1. US personal income and expenditures data showing additional evidence of possible recovery further were commented in another post.
2. Stanley Fisher, the vice president of US Fed, announced possible the end of disinflation and the possibility to continuing economic recovery in Jackson Hole Meeting.
So, the yield curve in US flattened as short-end rates soared. Futures' yield implied 38% as possibility of rate hike by 25bp in September's meeting.
Re-turnaround to flattening as expected last week?!
3. In Malaysia, thousands attended anti-government rally protesting against Prime Minister Najib Razak's management of the economy and debt problems at a state fund.
4. Slowdown from Chinese worries create next victims, the chip makers due to possible decreasing demand for handsets. In Korea, there are Samsung Electronics and SK Hynix...
5. 'Black Swan' fund earned $ 1 billion, last week via WSJ
Monday, August 31, 2015
US income and consumption data showed firm growth and somewhat acceleration in real-term as inflation is muted
In US, personal income and expenditures showed its firm data in July.
Personal income grew 0.4% monthly and 4.3% yearly spurring expectations about possible increase of consumption, especially in line with the higher growth of wages rather than income by rental services showed high contribution in 1st half this year and disposable personal income.
Yet, personal consumption expenditures showed lower growth than income continuously. So, saving rate rose to 4.9% from 4.7% in a previous month. It is somewhat curious that this means whether upside potential for increasing demands or broken-link between income and consumption due to structural problems so-called secular stagnation...
However, in real-terms, the yearly growth of real disposable income and expenditures are showing similar yearly growth rate, 3.3% and 3.2%, respectively.
That said, total personal income has been diverged from consumption because higher income class, who has lower marginal propensity to consume, has expanding their income more speedy.
However, on a disposable income side, it linked with consumption expenditures well, although their two growth rates are somewhat muted at about mid of 3% than previous year's more than 4%...
But, in real-term, the growth of both are showing higher number than previous year's data, from 2.7% to 3.3% and 3.2% in July this year.
So, increase in wage would be a key factor for future's US consumption economy from now...
Meanwhile, PCE price index remains low. It rose only 0.1% monthly... Maybe this could limit the decision of Fed, for now, at least.
Personal income grew 0.4% monthly and 4.3% yearly spurring expectations about possible increase of consumption, especially in line with the higher growth of wages rather than income by rental services showed high contribution in 1st half this year and disposable personal income.
Yet, personal consumption expenditures showed lower growth than income continuously. So, saving rate rose to 4.9% from 4.7% in a previous month. It is somewhat curious that this means whether upside potential for increasing demands or broken-link between income and consumption due to structural problems so-called secular stagnation...
However, in real-terms, the yearly growth of real disposable income and expenditures are showing similar yearly growth rate, 3.3% and 3.2%, respectively.
That said, total personal income has been diverged from consumption because higher income class, who has lower marginal propensity to consume, has expanding their income more speedy.
However, on a disposable income side, it linked with consumption expenditures well, although their two growth rates are somewhat muted at about mid of 3% than previous year's more than 4%...
But, in real-term, the growth of both are showing higher number than previous year's data, from 2.7% to 3.3% and 3.2% in July this year.
So, increase in wage would be a key factor for future's US consumption economy from now...
Meanwhile, PCE price index remains low. It rose only 0.1% monthly... Maybe this could limit the decision of Fed, for now, at least.
| Personal Income & Outlays (%) | Jul | Jun | May | Y/Y | 2014 | 2013 | 2012 |
|---|---|---|---|---|---|---|---|
| Personal Income | 0.4 | 0.4 | 0.4 | 4.3 | 4.4 | 1.1 | 5.0 |
| Wages & Salaries | 0.5 | 0.2 | 0.4 | 4.2 | 5.1 | 2.7 | 4.5 |
| Disposable Personal Income | 0.5 | 0.4 | 0.4 | 3.6 | 4.2 | -0.1 | 5.1 |
| Personal Consumption Expenditures | 0.3 | 0.3 | 0.8 | 3.5 | 4.2 | 3.1 | 3.4 |
| Personal Saving Rate | 4.9 | 4.7 | 4.6 | 4.8 (Jul '14) | 4.8 | 4.8 | 7.6 |
| PCE Chain Price Index | 0.1 | 0.2 | 0.3 | 0.3 | 1.4 | 1.4 | 1.9 |
| Less Food & Energy | 0.1 | 0.1 | 0.1 | 1.2 | 1.5 | 1.5 | 1.9 |
| Real Disposable Income | 0.4 | 0.2 | 0.1 | 3.3 | 2.7 | -1.4 | 3.1 |
| Real Personal Consumption Expenditures | 0.2 | 0.0 | 0.5 | 3.2 | 2.7 | 1.7 | 1.5 |
Friday, August 28, 2015
Weekly Global Aggregate Fixed Income Strategy
Weekly Global Aggregate Fixed Income Strategy
- OW USD against EUR and JPY bonds.
- Slightly Short Duration
- Almost Neutral in Yied Curve, skewed toward a slightly Steepener
- Neutral in Sector, but OW IG Financial Corp. against UW MBS in US on a relative trading
It's not a simple risk-off, albeit many participants expect bear market in equities is not ended. This view relies on a fear about sell-off safe haven bonds such as UST and German Bund by EM, China particularly as their foreign exchange reserves have been deteriorated somewhat rapidly. In line with this, last week, SocGen argued PBoC sold US treasury bonds by more than 100 billion dollar during last 2 weeks as their FX regime changed.
Under this circumstance, if worries about Chinese economy and a stability from capital outflows deepen further, or transfers to a financial crisis, it would not be a good news for global bonds market. Not only in China, but also in another emerging countries including oil producers mainly are showing their foreign reserves to decline. This is absolutely not the same picture that the Fed funds rate lift-off from 2004 did not lead the upward pressure in long-end rate, in contrast to weigh on short-end and mid term interest rates. We call it as Greenspan's conundrum. But, for now, apparently this is not same with that. A little bluffs Fed should conduct another QE rather than rate hike. But, QE4 would be possible, if US treasury 10 year rate soar by more than 100bp from now.
Or in the case of that Chinese risk does not transfer to a financial crisis and is proved only short-term risk, Fed should be encouraged to raise their funds rate soon. US economy has improved as not only consumption parts but also investments part contributed to economic growth in 2Q this year. Although inflationary pressure remains subdued for now, as a result, private real term disposable income and consumption expenditures are increasing faster than previous year's rate. In fact, soared savings rate in July could signal conditions about spending are not sufficient yet. But, given solid labor markets, both of income and consumption could be spurred soon. At once, some last sentiment index in both of consumer's and business' signaled somewhat woes about coming employment conditions, but recent data indicates rebound of the conditions. That said, in this case, US treasury bond could be pushed higher by possible Fed funds rate hike in all tenors of maturities, from short-end to long-end tenor pressured by continuing sell-off by EMs.
(I considered shortly flattening pressure on a chart analysis posted earlier. But, for now, I became somewhat cautious about the yield curve)
Considering these two extreme scenario, the bond price hardly could gain in near term. So, total duration position would be shorter, but a big short will not likely be a good choice as massive volatility is to be considered as well. The yield curve position, in line with this either, would be on the small steepner as Fed doesn't seem to raise policy rate in September and the inflationary pressure would be amplified especially in late this year. But, yield curve seems more difficult to positioning now. So, I recommend to decrease curve positions to neutral, if the spread such as 5s30s and 10s30s widen further.
There is a risk scenario that China is not so bad, but the woes that longer-run economic conditions or/and equity market prices would face a big headwind by strong USD, burden of inventory/sales ratio, and other structural problems, which could not tolerate lift-off rates. But, this case would be based on a given scenario of Fed fund rate hike. So, we could have some time to increase our duration position. But, the yield curve could be flatten earlier, so I am very cautious about yield curve.
And, how should we deal with the distribution of currencies? Are we ahead of possible QE in ECB and BOJ? If then, we have to overweight EUR and JPY position against USD bonds.
But, I don't think so. In Japan, although someone argues the additional monetary easing is needed, considering some critics that QE led improvement only in companies through depreciation of JPY, which did not spur household's wealth, it seems somewhat difficult BOJ to conduct another QQE from now. Recent comments by governors underpin this view. And in ECB, recent appreciation of ECB against USD has caused the possibility of expanding QE program. But, on a prospect that current QE started as Greece's woes intensified, another monetary easing would not be easy under possible inflationary pressure in the end of this year.
