month. On the rates outlook, he said "If (economic forecasts) evolves in line with my expectations ... I would be in favour of doing another rate hike later this year." Elsewhere, he said White House economic adviser Gary Cohn is a “reasonable candidate” to head the Fed if Trump does not name Yellen for a second term. Following on with the economic outlook, Bloomberg surveyed 38 economists recently, ~76% of them expect congress will pass tax cut legislations by November 2018, albeit the tax cuts are likely to be lower than what the Trump administration had originally promised. The potential policy changes are expected to add 0.2ppt to the pace of GDP expansion in 2018. The latest ECB CSPP holdings were released yesterday. They bought €1.11bn last week which compares to €1.54bn, €0.79bn, €0.72bn, €1.43bn over the previous four weeks. These continue to be low numbers and this week's equate to an average of €221mn per day (vs. €354mn/day since CSPP started). The CSPP/PSPP ratio was 11.4% (previous weeks 12.8%, 8.1%, 6%, 10.4%) which is slightly below the average since the April taper begun but the average since this point of 12.8% is still higher than the pre-taper ratio of 11.6%. So the evidence is still in favour of CSPP having been trimmed less than PSPP since April even if there have been some softer weeks of late. The ECB probably did a little front loading to account for summer credit liquidity being worse than in govt. bonds. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. Adding onto our comments yesterday for the slightly lower than expected July industrial production data in China, our China research term believes that slower growth was mainly driven by surprisingly weak data from the property sector. (eg: growth of property sales cooled to 4.8% yoy in July after a strong rebound to 30.3% yoy in June). Overall, our team think that the slowdown in July is unlikely to change the government policy stance in Q3 (ie: they do not expect a visible loosening of monetary or fiscal policy). With GDP growth at 6.9% in H1, they argue that the government can afford to allow growth to drop moderately in Q3. Elsewhere, the Eurozone’s June industrial production was slightly lower than expected at -0.6% mom (vs. -0.5%) and 2.6% (vs. 2.8% yoy). Looking at the day ahead, as our note is published, Germany’s preliminary 2Q GDP will be released, with 0.7% qoq and 1.9% expected. Then the UK’s July CPI (0% mom and 2.7% yoy expected), PPI output and retail price index are due. Over in the US, there will be quite a lot of data, including: July retail sales, import / export price index for July (0.1% mom and 0.3% mom expected respectively), empire manufacturing stats (10 expected), the NAHB housing market index and US foreign net transactions for June. Further, Home depot will report its results today.
The world did not come to an end this weekend and that's all the excuse markets needed to squeeze higher again... World did not end - yay! Buy Stocks, Dump Gold... But bonds and bullion remain the winners since Trump spoke last week... December rate-hike odds bounced higher today but remain well below levels before CPI/PPI hit last week... Trannies and Small Caps were panic bid but one glance at the chart below and its clear that The Dow and S&P went nowhere from the gap higher open... All the indices remain red post-"fire-and fury"... The S&P bounced back above its 50DMA but Small Caps remain below theirs... Financials and Tech outperformed (though notably drifted only marginally higher from the opening gap) and Energy underperformed as oil lagged... FANG Stocks retraced half the "Fire & Fury" losses then faded... VIX was clubbed back down towards its 200DMA (at 11.99) but failed to make it... Another quick rip and dip in vol... VXX (VIX ETF) tumbled back below its 50DMA.. Treasury yields remain below last week highs but were marginally higher on the day, thanks to comments from The Fed's Dudley on balance sheet normalization... However, 30Y yields never even made it back to Friday's highs... The Dollar Index rallied on the day...erasing the post-CPI plunge thanks to Dudley's comments... With all the majors weaker against the greenback... We wonder if this is the start of 2016 deja vu all over again... Gold sank modestly lower after failing to tag $1300 into Friday's close... Ugly day for WTI Crude... Finally, don't worry America - FED'S DUDLEY SAYS ASSET PRICES CONSISTENT WITH ECONOMY'S PERFORMANCE... hhmm.
One day after the 5th consecutive miss in US CPI, NY Fed President William Dudley threw currency and eurodollar traders for another loop when he said on Monday that it was not "unreasonable" to think that the central bank would begin trimming its balance sheet in September and sees another rate hike this year - supposedly in December - should economic data hold up, ignoring the message sent from monthly inflation reports. In an interview with the AP, Dudely warned that "the expectations of market participants are unreasonable," when asked if the expectation of the Fed reducing its bond holdings in September was accurate. The news sent the dollar and yields higher, pushing the 10Y from 2.2050% briefly to 2.2230%, although the move was subsequently faded. The news also sent December rate hike odds modestly higher on the day, up to 33% from 25% earlier, after Dudley said that he expects another rate rise as long as economic data meets his expectations. "I would expect — I would be in favor of doing another rate hike later this year." Despite the lack of inflation, Dudley expanded "my outlook for the economy hasn't changed materially since the beginning of the year. Continue to look for growths around 2%, slightly above trend, growth sufficient to continue to tighten the labor market. I did not raise my growth forecast after the Election because of the prospect of fiscal stimulus because I felt that there was a lot of uncertainty about how big it would be, what its composition would be, and when it would actually take effect. So, I always viewed it as a risk to the forecast. In other words, an upside risk to the forecast, but I never put it into my baseline forecast." Pressed on inflation, the NY Fed president said "the reason why inflation won't get up to 2% very quickly on a year-over-year basis is because we've had these very low inflation readings over the last 4 or 5 months. So it's going to take time for those to sort of drop out of the year-over-year calculation." "Now the reason why I think you'd want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that 1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening. So despite the fact that we've raised short-term interest rates, financial conditions are easier today than they were a year ago." Some more highlights from his interview transcript, courtesy of Bloomberg: "The stock market's up, credit spreads have narrowed, the dollar has weakened, and those have more than offset the effects of somewhat higher short-term rates and the very modest increases that we've seen in longer-term yields." On December hike odds, Dudley said that "If it (data) evolves in line with my expectations, I would expect -- I would be in favor of doing another rate hike later this year." "I think that if the economy continues to grow above trend, and the labor market continues to tighten, I do think we'll get to the point where that will lead to higher wages and that will show up in terms of higher inflation." "Now, the question is at what level of the unemployment rate will that all take place? So, if there are these secular forces that are pushing inflation lower, perhaps we can actually go to a somewhat lower unemployment rate. I would actually view -- rather than people wringing their hands that this is so awful that inflation is low, it actually might be a good thing because it could allow you to run the economy at a little bit higher level of resource utilization, which I think ... people get employed, they get job skills, they'd be able to build their human capital over time. (00:07:29) The productive capacity of the US economy would be greater -- all those things would be good things." There was also the amusing, token take on the stock market as reflective of the current state of the economy: "My own view is that -- I'm not particularly concerned about where our asset prices are today for a couple of reasons. The main one is that I think that the asset prices are pretty consistent with what we're seeing in terms of the actual performance of the economy." Which of course, is a "fake news": Dudley also spoke on balance sheet reduction: "And second of all, we can obviously announce the start of the program but delay the actual start date. So I think that -- I don't think the debt limit will have big impact on our decision about whether to start or not start the balance sheet normalization process... It's one of the reasons why the reinvestment process, phasing that down, is going to happen very gradually, that we're not just going to stop abruptly because we want to make sure that the adjustments are small, the model is gentle, and don't have a big consequence for financial statements.So far I would say that the market reaction has been extraordinarily mild. As expectations have gone from relatively low probability that we're going to start this to a very high probability that we're going to start this relatively soon. And so that makes me more confident that when we start, it's not going to have a big consequence for financial statements." Finally, on whether Gary Cohn will replace Janet Yellen: "I don't want to evaluate the various candidates for the Federal Reserve, except to say that I think Gary is a reasonable candidate. He knows a lot about financial markets. He knows lots about the financial system. I don't think you have to have a PhD in Economics, which I have, to be a Chair of the Fed or Governor or a President of one of the Federal Reserve Banks."
Authored by Gilbert Berdine via The Mises Institute, Enter “outrageous drug prices” into Google and you will receive plenty of examples. As reported here, Marathon Pharmaceuticals planned to charge $89,000 per year for its Emflaza brand of the corticosteroid deflazacort. Deflazacort was introduced in 1969 and is available outside the U.S. for less than $2 per tablet. US patients with muscular dystrophy have been obtaining the drug for around $1,500 per year from foreign sources. This pricing behavior cannot occur in a free market. In a free or unhampered market, if Marathon tried to charge $89,000 for a year’s supply of deflazacort, they would realize zero sales. There are at least 169 generic manufacturers of at least 300 brands of deflazacort. One or more competitors of Marathon would gladly supply the drug for a lower price. In a situation with robust competition, the price will move toward the minimal cost of production plus transport over time. Marathon can make its pricing decision, and expect to realize sales, because a government agency gave Marathon monopoly privilege to sell deflazacort in the United States. The debate over whether drug patents are beneficial to society is outside the scope of this discussion. Proponents of monopoly privilege for pharmaceuticals must admit, however, that the monopoly privilege enables the outrageous prices. In the case of Emflaza, Marathon did not develop a new drug. Deflazacort has been in use since 1969. The FDA awarded monopoly privilege to Marathon Pharmaceuticals for acquiring old clinical trial data and performing some additional analyses. Monopoly privilege enables pricing that extracts the last bit of disposable income from customers, but monopoly cannot, by itself, extract more from a customer than the customer can pay. The final policy element necessary for the outrageous price of $89,000 for a one year supply of Emflaza is public financing. By public financing I mean that the cost of the drug is not paid by the person receiving the benefit of the drug but by the public. Medicare and Medicaid are examples of public financing. Without public financing very few people could afford $89,000 per year, so Marathon Pharmaceuticals would charge less in order to maximize profit. With public financing, pharmaceutical companies stop making pricing decisions based on the economics of affordability and pursue rent seeking behaviors such as obtaining favorable pricing decisions by CMS (Centers for Medicare and Medicaid Services). To an economist, rents are incomes derived from political privilege rather than earned by voluntary trade. Rent seekers try to acquire political privilege rather than compete by innovation. Pharmaceutical companies are rent seekers when they apply for monopoly privilege to sell a drug, lobby government agencies to cover that drug under public financing, and then expand indications for treatment to maximize sales. Angus Deaton, Nobel Laureate in Economics, criticized rent seeking by the pharmaceutical companies. In an interview with The Atlantic, Deaton said, “My guess is that the FDA is acting pretty much in the interests of the pharmaceutical companies,” rather than serving the public interest. Public financing of medications enables an extraction of wealth from the poor and middle class and transfers it to wealthy pharmaceutical corporations. Rather than making profits by offering valuable drugs at prices for which people will voluntarily pay, pharmaceutical companies extract unearned rents via government privilege. Unlike capitalism which generates wealth and makes everyone better off, rent seeking slows economic growth. This process of rent seeking is not confined to pricey drugs treating rare disorders; drug prices are set based on political choices across the spectrum. Figure 1 Legend: Medicare Part D Total Drug Benefit. Part D benefit in billion U.S. dollars, nominal Gross Domestic Product (GDP), average hourly wage, and consumer price index (CPI) have been normalized to year 2006 and scaled to Part D Benefit in 2006 to clearly illustrate comparative growth rates in these variables. From modest beginnings in 2004, the drug benefit of Medicare Part D has grown to $89.5 billion in 2015 or $2,141 per beneficiary per year. This benefit is money extracted from current and future taxpayers and paid to pharmaceutical companies. Note the rapid growth in spending from 2004 to 2006 when full outpatient drug coverage became available. Subsequent growth in spending reflects changes as new drugs become available and older drugs face competition from generics. An AARP analysis of the price of drugs widely used by senior citizens from 2005 to 2013 demonstrated that for each quarter since December 2005, a basket of 280 generic drugs was less expensive while a basket of 227 brand name drugs increased in price faster than growth in the Consumer Price Index (CPI). Figure 1 illustrates that growth in Medicare Part D (even since 2006) is faster than either GDP or average hourly wages, so current trends cannot possibly be sustained. Growth is faster than the increase in CPI. Note the more rapid growth in Part D benefits since 2013. Total benefit grew from $69.3 billion in 2013 to $89.5 billion in 2015, more than 29% in two years. The Medicare trustees attributed this rapid growth to coverage for very expensive hepatitis C medications. AARP found a similar increase in the growth of brand name and specialty drug prices since 2013. Before we can make health care affordable, we must confront why a previously affordable commodity has become unaffordable. On February 9, 2017, the FDA awarded monopoly privilege for US sales of deflazacort to Marathon Pharmaceuticals. Within a few days, Marathon Pharmaceuticals raised the price of deflazacort from $1,500 to $89,000 per year. This price increase was not an example of failure by free-market capitalism. Rather this price increase was an example of how anticompetitive government regulations break functioning markets in favor of rent seeking corporations.
