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  • #31
    Daily Market Report for 24 July 2014: Kiwi Tumbled After Reserve Bank of New Zealand (RBNZ)’s Rate Hike On Wheeler’s Warning


    Economic Insights

    China manufacturing Purchasing Managers’ Index (PMI) bolstered the Aussie, but Kiwi dropped on Wheeler’s comments
    China HSBC manufacturing PMI flash reading rose to an 18-month high in July after various easing measures kicked in. Now it looks more realistic that the country stands a high chance to reach its full year growth target of about 7.5%. The preliminary manufacturing PMI is 52.0, topping all the earlier forecasts, even that of our earlier forecast at 51.1, which was already pretty optimistic comparing to most of the houses. Chinese stocks rallied and the Yuan rose to a three-month high, as the report suggested stimulus implemented this year including expedited infrastructure spending is supporting growth.

    China flash manufacturing PMI


    It’s not impossible for us to see the targeted stimulus this year. China may take further steps to revive the property and mortgage markets after home sales dropped YoY in 30 key cities every month this year and prices dropped YoY in 55 out of 70 cities in June. The country is already set for its first mortgage-backed debt sale in more than six years and the People’s Bank of China (PBOC) in May called on lenders to speed up mortgage approvals. The nation’s eight biggest banks hold 7.4 trillion Yuan of mortgages, mainly led by China Construction and Bank of China.

    China’s economic growth accelerated for the first time in three quarters in 2Q, reaching 7.5%. The pickup was aided by easing measures, including PBOC liquidity injections, looser loan-deposit ratio rules and cuts in reserve requirement ratios for small and medium enterprises (SME)- and rural-focused banks. These steps may also support bank lending in 2H and government efforts to meet a 7.5% full-year growth target despite the fact that we had a higher growth base in 2H last year.

    Credit issues could be solved in the near term as well. China is working on rules for managing and winding up failed banks, including ways of protecting deposits and ensuring the orderly repayment of financial liabilities, Bloomberg News stated. The move highlights the growing financial stress among the local lenders. Listed banks’ bad debts rose 15% YoY in 1Q, while the reserve-coverage ratio dropped to 264% vs. 283% in 2Q13 and 273% in 1Q13. Bad-debt reserves were equal to 21% of sector Tier 1 capital.

    In New Zealand, the RBNZ hiked the rate to 3.5%, however the Kiwi slumped. New Zealand’s central bank signalled a pause after its aggressive rate tightening since beginning of the year. Kiwi tumbled the most in six months.
    Governor Graeme Wheeler said that it is prudent that there now be a period of assessment before interest rates adjust further toward a more neutral level after raising the official cash rate by a quarter-percentage point to 3.5%. The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.

    Wheeler said while inflation remains moderate, strong economic growth is absorbing spare capacity and adding to domestic price pressures. The speed and extent of further rate increases will depend on the assessment of the impact of the tightening in monetary policy to date, and the implications of future economic and financial data for inflationary pressures.

    RBNZ OCR (white) vs. NZ CPI YoY (yellow)

    Comment


    • #32
      Daily Market Report for 25 July 2014: Recovery of the Euro Manufacturing Activities Buys More Time For Draghi


      Economic Insights

      We continue to exercise the "selling strategy" on euro, especially when it rebounds instead of "buying the dips"

      Both Euro Zone’s manufacturing and services Purchase Manager Index (PMI) has climbed up this month, easing the earlier worries that the fading of economic data among the different region had started to drag the economy recovery. Composite PMI edged higher to 54 from 52.8 in June, nearly reaching the highest level in the past three years, and it's the 13th consecutive month exceeding the key benchmark of 50. Manufacturing PMI rose to 51.9 in July after 51.8 in June, while the service gauge jumped to 54.4 from 52.8.

      Euro Zone composite PMI (white) vs. manufacturing PMI (yellow)

      Source: Bloomberg


      There is no sign that the recovery is from the effect of the new round of stimulus introduced by the European Central Bank (ECB) in early June, or even due to the confidence picking up. The confidence in the region dropped in the past two months, and inflation persistently running below its target calls for a weak demand. In a worse scenario, there is no evidence at this moment that it’s a one-off rebound or a reversal point of the recent weakening of manufacturing activities. ECB had cut its deposit rate below zero last month and unveiled a targeted loan program to boost lending in the currency bloc. It is very likely that the central bank needs to do more in order to put the recovery to be sustainable ultimately, including the asset-backed securities (ABS) purchasing in the private sector.

      There is still something encouraging. Germany Service PMI expanded the most in three years in July, jumping to 56.6 from 54.6 in June, suggesting the largest economy in the bloc will continue to support the aggregate growth. However in France, manufacturing contracted at the fastest pace this year, with the index falling to 47.6 from 48.2 in June. It suggests that the euro area’s second-largest economy is struggling to gather pace. This raises our attention to whether that the uneven growth in the euro zone will be finally dragged lower. The French economy stagnated in the first quarter of this year, compared with a 0.2% expansion in the 18-nation euro area. Now the evidence points out that France’s PMI data remain consistent with quarterly Gross Domestic Product (GDP) close to stagnation levels as the economy continues to show little sign of turning around its recent sluggish performance.

      The labour market suggests spare capacity remains in the economy. The unemployment rate is 1.4 percentage points above the non-accelerating inflation rate of unemployment. The former stands at 11.6%. The spare capacity is likely to weigh on inflation. The headline number has dropped to 0.5% year over year from a recent peak of 3% in November 2011, and the core figure has declined to 0.8% from a recent high of 1.7% in July 2012. The ECB has already show an intention to make further progression of its easing measures, further details of the initiative may be released again in a few months if there is no picking up in the inflation reading.