So, I prefer long USD bonds against EUR and JPY bonds as considering opposite scenarios of bull and bear global bond markets. In Euro area, peripheral bonds seem somewhat attractive as aversion of risk asset would be diminished further under shrinking fears about China. UKT seems more attractive than core countries in Euro area.
In Sector, as I posted last week, I prefer OW US IG Corp. bonds especially in financial sector as a defence sector against MBS because the spread between these two widened rapidly during last weeks. On a total positioning, I pursue neutral position on non-treasury bonds with possible volatility in global financial markets.
- OW USD against EUR and JPY bonds.
- Slightly Short Duration
- Almost Neutral in Yied Curve, skewed toward a slightly Steepener
- Neutral in Sector, but OW IG Financial Corp. against UW MBS in US on a relative trading
It's not a simple risk-off, albeit many participants expect bear market in equities is not ended. This view relies on a fear about sell-off safe haven bonds such as UST and German Bund by EM, China particularly as their foreign exchange reserves have been deteriorated somewhat rapidly. In line with this, last week, SocGen argued PBoC sold US treasury bonds by more than 100 billion dollar during last 2 weeks as their FX regime changed.
Under this circumstance, if worries about Chinese economy and a stability from capital outflows deepen further, or transfers to a financial crisis, it would not be a good news for global bonds market. Not only in China, but also in another emerging countries including oil producers mainly are showing their foreign reserves to decline. This is absolutely not the same picture that the Fed funds rate lift-off from 2004 did not lead the upward pressure in long-end rate, in contrast to weigh on short-end and mid term interest rates. We call it as Greenspan's conundrum. But, for now, apparently this is not same with that. A little bluffs Fed should conduct another QE rather than rate hike. But, QE4 would be possible, if US treasury 10 year rate soar by more than 100bp from now.
Or in the case of that Chinese risk does not transfer to a financial crisis and is proved only short-term risk, Fed should be encouraged to raise their funds rate soon. US economy has improved as not only consumption parts but also investments part contributed to economic growth in 2Q this year. Although inflationary pressure remains subdued for now, as a result, private real term disposable income and consumption expenditures are increasing faster than previous year's rate. In fact, soared savings rate in July could signal conditions about spending are not sufficient yet. But, given solid labor markets, both of income and consumption could be spurred soon. At once, some last sentiment index in both of consumer's and business' signaled somewhat woes about coming employment conditions, but recent data indicates rebound of the conditions. That said, in this case, US treasury bond could be pushed higher by possible Fed funds rate hike in all tenors of maturities, from short-end to long-end tenor pressured by continuing sell-off by EMs.
(I considered shortly flattening pressure on a chart analysis posted earlier. But, for now, I became somewhat cautious about the yield curve)
Considering these two extreme scenario, the bond price hardly could gain in near term. So, total duration position would be shorter, but a big short will not likely be a good choice as massive volatility is to be considered as well. The yield curve position, in line with this either, would be on the small steepner as Fed doesn't seem to raise policy rate in September and the inflationary pressure would be amplified especially in late this year. But, yield curve seems more difficult to positioning now. So, I recommend to decrease curve positions to neutral, if the spread such as 5s30s and 10s30s widen further.
There is a risk scenario that China is not so bad, but the woes that longer-run economic conditions or/and equity market prices would face a big headwind by strong USD, burden of inventory/sales ratio, and other structural problems, which could not tolerate lift-off rates. But, this case would be based on a given scenario of Fed fund rate hike. So, we could have some time to increase our duration position. But, the yield curve could be flatten earlier, so I am very cautious about yield curve.
And, how should we deal with the distribution of currencies? Are we ahead of possible QE in ECB and BOJ? If then, we have to overweight EUR and JPY position against USD bonds.
But, I don't think so. In Japan, although someone argues the additional monetary easing is needed, considering some critics that QE led improvement only in companies through depreciation of JPY, which did not spur household's wealth, it seems somewhat difficult BOJ to conduct another QQE from now. Recent comments by governors underpin this view. And in ECB, recent appreciation of ECB against USD has caused the possibility of expanding QE program. But, on a prospect that current QE started as Greece's woes intensified, another monetary easing would not be easy under possible inflationary pressure in the end of this year.
So, I prefer long USD bonds against EUR and JPY bonds as considering opposite scenarios of bull and bear global bond markets. In Euro area, peripheral bonds seem somewhat attractive as aversion of risk asset would be diminished further under shrinking fears about China. UKT seems more attractive than core countries in Euro area.
In Sector, as I posted last week, I prefer OW US IG Corp. bonds especially in financial sector as a defence sector against MBS because the spread between these two widened rapidly during last weeks. On a total positioning, I pursue neutral position on non-treasury bonds with possible volatility in global financial markets.
US 2Q GDP was stronger than initial estimate
US 2Q GDP advanced at a revised 3.7% saar, +2.7% year over year, from 2.3% of initial estimate and higher than 3.2% rise of market expectation.
All around indicators in GDP gained from 1st estimate, especially in business fixed investment from -0.6% saar to +3.2% as revised. Personal consumption expenditures revised up from 2.9% a.r. to 3.1% moderately as well.
On the prospect of increased both of investments and consumption, revised 2Q GDP suggests US domestic economy continues to improve on a healthy way.
All around indicators in GDP gained from 1st estimate, especially in business fixed investment from -0.6% saar to +3.2% as revised. Personal consumption expenditures revised up from 2.9% a.r. to 3.1% moderately as well.
On the prospect of increased both of investments and consumption, revised 2Q GDP suggests US domestic economy continues to improve on a healthy way.
15.08.28 Daily Summary
1. 2Q US GDP recorded higher than prior number. See another post.
2. US pending home sales during July rose 0.5%, 7.2% yoy, following decreased -1.7% in June. Consensus was +1.0% monthly gain. Despite lower than expectation, home sales and construction indicators seem somewhat solid.
3. Weekly US initial jobless claims decreased to 217K, -8.9% yoy, from 277K in previous week. 4-week moving average recorded 272.5K lower than market expectation, 275K. Current labor market condition seems solid as well.
4. French INSEE business climate index maintained at previous month's leve, 103, in August. In details, the index about recent trend of productions is improving. It seems somewhat positive following German business sentiment index released yesterday.
Both of them maybe signal moderate recovery in Euro area economy.
5. China bond market wins as stocks fall ?
It could be one of evidences that Chinese condition is not in a financial crisis...
6. China eased regulations about investments in housing market against foreign investors...!
For now, the weight of foreigners in Chinese property market is only below 1%...
7. And China increased the limit of debt swap from LGFV to agency bonds to 3.2 trillion renminbi.
8. WTI rose more than 10%...to $42.56... spurred by bullish economic indicators?
9. Shares of CNOOC, the Chinese off-shore oil producer, rose 14% yesterday. It was partly led by a plan to raise the dividend ratio from usual 30% to 40%. But, is it sustainable? Analysts say break-even price of Brent crude for CNOOC would be 45 dollar per a barrel in 2nd half this year while the oil price has faced strong headwind.
And so, they have big problems? Brent oil price rose about 10% to $47.56 yesterday...
10. SHCOMP index rose +4.8% to 3,232pt !! Playing with positive cloud in weekly chart ?! If then, somewhat fast rebound could be continued further...!
11. Japanese core CPI yoy turned flat in July from 0.1% in previous month. But, it is higher than consensus of -0.1% declines.
Unemployment rate in July was down to 3.3% from 3.4% in previous month.
And retail sales in July increased 1.6% from a year earlier higher than 0.9% of last month's data and 1.0% of market expectation. It gained 1.2% monthly.
12. Not only in western developed countries including US and Euro area, but also in Japan, the forecast about economy is somewhat improved again. Worries about economic contraction seem to be diminished moderately.
But, local government bond yield maintained around yesterday's value...while Nikkei225 index soared by 3% today.
2. US pending home sales during July rose 0.5%, 7.2% yoy, following decreased -1.7% in June. Consensus was +1.0% monthly gain. Despite lower than expectation, home sales and construction indicators seem somewhat solid.