While most banks have in recent weeks expressed concerns about the recent, near record high levels in the S&P - which is now 67 points above Goldman's year end price target of 2,400 - few have been willing to go out on a limb and announce they are short the market, and that the bull market is now over (unlike Gartman who on Friday staked his reputation that the "Bull market has come to an end" only to unleash another rally in the S&P in the next two days). Overnight, JPM's Misla Matejka has done just that, and in his latest equity strategy note writes that JPM "continues to see the risk-reward for equities as unattractive" for 4 main reasons: i) complacency seen in VIX and in HY spreads could unwind further, ii) EPS momentum is deteriorating, iii) valuations are "outright expensive", and iv) liquidity will be turning. If the JPM strategist had left it at that, it would have been notable as it would be one of the very few, unhedged bearish recos on Wall Street. He did not, however, and said that after the early periof of turbulence, markets will continue rising, effectively nullifying his warning because what's the point of selling just to have to buy again a few weeks or months down the line, or as Matejka put it the "medium-term fundamental view remains that equities are in an upcycle and that the potential consolidation should be used as another good entry point." Hedging aside, here are the details of Matejka's short-term bearish call, who writes that "we have been very bullish on equities in 1H, but think they will be consolidating during the second half of the year. Equities performed strongly in 1H and the key positive catalysts moved behind us. Now that SXXP is down 4% since May, where to from here? We believe a continued weakening in USD will keep helping EM & commodities (OW) and any rise in Bund yields will help Eurozone Banks (OW), but we think broader equity markets are likely to continue consolidating." Looking at the big picture, JPM sees the following "headwinds" as immediate red flags: 1) The change in liquidity provision by the main central banks is likely to have an impact on equities, given very elevated P/E multiples currently. In 2H ’13, Fed tapering was ultimately positive for equities, after an initial correction, but then the starting P/E for MXWO was 30% cheaper than current. Also, CPI, PMIs and EPS were all up then, but that might not be the case this time around. Will central banks make a “policy mistake” by tightening liquidity into potential growth and inflation weakening? Within this, we think US bond yields remain stuck in a range, but the potential for Eurozone yields to move up is greater. 2) Earnings delivery likely to weaken in 2H, post a strong Q1 and still adequate Q2. We were very bullish regarding the upturn in earnings, but the hurdle rate is much steeper in 2H and the base effects are turning less positive. The potentially weaker activity and pricing backdrop into year-end could be the headwind. Global PPI, which is typically strongly correlated to global EPS momentum, is likely to decelerate in 2H. After spending months in positive territory, we note SXXP EPS revisions are outright negative now, lead lower by Cyclicals. Stocks’ reaction to Q2 misses, and to the beats, was poorer than typical. 3) Soft patch in global activity ahead? US growth momentum is mixed, with a rollover in manufacturing, credit, housing and car sales. US CESI is negative – the gap between CESI and SPX remains uncomfortably high. China new project starts are soft. The last time this happened, in summer ‘15, a phase of significant de-risking followed. A big stimulus package stabilised the activity then, but this time around, a new support programme might not be forthcoming. Shibor rate is up 200bp ytd. Eurozone has been very strong so far, but even that region could see some softness ahead. We note Eurozone PMIs are sequentially lower for two months in a row. 4) Equity multiples are in outright expensive territory. There is some complacency in risk pricing, with HY spreads near record low, and VIX as well. Aug-Sep seasonals were typically weak Enough for JPM's bearish near-terms: now here is the longer-term bullish perspective: as part of the hedge, the JPM strategist asks if "the potential increase in volatility during the 2H something that might become more sinister than just the typical profit-taking given poorer seasonals, a valuation headwind from bond yields repricing, and a likely soft patch in global earnings and activity momentum?" And answers "We don’t think so." Here's why: Earnings base remains depressed in EM and in Eurozone. There is significant medium-term upside potential from here in both regions. Credit conditions are supportive, real rates are low and yield curves are generally steep. Equities are still under-owned, where the only buyers over the past 10 years have been the corporates, through buybacks. There are some signs that this is starting to change. Even though in absolute terms equities appear pricey, the relative value proposition between equities and fixed income still holds. USD behaviour might not add to the risk-off concerns. Typically, as one enters a de-risking phase, USD has tended to rally. This, in turn, has become a problem for EM, as the EM central banks need to hike interest rates in order to protect their currencies, which ultimately hurts EM growth. Also, a rallying USD is a headwind for commodity prices. We do not see USD strengthening this time around. * * * The cliff notes version of the above, of course, is "hedging one's bets": if stocks drop, JPM has 4 reasons why that should have happened. If they don't, JPM has 5 reasons why they should continue higher. Perhaps the most important take home from all of the above is the following statement from JPM: "the only buyers over the past 10 years have been the corporates, through buybacks." This is a concern, because as we showed earlier using a SocGen chart, the amount of corporate buybacks has declined by 20% Y/Y, the biggest drop since the financial crisis... ... leaving open the question "who will step in to buy"?
One Trader's Reality Check "If You Think Last Week Was A Disaster, You May Be In The Wrong Line Of Work"
While the moves in equity (VIX) and credit (CDX, ITRX) protection costs last week shocked many out of their recent coma of complacency, former fund manager Richard Breslow warns it was the lack of reaction across markets broadly that investors should be more worried about. Via Bloomberg, We really need to stop using the expressions “risk-on” and “risk-off.” Or if that’s too much to ask, how about a short holiday while we collect our wits. We grossly over use them to the point of rendering them meaningless and trivial. And reliance on these crutches is just a way of avoiding thinking about what might actually be going on. The markets’ perception and appetite for risk isn’t something that can be measured on an hour by hour basis. A few random basis points isn’t a measure of anything. And the reality that markets remain laughably correlated on a short-term basis means they are all just reflecting the same factor signal not giving independent confirmation of where we might be headed. The S&P 500 had its highest close of all-time last week before crashing to levels not seen in over three weeks. That’s not risk-off. It wasn’t wealth destruction on a mass scale. If you think that was a disaster, you may be in the wrong line of work. Or at least, you may want to give some thought about what you would do when there is a proper setback. Maybe call that “risk-offest?” It’s a mistake to analyze serious geopolitical risks by jumping up and down about minuscule moves in emerging market currencies or credit spreads that have little value to begin with. People were actually comparing the size of the South Korean economy to that of Iraq to try to convince us that this war would be a really bad one. No comment. The yen has been rallying since the Fed went dovish at the last Congressional testimony by Chair Yellen. The first 400 pips versus the dollar were the good news on rate hikes that propelled the last leg up in equities and helped trash Treasury yields. The cross didn’t fall on last week’s news from 114.50, it did so from 110.50. And that was with the help of yet another CPI miss. It would be an enormous mistake not to take the North Korean problem very seriously or not be concerned. It’s also misguided to think the markets are addressing the issue by widening Italian spreads to Germany by a few basis points from YTD tights. That’s called knee-jerk reaction, not prudence. If you want to be concerned and confused by how traders responded to this news do so based on how little anything moved, not by how much. During that entire “sell-off” asset prices were quite decidedly showing a firm risk-on bias. And one glance at overnight futures (and VIX) suggests it's BTFAONW dip deja vu all over again...
In what should be a relatively quiet, mid-summer week if only on the global economic schedule even as domestic and global political tensions continue to set the general risk tone on any given day, the focus over the next few days will be on US retail sales on Tuesday and Industria Production on Thursday, as well as on monetary meeting minutes from the Fed and the ECB. Here, focus is on the inflation outlook and discussion of transitory vs persistent factors. The FOMC minutes will likely show general agreement about the roadmap for balance sheet normalization. Furthermore, a discussion over the neutral rate could be on the table, given the recent Fed talk. We also have the ECB minutes where EU economist focus is on FX and QE after Dec-17. The opening statement by the ECB's chief economist is likely to insist and possibly quantify on the impact of the stronger euro on the inflation outlook. BofA economists also see the potential for remarks on the recent tightening in wider monetary conditions in Europe, and the surge in the Euro. The US the spotlight is again with retail sales. Consensus expected a 0.4% rebound, implying a strong rebound following a 0.2% decline in June. Industrial production and the manufacturing surveys should, on balance, inch up. As SocGen's Mihcala Marcusen previews, "we expect a mixed bag on the data front globally, with strong 2Q GDP growth in Germany, Italy and Japan while we see a moderation in Chinese activity data and only a tepid rebound in US retail sales. The Fed and ECB minutes should provide more details on the extent of the discussion on the balance sheet normalisation timing for the Fed and on the QE extension announcement for the ECB" United States - Balance sheet start date in focus: Market participants will scour the July FOMC Minutes to see if the start date for the balance sheet normalisation was discussed, or even decided upon. Retail sales will be the main data release this week, as investors try to gauge the strength of the consumer after disappointing spending figures recently and concerns that consumers' budgets may be getting stretched. Euro area - Strong 2Q17 GDP growth in Germany and Italy: We expect strong preliminary 2Q17 GDP prints for Germany (SGe 0.9% qoq) and Italy (SGe 0.4% qoq) as well as confirmation of euro area 2Q GDP at 0.6% qoq. The overall robust growth momentum should also be reflected in solid euro area industrial production numbers. The ECB minutes of the July meeting could reveal more on the discussion of exchange rate effects and on the timing for the announcement of QE extension into 2018. United Kingdom: Inflation to rise but earnings growth to fall: After a brief dip, CPI inflation should rise from 2.6% to 2.7%. The unemployment rate could fall again from 4.5% to 4.4% but this is very uncertain. Total earnings growth should fall from 1.8% to 1.7%. Retail sales ex auto fuels should rise by 0.5% mom. DB breaks down key events on a day by day basis: Monday starts with the Eurozone’s industrial production (IP) stats for June. Onto Tuesday, Japan’s final reading for June IP and capacity utilisation stats as well as German’s preliminary 2Q GDP stats will be due early in the morning. Then UK’s July CPI, PPI and retail price index are due. Over in the US, there will be quite a lot of data, including: July retail sales, import / export price index for July, empire manufacturing stats, NAHB housing market index and US foreign net transactions for June. Turning to Wednesday, the Eurozone and Italy’s preliminary 2Q GDP stats are due. Then for UK, we have the July jobless claims and claimant count rate and the June ILO unemployment data. Across the pond, we get the FOMC meeting minutes along with the July housing starts and MBA mortgage applications stats. For Thursday, Japan’s July trade balance, exports/ imports data along with France’s ILO unemployment rate will be out early in the morning. Then the Eurozone’s July CPI and UK’s July retail sales are due. In the US, quite a lot of data again, including: July IP, conference board US leading index, the Philadelphia Fed business outlook survey, initial jobless claims and continuing claims stats. Finally on Friday, Germany’s PPI will be due early in the morning. Follow by the Eurozone’s June current account stats and construction output data. In the US, various University of Michigan sentiment index are also due The week's other events include on Wednesday, the NAFTA talks between US, Canada and Mexico kicks off in Washington. Then on Thursday, the ECB will publish the account of its July policy meeting and the Fed’ Kaplan will speak on Thursday and Friday. Finally, notable US companies due to report include: Home depot, Cisco, Target and Wal-Mart. Closer to home, we have RWE reporting. Finally, looking at only the US, here is Goldman with a full weekly breakdown including consensus estimates: The key economic data releases this week are retail sales on Tuesday and industrial production on Thursday. There are a few scheduled speaking engagements by Fed officials this week. In addition, the minutes from the July FOMC meeting will be released on Wednesday. Monday, August 14 There are no major economic data releases. Tuesday, August 15 08:30 AM Retail sales, July (GS +0.4%, consensus +0.4%, last -0.2%); Retail sales ex-auto, July (GS +0.3%, consensus +0.3%, last -0.2%); Retail sales ex-auto & gas, July (GS +0.4%, consensus +0.4%, last -0.1%); Core retail sales, July (GS +0.5%, consensus +0.4%, last -0.1%): We estimate core retail sales (ex-autos, gasoline, and building materials) rose 0.5% in July, reflecting above-trend growth in the non-store category due to record sales on Amazon Prime Day. We also see scope for re-acceleration in core retail sales, following two consecutive monthly declines. We estimate a relatively firm increase in the ex-auto ex-gas component of 0.4%. A third monthly drop in gas prices should weigh on ex-auto sales, where we forecast a 0.3% increase. We look for a 0.4% increase in the headline measure, boosted by sequential improvement in unit auto sales. 08:30 AM Import price index, July (consensus +0.1%, last -0.2%) 08:30 AM Empire state manufacturing survey, August (consensus +10.3, last +9.8) 10:00 AM Business inventories, June (consensus +0.4%, last +0.3%) 10:00 AM NAHB housing market index, August (consensus +64, last +64): Consensus expects the NAHB homebuilders’ index to remain flat after a weaker than expected July report in which the index declined two points. Overall, the homebuilders’ index—which we have found to be a decent leading indicator of housing starts—suggests that the trend in construction activity is slowing, perhaps reflecting the lagged effect of higher mortgage rates. 