Emerging Markets Radar (July 9, 2012)

Sunday, July 8th, 2012

Emerging Markets Radar (July 9, 2012)

Strengths

• China cut interest rates again this Thursday, effective Friday, July 6. The one-year benchmark lending rate was cut by 31 basis points to 6 percent, and the one-year benchmark deposit rate was cut by 25 basis points to 3 percent. In the meantime, the People’s Bank of China (PBOC) lowered the floor of lending rates to 70 percent of the benchmark rates from 80 percent, which was just lowered from 90 percent in the previous rate cut. It’s another asymmetric cut, but much less asymmetric than the previous cut.
• According to China International Capital Corporation, of the 16 cities it monitors, housing sales volume increased last week by 33 percent week-over-week, and 15 percent month-over-month. Year-to-date, average sales volume has risen 18 percent. Also in the housing market, Shanghai existing home sales surged 20 percent in June to a 17-month high of 19,300 units, Shanghai Daily reported, citing Century 21.
• Brazil’s inflation rate in June fell to the lowest level in nearly two years by rising 0.08 percent from a month earlier.

Weaknesses

• Macau’s gambling revenue for June rose 12.2 percent to 23.3 billion patacas, versus market expectations of 15.3 percent.
• January to May profits at large and medium-sized Chinese iron and steel companies fell 94 percent year-over-year to Rmb 2.53 billion, the economic Information Daily reports.
• The Guangzhou government unveiled a purchase limit on some mid- and small-sized passenger vehicles license plates from July 1, with a yearly quota of 120,000 units or 10,000 units a month.
• Turkey, the fastest-growing economy after China and Argentina, saw its GDP shrink 0.4 percent (up 3.2 percent year-over-year) in the first quarter from the previous three months, promoting the market to believe an interest rate cut by its central bank.

Opportunities

• With further rate cuts, mortgage rates are lowered again. Particularly, PBOC has encouraged banks to lend to first-time home buyers. The best mortgage rate is a 30 percent discount to the benchmark rate. The chart below shows a downtrend in the ratio between monthly mortgage payments to income, showing improvement in housing affordability.

Threats

• Even with another rate cut within a month by China’s central bank, the market is still muted in Hong Kong and China. The best explanation might be the lack of liquidity in the banking system due to the lower Loan to Deposit (LTD) ratio, currently at 75 percent, and high bank requirement reserve ratio (RRR), currently at 20 percent. The market consensus is for China to cut RRR or reduce LTD soon. Also adverse to the economy is the weak loan demand this year, which might be improved by starting infrastructure projects and increasing consumption spending assisted by fiscal policy.

Tags: Bank Of China, Basis Points, Benchmark Rates, Century 21, China International, Economic Information, Emerging Markets, Existing Home Sales, First Time Home, Housing Market, Housing Sales, Inflation Rate, Iron And Steel, License Plates, Market Expectations, Mortgage Rates, Passenger Vehicles, Pboc, Sales Volume, Steel Companies
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Mark Carney Kicks the Can

Sunday, June 10th, 2012

Submitted by James Miller of the Ludwig von Mises Institute of Canada

Mark Carney Kicks The Can

Bank of Canada Governor Mark Carney takes a lot of cues from his U.S. equivalent and fellow central banker Ben Bernanke.  Both took interest rates to anorexic levels in light of the financial crisis in 2008.  Both used their positions of power as stewards of the people’s money to bail out the big banks.  Both take credit for the gains of their respective stock markets and for guiding their economies through the global recession.  Both are forever on a quest to rid of the world of the boogeyman of deflation.

And both are sewing the seeds of their own destruction by keeping interest rates artificially low and ultimately driving unsustainable investment that must eventually be liquidated.  All around the world, the boom bust cycle continues to occur due to central banks attempting to induce economic growth with money printing.  China’s economy is continuing to come apart as manufacturing output and real estate prices plummet.  These sectors were bid up by double digit increases per annum in the country’s money supply over the past decade.  Since inflationary growth, by definition, can’t go on forever, as its continuance results in what Ludwig von Mises called the “crack-up boom” and destruction of the currency, the chickens of the People’s Bank of China’s reckless monetary policy are finally coming home to roost.  The PBOC has responded to the downturn by recently cutting interest rates for the first time since 2008 in what will likely be a vain effort to reinflate the bubble.

Over in Europe, the year over year change in the broad money supply has dropped dramatically since 2010.  This provided the spark for the sovereign debt crisis which shows no sign of slowing down unless Angela Merkel and Germany concede to further inflationary measures by the European Central Bank.  Just like her support for the big banks and the austerity measures that ensure idiotic bankers don’t take too much of a loss on their holdings of euro government bonds, Merkel will likely give in to money printing in the end as she has already endorsed the push for a political union.