      Euro Zone CPI YoY

      Source: Bloomberg

      Thus, we continue to exercise the “selling strategy” on euro, especially when it rebounds instead of “buying the dips”. When the U.S. monetary policy is less accommodative, it’s hard to create a “euro bull” scenario in the mid-term basis.

      EUR/USD

      Source: Bloomberg

      Comment


      • #33
        Market Brief of the Week for 4 August 2014: U.S. Jobs Report Eliminates the New Languages From the Federal Reserve (Fed)

        Economic Insights

        Latest data from the Labour Department didn’t show much evidence of wage acceleration

        U.S. Nonfarm Payrolls was released last Friday. The U.S. added 209,000 jobs last month, following a 298,000 gain in June that was stronger than previously reported figures from the Labour Department. The jobless rate climbed to 6.2% from 6.1% in June as more people entered the labour force.

        Result was similar to what the Automatic Data Processing (ADP) payrolls had said – above the key threshold, but lower than the expectation. In general, this is a healthy labour report. One of the big debates over the Fed’s extraordinary stimulus policies focuses on wages. Some would like to see them growing faster, while others worry that the raises could trigger an inflationary spiral.

        Whatever the perspective is, the latest data from the Labour Department did not show much evidence of wage acceleration. The pace of wage growth in the private sector has been remarkably slow and steady. Hourly earnings rose at an annualised rate of 2% over the past three months, roughly the same as over the past year as well as since the beginning of the recovery in mid-2009. That’s just enough to keep up with consumer price inflation, which has run at an average annual rate of 2% since mid-2009.

        Fed policy makers led by Yellen said on June 18 that they are expecting their year-end rate to reach 1.13% in 2015 and 2.5% in 2016. The benchmark rate will remain below 2% until sometime in 2017. The Fed is expected to stay in easing mode for a longer time until the “bond yields are appropriately priced.” In other words, if we believe that the dollar tracks the yield curve closely, there wouldn’t be any dollar spike in the coming weeks if the current macro condition stays.

        Dollar – Yen impact

        The Bank of Japan (BOJ) is refraining from adding stimulus and the Fed stresses that they expect to keep the rates near zero for some time. It also shows traders expect the Dollar-Yen rates to fluctuate more in the coming year than it has over the past 12 months, as measured by implied and historical volatility, the first time that has occurred since September.

        Fed fund futures show a 65% chance that Chair Janet Yellen and her board will raise their target rate for overnight loans between banks by July, higher from 53% odds at the end of June. Policy makers have held the benchmark between 0 and 0.25% since 2008. The question now is when will the BOJ expand stimulus again? Governor Haruhiko Kuroda and his board have kept bond purchases at around 7 trillion Yen per month since April 2013.

        The Yen slumped 18% against the dollar last year, we expect the price to consolidate toward the end of the year. Further selling off could be seen in 1Q 2015.

        Comment


        • #34
          Daily Market Report for 5 August 2014: Recent Junk Bonds Rally Implied that the Federal Reserve (Fed)’s Tightening Pace Might Be Under-estimated


          Economic Insights

          Reserve Bank of Australia (RBA) remains the policy rate unchanged at 2.5%

          Argentina’s default and geopolitical risks has pressed the yield curves to a more flattening state this year. However, we noticed there is a yield recovery of those high yield debts in the past few days after the big decline that had been going on since June, had reflected the improving economic condition and 2Q corporate earnings. If this phenomenon were to sustain any further, it will be implied that the current feed is running behind the yield curve. Markit CDX North American High yield Index also fell 17 basis points to 336.8 basis points overnight. iShare high yield Exchange Traded Fund (ETF) showed the sign of increasing inflow in recent days.

          iShare high yield ETF

          Source: Bloomberg

          Once the market calms down on the Argentinian and other geopolitical risks, the flight destination could be aiming at those high yield assets again. The mask of Fed’s exceptional patience on its monetary policy could be removed as well, since we could not argue much on its latest economic releases such as 2Q growth, inflation and labour market report. Headline numbers of the Non-farm payrolls added up less than the previous one, but it still stood well above the 200k level. The U.S. added 209,000 jobs last month, following the 298,000 gain in June that was stronger than previously reported figures from the Labour Department. The jobless rate climbed to 6.2% from 6.1%, which however is not negative news, as more people have entered the labour force. Full time workers total rate accelerated while the part time workers declined with a higher participating rate, signalling that more people have joined the labour force.

          RBA’s broad language on exchange rate and monetary-policy course remains unchanged. Exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving a balanced growth in the economy.

          Monetary policy has appropriately configured to foster sustainable growth in demand and inflation outcomes which is consistent with the target. The most prudent course is likely to be a period of stability in interest rates.

          Australia trade deficit had reduced due to lesser imports, but exported goods figure didn’t improve. However, Iron Ore and Coal exports slightly raised base on the improving Chinese demand that was spurred by the targeted stimulus.

          Iron-ore January contract on Dalian commodity exchange touches 692 Yuan/MT, rising 2.4%, most since March 25 and to strongest since July 17.

          All in all, RBA’s Official Cash Rate (OCR) shall be remained at 2.5% which is unchanged this year.

          Comment


          • #35
            Daily Market Report for 8 August 2014: Aussie Stays Low Despite the Resilient Chinese Exports Data


            Economic Insights

            Aussie remains low as Australian unemployment rate hiked

            Unemployment rate figures show that unemployment increased drastically in July, sitting higher than usual in the United States. The question is that whether it is time for the Reserve Bank of Australia (RBA) to take decisive action. RBA intend to remain cool towards the end of the year by holding the rate unchanged at 2.5%. Employment report was weak in general, but there is still positive news.