04:00 PM Total Net TIC Flows, June (last +$57.3bn) Wednesday, August 16 08:30 AM Housing starts, July (GS flat, consensus +0.4%, last +8.3%); Building permits, July (consensus +2.8%, last -4.9%): We estimate housing starts were flat in July, reflecting a retracement in multifamily following a 13% rebound in June. While the impact of higher mortgage rates has likely weighed on single family demand and construction this year, we suspect this drag is now waning, particularly given the pullback in mortgage rates since March. 02:00 PM Minutes from the July 25-26 FOMC meeting; The July FOMC meeting hinted at a September announcement of balance sheet normalization, by noting in the post-meeting statement that the Committee expects to begin normalization “relatively soon.” The statement made several small tweaks to the description of economic conditions, acknowledging that inflation is now running “below” its 2% target (vs. “somewhat below” in the June statement), while upgrading the characterization of job growth. In the minutes, we will look for further discussion of the soft inflation data and the committee’s views on the weights attached to the inflation misses relative to the risk of a labor market overshoot. Thursday, August 17 08:30 AM Initial jobless claims, week ended August 12 (GS 245k, consensus 240k, last 244k); Continuing jobless claims, week ended August 5 (consensus 1,968k, last 1,951k): We estimate initial jobless claims rose 1k to 245k in the week ended August 12. Initial claims can be particularly volatile around this time of year due to annual auto plant shutdowns, and we expect a rise in factory closures to boost claims for this week. Offsetting this, we note elevated levels of claims in California and South Carolina, which could reverse in the upcoming report. Continuing claims – the number of persons receiving benefits through standard programs – have started to trend down again in recent weeks, following an early-summer rebound. 08:30 AM Philadelphia Fed manufacturing index, August (GS +19.0, consensus +18.3, last +19.5): We estimate the Philadelphia Fed manufacturing edged down 0.5pt to +19.0 in August, after the index climbed to a cycle high of 38.8 in May. We expect the index to soften a bit, but likely to levels still consistent with a solid pace of expansion in manufacturing activity. 09:15 AM Industrial production, July (GS +0.5%, consensus +0.3%, last +0.4%); Manufacturing production, July (GS +0.4%, consensus +0.3%, last +0.2%); Capacity utilization, July (GS +76.8%, consensus +76.8%, last +76.6%): We estimate industrial production increased 0.5% in July, reflecting solid growth in utilities. We expect manufacturing production rose 0.4% despite a pullback in auto production, reflecting broad cyclical improvement in other manufacturing categories. 01:00 PM Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Fed President Robert Kaplan will speak at the Lubbock Chamber of Commerce in Lubbock, Texas. Audience & media Q&A is expected. 01:45 PM Minneapolis Fed President Kashkari (FOMC voter) speaks: Minneapolis Fed President Neel Kashkari will participate in a moderated Q&A session at the Edina Rotary Club in Edina, Minnesota. Audience Q&A is expected. Friday, August 18 10:00 AM University of Michigan consumer sentiment, August preliminary (GS 94.4, consensus 94.0, last 93.4): We estimate the University of Michigan consumer sentiment index rose 1.0pt to 94.4 in the August preliminary reading, following two consecutive declines from its May peak. Our forecast reflects mostly firm higher frequency consumer surveys and decent stock market performance over the last two weeks. 10:15 AM Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Fed President Robert Kaplan will participate in a moderated Q&A at the Dallas County Community College District Conference Day in Dallas, Texas. Audience Q&A is expected. Source: BofA, DB, Goldman
The VIX tumbled by nearly 3 vols, down to 13.10 last, or over 18% lower and global stocks and S&P futures rebounded sharply on Monday as tensions over an imminent conflict with Pyongyang receded after U.S. officials played down the likelihood of a nuclear conflict with North Korea, recovering from fears of a U.S.-North Korea nuclear standoff drove them to the biggest weekly losses of 2017, while the dollar too rose off four-month lows it had hit against the yen. As DB summarizes the latest events in the ongoing N.Korean crisis, this could be a pivotal week in the stand-off as last week Kim Jong-un did say that they would be ready to attack Guam by "mid-August" which if we are being literal is this week. However a lack of much news on the story over the weekend is surely a positive for now. Indeed the CIA’s director Pompeo tried to calm nerves by speaking to Fox news on Sunday, noting that “…I’ve seen no intelligence that would indicate that we’re in (the cusp of a nuclear war) today…” and would not be surprised if NK tested another missile. Further, national security adviser McMaster also said there’s no indication war will break out. Perhaps these comments were a response to Trump’s comments on Friday that “military solutions are…locked and loaded, should NK act unwisely…”. European shares bounced after falling nearly 3% last week, with the STOXX 600 up 0.7% following on from a 0.9 percent jump in MSCI's index of Asia-Pacific shares outside Japan. The Stoxx Europe 600 Index headed for its first gain in four days, tracking increases across markets including South Korea. As the chart below shows, Still, Europe may be due for a pullback: the MSCI Europe Index hasn't had a 10% correction in more than a year. Gains were led by bounces in Australia, Hong Kong and South Korea while the MSCI world index rose 0.2%. That said, as the following chart from Cantillon Consulting shows, the MSCI world index is finally testing the support of the channel established during the Trump reflation move: it either snaps or rebounds to new highs. Japan failed to partake in the region's gains however, slipping 1 percent to three-month lows despite an impressive GDP print showing robust 1.1% Q2 growth in Japan (more below), driven by worries over the potential impact of the yen's recent surge against the dollar. Japanese investors also repatriated cash held overseas, keeping the USDJPY below 110. The dollar rose 0.5 percent to 109.70 after slipping to 108.720 on Friday, its weakest since April 20. Against a basket of currencies it firmed 0.2 percent, rising off last week's 10-day lows . "As long as the geopolitics ease, we look for dollar/yen to gradually grind higher, back above the 110.00 level, along with gently rising U.S. yields," ING Bank analysts told clients. "The risk aversion has stabilized and investors have gotten used to the North Korea situation a little bit - as long as it doesn't escalate further," said Daniel Lenz, a strategist at DZ Bank in Frankfurt. That said, expectations of an all clear may be premature: North Korea's Liberation Day celebration on Tuesday to mark the end of Japanese rule could see tensions rise again, markets are relieved that the weekend had passed without more rhetoric. This may be reflect in the ongoing surge in bitcoin, which jumped for the second consecutive weekend, and hit a new all time high above $4,200 this morning. In overnight data, Japan printed the strongest GDP in over two years, after the economy was said to have grown at a 4% annualized rate in Q2, a 6th consecutive quarter of growth. Meanwhile, economic data out of China disappointed across the board as Chinese retail sales and industrial production for July missed estimates. South Korea’s won led a rebound in most Asian emerging-market currencies after several top U.S. national security officials said a nuclear war with North Korea wasn’t imminent. The MSCI Asia index ex Japan advanced for the first time in four days amid steady sovereign bonds. “With the geopolitical concerns surrounding North Korea appearing to stabilize a little, we could see the USD/Asia complex be fairly range-bound today with a slight downward bias,” said Julian Wee, a senior market strategist at National Australia Bank in Singapore. Japan’s yen weakened, after rallying the most since May last week on haven demand. Gold halted its advance amid the efforts by U.S. officials to soothe the escalating tensions on the Korean peninsula. Bloomberg Dollar Spot Index jumps 0.23%, first gain in three days In China, the yuan gave up earlier gains with the offshore exchange rate falling most in six weeks as the dollar jumps and the People’s Bank of China sets a weaker-than-expected daily reference rate. The CNY dropped 0.05%, erasing an advance of as much as 0.16%, to 6.6700 per dollar, after the PBOC strengthened the yuan reference rate 0.06% to 6.6601, weaker than Mizuho Bank’s est. of 6.6573 and Nomura’s 6.6562. In rates, 10-year TSY yields inched higher after falling on Friday to six-week lows following data showing that U.S. consumer prices rose just 0.1 percent last month, below economists' forecast of a 0.2% gain. Euro zone bond yields also rose, with investors interpreting the robust Japanese data as a sign that the global economy is indeed on the mend. While Japan is not expected to dismantle its stimulus program any time soon, analysts reckon that signs of global recovery gives euro zone and U.S. central banks a reason to start rolling back some of their asset purchases. The yield on Germany's 10-year government bond was up 4.5 bps to 0.43%, a move mirrored by most other euro zone debt. Commodities trading was mixed overnight with safe-haven gold (-0.2%) pulling back from 9-week highs amid the improved risk sentiment. Demand for copper was subdued alongside weaker iron ore prices after Chinese Industrial Production data for July missed expectations, while WTI was quiet overnight with prices unchanged during Asia trade. Crude prices seeing a modest move lower, however prices are still up significantly from last week's gains with Brent remaining above $52. Much like fixed income, gold and silver prices are bearing the brunt of a more risk on environment. Libya's top oil field is said to drop on security threats. Bulletin Headline Summary from RanSquawk Equities in the Green Brexit Whispers Once Again Begin Market Snapshot S&P 500 futures up 0.6% to 2,454.30 VIX down 2.94 to 13.10, -18.33% STOXX Europe 600 up 0.8% to 375.08 MSCI ASIA down 0.1% to 158.25 MSCIA Asia ex Japan up 0.8% to 520.33 Nikkei down 1% to 19,537.10 Topix down 1.1% to 1,599.06 Hang Seng Index up 1.4% to 27,250.23 Shanghai Composite up 0.9% to 3,237.36 Sensex up 0.9% to 31,494.28 Australia S&P/ASX 200 up 0.7% to 5,730.41 Kospi up 0.6% to 2,334.22 German 10Y yield rises 4bps to 0.42% Euro down 0.2% to 1.1803 per US$ US 10Y yield rises 2bps to 2.21 Italian 10Y yield falls 1bp to 2.02% Spanish 10Y yield fell 2bps to 1.44% Gold spot down 0.6% to $1,281.92 U.S. Dollar Index up 0.3% to 93.32 Top Overnight News Two top U.S. national security officials sought to assuage fears of imminent nuclear war with North Korea following days of heightened rhetoric by President Donald Trump, as America’s top general prepares to meet with South Korea’s leader Patrick Drahi’s Altice NV is considering asking Canada Pension Plan Investment Board and BC Partners to help fund a potential bid to buy cable broadcaster Charter Communications Inc. JPMorgan Chase & Co. is proposing to charge as little as $10,000 a year for equity research, the lowest price to emerge so far, as the Wall Street giant seeks to grab market share when a European ban on free analysis for clients is imposed Venezuela will defend itself from the “madness” of Donald Trump, its defense minister said, a day after the U.S. president said he’s considering a military option in response to the escalating political and economic crisis in the oil-producing nation The pros who make their living forecasting the economy overwhelmingly expect President Donald Trump and his fellow Republicans to push through tax cuts in time for next year’s congressional elections Rovio Entertainment Oy is planning an initial public offering as early as next month that could value the maker of the Angry Birds mobile games and movie at about $2 billion Angry Birds Maker Is Said to Plan IPO at $2 Billion Value Toshiba Chip Sale Talks Are Said to Stall On Payment Timing Cathay ‘Begging With Golden Bowl’ to Win Back Chinese Fliers Alibaba and Tencent Looking Riskier And Placing Bigger Bets Stada Appeals to Hedge Funds to Push Through Bain, Cinven Bid MGM Resorts Bets on Wealthier Masses to Catch Up in Macau Survival of Brokers’ Morning Notes in Balance as MiFID Looms China Economy Loses Momentum as Factory Output, Investment Slow China July industrial output 6.4% vs 7.1% est; retail sales 10.4% vs 10.8% est; fixed-asset investment 8.3% vs 8.6% est Japan 2Q GDP 1.0% vs 0.6% est; y/y 4.0% vs 2.5% est; business spending 2.4% vs 1.2% est; private consumption 0.9% vs 0.5% est RBA’s Kent says interest rates unlikely to rise any time soon; RBA will be cautious when time to normalize New Zealand 2Q retail sales 2.0% vs 0.7% estimate Macri candidates leading key provinces in Argentina’s primaries Asian equity markets traded mostly higher following the rebound of US stocks last Friday on Wall Street where the NASDAQ outperformed amid tech strength, while a miss on CPI dampened prospects of a December Fed hike. The improvement in risk sentiment was also supported as some geopolitical concerns abated which saw ASX 200 (+0.7%) and KOSPI (+0.6%) positive throughout the session, however Nikkei 225 (-0.8%) bucked the trend despite strong GDP numbers, as Friday's Asian session losses caught up with the index on its return from a long weekend. Elsewhere, Hang Seng (+1.2%) and Shanghai Comp (+0.4%) were positive following a firm liquidity operation by the PBoC, although gains in the mainland bourse were capped as Industrial Production and Retail Sales data added to the recent trend of disappointing Chinese data releases. Finally, 10yr JGBs traded flat as participants mulled over strong GDP numbers and losses in Japanese stocks, with demand also dampened from a lack of a Rinban announcement by the BoJ.Japanese GDP (Q2 P) Q/Q 1.0% vs. Exp. 0.6% (Prey. 0.3%). Japanese GDP Annualized (Q2 P) 4.0% vs. Exp. 2.5% (Prey. 1.0%); Chinese data reported overnight was weak across the board: Chinese Industrial Production (Jul) Y/Y 6.4% vs. Exp. 7.1% (Prey. 7.6%). Chinese Industrial Production YTD (Jul) Y/Y 6.8% vs. Exp. 6.9% (Prey. 6.9%). Chinese Retail Sales (Jul) Y/Y 10.4% vs. Exp. 10.8% (Prey. 11.0%). Chinese Retail Sales YTD (Jul) Y/Y 10.4% vs. Exp. 10.5% (Prey. 10.4%) PBoC injected CNY 110bln in 7-day reverse repos and CNY 100bln in 14-day reverse repos. PBoC set CNY mid-point at 6.6601 (Prey. 6.6642) According to the China Commerce Ministry, China is to ban some imports from North Korea based on US resolution, the ban is to include imports of Iron ore, Coal, Lead and seafood (effective Tuesday August 15th) Top Asian News Hong Kong Stock Exchange Trading Hall to Close in October: SCMP Alibaba, Tencent, Telstra Options Overprice Earnings-Day Moves Gold Giant Gains to Record as India’s Tax Shift Seen as Plus HSBC Lowers USD/SGD Forecast With MAS Seen Tightening in April Sunac Is Said to