And now in Canada, Mark Carney announced a few days ago the Bank of Canada will keep its benchmark interest rate steady at 1%.  This announcement comes despite his previous warnings over the enormous increase in Canadian private debt.  But of course the run up in debt couldn’t have occurred if interest rates were determined by market factors only.  Had supply and demand been allowed to function freely, interest rates would have risen as a check on the swell in debt accumulation.   Carney won’t admit this though.  Like all central bankers, he has made a habit of boasting the positive effects of his low interest rates policies while avoiding blame for the negative consequences.

He is a bartender who gleefully takes the drunk’s cash while replying with “who, me?” when said drunk drinks himself to death.

What makes the promise of continually low interest rates especially worrisome is not only does it tell the market to keep accumulating debt, but it is also an attempt to keep what some are calling a nation-wide housing bubble from deflating.  Over the past decade, Canadian home prices have shot up at a far steeper pace compared to the decades that preceded it.  In recent years, the acceleration in home prices has been fueled by the Bank of Canada’s historically low overnight lending rate which went from 3% before the financial crisis to .25% in 2009 and now rests steadily at 1%.  The BoC has already acknowledged that its interest rate policies directly affect mortgage rates.  Many Canadian media publications and investment newsletters are pointing out this trend and warning of a potential collapse.  The BBC even did a report on it.  There is nothing potential about a sharp downturn in home prices however; it will happen.  It’s only a question of when.

With China and Europe leading the pack, the world economy is beginning to take a turn for the worse.  The orgy of money printing which took place over the past few years has slowed down significantly; even in the U.S.  Central bankers are standing at a precipice in which they must decide if they will forge ahead and prime the monetary pump to paper over the various malinvestments caused by their previous interventions or actually allow for a contraction and the market to adjust to a new path of sustainable growth.  If history is any indication, the latter is not a considerable option as it would be devastating to the banking sector which is reliant on piggybacking credit expansion off of an uninterrupted flow of newly printed monies.

Carney’s decision to keep interest rates suppressed is yet another instance of a central banker unable to face reality.  The malinvestments will continue to accumulate and will have to be liquidated at another date.  What Carney has done to mitigate the looming debt and housing bubble is effectively kick the can down the road.  He has revealed through his actions the undeniable truth which holds for all central bankers: that they have no other card to play but the printing press.  As legendary investor Marc Faber has noted,

“I do not believe that the central banks around the world will ever, and I repeat ever, reduce their balance sheets. They’ve gone the path of money printing… And once you choose that path, you’re in it and you have to print more money.”

The Austrian theory of the trade cycle developed by Mises a century ago tells us that credit expansion is bound to end in depression.  To quote Herbert Stein’s Law, the business cycle theory essentially boils down to “if something cannot go on forever, it will stop.”  The debt fueled boom in Canada is a house of cards.  No matter how much money printing or interest rate manipulation Carney attempts, the collapse in inevitable.   His record, along with Ben Bernanke’s, will eventually be one of dismal failure.

Tags: Angela Merkel, Bank Of Canada, Bank Of Canada Governor, Bank Of China, Ben Bernanke, Bust Cycle, Central Banks, China, Crack Up, Debt Crisis, Digit Increases, Global Recession, Ludwig Von Mises, Ludwig Von Mises Institute, Mark Carney, Money Printing, Money Supply, Pboc, Sovereign Debt, Vain Effort, Von Mises Institute
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Emerging Markets Radar (June 11, 2012)

Sunday, June 10th, 2012

Emerging Markets Radar (June 11, 2012)

Strengths

• The People’s Bank of China (PBOC) has cut interest rates. Lending rates were cut by 25 basis points for all maturities. Deposit rates were cut by between 10 and 40 basis points. The move makes the one-year reference lending rate 6.31 percent and the one-year reference deposit rate 3.25 percent. However, banks have also been given increased flexibility to pay deposit rates up to 10 percent above the reference (previously the reference rate was a ceiling) and make loans at rates up to 20 percent below the reference (previously the floor was 10 percent below).
• Chinese banks lent almost 800 billion Yuan in May, Economic Information Daily reports.
• China HSBC Services PMI was 54.7 versus 54.1 in the prior month, indicating retail and services still in an expanding stage.
• The Philippine economy expanded by 6.4 percent year-over-year in the first quarter of 2012, beating expectations with strong services growth of 8.5 percent amid an improving domestic outlook.

Weaknesses

• While the market praised the progress the PBOC has made in liberalizing interest rates by widening the band where the banks can deviate lending and deposit rates from the reference rates, it almost unanimously agreed this squeezes the banks’ profit margin. In fact, there are a couple of reasons that the margin pressure will be much smaller than the market would believe. Those money center banks have a dominant franchise in China and so they can resist reducing lending rates and increasing deposit rates. For depositors, safety is more important than earnings from the deposits. Besides, bank customers place more than 50 percent of their money in demand deposits with large banks, which pay very little interest and provide banks with cheap money.
• Malaysia’s exports unexpectedly fell in April for a second straight month, dropping 0.1 percent as shipments of electronics and palm oil dropped.
• Lackluster external demand is weighing on the Israeli economy, and weak data have led the broad market index (BMI) to revise down the 2012 real GDP growth forecast from 3.2 percent to 2.9 percent.

