Tickmill Daily Market Notes

Discussion in 'Fundamental Analysis' started by Tickmill-News, Aug 3, 2018.

  1. Tickmill-News

    Tickmill-News Trader

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    Fed-fueled rally fades as markets concentrate on Trump-Xi meeting


    In continuation of my Thursday discussion about the stock market rally, volatility responded curiously to Powell’s speech on Wednesday. Usually, the VIX and S&P 500 move just the opposite (although with different amplitudes), but on Wednesday there was a moment when the 9-day expected volatility (VXST) rose despite the 2% gains of S&P 500 which is very unusual.

    [​IMG]
    Usually, the VIX and the S&P 500 move in different directions, since, roughly speaking, panic and the accompanying increase in volatility is inherent in a rather bear market (“market goes up by stairs and down by elevator”). Interestingly, this movement has not been observed on the market since 2011.

    The dots on the chart indicate the daily changes in VXST (9-day volatility), in those days when the S&P 500 grew by more than 2% per day. On average, VXST fell by -17%.


    One of the possible explanations for what happened is that some market participants did not buy at the rally initiated by Powell, as they are waiting for the results of the Trump-Xi meeting, which I wrote about yesterday.


    Despite the increase in fiscal and monetary support in recent months, the activity of the manufacturing sector in China fell to 2016 low and is on the verge of contraction. The main indicator was 50 points in November – the value of separating recovery and recession.


    The service sector in China is also not yet able to take on the burden of growth – activity in it slowed to 53.4 points in November against expectations of 53.8 points.


    The weakness of debt-addicted economy cannot be eradicated even after a fresh stimulus package- income tax cuts, credit support for financial organizations in order to pour this money into enterprises through stocks and bonds. The size and position in China in the global economy will guarantee the recession echoes will feed into the PMI data of other countries, primarily in the EU and the US. Their PMI gauges is expected to be released next week.


    The minutes of the Fed meeting, which appeared yesterday, could seem irrelevant knowledge to the markets in the light of Powell’s communication on Wednesday, but the statement language convinces that concerns about growth in 2019 has been already gaining momentum at the beginning of this month.


    First, the officials urged to be more attentive to the incoming economic data. They said that in the upcoming meetings, in the content of the statement and the wording, it may be appropriate to place more emphasis on economic data in economic assessments and policy forecasts.


    That old and well-known “data dependence” narrative which pervaded Yellen’s comments and which Draghi cannot yet get rid of. This is the exact caution motive which may serve as fundamental ground for expectations of only one rate increase next year (in fact, to the lower limit of the neutral rate estimates by the Fed).


    Secondly, after a series of previous statements about strong, robust growth, first signs of Fed concerns about the economy were concentrated around slowdown in “some rate-sensitive sectors” in the November statement. Most likely this is the real estate market and possibly the construction sector related to it, the data for which were absolutely not impressive this year. Since March 2016, the 30-year mortgage rate has risen from 3.6 to 5.2%.


    Stock markets reacted slightly, the dollar changed was flat. Futures on the interest rate point to the same probability of a rate increase in December, while we are waiting for the results of the Trump-Xi meeting.


    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  2. Tickmill-News

    Tickmill-News Trader

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    Huawei – the new bone of contention between China and US


    Despite the catchy headlines of the reports covering the OPEC meeting, the oil market preferred to read between the lines, making frowning conclusion from the statements: the cartel members could not move further from the mere awareness that the threat of oversupply exists.

    The meeting of Saudi Arabia, other members of the cartel and Russia ultimately produced only a recommendation to curb production, without a formal agreement on how much oil should leave the market.

    Representatives of the OPEC countries hit the wires with comments on Wednesday on how important it is to cut production now, and the Russian representative confirmed that the meeting was constructive, but the result will be announced at a meeting in Vienna today. As a result, relying on positive rhetoric, oil prices may spend the day in positive territory, waiting for fruitful decisions.

    Most likely the participants will agree on the extension of the existing production quotas. But some of the Russian producers have already expressed doubts about the possibility of cutting production due to seasonal difficulties, for example, Lukoil.

    After the statements from Oman delegates that decline in production could be as low as 1 million barrels, prices fell. This may indicate that the market expects more serious concessions from OPEC.

    The growth of commercial inventories in the United States so far effectively prevents the growth of positive sentiment in the oil market, which, moreover, is gradually accepting the hypothesis of a global slowdown in demand. In such conditions, output cut is an obvious necessity for OPEC, but the whole question is how much the members of the cartel are willing to sacrifice in order not to infringe upon their national economic interests.

    Yesterday there were reports that Huawei CFO was detained in Canada on request of the US. The part of the market that has relied on the rapprochement of China and the United States after the meeting in Argentina is likely to start correcting its wrong hopes, this can now be seen from the fall of US stock futures. SPX, with ease, punctured the 2,700 mark down, Wall Street is likely to hold in sales today.

    A top manager of a Chinese company is awaiting extradition to the US after being detained on the first of December, that is, before Trump and Xi meeting. Most likely, the reason for the arrest was the involvement in the sale of HP equipment, to the sanctioned Iran. It is unlikely that Trump did not know about this and did not authorize the detention, so he won’t be able to portray a surprise. And if he knew, the reaction of the markets was easy to predict, the fragile expectations due to the uncertainty with the tariffs only increases the amplitude of the negative reaction. The costs of creating additional tensions with China are high, so the reason is serious, and the dust will not be settled down quickly. The short trade of the S&P 500 now looks like an easy bet as the truce in a trade war can easily be broken.

    The Fed released the Beige Book on Wednesday with pretty rich content for even polar interpretations. On the one hand, the number of references to the word “tariffs” decreased from a peak of 51 to 39 in December, on the other hand, the number of references to the word “slow” rose to the highest level in 2018. The frequency approach to analyzing the content of the Beige Book is justified by the fact that the Fed gathers anecdotal feedback of company managers, economists, market experts from different US districts about economy situation in the country. The citation of some actual words allows us to assess the general mood of the respondents.
    [​IMG]

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  3. Tickmill-News

    Tickmill-News Trader

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    A short guide: How to use data on the T-bills to estimate future Fed rate hikes?
    Amid growing jittery that the Fed made a mistake picking up the quarterly pace of rate hikes and reluctantly admits its flaw, the US term structure of interest rates earns back the status of a “reliable predictor” of a looming slowdown. Recently, I wrote about how the spread between 10-year and two-year bonds portrayed extreme distrust of the Fed’s policy in the medium term, but today I would like to speculate about the even shorter timeframe of the Fed’s actions.

    With the December meeting approaching and keeping in mind the quarterly pace of rate increases by the Fed, it is curious to see how the yield of 1-month and 3-month Treasury bonds behave together. If we assume that inflationary expectations in the short-term interval are roughly equal (i.e. only Fed decisions affect their yield then), comparing their yields, we can put forward a guess what the bond market thinks about the Fed meeting in March, which corresponds to the supposed quarterly increase in the rate.