Consider Strategic Investor for Leshi: Caixin A relief rally in Europe to begin the week with much of the gains stemming from financials, while RWE is making solid gains after strong earnings results. Elsewhere, Danone are among the best performers this morning following reports that Kraft and Coke are seen as possible buyers for the company. Demand for riskier assets amid the quiet newsflow over tensions on the Korean peninsula has subsequently hampered EGBs. German curve has been bear steepening this morning, while peripheral spreads are slightly tighter. UK Chancellor Hammond and Trade Minister Fox stated that the Brexit transition period will be limited and will be intended to avert a cliff edge. The ministers also added that the transition period cannot be an alternate path for staying in the EU. Markets have been unfazed by the speech, with the indecision and uncertainty continuing to be evident in sterling. Top European News Hammond, Fox Say Transition Won’t Be Back Door to Staying in EU Pandora Shares Fall; Carnegie Says FY Guidance Is ‘Stretched’ Draghi Gets Help From Euro Zone’s Northerners Wanting More Pay London’s Big Ben Bell to Fall Silent Next Week for Four Years Merkel’s Election Rivals Roll Out the Big Guns to Narrow Gap Allianz Looks to Buy Bunds After ECB Gives Tapering Steer Brace for Pound Turbulence as Economics and Politics Collide In currencies, as newsflow covering the spat between North Korea and the US simmers down, the USD index has been trading at better levels against the Yen which has pressured major pairs. In turn, EUR tripped through 1.18 to hover near session lows. Poor data out of China damped AUD, as Chinese Industrial Production and Retail Sales missed across the board. As the data was digested, AUD/USD came off best levels, and trades around session lows, through 0.79 once again. A clear break through 0.7840 is needed to indicate any clear change of direction. Yen has seen some unwinding of the risk off positions taken throughout last week's trade, amid the growing geopolitical tensions. USD/JPY's June's low just through 109.00 saw some bids waiting, as the pair has come off best levels, with bulls likely to look to test 110.00. The pound has seen rangebound trade throughout the Asian session despite Brexit commentary emerging from the woodworks once again. Comments from UK Chancellor Hammond and Trade Minister Fox stated that the Brexit transition period will be limited and will be intended to avert a cliff edge. The ministers also added that the transition period cannot be an alternate path for staying in the EU. Markets have been unfazed by the speech, with the indecision and uncertainty continuing to be evident in sterling. In commodities, trading was mixed overnight with safe-haven gold (-0.2%) mildly pulling back from 9-week highs amid an improvement in global risk sentiment. Conversely, demand for copper was subdued alongside weaker iron ore prices after Chinese Industrial Production data for July missed expectations, while WTI quiet overnight with prices unchanged during Asia trade. Crude prices seeing a modest move lower, however prices are still up significantly from last week's gains with Brent remaining above USD 52. Much like fixed income, gold and silver prices are bearing the brunt of a more risk on environment. Libya's top oil field is said to drop on security threats. On today's calendar there is no major economic data and no Fed speakers DB's Jim Reid concludes the overnight wrap Hopefully you all had a good weekend? Mine involved picking up our new car and having to deal with epic meltdown tantrums. On Saturday we took Maisie to the swings where she couldn't stop smiling and laughing. She was so so happy. We then said it was time to go home and the response was to throw herself on the floor and roll about in pain like a diving footballer looking for a penalty, scream and shout, cry at the top of her voice and basically embarrass us. The same thing happened the following day at the first of her friends to have a second birthday party. She had a wonderful time and wouldn't stop giggling for two hours. Everybody remarked what a credit to us she was. Then when she was told we had to leave the humiliation of us as parents began. The only thing that calmed her down on both days was her new favourite TV show Peter Rabbit!! TV is becoming our saviour as bad parents......... until we turn it off and then the tantrums start again!!!! Markets were obviously in semi tantrum mode over the course of the last seven days. This time last week we suggested how it was likely we would now be in for a summer lull for a couple of weeks and that it was set to be extremely quiet. We went on to say that if anything was guaranteed to ensure that something would blow up then it was that comment. So we were half right! To be fair in July the one thing that we raised that we thought could break the summer calm was that Mr Trump might look to distract from his legislative difficulties so far and up the ante against Korea. Tensions have been bubbling for a few weeks. It was impossible to predict the timing and a big risk to position for it but it was an observable risk. However it does take two to tango and Kim Jong-un has been highly provocative of late. This could be a pivotal week in the stand-off as last week Kim Jong-un did say that they would be ready to attack Guam by "mid-August" which if we are being literal is this week. However a lack of much news on the story over the weekend is surely a positive for now. Indeed the CIA’s director Pompeo tried to calm nerves by speaking to Fox news on Sunday, noting that “…I’ve seen no intelligence that would indicate that we’re in (the cusp of a nuclear war) today…” and would not be surprised if NK tested another missile. Further, national security adviser McMaster also said there’s no indication war will break out. Perhaps these comments were a response to Trump’s comments on Friday that “military solutions are…locked and loaded, should NK act unwisely…”. On this whole episode I'm not sure what it is about Augusts. In my career, this month has often created volatility from nowhere. With people on holiday thin trading can certainly exacerbate market wobbles. Interestingly the WSJ over the weekend discussed how North Korean provocations haven't had much impact on markets in the past. They examined 80 international incidents involving their nuclear program since 1993 and their impact on financial markets. They suggested that there hasn't been much of a risk off in response to nuclear escalations. I suppose the reality is that its noise and bluster until it isn't. In the last 20 years it’s been mostly noise and then diplomacy. The worry that markets might have at the moment is that the Trump administration could be unpredictable relative to his predecessors. With his popularity low and legislative failures hurting then it’s possible to envisage a scenario where he reacts more aggressively than earlier presidents. So far the sell-off has been relatively measured it’s just that in the context of very very calm markets recently it’s still been a bit of a shock. In our list of global assets we regularly review, Silver (+4.9%) and Gold (+2.4%) were the best performers last week. Gilts (+1.1% - the longest duration govt bond market), Bunds (0.6%) and Treasuries (+0.5%) were also towards the top of the leader board and showing pretty strong weekly numbers for fixed income. In terms of equities the highlights were the Nikkei (-1.1% but closed Friday), S&P 500 (-1.4%), FTSE (-2.1%), DAX (-2.3%), FTSE-MIB (-2.7%) and the IBEX (-3.5%). Note that European Banks (-4.0%) were one of the worse performers mostly responding to the drop in yields. Diving down more specifically on this for 10 year yields we saw Bunds -8bps, Gilts, -8bps, UST -6bps, OATs -6bps, Spain flat and Italy +4bps. In credit the sell-off was fairly measured with Crossover +11bps, iTraxx Europe +3bps, Sen Fins +2bps and US CDX IG +2bps on the week. Overall these type of moves wouldn't normally merit a specific mention but in the low vol world they have shaken things up a bit. We'd also note the VIX rose 55% last week from 10.0 to 15.51 but off the week's (and year's) highs of 16.04. Thursday actually saw the highest volume day ever for VIX options. For equities so far the moves haven't been that large. In today's PDF we reproduce a table from DB's Binky Chadha looking at major geo-political events and US market sell-off. So spreading the net wider than just North Korea and also at actual events rather than aggressive rhetoric. He highlights 28 such events since the start of WWII and suggests that the average behaviour of the S&P 500 around geopolitical events is of a sharp short-lived selloff with 1) a median sell off of -5.7%, 2) 3 weeks to find a bottom, 3) Another 3 weeks to recover to prior levels and 4) Significantly higher markets 3 months (+6.5%) and 12 months (+13%) on. This morning, Asian markets were broadly higher as new escalations in the conflict is good news for now. Japan’s preliminary 2Q GDP beat expectations at 1% qoq (vs. 0.6% expected) and 4% yoy (vs. 2.5% yoy), but the Nikkei fell 0.8%, partly reflecting a catch up effect as last Friday was a holiday. Also, our Japanese economist believe the 2Q trends appears too good to be sustained, partly as major leading indicators of investment appear to have already peaked. Elsewhere, Chinese data was softer than expectations, with the July IP at 6.4% yoy (vs. 7.1%, 7.6% previous) and retail sales at 10.4% yoy (vs. 10.8%). Chinese markets have dipped a little after the news, but have continued to strengthen afterwards, with the Hang Seng up 1.2% and Chinese bourses up 0.4% to 1.7% as we type. The Kospi is up 0.7% and the Won up 0.4%. Onto Friday's US July inflation numbers, which missed for the fifth consecutive month. Headline inflation was lower than expected at 0.1 % mom (vs. 0.2%) and 1.7% yoy (vs. 1.8%), but core inflation was in line at 1.7% yoy. DB’s Luzzetti argued there were some outliers and saw some tentative signs of an improving underlying trend (medical services inflation). Even so, the team acknowledge that it is difficult to dismiss the string of recent soft inflation prints. Looking ahead, core CPI inflation is still expected to remain near recent levels in yoy terms through 2017, but on a mom basis, DB expects a rebound through year end, which if it occurs would support a Dec 17 rate hike. However that hike must be more in doubt at the moment. Elsewhere, the Dallas Fed’s Kaplan said that whilst he was a strong advocate of the two recent rate hikes, “I at this stage want to see continued evidence - or more evidence - that we’re making progress on reaching our inflation objective, …I’m willing to be patient”. According to Bloomberg’s implied probability function, the chance of a rate hike in Dec 17 has fallen from ~38% to ~26% post the CPI data and Fed speeches. Elsewhere, in an attempt to get Brexit talks back on track. The UK government plans to issue three discussion papers ahead of the next round of talks on 28th August. The papers could set out proposals for Northern Ireland and borders with Ireland, continuity on the availability of goods and confidentially & access to official documents after Brexit. Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, there was the aforementioned CPI stats. Over in Europe, the final July inflation readings for Germany and France was released, both had no change relative to their flash readings. For Germany, it was 0.4% mom and 1.5% yoy, and for France, it was -0.4% mom and 0.8% yoy. To the week ahead now. Today starts with the Eurozone’s industrial production (IP) stats for June. Onto Tuesday, Japan’s final reading for June IP and capacity utilisation stats as well as German’s preliminary 2Q GDP stats will be due early in the morning. Then UK’s July CPI, PPI and retail price index are due. Over in the US, there will be quite a lot of data, including: July retail sales, import / export price index for July, empire manufacturing stats, NAHB housing market index and US foreign net transactions for June. Turning to Wednesday, the Eurozone and Italy’s preliminary 2Q GDP stats are due. Then for UK, we have the July jobless claims and claimant count rate and the June ILO unemployment data. Across the pond, we get the FOMC meeting minutes along with the July housing starts and MBA mortgage applications stats. For Thursday, Japan’s July trade balance, exports/ imports data along with France’s ILO unemployment rate will be out early in the morning. Then the Eurozone’s July CPI and UK’s July retail sales are due. In the US, quite a lot of data again, including: July IP, conference board US leading index, the Philadelphia Fed business outlook survey, initial jobless claims and continuing claims stats. Finally on Friday, Germany’s PPI will be due early in the morning. Follow by the Eurozone’s June current account stats and construction output data. In the US, various University of Michigan sentiment index are also due.
A degree of risk-on sentiment returned to the markets, as the tensions between the US and North Korea appear to have “cooled” down. On Monday Japan’s Q2 growth topped estimates, showing higher domestic demand. Japan’s growth accelerated to a 4.0% annualized rate and, whilst inflation stays weak, it is not likely that the Bank of Japan will reign in its massive stimulus program any time soon. China’s economy posted its worst showing this year as curbs on property, excess borrowing and industrial overcapacity began to take hold. Chinese Factory output increased 6.4% from a year earlier, below the 7.1% forecast and against 7.6% in June. Retail sales slowed to 10.4 % from 11% in June. In separate Sunday talk shows CIA Director Pompeo and National Security Advisor McMaster both commented that there was no indication that war will break out. However, markets will be on guard for any rhetoric from Trump or Kim Jong-un. Last Friday’s data showed US CPI edged up just 0.1% in July after it was unchanged in June. Many market participants had forecast CPI rising 0.2% in July. With weak inflationary pressure the FOMC will struggle to justify any further rate hikes, which will keep USD under pressure. This week, the markets will be focusing on US retail sales (Tuesday) and FOMC minutes (Wednesday). EURUSD improved slightly over the weekend to currently trade around 1.1830. USDJPY showed little reaction to Q2 gross domestic product data, which revealed that the economy expanded for a 6th straight quarter led by private consumption and capital expenditure. Currently, USDJPY is trading around 109.50. GBPUSD is little changed in early trading and currently trades around 1.3015. Gold is down 0.25% in early trading, at around $1287.50, following last week’s 2.4% gain on the week. WTI, down 1.5% last week, is currently flat on the day, trading around $48.90pb. A relatively “light” start to the week for economic data releases with the markets likely to focus on: At 10:00 BST, Eurostat will release Eurozone Industrial Production Month-on-Month and Year-on-Year for June. The MoM consensus call for a disappointing consensus of -0.5% (prev. 1.3%) with the YoY consensus of 2.8% (prev. 4.0%). Such poor forecasts will underscore poor inflationary conditions, making any near-term hike in interest rates unlikely. The markets will also be concerned will further USD weakening in the current risk averse atmosphere.
