Wtih the preliminary estimate of Q2 GDP behind us, we can focus more on Q3 data. But the sharper than expected drop in Q2 inventories (of course subject to revisions)--$141.1 bln after $113.9 bln in Q1, leaves it in a good position to make a positive contribution to Q3 GDP. As long as inventories fall less than $141 bln, it will be bolster GDP, even if inventories are not re-stocked. Indeed, if they do stabilize, then it could contributre mightily to GDP. We continue to believe that a positive Q3 GDP read is the most likely scenario.
Friday, July 31, 2009
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There seems to be a rough agreement that the world economy is on the mend. Earlier this year the focus was on the turning of second derivatives, which is how some economists refer to the pace of economic contraction slowing. Increasing amounts of data from a broad array of countries suggest positive growth is at hand; the world economy seems poised to expand for the first time in a year.
The US economy contracted at a 1% annualized pace in the second, a bit better than the consensus expected and Q1 was revised to -6.4% from -5.5%. Benchmark revisions reveal weaker growth on balance in the recent past as well. Consumer spending fell 1.2%, nearly twice the pace economists had expected. The net export function added 1.4 percentage points to GDP. Inventory de-stocking continued apace, with a record drawdown $156 bln, vs $127.4 bln in Q1. This subtracted 0.8% from the GDP figure. It took 2.3% of Q1 GDP. The slide in business investment slowed (-9% vs -36.4% in Q1), though residential construction continued to fall. Core PCE rose 2% in Q2, a bit less than expected and 1.1% in Q1. The employment cost data hit a new record low of 1.8% year-over-year, suggesting that core inflation is likely to remain subdued.
Thursday, July 30, 2009
The U.S. Treasury market is on its back foot today. The stars are aligned against it. Equities are posting strong gains. Recent string of economic data has been consistent with the end-of-recession story. There has been record supply hitting this week and today's 7-year note sale complete the week's operations. Demand in the 2-year and 5-year note sales on Tuesday and Wednesday saw relatively weak demand, especially from the indirect bidders. Indirect bidders took up about a third of the 2 year and a little more of yesterday's 5-year note sale Last month indirect bidders took down closer to two-thirds of the supply.
The euro was trading heavily even before the IMF's comments hit the wires suggesting that in the February 25-March 25 period, the single currency was over-valued by 0-15%. Although this is wide enough to be nearly meaningless substantively, the significance may lay in the shift. In recent years IMF officials were often seen on the side of those that thought the dollar was over-valued and that to redress the global imbalance, the dollar would have to decline.
Wednesday, July 29, 2009
The initial read of the Fed's Beige Book is ho-hum. Most districts report slower pace of economic contraction. Labor markets remain soft. Modest manufacturing recovery in 6-12 months. There were few signs of positive growth, but we would anticipate that by the end of Q3 there will be positive growth signs. The Beige Book was compiled by the Boston Fed. The next FOMC meeting is August 12th. No new initiatives are currently expected then.
The earlier estimate of SNB intervention was derived from last week's data that showed that its euro holdings rose by 32 billon euros in Q2 after a 20.26 billion euro increase in Q1. Dollar holdings rose to almost $20 billon from $13.2 billion. Of course the full increase might not reflect only intervention as there may be a valuation component as well. The real point was to take a quick look at how effective the intervention has been, not so much to have the final word on the size of the operations. The other important points include:
- SNB thinking the intervention has been successful
- They will continue to intervene (if needed) The direct market impact has been minimal.
According to Reports the Swiss National Bank has confirmed it has spent $32 billion to weaken the Swiss franc since March. How effective has it been? The trade-weighted index (BOE calculation CEERSZ on bloomberg) has effectively depreciated by about 3.2% from its peak on March 6th to today. Against the euro, the Swiss franc has fallen about 4.3%. Given the openness of the Swiss economy (exports+imports as % of GDP) this currency move is not tantamount to much easing of monetary conditions.
The headline decline in durable goods orders (-2.5%) was greater than the market expected, but ex-transportation figure rose 1.1% , well above the flat expectation and is the highest in four months. In addition to the closure of auto plants in the first part of the month, commercial aircraft bookings fell 39% after the 60% jump in May. Orders for non-defense, capital goods, excluding aircraft, a lead indicator for investment rose 1.4% after the 4.3% rise in May. The shipments of those goods, which is used for the government's estimate for GDP rose 0.1%, the first gain this year.
Japan reports retail sales figures first thing on Wednessday in Tokyo. A 0.4% month-over-month gain is expected, which would leave it off 6% over the year. Retail sales tends not to be a significant number in Japan or for the yen, as the Japanese economy traditionally stands on three legs: government spending, capex and exports. Japan reports industrial output figures on Thursday in Tokyo. The consensus is for a 2.5% increase in June after a 5.7% in crease in April. The increase would be the fourth consecutive month of gains. If the consensus is right, this would represent the largest quarterly rise in modern times.
Tuesday, July 28, 2009
Friday, July 24, 2009
The United States and China will hold a Strategic Economic Dialogue during the last week of July. The talks were an initiative of former Treasury Secretary Hank Paulson, but have continued under President Barrack Obama and Treasury Secretary Tim Geithner.
Tuesday, July 21, 2009
Friday, July 10, 2009
The swine flu continues to spread, but there appears to be another ailment afflicting many Americans. There are two strains. The first has been dubbed America Firsters, but is different than the isolationists of the ‘30s and ‘40s and more contemporary times. When inquiring into nearly all of the world’s problems, the illness makes them typically blame America first and foremost. Those harboring left of center views often appear more susceptible to this strain.