    The last auction of 3-month bonds in the amount of 39 billion was held this Monday, while the auction for the 1-month ones was held on Thursday. It is noteworthy that the yield to maturity of both terms was about the same.
    [​IMG]
    Since the market is highly likely to expect a rate hike in December, convergence in yields of 1-month bonds with 3-month (which YTM basically focuses on the March decision) means that the expectations for a rate increase in March gradually leave the market. After all, if the opposite were true, the demand for three-month bonds would have to fall, which would be expressed in the increase in YTM (yield-to-maturity).

    Of course, you may not bother with the details of yield movements and just look at the probability distribution of futures on the rate hike.
    [​IMG]
    The chances of a rate increase in March to the level of 250-275 dropped to 33%, although only a month ago the probability of the increase was 50%.

    And certainly, what will not leave the Fed indifferent is the inflation expectations (albeit measured through inflation-linked bonds), which did not last long at the desired level of 2% and began to dive.
    [​IMG]
    The latest data shows that inflation expectations, measured “through the consumer” (for example, from W. Michigan), also slightly slowed down. The problem is that they are more likely to be lagging (considering that the consumer is less aware of the trend in economy) than the leading inflation expectations measured through the demand for bonds. On the other hand, we can’t rule out that the market reaction to what is happening in the economy can be irrational (for example, to the effects of tariffs), which then spreads to other agents (firms, consumers), and positive loop feedback only enhances the effect. The Fed is now trying to stabilize expectations and particularly illustrative for this are the comments of the President of the Federal Reserve Bank John Williams, who said recently that the Central Bank cannot react to every whim of the markets.

    In general, the following situation arises: the market prices in one incomplete rate increase in 2019 and the beginning of a new easing program (QE4) in 2020. Then the Fed will have to begin to soften credit conditions in the economy, as expectations of a new wave of recession rise due to fading fiscal impulse, the effects of trade tensions and a seemingly deadlock state in the oil market.

    In the short-run, hopes to remain for wage growth, data on which will be released today. The monthly wage change is expected to be at the level of 0.3%, the number of jobs – 198K, unemployment – at the level of 3.7%.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  4. Tickmill-News

    Tickmill-News Trader

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    November US CPI may follow lackluster wages, Fed to call off March rate hike

    The Asian and European markets rose on Wednesday thanks to positive comments from the US president regarding the trade deal, freeing Huawei top manager Meng on bail. The major source of gloom remains the risk of ousting British Prime Minister May, what threatens to thwart Brexit plans.

    In an interview with Reuters, Trump said that the US government is conducting trade negotiations with China over the phone, and the new tariffs will not be introduced until certain results on the deal appear.

    Trump decided to intervene in the Huawei case, under with the provision that non-intervention poses a threat to national security. This moment has yet to be clarified, but even now it allows the markets to downplay the risk of an escalation of the conflict with China.

    A Canadian court decided to release Meng on bail, although, according to tentative information, he refused to do so, given severity of the charges and difficulty of determining the correct amount of bail. Keeping Meng in custody forced the markets to include the consequences of China’s “stern response” in the asset prices, but now it allows them to count on positive developments, in particular, on the trade deal.

    The news background has improved enough to allow global markets to start trading on Wednesday with a correction, after a weak start at the beginning of the week. The MSCI broad Asia-Pacific index added 1.2% on Wednesday, while the positive attitude was clearly visible on the Chinese stock market.

    China has already shown the will to cooperate, considering the reduction of tariffs on car imports from 40 to 15%. On the other hand, it can hardly be called a serious concession, given that the authorities are trying to boost consumer demand in the context of weakening the main driver of growth – production.

    Negative expectations regarding the trade deal are fueled by news that several state agencies in the US are going to publish a report on China’s wrongdoings in commercial espionage and hacking. On the other hand, the government already has this information, so without specific consequences (for example, sanctions or indictments) the publication of evidence is unlikely to lead to an escalation of the conflict.

    In the foreign exchange market, the pound sterling is down to the lowest level for 20 months against the dollar amid speculation that the conservative party may put forward a vote of no confidence in May. The likelihood of such an outcome increased after May moved the vote on Brexit, fearing its failure. In the event that May loses her seat, a supporter of hard Brexit will probably come to power, who may even initiate a second referendum. The pound is significantly oversold and barely holds above 1.25 on negative expectations, so any news about the trade-off will allow the British currency to materially strengthen.

    Consumer inflation data for November are due later today. There is a significant risk of a negative surprise, considering that the data on wage for the past month did not meet expectations. Wage growth increased by 0.2% in November against the forecast of 0.3%. The early weakening of pressure in prices will strengthen speculation that the Fed will postpone rate hikes in 2019. The chances for the March rate hike are low, currently staying nearly 26%.

    Oil prices rose after the API data pointed to a significant (-10M) decline in US commercial reserves, suggesting that a sharp decline in prices forced producers to slow down production pace. WTI rose cautiously on Wednesday by half a percent.
    [​IMG]
     
  5. Tickmill-News

    Tickmill-News Trader

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    BoE is likely to keep defense in the absence of political certainty

    Non-farm payrolls released on Friday created a mixed impression about the state of the US labor market: demand for labor force grew significantly, which led to an increase in the number of new job openings by 304K in January (the biggest jump in almost a year), while the number of layoffs increased too, especially temporary, which left their footprints in the trend of jobless rate. The number of unemployed for the period surveyed increased to 6.5 million in January, or 4.0%.

    In part, the unemployment was affected by the shutdown of federal government. Civil servants who were sent on unpaid leave at the time of the survey were temporarily out of work, but were included in the number of employed persons, because, albeit with a delay, they will receive a salary for the days of government holidays. It’s a bit more complicated with federal contractors, with whom the government has no hard-binding obligations: employees of the firm-contractors who lost their job were counted as unemployed. In general, the government shutdown as a factor affecting employment was worthy of mention in the BLS report. Therefore, with the government back into work we can observer positive impulse in employment in February.

    Wages grew by only 0.1%, which is far from the market’s expectations and the Fed (0.3%), so the Fed’s balance of expectations may start to shift towards caution. However, only persistence of weakness in wages will be able to verify the assumption; accordingly, the pressure on the dollar after the data was very transient.

    Meanwhile, the dollar has completely reverted the drop after the Fed statement in January:


    [​IMG]

    The probability that the Fed will leave interest rate in the current range of 225-250 this year fell from 97% to 91% on Tuesday. Talking about reassessment may be still premature, but realization of this outcome could be very rewarding. You can read more about this here or here.

    Consumer spending in the UK went on the mend in January after a season of modest spending in November and December. The rise in savings rate may be also promoted by the uncertainty associated with Brexit.