A degree of risk-on sentiment returned to the markets, as the tensions between the US and North Korea appear to have “cooled” down. On Monday Japan’s Q2 growth topped estimates, showing higher domestic demand. Japan’s growth accelerated to a 4.0% annualized rate and, whilst inflation stays weak, it is not likely that the Bank of Japan will reign in its massive stimulus program any time soon. China’s economy posted its worst showing this year as curbs on property, excess borrowing and industrial overcapacity began to take hold. Chinese Factory output increased 6.4% from a year earlier, below the 7.1% forecast and against 7.6% in June. Retail sales slowed to 10.4 % from 11% in June. In separate Sunday talk shows CIA Director Pompeo and National Security Advisor McMaster both commented that there was no indication that war will break out. However, markets will be on guard for any rhetoric from Trump or Kim Jong-un. Last Friday’s data showed US CPI edged up just 0.1% in July after it was unchanged in June. Many market participants had forecast CPI rising 0.2% in July. With weak inflationary pressure the FOMC will struggle to justify any further rate hikes, which will keep USD under pressure. This week, the markets will be focusing on US retail sales (Tuesday) and FOMC minutes (Wednesday). EURUSD improved slightly over the weekend to currently trade around 1.1830. USDJPY showed little reaction to Q2 gross domestic product data, which revealed that the economy expanded for a 6th straight quarter led by private consumption and capital expenditure. Currently, USDJPY is trading around 109.50. GBPUSD is little changed in early trading and currently trades around 1.3015. Gold is down 0.25% in early trading, at around $1287.50, following last week’s 2.4% gain on the week. WTI, down 1.5% last week, is currently flat on the day, trading around $48.90pb. A relatively “light” start to the week for economic data releases with the markets likely to focus on: At 10:00 BST, Eurostat will release Eurozone Industrial Production Month-on-Month and Year-on-Year for June. The MoM consensus call for a disappointing consensus of -0.5% (prev. 1.3%) with the YoY consensus of 2.8% (prev. 4.0%). Such poor forecasts will underscore poor inflationary conditions, making any near-term hike in interest rates unlikely. The markets will also be concerned will further USD weakening in the current risk averse atmosphere.
Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk FX Week Ahead - Myopic markets hit USD on inflation 'miss' - rest of the major economies in focus ahead. Once again, sluggish inflation takes a hammer to currency and we saw the USD turn back from a tentative recovery, which many still see as corrective against some of its major counterparts. In comparative terms, we still feel the numbers out on Friday were not as bad as the pundits and markets perceived, but liquidity in the summer is not at its best at short term (reactive) flow gets the 'benefit' to some degree, with the usual suspects winning out - for now. The core rate held 1.7% - so that is 3 months in a row now, but the headline was up from 1.6% to 1.7% instead of 1.8% - small potatoes at the moment, but when looking at this as a global phenomenon, the impact was a little too one dimensional/sided, but next week will naturally tell us more. No surprise then to have seen the EUR shooting back into the mid 1.1800's again as the revival in Europe continues to draw in investors. As we have seen in the sharp upturn in EUR/CHF, dormant cash on the sidelines is now being deployed, but at a pace which may unnerve the ECB who are ever wary of seeing another taper tantrum get out of hand. Not that they have to worry about the rates market at the present time, with tensions between the US and North Korea driving money back into fixed income and safe haven in general, with the benchmark German 10yr now under 40bps again alongside the T-Notes pulling back further into the low 2.00%'s. The spread has been widening again, but the near term correlation with EUR/USD has diminished (to put it politely) and after the very brief dip under 1.1700, 1.2000 is back on the radar. In the US, retail sales on Tuesday will be the primary data driver from the USD perspective, so price action may be a little more lively through the week rather than having to sit tight until the end of week determinants, with both payrolls and CPI traditionally released on a Friday. On Wednesday however we get the FOMC minutes to dissect rhetoric on whether there is another Fed hike coming this year, alongside the now widely anticipated start of balance sheet reduction, which in itself has brought into question if another move on rates is required near term. Fed members Kashkari and Bullard think not, but their dovish stance is widely acknowledged given increased air time of late. USD/JPY is naturally struggling also, but this is largely down to the repatriation flow hitting all JPY pairs at the present time, and enough to see 109.00 relinquished - the year's low ahead of 108.00 now on the horizon. Downturns are continually bought up on dips, but the market is still significantly short JPY, and despite the clear rate differentials and BoJ yield control, sentiment is and will be overriding, and the sabre rattling between president Trump and North Korea maintains the real risk of a fallout which could take this pair down to 107.00-105.00 unless the situation de-escalates as everyone naturally hopes for. Late Friday, Russia's Lavrov suggested they have a plan to coordinate with China to defuse the situation, and stocks gave this a tentative 'thumbs up'. Plenty of data out of Japan this week, as we get Q2 GDP very early on on Monday. Industrial production and capacity utilisation out on Tuesday and the trade figures are out on Thursday. We also get industrial output data from China at the start of the week, along with retail sales and fixed asset investment, but unless we get any wild deviations from consensus, then minimal impact expected. Losses in EUR/JPY - under 129.00 - alongside those seen in some of the other EUR crosses, was perhaps a sign that we are finally due a correction in the single currency, but as we stated above, prospects look thin vs the USD, and even thinner against the GBP. Thursday's data schedule is the heaviest for Europe next week, with the latest inflation readings for EU wide July CPI to confirm 1.3% for the yearly rate; core standing at 1.1% so, let's see whether the market can put this into context. The ECB minutes later in the day can only offer the familiar lines of steady economic recovery amid damp inflation, but as we get closer to the September meeting, traders will be loath to go against the obvious narrative in play. German GDP for Q2 is on Tuesday, with the EU number on Wednesday - the former seen improving from 1.7% to 1.9% (yoy), while Eurozone growth as a whole is expected to remain unchanged at 2.1%. Inflation data out on Friday for Canada also, where consensus is looking for a pick up from 1.0% to 1.2% over July. However, this will be overshadowed by the start of the NAFTA talks which begin on Wednesday, and may produce some jitters in the CAD pairings despite the recent signals that negotiations will be cordial at the very least. Many of us still feel Mexico has more to be concerned about - I seem to remember president Trump alluded to this when we met with Canada's Trudeau! In the past week or so, we have seen the market reining on some of the recent CAD strength which really gathered pace in the aftermath of the BoC rate hike, and was bolstered by the bullish rhetoric on the economy, leading to further rate hike pricing which now looks to have been over-done. USD/CAD stopped short of the 1.2400 mark, but this was only a modest 30-35 tick extension to the 2016 lows. Had the moves had a little more give and take on the way down, we may have squeezed out levels into the mid 1.2300's. Oversold, levels have moderated as they usually do, and we have also seen Oil prices struggling past $50.0 (WTI), so we may have more to correct under the present circumstances, but over the longer term, 1.2000-1.2200 remains the target - it's just how we get there. A quick look at USD/MXN, and we note some very similar price action, with the weekly charts showing a base just under 17.5000, but the upturn stalling above 18.0000. 18.4000 is the next level up top if the NAFTA talks threaten Mexico's export profile going forward. The UK offers up the largest slate of economic stats next week, and again, inflation is on the agenda on Tuesday, but swiftly followed up by the employment report on Wednesday and then retail sales on Thursday. The combination of these three metrics guarantee a choppy week ahead for the Pound, with the market now talking of parity vs the EUR, but first target for us on the upside is 0.9170-0.9250. It has been a slow grind higher, but with the BoE clearly highlighting the concerns over the Brexit impact on economic activity ahead, the mood has changed drastically. Indeed, it is hard to see why the market was so bullish given the overall impact of a 25bp rate hike at this point, and it has again taken the 'underwriting' of central bank viewpoint to sway sentiment. Cable has dropped from the upper 1.3200's to test under 1.3000. The mid 1.2900's have held since as the USD has turned back en masse, but we expect selling to remain heavy unless the jobs report in particular shows market improvement. CPI numbers have been distorted by exchange rate weakness, and retail has been bolstered by seasonal factors (tourism), so earnings will be bigger focus among the mix of data. The low 1.2800's are the next level to watch here if we take another leg lower. The RBA minutes were a notable boost for the AUD near a month ago, despite the relatively cautious statement from the related central bank meeting at the time. Monday's release comes after a relatively neutral meeting statement seen at the start of this month, maintaining the caveats on wages and inflation, and we can see little to materially lift the AUD as currency strength is again highlighted - not as aggressively as on previous occasions, but likely enough to deter an all-out push for 0.8000 again. That said, the RBA - and RBNZ - have both acknowledged the lower USD in all this, and this alone will defer any material depreciation here for now. As with the NZD, we expect a choppy correction to the downside from here, and the Australian employment numbers will influence the path to some degree on Thursday. NZD/USD has pushed down to 0.7250 or so, with the support ahead of 0.7200 coming in a little early and reclaiming 0.7300 after the USD sales seen Friday. Retail sales in NZ released late Sunday, and we get the latest Global Dairy Auction results on Tuesday, but the latter has been a mere sideshow of late. Swedish CPI on Tuesday to note, and we will see whether the strong growth data of late is feeding into asset prices. SEK has found a strong base against its Norwegian counterpart in the 1.0300-60 area, so we may get some traction through 1.0200 next week, with the pullback in Brent dragging the NOK back. Trade figures are the only release scheduled in Norway, on Tuesday also.
Back in April, we reported that the Long-Short Strategy Fund of John Burbank, one of the handful of investors who made a killing from shorting subprime, and head of what was at the time the $2.4 billion Passport Capital, was shutting down after a series of negative returns: according to HSBC, the fund - which had an AUM of $636 million as of March - had lost 2.1% in the first two months of this year and was down 11.8% in 2016. As we further reported, a catalyst for the closure appears to have been the January 2017 decision by the San Bernardino employees fund to pull its funds from Passport. Fast forward to today, when in his latest letter to investors, Burbank reports that at what was once a multi-billion fund, total firm assets at Passport Capital have as of June 30 shrunk to just $900 million as a result of net outflows (not including the Long Short hedge fund strategy liquidation, effective 4/30/2017) which totaled a whopping $565 million, or a nearly 40% loss of AUM due to redemptions. Worse, Burbank also reports that his flagship Passport Global fund has been virtually wiped out, and following $480 million of outflows, or a stunning 63% in assets under management, net of redemptions Fund assets as of June 30 stood at only $275 million, to wit: Capital Flows: For the second quarter, the Fund had net outflows of $480 million. Firm-wide, net outflows (not including the Long Short hedge fund strategy liquidation, effective 4/30/2017) totaled approximately $565 million. At quarter-end, net of June 30th redemptions, Fund assets stood at $275 million and Firm assets totaled approximately $900 million. That said, aside from these devastating capital outflows, Burbank marches on, and reports that the funds was up 1.6% in Q2 net of fees. Additionally, following the shuttering of the Long/Short fund, Burbank says that the firm's new focus will be as follows: "Lower gross exposure: ranging between 160% and 170% for most of the quarter; Lower turnover; Lower number of holdings (halved since the first quarter, from 150 names to 70). Despite higher concentration, with risk diversification of the long book, lower gross exposure and maintenance of risk limits, we have maintained realized volatility at the low end of recent historic averages at approximately 11%, as well as low realized correlation with the broader equity market." Finally, here are some additional observations from Burbank in his latest letter. First, on Macro: As mentioned, we intentionally reduced our directional macro bets and U.S. policy-dependent exposure which appears to be the right positioning, as this year has provided some surprises, most notably with regard to the USD, as well as its typical relationship with gold and oil. Contrary to expectations, the trade-weighted dollar index peaked on January 3rd and is now below its level immediately prior to the presidential election in November 2016. It is clear there has been very limited follow-through on pro-growth policies promised by the current administration, and as a consequence broad expectations, as measured by the Citi Economic Surprise Index, peaked in mid-March and have dropped precipitously since then; it is now at a five-year low. The University of Michigan Consumer Confidence is also at its lowest levels since November 2016 (election month) and is in a downward trend. The bond market is reinforcing this view (yields lower/curve flatter). Even after the recent bounce following discussion of rate normalization, the 2/10yr remains at pre-election levels after almost reaching the post-crises lows set in August 2016. Dollar weakness could easily persist; economic growth in many places around the world is faster than the U.S., and the $23 trillion of foreign capital invested in the U.S. post the financial crisis could be reversed triggered by faster growth and increased optimism. We believe a weak-dollar environment could be good for commodities, but surprisingly the fundamentals of oil, in particular, have overwhelmed the weak dollar (this is consistent with our view on oil and represented in our neutral oil construct). Further, core CPI inflation remains weak, and we believe the bond market is not yet convinced that the U.S. will sustain sufficient nominal demand growth momentum to push inflation sustainably back to the Fed’s 2% target. We are carefully monitoring discussions regarding the debt ceiling, given the Trump administration’s push for a debt limit increase before the August recess. In our opinion, if an agreement is not reached, the Treasury may use interest receipts held at the Fed (approximately $150 billion) to pay bills. Perversely, this could act as incremental fiscal stimulus—as it represents an injection of more cash into the market. The potential consequences of Fed balance sheet normalization are also important. We understand the Fed intends to gradually reduce securities holdings by decreasing its reinvestment of the principal payments it receives, which would potentially reduce principal reinvestment by an aggregate of $10 billion per month (Treasuries & MBS) and would increase in steps of $10 billion at three-month intervals over 12 months until it reaches $50 billion per month. Some estimates suggest that global quantitative easing (“QE”) will turn negative in 2019 after being consistently positive by about 2% of Global GDP in every year since 2011 (e.g., since 2007, the Fed’s balance sheet has increased by approximately $3.5 trillion). While it is believed this could result in a much steeper yield curve and tighter financial conditions, the Fed continues to give itself substantial policy leeway. However, the consequences of balance sheet normalization may be limited, given that the pace of reduction will be much slower than the ramping up of QE, and some of the effects of balance sheet reduction are already priced in (the pace has been communicated). Balance sheet normalization could be offset by the Fed adopting an easier path for short-term interest rates than it otherwise would have chosen, and the Fed is going to be cautious out of concern that any decision to shrink the balance sheet might be seen as tightening monetary policy. Ironically, reducing the balance sheet could have a stimulating effect, by reducing excess reserves on deposit (which sit idle) and freeing up Treasuries which provide liquidity to the market. It will also potentially allow the collateral reuse rate to increase as balance sheet space on banks becomes more available. Although the Dodd-Frank Act and Basel accords make it more expensive for collateral to be reused, the increase in balance sheet space of the banking system may outweigh the regulatory cost. Finally, our view on China has been that after the massive credit stimulus of 2016 that led to rapidly rising housing prices and rising levels of leverage and system risk, the Chinese government would tap the brakes with restrictions on housing and credit. This would be detrimental for commodity demand in the second half of 2017. In fact, so far this year the Chinese government has put a number of restrictions in place such as raising short-term lending rates and enacting housing regulations on a number of Tier 1 & 2 cities. However, the negative impact on industrial production, investment and commodity demand has not yet materialized, as the government has continued to inject credit into the economy via infrastructure and support for housing in Tier 3– 5 cities. Recent economic data has in fact been supportive of a continuation of strong growth near-term, with a slowdown possibly pushed to 2018. In its effort to crack down on shadow banking the authorities have encouraged a flow of capital into commodities given the limited number of investment options available to Chinese investors—which benefited commodity prices, particularly steel. We maintain a portfolio with a short tilt to Chinese IP, but we continue to monitor incremental data out of China that may impact our thesis and positioning. ... on Energy: We remain bearish on oil. Currently the market is slightly undersupplied, with inventories peaking now but likely to decline sharply in Q4 and then flip into an oversupply during the first half of 2018. OPEC, and its attempts to manage price higher, is frustrated by U.S. shale oil producers’ indifference to OPEC’s desire, and seems eager to hedge production in the high-$40s to lock in positive rates of return and mobilize rigs. We believe this dysfunctional dynamic is now appreciated by OPEC, putting future compliance at risk. The downside risk to price is a consequence of 1) robust U.S. production that we expect will inflect higher during the second half of this year, 2) sustained gains in Libyan and Nigerian production (not subject to OPEC compliance), and 3) increasingly poor compliance by OPEC members. The potential upside risk to prices stems from stronger than expected demand, disruption in supply (Venezuelan production, for instance, continues to drop), and U.S. underwhelming on production increase. ... and on AMD and Cryptos: AMD has been executing in line with our expectations, with successful product launches across the PC, server, and graphics markets. Beyond its traditional markets, AMD is benefiting from an unexpected tailwind from the rising interest in cryptocurrencies, as its graphics cards are particularly well suited to the application of mining several cryptocurrencies. Recent market share studies also show AMD to be gaining meaningful share vs. Intel (over 5% in one quarter), and we expect those trends to continue, possibly even accelerate, in the server market. Based on these trends, our expectation is for AMD to generate earnings significantly ahead of sell-side estimates for 2018 and 2019. We have been monitoring block chain technology and cryptocurrencies for some time. We believe this technology represents a secular change with the potential to profoundly disrupt many markets. AMD is the first position in the portfolio that has been a net beneficiary of this trend, but we expect our understanding of block chain technology’s potential to be an increasingly relevant factor in stock selection.