3. Weekly US initial jobless claims decreased to 217K, -8.9% yoy, from 277K in previous week. 4-week moving average recorded 272.5K lower than market expectation, 275K. Current labor market condition seems solid as well.
4. French INSEE business climate index maintained at previous month's leve, 103, in August. In details, the index about recent trend of productions is improving. It seems somewhat positive following German business sentiment index released yesterday.
Both of them maybe signal moderate recovery in Euro area economy.
5. China bond market wins as stocks fall ?
It could be one of evidences that Chinese condition is not in a financial crisis...
6. China eased regulations about investments in housing market against foreign investors...!
For now, the weight of foreigners in Chinese property market is only below 1%...
7. And China increased the limit of debt swap from LGFV to agency bonds to 3.2 trillion renminbi.
8. WTI rose more than 10%...to $42.56... spurred by bullish economic indicators?
9. Shares of CNOOC, the Chinese off-shore oil producer, rose 14% yesterday. It was partly led by a plan to raise the dividend ratio from usual 30% to 40%. But, is it sustainable? Analysts say break-even price of Brent crude for CNOOC would be 45 dollar per a barrel in 2nd half this year while the oil price has faced strong headwind.
And so, they have big problems? Brent oil price rose about 10% to $47.56 yesterday...
10. SHCOMP index rose +4.8% to 3,232pt !! Playing with positive cloud in weekly chart ?! If then, somewhat fast rebound could be continued further...!
11. Japanese core CPI yoy turned flat in July from 0.1% in previous month. But, it is higher than consensus of -0.1% declines.
Unemployment rate in July was down to 3.3% from 3.4% in previous month.
And retail sales in July increased 1.6% from a year earlier higher than 0.9% of last month's data and 1.0% of market expectation. It gained 1.2% monthly.
12. Not only in western developed countries including US and Euro area, but also in Japan, the forecast about economy is somewhat improved again. Worries about economic contraction seem to be diminished moderately.
But, local government bond yield maintained around yesterday's value...while Nikkei225 index soared by 3% today.
Chinese Capital increases Investments and Diversifies in Overseas Properties
By CBRE Research, Chinese investments on global property markets started to increase rapidly since 2013. In another materials from CBRE, the investments in America increased especially in 1st half this year, via WSJ.
Albeit someone argues the capital outflow in China from last year mainly was caused by investments to overseas property markets partly, by CBRE, the size of investments increased a bit more than 10 billion dollar seen not huge and the difference from previous year, 2013, was only 2 billion dollar. So, it seems not a main or sub reason for capital outflow in China.
Anyway, it seems somewhat clear that Chinese capital to global property markets is increasing now with earlier experience in Australia.
Albeit someone argues the capital outflow in China from last year mainly was caused by investments to overseas property markets partly, by CBRE, the size of investments increased a bit more than 10 billion dollar seen not huge and the difference from previous year, 2013, was only 2 billion dollar. So, it seems not a main or sub reason for capital outflow in China.
Anyway, it seems somewhat clear that Chinese capital to global property markets is increasing now with earlier experience in Australia.
Thursday, August 27, 2015
US IG Corp. Bond versus MBS
The correlation between S&P500 as a equity market index and investment grade corporate bond spread usually is very high. In this year, the spread of corporate bond started to widen earlier as issuance increased ahead of possible federal funds rate hike by main companies in US. And recently, US equity index is tumbling as external worries deepen with especially China and EM economies. And current worries and weak equity market weigh on corporate bond price again.
The average OAS of IG corporate bonds in US increased above high in 2013 and the momentum seems very strong with persistent risk aversions. But, considering relatively solid US economies and ample cash in US companies without energy related, investment in this bond seems somewhat attractive to pursue higher yield.
In a relative view against high yield companies, IG companies' bond is undervalued.
Further more, considering MBS market, IG corporate bond seems more attractive.
The spread between these widened fast recently, which gives an advantage from higher yield of IG corporate bond, while MBS' low yield is reflecting solid housing market in US and residential market is predicted to maintain solid.
Considering these prospects, I recommend OW in IG corporate bonds in US, except for energy-related companies, and UW in MBS pass through to enhance return from carry.
The average OAS of IG corporate bonds in US increased above high in 2013 and the momentum seems very strong with persistent risk aversions. But, considering relatively solid US economies and ample cash in US companies without energy related, investment in this bond seems somewhat attractive to pursue higher yield.
 |
| White Line : S&P500 Index / Orange : IG Corp. OAS in Barcap US Agg. |
In a relative view against high yield companies, IG companies' bond is undervalued.
Further more, considering MBS market, IG corporate bond seems more attractive.
The spread between these widened fast recently, which gives an advantage from higher yield of IG corporate bond, while MBS' low yield is reflecting solid housing market in US and residential market is predicted to maintain solid.
 |
| White Line : MBS OAS in Barcap US Agg. / Orange : IG Corp. OAS |
Considering these prospects, I recommend OW in IG corporate bonds in US, except for energy-related companies, and UW in MBS pass through to enhance return from carry.
Waiting Political News in US
1) Congressional consideration of the Iran nuclear agreement : before 17 September
If congress disapprove, they should vote once again for possible veto against that by president...
2) The end of Fiscal Year : 30 September
...seems not noisy
3) Transportation infrastructure funding expires : 29 October
...would pass a long-term reauthorization...
4) Needed raising debt limit : maybe in November
5) Other events remains...
- Oil exports ban
- Tax reform and profit repatriation !!!
I don't think Fed should wait until this events pass through well...
If congress disapprove, they should vote once again for possible veto against that by president...
2) The end of Fiscal Year : 30 September
...seems not noisy
3) Transportation infrastructure funding expires : 29 October
...would pass a long-term reauthorization...
4) Needed raising debt limit : maybe in November
5) Other events remains...
- Oil exports ban
- Tax reform and profit repatriation !!!
I don't think Fed should wait until this events pass through well...
15.08.27 Daily Summary
1. By SocGen, PBOC sold more than 100 bil.USD of UST during last 2 weeks. US treasury yield soaring much higher amid disappointed auctions yesterday would be caused by this with rebounded equity prices as well.
10yr yield increased by 11bps and 30yr yield soared by 13bps despite of dovish comment by Fed's Dudley.
(See another post today, about this)
2. Recently major yield curve position in US treasury market, which is curve flattener, especially in 5s30s, seems to be unwound under declining expectation of Fed fund rate hike. However, how the big bearish steepening market are showing... it was really unexpected... Anyway, is this the timing to enter the curve flattening position as I recommend in yesterday's post?
3. S&P500 index rose 3.9% underpinned by dovish comment of Fed member, Dudley, signaled hike in September would be too early.
4. And, today, SHCOMP index rose more than 5% strengthening upward momentum nearby its closing time...! Let's see the weekly chart of this on the positive cloud...!
5. I like this express, "World Struggles to Adjust to China's 'New Normal'", by WSJ
6. OECD 34 countries' GDP growth in 2Q recorded at 0.4% quarterly lower than 0.5% in 1Q. Lowered data is dependent almost on Japanese contraction by -0.4%. Considering this prospect, is this number lower really? OECD members contribute 60% for whole world output. On the other hand, is this number low? It seems not...
7. Indonesian Finance Minister said U.S. Fed has to raise interest rate now to reduce global uncertainty. This is somewhat interesting because Indonesia is suffered from weakening currency due to strong USD. Indonesian government seems to think current turmoil in domestic financial market is led by the uncertainty, not by fundamental woes from strong USD.
8. In Greece, even before September election is officially called, outgoing Prime Minister Tsipras is facing a growing challenge of splintery party...
9. U.K. survey of retail sales improved in August. Western economies continue to improve very moderately for now, anyway...
10. Overall, the economic indicators are mixed in US. But, actual economy is close to improvement as employment conditions continue to be robust, despite the woes about external uncertainties...
(See another post today, about Durable Goods Orders)
11. So, unless Fed conclude current condition in China as a possible financial crisis, they would want to hike the policy rate soon... What is decided in Jackson Hole meeting? Will they likely ignore current woes from China?
10yr yield increased by 11bps and 30yr yield soared by 13bps despite of dovish comment by Fed's Dudley.