    According to KPMG, retail sales increased by 2.2% last month, after lackluster December, the weakest for 10 years. Barclaycard figures also showed that card spending rose by 2.9%. According to the company report, buyers made holiday purchases in advance in November to take advantage of discounts. Sacrificing Christmas traditions to the desire of saving by conservative Britons speaks either of a drop in the income or greater risk aversion associated with leaving Britain from the EU. The second option is more likely, since the incomes of the British are growing at a pace higher than inflation:

    [​IMG]
    In January, discounts continued to stimulate sales, but it is unclear whether the momentum will last without price support. The Barclaycard report showed that consumers are worried about rising prices and the purchasing power of money, so they changed their consumption profile so that it now characterizes the financial stress of the British. In particular, expenses in supermarkets have increased at the highest rates since April 2017, when there was a peak of the negative mood associated with Brexit.

    The pound is defending the level of 1.30 while being caught in bearish trend for about a week. The local highest point was reached on January 27 at 1.32, the rally was ensured by the news indicating support and strengthening of May’s control over the government. There is only about two months left until the UK’s deadline for leaving the EU, and it is clear that the pressure on the pound will grow due to the lack of news indicating progress. A potential surprise that will allow the pound to advance will be the postponement of the Brexit deadline. In the short term, GBPUSD short position looks reasonable, after retracement from 1.30. The soft comments of Bank of England boss Mark Carney this week increase the likelihood of such a scenario, as the Bank is likely to make a classic move, preferring to take a defensive stance in the absence of political certainty.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  6. Tickmill-News

    Tickmill-News Trader

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    Swiss franc flash crash – PBOC fills banks with liquidity

    A month later, after various spikes ranging from tens to thousands pips in pairs with the yen, lira and sterling (and this happens on the most liquid foreign exchange market!), swiss franc joined the party on Monday. A collapse of the franc against dollar, yen and euro “surprisingly” coincided with the highly illiquid Asian session, and the day when Japan is closed for holidays. Dealers did not fail to take advantage of the opportunity to hunt for stop loss of the large bulls of the franc. They did succeed in this which, in fact, intensified the crash of franc:
    [​IMG]

    As a result of the “raid on the franc buyers camp”, USDCHF jumped from 0.9% to 1.0096, but after having completely eliminated the effects of the movement, having gone below 1.000. CHFJPY was losing less, about 0.4%, EURCHF also reached 1.14081 for a very short period of time, before returning to the previous equilibrium range.

    The recovery of the franc to the pre-crash trading range hints that the drop was not driven by some shift in fundamentals, i.e. it was not preceded by the release of any important news or events.

    Asian markets started the week at minor loss, as in the last week they didn’t get favorable updates on the course of negotiations between the US and China. Trump tied market expectations to his own will, saying last week that only a personal meeting with Chinese leader Xi would be able to resolve major trade differences.

    It is also curious to observe the movement of the mainland and offshore yuan today. Despite the sale of the mainland yuan to 6.78 per dollar (+ 0.55%), CNH, on the contrary, increased, although it is usually more sensitive to negative expectations, if any. The reference rate was set today at 6.7495. The Chinese are celebrating the lunar new year, which is traditionally associated with an increase in consumer spending, which means an increased demand for cash, so the PBOC probably is now taking appropriate measures to fill banks with liquidity. It is worth considering this as, the factor pushing the yuan lower, and behind it the gold. Recently, a correlation has reappeared between them:
    [​IMG]
    This week, there should be data on monetary aggregates and lending rates in China, which will shed light on the implementation of plans to stimulate the economy in response to a fall in export and production growth rates. Global risk aversion may increase this week if export and import data for January does not meet expectations in China. I remind you that now, China’s trade with partners is experiencing a kind of “exhaustion” after Chinese firms rushed to ship goods in the third quarter of last year to avoid tariffs. Then, export grew amid reduced production volumes and it is clear that the business inventories were the “fuel” for export growth. The pace of their refilling is likely to have a negative impact on export statistics in January, as well as in the following months.

    The European Commission last week sharply lowered growth forecasts for the Eurozone this year and next, Trump said he has no plans to meet with Xi before March 1, i.e. the date of introduction of new tariffs. That automatically makes relevant the scenario of a new round of tariffs. As a result, the dollar returns itself the status of the best safe heaven out of the worst that it is likely to use it this week.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


     
  7. Tickmill-News

    Tickmill-News Trader

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    When everybody sells, who buys? Who is supporting the US equities now?

    The US stock market and the Chinese yuan soared on rumors that President Trump is considering the option to move the deadline in negotiations with China, presumably by 60 days.

    In Twitter, Trump was deliberately reluctant to shift the deadline, saying that his decision is subject to the progress in negotiations. On the one hand, Trump’s announcement is a bullish signal, since in fact the new round of tariffs will be postponed, on the other hand the delay means that the progress of trade talks is basically in the same state as it was 2 months ago. Also, the effect of 10% tariffs will last more and the possibility of their early end (that is, the first of March) becomes a less realistic outcome.

    One of the few leading indicators of sentiment in global trade is the Baltic Dry index. It is an aggregate estimate of the cost of transporting raw materials by sea. With the introduction of US tariffs last year, the index began to slide, reflecting the slowdown in global trade, and since January, the index decline has accelerated as the possibility of trade truce has remained extremely unclear, despite the flow of assurances from Chinese and American officials that they will make every effort to strike the deal.

    [​IMG]

    The Index movement also depends on oil prices. If fuel costs are reduced, the freight is also getting cheaper. Therefore, part of the downward movement in the index is due to drop of prices in the oil market.

    The US stock market finds itself in an interesting position. According to Bank of America, all three groups of investors – hedge funds, professional and private clients have been net sellers of stocks for the past two weeks. From a set of investment alternatives, stocks in the US stock market were considered the worst for all of January, while sovereign debt of emerging markets was the most preferable.

    [​IMG]

    Nevertheless, the US stock market was not only able to recover from a fall but made unprecedented upturn since January 1987. Since the beginning of the year, the S&P 500 dynamics have become the second in terms of recovery rates since 1990, earning investors more than 10% of capital gains in less than a month and a half:

    [​IMG]

    A reasonable question arises: who buys when everyone sells?

    There is one driver which was in the lead last year and will probably be the basis for a stable (or even bullish) market in 2019 – share repurchase. Last year, the managers had been backing market caps of their firms burning almost $1 trillion (including money received through tax breaks). But since the beginning of this year, the companies have already spent 78% more funds to repurchase shares than they did in the same period last year.

    Investors also prefer share buybacks instead of dividends, since capital gains are taxed less than dividend payments. Thus, US law encourages long-term investment in the stock market (after all, return on capital is “more deferred”), and for companies this is less stressful in decision-making because the dividend policy is a less flexible tool to reward investors than repurchase (usually, increasing dividends is a “commitment” to maintain them at a new level for a long time). Directing retained earnings to share repurchases also means the lack of investment prospects from companieswhat is another sign of the coming weakness in the future.