Сергей Голубицкий рассказывает про основы основ: феномен валового внутреннего продукта (ВВП) и паритета покупательной способности (ППС). Единое гиперинформационное пространство — штука замечательная, однако же чреватая множеством явных и скрытых опасностей. Одни феномены более или менее изучены, например, «пузырь фильтров», который формируется в интернете и искажает пользовательскую картину реальности. Другие явления, вроде коллективных усилий скрытых групп, направленных на релятивизацию самой объективной реальности, хорошо запротоколированы и дожидаются достойного анализа.Существуют, однако, феномены, которые вообще не артикулированы (или крайне недостаточно) и, соответственно, пока даже не воспринимаются как проблема. Один из таких феноменов, который условно можно назвать пассивные профессиональные утечки, я и предлагаю рассмотреть в первом приближении на примере близкой нам экономической тематики.Основная причина возникновения пассивных профессиональных утечек кроется в главном достоинстве мирового гиперинформационного пространства — его полной открытости, отсутствии границ. Речь идёт не столько о границах межгосударственных, сколько об ограничениях на уровне жанра и стиля. Иными словами, профессиональные площадки (порталы, форумы, дискуссионные доски и проч.) никак не отделены в информационном поле от площадок бытовых, на которых курсирует совершенно иное — обывательское — «знание».В результате с профессиональных площадок на территорию мейнстрима, из которого и черпают информацию подавляющее число пользователей интернета, перемещаются узко специализированные термины, гипотезы, идеи и теории, которые получают в обывательской среде «вторую жизнь», как правило, иллюзорную, ложную в своей основе. Это и есть феномен пассивных профессиональных утечек.В контексте озвученной проблемы давайте проанализируем, как используются сегодня в информационном мейнстриме такие специфические понятия экономической науки, как валовой внутренний продукт (ВВП, GDP, Gross Domestic Product), а также его самая популярная (и опасная!) инкарнация — валовой внутренний продукт с учётом паритета покупательной способности (ВВП (ППС), GDP (PPP), Purchasing Power Parity).Опасность данной профессиональной утечки заключается в том, что, будучи вырванной из сугубо теоретического научного контекста, ВВП (ППС) превращается в условиях информационного мейнстрима в эффективное орудие неадекватного анализа и даже прямой дезинформации. С помощью этого макроэкономического показателя мейнстримные «аналитики» и «идеологи» сравнивают национальные экономики, делают ложные выводы, вводя, тем самым, ничего не подозревающую общественность в откровенное заблуждение.В рамках нашего трейдерского и инвесторского ремесла показатель ВВП (ППС) ещё более опасен, поскольку неизбежно подталкивает к ошибочным заключениям, положившись на которые вы рискуете наполнить свой портфель бумагами, заряженными потенциалом тяжёлых финансовых потерь.Начнём разговор с краткого обзора релевантных для конкретной профессиональной утечки понятий: номинального и реального ВВП, дефлятора и ППС.Впервые объём производимых государством продуктов и услуг измерил в начале 30-х годов прошлого века сотрудник Национального бюро экономических исследований (NBER) Саймон Смит (в отрочестве Саймон — статистик Южбюро ВЦСПС города Харькова Шимен Абрамович Кузнец, а в будущем — лауреат Нобелевской премии по экономике).Методика Кузнеца сохранилась почти в первозданном виде во всех современных расчётах ВВП, основанного на «номинальном принципе».В теории концепция ВВП проста: берём всю совокупность произведённых страной за отчётный период (например, за один год) товаров и услуг, суммируем — et voila! — получаем искомую цифру. Проблемы рождаются лишь на практике, когда встают вопросы: «По каким ценам считать?» и «В какой валюте?»Цены на услуги и продукты меняются в зависимости от экономического цикла (инфляция — дефляция), поэтому даже если страна произвела один и тот же объём товаров в два разных года, их совокупная стоимость (а значит и ВВП) будет отличаться с учётом цен на рынке в каждый из отчётных периодов.По этой причине ВВП рассчитывают двумя способами, каждый из которых не обладает приоритетом, выбор диктуется исключительно целями анализа.Если мы хотим отследить реальное положение дел в экономике государства, мы отслеживаем так называемый номинальный ВВП, при вычислении которого товары и услуги учитываются по текущим рыночным ценам.Если мы хотим отследить динамику производства товаров и услуг, мы используем реальный ВВП, в котором данные номинального ВВП корректируются таким образом, чтобы исключить изменение цен.Отношение реального ВВП к номинальному ВВП называется дефлятором (Deflator) и используется для изменения роста или падения объёмов производства товаров и услуг в национальной экономике.Слово реальный, присутствующее в данных определениях, явилось одной из причин совершенно неадекватной интерпретации показателей ВВП после пассивной профессиональной утечки, в результате которой термин перекочевал в бытовое информационное пространство и затем породил буйную мифологию ложных сравнений экономического развития стран.Так, в мейнстримной среде принято считать, что реальный ВВП является более точным, чем номинальный ВВП, отражением подлинного состояния экономики (на то он и «реальный»!), поскольку исключает инфляционные изменения цен и отслеживает непосредственно динамику производства товаров и услуг.Однако подобное утверждение является глубочайшим заблуждением! По той простой причине, что инфляционное изменение цен само по себе является важнейшим показателем реального состоянии экономики страны! Устранив инфляцию из расчёта (и получив «реальный» ВВП), вместо «реальности» мы получаем чисто гипотетическую фикцию, полезную разве что для каких-то статистических выкладок.Проиллюстрирую на примере. В 2014 году некая страна Х произвела 10 тысяч тракторов, цена которых на рынке составляла 10 тысяч тугриков (местная валюта в стране Х). В этом случае в расчёт номинального ВВП пойдёт цифра 10 000 * 10 000 = 100 000 000 тугриков.В следующем году страна Х произвела 12 тысяч тракторов, однако конъюнктура рынка изменилась и цена трактора упала до 8 тысяч тугриков. Соответственно, в номинальном ВВП отразилась цифра 12 000 * 8000 = 96 000 000 тугриков.Из чего можно сделать вывод, что экономическая ситуация ухудшилась, по меньшей мере в «тракторном» аспекте ВВП.Однако если мы исключим из расчёта инфляционное изменение цен на рынке и посчитаем 12 тысяч тракторов, произведённых на следующий год, по ценам первого года, то получим цифру «реального» ВВП: 12 000 * 10 000 = 120 000 000 тугриков. Налицо рост «реального» производства, а значит не ухудшение, а улучшение экономики страны Х!Проблема лишь в том, что данное «реальное» улучшение — иллюзия, ничто кроме «номинального» увеличения числа собранных тракторов нам не говорит о действительном положении экономики! Кого волнует количество железа, если суммарно оно приносит меньше денег, чем годом ранее страна Х заработала на меньшем числе собранных тракторов?Получается, что как раз реальным ВВП является показатель, который называют номинальным ВВП. А вот реальное ВВП, игнорирующее реальное же изменение цен, — это самая что ни на есть номинальная информация.Ещё раз хочу повторить: в рамках экономической теории, внутри профессионального сообщества, никаких противоречий с логикой и путаницы не возникает, потому что номинальное и реальное ВВП используются для узко специализированных статистических расчётов, а не для сравнения состояния государственных экономик, как то происходит в мейнстримном информационном пространстве. Неслучайно ещё сам «отец ВВП» Саймон Смит (Кузнец) энергично указывал на отсутствие корреляции между изменениями показателя ВВП и выводами относительно экономического роста или изменений в благосостоянии нации.Дальше больше. Чтобы привести цифры достижений национальных экономик к общему знаменателю, необходимо избавиться от национальных валют (тех самых тугриков) и пересчитать стоимость произведённых товаров и услуг в едином эквиваленте. В качестве такового по очевидным причинам избрали доллар США.Самый простой способ — перевести ВВП, рассчитанный в национальной валюте по текущим ценам, в доллары по официальному обменному курсу. Такой подход называется номинальным ВВП в долларом выражении (Nominal Official Exchange Rate GDP). Характеристика номинальный в данном термине присутствует потому, что учёт дефлятора не производится.Так же, как и в случае с номинальным и реальным ВВП, показатель номинального ВВП в долларовом выражении гораздо ближе к реальному положению дел в национальной экономике, чем любые другие виды калькуляций ВВП, призванные «улучшить» и «объективизировать» ситуацию.Самую большую путаницу в термин ВВП при его портировании в обывательское информационное пространство привносит так называемый паритет покупательной способности (ППС, Purchasing Power Parity, PPP), который, в силу очень серьёзных концептуальных издержек самой гипотезы, искажает параметр ВВП до полной неузнаваемости. Это тем более прискорбно, что именно ВВП по ППС — валовой внутренний продукт с учётом паритета покупательной способности — является в мейнстримной (особенно в пропагандистской!) прессе излюбленным параметром для межгосударственной фаллометрии.Благое намерение, положенное в основу расчёта ППС, и протоптавшее дорогу в ад деформации реальности, заключено в гипотезе, согласно которой, американский доллар в США не равен американскому доллару в Бразилии, Индии или России. Иными словами, если в Соединённых Штатах на один доллар вы сегодня не купите практически ничего, в Индии на те же деньги вы сможете сытно отобедать.«Раз так, то это обстоятельство нужно непременно учитывать при сравнении ВВП разных стран!» — убеждают мир экономисты, стоящие за теорией ППС (отец теории социальной экономики Карл Густав Кассель, представители Саламанкской школы и проч.)Глобальная иллюзия ППС достаточно обширна, чтобы заведомо не уместиться в рамки нашей статьи. Тем более, перед нами не стоит задача критики этой теории по всем направлениям. Для нас сейчас важно понять суть претензий паритета покупательной способности на состоятельность и практическое применение этой гипотезы к показателю ВВП.Теория ППС исходит из гипотезы существования некоего естественного обменного курса валют, при котором устанавливается паритет покупательной способности. Иными словами: если в Нью-Йорке чашка кофе стоит 5 долларов, а в Москве 200 рублей, то «естественный обменный курс валют» должен быть не 70 рублей за доллар, а 40.Тот факт, что разница цен не в последнюю очередь объясняется ещё и расходами на транспортировку кофе, таможенными пошлинами, налогами и прочими «условностями» живой экономики, теоретиками ППС хоть и осознается, однако на практике не учитывается, поскольку в противном случае модель усложняется до абсолютной практической нереализуемости.Казалось бы, уже одного обстоятельства, что для расчёта «естественного обменного курса» и получения паритета покупательной способности приходится моделировать химерическую картину псевдореальности (без учёта транспортных расходов, налогов, пошлин, госрегулирования), должно быть достаточно для того, чтобы изъять гипотезу ППС из прикладного экономического знания и изолировать в естественной для неё среде — теоретической лаборатории.В экономической науке так, собственно, всё и обстояло до тех пор, пока модель ППС не утекла в мейнстримное информационное пространство, где сегодня заняла доминирующие позиции, по меньшей мере в контексте ВВП. ВВП (ППС) де факто стал стандартом для сравнения производства продуктов и услуг, якобы, на том основании, что лишь учёт паритета покупательной способности позволяет нам оценить «реальную» экономическую картину.Идея ППС в контексте ВВП реализована «от обратного»: вместо выведения гипотетического «естественного обменного курса», при котором один и тот же продукт будет стоить в разных странах одинаково, используется разница реальных цен для получения некоего коэффициента, который затем накладывается на величину номинального ВВП.Существует множество различных форм применения теории ППС к реальной экономике: от классических потребительских корзин до индексов БигМака и айпада, однако все их объединяет принципиальный изъян — после учёта паритета покупательной способности экономическая реальность не просто деформируется, а вообще перестает быть реальностью.