Opportunities

• India’s external weaknesses are starting to correct. The country’s trade shortfall came in at $13.5 billion in April, down from $15.2 billion in February and $19.6 billion in October 2011. Lower global commodity prices and the weaker currency are likely to lead to a further narrowing of the trade deficit in the coming months.
• The Colombian peso has a potential to further strengthen in the short term, points out Business Monitor International as companies bring in U.S. dollars from abroad to pay annual taxes due on June 25.
• China cut benchmark lending and deposit rates by 25 basis points on Thursday. Historically, such a move will drive up liquidity and the stock market in Hong Kong and in the domestic B share market, as the chart shows.

Threats

• In spite of the interest rate cut on Thursday evening by the PBOC, both Hong Kong and China domestic A share markets went down on Friday. This indicates that the market is worried about the economic data to be released over the weekend. Also, the rate cut of 25 basis points is not to reverse the economic slow-down in China in the short term, but infrastructure investment and government fiscal spending will.
• The Russian central bank feels increasingly uncomfortable with the recent weakening of the ruble. The central bank has now started to intervene on the open market by selling its foreign currency reserves. So far, this intervention, which is partly responsible for a $10 billion decline in foreign reserves in May, had little success in reversing the decline in the ruble.

Tags: Bank Customers, Bank Of China, Basis Points, Cheap Money, China, Chinese Banks, Demand Deposits, Depositors, Economic Information, Emerging Markets, First Quarter, Hsbc, India, Margin Pressure, Maturities, Money Center Banks, Palm Oil, Pboc, Philippine Economy, Profit Margin, Services Pmi, Yuan
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China Joins Global Easing Party By Cutting The Lending And Deposit Rates By 25 bps

Thursday, June 7th, 2012

Update: 9:00 am has come and gone… and no global bailout unlike November 30, 2011. Not a good sign for those expect a central-bank D-Day.

While minutes ago the Bank of England followed in the ECB’s footsteps, it was the China central bank that stole England’s thunder, announcing an unexpected rate cut moments before 7 am, and thus finally joining the global easing party: this was the first Chinese interest rate cut since 2008. As a reminder, hours before the global central bank intervention on November 30, China announced its first (50 bps) reserve requirement cut since 2008. Is today’s PBOC move, which is the first cut of deposit and 1 year lending rates also since 2008, a harbinger of something much bigger to come any second now?

From the PBOC:

The People’s Bank of China decided to cut financial institutions RMB benchmark deposit and lending interest rates since June 8, 2012. One-year benchmark deposit rate cut of 0.25 percentage points, year benchmark lending interest rate cut by 0.25 percentage points; other deposit and lending interest rates and individual housing provident fund deposit and lending rates be adjusted accordingly.

 

Since the same day: (1) the upper limit of the floating range of interest rates on deposits of financial institutions was adjusted to 1.1 times the benchmark interest rate; (2) loans from financial institutions interest rate floating range of the lower limit was adjusted to 0.8 times the benchmark interest rate.

And from Bloomberg:

China Cuts Interest Rates for First Time Since 2008

China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe’s worsening debt crisis threatens global growth.

The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks can also offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent.

European stocks and U.S. index futures extended gains as China’s move fanned optimism that policy makers around the world will do more to bolster growth. The announcement, two days before China is due to report inflation, investment and output figures, may signal that the economy is weaker than the government expected.

“This will be the beginning of a rate cut cycle and there will be at least one more reduction this year,” said Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. “The data to be released over the weekend must be very weak and inflation must have eased sharply.”

The MSCI All-Country World Index added 0.8 percent at 7:30 a.m. in New York. The Stoxx Europe 600 Index jumped 1.2 percent, extending yesterday’s biggest rally in six months, while the Standard & Poor’s 500 Index futures advanced 0.7 percent.

Slower Growth

The central bank last reduced benchmark interest rates in late 2008, when the government unveiled a 4 trillion yuan ($586 billion at the time) stimulus package to counter the effects of the global financial crisis. Interest rates have been unchanged since an increase in July 2011.

Industrial output in China, the world’s biggest producer of steel and cement, probably rose 9.8 percent last month from a year earlier, close to the slowest pace in three years, according to the median estimate in a Bloomberg News survey of 27 economists ahead of a National Bureau of Statistics report due June 9.

Inflation may have moderated to 3.2 percent in May from a year earlier after a 3.4 percent rate in April, a separate survey showed, the fourth month consumer prices have risen by less than the government’s 2012 target of 4 percent.

Today’s move signals policy makers are concerned that the cost of borrowing is crimping companies’ spending and holding back expansion in the world’s second-biggest economy. Three bank officials told Bloomberg News last month that the nation’s biggest banks may fall short of loan targets for the first time in at least seven years as demand for credit wanes.
Slowdown Worsening

The PBOC cut banks’ reserve requirements in November for the first time in three years, and again in February and May, to spur lending.

China’s manufacturing expanded at the slowest pace in six months in May, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.