(See another post today, about this)
2. Recently major yield curve position in US treasury market, which is curve flattener, especially in 5s30s, seems to be unwound under declining expectation of Fed fund rate hike. However, how the big bearish steepening market are showing... it was really unexpected... Anyway, is this the timing to enter the curve flattening position as I recommend in yesterday's post?
3. S&P500 index rose 3.9% underpinned by dovish comment of Fed member, Dudley, signaled hike in September would be too early.
4. And, today, SHCOMP index rose more than 5% strengthening upward momentum nearby its closing time...! Let's see the weekly chart of this on the positive cloud...!
5. I like this express, "World Struggles to Adjust to China's 'New Normal'", by WSJ
6. OECD 34 countries' GDP growth in 2Q recorded at 0.4% quarterly lower than 0.5% in 1Q. Lowered data is dependent almost on Japanese contraction by -0.4%. Considering this prospect, is this number lower really? OECD members contribute 60% for whole world output. On the other hand, is this number low? It seems not...
7. Indonesian Finance Minister said U.S. Fed has to raise interest rate now to reduce global uncertainty. This is somewhat interesting because Indonesia is suffered from weakening currency due to strong USD. Indonesian government seems to think current turmoil in domestic financial market is led by the uncertainty, not by fundamental woes from strong USD.
8. In Greece, even before September election is officially called, outgoing Prime Minister Tsipras is facing a growing challenge of splintery party...
9. U.K. survey of retail sales improved in August. Western economies continue to improve very moderately for now, anyway...
10. Overall, the economic indicators are mixed in US. But, actual economy is close to improvement as employment conditions continue to be robust, despite the woes about external uncertainties...
(See another post today, about Durable Goods Orders)
11. So, unless Fed conclude current condition in China as a possible financial crisis, they would want to hike the policy rate soon... What is decided in Jackson Hole meeting? Will they likely ignore current woes from China?
US durable goods orders in July beat market expectations
US durable goods orders in July beat market expectations.
Orders increased 2.0% monthly while economists expected contraction by -0.4% after +3.4% growth in previous month, June. Further more, last month's date revised up from +3.4% to +4.1%.
Non-defense capital goods orders increased 2.2% from previous month, more than 1.4% growth rate in last month.
This signals private consumption economy in US is somewhat solid. This strong data is in line with retail sales data in June released earlier.
Overall, the economic indicators are mixed. But, actual economy is close to improvement as employment conditions continue to be robust, despite the woes about external uncertainties...
Orders increased 2.0% monthly while economists expected contraction by -0.4% after +3.4% growth in previous month, June. Further more, last month's date revised up from +3.4% to +4.1%.
Non-defense capital goods orders increased 2.2% from previous month, more than 1.4% growth rate in last month.
This signals private consumption economy in US is somewhat solid. This strong data is in line with retail sales data in June released earlier.
Overall, the economic indicators are mixed. But, actual economy is close to improvement as employment conditions continue to be robust, despite the woes about external uncertainties...
Contrary Environment to Greenspan's Conundrum?
Below chart showed Chinese FX reserves on left hand side and US treasury bond 30y yield on right hand side.
Around 2004 when Fed started to hike interest rate with Greenspan as the president of Fed, long-end tenor yields, such as 10 year and 30 year, did not increase, contrary to short-end or mid tenor yields which were affected by funds rate mainly. From this, many economists studied about that case including Ben Bernanke. Main rationale of this so-called Greenspan's conundrum acceptable broadly was that money power from Chinese fast growing FX reserves was buying US treasuries especially in long-end tenor and this limited upward pressure of long-end yields.
According to market, by SocGen's math, China sold their US treasury position by more than worth of 100 billion dollar during last 2 weeks as FX regime in China changed. And we are maybe ahead of Fed fund rate hike by the end of this year with decreasing EM countries' FX reserves recently. It seems contrary environment to mid 2000s, Greenspan's conundrum.
According to Citi or Zero Hedge, EM countries have about 5,500 billion dollar of UST as a position of foreign reserves. And if suppose they decrease their reserves by 10%, the long-end yield could rise more than 100bps. This is one of rationales that Fed should conduct 4th QE rather than monetary tightening...
That said, unless there is another asset purchase by Fed, starting raising Fed funds rate, the long-end yields could be pushed higher either, contrary to mid 2000s...
Around 2004 when Fed started to hike interest rate with Greenspan as the president of Fed, long-end tenor yields, such as 10 year and 30 year, did not increase, contrary to short-end or mid tenor yields which were affected by funds rate mainly. From this, many economists studied about that case including Ben Bernanke. Main rationale of this so-called Greenspan's conundrum acceptable broadly was that money power from Chinese fast growing FX reserves was buying US treasuries especially in long-end tenor and this limited upward pressure of long-end yields.
According to market, by SocGen's math, China sold their US treasury position by more than worth of 100 billion dollar during last 2 weeks as FX regime in China changed. And we are maybe ahead of Fed fund rate hike by the end of this year with decreasing EM countries' FX reserves recently. It seems contrary environment to mid 2000s, Greenspan's conundrum.
According to Citi or Zero Hedge, EM countries have about 5,500 billion dollar of UST as a position of foreign reserves. And if suppose they decrease their reserves by 10%, the long-end yield could rise more than 100bps. This is one of rationales that Fed should conduct 4th QE rather than monetary tightening...
That said, unless there is another asset purchase by Fed, starting raising Fed funds rate, the long-end yields could be pushed higher either, contrary to mid 2000s...
 |
| Size of left hand side is Trillion USD, Not Million |
Wednesday, August 26, 2015
Rally of EUR Finished?
In a weekly chart of EUR/USD, the value seems to loose the momentum of appreciation. The weekly candle showed long tail until today ahead of very thick negative cloud. In a daily chart, through the convergence of all of moving average lines, gathered power seemed to start moving with a direction.
But, on the other hand, as convergence of moving average lines means the volatility rather than a direction, we should be cautious about turned to be weaken again on EUR against USD in short term, at least...
And, if then, what are implications for global financial markets? At first, it will signal strong USD. The noise in EM, especially in China and Asia, would be louder than now... That said, negative momentum in risky assets could be continued further... And then, how is the fixed income market? Should we buy long-end treasuries...? Or it could mean the possible policy rate hike by Fed... if then, we would be reluctant to buy bonds...
But, on the other hand, as convergence of moving average lines means the volatility rather than a direction, we should be cautious about turned to be weaken again on EUR against USD in short term, at least...
And, if then, what are implications for global financial markets? At first, it will signal strong USD. The noise in EM, especially in China and Asia, would be louder than now... That said, negative momentum in risky assets could be continued further... And then, how is the fixed income market? Should we buy long-end treasuries...? Or it could mean the possible policy rate hike by Fed... if then, we would be reluctant to buy bonds...
15.08.26 Daily Summary
1. German IFO increased in July broadly while the difference between current conditions and expectatios widens. IFO expectation index tends to lead the current conditions with a lag of from a quarter to two quarters historically.
2. US Conference Board's consumer confidence jumped above the market consensus in July, making up the tumbled in previous month. In a younger group, under 35 years old, the sentiment improved most particularly. Recent woes about losing growth momentum in U.S. are underpinned by weak sentiment index in a part, but this indicator showed the recent trend that the indicator rose again followed by disappointed previous data. U.S. economy is maybe really solid...it's really hard to track...
3. New home sales in U.S. rebound in July along with the prices.
4. Some economists argue that Fed funds rate hike is possible in September meeting as emphasize the role of vice president, Fisher. But, it will be hard to...
5. Premier Li in China is responsible for the panic equity market and economic burst? He faces many criticism... announced by Financial Times
6. SHCOMP index fell today despite cut of both of lending rates and RRR in late evening, yesterday, and rebounding other countries equity markets. Index lose -1.3% today. But, I see the possible rebound on the positive cloud of monthly chart...
7. Although S&P500 index in U.S. seems somewhat negative...on the weekly and monthly chart of S&P500 index showed the possibility of restrained downside risk from current level... In contrary, it would be another falling knife...
In this environment, we should be cautious on risky assets at least...
Investors aim at Currency Peg
Following devaluation of CNY, investors are looking at who is next. Hong Kong dollar will likely be one of candidates for consideration in line with Saudi Arabia which showed declining foreign reserves for a few months. But, the CDS premium of Hong Kong is low in contrast of Saudi.