Откуда вообще взялась идея сведения экономического многообразия товаров и услуг к ограниченному списку отобранных образцов? Вопрос риторический: без подобного упрощения реальности теорией ППС вообще невозможно было пользоваться на практике.Первый ход мысли. Нужно составить некий список товаров и услуг, который:содержит товары и услуги первой жизненной необходимости;либо является универсальным списком потребительских запросов жителей разных стран;либо пользуется особой популярностью во всём мире;либо повсеместно распространён (а значит — упрощает расчёты).И первый, и второй, и третий, и четвёртый варианты являются поразительной аберрацией, деформирующей реальность до неузнаваемости, однако же все четыре подхода энергично используются на практике в тех или иных вариациях расчёта ППС.Различные по составу и содержанию списки товаров и услуг используются в потребительских корзинах при расчёте американских Consumer Price Index (CPI) и Producer Price Index (PPI), своя собственная корзина есть у Организации экономического сотрудничества и развития (ОЭСР) для расчёта «сравнительных ценовых уровней» (Comparative Price Levels), оригинальные корзины для учёта ВВП (ПСС) используют ЦРУ для своего знаменитого FactBook’a, Международный Валютный Фонд (International Monetary Fund), Всемирный банк (World Bank) и ООН.На принципе повсеместного распространения производит журнал The Economist расчёт своего Big Mac Index — индекса БигМака, сравнивающего стоимость популярного бутерброда в различных странах на том основании, что этой сети общепита удалось открыть свои точки едва ли не во всех уголках планеты.Фетиш глобальной популярности продукции Apple позволяет импровизировать на тему паритета покупательной способности компании CommSec, сравнивающей мировые экономики через iPad Index — индекс айпада, который фиксирует цену планшета в том или ином государстве.Претензий ко всем практическим реализациям теории ППС столь много, что можно утомиться от одного перечисления.Как можно рассчитывать стоимость БигМака для стран вроде Индии, где подавляющее число жителей вегетарианцы?! The Economist нашёл «выход» из положения: вместо мясного бутерброда учитывает для Индии стоимость булки с картофельной котлетой вада пав, которая, якобы, пользуется в стране такой же повсеместной и массовой популярностью, что и БигМак в Америке. Как человек, проводящий последние 8 лет большую часть жизни в этой стране, могу сказать, что это — неправда.Как можно говорить об универсальной потребительской корзине в принципе, если в разных странах в неё входят совершенно отличные продукты, многие из которых вообще отсутствуют на чужих рынках?Как можно деформировать цифру ВВП с помощью ППС, который не берёт во внимание ни государственное регулирование цен, ни субсидии, ни таможенные пошлины, ни акцизы?О какой объективности приведения к общему знаменателю можно говорить, если внутри каждой отдельной страны цены на одни и те же товары и услуги в зависимости от региона могут отличаться в разы?Вовсе не стремлюсь запутать читателя всеми этими тонкостями и нюансами, а лишь пытаюсь вызвать у него скепсис относительно любых попыток деформировать объективную реальность с помощью бесчисленных «улучшайзеров» вроде паритета покупательной способности: ничего кроме путаницы и усложнения сравнения они не привносят.Возвращаясь к нашей теме: лучшим инструментом для более или менее объективного сравнения национальных экономик является параметр, максимально освобождённый от каких бы то ни было модификаций. Таким параметром выступает номинальный валовой внутренний продукт в долларовом выражении (Nominal Official Exchange Rate GDP), поскольку он не только не пытается избавиться, но и напротив — стремится учитывать такие важнейшие аспекты состояния национальной экономики, как реальная инфляция и реальный же обменный курс национальной валюты.Разительное отличие данных по ВВП с учётом ППС и без оного можно продемонстрировать близким и хорошо понятным каждому примером.Вот как выглядит динамика российского ВВП с учётом паритета покупательной способности:2013 год — 3,59 триллиона долларов США;2014 год — 3,612 триллиона долларов США;2015 год — 3,471 триллиона долларов США.Ответьте себе на вопрос: можно по этим цифрам составить хоть какое-то мало-мальски осмысленное представление о том, что творится с РФ и её экономикой? Вы видите здесь хоть какую-то динамику? Следы хоть какого-то кризиса? Падения производства? Массового обнищания населения?Вот та же динамика, но без деформации ППС:2013 год — 2,113 триллиона долларов США;2014 год — 1,857 триллиона долларов США;2015 год — 1,236 триллиона долларов США.Полагаю, всё очень наглядно…
В четверг была опубликована завершающая часть статистики из Поднебесной. Инвесторы увидели в том числе данные по инфляции. Дефляционная угроза для китайской экономики остается исключительно актуальной. И да, вроде бы Индекс потребительских цен несколько подрос, но цены производителей 47-ой месяц подряд падают. Причем, падение превышает пять процентов.
Росстат выпустил данные по инфляции за декабрь 2015 и по зарплате населения, соответственно можно оценить уровень покупательской способности доходов в России. С 1995 номинальная зарплата выросла в 58 раз, с 2000 в 14 раз, с 2005 в 4 раза. Но какая покупательская способность?На основе данных Росстата я рассчитал покупательскую способность зарплаты для товаров, цены на которые непрерывно публикуются с 1995 года по 2015 включительно. В таблице данные по состоянию на декабрь каждого года в количестве единиц товаров или услуг к фактическому доходу за указанный период . Например, в декабрь 2015 на номинальный доход (до уплаты налогов) можно было купить 93.6 кг бескостной говядины, а в 1995 около 59 кг. Т.е. покупательская способность (уровень жизни) по говядине выросла всего лишь в 1.6 раза, хотя номинальный доход (зарплата) в 58 раз. Таблица ниже огромная, поэтому открывается в отдельном окне и разделена на 5 частей.Ухудшение жизни за последние 2 года катастрофическое. Кризис 2008-2009 даже рядом не стоял и это по официальным данным Росстата, где в последнее время имеет место занижение инфляции. Речь идет в первую очередь о товарах среднесрочного пользования, как одежда и обувь и долгосрочного пользования, как бытовая и цифровая техника, компьютеры. Суть в том, что, по всей видимости (данные это подтверждают), Росстат проводил ребалансировку потребительских качеств анализируемых товаров.Элементарный пример. По Росстату ноутбуки в цене выросли на 17% (с 23.3 тыс до 27.5 тыс) за 2 года (с декабря 2013 по декабрь 2015), что расходится с реальностью раза в 2 минимум, а смартфоны всего лишь на 10% выросли в цене, что также является полным бредом для товаров сопоставимой категории. Как получилось?Предположим, два года назад топовый компьютер с наилучшей доступной на рынке начинкой в виде высокопроизводительной видеокарты (nvidia GTX 780), процессора Core i7 4770k можно было взять за X рублей, теперь топовый компьютер с другой конфигурацией, но также лучшей на рынке начинкой (GTX 980/ Core i7 6700k), стоит 2.5X в виду роста курса доллара в 2.5 раза, но в долларах аналогично. Как сделать так, чтобы инфляция была не 150%, а 17%? Правильно, взять не топовый компьютер, а из среднего ценового диапазона (GTX 950, Core i5 6400). Опа, вот и готово! Теперь компьютер из среднего сегмента стоит так, как пару лет назад топовый. Компьютер есть? Есть! Работает? Да. А что еще надо? А то, что из другого сегмента производительности? Ишь вы что захотели - хавайте, что дают. При этом не так и важно, что компьютер в среднем ценовом сегменте тоже вырос в 2.5 раза по стоимости. Главное, чтобы был товар, а качество подождет. Эта логика применима к любому другому товару. Одежда не брендовая, а от азиатских нонеймов, колбаса более низкого качества и так далее.У Росстата оценка стоимости на коммунальные, транспортные и телекоммуникационные услуги и товары из сегмента продуктов питания и бытовой химии еще как-то соотносятся с действительностью, а вот на товары длительного пользования и услуги спорно. В одежде и обуви десятки тысяч единиц номенклатуры даже в выбранной товарной группе. Выросла цена в два раза, возьмем то, что хуже по качеству и цена останется на месте, хотя то, что хуже по качеству тоже выросло в два раза, но сравнялось с тем, что год-два назад было в верхнем сегменте по потребительским свойствам. Вот такая проблема.Но так что там с данными? Таблица ниже.Что мы видим? Фантастическое снижение уровня жизни. Обратите внимание, что на население кризис 2009 не отразился практически никак. В таблице показано, что сейчас даже по отношению к 2010 году имеет место падение уровня жизни (два последних столбца со сравнением к 2010 и 2013 годам). Фактическое снижение уровня жизни, в реальном выражении, так сказать, в натуре.Если сравнить продукты питания и напитки с 2013, то россияне стали богаче только в картофельном и свекольном измерении. Во всех остальных потеряли. Тамв таблице свыше 220 видов товаров и услуг, естественно, не имеет смысла комментировать все, но некоторое не помешает. Покажу товары с преимущественно рублевым ценообразованием (не импорт), за редкими исключениями по фруктам и овощам.Покупательская способность по чесноку опустилась к 2004 году, апельсины к 2006-2007 году, яблоки к 2010-2011, капуста – 2007, морковь и картофель остаются на высоком уровне.По крупам не лучше. Практически по всем видам покупательская способность снизилась к 2006-2007 годам.По хлебу и хлебобулочным изделиям чуть лучше – уровень 2010 года, но ухудшение все равно происходит.По чаю, кофе и сладостям снижение покупательской способности произошло резко и стремительно – до 2005 года почти по всем категориям.С мясными продуктами «мягче» - всего лишь 2007 год, за исключением куриных окорочок, где по покупательской способности примерно, как в 2011.По большинству молочных продуктов покупательская способность упала к 2005-2007С лекарствами значительно хуже. В 2015 валидол можно было купить столько же, сколько в 90-х годах и почти в 6 раз ниже, чем в 2011. По группе отечественных лекарств в среднем до уровня 2005-2006 грохнулись.С развлечением и местами культурного сопряжения за последние 20 лет доступность почти не выросла. Т.е. цены на музеи, выставки, театры и кинотеатры росли в темпах роста номинальной зарплаты. С санаториями и домами отдыха – 2007 год.С услугами медицины и стоматологией все более драматично. Например, изготовление съемного протеза и изготовление коронки на худших уровнях покупательской способности с конца 90-х.Доступность транспорта с конца 90-х увеличилась в среднем в два раза, но стагнирует с 2006. По авиаперевозкам там статистический глюк, когда в 2011 Росстат стал учитывать только эконом класс.С услугами ЖКХ все понятно. Цены растут в среднем на величину инфляции и около нормы чистого приращения номинальных доходов, поэтому доступность услуг ЖКХ не меняется 10 лет, а по газу и услугам капремонта даже хуже, чем в 90-х.Из этого главный вывод. На группы товаров и услуг с рублевым ценообразованием доступность находится на уровнях десятилетней давности для населения России. По большинству услуг, в том числе ЖКУ, культура, развлечение, медицина, образование за последние 20 лет особых изменений не произошло. Т.е. сейчас за полученный доход народ России может купить примерно столько же базовых услуг, как в конце 90-х, в начале 2000 (за исключением транспорта и связи, где покупательская способность выросла в среднем в два раза). В этом плане богаче не стали. С товарами значительно лучше. Доступность выросла в разы с 90-х годов (подробности в таблице). Но с 2005-2007 практически не изменилась, опять же, за редкими исключениями.За 2 года номинальный доход вырос менее, чем на 10%. Учитывая последние тенденции в бюджетной сфере с необходимостью секвестра бюджета нет объективных причин ожидать прироста номинальных доходов в 2016 году выше, чем на 5% при инфляции выше 10%. 2016 год станет хуже 2015 в плане доступности базовых товаров и услуг, тем самым покупательская способность может опуститься с уровней 2005-2007 до 2004-2005, т.е. 12 лет на нуле. Это еще никаких санкций не вводили против России и негативные тенденции после инвестиционного паралича реализовались не в полной мере.