Thursday, July 9, 2009
The dollar has been hit again since the close of European markets. Losses are broad based, with most emerging market currencies participating, though the Mexican peso is a clear laggard as concerns about the budget (and therefore rating) implications of last week's elections. The main driver appears to be players being stopped out of short foreign currency positions, which had been the trend since the start of the month. Some momentum players are getting long the foreign currencies. While the gains in the foreign currencies look impressive, they are still mired in the ranges that have plagued players since late May.
The G8 meeting is wrapping up and there have been no surprises to speak of. The global economies and financial systems appear too fragile to begin reversing the emergency measures. There were the usual platitudes about completely the Doha trade round and promises to avoid protectionism. Of note, especially in light of the various comments in recent weeks from assorted officials warning that currency appreciation would jeopardize their economic recoveries or in other ways underscored the benefits of soft currencies,the G8 encouraged countries to refrain from competitive currency devaluations.
Wednesday, July 8, 2009
One of the persistent questions from investors is who is going to buy all these Treasuries the government is issuing to finance the yawning budget deficit. Ironically, thus far this year, at least three countries, Germany, the UK and today, joined by China, have failed in selling the amount of bonds they intended. The U.S. has not had that problem. Today's 10-year auction, like yesterday's 3-year note sale was warmly received and it does appear that indirect bidders, which include foreign central banks are picking up a greater share (there was a rule change recently that could be bolstering the indirect bid figures, though it appears to make the indirect bidders more transparent and not concealed in primary dealer activity).
Outside of the ethnic turmoil in China, there is another story that appears to be hitting the markets. Earlier today, Chinese authorities "detained" Rio Tinto's top iron ore negotiator on suspicion of espionage and stealing state secrets. This comes as a Shanghai paper reported that Chinese steel companies have belatedly agreed iron ore prices, accepting a 33% cut for six months, though other reports suggest Chinese negotiators continue to seek deeper price cuts. Recall as well that Rio Tinto balked at a $19.5 billion investment by a Chinese company (Chinalco) a few weeks ago. Chinese officials deny a connection between the detention of the negotiator and the belabored negotiations that failed to meet the June 30th deadline.
Yesterday's Financial Times carried an op-ed type of piece that acknowledged there was no alternative now to the dollar as the main reserve currency and numeraire. While this is consistent with our own analysis, we take exception at the idea that "the chances for coordinated intervention among developed economies to support the dollar are higher now than any time in the past 10 years." We see no evidence for such a claim. Intervention is best conceptualized as an escalation ladder. Coordinated intervention is near the top. The major developed countries have barely stepped on to the ladder at all.
Tuesday, July 7, 2009
A number of observers are suggesting that the recent heavy tone in equities and the relative dollar and yen's strength in the foreign exchange market is a function of growing doubts about the green shoot story that unfolded for most of Q2. There have of course been some disappointing data. The recent employment report comes to mind. However, in the past 24 hours there have been two reports--one in the U.S. and one in Germany that seems distinctly more promising.
Monday, July 6, 2009
Talking with a range of market participants, we have been struck by the fact that the vast majority are very concerned about inflation in the United States. Leaving aside our usual arguments about the output gaps that will require a protracted period of above trend growth to close, there a several other considerations that may help ease inflation worries.
The unconventional policy in Europe, under which the central banks will buy up to 60 billion euros of covered bonds kicks off today. European officials are loath to call it quantitative easing, but exactly why it isn't, has not been explained. The ECB itself will buy 8% of the targeted amount with the national central banks responsible for the remainder.
The dollar is posting broad based gains today, with the yen as the notable exception. Despite the upticks, which are carrying the greenback to the upper end of its recent consolidative ranges, there continues to be much talk about the dollar's future as the numeraire--the key currency in the world economy, especially ahead of the G8 meeting later this week.
Thursday, July 2, 2009
Freddie Mac reports that mortgage rates fell in the U.S. in the past week. The average 30-year fixed rate mortgage fell 10 basis points to 5.32%. Fed officials may find some comfort in this development, but it is unlikely to silence its critics.
Japan's Financial Service Agency will reportedly will limit the amount leveraging available to retail foreign exchange participants, who according to estimates account for around a quarter of the daily turnover in Tokyo, which according the the BIS survey averaged about $302 billion a day.
Wednesday, July 1, 2009
News wires report that China has announced it wants to talk about reform of the international monetary order at next week's G8 meeting in Italy. The dollar has been hit in a knee-jerk reaction to the news headlines, but we are skeptical of the merits.
Construction spending fell 0.9% in May, completely offsetting the revised 0.6% gain in April (which was initially 0.8%). This is slightly weaker than the consensus forecasts. Overall, construction spending has fallen 11.6% from year ago levels. Residential construction was poor, off 3.5% after a flat reading in April. Yet we know that housing starts rose from 454k in April to 532k in May. Non-residential construction rose a meager 0.1% after a 0.8% gain in April. Private spending fell 1% in May and public spending fell 0.6%.
The South African rand has been the strongest currency this year, appreciating 23% against the dollar in H1. Since putting its recent low (with the dollar at ZAR8.28) on June 23, the rand has appreciated every day, for a cumulative gain of 6.2%, until today. The rand is off by a little more than 0.5%. The ostensible cause of the modest profit taking is disappointment with the purchasing managers index. It rose to 37.9 in June from 37.3 in May, but the market was more optimistic. Manufacturing is a small part of the South African economy, accounting for a little more than 1/6 of GDP.