Premier Wen Jiabao and the State Council, or Cabinet, pledged last month to place greater emphasis on stabilizing growth after data showed April industrial production, new loans and exports all increased less than economists forecast. The data prompted banks including Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. to cut their economic-growth estimates.

Slowdown Worsening

The PBOC cut banks’ reserve requirements in November for the first time in three years, and again in February and May, to spur lending.

China’s manufacturing expanded at the slowest pace in six months in May, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.

Premier Wen Jiabao and the State Council, or Cabinet, pledged last month to place greater emphasis on stabilizing growth after data showed April industrial production, new loans and exports all increased less than economists forecast. The data prompted banks including Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. to cut their economic-growth estimates.

Tags: Bailout, Bank Of China, Bank Of England, Benchmark Interest Rate, Bps, Central Bank Intervention, China, China Cuts, D Day, Debt Crisis, ECB, Economic Slowdown, Financial Institutions, Footsteps, Global Growth, Gold, Harbinger, interest rates, Pboc, Percentage Points, Provident Fund, Reminder
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Emerging Markets Radar (April 23, 2012)

Sunday, April 22nd, 2012

Emerging Markets Radar (April 23, 2012)

Strengths

• The People’s Bank of China (PBOC) is ready to use reserve required ratio (RRR) cuts and open market operations (OMOs) to boost liquidity where necessary, Xinhua News reported.
• China will widen the yuan trading band to 1 percent as of April 16, PBOC said in a statement. The new move eventually will pave the way for RMB internationalization and an open capital market.
• China has cut RRRs for some county-level lenders by 100 basis points.
• Recently China started experimenting in Wenzhou with legitimizing private capital for bank lending. This type of lending has been banned since the Communist party started ruling the country. The move should have significant impact for long-term social and economic development in China, which tends to thrive in a freer environment.
• Brazil’s central bank cut its benchmark rate by 75 basis points to 9 percent from 9.75 percent this week. This positively impacts money supply, but weakens the Brazilian real and may cause money to flow out of the country.
• India also cut its benchmark rate by 50 basis points to 8 percent to help boost growth after inflation stabilized and first-quarter GDP growth significantly slowed.

Weaknesses

• China International Capital Corp. reported that the big four banks in China lost Rmb 1 trillion of deposits in early April, which may renew concerns over a lack of new loans this month.
• Foreign direct investments in China dropped for a fifth-straight month in March. Inbound investment fell 6 percent from a year earlier to $11.76 billion after a 0.9 percent drop the month before.
• The Philippines central bank maintained its benchmark rate at 4 percent, halting after two consecutive cuts.
• Singapore’s non-oil domestic exports fell 4.3 percent in March as shipments of electronics and petrochemicals eased, while the market expected a gain of 7.1 percent.
• Chinese premier Wen Jiabao indicated from a State Council meeting that China remains firm on its property curbs despite slowing economic growth (China power use rose only 7 percent in March, the lowest for a long time) and will strictly regulate local government financing vehicles (LGFV). In truth, the housing market may become healthier if developers can come to reality by lowering prices and clearing up inventories.

Opportunity

• The population in China is increasingly using mobile internet as smartphone penetration rises. The chart below by Morgan Stanley shows the number of mobile internet users is reaching 400 million, and the firm says this will benefit social network and search engine providers such as Sina, Tencent, and Baidu.

Threat

• China’s economy is still seeing downward pressure and the second quarter may mark a “lower point” for growth before it slowly accelerates in the second half, said Zhu Baoliang, chief economist at the State Information Center’s forecast department in China.

Tags: Bank Of China, Benchmark Rate, China International, Chinese Premier Wen Jiabao, Consecutive Cuts, Country India, Domestic Exports, Economic Development In China, Foreign Direct Investments, GDP Growth, Inbound Investment, Open Market Operations, Pboc, Philippines Central, Premier Wen Jiabao, Private Capital, Quarter Gdp, Wenzhou, Xinhua News
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Art Cashin: The Clandestine War Among Central Banks

Wednesday, April 18th, 2012

Nothing dramatic here, but the Chairman of the fermentation committee [Cashin] just has that unique flair for explaining things so simply, even an economics Ph.D., a caveman, or the other kind of ‘Chairman’, would understand…

The Not So Clandestine War Among The Central Banks - Back in Philosophy class in the 5th grade, the instructor in Epistemology used to have an interesting parable on problems of perception.

The thesis went something like this: Suppose you are an alien and have been told about the game of chess. Due to a technicality, however, your equipment would only allow you to see one square on the board. Over the course of the game any, or all, the pieces might arrive on your square.

You might see a Knight or a Bishop; a Rook or a Queen or a Pawn, but you would never know where it had come from nor where it had gone when it disappeared. You never got quite enough information to envision the entire board or the concept of the game.

I was reminded of the parable as I have watched the actions of some key central banks over the last few years.

According to the financial media, each central bank is easing aggressively to serve a need of the area it serves.

