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Posts Tagged ‘Chandler’

Europe’s Third Challenge

Posted by hkarner - 27. Januar 2016

By on January 22, 2016  RGE EconoMonitor

Europe’s Third Challenge

 ECB President Draghi made clear at yesterday’s press conference that new risks have materialized and the central bank’s job to reaching its mandate is far from over. Current efforts may not suffice to achieve its legal prescribed mandate. Monetary policy will be reviews and reassessed at the next meeting in March, when new staff forecasts will also be available.

In his opening remarks, Draghi cited the “slightly expansionary” fiscal policy, “reflecting in particular measures in support of refugees.” And hence two main challenges, the economy and immigration, converge. Of course, the definition of the economy has to be broad enough to include the prices and finance. Even before the Greek crisis in last year was over, German Chancellor Merkel recognized the immigration-refugee problem was going to more intractable than negotiating with Tsipras and Varoufakis.

It seems to be increasing clear that liberal order that has erected in Europe was partly predicated on illiberal regimes in Northern Africa and the Middle East. The collapse of several strong-man regimes has flooded the Italy and Greece with asylum seekers and refugees. One of the agreements at very foundation of the liberal project of European integration lies the Schengen Agreement (1985), which does away with internal border checks. Den Rest des Beitrags lesen »

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Three Developments in China

Posted by hkarner - 18. Juni 2014

Author: Marc Chandler  ·  June 16th, 2014  ·  RGE EconoMonitor

After depreciating earlier this year, China’s yuan now appears to be carving out a trading range.  The dollar has been confined to roughly CNY6.20-CNY6.2650 since early April.

Recent data lends credence to our view that the Chinese economy was stabilizing with annualized growth a little above 7%.  Although officials have clearly indicated a reluctance for large scale measures, this does not mean that officials are doing nothing.
In fact, both monetary and fiscal measures have been deployed.  Local and central government expenditures rose 25% year-over-year in May.  This compares with a 9.6% increase in the Jan-April period.  Last week, the central government approved new infrastructure spending for roadways, railroads and ports.   It is not clear how much this represents new money or the acceleration of spending that was already authorized.
It is also notable that the increase in spending took place as revenues slowed.  Revenue seems to be a contemporaneous or even a lagging indicator.  Government revenues rose 7.2% in May from a year ago.  In April, revenues were 9.2% above year ago levels.
The PBOC has been targeting reductions in reserve requirements for banks with desired loan books and has been largely limited to relatively small and rural banks. There was a cut in April and earlier this month.   PBOC has widened the number of banks to four more banks today, including Industrial Bank and China Merchant Bank.  These four banks have about CNY7.7 trillion of loans as of the end of Q1.  A 50 bp cut in the required reserve ratio (RRR) frees up about CNY40 bln of liquidity.  An estimated CNY320 bln of liquidity has been generated by the reserve reductions since late April. Den Rest des Beitrags lesen »

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Great Graphic: The Yellen Effect

Posted by hkarner - 24. März 2014

Author: Marc Chandler  ·  March 20th, 2014  ·  RGE EconoMonitor

This Great Graphic was generated on Bloomberg.  It shows the price of two financial instruments.  The yellow line is the price of the December 2015 Fed funds futures.  The white line is the price of the December 2015 Eurodollar futures contract.
Both contracts sold off hard yesterday and are lower today.  From yesterday’s high to today’s low, both contracts have fallen about 20 ticks.
The implied yield (subtract price from 100) of the Eurodollar futures contract is 119 bp, up from about 97 bp at the lowest yield level yesterday before outcome of the FOMC meeting.   The implied yield of the Fed funds futures contract has risen from about 62 bp to 81 bp.
It is fair criticism of this observation to note that the December 15 Fed funds futures contract, which settles at the effective average rate of the month, may be distorted by the year-end roll.  That is less significant in the Eurodollar futures contract.  However, both contracts indicate that it was not quite prepared for the outcome of the FOMC meeting.
Before the FOMC meeting, we suggested that the measure of the Chair’s success would be how little expectations for Fed tightening would change.  This was on the assumption that the Yellen wanted to demonstrate continuity with the Bernanke Fed and the strategy that was put into place.  Indeed, Yellen herself said there was not change in the FOMC policy intentions.  The market suspects otherwise and a good night sleep has not changed those suspicions as both futures contracts we are discussing of implying a higher yield now that at yesterday’s close.
We would expect “clarification” in the coming days by Fed officials to drive home the point that rates will be low for longer.  Surveys of primary dealers will also show that while the risk of an early rate hike may be above zero, most will continue to look for the first rate hike in Q3 15 not Q2 15.  The risk that the first rate hike is delivered in Q4 15 rather than Q3 15 seems greater than the odds of a Q2 move.

