Observations on the Capital Markets – Week Ended January 24, 2014
- In the U.S.: Few surprises in economic data, though the debt ceiling looms
- In Europe: Better economic data, but the credit crunch persists
- In China: GDP growth is on track, but offshore investors watch PMI
- In Japan: All eyes will be on wages – will they rise?
- In Argentina: devalued currency
Last week the IMF raised its 2014 global growth forecast from 3.6% to 3.7%. The U.S. growth forecast rose from 2.7% to 2.8%, Eurozone from 0.9% to 1.0% and China from 7.2% to 7.5%. Here’s a closer look at some of the developments influencing the global economies and markets:
In the U.S.: Few Surprises in Economic Data, though the Debt Ceiling Looms
The debt ceiling will take center stage in Washington, as Treasury Secretary Jack Lew said the government will run out of cash around the end of February if the debt limit (scheduled to be reached Feb 7) isn’t raised (and if tax refunds are sent out on time). The White House wants a “clean” increase; Republicans want something in return for an increase … neither side wants a default.
There wasn’t much U.S. economic data released last week and what we saw was inconclusive.
- One notable development – Emergency extended unemployment benefits ended; 1.35 million people were cut off, reducing federal spending by $25 billion/year (0.1% of GDP).
- Query: Since people don’t have to be collecting benefits to count as unemployed (they only have to say they’re looking for a job), how many of those who are losing extended benefits will stop saying they’re looking for a job (and thus no longer count as unemployed)? Will it further depress the stated unemployment rate?
- Lower bond yields and gasoline prices, while not headline news, are good for the U.S. economy. On the other hand, very cold weather is probably dampening economic activity (other than consuming energy to heat buildings).
- With 122 S&P 500 companies having reported, earnings are OK. Roughly 2/3 (the normal rate) are beating consensus; aggregate earnings are on track to be just (2-3%) above consensus. T-12 EPS growth is on track for around 6-7% growth. Many mentions of weather as a drag, but little forward guidance.
In Europe: Better Economic Data, but the Credit Crunch Persists
- ESM (European Stability Mechanism) MD, Klaus Regling, said “The euro crisis is not over, but the end is in sight.” He also dismissed simple comparisons of unemployment rates because the labor force participation rate in Europe has not fallen as it has in the U.S.: “More people as a percent of the population have a job than in the United States.”
- Eurozone composite PMI rose to 53.9, its highest level since June 2011 (just before ECB tightening caused a double-dip recession). Germany rose to 56.3, France to 48.8. The Manufacturing PMI rose to 53.9 (highest reading since May 2011); the Services PMI rose to 51.9 (second-highest reading since June 2011).
- Eurozone ZEW Economic Sentiment Indicator rose from 68.3 to 73.3 … above consensus, despite a lower reading from Germany.
- The Bank of Italy projects Italian GDP, which fell 1.8% in 2013, will grow 0.7% in 2014 and 1% in 2015.
- Moody’s reaffirmed France’s credit rating of Aa1, but retained its negative outlook.
- Spain issued $10 billion of 10-year debt at a yield close to a 4-year low.
- An ECB survey found that bank lending declined for the 19th consecutive month in November. Longer-term, the concern remains that undercapitalized banks remain unwilling to lend.
In China: GDP growth Is On Track, but Offshore Investors Watch PMI
- Reported GDP growth was 7.7% for both Q4 and full-year 2013 (2012 was also 7.7%). The lack of volatility in reported GDP (always ‘7.x%’) and the lack of underlying data/detail (China does not conform to generally-accepted standards for reporting) has skeptics rolling their eyes, but other data is still consistent with growth something like ‘7.x %’. Industrial production, for example, was up 9.7% year over year (y/y), while retail sales were up 13.6% y/y.
- The January HSBC Markit ‘Flash’ Manufacturing PMI slipped to 49.6 from 50.5 on softer domestic demand … its third consecutive decline, and its first sub-50 reading in six months. Comment: note the ‘6 months’ observation: this index has been in negative territory before, even when the economy was growing robustly, so this could easily be just volatility within the trend, not a trend change. Further, there is no evidence to suggest any contraction in the Chinese economy … so I don’t put too much weight on this number.
- The People’s Bank of China added liquidity going into the Jan 31-Feb 6 lunar new year (national holidays); short term interest rates moderated.
- It’s not hot data, but a clear trend is developing: the government’s anti-corruption drive is crimping sales of luxury goods. A report from the International Consortium of Investigative Journalists suggests that between $1 trillion and $4 trillion of assets that haven’t been publicly accounted for have been taken out of China since 2000 (corruption has been big).
- Markets are watching the “Credit Equals Gold #1” structured finance (wealth management product, or WMP) … a note supporting a coal mining project which matures 1/31 and is virtually certain to default. Will investors panic if they aren’t bailed out? How much moral hazard is created if they are bailed out? Will investors be bailed out … and by whom?
In Japan: All Eyes Will Be On Wages – Will They Rise?
- The Bank of Japan voted to maintain its QE policy and 2% inflation target, while no longer saying that the economy faces “uncertainty.”
- Japan’s trade deficit rose to a new record, driven by rising energy purchases and a falling yen.
- Rising tax revenue means Japan will be able to reduce its budget deficit by half by fiscal 2015, the government says. Looking forward, the question is whether the seasonal Shunto wage negotiations will lead to rising wages. If they don’t, the big April tax hike might put GDP growth at risk. A 1997 consumption tax hike is widely viewed as contributing to the 1997 Asian Crisis and Japan’s 1997/98 recession.
- Condo sales were strong in the run-up to an October tax hike, and have fallen sharply since. Will the same happen to consumption after the April increase?
In Argentina: Devalued Currency
Argentina’s peso fell 15%, to its lowest value in 12 years, as the central bank (running short of currency reserves) stopped intervening in the currency market. The government had said it wouldn’t devalue the currency … that did not turn out to be the case, of course, just as it didn’t with respect to inflation.
Comment: Argentina’s problems should come as no surprise: We believe the government has been following unsustainable policies for years (as has Venezuela) … it was just a matter of time before the inevitable happened.
Data Sources: The Wall Street Journal, Financial Times, Bloomberg.