    It seems that the return of the S&P 500 to the lows of 2018 and the QE4 from the Fed could only a matter of time.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  8. Tickmill-News

    Tickmill-News Trader

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    Two ECB officials see bearish shift in the policy if weak growth persists

    Several ECB policymakers made comments on Friday and Monday that were disappointing for the euro. On Friday, Benoit Coeure, a member of the ECB’s executive committee responsible for markets, said that the European banks may need additional money injections in the form of a fresh TLTRO round. In simple terms, these are long-term loans to banks at a preferential rate, which banks must then direct exclusively to lending to households and firms. The first round of TLTRO was held in 2016 with 4-year maturity loans, the money was received by banks that showed “distinguished” lending performance, instead of a search for arbitrage opportunities which ECB of course doesn’t appreciate. TLTRO is essentially a channel for the transmission of monetary policy, because a decrease in the ECB rate should be conveyed to the economy as lower loan rates, but banks are not always interested in this, since a shrinking interest margin forces them to hunt for yields and the economy with weak demand for loans or ability to repay loans (higher risks) is not profitable “point of delivery” of cheap money.

    Earlier, Draghi complained that banks used “targeted” credit money for other needs, so they won’t be in a hurry with the new TLTRO. At the last meeting, he declined to discuss a new round of such funding, which disappointed the banking sector. Now, a turnaround is looming on this policy measure, and this may mean that the ECB will sacrifice with its efficiency as the growing slowdown in the economy and the deterioration of growth forecasts require additional easing actions.

    The eurozone economy often upsets markets and policymakers, as can be seen from the growing number of negative economic surprises over the past six months:

    [​IMG]

    Coeure also noted that the ECB’s economic slowdown is becoming “clearer and broader” and the inflation trajectory is also at risk. Monetary policy should “adapt” to new challenges, he said.

    After Coeure’s comments on Friday, the euro went down sharply, touching on the 1.1250 mark against the dollar, but paring losses by Monday, bargaining around the 1.13 mark. The stock index of banks from Euro Stoxx also strengthened on Friday, bringing the weekly growth to 4%.

    ECB Governing Council member Villeroy said on Monday that the slowdown in the eurozone economy is becoming significant, so the monetary policy guidance may change if it turns out that the nature of the downturn is persisting. The weakness of the economy came as a surprise to policymakers, since Italy was already entering recession, and Germany barely escaped this fate.

    Responding to a question about whether weak economic reports would be a reason to reduce the rate, in an interview with the Spanish newspaper El Pais, Villeroy said that if the data indicates a steady recession without a rebound perspective, then a change in the rate is possible.

    So, already two officials of the ECB expressed the opinion that economic challenges may require a U-turn in the policy. It should be noted that, according to previous statements, Coeure is distinguished by a hawk-like approach to politics, while Viléroi takes the position of a “centrist” with “dove” elements:
    [​IMG]

    Based on the negative reaction of the euro to the statements of officials, its growth against the dollar is under threat and the downward movement is likely to resume this week.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  9. Tickmill-News

    Tickmill-News Trader

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    Are Global Central banks in a “stealth” gold-buying mode?

    While the dollar is being dumped in the short-term presumably on expectations of a happy end to trade negotiations, and the yen is sinking after warnings from the head of the Bank of Japan, Kuroda, gold seems to be taking the opportunity to swiftly update medium-term peaks. Yesterday, yellow metal went up by $14 to $1,341 per troy ounce, and since November last year yielded almost 12% capital gains for lucky gold buyers. The recent rally helped gold to reach its highest level in 10 months.

    What, however, is embarrassing in the rise in price of gold, is the intervention of new growth factors and the rather muted action of traditional ones, such as the safe haven status. For the most part of 2018, gold had a negative correlation with risky assets, for example, with the S&P 500 index, that is, the outflow from high-risk stocks was accompanied by an inflow into the zero-yield asset, i.e. gold. However, at the end of December, the correlation changed sign, which concurred with the beginning of the Fed’s U-turn, which basically opened the door for a decline in the opportunity costs of investing in gold. That is, the signal of a broad-based decline in real yields in the US economy has somewhat boosted appeal of gold relative to other assets, which expected yields began to raise doubts. What is curious is that last year gold enjoyed the status of a defensive asset even more than the dollar, the yen and the US Treasury bonds:
    [​IMG]

    It is possible that gold has become a choice in the “broad-based rally”: since December, not only the S&P 500 has grown, but also the commodity market, including WTI, which has rebounded from the lower limit of the range of $40–45 and is now trading above the $55 mark. Other base metals staged even more impressive rally: take, for example, Palladium, which grew by almost 50% from August last year, overtaking gold in value in nominal terms and even reached a historical record amid slowing growth in supply and increased demand as an effective catalyst in automobile engines.

    However, the most curious fact which nobody can’t deny as a rally factor was the activity of central banks in the gold market. While we are focusing on the hourly updates of trade talks and Trump’s Twitter account, the world’s central banks are “on the sly” ramp up of gold purchases.

    [​IMG]

    The volume of purchases in 2018 grew by 74% in annual terms marking the highest level since the collapse of the Bretton Woods system. Seems that some countries hedged their national currencies from sanctions and their associated decline against the dollar. And what do you think about it?

    It is also possible that in the short term, gold is on the sights of trend-following algos, whose activity is enhancing each other and creates the effect of “self- sustained rally” the yellow metal. The immediate resistance of gold can be at around $ 1366, where unsuccessful attempts to break up in mid-2016 and early 2018 took place.

    However, arguing in the context of the global trend, will the world central banks be able to buy the precious metal further without provoking sharp moves in the price?

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  10. Tickmill-News

    Tickmill-News Trader

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    The capital-labor tradeoff. Why US firms continue to hire?

    Orders for durable goods missed estimates in December showed data released on Thursday. November reading was revised upward (from 0.7% to 1.0%), which somewhat eased concerns, however, breaking down December report helps to see some worrying developments in the underlying trend.
    [​IMG]
    he biggest contribution to the growth rate in December (1.2% vs. 1.7% of the forecast) came from transportation-related orders. Indeed, new orders for civil aircraft and spare parts for them jumped by 28.4%, which had the biggest impact to the increase in December figure. Excluding the volatile aviation component, the base trend in orders was dismal:

    New orders ex-aviation – +0.1% in December, after decline by 0.2% in November;
    New orders, ex-defense – +1.8% in December, after being unchanged in November.
    [​IMG]

    Considering the data without these two components we can basically obtain the proxy of the demand for capital investments, which turns out to be quite disappointing:

    New orders excluding aviation and defense industry – -0.7% in December, after falling by 1.0% in November.
    [​IMG]

    Now it’s clear where US firms saved to pour then money into stock buybacks, which keeps the American stock market from falling sharply.

    It is worth noting that the decline in fixed asset investments lasted for three months in a row (and maybe continued in January), which was the worst dynamic since the end of 2015, when China almost dragged the whole world into recession. There are rumors that then the dollar was weakened in order to whet the appetite for risk, which is known in the conspiracy circles as the “Shanghai Accord”.