The Fed is easing to help employment and the housing market in the U.S. The ECB is easing to help it banks, sinking under sovereign debt problems. The People’s Bank of China is easing to avoid a hard landing. The Bank of Japan is easing to restart an economy that has been dormant for two decades.

Those may be the official lines but cynics think there may be more to the game than is seen through this telescope. Cynics think it’s all about the currencies.

The thinking is that each bank would like to see its currency weaken to make its exports more attractive. It doesn’t stop there. With Europe being China’s biggest trade partner, some believe the PBOC is the bid under the Euro at 1:30, keeping the Euro strong enough to make Chinese goods attractive.

The currency influences of the other central banks may be a bit more subtle but no less effective or intense. No trade war yet but lots of drilling and marching.

Actually that is not true. from Mercopress: “US and EU considering WTO actions against Argentine ‘protectionist practices”

The US and forty countries which formalized a joint statement before the World Trade Organization complaining about Argentina’s trade restrictions are considering moving a step further and begin a “disputes settlement” process which could lead to an open condemnation if the administration of President Cristina Kirchner does not lift the protectionist network.

According to Buenos Aires daily Clarin quoting WTO sources in Geneva, “expectations are that it will be the US that presents the “disputes settlement” process since the White House was the main sponsor of the joint statement. The process could end with a formal condemnation of Argentina opening the way for commercial reprisals”.

In the March joint statement presented by the US and forty other leading countries the main complaints against Argentina included the non automatic licences system; the previous sworn statement registry to obtain the approval of an imports operation and the policy forcing companies to apply the ‘dollar-to-dollar’ mechanism which means they have to export a dollar for each dollar import.

Once the disputes settlement begins there is a period of consultations in which in this case Argentina must prove it has not infringed WTO rules, and if no agreement is reached a three member panel is named, chosen by the litigants or WTO Director General Pascal Lamy.

Time for some blogger-cum-budding author (which is about 99% of all) to write a currency wars sequel: Trade Wars: The Final Frontier.

Tags: Art Cashin, Bank Of China, Bank Of Japan, Caveman, Central Banks, Chinese Goods, Clandestine War, Cynics, Debt Problems, ECB, Epistemology, Game Of Chess, Parable, Pboc, Philosophy Class, Problems Of Perception, Rook, Sovereign Debt, Technicality, Trade Partner
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March Inflation Rises 0.3%, As Expected, And A Primer On CPI For Energy

Friday, April 13th, 2012

No surprises in today’s release of US CPI, which unlike China’s still searing inflation (which is the PBoC’s way to check to Bernanke on more easing) came just as expected at 0.3% headline and 0.2% core, or 2.7% Y/Y.

From the release: “The indexes for food, energy, and all items less food and energy all increased in March. The gasoline index continued to rise, more than offsetting a decline in the household energy index and leading to a 0.9 percent increase in the energy index. The food index rose 0.2 percent as the index for meats, poultry, fish, and eggs increased notably. The index for all items less food and energy rose 0.2 percent in March after increasing 0.1 percent in February. Most of the major components increased in March, with the indexes for shelter and used cars and trucks accounting for about half the total increase for all items less food and energy. The indexes for medical care, apparel, recreation, new vehicles, and airline fares increased as well, while the indexes for tobacco and household furnishings and operations were among the few to decline in March.” The items rising the most in March sequentially: fuel oil at 2.7%, gasoline at 1.7% and apparel at 1.3%. The only decliner was electricity at -0.8%, courtesy of nat gas plunging. With a record hot summer approaching, this is a good thing.

For those who eat and use energy, so not the Fed, here is a drill down:

Food

The food index rose 0.2 percent in March after being unchanged in February. The index for food at home, unchanged in February, rose 0.1 percent in March. The index for meats, poultry, fish, and eggs rose 0.8 percent, its largest increase since May. The index for other food at home also rose in March, increasing 0.3 percent. The other four major grocery store food groups declined. The fruits and vegetables index fell 0.4 percent, its sixth consecutive decline, as the fresh vegetables index fell 1.6 percent. The index for cereals and bakery products fell 0.2 percent, as did the index for nonalcoholic beverages. The index for dairy and related products fell 0.1 percent, its fourth decline in five months. The food at home index has risen 3.6 percent over the last 12 months; this was its smallest 12-month change since last March. The fruits and vegetables index has declined 3.9 percent over that period, its largest 12-month decline since November 2009. The other five major grocery store food group indexes have increased over the past year, with the dairy group posting the largest increase at 6.3 percent. The index for food away from home rose 0.2 percent in March after a 0.1 percent increase in February and has risen 3.0 percent over the last 12 months.

Energy

The energy index, which rose 3.2 percent in February, increased 0.9 percent in March. The gasoline index rose 1.7 percent following its 6.0 percent February increase. (Before seasonal adjustment, gasoline prices increased 8.1 percent in March.) The fuel oil index also continued to rise, increasing 2.7 percent in March after rising 2.8 percent in February. In contrast, the index for energy services (comprised of electricity and natural gas) fell 0.4 percent. The natural gas index rose 0.9 percent after declining in each of the previous five months. The electricity index, however, fell 0.8 percent, its largest decline since June. Over the last 12 months, the gasoline index has risen 9.0 percent and the fuel oil index has increased 5.3 percent. The electricity index, however, has only increased 0.6 percent and the index for natural gas has declined 9.1 percent.

