MacroScope

from Global Investing:

Show us the (Japanese) money

Where is the Japanese money? Mostly it has been heading back to home shores as we wrote here yesterday.

The assumption was that the Bank of Japan's huge money-printing campaign would push Japanese retail and institutional investors out in search of yield.  Emerging markets were expected to capture at least part of a potentially huge outflow from Japan and also benefit from rising allocations from other international funds as a result.  But almost a month after the BOJ announced its plans, the cash has not yet arrived.

EM investors, who seem to have been banking the most on the arrival of Japanese cash, may be forgiven for feeling a tad nervous. Data from EPFR Global shows no notable pick-up in flows to EM bond funds while cash continues to flee EM equities ($2 billion left last week).

But first, some good news. Retail investors are demonstrating some interest in emerging assets. Barclays says launches of toshin or investment trusts last week garnered $2 billion in subscriptions, with a Pacific Rim equities fund, partly geared to Asia, receiving $1.2 billion.  The previous week saw a $500 million ASEAN fund while an emerging equities toshin started in March took in $1.6 billion. There has also been net new uridashi bond issuance in the Mexican, Brazilian, Turkish and Russian currencies over the past few weeks, Barclays data shows.

The bad news is that Japanese  funds and insurers -- and that's where the big money is -- have steered clear of emerging markets, and indeed foreign assets so far.   Barclays writes that could be bad news for markets such as Hungary and South Africa, which have poor fundamentals and have benefited from talk of Japanese cash:

Not again, please! Brazil and India more vulnerable now to another crisis

After bad economic news from Germany, China and the United States over the past few weeks, here are two more. Brazil and India, two of the world’s largest emerging economies, are increasingly vulnerable to another crisis or to the eventual end of the ultra-loose monetary policies in developed economies after five years of a severe global slowdown.

Weak demand for Brazil’s exports and the voracious appetite of local consumers for imported goods widened the country’s current account deficit to 2.93 percent of GDP in the 12 months through March, the widest gap in nearly eleven years. In dollar terms, that amounts to $67 billion.

To help fund this gap, Brazil could at first loosen the currency controls adopted in the past few years and let more dollars in. But if the dollar flows change too swiftly, Brazil would find itself with three other options: curb spending by growing less, allow a decline in the foreign exchange rate at the risk of fueling inflation, or burn part of its international reserves – which are large, at $377 billion, but not infinite.

Investors call for interest rate hike in Brazil

Two analyses published this week highlight how alarmed investors are about inflation in Brazil.

In the first, published on Wednesday following a poll on global stock markets, equity investors say an interest rate hike wouldn’t be a bad idea – a paradox, since stocks usually drop when borrowing costs rise. Are they keen to move to bonds? Not really; their argument is that an interest rate hike could assuage inflation fears after eight consecutive months of above-forecast price rises. A rate hike could also reduce concerns of economic mismanagement after several government attempts to intervene in key sectors such as banking and power generation.

The central bank signalled it could act later this year, but would rather wait because the recent inflation surge could be just temporary. Bond investors disagree, according to a separate analysis published today. In their view, inflation will remain above the 4.5 percent target mid-point through at least 2018, raising uncertainty about long-term investments needed to bridge the gap between Brazil’s booming demand and its clogged roads and ports.

Quickening Brazil inflation tops forecasts for 8 straight months

Brazil inflation jumped above expectations in February, despite a steep cut in electricity rates. It was not the first time, though; inflation has been running higher than consensus forecasts since July, considering the market view one month before the data release:

 

 

The total gap between market consensus and the actual inflation figures amounts to 1.19 percentage point – about one quarter of the inflation rate reported. Reuters polls conducted a few days before the official numbers come out have also proved wrong since July, with a total error of 0.37 point.

Why is that? Part of the difference was due to an unexpected jump in food inflation. But another part has to do with the mix of strong demand and weak supply that has dragged down the Brazilian economy over the past two years.

Self-inflicted ‘sudden stop’? Brazil blocked by its own currency war trench

In times of currency wars, it’s best not to shoot yourself in the foot. By imposing several capital controls in the past years, Brazil might have tightened monetary policy right when the economy started to falter, Nomura’s strategist Tony Volpon wrote in a research note on Friday.