    In addition to weak data on capital investments, the Fed gets an additional blow from economic conditions front. The index of manufacturing activity from the Federal Reserve Bank of Philadelphia fell from 17.0 in November to -4.1 points in December, which was the first negative and the lowest reading since May 2016.

    [​IMG]
    The decline was observed both in new orders and shipments of finished goods. The index of new orders fell from 24 to -2.4 points, while shipments index fell from 17 to -5.3 points. Monthly decline in new orders was the biggest since the 2008 crisis.

    Inflationary pressure in input prices for firms continued to decline. The corresponding index fell by 11 points to 21.8 and already only 28% of surveyed managers reported an increase in resource prices compared to 40% last month. Nevertheless, 33% of companies reported that they were able to raise prices for finished products, which, of course, is good news for profit margins.

    The employment index showed that firms continue to increase hiring. The corresponding index rose from 9.6 to 14.5 in February. A strong labor market and worsening economic conditions constitute a controversial picture in the US economy, but if we consider the increase in jobs to be a “forward-looking” decision, then the managerial economic expectations index, which turned out to be positive in February, is consistent with consistently high labor demand. It is quite possible that in the economy there is some rebalancing between capital-intensive and labor-intensive methods of production, since the rate of employment clearly exceeds the capital investment.
     
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    Easing inflation pressure may prompt ECB to consider new round of TLTRO

    According to data released on Friday, inflation in the eurozone eased in January, the rate of decrease was not as significant as preliminary data showed.

    The Eurostat report said that in January, the consumer price index (CPI) in the euro area rose by 1.4% compared with the same period last year. This is below the inflation rate of 1.5% in December. At the same time, compared with the previous month, inflation in January fell to –1%.
    The base consumer price index (CPI) in the eurozone, which does not include the prices of food, energy and tobacco, rose by 1.1%, against growth of 1.0% in December.

    The ECB struggles to boost growth of the price level, but it stubbornly stays below 2% goal.

    On Thursday, an economic conditions report that showed that business activity in the EU manufacturing sector recorded the steepest decline in six years amid concerns about Brexit and the slowdown in economic growth in Italy and Germany.

    The slowdown in economic growth in the eurozone forced the ECB to consider the possibility of introducing new financial stimulus measures. According to analysts, the European Central Bank in March will lower its forecasts for economic growth and will consider the possibility of starting the next round of targeted long-term lending operations (TLTRO).
     
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    Has debt-addicted China relapsed?

    After a flurry of optimistic headlines about the trade talks last week, which caused a massive pullback in the long positions on gold, specific details remain largely unknown. The news about the “breakthrough” in the negotiations culminated in Trump’s Sunday tweet about extension of the tariff deadline, which hit the wires 20 minutes before the start of the opening of US futures trading:

    Inflated but stable stock market seems to be one the criteria of successful presidency for Trump, since he attempts to talk up asset prices in a rather unusual manner.
    [​IMG]

    [​IMG]
    Trump entered a debate with the main hawk of the White House, Robert Lighthizer on the essence of the Memorandum of Understanding, which both sides signed during the negotiations. During a meeting with a special representative of China, Liu He, which was broadcast on television, Trump was outraged by the non-binding feature of the document, while the Lighthizer tried to explain that this is a trade agreement that countries usually sign when they reach an agreement. Lighthizer eventually capitulated, assuring that he would no longer use the notion of “Memorandum of Understanding” and would call it a “trade agreement”.

    The Markets’ reaction to Trump’s positive comments on Sunday was even bigger after Trump’s public discord with the adviser which created the impression that Trump was again not satisfied with progress of the negotiations, as was the case last March. However, it seems that everything was OK this time.

    According to Bloomberg, the relationship between Trump and Lighthizer has cracked since the meeting of the leaders of the United States and China in Argentina. Trump then demanded that the negotiations begin immediately, but Lighthizer objected that China was not ready yet. Negotiations had to be initiated and Lighthizer hoped that the deadline of March 1 wouldn’t be extended, and weak progress would increase the pressure on China with the next round of tariffs. In general, Trump upset belligerent senators and White House officials with the desire to “get a fast deal”, because, in their opinion, the United States got enough leverage on China, which is losing in a trade war (based on the economic damage that both countries received). Trump’s attempt to calm the markets by hurrying his team in preparing an agreement may be a tactical mistake, as growing economic damage will reduce China’s bargaining power.

    And there is a considerable amount of truth in this. Data on the easing of credit conditions in the Chinese economy do not need any comments:

    In January alone, cash inflows to the economy amounted to almost $ 700 billion, which is comparable to Saudi Arabia’s GDP.

    Of course, this not only means a retreat of the government in the US trade war, but also a surrender in the fight against shadow funding, which was never completely suppressed.
    [​IMG]

    Officials from the central bank said that the acceleration of credit expansion is associated with the traditional increase in demand for loans in January. It is strange that on the social financing chart above there are no characteristic spikes at the beginning of previous years.

    Monetary stimulus in China and Trump’s optimism will whet the appetite for risk this week, so the pullback on risk-free assets, in particular gold, is likely to resume this week.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
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    “Secret buyer” of illiquid Chinese housing


    With China’s economic transition from production to consumption rails, Chinese authorities are faced with the task to uphold consumer optimism, which, apart from current incomes also depends on the market value of their assets (wealth). Unlike in the US, where the stock market is a barometer of consumer confidence, economic decisions of Chinese households and firms are quite sensitive to real estate prices since for households it represents the biggest asset in their balance sheet:

    [​IMG]

    Firstly, this is the result of the lack of other investment instruments and undeveloped financial markets. Secondly, the fiscal budget of China’s municipal authorities strongly relies on the proceeds from the sale of land and they use future revenues from land sale as collateral for financing by the government. Third, firms use real estate as collateral for loans, and therefore also prefer to keep it as an asset.



    The government has realized the importance of stable house prices, therefore, they “inflate the bubble” from time to time, especially during the time of emergence of a strong imbalance between supply and demand. Such attempts were successful in 2011 and 2014, when another important driver of the economy, production, made up for the decline in such a component of GDP as residential investment. However, the last episode of weakness of Chinese economy which is characterized by a marked drop in production activity limits potential of past successful measures:

    [​IMG]

    In the years when production activity was in the phase of expansion, the government could confidently pursue economic goals of the party by spending huge amounts of money on infrastructure and urbanization, which also supported the growth of capital investments of companies getting direct benefits from government expenditures. In the best traditions of the Keynesian idea of the government role state in maintaining growth, China built bridges, airports, roads and “ghost cities” which still miss their inhabitants:

    [​IMG]

    But well, for Marxist-inspired Chinese officials, ghost cities can be simply a part of long-term government plan. The process of urbanization in China may not be fully based on market signals (i.e. prices), since the rapid increase of urban population can be a strategical goal for the government. Command methods can prevail in the block of macro-decisions, including regulation of the process of migration from villages to cities. The question is how long the state will be able to bear the burden of illiquid housing stocks.