And since the CPI number was a snoozer, here is a great primer on breaking down the all critical CPI for Energy courtesy of Stone & McCarthy:

The CPI for Energy accounts for roughly 10% of the composition of the All Items CPI for Urban Consumers. It receives high focus by the media, market players, and economists because it is a topic of controversy since it is excluded from ‘Core’ measures of inflation. It also represents the prices of a package of goods that are vital to consumers. This Chart of the Day examines how Energy Prices are organized in the CPI.

The CPI for Energy is a “Special Aggregate” in the BLS’s database. In other words, it is a separate aggregation for informational purposes rather than an integral one within the main All Items CPI organization scheme. It is not one of the Eight Major Groups that compose the All Items CPI: parts of the CPI for Energy can be found separately in two of the Eight Major Groups.

Specifically, the CPI for Motor Fuel category can be found in the Transportation grouping, and the CPI for Household Energy can be found in under the Housing category.

Each component of the CPI has its own Aggregation Weight, derived from a calculation based on the Consumer Expenditure Survey conducted by the BLS. Items that are more heavily purchased by consumers get a larger weight in the CPI aggregation. For example, the component indices are multiplied by their Aggregation Weights and summed to generate the CPI for Energy. An Index times its Aggregation Weight is called a Cost Weight, and all of the Cost Weights within a category sum together to form the category’s index. We can look to the Cost Weights to measure the size of each component within a category.

Another transformation of the data is the Contribution to the Percent Change of the Category Index. This is noteworthy because a large change of a small component might have less of an impact on the overall index compared to a small change of a large component. The following graph displays the Contributions of each component of the CPI for Energy to the month-over-month change in the Energy Index, in Percentage Points. The contributions sum to the month-over-month percent change of the category. In other words, if the contribution of a component is one percentage point, than the category would have increased one percentage point less if the component had remained unchanged in the month.

We can perform the same operation to learn about each component’s impact on the CPI for Energy over the past year.

Tags: Airline Fares, Care Apparel, Cereals, Energy Index, Fish Eggs, Food Energy, Food Groups, Food Index, Fruits And Vegetables, Fruits Vegetables, Hot Summer, Household Energy, Household Furnishings, Major Components, Nat Gas, New Vehicles, Pboc, Poultry Eggs, Store Food, Us Cpi
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Emerging Markets Radar (March 12, 2012)

Sunday, March 11th, 2012

Emerging Markets Radar (March 12, 2012)

Strengths

• The Global Emerging Markets Fund (GEMFX) has benefited from a bias toward small-caps in 2012. On a relative basis, the fund has benefited from choosing stocks that pay more than twice the dividend yield of the Russell 2000 Index and those companies which have a low price-to-earnings ratio.
• China’s February Consumer Price Index (CPI) was up 3.2 percent in February, lower than the estimate of 3.5 percent and below January’s 4.5 percent figure. With inflation expectations tamed, the market expects the People’s Bank of China (PBOC) to further cut the reserve requirement ratio (RRR).
• China’s fixed asset investment (FAI) growth came in stronger than expected at 21.5 percent year-over-year during the first two months of 2012, up from 18 percent in December. Interestingly, residential FAI rose 27 percent, the same pace as last year. This indicates that the housing market may not collapse as many worried last year.
• New bank deposits rebounded strongly in February to Rmb 1.6 trillion, enabling Chinese banks to lend more in March. In addition, M2 money supply growth was near expectations, right at 13 percent.
• Philippine CPI rose 2 percent in February. This is well below the 3.2 percent increase that was forecasted.

Weaknesses

• China’s retail sales and industrial production growth came in weaker than expected. Retail sales rose 14.7 percent, down from 17.1 percent in 2011. Industrial production rose 11.4 percent, slowing by 1.4 percentage points from December. These data points indicate that China had probably over tightened its monetary and industrial policies and needs to loosen up these policies during the first half of the year.
• China has lowered the country’s GDP growth target to 7.5 percent this year, 50 basis points lower than in the past eight years. Many believe Chinese policymakers will try to slow down the country’s economic growth by curbing housing market growth and postponing some infrastructure growth. However, China has consistently beaten its own GDP target every year over the last decade and the country will still encourage growth in consumption and industrial enhancement.
• Malaysia’s exports grew 0.4 percent in January, the slowest pace in 15 months.
• After a good run, Turkish industrial production faltered in January. Industrial production was up by 1.5 percent year-over-year in January, weaker than the market expectations. Turkey’s Purchasing Manager’s Index (PMI) also deteriorated in February as a result of poor weather conditions.

