A larger than expected majority of Scots (55.3%) voted to remain in the UK. Westminster has promised more powers for Scotland, which has lead to calls for further powers for Northern Ireland, Wales and, of course, England. The politics will get messy, but thats a game for next year.
The FED did not remove the “considerable time” phrase from its recent statement. However, interest rate projections were raised from that forecast in June. The QE programme is to end in October, though the FED will continue to reinvest the proceeds from maturing securities. Ms Yellen indicated that the FED was likely to reduce its balance sheet by the end of the decade. I continue to believe that there is a better than 50/50 possibility that the “considerable period” phrase will be removed next month. Whilst Ms Yellen was dovish, her charts (the dot plot) suggested a more hawkish policy, which resulted in the US$ strengthening materially, something I expect will continue, in particular against the Euro and the Yen.
Whilst the Yen has weakened materially, trading above 109 to the US$ for the 1st time since 2008, the Nikkei closed at its highest level since November 2007.
The Japanese cabinet office cut its assessment of growth for the 1st time in 5 months, citing weaker domestic consumption, which their statement suggested was continuing. Furthermore, exports were flat and industrial output weak, with the improvement in corporate profits slowing. The only positive was that the employment position was improving.
The PM, Mr Abe, wants a speedy reform of the world’s largest pension fund, the GPIF. The reforms will increase holdings in domestic equities and foreign securities (both equities and bonds), whilst reducing holdings of Japanese bonds. Furthermore, further fiscal and monetary stimulus is very likely, all Yen negative policies.
The particularly poor Chinese data released last weekend reinforces my fear that the Chinese economy is fundamentally weak and that it will decline materially unless supported by significant additional fiscal and monetary stimulus. The problem is that such stimulus just makes the situation worse, other than in the short term, which is the dilemma facing the Chinese leadership and the central bank, the PBoC. Unsurprisingly, on Tuesday, the PBoC provided additional monetary stimulus. They lent a massive Yuan 500bn to the 5 major banks. However, the facility is for 3 months only, which will provide a temporary respite and which suggests that it will have to be rolled over. At the end of the day, I suspect the authorities will blink and increase both monetary and fiscal stimulus in the next month or so, even though they are clearly reluctant to do so.
The Ukrainian government has granted more self-rule powers to the eastern areas of the country controlled by pro Russian separatists. Furthermore, it has granted amnesty to many of the separatists. Whilst Russia welcomed the move, the pro-Russian separatists are more demanding. In addition, a number of Ukrainians are opposed to the concessions.
US
The FED repeated that interest rates would remain low for a “considerable time” after the end of QE, though confirmed that their asset purchase programme would end next month. Whilst 2015/2016 growth, inflation and employment projections were relatively unchanged, they did raise interest rate projections for next year, with the end 2015 forecast up to +1.375% from +1.125% in June and rates at 2.875% at the end of 2016, as compared with 2.50% previously. They also included a 2017 forecast, with interest rates expected to increase to +3.75% at the end of that year. Ms Yellen confirmed that the FED would continue to reinvest proceeds from maturing securities, with no end date provided, though she stated that the FED expected its holdings of securities to fall to normal levels by the end of the decade. Unlike previously, she did not state that considerable time meant, in effect, a period of around 6 months and that FED policy would be data dependent. 2 member (Fisher and Plosser) dissented, in particular to the statement that the FED was not close to raising interest rates. She added that the main tool to tighten credit will be a rise in interest rates.
US August industrial production declined by -0.1% M/M (+4.1% Y/Y), well below the rise of +0.3% expected and July’s increase of +0.2%, which was revised lower from the +0.4% reported initially. It was the 1st decline since January. Capacity utilisation declined to 78.8%, down from 79.1% in July. Output of autos and motor parts declined by -7.6%, the largest fall since May 2009, most likely compensating for the material increase of +9.3% in July and the major reason for the overall decline.
US August producer price index (PPI) came in flat M/M as expected (+1.8% Y/Y) and as opposed to a rise of +0.1% in July. Core PPI (ex food and energy) was +0.1% higher as expected and lower than the +0.2% rise in July. The stronger US$ and slower international growth, combined with lower energy and other commodity costs, is keeping inflationary pressures contained.
US August CPI came in at -0.2% M/M (+1.7% Y/Y, as opposed to +1.9% expected), much lower than the unchanged level expected and the +0.1% rise (+2.0% Y/Y) in July. It was the 1st time that consumer prices have declined in more than 1 year. Lower energy prices were the main reason for the decline. Core inflation was unchanged at +1.7% Y/Y, lower than the +1.9% expected.
US household debt rose by +3.6% in Q2, the fastest rate since Q1 2008. Its surprising that consumption data is not better given the sharp increase in debt.