    In 2017, the number of vacant homes was 22% or 50 million, which is the highest among the major economies:

    [​IMG]

    In mid-2016, the real estate bubble in China reached another peak, but then authorities managed to partially control the fall in prices, deflating the price bubble in Tier 1 cities and supporting a moderate price increase in other regions:

    [​IMG]

    However, the calculation of house price inflation in China can be tricky. In addition to the notional regions’ taxonomy based on their administrative and economic importance (Tier 1, Tier 2, etc.), the urbanization process involves improvement of living conditions in a city, which creates a kind of “qualitative price inflation”. That is, if the price of a house rose 10% over the month, this does not always mean that inflation was 10%, since part of the price change fell on the growth of “intrinsic value” (improved infrastructure, newly created jobs near home etc.)



    Taking into account the behavioral factors of the Chinese, investment needs, as well as speculation motive, the government attempts to stabilize real estate market which are accompanied by a strong amplitude of price fluctuations, as can be seen on the chart above. On the one hand, depriving the public of the fancy of endless price growth easily triggers a chain of panic sales, and demotivates potential buyers, including speculators (a sharp bias towards supply). On the other hand, the rise in prices as a result of artificial absorption of the supply by the government forces young buyers out of the market but begins to attract speculators. Recent decline in production activity, in turn, can be reflected in a decrease in the demand for rental housing, which can be an argument for potential rentiers to sell the house, increasing pressure on the market.



    Attempts to withdraw excess supply by ordering municipal governments to buy surplus from developers lead to the price inflation outpacing other regions without government support:

    [​IMG]


    Once a major buyer of housing in the province of Bengbu became the government, speculators were quick to jump in benefiting from state guarantees what drove prices up quickly. The program for buying out illiquid housing is planned to continue up to 2020 in 200 cities, but in cities with obvious speculative trends, such as in Shanghai, the right to determine prices is granted to the market.



    Brief summary:

    – More than 50 million uninhabited houses and apartments in China;

    – The volume of mortgage loans increased 8 times in ten years;

    – Government buys surplus real estate to support the market;

    – Prices in developed cities are falling, the discount from developers reaches 30%.

    It is obvious that China will have to continue to bear the burden of the “principal-agent” problem, which seems to be eternal for the command economy.



    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
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    Preview of the upcoming ECB meeting: Are new TLTROs necessary or not?

    From the beginning of the new year, when it comes to the ECB policy stance, the discussions most often focus on the reasons, conditions and design of a new round of TLTRO round, long-term bank financing operations. After the massive asset-purchase program ended in 2018, basically meaning that ECB opened a new chapter of policy normalization, economic conditions in the Eurozone suddenly deteriorated as shown by numerous negative surprises in manufacturing and services PMI reports. This prompted the ECB to taper off rate hike discussions completely, while raising the need to offer some flexible easing measure to confront the downturn. The “candidate” supported by ECB members and markets which has reasonable impact on financial conditions and is safe to discuss in the current situation is TLTRO.

    The latest meeting of the ECB offered few surprises, the guide to interest rates and reinvesting policy remained unchanged. Meanwhile, the Head of the ECB Mario Draghi and other officials became more concerned about the growing number of negative surprises in the data, especially in current corporate sentiments and their outlook, which slashed chances of the rate hike in 2019. After a short period of relief at the beginning of this year, Citigroup’s calculated economic surprise index resumed its decline in February and March:
    [​IMG]
    It looks like that the ECB got some clues from Fed’s pessimism in January, which suddenly changed its tone in January due to the pressure of negative market expectations. Several ECB board members said that the economic slowdown may be stronger and longer than previously expected which shifted expectations for a rate hike to a more distant future, at least until 2020. At the last meeting, the ECB described risks as “tilted to the downside”, as compared to the previous wording “moving to the downside”, i.e. raising the degree of gloom relative to the pace of economic recovery. However, at the press conference, Draghi limited the impact of the bearish statement saying that the reassessment of economic conditions would not have monetary policy implications. On the front of ECB policy decisions, there is a consolidation of views that banks will probably need a new round of cheap funding (TLTRO). According to the latest data from Handelsblatt most members of the expert community, referred to as “ECB Shadow Council” considered that the ECB should extend long-term financing operations in order to maintain control over financial conditions, preventing their unwarranted tightening. It should be noted that the purpose of the community comments is to determine the preferred behavior of the regulator, and not to predict its decisions. At the last meeting of the ECB, the inflation forecast for 2019 was lowered from 1.6 to 1.4% and remained unchanged for the next year at 1.5%.

    A useful indicator of the ECB’s readiness to continue normalizing policy will be the updated forecast for 2021. Lowering the long-term forecast means recognizing by the ECB that inflation is moving away from a convergence path with a target of 2%, which implies incline towards the measures. Within the limits of existing opportunities, this means a signal for a new round of TLTRO. At the last meeting, the ECB expected inflation to be 1.8% in 2021, and GDP – 1.5%.

    Forward guidance with respect to rates is unlikely to change at this and subsequent meetings without visible signs of economic growth, so as not to complicate decision-making for the new head of the ECB. Recall that that Draghi’s term ends in the end of October this year.

    The ECB rhetoric after the last meeting is full of doubts, both among dovish and hawks. Benoit Coeure admitted that the growth momentum is becoming less and less pronounced, the trajectory of inflation is less distinct, a new round of TLTRO may be needed and this point is included in the ECB agenda. Chief economist Pratt said that the short-term outlook is not particularly bright, but there are positive signs in the medium term. Ewald Novotny, one of the most eminent hawks of the ECB, said that the reasons for the slowdown in the economy can be transient and TLTRO should be probably delayed. He also noted that there are some discrepancies between market expectations and the ECB guidance, most likely pointing to an underestimation of the chances of a rate hike in the future. Draghi, speaking to Parliament, said that a significant monetary stimulus for the economy remains a necessary measure.

    Here are the scenarios of the meeting and the possible reaction of EURUSD and European bonds according to ING:
    [​IMG]
    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
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    US trade deficit soars to record highs at the expense of the government?


    The US trade deficit updated the record in December, official trade data showed on Wednesday. Strong consumer demand and tax cuts were essential factors of import immunity to the impact of import duties, but US exporters also failed to secure sales due to counter-tariffs, which increased the skew in foreign trade in favor of imports. Trump’s protectionist policies, judging by the US trade with the rest of the world, produce results that are directly opposed to the stated goal of restoring the trade balance.

    [​IMG]

    The US Commerce Department reported on Wednesday that the trade deficit jumped 12.4% in December from the previous month. Last year, imports surpassed exports by $621 billion, which is 12.5% more than in 2017, making it the highest figure since 2008. Considering the change of the US budget deficit, which grew by 77% over the period October-January compared with same period of prior year, it is likely that the United States paid for the growth of the trade deficit by increasing the public debt.



    Decline in exports by 1.9% in December in monetary terms amounted to 59.8 billion dollars, which was the worst change of US trade since October 2008. Imports in December increased by 2.1% compared with November. By adjusting the data for inflation, the increase in the trade deficit amounted to 10 billion dollars.