            1) Numbers of Full time workers increased, an offset by the decrease in part time works.

            2) Participating rate has increased, indicating that more people have joined the labour force.

            The spike of the unemployment rate could also be partly due to the sample rotation. As the inflation still stays in the upper band of the RBA’s target range, RBA has limited scope to ease at this moment. We cannot expect much shift in its language for the coming September meeting.

            Today’s data certainly raises the warning to the Australian economy outlook and its currency which is still the top performer among the G10′s. Australian recovery still heavily depends on the Chinese recovery in our point of view. We saw that there is a recent rising in optimism according to the Chinese economy data, but we remain cautious on its sustainability as the resilient data is largely driven by the government targeted stimulus. Industrial Demand in China remains tepid and it is unlikely to largely benefit the Australian commodity exports without a broad base stimulus.

            Australia export volume has a very large correlation with the iron ore price in the past 5 years. Overcapacity is severe in the Chinese steel sectors so we do not see this as a positive catalyst to the Australian economy.

            No single policy works all time in the different cycle. I think that is the similar issue to what these 2 economies are facing now. Post-euro zone debts crisis in the past 2 years as well as the European Central Bank (ECB) has lowered the benchmark lending rate close to zero. However besides boosting the confidence and lowering the borrowing cost, it did very little to boost the credit demand when the lending to non-financial sectors has shown no signs of picking up. That’s how we see its recent inflation to fall on a near 5-year low.

            In Australia, Official Cash Rate (OCR) rate cut has been spurring the lending amount, including that of those commercial lending. But I think the Government should take a bigger role to aid RBA’s action, as the country urgently needs to seek revenues such as structural improvements after the commodity has been peaked and the substantial lesser demands from China. I do not think RBA can do much here.

            ECB Press conference overnight looks like there were no extra measures being introduced. Draghi still needs some time to exanimate the previous easing that was announced two months ago.

            Uneven growth in the currency bloc becomes more and more obvious from the latest reading of the Purchasing Managers’ Index (PMI) data this week, meanwhile confidence indices in both Germany and Euro Zone have been dropping since 1Q this year.

            Now geopolitical risk such as the sanction between EU and Russia sets to pose the extra deflation risk in the Euro zone, as well as the expectation on an ultimate Quantitative Easing (QE) program could rise toward the end of the year, is driving the euro lower in a medium term when the dollar demand holds well.

            Comment


            • #36
              Market Brief of the Week for 11 August 2014: Euro Doesn’t Look Attractive Against Its Peers in 2H

              Economic Insights

              U.S/Japan Quantitative Easing (QE) style will be ultimately seen in the Euro zone and it is difficult for Draghi to avoid the situation

              Euro Zone 2Q Gross Domestic Product (GDP) will remain stagnant based on the recent evidence. Growth in the first quarter was mainly contributed by Germany’s 0.8% gain, but its Bundesbank had predicted a minor contraction in 2Q. Manufacturing activities deteriorated in Germany and France in 2Q, and the development in Italy failed to pull its economy out of a technical recession. We expect a flat growth in 2Q to be announced later this afternoon from previous reading at 0.2%.

              There is no sign of momentum picking up from the July’s data. Aggregate manufacturing Purchasing Managers’ Index (PMI) remained unchanged from June, falling in 3 economies out of the largest 4 in the region, except for a tiny rise in Germany. Moving forward, German economic outlook could stay in the downward channel due to the impact of the Russian sanction, as they are the 2nd largest exporters to Russia. There is a Forward looking indicator when New Order rebounded slightly last month, but it’s far from valid to prove that a reversal move had started after a 6-month fall.

              U.S/Japan QE style will be ultimately seen in the Euro zone and it’s difficult for Draghi to avoid that. There will be lower borrowing cost in the peripheral counties partly due to the broad low volatilities around the world in past two years. There will be big questions whether Draghi’s current tools are enough to counter a possible higher Chicago Board Options Exchange (CBOE) Volatility Index once a less dovish Federal Reserve (Fed) is ready to openly discuss its exit strategy. In the other scenario, a flight to the Euro sovereigns’ due to bonds selling off in the U.S. could push the Euro higher, which could force the European Central Bank (ECB) to use unconventional tool to fight with.

              The 18-nation Euro area itself is struggling to boost growth and inflation even within unprecedented ECB stimulus, with ECB President Mario Draghi citing inadequate structural reforms as the key reason. Specifically, he mentioned that the countries which have the most structural reform – Spain and Portugal – are outperforming those that have lagged on reforms, namely France and Italy.

              Spain is seeing domestic demand starting to recover from the deepest severity measures in the country’s democratic history, and Prime Minister Mariano Rajoy is relying on that rebound to dent a 25% unemployment rate which is the second highest in the European Union (Greece holds the current highest unemployment rate).

              The latest Euro-area data came two months after the ECB unveiled a historic package of measures which includes a targeted long-term loans for banks and a negative deposit rate. Draghi has said that while he doesn’t expect deflation, ECB officials are unanimous in their willingness to deploy additional measures such as broad-based asset purchases if needed. Inflation slowed to 0.4% in July, compared to a goal of just under 2%. The ECB in June forecasted economic growth for the currency bloc of 1% this year and 1.7% in 2015.