Хорошо известно, что золото (или реальные деньги) прекрасно сохраняет свою покупательную способность на протяжении длительных промежутков времени. Примеры со стоимостью хлеба или одежды, которые были практически стабильны на протяжении тысячелетий, начиная со времен Вавилона, довольно показательны. Однако могут возразить, что это слишком длинный промежуток времени или специально подобранные отдельные категории товаров, а современный мир отличен от того, что было раньше, поэтому подобные сравнения могут быть не вполне корректны. Поэтому довольно интересно посмотреть, какие изменения в уровне цен произошли, скажем, за последние тридцать лет, а в качестве столь же обобщающего товара возьмем «Биг Мак», который предлагает своим посетителям McDonalds. Индекс «Биг Мака», как в том числе и своего рода комплексный показатель состояния экономики, регулярно публикуется и поэтому вполне может быть использован для такой оценки. Это позволит легко сравнить изменения цен за этот период как в необеспеченной бумажной мировой резервной валюте, так и в твердых деньгах. Цена «Биг Мака» в американской валюте в 1985 году была равна 1,60 американским дензнакам, в 2015-ом – 4,79 ам.дензнакам. В граммах золота он стоил в 1985 году 0,15 грамма, а в 2015-ом – 0,13 грамма. Несложно увидеть, что американская валюта за это время похудела на 67%, а на доллары 1985 года можно было бы купить лишь треть от того «Биг Мака». С золотом все иначе. В деньгах за этот же период «Биг Мак» подешевел на 15%. И это при том, что сейчас далеко не самые лучшие условия для золота. Не будь существующих ныне искажений его мировой цены этот показатель мог бы быть существенно выше. Поведение цены «Биг Мака» в золоте хорошо отражает тот факт, что со временем, по мере развития науки и технологий, затраты на производство единицы продукции снижаются, и товары дешевеют относительно денег. То же самое относится и к стоимости топлива, машин, домов или квартир, билетов в кино и прочего. Либо тот же самый товар можно купить за меньшее количество золота, либо за то же количество золота можно купить больше того же товара или такое же количество аналогичного товара, но обладающего гораздо лучшими потребительскими характеристиками. Поэтому откладывать средства на более-менее длительный срок, не менее года, имеет смысл именно в деньгах, а не в бумажной валюте. Можно посмотреть на индекс и несколько под иным углом. При средней заработной плате в 23618 ам.дензнаков в 1985 году, на нее за год можно было приобрести 14761 «Биг Мак», что было эквивалентно 2214,15 граммам золота. При стоимости унции на момент написания данной заметки равной примерно 1170 ам.дензнакам средняя заработная плата должна была бы составлять сейчас примерно 83300 ам.дензнаков, в то время как в реальности она находится на уровне в 52246 ам.дензанков в год. Таким образом, с помощью использования бумажных валют трудящиеся получают в среднем на 37% меньше, чем в случае с использованием твердых обеспеченных денег. Это лишний раз доказывает тот вполне очевидный факт, что основная задача бумажных валют, которые в настоящее время используются властями и центральными банками, это ограбление самых широких масс населения и перераспределение общественного богатства в пользу совершенно конкретных физических лиц и их групп. И то, что было гораздо сложнее сделать в условиях твердых обеспеченных денег, с легкостью позволяют осуществлять бумажные необеспеченные валюты. Мои книжки «Крах «денег» или как защитить сбережения в условиях кризиса», «Золото. Гражданин или государство, свобода или демократия», «Занимательная экономика»,«Деньги смутных времен. Древняя история», «Деньги смутных времен. Московия, Россия и ее соседи в XV – XVIII веках» можно прочитать или скачать по адресу http://www.proza.ru/avtor/mitra396 23.10.2013 на канале «РЕН-ТВ» вышла передача «Нам и не снилось: грязные тайны большой политики», в которой я также принимаю участие. Ее можно посмотреть либо на сайте «РЕН-ТВ», либо по следующей ссылке - http://www.youtube.com/watch?v=r5fl1qqRUdo
Последние четверть века запомнятся прежде всего безудержным ростом цен на всё и вся. А больнее всего по большинству из нас бьет рост цен на продукты питания. Уж что-что, а не питаться мы не можем. Так на какие продукты питания и виды алкоголя цены выросли с 1991 года более всего? Ответ можно найти на моих диаграммах по данным Росстата. Первая диаграмма покажет во сколько раз выросли цены в 1992 году относительно 1991 года:Пунктирной линей показан средний уровень роста цен. Указан также рост средней зарплаты/среднего дохода. в 30 раз выросли цены за год и в 11 раз зарплата. Среднедушевой доход же вырос всего 8 раз. Это означает, что население страны катастрофически обеднело буквально за год в три с лишним раза.Цветом я выделил некоторые базовые продукты, чтобы можно было отследить, как менялись их позиции со временем. Теперь смотрим 2000-й год:Цены выросли в 6 042 раза, а зарплата/доход в 4 057/4 562 раза. Факт обеднения относительно 1991 года все еще есть. Иная картина в 2014 году:Наконец-то зарплаты/доходы обогнали средний рост цен. Однако, общее для всех трех диаграмм то, что лидером роста цен являются базовые продукты питания: молоко, хлеб, рыба, макароны. Самые дешевые продукты в СССР подверглись самому большому росту цен.Картину в целом же можно увидеть тут:На ней также видно, что медианная зарплата так и не догнала рост потребительских цен относительно 1990 года. Это означает, что больше половины россиян за 25 постсоветских лет так и не стали богаче самих себя образца 1990-91 года. В общем, когда российские либералы говорят, что они спасли страну от голода и бедности, то они исключительно нагло врут, чтобы выгородить свой самый массовый в российской истории грабеж. Факты говорят ровно об этом.
выкладываю презентацию, с которой выступал на бизнес-завтраке в феврале 2015, когда еще в КИТе работал, потом в Москве на смартлабе представлял в апреле + в Москве для клиентов Энергокапитала представлял также в рамках бизнес-завтрака.старался максимально доступным языком, чем проще - тем понятнее и лучше.сценарии, понятно, будут корректироваться по ходу пьесы, а точнее нашей российской трагикомедии.ссылка на презентацию здесь1. сценарии по экономике2. природа экономического спада.3. экономика "сжирает" сама себя из-за структурных дисбалансов.4. памятка для любителей предсказывать курса валюты в режиме свободного плавания.5. хронология валютного кризиса 2014-20156. график нефти Brent в $/барр.7. график нефти Brent в руб./барр. - важнен для социально-военнооборонного бюджета, где нет места инвестициям в будущий экономический рост.8. До таргета по инфляции ЦБ как до Луны, но пики прошли во втором квартале 2015. Эффект будет от повышения тарифов естественных монополий...9. ... и показательный график от Минэкономразвития из доклада "О ТЕКУЩЕЙ СИТУАЦИИ В ЭКОНОМИКЕ РОССИЙСКОЙ ФЕДЕРАЦИИ В ЯНВАРЕ-АПРЕЛЕ 2015 ГОДА", где хорошо отражена природа инфляции в России. Она немонетарная, но борятся с ней монетарными методами - ставками.Проблемы экономики структурные и не решаются простым смягчением монетраной политики и/или наращиванием государтсвенных расходов и дефицита бюджета. Инфляция тоже структурная проблема и во многом завист от доли продовольствия (40%) в корзине для расчета индекса потребительских цен, от тарифов естественных монополий, так и от волатильности рубля, который находится под давлением не счета текущих операций, а капитального счета (отток капитала), который в своей динамике малопредсказуем.Если признать, что природа инфляции структурна, как и природа экономического роста, то надо понимать, что есть ограничения как по стимулированию экономического роста, так и по влиянию на инфляцию монетарными методами.10. ключевая ставка ЦБ vs USD/RUB11. Про санкции и внешний долг подробно писал в феврале 2015 здесь в блоге12. Валютное РЕПО, вентиль которого ЦБ уже прикрутил.13. Немного о ЗВР + отдельное мини-расследование про ФНБ и Резервный напишу на днях.14. Оценки платежного баланса и вывод некой "справедливой" оценки курса рубля на 2015-2016.спасибо за внимание.
Под конец года многие инвестиционные банки в своих годовых обзорах по Еврозоне характеризуют текущее экономическое положение, как «исключительно устойчивое и вселяющее оптимистичные надежды», а корпоративный сектор - «показывающий впечатляющие результаты, которые в полной мере оправдывают прогнозы», общие перспективы «благоприятные», состояние фондового рынка «волшебное». Рекомендации инвесторам «strong buy», т.к. мировая экономика в общем и Еврозона в частности «уверенно восстанавливаются, бизнес полон решимости, потребители воодушевлены, инвесторы в блаженстве». Ну и, разумеется, как обычно «лучшее время в истории, чтобы купить невероятно дешевые акции». Все замечательно! Глядя на обновляющие хаи по рынку, поток оптимизма в СМИ можно сделать вывод, что сейчас не иначе, как супер бум – экономический – всеобщее счастье и процветание. Так ли это? Сейчас в Еврозоне дефляционная тенденция. Уровень инфляции снижается – уже ниже 1% годовых. Причиной этому является падение темпов номинальных доходов работников. Доходы в настоящий момент растут всего на 0.5% в год, ниже было только в 2009. Между инфляцией (CPI) и номинальными доходами однозначная взаимосвязь, которую можно проследить ниже на графике Нет доходов – нет расходов. Если скорректировать расходы с учетом общего изменения цен, то динамика отрицательная. Лучше за последний год не стало. Масштаб кризисных явлений в 2011-2013 сопоставим и даже превышает фазу кризиса 2008-2009. Даже не смотря на низкую базу, потребительские расходы так и не стали расти. Уровень инвестиций в Еврозоне грохнулся до минимумов с 1999 года, гос.расходы стагнируют последние 4 года, потреб.расходы всего на 2.2% выше, чем 8 лет назад и снижались последние 2 года. Совокупный ВВП перестал расти с 2 квартала 2011 и также сокращается. В динамике год к году все в отрицательной зоне за исключением расходов правительства. В последнее время произошла некая стабилизация, однако, во многом благодаря вкладу чистого экспорта. Сейчас чистый экспорт в доли от реального ВВП составляет почти 5%, что является максимальным уровнем за всю историю существования Еврозоны. Причем вывод торгового баланса в профицит обеспечивает до 2.5% ВВП ежегодно. Без этого фактора все было бы значительно хуже. Но этот ресурс себя практически исчерпал, учитывая, что дополнительное увеличение чистого экспорта невозможно по многим причинам. А что там с бизнес активностью? Пром.производство продолжает снижение. Последние 2 года траектория стабильно нисходящая. Общие уровни могут показаться достаточно высокими, но все благодаря Германии, которая обеспечивает до 60% всего пром.производства Еврозоны. Без учета Германии объем пром.производства не так далеко от уровней начала 90-х (!!) Объем строительства обновляет исторические минимумы. Количество регистраций новых авто на новых минимумах (с момента образования Еврозоны меньше, чем сейчас не было никогда). Реальные розничные продажи на 10 летнем дне и на 15 летнем минимуме, если пересчитать учитывая изменение количества населения. Отскок последнего полугода не компенсирует даже 10% от совокупного падения с докризисных уровней. Экономика Еврозоны потеряла более 6 млн рабочих мест с 2007. Роста занятости нет даже близко. Безработица растет, достигая 12% и 25% для лиц младше 25 лет. Кредитование населения? Низкие ставки и всякие там LTRO никак не способствовали оживлению кредитной активности. До сентября 2011 еще как то росли на траектории общей стагнации, но с тех пор безостановочное падение. С кредитам для нефинансового сектора не лучше. Динамика год к году выглядит устрашающе, т.к. делевередж по масштабу превосходит 2009 год. В итоге имеем. Бизнес и потребительская активность на 10-15 летнем минимуме. Без Германии с коррекцией на рост населения там дно с начала 90-х. Кредитование сокращается, безработица растет, увеличения занятости нет, динамика номинальных доходов на самых низких уровнях с 2009, дефляционные процессы преобладают. Улучшения в потребительских расхода нет, даже с низкой базы. Инвестиции падают в ад. Вот такое по факту состояние экономики, которое у многих после зомбирования СМИ стало восприниматься, как «исключительно устойчивое и вселяющее оптимистичные надежды» при «благоприятных перспективах» и «прекрасных отчетах бизнеса». Да, особенно это видно по динамике инвестиций и доходов компаний. Весьма забавно наблюдать за тем, как инвестбанкиры и аналитики пытаются оправдать самый масштабный рост рынков с конца 90-х, учитывая, что реальное положение дел значительно хуже кризиса 2009. Это как шоу стало. Какой еще бред придумают про "сказочные перспективы" и "волшебное состояние"? ))
Сейчас попытаюсь объяснить, каким образом монетарная политика НБК зависит от цен на сою :)) Вся цепочка выглядит примерно так: PBOC Monetary Policy CPI Food CPI Pork CPI Soybean&Corn price Для центробанка страны с населением более 1,3 млрд человек стабильность цен на продовольственном рынке всегда будет являться основным мандатом. Народный Банк Китая (НБК) таргетирует уровень потребительской инфляции (ориентир на уровне 4%). Важно отметить, что доля продуктовой инфляции (Food CPI) в структуре потребительской инфляции (CPI) Китая составляет почти 40% - это второе по Индии место среди наиболее развитых стран. Среднемировой показатель без учета США – 17,8%, а в Соединенных Штатах - 7,8% (один из самых низких в мире). Неудивительно, что между уровнем потребительской и продуктовой инфляции и сводным индексом цен на сельскохозяйственные товары (S&P GSCI Agriculture Index) существует тесная корреляция. Свинина является важнейшим продуктом в Китае. Страна является крупнейшим производителем (>50%) и потребителем свинины в мире. C 1980 по 2013 год потребление свинины на душу населения в Китае выросло в 5 раз. При этом почти 90% изменения внутренних цен на этот продукт животноводства в Китае обусловлены ростом мировых цен на зерновые и соевые. Китай является крупнейшим импортером сои – на страну приходится более 40% всего мирового объема поставок. В структуре торгового баланса Китая импорт сои в стоимостном выражении занимает третью строчку после нефти и железной руды. Зависимость потребительской инфляции Китая от цен на сою на мировом рынке достаточно очевидна, причем динамика цен на сою является опережающей. Судя по динамике ценообразования на рынке зерновых и соевых (опережающие индикаторы), инфляционные ожидания в Китае останутся сдержанными, что даст НБК пространство для маневра... в случае необходимости. P.S. читатели блога ругались недавно на меня из-за мелких графиков... так нормально?