    Growth in the real deficit may indicate that the revised estimate of GDP growth in the fourth quarter of last year may be less optimistic with a preliminary estimate of 2.6%, published last Thursday.

    US importers sought to increase stocks of goods for sale in response to the imposition of tariffs, fearing that the escalation of a trade war would lead to a chain of tariff increases and a subsequent rise in import prices.



    The trade deficit with China increased by 11.6% to a historical record of 491.2 billion dollars. The Trump administration introduced tariffs for steel, aluminum, solar panels, and washing machines, but as a result received a record import of goods from 60 countries, the leaders of which were China, Mexico and Germany.

    [​IMG]

    Nevertheless, tariffs also led to a positive export change, which rose to 1.7 trillion dollars in 2018. For the last three months, exports have declined due to tariff restrictions from China, a slowdown in the global economy and a strong dollar that reduced the competitiveness of American goods.



    The dollar has slightly changed against other major currencies on Wednesday, while the yield of Treasury bonds declined ahead of the ECB meeting today.



    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
  16. Tickmill-News

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    Chinese exports show Lunar Year celebration came at a price for the economy

    With the data on foreign trade for February, China has decisively emerged as the leading source of gloomy economic headlines. Exports in RMB fell in annual terms by 16.6% against the forecast of 6.6%, imports grew by only 0.3% against the forecast of 6.2%. In dollar terms, the data is even more disappointing.

    At first, Bloomberg “refused to believe” in the scale of the fall, mistakenly reporting an increase in exports by 16.6%, but quickly corrected the data, adding a minus sign. Algo traders were probably left with the bad taste.

    Part of the decline can definitely be attributed to the seasonal factor, namely, the celebration of the Lunar New Year, which began 10 days earlier than last year, probably propping up shipments in January and leaving a negative print in February. The rebound in manufacturing PMI from 48.3 to 49.9 points in February, in light of the significant downturn in foreign trade, has slightly lost its relevance in assessing the state of the Chinese economy.

    In dollar terms, exports crashed by 20.7% YoY, while imports fell by 5.2%. The trade surplus was $4.12 billion, Chinese customs reported.

    Looking into the past years of exports and imports data, the role of seasonality looks pretty convincing, making the February figures not so much frightening.
    [​IMG]


    Strong trade downturns at the beginning of the past years suggest that the trade prints in coming months should help to understand February decline better, especially whether it was a seasonal quirk or heavy blow to world trade due to domestic issues or decline in consumer demand in the economies of major trading partners, such as the United States.

    Despite the “commitment” of the US and China to constructive talks, the trade war seems to be unleashing in full swing.

    [​IMG]

    As can be seen from the chart, China’s imports from the United States fell at a record pace – more than 40% compared with February 2018. This explains the record increase in the US trade deficit, which was published yesterday. The decrease in exports was also accompanied by a strong drop in imports from the United States, so if anyone benefits from Trump’s protectionist policies, it is China.

    In contrast, imports from the EU increased by 5.8%, according to Chinese customs data.

    Reducing imports from the United States can significantly affect the layoffs and the creation of new jobs in the US manufacturing sector. This will probably happen with a delay, as US factories will need time to adjust.

    [​IMG]

    In January, the PBOC announced a giant injection of liquidity into an economy, which amounted to 4.6 trillion RMB in the form of various forms of loans (including through shadow banking), explaining its decision with rising liquidity needs in the economy. The manufacturing sector responded poorly to stimulation, hope remains for rapid growth in the service sector.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
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    What “gold rush” of Central Banks tells us about credit risk in US Treasuries?

    A central bank’s demand for gold

    The data on China’s foreign exchange reserves, which is reluctantly and irregularly released by the PBOC, indicated another increase in gold reserves for three consecutive months (December-February) to 60.26 million ounces. The value of Chinese gold reserves rose by almost $3 billion to $79.5 billion compared with the same period last year.
    [​IMG]
    Goldman Sachs believes that the price of gold could rise to 1,400 per troy ounce in the next 6 months due to increased demand from central banks.

    At the same time, investments in US Treasury bonds by the PBOC declined again reflecting a shift of investment accent on gold:

    [​IMG]

    Given the money supply in circulation, it is difficult to imagine that the Central banks – active buyers of gold are considering a return to the gold standard in the long run. The price of gold in this scenario has to be much higher, which, in fact, should naturally follow from the failure of the concept of fiat currencies. However, in the presence of more realistic reasons, there is no need in mental exercises for constructing conspiracy theories. After a 10-fold increase in the Hungarian Central Bank of gold reserves in October last year, it became clear that, considering the Central Bank as an organization that is not without goals for profitability, diversification and liquidity of its asset portfolio, the increase in gold reserves should pursue one or more of these goals. Given that the choice of assets for the Central Bank is limited, we can assume that there is a so-called concentration risk, as for an ordinary bank – that is, when investments are focused on one or several assets. In turn, this naturally implies reduced portfolio diversification.

    It is easy to see that in the asset portfolio of China, Russia and other Central banks, significant share of total assets accounts for non-resident securities, in particular, US treasury bonds. Recalling costly tax reform, funded from the government’s pocket, debates on the Trump wall construction, the Green Deal, which are also expected to be funded by the government, we can clearly understand the Central Bank’s concern about the growing risk of asset concentration in their portfolios. United States not only opted to postpone reduction of the fiscal spending, but also wants to deviate from stable path of expenditures further. In this case, there are certain expectations that the credit risk in the “risk-free” US government bonds may eventually increase and their price fall.

    And Central Banks’ forecasts, as you know, are often credible signals.

    Credit maneuver

    After the January generosity of the Central Bank of China, when cheap loans flooded the economy with an aggregate volume of 4.6 trillion. yuan, the “horn of credit plenty” suddenly disappeared in February, leaving “credit addiction” rumors with little proofs. The data released on Sunday showed that the total social financing in China grew by only 703 billion yuan, which is two times lower than the forecast and almost 7 times less than the January liquidity surge.
    [​IMG]
    Thus, the “demand for liquidity before the celebration of the Lunar Year” argument turns out to be the leading one in understanding China’s monetary policy. Switch to the higher timeframe, it can be seen that, in annual terms, total financing (including municipal bonds) increased by 10.1% in February, after rising by 10.4% in January, and the figures don’t look quite surprising.

    The head of the PBOC said at a press conference that the data for January and February should be considered together, but the intensity of easing still exceeds the level of the same period last year. The indicators of credit expansion for March should give even more evidence that the policy adheres to the long-term target level and that the January growth was due to a seasonal increase in demand for money.