              Meanwhile in UK, economists are backing Bank of England (BOE) chief Mark Carney’s rationale for holding the key benchmark rate at a record low of 0.5%. 67% of 33 respondents said that there is still enough slack in the economy to justify holding the key rate at 0.5%, where it has been since March 2009. The BOE itself has put spare capacity at about 1% to 1.5% of GDP.

              Short-sterling futures indicate investors are scaling back expectations of an increase in borrowing costs this year. The implied yield on contracts expiring in December has fallen to 0.77% from 0.85% a month ago. The yield on the March 2015 contract was 0.98% on 8th August.

              Comment


              • #37
                Daily Market Report for 12 August 2014: Aussie Is Unlikely To Achieve 95 cents To the Greenback By Year End


                Economic Insights

                Little support from China as Aussie slumps

                The credit expansion and the current monetary policy condition could send off an alarm on how far the extra stimulus can go in 2H. People are talking about tepid inflation which gives the officials more room to ease, but they will probably just ignore the extra room left to further the credit which could be added. Bloomberg Monetary Condition Index has been moving to a peaking territory in the past 3 years, implying that the growth momentum could be fading, given its strong correlation with the credit condition in the past 5 years.

                “Shanghai-Hong Kong Stock Connect” is one of the key drivers to push the Chinese stocks higher as the valuation narrowed down since 3 weeks ago, as the Chinese big caps are cheaper. But market chasing the price in shares is not new to us since the news hype rallied spur by the Shanghai Free Trade Zone concept proved to be short-lived. Without a strategic structural reform, we are most unlikely to see a sustainable rally and reverse the prolonged downtrend.

                Aussie is losing steam as the Reserve Bank of Australia (RBA) reinforces prospects that it will consider cutting down interest rates unless the economy regains momentum. Derivative traders turned most cynical on Australia’s dollar since March and boosted the odds of an interest-rate reduction by year end to 29% as shown in the data compiled by Bloomberg. Futures positions last week saw the biggest bearish shift since January, according to the Washington based Commodity Futures Trading Commission. The Aussie has dropped 1.8% since June 30, paring to 3.9% 2014’s advance.

                Central bank policy makers fuelled speculation that they will reduce the record-low benchmark rate by lowering economic growth and inflation forecasts last week after the mining investment slumped. The changes followed a surge in joblessness to a 12-year high of 6.4% last month, from 6% in June, that surprised analysts and took the rate above that in the U.S. for the first time since 2007.

                The change came even before the data on August 7 which showed Australia’s jobless rate rose in July as employers cut 300 positions. The following day the RBA projected gross domestic product of 2%-3% in the year through June 2015, down from a range of 2.25%- 3.25% that was forecasted three months earlier.

                On core inflation, the RBA lowered its forecast to 1.75%-2.75% from 2.25 %-3.25 % in May. Policy makers seek to hold the annual rate between 2%-3 %.

                In the U.S., employers have added more than 200,000 jobs in each of the past six months and the unemployment rate was at 6.2% in July. Traders are pricing in a 70% chance the Federal Reserve will raise its key rate to at least 0.5% by September 2015.

                An eventual increase may depend on progress on a broad set of joblessness measures, which Federal Reserve (Fed) Chair Janet Yellen has stressed on in making the case for maintaining accommodative policy. In her July testimony to House and Senate committees, her discussion of labour market slack turned on indicators such the participation rate, rather than the unemployment rate alone.

                If the above condition is to be released in the near term, we are unlikely to see a higher Aussie even with the Chinese economy stabilized in the near term.

                Comment


                • #38
                  Daily Market Report for 13 August 2014: Congratulations China On The Lower Lending And Higher Growth Momentum; What Else Can’t You Achieve?


                  Economic Insights

                  Chinese aggregate financing moves to a 6-year-low, after we saw a record high trade balance

                  China’s broadest measure of new credit unexpectedly plunged last month as growth in money supply slowed down. The aggregate finance fell to a 6-year-low in July, signalling the government have successfully cracked down the size of shadow banking. Was it that easy? Yes, it was, and what else can’t Chinese officials achieve?

                  Aggregate financing was 273.1 billion Yuan, the People’s Bank of China (PBOC) said today in Beijing, compared with the 1.5 trillion Yuan median estimation that the analysts had surveyed. New local currency loans of 385.2 billion Yuan were half of the projections, while M2 money supply grew a less than anticipated of 13.5 % from a year earlier.

                  A property slump is testing Premier Li Keqiang’s ability to achieve the government’s economic expansion target of about 7.5% this year. The International Monetary Fund last month had urged China to target slower growth in 2015, saying that its economy faces a “web of vulnerabilities” from rising debt and financial institution’s exposure to real estate. But we do not expect any growth target that needs to be adjusted and will just stay with the current 7.5% growth target – which should be a piece of cake for China.

                  Analyst estimates for aggregate financing ranged from 1.2 trillion Yuan to 2.03 trillion Yuan, after 1.97 trillion Yuan in June and 819.1 billion Yuan in July 2013. Actual number is lower than 273.1 billion, lower than the new Yuan loan. I did everything to make sure that I wasn’t dreaming.

                  China New Yuan Loan (white) vs. China aggregate financing (yellow)

                  dmr_13082014

                  Source: Bloomberg
                  Click the image to enlarge
                  There are ample examples around the world of central banks that tilted toward restraint even as deflation was a greater risk than inflation. At the Reserve Bank of New Zealand (RBNZ), Governor Graeme Wheeler increased the rates four times between March and July and has since paused amid concerns he might have gone too far. Draghi, at the European Central Bank (ECB), has been far less aggressive than his predecessor, but it sure took him long enough. Yellen is battling pressure to end the quantitative easing (QE) program that is ensuring stable growth.