Brazil’s mediocre economic growth in the past two years has been a mystery, indeed. Some say it has been due to the global slowdown – which contrasts with steady growth elsewhere in Latin America. Many others blame Brazil’s several supply bottlenecks. But then, why don’t businesses see them as an investment opportunity?

The missing link, Volpon argues, has been the imposition of capital controls. Inflows dropped suddenly, reducing the supply of cheap foreign money available for banks and companies. So, even though the central bank cut local interest rates ten straight times to a record low of 7.25 percent, money supply growth has actually slowed since January 2012.

Brazil: Something’s got to give

How about living in a fast-growing economy with tame inflation, record-low interest rates, stable exchange rate and shrinking public debt. Sounds like paradise, doesn’t it? But Brazil may be starting to realize that this is also impossible.

Inflation hit the highest monthly reading in nearly eight years in January, rising 0.86 percent from December. It also came close to the top-end of the official target, accelerating to a rise of 6.15 percent in the 12 months through January.

That conflicts with key pillars of Brazil’s want-it-all economic policy. The central bank cut interest rates ten straight times through October 2012 to a record-low of 7.25 percent, saying Brazil no longer needed one of the world’s highest borrowing costs. The government also forced a currency depreciation of around 20 percent last year, aiming at boosting exports and stopping a flurry of cheap imports.

Brazilian industrial rebound: wishful thinking?

2012 has been a year to forget for Brazil’s struggling industry – just like the year before. But a weekly central bank survey of around 90 financial institutions says that will all change next year and industry will grow at healthy 4 percent pace.

Will it?  One year ago, the same survey predicted 4.1 percent growth for 2012. Despite massive stimulus by President Dilma Rousseff’s government, including record-low interest rates and billions of dollars in tax cuts that were off everyone’s radar, industrial output in Latin America’s largest economy is set to fall by 2.3 percent.

The same pattern happened the year before. Two months before the start of 2011, analysts expected an expansion of 5.3 percent in Brazil’s industrial output but in the end it grew by only 0.3 percent.

Has the Brazilian FX market lost its swing?

Tiago Pariz in Brasilia also contributed to this post.

Brazil’s Trade Minister Fernando Pimentel was the latest authority this week to fire warning shots in a resurging currency war. The government is “focused” on keeping the real at its current level of 2 per U.S. dollar, he told journalists after a meeting with fellow ministers and businessmen.

Using market rules, we are going to try to keep (foreign exchange) rates steady every time the currency is under attack.

These words came days after Finance Minister Guido Mantega admitted Brazil now has a “dirty-floating” regime. “We cannot continue watching as others take ownership of our market and bring down our industry,” he told a local newspaper.

When interest rates rise, credit growth should… accelerate?

Latin America has defied one of the most elementary rules of macroeconomics in the past decade, Citigroup economists Joaquin Cottani and Camilo Gonzalez found in a report.

Lower interest rates reduce the cost of money and therefore should encourage businesses and consumers to borrow, as we’ve repeatedly heard from analysts and government officials for decades. Puzzlingly enough, credit growth accelerated after central banks in countries like Brazil and Peru raised rates, and slowed when borrowing costs fell. Why is that?

The keyword here is confidence. In this commodity-exporter region, with a long history of deep, painful crises caused by currency devaluations and global downturns, perhaps it’s worth paying more attention to what happens abroad than to the cost of money – and how the global background might affect the local business cycle.

Latin America: the risks of being too attractive

Ironically, an increase of capital inflows to Latin America in the last few years due to unappealing ultralow yields in industrialized countries and the region’s relative economic success is posing a threat for development, according to a recent paper that provides wider background to BRIC criticism of the latest U.S. Federal Reserve´s quantitative easing.

The article, written by Argentine economists Roberto Frenkel and Martin Rapetti for the World Economic Review – an international journal of heterodox economics –  warns about the possibility of a Latin American variant of the so-called “Dutch Disease”. This is a situation where a country suddenly finds a new source of wealth that makes its currency more expensive, hurting local exports and causing traumatic de-industrialization.

“Our concern is that massive capital inflows to Latin America may have pernicious effects via an excessive appreciation of the real exchange rates, which could lead to a contraction in output and employment in tradable activities with negative effects on long-run growth”, says the paper.