Tuesday, July 20, 2010
Grantham Summer Essays
Wednesday, July 14, 2010
Friday, July 09, 2010
Click on chart to enlarge, courtesy of ESN/Equinet/Danske Markets Equities.
Thursday, July 08, 2010
Click on chart to enlarge, courtesy of Nordea Markets.
However, the Finnish economy was very long in coma, as the economists at Danske Bank are summing up in their Nordic Outlook today:
Click on chart to enlarge, courtesy of Danske Bank Markets.
After an unprecedented 7.8% fall in GDP in 2009 and a weak Q1, we expect the economy to have returned to growth in Q2 10, as exports rose in April and confidence indicators are back to normal levels.
We forecast GDP to rise 1.8% in 2010 and 2.5% in 2011. Despite the debt crisis in the euro area, Finland’s position as a low debt country gives it a good chance to recover on the back of exports. A worse-than-expected performance of the EU economies would flatten our forecast.
Strong consumer confidence and record-low interest rates are feeding through to retail sales and car registrations, which have bottomed out during spring. The housing market is expected to cool a bit after heating up during the first quarter.
A modest recovery is confirmed by a better-than-feared labour market performance. The seasonally adjusted unemployment rate appears to have peaked in January at 8.9% and hours worked have also started to rise slowly.
We expect inflation to reach 1.4% in 2010 and 2% in 2011. Most cost pressures remain low and demand on the weak side, but import prices and the rise in VAT will show up on new price tags.
The economic crisis together with policy response has created a wide budget deficit, but the incumbent government is unlikely to make major policy changes before parliamentary elections in April 2011. Austerity measures and a tax reform are likely to follow the elections.
Wednesday, July 07, 2010
Over the shorter term, in order to re-start the commodities price cycle, we see the need for restoration of positive GDP/capita growth rates. Although the data is not sufficiently robust to pinpoint the exact tipping point, there is a considerable body of evidence to suggest that commodity price increases over the past 10 years have a solid fundamental underpinning. We believe that it is also equally clear that volatile and directionless global growth rates over the next several years could imply similarly volatile short-term commodity prices within a long-term bullish 'channel'.Click on charts to enlarge, courtesy of Nomura.
Tuesday, July 06, 2010
Monday, July 05, 2010
Click on chart to enlarge, courtesy of Deutsche Bank.
Some market participants worry that a slow-down might turn into a “double-dip” recession (with real GDP falling again for two or more consecutive quarters). While this possibility certainly should not be ruled out, we see a number of reasons why a “double-dip” is not the most likely outcome:
First, the move towards fiscal policy tightening appears generally to be relatively measured ... This year, we expect the euro area and China to run somewhat expansionary fiscal policies while the other countries are likely to embark on some fiscal restraint. Next year, almost all countries are forecast to tighten policy, but the contractionary fiscal impulse seems fairly modest in most cases. The UK does show a substantial fiscal drag in 2011, equal to about 2-1/2% of GDP, and in the US it reaches 1-1/2% of GDP, but for other major areas (euro zone, China, and Japan) it is generally 1% of GDP or less, not enough to induce a serious downturn, in our view.
Second, while fiscal policy is tightened, we expect monetary policy to remain expansionary. 1 [Look for footnote below] Earlier expectations of an exit from the low interest rate and non-standard monetary policy have been shifted well into 2011 (affecting growth only as of 2012).
Third, with discretionary spending on durables and structures already having fallen to recent historical lows, this key driver of economic downturns has much less room to be compressed than it did before the crisis began (Chart 3). Indeed, this is one reason double dip recessions are so rare. The more and the longer such spending is compressed, the more pent-up demand builds to support the eventual expansion. Durable goods that have worn out eventually need to be replaced.
Fourth, with pent-up demand beginning to show through into consumer and business spending, we believe that the economy is developing sufficient momentum through 2010 to deflect the upcoming headwinds to a significant degree. A positive feed-back loop between investment, employment, and consumption seems to have emerged in most major countries.
1 Those forecasting a double-dip recession point to the experience of 1938, when the US economy fell back into recession after its recovery from depression in 1934-37. However, the recession of 1938 went along with a sharp drop of money growth as the Fed began to tighten policy. We do not expect any policy tightening comparable to this in the foreseeable future.
Fear-mongering only? Some, though, see e.g., monetary tightening, summer breaks by consumers ...
Another set of latest macro prospects by Credit Agricole, if you wish!
Friday, July 02, 2010
Click on charts to enlarge, courtesy of BNP Paribas.
There can be no doubt that ECB President Trichet will again characterise interest rates as “appropriate” next week. While the case for keeping policy accommodation in place remains compelling, however, one should not overlook that monetary conditions are changing nevertheless! Following this week’s LTRO expiry, excess liquidity in money markets will stay lower and the maturity of outstanding operations will be shorter than before – with important implications for various rates: Money market term premia should be higher, we see upside risks to Euribor-related short-term rates, the curve flattening bias looks set to persist for now and breakevens have further to fall, keeping nominal Bund yields subdued. More near-term we treat 10y Bunds with yields near 2.5% as a better selling opportunity. In covered bonds, there would be good arguments or continued central bank buying after the ECB’s official purchase programme deadline has just expired. Given that the former format has revealed some flaws, however, these should be carried out under the more flexible framework of the SMP.Click on charts to enlarge, courtesy of Commerzbank.
On the other side of the pond, the trading guys at Goldman Sachs are pointing, among other things, to a break-down of yield curve steepening in the US. This does not bode well for banking bulls ... ?
Click on charts to enlarge, courtesy of Goldman Sachs.
Thursday, July 01, 2010
Liquidity circus so far ...
On the other side of banks’ balance sheets, in the cash market, yesterday’s alarmingly low take of €131.9bn at the ECB’s 3-month tender - compared with the Reuters Poll market consensus at €210bn - lifted the overnight funds rate, Eonia, to 0.542% from 0.325% the day before. Off the back of this, 3-month Euribor shot up to 0.782% today from 0.767% yesterday, marking the biggest increase since October 2008. As we noted this morning, the result increased uncertainty about the uptake in today’s 6-day operation, which was the second leg of the ECB’s strategy to smooth over the effects of the maturing €442bn 12-month funds today. The ECB allotted €111.2bn in the 6-day tender, in line with Tullett Prebon’s Euro Cash Desk’s prediction of over €100bn.
The combined take of €243bn at the 3-month and 6-day tenders matches our forecast of the €250bn threshold which will be needed to keep Eonia at the 0.3% handle, barring any new bank shocks. Based on Tullett Prebon data, the 1-week Eonia rate has fallen to 0.38% compared with 0.50% ahead of the 6-day ECB auction. However, this is far from an encouraging signal about either the health of the European banking system or about liquidity in capital markets. That banks should opt to raise €111bn from the ECB at 1% when the 1-week market rate is 0.446% and there were €309bn of investable funds deposited at the ECB overnight attests to the acute lack of confidence in risk capital provisions of the banking system.