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Great Graphic: Emerging Markets’ External Hard Currency Debt

Posted by hkarner - 21. März 2014

Author: Marc Chandler  ·  March 13th, 2014  · RGE EconoMonitor

external hard currencyThis Great Graphic was posted on Business Insider by Matthew Boesler. He got it from Nomura, who drew BIS and IMF data.  It looks the mix of foreign currency bonds. issued offshore, (red)) local currency bonds, issued on shore (gray) and cross-border loans (blue).
Off-shore bonds are not picked up in the country-level balance of payments and capital account figures.  The traditional national accounts are more interested in residency of the issuance not the nationality of the issuer.  Nomura estimates that since 2010, corporations, based in emerging markets, have issues about $400 bln in offshore debt, or about 40% of its total issuance.  The bulk is thought to be denominated in dollars. Den Rest des Beitrags lesen »

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ECB Update

Posted by hkarner - 18. Februar 2014

Author: Marc Chandler  ·  February 17th, 2014  · 

Many observers remain convinced that the ECB will ease policy when it meets in March.  The focus is on a small (10 bp) cut in the repo rate from 25 bp.

Some observers have noted that the new ECB staff forecasts will extend for the first time to 2016.  Some think that a low inflation forecast would be the incentive needed to cut rates. While possible, more likely the ECB staff will provide fodder for the official mantra that inflation expectations remain anchored.  Indeed, this was one of the take-aways from the ECB’s survey of professional forecasters.
In other ways, officials cannot be too disturbed by what they see.  EONIA has become less volatile and somewhat less elevated.  Just below 16 bp yesterday, it is well its 20-day average.  Over the last two weeks, it has traded generally between 12-18 bp.
Excess liquidity in the euro system has also appears to have stabilized.  Bank have slowed their repayment of LTRO borrowings.  Only 1.02 bln euros will be repaid next week.  The four week average is near 1.7 bln euros.  Under its main refi operation, the ECB allocated 93.3 bln euros, which represented a net drain of 1.8 bln euro.  This has been offset, it appears by increased overnight borrowing.  Yesterday banks borrowed 1.05 bln euros overnight, which is the most since September 10. Den Rest des Beitrags lesen »

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Italian Events Spinning Away From the Letta and Alfano Government

Posted by hkarner - 30. Januar 2014

Author: Marc Chandler  ·  January 28th, 2014  ·  RGE EconoMonitor

Political developments in Italy are happening faster than Prime Minister Letta can maneuver.  The economy he is overseeing is the poster child of ECB President Draghi’s assessment of a weak, fragile and uneven recovery in the euro area.

 While Spain’s Target2 imbalances are gradually declining, Italy’s are edging higher.   The economy is lagging behind Spain in the recovery as well.  Spanish assets markets are outperforming Italy’s.
This does not mean, though, that Italy’s markets are doing poorly Italy’s 10-year bond yield is off about 18 bp this year so far, less than half the decline seen in Spain, but in line with the decline in French yields.    Italy’s equities are the best performer in the G7 so far this year.  The FTSE MIB is up about 2%, while no other G7 market is positive, especially after last week’s drop. Den Rest des Beitrags lesen »

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2014 Outlook: Annus Not-So-Horribilis

Posted by hkarner - 1. Januar 2014

Author: Marc Chandler  ·  December 26th, 2013  RGE EconoMonitor· 

Overview:

US: The broad characteristics of the investment climate are unlikely to change very much in the first part of next year.  The largest policy change is the  beginning of the long awaited slowing of the Federal Reserve’s long-term asset purchases.  The process will likely be gradual and may take the better part of 2014 to come to a complete stop.  The drag from fiscal policy will likely lessen. The roughly 1.7% annual growth in employment since 2009 is set to continue and underpin a continued expansion of the world’s largest economy.