    New loans increased by 886 billion yuan instead of the expected 950 billion, and that significantly exceeds the total social financing. This implies that the government resumed “tightening the screws” on shadow banking i.e. money market financing of capital markets. In January, the figure grew by 343 billion yuan, but in February it turned around dropping by 364.4 billion, including such components as entrusted loans (-54.4 billion), bank acceptance bills (-310 billion)

    Tough measures against shadow financing followed Premier Keqiang criticism of the central bank in January, urging banks to focus on long-term loans to the real sector, instead of trying to revive economic activity by inflating a bubble of short-term financing.

    Considering the distortions in export and import activity in the period before the Lunar New Year celebration, which I explained in my Friday article, extraordinary credit growth in January fits into a number of macroeconomic effects resulting from seasonal economic challenges.
     
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    Retail sales still miss welcomed rebound in car sales
    In the first quarter of 2019, the US economy did not perform a miracle. Retail sales rose a mere 0.2% in January, after the little tragedy in December, when the seasonally favorable month was marked by surprisingly sluggish consumer activity. The revised value for December was probably the biggest negative point of yesterday’s report.

    [​IMG]

    The preliminary value of -1.2% in December was revised down to -1.6%, thus excluding speculation about an incorrect assessment due to delays in the collection and processing of statistical information after the government stopped working.

    Excluding car sales, which turned out to be very weak, retail sales rose by 0.9%. Two basic indicators of the report – sales excluding cars and fuel, as well as sales in the control group showed quite healthy growth of 1.2 and 1.1 percent. In December, these figures were revised down to -1.6 and -2.3 percent.

    General consumer goods constitute the most stable core of retail sales; therefore, a corresponding increase of 0.8% in January, after a fall of 1.5%, may indicate the transitory nature of the drop of consumer spending at the end of last year. Retailers without physical stores, which also include online stores, increased sales by 2.6% in January, after a decline of 5.0% in December.

    The increased volatility in the data is likely to force the Census Bureau to be doubly attentive when revising the indicators. However, it’s not just the cost of restoring the agency’s work after a 35-day vacation. The suspension of the government’s work negatively impacted consumer sentiment, but also consumer spending (primarily through the civil servants who did not know for a long time whether they would be compensated). Despite the pressure of this factor in January, retail sales have rebounded, which indicates the preservation of consumer potential.

    The only weak point is in car sales, which seem to have lost touch with consumer optimism. Motor vehicle sales fell by 2.4% and year-on-year sales contracted as well.

    [​IMG]

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
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    Lunar Year weighs on February data but the outlook remains dim
    Industrial production growth in China slowed to a 17-year low in the first two months of this year, fueling expectations that the “difficult child” of the Chinese economy will draw more attention from the authorities, mainly in the form of financial support.

    Nevertheless, the contribution of other components of GDP has tallied with or exceeded expectations, allowing hopes to spin that the peak of the slowdown in the economy has passed. Investment in housing grew by 11.6% YoY, with a forecast of 9.50%, while retail sales lost an impressive growth rate, although they preserved the necessary firmness, rising by 8.2%. Capital investments continue to rely on the support of the government, which creates implicit guarantees of demand in the economy, for example, through infrastructure spending. This type of spending missed expectations of it rising by 4.3%.

    [​IMG]

    The authorities intend to increase support for the economy in 2019, as economic growth risks falling to the 29-year low, but most measures need time to take effect. Chinese Premier Keqiang announced that the state will provide the economy with billions of dollars in the form of tax cuts and increased infrastructure spending, although the general tone of Chinese officials indicates an unwillingness to conduct massive state interventions in the economy as it was, for example, in 2016. Then the economy quickly went on the mend and caused a strong reflation impulse that swept across the world.

    The output of the industrial sector grew by 5.3% in the period January-February, less than previously expected. The pace turned out to be minimal since the beginning of 2002. The forecast projected that output would decrease to 5.5% from 5.7% in the previous period.

    China is trying to combine data for January and February to smooth out the distortion of data caused by the celebration of a long holiday – the Lunar New Year. This happened with exports and imports, which also show strong seasonal fluctuations, as well as with social financing, for which there was a seasonal surge of up to 4.6 trillion. dollars in January. The Central Bank urged to consider the data immediately for two months – January and February in order to better understand the dynamics of credit expansion.

    [​IMG]

    Non-seasonal distortion, output grew by 6.1% over two months, the official statistics agency of China reported in annual terms.

    A survey of Chinese factories, adjusted for seasonal factors, indicated a monthly decline in output in February, for the first time since January 2009. Such data naturally follow from the universal reduction in demand, both domestic and foreign due to the effect of tariffs.

    On Wednesday, Trump said that he would not rush to conclude a trade deal with China, stressing that it would necessarily contain provisions for the protection of the intellectual property of American companies in China and measures to prevent theft and extortion.

    Another surprise in the data was the increase in unemployment among respondents to 5.3% from 4.9% last month. However, the holidays probably left a strong imprint on employment, as some factories were closed for more than three weeks.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     
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    Trade terms improve for the US, but housing market disappoints
    Following a strong Core PCE growth of 1.9% in February, import prices in the US also rose by 0.6%, after a slight increase of 0.1% in January and a fall of 1.4% in December. The leader in price growth among imported goods was fuel, that is, the main increase in inflation in February was due to an increase in costs, which is a somewhat unwelcome change on the inflation front, since it doesn’t come from consumption uptick (but could boost it).

    Excluding the cost of fuel, import prices have not changed, raising many questions about the existence of some hidden factors constraining inflation caused by tariff wars.

    [​IMG]

    Export prices, for the first time in three months, went up and also added an 0.6% after falling by 0.5% in January and by 0.7% in December. Some clues about the warming in the tariff confrontation between the US and China and the effect of seasonality gave a rise in prices for agricultural products by 0.2% in February, after a decline of 2.1% in January. Export prices excluding agricultural products rose by 0.7% for the first time since April 2018.

    [​IMG]

    US strengthening positions in trade with specific countries surprisingly concerns China as well. Prices for Chinese imports to the United States did not change in February after falling during the previous two months, at the same time there was some growth in export prices; in February it was 0.7%.

    As soon as the November and December data on housing sales inspired some optimism in the hearts of developers, the January data broke the positive trend, indicating a monthly decline of 6.9%. It turns out that in annual terms, home sales not only did not grow, but also declined.

    Sales of new homes fell in January to the lowest level since October last year. The largest drawdown in demand was observed in the mid-west, where high prices scared off buyers.

    [​IMG]

    Real estate sales at the pre-construction stage fell to 183K, the worst figure in three months, indicating that the pace of construction in the coming months will be sluggish. Despite the fact that the median property price fell by 3.8%, consumer demand “requires more affordable prices.”

    [​IMG]

    Investment in housing accounts for about 13-18% of US GDP and the forecast for this component is likely to be consistently revised downwards in coming months. Few improvements on this front are expected since there are no “super-bright” expansion prospects for the US economy. The offsetting effect curbing impact from downbeat housing data can be expected from U. Michigan consumer sentiments figure which is due today. Unfortunately, its rise has little to do with increase in the number of expensive purchases. This is confirmed not only by home sales, but also by sliding car sales.

    Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.
     

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