Opportunities

• Droughts from Mexico to Argentina are shrinking corn stockpiles to a five-year low. This raises the prospect of a bull market in the U.S., as farmers are expecting to see the biggest crop ever.
• Corn demand in China, the biggest consumer after the U.S., may decline after Premier Wen Jiabao lowered the annual growth target to 7.5 percent. Prices fell 16 percent in the last four months of 2011 as the U.S. Department of Agriculture (USDA) predicted Brazil and Argentina would produce their biggest crops ever. The two countries currently account for almost 10 percent of global corn supply. While prices may keep rising for now, analysts anticipate declines by the end of the year as U.S. growers harvest the most acres planted since 1944.
• This chart shows China’s inflation has come down notably since July 2011. Food prices, the largest contributor to the rise in inflation last year, have come down since the fourth quarter after the supply chain and logistics were improved. The market expects the PBOC to cut RRR again in order to support economic growth and liquidity in the economy.

Threats

• While investment flows pour into most of the largest emerging markets, foreign investors are selling South African equities at the fastest pace in four years over growing concern that policy makers will seek a larger share of the nation’s mining profits. International investors sold $933 million of South African equities in the first two months of this year and are on track for the biggest first-quarter outflow since 2008.
• A study commissioned by President Jacob Zuma’s ruling African National Congress party proposed increasing taxes on the mining industry last month. In addition, the party’s youth wing has lobbied for a government takeover of gold and platinum mines to boost employment in Africa’s biggest economy.
• China’s February retail sales rose 14.7 percent, below the expectations of policymakers. In order to reach the stated consumption growth target near or above 18 percent, Chinese policymakers need to loosen the country’s monetary policy or begin a fiscal subsidy, such as a new home appliance incentive.

Tags: Agriculture, Asset Investment, Bank Deposits, Bank Of China, Chinese Banks, Consumer Price Index, Dividend Yield, emerging markets fund, GDP Growth, Gemfx, Growth Target, Index Cpi, Industrial Policies, Inflation Expectations, Infras, Money Supply Growth, Pboc, Price To Earnings Ratio, Relative Basis, Russell 2000 Index, Small Caps
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China’s Cut in Reserve Requirements – Very Bullish for Stocks

Wednesday, February 22nd, 2012

The PBoC’s announcement of a 0.5% cut in the reserve requirement rate (RRR) of Chinese banks has significant consequences not only for the Chinese economy but also for China’s stock market. The cut to 20.5% for large banks follows a similar cut in December last year after hikes since January 2010 that saw the RRR increasing in 12 increments from 15.5% to 21.5%. It is estimated that one half percent change in the RRR amounts to a change of approximately 400 billion yuan or roughly US$60 billion in liquidity. It therefore means that the jump in the RRR since January 2010 has effectively drained overall liquidity by approximately US$720 billion. That is equal to approximately 6% of China’s GDP in 2010 and 2011 combined.

Although the PBoC cited weak external demand as the main reason for the drop in the RRR, liquidity became very tight in recent weeks and forced interbank rates significantly higher. The CFLP Manufacturing PMI that I seasonally adjust continues to indicate lackluster growth in China’s manufacturing sector largely as a result of weak export orders. As in 2008 the PBoC held off on further increases in the RRR in 2011 when weakness in the manufacturing PMI became apparent. The first cut in the RRR last year was announced when the manufacturing PMI contracted – again similar to what happened in 2008. The latest cut therefore indicates that the manufacturing PMI for February is likely to again show abysmal growth.

Sources: CFLP; Li & Fung; BIS; Plexus Asset Management

The weakness of China’s economy is not only confined to the manufacturing sector, though. While still signaling growth, my seasonally adjusted CFLP Non-manufacturing PMI indicates that growth has slowed to about half of the average since the recovery after the 2008/2009 crisis.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

The weakness in the non-manufacturing sector is driven by weak consumer confidence.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

My GDP-weighted seasonally adjusted CFLP PMI indicates that China’s year-on-year GDP growth has slowed to approximately 8 – 8.5% from 8.9% in the fourth quarter last year.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

The cut in the RRR is consistent with what happened in 2008 when GDP growth fell below 9%.

Sources: NBSC; BIS; Plexus Holdings.

Assuming that a 0.5% change in the RRR equaled US$60 billion throughout, I calculated the cumulative liquidity drain. It is evident that changes in liquidity lead GDP growth by approximately two quarters and the seasonally adjusted manufacturing PMI by three months.

Sources: NBSC; BIS; Plexus Holdings.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

I view the cut in the RRR as very bullish for Chinese stocks. Changes in the direction of the RRR had a major impact on the Shanghai Composite Index (SSEC 2403.59 �‘0.00%) in the recent past. In 2008 the first cut in the RRR coincided with the bottom in the Shanghai Composite Index, while the hike in January 2010 coincided with the start of the slide in equity prices.

Sources: CFLP; Li & Fung; BIS; Plexus Holdings.

The market is currently not out of sync with the underlying economy and is discounting a not seasonally adjusted CFLP Manufacturing PMI of approximately 50 for February. March and April are normally exceptionally strong months from a seasonal perspective and are likely to be supportive of stock prices. Together with the likely impact of the increase in liquidity I think the next strong bull market in Chinese stocks is underway. I stick to my view that the Chinese stock market will be the best performing equity market globally in 2012.