                  The biggest risk to Australia, which is a weaker Chinese economy, may soon be impendent to the world too. A slower pace of gross domestic product is assured as President Xi Jinping reins in a credit bubble and weans the economy from exports. There’s a growing alarming rate about a fast spreading property slump around the country, which is already affected by ghost cities. In the first half of 2014, home sales fell 9.2% from a year earlier.

                  Comment


                  • #39
                    Daily Market Report for 14 August 2014: Euro Zone Is Likely To Report A Stagnant Growth In 2Q


                    Economic Insights

                    European Central Bank (ECB) needs to exercise Quantitative Easing (QE) before the Federal Reserve (Fed) raises the rates containing low volatility

                    The growth in the current period will remain stagnant based on the recent evidence. Growth in the first quarter was mainly contributed by Germany’s 0.8% gain, but its Bundesbank has predicted that there will be a minor contraction in 2Q. Manufacturing activities had deteriorated in Germany and France in 2Q, and the development in Italy failed to pull its economy out of a technical recession. We expect a flat growth in 2Q to be announced later this afternoon from previous reading at 0.2%.

                    Still, we doubt that QE can be avoided in the Euro zone even with the little fresh insights that we heard from Draghi last week, as you can’t ignore the impact that will be caused from the Fed’s action later on. The yield curves that had flattened in the peripheral countries were partly due to the broad low volatilities around the world in past two years. There will be big questions later on whether Draghi’s current tools are enough to counter a possible higher Chicago Board Options Exchange (CBOE) Volatility Index (VIX) that is potentially driven by the Fed later. The other scenario could be that a flight to the Euro sovereigns’ due to bonds that had been selling off in the U.S., which could force the ECB to use unconventional tool to fight along with the currency appreciation.

                    The sanction could threat the Euro zone’s inflation more than growth. Russia is not even within the EU’s top 15 on its “net exports” list, so it seems to have very less impact on the growth on EU countries. But food related imports ban by Russian Government could further increase the production in EU, driving the price lower. Further confidence drop and price drop will easily lead the Euro zone into a deflation territory, thus many things look pretty vulnerable now.

                    Geopolitical tension is a great scapegoat for traders to sell Euro, plus the ECB hasn’t done enough to reverse the current falling inflation and economic conditions. There were no concrete details of its outright purchases in the asset-backed securities (ABS) or sovereign market, but we could sense that the framework is currently under construction. The key language here is that ECB is accelerating its balance sheet while the rest of the major central banks are about to start on shrinking it down. The single currency will continue to underperform.

                    Things look in favour for the greenback as well. Fed could pay less attention to be dovish now because the increasing geopolitical risk pushes the yield lower, potentially unlocking the dollar’s upside during this period. Another key reason for the recent dollar rally is due to a much weaker Euro. The coming risk for the USD will be from Yellen’s script in Jackson Hole meeting next week. A dovish language is expected since the latest labour market report wasn’t so exciting, but we do not expect something “extreme”.

                    U.S. economic data indicates that the recovery is continuing, so dollar remains attractive to us. We noticed that most of the selling off on dollar this year was driven by the Fed’s rhetoric, instead of the macro condition. In other words, buying opportunity could emerge again, once the Fed offers any dovish languages as long as macro condition remains well anchored.

                    In China, the downside data had surprised everyone yesterday. The credit data from yesterday and the current monetary policy condition could send an alarm on how far the extra stimulus can go in 2H. People are talking about tepid inflation which gives the officials more room to ease, but they probably ignore the extra room left to unlock further the credit. Bloomberg Monetary Condition Index has been moving to a peaking territory in the past 3 years, implying that the growth momentum could be fading if the Chinese officials refuse to offer anything new.

                    Yuan remains to stay in the uptrend against the greenback since April when growth fears had eased down. But the crucial times could arise now after the seeing the data in July had faded. Further gain on Yuan contradicts the current easy monetary policy regime preferred by the officials. Record-high trade balance could merely be a one-off event as negative imports growth was because of a high base in July last year. If the shrinking of Euro zone demand is confirmed later on, it will not be good news for the Chinese exporters.

                    Comment


                    • #40
                      Daily Market Report for 15 August 2014: Euro Zone’s Recovery Halted By A Negative Contribution From Germany



                      Economic Insights

                      Euro is still struggling as more measures from the European Central Bank (ECB) expected

                      The Euro area’s recovery has halted in its three biggest economies in the second quarter, underlining the vulnerability of the region to weak inflation and the expanding crisis in Ukraine. At the same time, the Spanish economy expanded at the fastest pace since 2007, and the Netherlands and Portugal finally had returned to report growth. Gross Domestic Products (GDP) also increased in Belgium, Estonia, Latvia, Lithuania, Austria, Slovakia and Finland.

                      Euro Zone GDP GoQ (white) vs. Germany GDP QoQ (yellow)

                      Source: Bloomberg

                      German GDP shrank 0.2%, more than its Bundesbank had forecasted, while French data that were also released today showed that the economy stagnated which had prompted the government to s**** its 2014 deficit target. Combined with Italy’s unexpected slide into recession, the numbers may add pressure on the ECB to expand stimulus. This time they will have difficulties to exempt from the situation.

                      While Germany’s second-quarter weakness was largely due to a warm winter that shifted production to the earlier months, the outlook is now clouded by the impact of international measures against Russia over its support of separatists in Ukraine. The Euro-area recovery is already fragile, with inflation running at the slowest pace since 2009, and current ECB measures will take time to have an effect.