The NAHB homebuilder index rose to 59.0, much higher than the rise to 56.0 expected and August’s reading of 55.0. It was the highest reading since November 2005. Importantly, the component which represents the 6 month sales outlook rose to 67.0, the highest since August 2013.
Whilst the NAHB index was particularly positive, August housing starts came in much weaker than expected, falling by -14.4% to an annualised rate of 956k, mainly due to the volatile multifamily component. However, July’s data was revised higher to a 1.12mn annualised rate, the fastest since November 2007. Permits fell by -5.6% M/M to an annualised rate of 998k.
US weekly jobless claims came in at 280k (a 2 month low), lower than the forecast of 305k and the previous weeks 316k.
The September Philly FED report came in at 22.5, slightly lower than the 23.0 expected. The employment component rose materially to 21.2, up from August’s 9.1, the highest since May 2011.
Europe
The German ZEW economic sentiment index (the expectations component, which aims to predict economic developments 6 months ahead), fell to 6.9 in September from 8.6 in August, though above the forecast for a decline to 5.0. It has fallen every month since last December. The current situation component declined materially to 25.4, from 44.3 previously and well below the forecast of 40.0. However, ZEW reports that the economic situation in Germany is stabilising, though concerns remain relating to the Ukraine.
Eurozone (EZ) labour costs rose by +1.2% Y/Y, mainly due to a +1.7% increase in Germany. Italian labour costs were unchanged, whilst French labour costs rose by +0.9%.
Italian GDP is forecast to decline by -0.4% this year. The Italian business federation adds that debt to GDP will rise to 137%, with it continuing to increase. It is certain that the Italian government will not stick to its budget deficit targets.
Surprisingly, final EZ August CPI came in at +0.4% Y/Y, slightly higher than the +0.3% reported initially. With the decline of energy prices, it was expected that CPI would remain at +0.3%.
The French government just survived a vote of no confidence last Tuesday. However, the problems for the current administration are likely to continue.
The ECB’s announced that it allotted only E82.6bn in respect of its 1st TLTRO programme, well below the E150bn expected. Whilst disappointing, I believe that it is no surprise, as banks will wait for the results of the stress tests due out next month, before subscribing for TLTRO’s. A further TLTRO is due in December. Overall, I expect that the size of the TLTRO programme will exceed expectations as the funds from the ECB will be lent at just 15 bps on a fixed rate basis over 4 years. A number of analysts speculate that the ECB will be forced to introduce a QE programme involving the purchase of EZ government bonds, as the 1st TLTRO was not successful. I believe that it is unlikely this year, if at all.
UK inflation declined to +1.5% in August, in line with forecasts and down from +1.6% in July. It was the lowest reading in 5 years. Core inflation rose to +1.9%, from +1.8% previously. Factory input prices declined by -0.6% in August M/M and were down -7.2% Y/Y, more than the decline of -6.8% expected. It was the 10th consecutive monthly decline. Output prices declined by -0.1% M/M, down -0.3% on the year.
Minutes of the monetary policy committee of the BoE reveal that 7 out of the 9 members voted to keep rates unchanged, the same number of members as last time. They added that GDP growth may slow in Q4 (likely), with downside risks increasing as a deterioration of growth in the EZ posed the “most significant development”. However, they added that they were some signs of wage growth, whilst the stronger pound was keeping inflation under control. Generally a more dovish statement than expected, though I remain of the view that rates will rise in Q1 next year.
UK unemployment declined to a 6 year low of 6.2% in the 3 months to July, down from the rate of 6.4% and lower than the decline to 6.3% expected. Average weekly earnings for the 3 months to July rose by +0.6% Y/Y, higher than the rise of +0.5% expected and the revised decline of -0.1% for Q2, though the much higher gain was mainly due to the timing of bonus payments.
UK retail sales rose by +0.4% in August M/M (+3.9% Y/Y), the most in 4 months and in line with forecasts, though much better than the unchanged reading in July. It was the 17 consecutive month of increased sales. Prices however were -1.2% lower Y/Y, the largest decline since October 2011, mainly due to lower petrol prices, though food prices also declined as the supermarket “war” continues.
The UK’s Confederation of British Industries industrial trends orders index declined to -4, well below the reading of 9 expected and August’s 11. The exports orders component was particularly weak, coming in at -24.
The Irish economy grew by the most in 7 years in Q2. GDP rose by an annualised rate of +7.7%, the most since Q1 2007 and by +1.5% Q/Q. The finance minister announced that the government will not need to increase revenues by the E2bn previously forecast for next year and that the budget deficit would narrow to 4.0% this year, well below the target of 4.8%. The economy should grow by over +3.5% this year.