EUROZONE: The ordo-liberalism as articulated by Germany, embodied in treaty agreements, and enshrined by the European Central Bank condemns the euro area, and by implication, many of the countries that move in its orbit, to a protracted period of slow growth and low inflation.    The institutional evolution in Europe continues and the pieces of an imperfect banking union are being established.   The ECB is likely to respond to the adverse monetary developments, but unless the perceived threat of deflation increases, it is likely to refrain from extreme measures, such as a negative deposit rate or outright purchase of bonds.
CHINA: The Chinese economy may slow modestly in the coming quarters, though officials will likely respond to evidence that growth is falling below 7.0%. The focus has shifted toward the implementation of reforms announced by the Third Plenum.   These entail financial and governing reforms.  The special economic zone in Shanghai will be viewed as a test case of the ability of the reformers to implement their program over the obstacles posed by inertia, corruption, and outright opposition.
JAPAN: The first year of Abenomics has seen growth strengthen, deflation pressures ease, the yen weaken and Japanese equities advance smartly.  The early turbulence of Japanese government bonds has eased and nominal yields remain low (real rates negative).  The second year is bound to be more challenging, as the economy has lost momentum in the second half of 2013. Den Rest des Beitrags lesen »

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China’s Banking System: The Claymation Version

Posted by hkarner - 29. Dezember 2013

Author: Marc Chandler  ·  December 27th, 2013  ·  RGE EconoMonitor

China BanksIn this two-minute video from the Wall Street Journal, Ken Brown explains the basic imbalances caused by Chinese insular banking system and why it generates too much infra-structure investment and favors large state-owned businesses over smaller businesses and consumption. While the discussion and animation is engaging, it does not really bring us closer to a solution, other than the neo-liberal mantra of greater deregulation.

That message may have been more compelling before the recent financial crisis. Of course, we are sensitive to the distortions caused by state-owned banks lending to state-owned businesses and still mostly state-set interest rates. Yet, the call for liberalization seems overly simple. Did not the US and Europe err in precisely that direction ? Did not the US and Europe enjoy rapid industrialization and growth during periods when interest rates and banking activity were closely regulated?

 

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Great Graphic: Manufacturing PMI in US, EMU and China

Posted by hkarner - 28. Juli 2013

Author: Marc Chandler · July 26th, 2013 · RGE EconoMonitor

Recent data suggests some moderation in the world’s two biggest economies, the US and China, and some improvement in the weak sister of the major economies, the euro area. This Great Graphic that was posted on Business Insider captures this.

At the same time, it is important to recognize that cross-country comparisons are misleading. For example, China’s flash PMI reading shows it the weakest of the three depicted in the graph, but China’s overall growth is still faster than the US and the euro area put together.

Arguably it is best to evaluate each in the context of their own recent performance. The take away from the US is one of overall stability. It may not be very inspiring, but it is stable. China, by contrast, is soft and weakening. The soft landing of 2011-2012 has given way new weakness, which, at least up until now, has the approval of the new Chinese government.

The euro zone’s recovery is the most impressive, though overall growth is challenging and Q2 may have been the seventh consecutive quarterly contraction. Den Rest des Beitrags lesen »

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A Few Thoughts on the EU Recommendations

Posted by hkarner - 1. Juni 2013

Author: Marc Chandler · May 29th, 2013 · RGE EconoMonitor

As widely tipped, the EU is recommending giving several countries more time to reach the budget deficit targets. We have long argued that moving the goal posts was and remains the most likely course.EC President Barroso insisted that this is not a retreat from the austerity, but rather “because of the good progress made, we now have the space to slow down the pace of consolidation.”

That narrative is not compelling. It is not a change in economics that is dictating the change in tact but politics. Youth unemployment in the euro area is nearing 25%, with updated figures due at the end of the week. Even if they are not very organized, the populism on the right and left threatens the elites. German politics are also a key consideration as polls that despite Merkel’s popularity, she might not be able to secure a majority for her governing coalition. Softening austerity and seeking modest stimulative measures may curry support from some voter and steal some of the critics thunder, but not too much to alienate the center-right base.

The EU recommendations have to be approved by the finance ministers, but with Germany’s Schaeuble on board, there is unlikely to be much opposition. That the Dutch are given until 2014, France 2015 and Spain 2016 to reach the 3% deficit/GDP target was anticipated. That Portugal and Slovenia were given until 2015 was not as anticipated. Poland was given an extra year as well (2015)). Den Rest des Beitrags lesen »

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