                      Hence, we see the German and French bonds increased after the data with 10-year yields of both nations’ debt falling to record lows, extending a rally fuelled by bets on more central-bank stimulus. The Euro had an uneven session overnight but still pointing to the weak area.

                      German 10-year yield


                      Source: Bloomberg

                      The European Union has agreed to curb Russia’s access to bank financing and advanced technology in its widest ranging sanctions yet, eroding confidence in the region’s recovery. German investor confidence fell in August to the lowest level since 2012.

                      In the U.S. its applications for unemployment benefits in the U.S. increased more than forecasted last week, interrupting a steady decline to pre-recession lows. Jobless claims had climbed up by 21,000 to 311,000 last week, the highest in six weeks. The jump represents a departure from a run of low readings that showed employers had been holding firm on staffing levels in order to keep up with demand.

                      Federal Reserve (Fed) Chair Janet Yellen is among the policy makers who remain concerned that pockets of slack in the job market, including stagnant wages and elevated numbers of long-term unemployed workers, will continue to hold back the world’s largest economy.

                      The four week average of claims, a less volatile measure than the weekly figure, increased to 295,750 from 293,750 in the prior week, which was the lowest since 2006. Last week’s average is still well below the 318,700 mean so far this year.

                      Cost of goods imported into the U.S. had dropped down 0.2% in July, the first decrease in three months, after rising 0.1% in June. The drop was led by retreating costs for fuels and the biggest decrease for automobiles since 1992.

                      Employers added more than 200,000 workers to payrolls in July for a sixth straight month, the first time it has happened since 1997. Employment increased by 209,000 after a 298,000 increase in June, and the jobless rate increased to 6.2% from an almost six-year low of 6.1% as more Americans entered the labour force seeking work. Job openings increased in June to the highest level in more than 13 years.

                      Comment


                      • #41
                        Market Brief of the Week for 18 August 2014: Jackson Hole Will Decide the Fate of Greenback in the Near Term

                        Economic Insights

                        Yellen is expected to be dovish this week

                        Federal Reserve (Fed) Chair Janet Yellen and European Central Bank (ECB) President Mario Draghi are among the speakers at the Federal Reserve Bank of Kansas City’s conference on the economy and monetary policy in Jackson Hole, Wyoming. Fed Chair Janet Yellen has a stubborn warning light blinking on her labour market dashboard, which indicates that a group of Americans larger than Washington State’s population can find only part-time work. As Yellen heads to this week’s Fed symposium in Jackson Hole, Wyoming, where the focus will be on the labour market, those 7.5 million part-time workers who want full-time jobs are inflating the broad measure of underemployment which she watches to gauge the job market health. Involuntary part-time workers have increased by 325,000 from February’s five-year low.

                        With employment and inflation nearing Fed goals, Yellen has consistently cautioned that some labour market measures still show enough slack to warrant on keeping interest rates low.

                        The Fed has planned to release the minutes of its July 29-30 meeting of the Federal Open Market Committee (FOMC) and the Bank of England (BOE) is publishing its minutes from August. U.S. sales of previously owned homes probably will increase to an eight month high in July, a report in the coming week may show.

                        Some previous conferences have foreshadowed some of the Fed’s biggest policy shifts since the financial crisis. In 2010 and 2012, the then Chairman Ben S. Bernanke signalled new bond buying that has pumped up the Fed’s balance sheet to a record USD 4.43 trillion.

                        Heading into this year’s Jackson Hole assembly, the labour market is giving off mixed signals even as unemployment falls. About 28% of all part-time workers in July reported that slack business conditions or a dearth of full-time jobs kept them from finding full-time work. That’s up from a 19% share at the start of the downturn.

                        The U.S. consumer-price index probably rose at the slowest pace in five months. Congressional primaries are taking place in Alaska and Wyoming. ECB President Mario Draghi had a plan to revive the European economy in the form of Targeted Longer-Term Refinancing Operations, or TLTROs. Launched in June this year, the program allowed lenders to apply for funds from the ECB at 10 basis points above the benchmark interest rate, which was cut to a record-low 0.15% in June.

                        The program was part of a wider package, including a negative deposit rate for the first time, aimed at returning inflation to just below 2%. This month, Draghi called the TLTRO program “very, very attractive” and will lead to a “significant expansion in credit.”

                        However, on the contrary the reality is singing to a different tune. Analysts this month estimated that banks will borrow 650 billion euros from the TLTROs. That’s down from 710 billion euros estimated in last month’s survey. In July, Draghi said that the maximum size of the program could be about 1 trillion euros. On 7th August, he said market estimates and indications by individual banks pointed to a take up of between 450 billion euros and 850 billion euros.

                        The reduction show concerns that the outlook for the currency bloc may be too weak to drive demand for loans. More than a quarter of respondents in a recent Bloomberg Survey said conditions will deteriorate in the next four weeks, compared to the 10% in July. Almost half identified inadequate structural reforms as the biggest risk, with 39% citing the Ukraine crisis.

                        The escalating standoff with Russia threatens to worsen the prospects for the 18-nation euro area, where growth has already ground to a halt and inflation is running at the weakest pace in almost five years. Data last week showed the euro-area recovery unexpectedly halted in the second quarter as the region’s three biggest economies failed to grow.

                        Germany’s gross domestic product (GDP) fell more than forecasted, France’s economy stagnated for a second straight quarter and Italy succumbed to its third recession since 2008.