Japan
Japanese exports declined by -1.3% in August Y/Y, better than the forecast for a decline of -2.6%, though much lower than the +3.9% rise in July. Imports were -1.5% lower, mainly due to lower energy prices and more than the forecast decline of -1.2%. The trade deficit amounted to Yen 948.5 bn. The weaker Yen has not helped exports as was expected, with companies expanding their overseas operations instead, with investment surging to a record Yen 67 bn as at the end of June.
The BoJ reported that Japanese pension funds were net sellers of domestic bonds for the 4th consecutive Q to June. The funds have been buying domestic shares (Yen 393 bn in Q2 )and foreign securities (Yen 284.8bn), though the pace of purchases of foreign securities slowed from Yen 489.8bn in Q1.
China
Chinese August industrial output rose by just +6.9% Y/Y, down from +9.0% in July and below the forecast of +8.8%. It was the slowest rate of growth since the global crisis in 2008.
Retail sales rose by +11.9% Y/Y in August, slower than the rise of +12.2% in July and the forecast for a rise of +12.1%.
Fixed asset investment for the period between January to August rose by +16.5%, less than the forecast increase of +16.9% and below the rise of +17.0% in January to July.
Housing sales continue to decline. Housing sales declined by -10.9% in the 1st 8 months of the year, worse than the decline of -10.5% in the 7 months to July.
FDI declined by -14% Y/Y in August, having declined by -17% in July and is at a 4 year low. FDI has fallen by -1.8% Y/Y for the 8 months to August.
The above data suggests that the Chinese economy is slowing a lot faster than analysts have forecast.
The central government increased spending materially in H1 this year and, in addition, ordered the provinces to bring forward expenditure into the 1st half, even threatening to cut their quota next year unless they complied. However, spending for the rest of the year will decline materially unless the government increases fiscal stimulus, which it is reluctant to do. Indeed, central government spending rose by just +1.6% Y/Y in August, down from +11.7% in July. Local authority spending rose by +7.1% Y/Y in August, as opposed to +9.3% in July. The government obviously expected the increased spending in the 1st half of the year to help stimulate private sector growth, though this has not happened. Recently, Premier Li seemed to be backing off the government’s growth forecast of +7.5% for this year. To try and “fix” the problem, the government has clearly lent on the PBoC to provide assistance. The central bank has provided a Yuan 500bn lending facility to the major 5 banks, for a period of 3 months. In addition, it is likely that the PBoC will reduce rates, cut reserve requirement ratios for the banks and, generally, ease monetary policy further. However, the Yuan 500bn facility is a short term fix which, in my humble opinion, will not be enough and just highlights the deep concerns of the Chinese leadership. Indeed, unless the authorities ramp up government spending (which is producing lower and lower returns – I would argue negative returns), growth will decline, in my opinion materially. However, additional spending, most likely on fixed assets (which is already far too high), will just compound China’s problem’s, other than in the short term.
Chinese new home prices declined in 68 out of 70 cities in August M/M, the most since January 2011, despite a number of provinces (37 out of 47) having removed or reduced previous restrictions. Prices fell in 19 cities Y/Y, with developers offering significant discounts. Home prices are expected to decline further in coming months.
Other
The OECD downgraded its May 2014 GDP growth forecasts. The EZ was reduced to +0.8%, from +1.2% previously, with the US down to +2.1%, from +2.6%. Germany was reduced to +1.5%, from +1.9%, the UK marginally lower at +3.1%, from +3.2% previously and Japan down to +0.9%, from +1.2%. The forecast for France was more than halved to just +0.4%, from +0.9% previously, with China remaining the same at +7.4%. The OECD has urged the ECB to introduce QE to avoid deflation.
Saudi Arabia announced that it had cut oil production by 408k bpd in August (the largest cut since 2012) in an attempt to stabilise prices. Analysts believe that the cut will not be enough and that a further cut of a similar amount will be necessary to stop prices falling further. The EIA states that global demand growth for oil is at its lowest since 2011, whilst production by non OPEC countries has risen to the highest since the 1980’s. The OPEC secretary general warned that its members may cut its crude oil production targets next year. However, a number of countries do not stick to their production quotas, as they need to generate revenues.
Whilst FDI into China is decreasing, it has risen into India. FDI more than doubled in July to +US$3.5bn Y/Y. Whilst still relatively low, this trend should continue.
The IMF warns that the global recovery is on a precarious footing due to expected tighter US monetary policy and heightened geopolitical tensions. The IMF, as was the case with the OECD (see above), is likely to reduce their GDP forecasts in October. Whilst they forecast that growth in the USA and the UK should continue to rebound, the outlook for the EZ and Japan was less positive.
Finance ministers of the G20 countries are meeting this weekend. The ministers are to consider ways to increase global growth, which has been slipping in recent months. I suspect little will be achieved.
Kiron Sarkar
20th September 2014