Analysts said bets on weakening currencies or giving up the pegging through the option market have increased recently like in RMB market... Is not the end of strengthening USD yet?
Analysts said bets on weakening currencies or giving up the pegging through the option market have increased recently like in RMB market... Is not the end of strengthening USD yet?
Chance to enter flattening position of 10s30s in UST market
We have waited for somewhat long time to curve steepen in US treasury market. Especially in the spread of 10 year and 30 year, so called 10s30s, has started to narrower from start of July in this year, to mid of 60bps from 80bps at the inflection point.
And recently, the spread widened fast due to possible unwinding from flatteners spurred by lowering possibility of Fed funds rate hike in this year as external woes arise especially in China.
I think we should approach the 10s30s spread as a range from 0 to 100bps of a historical range for a few decades except for the period of QE. With this analysis, and as not start to hike the Fed funds rate yet, I have recommended to enter the flattening position above 75bps of the spread which means 25% of ongoing tightening of a whole monetary policy cycle.
And now, the spread is above 73bps and the chart analysis seems somewhat favorable to do this.
The spread value is reaching the 2nd leading span with reflecting the effect of volatility from the sharp shape of the cloud by leading spans. Additionally, lagging span met the previous value at that time and current value faces changing to a negative cloud from next month.
On the fundamental sides, the flattening position will likely be effective strategy, I believe.
Market players continue to consider the timing to hike funds rate as a start of monetary tightening, and it would be in Sep. or Dec. in this year. If Fed decide to hike their policy rate in September, the upward pressure of bond yields would be especially in short-end and mid tenor as very low inflationary pressure weighs on long-end tenor yields. That said, in a current circumstance, the monetary tightening for now means the possible yield curve flattening.
If Fed couldn't start monetary tightening within this year, it would mean the massive lack of global demand. If then, the yield curve should go to narrow as long-end yields tumble.
While I expect return to be flattening from current spread of yield curve, I have some problems to forecast the direction of bond yield whether toward higher or lower from now on. I have thought the lower momentum of growth and inflation should continue to weigh on the long-end yields for 3rd quarter, but it would be September, the last month of 3rd quarter, soon. On the other hand, we faces a big headwind from Chinese capital outflows problems. As I posted yesterday, it seems not a financial crisis in China, if then, Fed will start to hike rate at last.
Where is the higher possibility tilted toward? I was surprised because of soared German Bund yield rather than US treasury yield last night. It could mean the drought of liquidity or possible normalization of both of monetary policy and the spread between core countries in Euro area and U.S. At any case, this signals the upside potentials for bond yields. However, economic headwinds and the woes from China are saying the need to be more cautious for now...
And recently, the spread widened fast due to possible unwinding from flatteners spurred by lowering possibility of Fed funds rate hike in this year as external woes arise especially in China.
I think we should approach the 10s30s spread as a range from 0 to 100bps of a historical range for a few decades except for the period of QE. With this analysis, and as not start to hike the Fed funds rate yet, I have recommended to enter the flattening position above 75bps of the spread which means 25% of ongoing tightening of a whole monetary policy cycle.
And now, the spread is above 73bps and the chart analysis seems somewhat favorable to do this.
The spread value is reaching the 2nd leading span with reflecting the effect of volatility from the sharp shape of the cloud by leading spans. Additionally, lagging span met the previous value at that time and current value faces changing to a negative cloud from next month.
On the fundamental sides, the flattening position will likely be effective strategy, I believe.
Market players continue to consider the timing to hike funds rate as a start of monetary tightening, and it would be in Sep. or Dec. in this year. If Fed decide to hike their policy rate in September, the upward pressure of bond yields would be especially in short-end and mid tenor as very low inflationary pressure weighs on long-end tenor yields. That said, in a current circumstance, the monetary tightening for now means the possible yield curve flattening.
If Fed couldn't start monetary tightening within this year, it would mean the massive lack of global demand. If then, the yield curve should go to narrow as long-end yields tumble.
While I expect return to be flattening from current spread of yield curve, I have some problems to forecast the direction of bond yield whether toward higher or lower from now on. I have thought the lower momentum of growth and inflation should continue to weigh on the long-end yields for 3rd quarter, but it would be September, the last month of 3rd quarter, soon. On the other hand, we faces a big headwind from Chinese capital outflows problems. As I posted yesterday, it seems not a financial crisis in China, if then, Fed will start to hike rate at last.
Where is the higher possibility tilted toward? I was surprised because of soared German Bund yield rather than US treasury yield last night. It could mean the drought of liquidity or possible normalization of both of monetary policy and the spread between core countries in Euro area and U.S. At any case, this signals the upside potentials for bond yields. However, economic headwinds and the woes from China are saying the need to be more cautious for now...
Tuesday, August 25, 2015
Rebounding CEE local 5y yield... with Capital Outflow or the End of Lower yield?
Below chart is Poland's local government bond 5y yield.
EMBIG Spread toward higher than 2011's level
It will be likely the attractive point, unless there is a financial crisis in China...
The time to unwind flattener in UST market, shortly?
The spread between mid yield and long-end yield would widen further by weekend in the chart analysis. Below charts about 5s30s and 10s30s in US treasury market. And last one is 30y yield chart.
The yield curve seems to steepen further and turnaround to flatten from next month. But, I don't have any idea about the level of 30y treasury bond... because it's difficult whether the chart means falling knife or MACD divergence...
The yield curve seems to steepen further and turnaround to flatten from next month. But, I don't have any idea about the level of 30y treasury bond... because it's difficult whether the chart means falling knife or MACD divergence...
Soaring CDS Premium in Saudi Arabia
Is this the evidence of drought liquidity in oil makers?
Current tumbled global stock prices do not mean the risk aversion? This is the liquidity problem now? So, despite panic selling in global equity markets, the bond yield does not react for this?
Current tumbled global stock prices do not mean the risk aversion? This is the liquidity problem now? So, despite panic selling in global equity markets, the bond yield does not react for this?
Chart Analysis of WTI... I don't have any idea about this...
It's monthly candle in WTI market. The price has been down to almost the previous trough right after financial crisis in 2009, and at the same time, the value of MACD is similar with then. On the cycle approach, it seems the final adjustment in price now with possible divergence of MACD. Further, the lagging span seems to match the inflection point then. In these materials in the chart, oil price would turn to higher soon... but, current condition is the falling knife with vulnerable fundamentals...
Maybe it is Not a Financial Crisis in China
Current vulnerable volatility in the global markets started from weakening CNY by PBOC. News argued this could restrict exports sector in other countries such as EM Asia due to negative effect of weak renminbi. But, I don't think current devaluation of CNY aims to boost Chinese exports sector by weakening real effective exchange rate. But, China is on the process to muddle their external debt through to give an incentive to go out Chinese domestic shadow banking market slowly following last year's devaluation of renminbi.
In this point, the main problem and concern would be how much needed deleveraging position is in Chinese domestic companies and whether Chinese government could handle them or not. If the amount of needed deleveraging position additionally is too big to handle, it must be in a financial crisis in China. And if then, because this crisis is from the liquidity problem, banking system should be much more vulnerable, so the inter-bank market interest rate should soar much higher.
But, see the inter-bank market interest rates... Below picture is 5 year Chinese government bond yield. This yield soared rapidly in the early stage of weakening CNY, but it turned to be lower rapidly from then... it is maybe not a financial crisis in China...
In this point, the main problem and concern would be how much needed deleveraging position is in Chinese domestic companies and whether Chinese government could handle them or not. If the amount of needed deleveraging position additionally is too big to handle, it must be in a financial crisis in China. And if then, because this crisis is from the liquidity problem, banking system should be much more vulnerable, so the inter-bank market interest rate should soar much higher.
But, see the inter-bank market interest rates... Below picture is 5 year Chinese government bond yield. This yield soared rapidly in the early stage of weakening CNY, but it turned to be lower rapidly from then... it is maybe not a financial crisis in China...