                        Comment


                        • #42
                          Daily Market Report for 19 August 2014: Equities Gain Ahead of the Jackson Hole Meeting


                          Economic Insights

                          Global stocks started the week on a firm note amid easing concerns over the situation in Ukraine, while Yellen is expected to act dovish

                          There was good news regarding the US housing market on Monday, as the National Association of Home Builders’ sentiment index rose up to 55 in August from the previous 53, ahead of market expectations and the highest reading since December.

                          While there was some scepticism among analysts that the housing market has finally starting to pick up, the picture may only become clearer this week with the release of figures on housing starts and building permits, plus existing and new home sales. But it will be the health condition of the US labour market that takes centre stage on Friday when Mrs Yellen airs her views on the subject.

                          Global stocks started the week on a firm note amid easing concerns over the situation in Ukraine and a fresh bout of merger and acquisition activity in the US discount retail sector.

                          But the main focus for the markets were this week’s annual central bank conference in Jackson Hole, Wyoming, which will see Federal Reserve (Fed) chairwoman Janet Yellen speak on Friday about the US labour market. While risk sentiment has turned positive on the news that Ukraine and Russian foreign ministers had met in Berlin over the weekend seeking a solution to the crisis, in truth an agreement is unlikely to happen in the near term and the market is responding positively to the fact that there will be no further escalation unfolded over the weekend.

                          The Fed’s Jackson Hole symposium will clearly focus on the labour market though we are not expecting any new developments, with Mrs Yellen likely to restate her view that significant slack remains in the labour market. The S&P 500 equity index rose 0.8% to 1,971 overnight, leaving it less than 0.9% below its record closing high, while the Nasdaq Composite closed at a 14-year peak. The Chicago Board Options Exchange (CBOE) Vix index of implied equity volatility, a gauge of the cost of protecting equity portfolios, was down 5.6% at 12.41 in late trade, well off Friday’s intraday high of 14.94.

                          The Shanghai Composite index climbed up 0.6% to an eight-month high, even after data showed that new home prices fell in 64 out of 70 Chinese cities last month, while foreign direct investment in China dropped 17% from beginning of the year until July.

                          Australia’s central bank said the nation’s economic outlook remains uncertain because of the conflicting forces that are at play and reiterated that interest rates are set to remain on hold. Members “noted the significant uncertainties around the growth forecast and the importance of considering the risks to the forecast as well as the central projection,” the Reserve Bank of Australia (RBA) said in minutes released today, where it kept the cash rate unchanged at a record-low 2.5%. “Gross Domestic Products (GDP) growth was likely to have slowed to a more moderate pace in the June quarter.”

                          Governor Glenn Stevens, seeking to stoke the domestic demand to compensate for a slowdown in mining investment, has seen his efforts hampered by an elevated currency. Market pricing shows a higher chance of further policy easing after the nation’s unemployment rate jumped to a 12-year high in July. The RBA cut its growth and inflation forecasts and wage growth stagnated.

                          The central bank noted the local currency remained “well above” its level in late January even as commodity prices have weakened and rate differentials between Australia and most other advanced economies have narrowed down since then. The Australian dollar, which traded as high as about $1.11 and as low as 80 U.S. cents in the past five years, has remained above 90 cents since March.

                          Comment


                          • #43
                            Daily Market Report for 20 August 2014: Market Gush Higher Before Federal Open Market Committee (FOMC) Minutes & Jackson Hole Conference


                            Economic Insights

                            Janet Yellen’s speech this Friday at the annual Jackson Hole symposium is titled as Re-Evaluating Labour Market Dynamics

                            China’s property slump worsened in July as prices fell for the third straight month and developers had scaled back their investments, prompting economists to predict that there will be further financial defaults and a slowdown of economic growth in the second half of this year.

                            Home prices fell in 64 out of the 70 cities, the biggest monthly proportion of declines since records began in July 2005. On average, property prices fell down 0.9% between June and July, the sharpest tumble in three straight months of declines. As prices fell, real estate developers had pulled back from making new investments. Property investments rose 13.7% in the first seven months of the year, down from 14.1% in the first half. In terms of floor space sold in July, China suffered a 16.3% decline, down from a 0.2% drop in June.

                            Nevertheless, it is agreed that Beijing could yet come to the property market’s rescue later this year, potentially cutting mortgage lending rates and the proportion of deposits that commercial banks are required to hold to at the People’s Bank of China (PBOC), central bank.

                            In the U.S., Janet Yellen’s speech this Friday at the annual Jackson Hole symposium is titled, with understated simplicity and brevity – “Labour Markets”. The wider symposium is itself themed, “Re-Evaluating Labour Market Dynamics”, and it was expected. Even now, after more than a year of monetary policymakers and academics arguing about the amount of labour market slack and how much it should matter, most of the known unknowns in the debate remain, well, unknown.

                            In the labour market, conditions have improved further. The unemployment rate, at 6.3 %, is four-tenths lower than at the time of the March meeting, and the broader U-6 measure, which includes marginally attached workers and those working part time but preferring full-time work, has fallen by a similar amount. Even given these declines, however, unemployment remains elevated, and a broader assessment of indicators suggests that underutilization in the labour market remains significant.

                            Second quarter Gross Domestic Products (GDP) and the employment situation reports since then were strong. But the latest job reports actually revealed that there is an uptick in the unemployment rate, and we also learned that year-on-year inflation actually cooled down slightly in June, the most recent month for which the Personal Consumption Expenditures (PCE) price index has been released. It is obviously too early to say that whether the current trends will hold, but right now Yellen’s stance on labour market slack and her prediction that surprisingly high inflation readings earlier this year would turn out to be “noise” look prescient.