Sources: CFLP; Li & Fung; Plexus Holdings.

Tags: China Economy, China Gdp, China S Economy, Chinese Banks, Chinese Economy, Consumer Confidence, Economy China, Export Orders, GDP, Half Percent, Increments, Interbank Rates, liquidity, Manufacturing Sector, Pboc, Percent Change, Plexus Asset Management, Rrr, Stock Market, Yuan
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China Cuts RRR By 50 bps Despite Latent Inflation To Cushion Housing Market Collapse

Saturday, February 18th, 2012

It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice’s point that when it comes to “inflation targeting” central planners are merely the biggest “fools“, this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious – a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, “The last time they stimulated their CPI was close to 2%. It’s 4.5% now, and blipping up.” As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these “pockets” happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world’s biggest shadow liquidity tsunami.

First, here is a chart showing the collapse in the Chinese housing market in all its glory – without a shadow of a doubt the primary reason for the PBOC to do what it did today:

Will the PBOC be able to redirect the “Austrian” money flow into ponzi encouraging prospects? Here is Sean Corrigan with some thoughts:

Chinese Real M1 joins that of parts of Europe, the UK, India, and several other, key EM nations in dropping into negative territory and hence strangling the monetary impetus towards both dubious short-term output gains and more certain quickening of the pace of price appreciation which has driven so much of the recovery so far. This means that only the US is left creating sufficient real new money to keep things supported at present – a phenomenon not surprisingly being reflected in its run of somewhat improved macro numbers in recent months.

For China itself, this is unprecedented – at least in the last 15 years or so during which China has assumed the role of marginal buyer of inputs a fortiori – and it represents the latest stage in a jarring, screeching, airbag-triggering deceleration from 2010′s extraordinary 37.5% growth rate. You don’t have to be an Austrian to see what this must imply for all the non-remunerative, hyper-Keyensian, ‘stimulus’ projects launched to offset the Western slump, post-LEH/AIG which litter the Middle Kingdom’s landscape, both figuratively and literally.

While we must be slightly tentative in our inferences – due to the disruptive arithmetical effect of that highly moveable feast which is the Lunar New Year – it cannot be denied that several other indicators – imports, container traffic, power consumption, for example – are also flashing Hard Landing Red here.

Watch this space…

Here is the MSM take on today’s event via Reuters:

China’s central bank cut the amount of cash banks must hold in reserves on Saturday, boosting lending capacity by an estimated 350-400 billion yuan ($55.6-$63.5 billion) in a bid to crank up credit creation as the world’s second-biggest economy faces a fifth successive quarter of slowing growth. The People’s Bank of China (PBOC) is on the course of gentle policy easing to cushion the world’s fastest-growing major economy against stiff global headwinds as Europe’s debt crisis grinds on, although it has been treading warily.

The PBOC cut big banks’ reserve requirement ratio (RRR) by 50 basis points to 20.5 percent, effective from next Friday, after repeatedly defying market expectations for such a move after it first cut the ratio last November.

“It’s not a big surprise. Although they (Chinese leaders) stress policy stability, an RRR cut is necessary. Trade and monetary data in January pointed to some downward pressure on the economy,” said Hua Zhongwei, an economist at Huachuang Securities in Beijing.

“But policy easing will be gradual given the central bank sounded cautious about inflation in its fourth-quarter monetary policy report.”
…

Slower growth also has ramifications for the world economy — already hampered by decaying demand from debt-ridden Europe and still under-spending U.S. consumers — given that China now adds more each year to net global growth than any other nation.

China’s leader-in-waiting, Xi Jinpeng, assured an audience of business executives in Los Angeles on Friday that China’s growth would not falter it would continue to rebalance its economy to import more from other countries.

“There will be no so-called hard landing,” said Xi, who is almost sure to succeed Hu Jintao as Chinese president in just over a year, on the final day of his tour of the United States.

The central bank announced its first cut in RRR in three years on Nov. 30, 2011, taking the rate down by 50 bps.

Investors had expected another RRR cut ahead of the Chinese Lunar New Year in late January, but they were wrong-footed as the central bank opted for open market operations to provide short-term cash for banks.

More meaningless RRR cuts coming?

“We still see four more RRR cuts in the remainder of the year,” said Shen Lan, an economist at Standard Chartered Bank in Shanghai. “The central bank may still stress policy stability. The next cut should be in Q2.”

Oh well, if the perception of encouraging inflation is what the PBOC wants, the perception of encouraging inflation is what the Chinese gold bugs get.

Tags: Animal Spirits, Austrian Money, Beating Around The Bush, Bps, Brute Force, Central Planners, Corrigan, CPI, Gold Trade, Grice, Housing Market, Market Collapse, Michael Mcdonough, Money Flow, Pboc, Reserve Ratio, Shadow Of A Doubt, Shanghai Composite, Time China, Uk India
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