Chinese Shanghai Stock Index broke below 3,000pt and PBOC cut thepolicy rate and RRR in the evening
Chinese Shanghai stock index fall -7.63% today, following more than 8% yesterday, and broke below 3,000pt at most. And then, in the evening, just before, PBOC announced cut the policy rate by 25bp, its lending rate for 1 year from 4.85% to 4.6% and RRR by 50bp.
It seems the fear perfectly ruled the market in China. In contrary, other Asian equity markets showed rebound today despite panic sells in China. S&P500 futures rebound about 4% following tumbled about -4% yesterday.
What does it mean? Merely, temporary and technical movement under big trend market toward downside? or, in fact, is not there the financial crisis in China?
In monthly candle in SHCOMP index, the price seems to rebound soon underpinned by the positive cloud... It means, at least, in short term, stock index could upturn for next few months... And, this will be possible, unless current problem in China does not transfer to financial crisis...
It seems the fear perfectly ruled the market in China. In contrary, other Asian equity markets showed rebound today despite panic sells in China. S&P500 futures rebound about 4% following tumbled about -4% yesterday.
What does it mean? Merely, temporary and technical movement under big trend market toward downside? or, in fact, is not there the financial crisis in China?
In monthly candle in SHCOMP index, the price seems to rebound soon underpinned by the positive cloud... It means, at least, in short term, stock index could upturn for next few months... And, this will be possible, unless current problem in China does not transfer to financial crisis...
Friday, August 21, 2015
Summary and Conclusion about a History of Chinese Capital Controls
A renewed post about a history of Chinese capital controls
1. early 1990s
As a planned economy, China conducted government-led projects to boost economic growth with a huge devaluation of RMB. As a result, inflationary pressure had increased and people were suffered especially because of lack of investment vehicles protecting inflation such as stock or bond market. Despite the pain, Chinese government shouldn't stop this business, because if they paused economic plans, people would be suffered more with the mega unemployment. So, government started to consider economic reforms.
2. mid 1990s
China decided to adopt Exports-led Economic Model and thus economic growth started to be boosted by exports sector with relatively weak real effective exchange rate as China pegged RMB to USD. In fact, pegging local currency to dollar was the main mandate for Asian countries which adopted exports-led economic model, succeeded in Japan earlier, including from Korea, Taiwan, Hong Kong to Malaysia. As you know, they experienced financial crisis in late 1990s, but China was somewhat free from the crisis. It was because China was controlled economy, especially in capital accounts, so their external debt was much smaller than other Asian countries.
3. late 1990s
PBOC purchased FX to hold exchange rate for pegging and it could led the inflation to decline rapidly. But, the world was somewhat upset because they couldn't get dollar absorbed in China again. There was a criticism that China broke a WTO policy. On the other hand, many corporations in developed countries, such as U.S, Europe and Japan, seemed not reluctant weak RMB because they were transferring their factories into China as pursue competitiveness of lower cost. Those two factors offset.
4. early 2000s
Chinese FX reserves increased more rapidly in early 2000s. They bought US treasury bonds massively and Fennie and Fraddie bonds to use dollars. It was one of a reason for so-called Greenspan's conundrum, long-end bond rate did not rise despite hiking Fed funds rate. Moreover, it would be another rationale for housing bubble in U.S, because their buying bonds issued by mortgage firms lowered their capital costs.
5. mid 2000s
In this period, Chinese government decided to conduct structural rebalancing to increase domestic consumption. For this, they started to appreciate RMB, albeit there were many criticism that RMB would be much stronger. Anyway, as a consequence, as you know, the super cycle in commodities started under massive consumption by China. Meanwhile, China established C.I.C, a sovereign wealth fund, for appropriate investments of FX reserves and allowed individuals to invest on equity markets in Hong Kong and U.S.
6. in 2008
Global financial crisis was. China recognized they should reform the economy like other countries following commodities drop and economic recession. They set RMB market to diversify three things, on-shore CNY, off-shore CNH, and off-shore and USD-settled NDF of CNY. However, they couldn't give up their mandate to pursue both of exports-led economy and rebalancing to boost internal consumption. So, they decided to increase expenditures from government and corporations to boost economy, and it meant increased debts.
7. by 2013
Continuing double economic mandate in China pointed the possible and moderate appreciation of CNY further for market participants. And so, Chinese industrial firms started to pursue higher yield from leverage positions borrowed in USD, and this money moved into shadow banking. On a early stage, they used commodities in their hand as a collateral. But, after commodities price dropped, they used gold and invoices of exports as a collateral as a popular theme. In fact, short term foreign debt increased rapidly since 2009.
8. in 2014
Chinese government had to warn this leverage positions. They started to recognize current environment as different from mid 1990s when they could avoid from financial crisis. So, they depreciated CNY rapidly and unexpectedly. Surprised leverage positions started to run out from on-shore market. There have been massive capital outflows since 2014 as flee from both of domestic deleveraging and investment capitals form overseas since then. In this circumstance, under the burden of debts for Chinese companies, capital outflows threatened banking system. So, China had to start to cut both of RRR and base rate in late 2004.
9. in 2015-ing
Chinese government seems afraid of possible more speedy capital outflow in line with deleveraging of domestic companies ahead of monetary tightening from U.S Fed which could lead stronger USD than now. So, China must need to include CNY into SDR in IMF to boost external demands of RMB for weakening shock from capital outflows, while they intend additional deleveraging modestly. So, they decided to devalue CNY, right after the warning sign from IMF, and before U.S Fed starts to hike the policy rate. It's maybe not for spurring exports sector.
10. Conclusion
Chinese government seemed to follow a planned step for restructuring economic model to open capital markets to maintain the status for global manufacturing and economic rebalancing to boost domestic consumption. On this side, current woes about devaluation of CNY are likely over stated and it will be positive rationales for Chinese economy in longer-run.
However, in short-term, we should concern how much possible capital outflows remain and the shock is. These are very difficult to estimate for now. Moreover, many suspect the ability to handle this in Chinese government. To confirm this, we have to wait further, and risky assets could face a headwind continuously, in short run, at least.
1. early 1990s
As a planned economy, China conducted government-led projects to boost economic growth with a huge devaluation of RMB. As a result, inflationary pressure had increased and people were suffered especially because of lack of investment vehicles protecting inflation such as stock or bond market. Despite the pain, Chinese government shouldn't stop this business, because if they paused economic plans, people would be suffered more with the mega unemployment. So, government started to consider economic reforms.
2. mid 1990s
China decided to adopt Exports-led Economic Model and thus economic growth started to be boosted by exports sector with relatively weak real effective exchange rate as China pegged RMB to USD. In fact, pegging local currency to dollar was the main mandate for Asian countries which adopted exports-led economic model, succeeded in Japan earlier, including from Korea, Taiwan, Hong Kong to Malaysia. As you know, they experienced financial crisis in late 1990s, but China was somewhat free from the crisis. It was because China was controlled economy, especially in capital accounts, so their external debt was much smaller than other Asian countries.
3. late 1990s
PBOC purchased FX to hold exchange rate for pegging and it could led the inflation to decline rapidly. But, the world was somewhat upset because they couldn't get dollar absorbed in China again. There was a criticism that China broke a WTO policy. On the other hand, many corporations in developed countries, such as U.S, Europe and Japan, seemed not reluctant weak RMB because they were transferring their factories into China as pursue competitiveness of lower cost. Those two factors offset.
4. early 2000s
Chinese FX reserves increased more rapidly in early 2000s. They bought US treasury bonds massively and Fennie and Fraddie bonds to use dollars. It was one of a reason for so-called Greenspan's conundrum, long-end bond rate did not rise despite hiking Fed funds rate. Moreover, it would be another rationale for housing bubble in U.S, because their buying bonds issued by mortgage firms lowered their capital costs.
5. mid 2000s
In this period, Chinese government decided to conduct structural rebalancing to increase domestic consumption. For this, they started to appreciate RMB, albeit there were many criticism that RMB would be much stronger. Anyway, as a consequence, as you know, the super cycle in commodities started under massive consumption by China. Meanwhile, China established C.I.C, a sovereign wealth fund, for appropriate investments of FX reserves and allowed individuals to invest on equity markets in Hong Kong and U.S.