                            The mere point here is that the conditions now are roughly similar to that of what she said they were two months ago, the economic recovery continues to accelerate after a weather-driven blip in the first quarter. But labour markets have more slack in them than the unemployment rate would suggest, while inflation remains well below the Fed’s objective, and wage growth in particular is still quite low.

                            Comment


                            • #44
                              Daily Market Report for 21 August 2014: Aussie Slumped After China Manufacturing Data Missed the Estimates According to Federal Reserve (Fed) Minutes


                              Economic Insights

                              China manufacturing Purchasing Managers’ Index (PMI) fell, while the Fed could be able to raise the rates earlier than expected next year

                              HSBC flash China manufacturing gauge fell more than the analysts had estimated in August, after lending had a slowdown and property slump added to the risks that the world’s second-largest economy may miss its growth target this year.

                              The preliminary PMI Index was at 50.3, trailing all 22 as estimated in a Bloomberg News survey of economists that had a median of 51.5. The measure dropped from July’s 51.7 and was at a three-month low. Here are the five takes in our views of this report:-

                              Both input and output prices decreased, which signal less demand from domestic and external when less targeted stimulus was announced this month.
                              Yuan rallied 0.44% against the USD this month, and this is not favoring the “export-oriented” HSBC manufacturing PMI survey sample.
                              We expect the People’s Bank of China (PBOC) to bring the Yuan lower in near term after the activities fell, because a rising yuan contradicts to its current loosing monetary policy.
                              Officials will continue to keep monetary policy accommodative and prudent, with the recent Chinese economic data such as lending, property prices together with today’s PMI data threat the 3Q growth.
                              Weak fundamentals in China from the recent economic releases and a more than 3% iron ore price fall could continue to drag the Aussie lower, it could fall 0.6% from against the dollar next week.
                              Stocks in China fell today, Shanghai Composite Index fell down 0.6% in the morning session, and the Australian dollar extended its decline after the report, which follows a slump in credit expansion and slowing growth in investment spending in July. While the PBOC has signalled that it will maintain a “prudent” policy stance, any further deterioration this quarter may force a looser setting. The official PMI reading for August will only be released next week, and it is already set to have a weaker reading.

                              Overnight, dollar was driven higher by the Fed minutes. The improving labour markets are bringing Fed officials closer to a time when they can get back to bread-and-butter central banking, where there’s a tighter connection between changes in economic data and movements in short-term interest rates.

                              Some participants were increasingly uncomfortable with the committee’s forward guidance on keeping its benchmark rate low for a considerable time, according to the minutes published. Many participants said that they might have to raise the borrowing costs sooner than they had anticipated.

                              Fed Chair Janet Yellen will provide her take on the latest data on labour markets in a keynote speech tomorrow at the Fed’s annual symposium in Jackson Hole, Wyoming. Now, U.S. central bankers see enough progress in the job market that they can finally let go of their zero-rate policy sometime next year.

                              The jobless rate is still a percentage point higher than Fed officials’ estimate of full employment. The Federal Open Market Committee (FOMC) statement last month emphasized that there is still a “gap” between current labour market conditions and “normal levels of labour utilization”. There are also signs of progress shown. Non-farm payrolls have increased at an average monthly rate of 230,000 this year, compared with 162,000 in the 2004-2007 pre-recession periods.

                              Comment


                              • #45
                                Daily Market Report for 22 August 2014: A Guide to the Jackson Hole Day


                                Economic Insights

                                Janet Yellen is the key focus today, while it will be Mario Draghi tomorrow

                                The hawks were the first to be focused on at this moment and the moose wandering close to the Jackson Lake Lodge, where the symposium was held. It was those Federal Reserve (Fed) officials who were the most concerned by easy monetary policy and were making their views known as the annual event began with the opening dinner.

                                Kansas City Fed President Esther George is the conference host, and she is the most hawkish one. She said that the broad based employment gains suggest that the U.S. economy is strong enough to withstand any higher interest rates.

                                She recently said, “We have seen significant progress in the labor market over the last three years, and particularly this year. As we look at the healing we’ve seen in the economy and that progress, we’re in a good place to begin talking about normalization.”

                                Meanwhile, the Philadelphia Fed President Charles Plosser, who voted against the Fed’s policy statements last month, said that the centerpiece of policy and their relationship with the inflation isn’t strong. He said he’s concerned about the Fed not adjusting the policy appropriately.

                                Yellen has regularly cited weak labor markets as a scourge of the economy that she’s trying to boost with easy monetary policy. The conference’s theme is labor markets and Yellen’s speech will be the main event of the first full day of the conference.

                                European Central Bank (ECB) President Mario Draghi will deliver the keynote during luncheon speech tomorrow. Draghi said that this month’s policy makers have intensified the preparation to buy asset backed securities (ABS). In June, the bank had introduced targeted long-term refinancing operations (TLTRO) to improve bank lending in the non-financial private sector.

                                But one thing we need to notice is that the conference is lacking Wall Street participants for the first time ever.

                                It’s a clear “risk on” now with the rise in Standard & Poor’s 500 Index to a record rate. Meanwhile oil advanced with bonds, amid optimism that the Fed is committed to supporting a strengthening economy. Gold sank to a two-month low.

                                The S&P 500 added 0.3% overnight for a fourth day of gains, its longest streak since June. Data from housing to employment and manufacturing bolstered optimism that the growth in the world’s largest economy is accelerating a day after minutes from the Federal Reserve’s last meeting reinforced the central bank’s commitment to supporting the recovery. Chair Janet Yellen speaks on the labor market today as investors look for clues on the timing of higher interest rates.

                                Comment

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