Reuters blog archive
from Global Investing:
Many emerging economies have been banking on weaker currencies to revitalise economic growth. Oil's 25 percent fall in dollar terms this year should also help. The problem however is the dollar's strength which is leading to a general tightening of monetary conditions worldwide, more so in countries where central banks are intervening to prevent their currencies from falling too much.
Michael Howell, managing director of the CrossBorder Capital consultancy estimates the negative effect of the stronger dollar on global liquidity (in simple terms, the amount of capital available for investment and spending) outweighs the positives from falling oil prices by a ratio of 10 to 1. Not only does it raise funding costs for non-U.S. banks and companies, it also usually forces other central banks to keep monetary policy tight, especially in countries with high inflation or external debt levels. Howell says:
If you get a strong dollar and intervention by EM cbanks what it means is monetary tightening...The big decision is: do they allow currencies to devalue or do they defend them? But when they use reserves to protect their currencies, there is an implicit policy tightening.
The tightening happens because central bank dollar sales tend to suck out supply of the local currency from markets, tightening liquidity. That effectively drives up the cost of money, as banks and companies scramble for cash to meet their daily commitments. Central banks can of course offset interventions via so-called sterilisations - for instance when they buy dollars to curb their currencies' strength, they can issue bonds to suck up the excess cash from the market. To ease the tight money supply problem they can in theory print more cash to supply banks. But while many emerging central banks did sterilise interventions in the post-crisis years when their currencies were appreciating, they are less likely to do so when they are trying to stem depreciation, says UBS strategist Manik Narain. So what is happening is that (according to Narain):
Brazil's unemployment rate has been a mystery for months: a strike in the country's statistics agency, ironically enough, disrupted its main job market survey. The numbers will finally come out in a few hours, less than two weeks before a tight presidential election, and will help voters understand just how bad the recently-confirmed recession has been.
IBGE’s August unemployment report is important not only because it can tilt Brazil's election balance in favor of current President Dilma Rousseff or her opponent Marina Silva, but also because it will determine the starting point of the labor market for a much-anticipated adjustment in Brazil’s economic policy. Some kind of shift is expected after the October election regardless of who wins, to keep debt under control and avoid losing the investment grade in coming years.
A glut of euro zone GDP data is landing confirming a markedly poor second quarter for the currency area.
The mighty German economy has shrunk by 0.2 percent on the quarter, undercutting the Bundesbank’s forecast of stagnation. Foreign trade and investment were notable weak spots and the signs are they may not improve soon.
It's a familiar narrative: companies will finally start investing the trillions of dollars of cash they're sitting on, unleashing a capital expenditure boom that will drive the global economy and lift stock markets this year.
The problem is, it looks like an increasingly flawed narrative.
For a start, capital expenditure, or "capex", has already been rising for years. True, the Great Recession ensured it took three years to regain its 2007 peak. But the notion companies are just sitting idly on their mounting cash piles is misplaced. As Citi's equity strategists point out:.
from The Great Debate UK:
--Cathy Corrie is a researcher at the independent think tank Reform. The opinions expressed are her own.-- Today’s budget was a good news story. There is now no major advanced economy growing faster than the UK. Yet underneath the chancellor’s celebration, the end of austerity is nowhere in sight. With national debt heading inexorably up to over 75% of GDP, in the words of the chancellor: “The job is far from done.”The chancellor today made reference to two strategies to secure the public finances for the long term; the first, an Annual Managed Expenditure (AME) cap to limit welfare spending, and the second, a new Charter for Budget Responsibility, to be announced in full this autumn. Through these new measures Osborne has pledged to “fix the roof when the sun is shining to protect against future storms”, by returning to absolute surplus in the years of growth. The goal is to allow the UK to enter recessions from a position of financial strength, not on the back foot.Yet while the chancellor should be applauded for keeping fiscal discipline at the top of the agenda, history shows he faces a daunting challenge to deliver on his promise. For twenty years, governments have allowed debt to build by consistently spending more in recessions than they save in periods of growth. Debt has been left £124 billion higher as a result. It’s worth noting that 22 out of the last 26 forecasts have promised a return to surplus. No government since 2002 has thus far delivered.
Spanish third quarter GDP figures tomorrow are likely to confirm the Bank of Spain’s prediction that the euro zone’s fourth largest economy has finally put nine quarters of contraction behind it, albeit with growth of just 0.1 percent.
Today, we get some appetizers that show just how far an economy with unemployment in excess of 25 percent has to go. Spanish retail sales, just out, have fallen every month for 39 months after posting a 2.2 percent year-on-year fall in September, showing domestic demand remains deeply depressed. All the progress so far has come on the export side of the balance sheet.
Spain heads the rest of the euro zone pack with second quarter GDP figures at a time when we’re seeing glimmers of hope, with surveys suggesting the currency area could resume growth in the third quarter.
The Bank of Spain has forecast a 0.1 percent drop in GDP from the previous three months. It is usually close to the truth which supports the government’s claim that the economy is close to emerging from recession.
The surprising weakness in June housing starts is probably only temporary, according to Morgan Stanley economist Ted Wieseman, but the softness in June nonetheless prompted him to cut Morgan Stanley's Q2 GDP estimate to 0.3 percent from 0.4 percent.
After a 9.4 percent pullback from the February cycle high, single-family starts are now running far below the pace of new home sales. Unless sales roll over -- which was certainly not the message from the surging homebuilders' survey -- supply of unsold new homes will fall to record lows in coming months, likely spurring a sharp renewed pickup in new home construction.
It looks like a week short of blockbusters, particularly today with much of Europe on holiday. But there will be plenty to chew over over the next few days on the state of the euro zone and whether newly-printed central bank money lapping round the world risks throwing things off kilter.
Flash PMIs for the euro zone, Germany and France for May, plus the German Ifo index, follow first quarter GDP data which showed Europe’s largest economy just about eked out some growth but nobody else in the currency bloc did. That trend is likely to be reaffirmed with the harsh winter, having curbed German activity in Q1, allowing for a rebound in sectors like construction in Q2. France and the rest of the pack are unlikely to be so lucky.
from Global Investing:
So, it's May and time for the annual if temporary equity market selloff, right? Well, maybe - but only maybe. A fresh weakening of the global economic pulse would certainly suggest so, but central banks have shown again they are not going to throw in the towel in the battle to reflate. The ECB's interest rate cut today and last night's insistence from the Fed that it's as likely to step up money printing this year as wind it down are two cases in point. And we're still awaiting the private investment flows from Japan following the BOJ's latest aggressive easing there.
So where does that all leave us? A third of the way through 2013 and it’s been a good year so far for nearly all bulls – both western equity bulls and increasingly bond bulls too! Not only have developed world equities clocked up some 13 percent year-to-date (the S&P500 set yet another record high this week while Europe's bluechips recorded a staggering 12th consecutive monthly gain in April) , but virtually all bond markets from junk bonds to Treasuries, euro peripherals to emerging markets are now back in the black for the year as a whole. For the most eyebrow-raising evidence, look no further than last week’s debut sovereign bond from Rwanda at less than 7 percent for 10 years or even newly-junked Slovenia’s ability this week to plough ahead with a syndicated bond sale reported to already be in the region of four times oversubscribed. For many people, that parallel rise in equity and bonds smells of a bubble somewhere. But before you cry “QEEEEE!” , take a look at commodities -- the bulls there have been taken a bath all year as data on final global demand hits yet another ‘soft patch’ over the past couple of months.