6. in 2008
Global financial crisis was. China recognized they should reform the economy like other countries following commodities drop and economic recession. They set RMB market to diversify three things, on-shore CNY, off-shore CNH, and off-shore and USD-settled NDF of CNY. However, they couldn't give up their mandate to pursue both of exports-led economy and rebalancing to boost internal consumption. So, they decided to increase expenditures from government and corporations to boost economy, and it meant increased debts.
 |
| Source : IMF |
7. by 2013
Continuing double economic mandate in China pointed the possible and moderate appreciation of CNY further for market participants. And so, Chinese industrial firms started to pursue higher yield from leverage positions borrowed in USD, and this money moved into shadow banking. On a early stage, they used commodities in their hand as a collateral. But, after commodities price dropped, they used gold and invoices of exports as a collateral as a popular theme. In fact, short term foreign debt increased rapidly since 2009.
8. in 2014
Chinese government had to warn this leverage positions. They started to recognize current environment as different from mid 1990s when they could avoid from financial crisis. So, they depreciated CNY rapidly and unexpectedly. Surprised leverage positions started to run out from on-shore market. There have been massive capital outflows since 2014 as flee from both of domestic deleveraging and investment capitals form overseas since then. In this circumstance, under the burden of debts for Chinese companies, capital outflows threatened banking system. So, China had to start to cut both of RRR and base rate in late 2004.
9. in 2015-ing
Chinese government seems afraid of possible more speedy capital outflow in line with deleveraging of domestic companies ahead of monetary tightening from U.S Fed which could lead stronger USD than now. So, China must need to include CNY into SDR in IMF to boost external demands of RMB for weakening shock from capital outflows, while they intend additional deleveraging modestly. So, they decided to devalue CNY, right after the warning sign from IMF, and before U.S Fed starts to hike the policy rate. It's maybe not for spurring exports sector.
10. Conclusion
Chinese government seemed to follow a planned step for restructuring economic model to open capital markets to maintain the status for global manufacturing and economic rebalancing to boost domestic consumption. On this side, current woes about devaluation of CNY are likely over stated and it will be positive rationales for Chinese economy in longer-run.
However, in short-term, we should concern how much possible capital outflows remain and the shock is. These are very difficult to estimate for now. Moreover, many suspect the ability to handle this in Chinese government. To confirm this, we have to wait further, and risky assets could face a headwind continuously, in short run, at least.
Update of Chinese Real Imports, with BDI and Housing Prices
Chinese real* imports consist of exports data to China from main trade partners showed hovering negative growth in July following small upturn in June, while BDI started to follow weak Chinese imports out of positive effects from seasonal benefits.
Meanwhile, 70 cities new housing prices rose on rate of year on year increase in July for 3rd consecutive months from a April's trough. This data released on this Tuesday, but SHCOMP index tumbled with diminishing the expect of additional policies to boost economy and equity market as I commented previously.
Meanwhile, 70 cities new housing prices rose on rate of year on year increase in July for 3rd consecutive months from a April's trough. This data released on this Tuesday, but SHCOMP index tumbled with diminishing the expect of additional policies to boost economy and equity market as I commented previously.
Thursday, August 20, 2015
A History of Chinese Capital Control since 1990s
Ignore this post. Rather, see another post written in 21, Aug.
-----------
1. In early 1990s, there was a devaluation of CNY. But, the negative effects were to Chinese workers mainly, because they had no investment vehicle such as stock market or private bond market to protect the risk from inflation. Deposits were officially limited by the state, as well.
-----------
1. In early 1990s, there was a devaluation of CNY. But, the negative effects were to Chinese workers mainly, because they had no investment vehicle such as stock market or private bond market to protect the risk from inflation. Deposits were officially limited by the state, as well.
2. By 1994,
China had a major inflation problem in line with launching the government-led
projects. But, they couldn’t stop those because of the fear of mass
unemployment.
…
Economic reforms were coming.
3. So, by mid
1990s, China began to introduce export oriented model including the openness of
capital account to foreign direct investments. One is the most important was
China adopted pegging CNY to USD. And then, mega inflation promptly eased.
4. Many Asian
countries, from Hong Kong, Korea, Taiwan to Malaysia, adopted the export-led
economy which succeeded in Japan, however, as known as, they suffered from the
financial crisis in late 1990s. The only one difference of them and China was
pegging local currency to dollar or not. China compeletey controlled their
capital account.
5. By 1998, the
strategy was working. Exports were greater than imports due to the impact of
weaken real effective exchange rate.
6. Meanwhile,
the trade partners with China hardly took any benefit as China absorbed all of
excess dollars from trade with FX purchasement. So, the world was upset. China
broke WTO rules as well.
7. But, main
developed markets which had high-cost industrial environments should use cheap
factories in Chinese economy. So, FDI flowed into China. This was an essential
selection for corporations in western society to remain their competitiveness.
They were Japan, US, and Europe.
8. China had to
maintain its direction of relatively weak CNY because they should face the emergence of
bubbles in asset markets, especially in property market. It suggested a signal
that Renminbi value would remain to market participants. In fact, if PBOC
stopped FX purchases, individuals would increase their spending and this could
decrease the competitiveness of exports side.
9. By 2004 to
2005, the amount of FX reserves in PBOC, consist of USD mainly, were sufficient
to defend long-end US treasury yield from rising higher, as known as a
conundrum with monetary tightening cycle, as China should buy USD assets
especially long-end treasury bonds to use their reserves.
10. They
invested US government sponsored enterprise paper, GSE, including Fannie and
Freddie. Chinese investments could lead lower cost of borrowing for those, and
the residential market bubble in US had grown.
11. At the same
time, China decided to start economic rebalancing to boost domestic
consumption. To help achieve this, it should begin to appreciate RMB.
12. As a
result, the world started to recognize China as the biggest consumption
powerhouse and the commodity super cycle began.
13. As Chinese
FX reserves increase rapidly, China set the soverign wealth fund, Chinese
Investment Corporation, to diversify their FX in 2007. And in 2007, premier Wen
Jiabao allowed for Chinese individuals to start investing in Hong Kong markets,
and expanded toward US by 2008.
14. And in
2008, as you know, it happened…
15. As a
result, US and other western economies started to reform their economic
structures as decrease low-value jobs and increase competitiveness of luxury
good, service, arts and high tech sectors.
16. After late
of 2008, the commodity market bursted, so China felt need to rebalance. They
set the tri-value RMB system made up of onshore CNY, offshore CNH, and
non-deliverable forward (NDF, USD setteled) market in 2009.
17. But, they
wanted to maintain their dual mandate which was both of export-oriented modle
and economic rebalancing. So, they decided to increase expenditures worth of
about 4 trillion dollars to boost social welfare and infrastructures rather
than led market liberalization. This meant increasing debts.
18. That said,
they had not to give up the appreciated RMB, so domestic institutions tried to
use leverage of USD for investments in RMB assets.
19. On the
early stage, they use the commodity stock as a collateral to borrow dollars to
reinvest in higher-interest shadow banking vehicles at shorter duration. But,
after continued collapse in commodity price, they started to use trade invoices
and gold, especially in 2013.
20. Chinese
government warned those institutions as devalue RMB unexpectedly in 2014. And
there was somewhat capital outflow from China. One of this outflow was from
domestic corporations used leverage investments, which meant deleveraging, while
another one was from foreign FX lending positions due to the fear of conditions
in Chinese industries.
21. Chinese
companies seemd to be suffered from the burden of debts increased especially
from 2008 to 2010, in line with government’s economic boosting policies. And as
capital outflow continued, the monetary conditions tightened and banking system
was to be vulnerable.
22. So, PBOC
should start to cut both of RRR and base interest rate in late 2014.
23. And for
now, China seems to want CNY to include into SDR in IMF. It wil likely
stabilize CNY value in longer term.
24. Meanwhile,
FDI in China doesn’t look bad. During 7 months in this year, FDI increased 7.9%,
a worth of 76.6 bn dollar.
25. Chinese
government may was afraid of possible shock with additional deleveraging and
capital outflow rapidly which could start with US Fed’s rate hike could lead
stronger dollar than now. If then, inclusion into SDR of CNY would be difficult
for now.
26. If this
analysis is correct, the fear of devaluation of CNY or capital outflow from
China would be overstated, because both of them are all Chinese government’s
intensions.
27. On the
other hand, remaining amount of leverage position, as know as a carry trade, is
difficult to estimate, so this would be a risk in short term. Market would
continue to suspect Chinese government’s ability to handle this.
28. But, in mid
term or longer run, this could stabilize Chinese capital account as open the
market to get investments from overseas through liberalization and inclusion
into SDR.
(Thanks to FT Blog... I couldn't write the daily summary yesterday due to studying this...)
(Thanks to FT Blog... I couldn't write the daily summary yesterday due to studying this...)
Tuesday, August 18, 2015
15.08.18 Daily Summary
1. The bond yields in main western countries somewhat declined amid disappointed economic indicators in US as NY Empire state index tumbled to 6 year low, while NAHB index rose, and weakness in equity market.
See other posts written today.
2. The effect of meeting lag span with positive cloud in a German Bund 10 year chart was maybe very short as the yield dropped yesterday. However, it will likely remain a range movement during a few days, so I'm reluctant to buy long-end treasuries additionally yet.
3. In Thailand, an explosion of bomb which killed 21 people as known, caused domestic weakness in equity and FX market. Someone suspects the government as a implicit leader of this tragedy.
4. PBOC continued to hold CNY fixing rate with extremely small adjustment. But, Asian equity markets tumbled in line with Thailand and Chinese SHCOMP index drops.
5. SHCOMP tumbled more than 6% today after -8.5% drop in 27th July as the expectation of state support declined as market participants said. They pointed somewhat robust property price data could lead the limit of additional market support measures or remaining current tools.
6. Chinese cities where home prices rose exceeded those where declined for the first time in 16 months in July, as authorities removed some property curbs and interest rate fell. New-home prices rose in 31 cities of 70, from 27 of the previous month. The average price of 70 cities rose 0.17% from June, gaining for a third consecutive month.
This seems an irony because real Chinese economy has been moved with property prices face to face... Now seems too early to suggest one-side direction of markets price...
7. In Korean treasury bond market, foreign investors have sold cash bonds recently, while continue to buy futures especially in 10y tenor. Market players had thought cash bond market and futures market was seperated for foreign investors because oversea's mutual funds were main in cash bonds and maybe hedge funds had dominant positions in futures market for an off-shore. But we maybe should change the thought. There has been movements to transfer cash bonds to futures positions as the drain liquidities in cash bonds market is threatening participants. If then, the fear about the outflow of foreign investors in Korean bond market maybe overstates despite soaring KRW exchange rate against USD.
Bad Debt raises Risks India's Growth
The percentage of loans in default at Indian banks stood at 4.3% in December last year, more than twice the 2010 value. That compares 2.1% in Indonesia and 1.1% in China, whether it is reliable or not, especially in China. Bad loans at US banks ell to 2% last year.
According to recent each Indian bank's released data, NPL, nonperforming loans, ratio seems to be increasing further at the end of 2nd quarter. Banks are still suffering...
In addition, EM credit bond traders say these woes are already reflected in market. Although the momentum will likely be negative further, it's difficult to transfer Indian banks bonds to another one, because alternative bonds are not sufficient in global market.
Does it mean the momentum of deteriorating is not too strong, or remaining power of global liquidity?
According to recent each Indian bank's released data, NPL, nonperforming loans, ratio seems to be increasing further at the end of 2nd quarter. Banks are still suffering...
In addition, EM credit bond traders say these woes are already reflected in market. Although the momentum will likely be negative further, it's difficult to transfer Indian banks bonds to another one, because alternative bonds are not sufficient in global market.
Does it mean the momentum of deteriorating is not too strong, or remaining power of global liquidity?
Expect USD/KRW to loose upward momentum in short-term, while possibility of tumbling seems to be limited
With a chart analysis, especially in monthly candle of USD/KRW to suggest longer-term view, we could see both of current candle and lagging span met the negative cloud consist of 1st leading spans. While the fear of currency war by Chinese RMB devaluation weighs on KRW, current level of USD/KRW seems somewhat high in short-term. There should be stronger momentum than now for additional depreciation like a few cases earlier, but upward pressure would be moderate for now.
In contrast, in a longer-term, the leading span is transforming to positive as 1st lead rose higher than 2st lead, which means downward pressure of exchange rate would be small as well. Rather, USD/KRW will more likely soar in longer-term...with chart analysis...
In contrast, in a longer-term, the leading span is transforming to positive as 1st lead rose higher than 2st lead, which means downward pressure of exchange rate would be small as well. Rather, USD/KRW will more likely soar in longer-term...with chart analysis...
 |
| USD/KRW, Monthly Candle for long-term period |
US Home Builders, NAHB, Index recorded higher to 2005 high
Back to end of last year or start of this year, many economists expected growth of residential market would be slow, though they had somewhat convictions to economic improvements.
In contrast, housing market in US seems so solid. August NAHB index recorded 61 following not revised 60 in July, higher to 2005 high level, and increased by 10.9% from a year earlier. Even optimistic economists had expected only about 5% growth rate in the start of this year.
This indicator offset the bullish movement in US treasury market following NY Empire state manufacturing index tumbled, partly, toward somewhat upward pressure on the yield, yesterday.
As many analysts see the only limited wealth effect or hardly by increasing residential price, I would not point this as a proof of economic recovery. However, we could think eased money is playing in anywhere, housing market, for example, someone believes extraordinary monetary easing is leading deflationary pressure.
I really wonder where is the end of this era of QE...
In contrast, housing market in US seems so solid. August NAHB index recorded 61 following not revised 60 in July, higher to 2005 high level, and increased by 10.9% from a year earlier. Even optimistic economists had expected only about 5% growth rate in the start of this year.
This indicator offset the bullish movement in US treasury market following NY Empire state manufacturing index tumbled, partly, toward somewhat upward pressure on the yield, yesterday.
As many analysts see the only limited wealth effect or hardly by increasing residential price, I would not point this as a proof of economic recovery. However, we could think eased money is playing in anywhere, housing market, for example, someone believes extraordinary monetary easing is leading deflationary pressure.
I really wonder where is the end of this era of QE...
Empire State Factory Sector Index Declines Sharply
*Definition of NY Empire State Index : is based on survey responses by an unchanged pool of about 200 top manufacturing executives such as CEO, NY based. They reply to the 11 components about the business conditions from a month earlier and future expectation after 6 months. Detail indicators were calculated by subtracting percentage replied as 'increase' of indicators from replied as 'decrease', while are not considering 'hold' opinions. New York is the 3rd largest state as a contributor of real GDP in 2014 following California and Texas, and NY's GDP was 8.1% of total United States GDP in 2014.
So, the headline number, -14.9, means more than by 14.9%p CEO in NY based manufacturers revealed an anxiety against last month's conditions, although the difference of these about the expectation ahead 6 months rose from a month earlier. This -14.9 is the lowest level in 6 years.
In details, it looks like there are headwinds from the burden of inventories apparently. We could see this on some detail indicators such as Inventories, New Orders, and Shipments. Meanwhile, the employment indicator showed positive number, but its level is very low relatively.
Albeit someone could argue NY is not only rationale to forecast whole US economy, current economic activities seem to be somewhat slow for now, at least...
So, the headline number, -14.9, means more than by 14.9%p CEO in NY based manufacturers revealed an anxiety against last month's conditions, although the difference of these about the expectation ahead 6 months rose from a month earlier. This -14.9 is the lowest level in 6 years.
In details, it looks like there are headwinds from the burden of inventories apparently. We could see this on some detail indicators such as Inventories, New Orders, and Shipments. Meanwhile, the employment indicator showed positive number, but its level is very low relatively.
Albeit someone could argue NY is not only rationale to forecast whole US economy, current economic activities seem to be somewhat slow for now, at least...
Empire State Manufacturing Survey
|
Aug
|
Jul
|
Jun
|
Aug'14
|
2014
|
2013
|
2012
|
General Business Conditions (Diffusion Index, %, SA)
|
-14.92
|
3.86
|
-1.98
|
15.10
|
11.83
|
3.87
|
4.22
|
New Orders
|
-15.70
|
-3.50
|
-2.12
|
14.24
|
7.89
|
1.16
|
1.46
|
Shipments
|
-13.79
|
7.88
|
12.01
|
21.93
|
12.09
|
4.52
|
11.20
|
Unfilled Orders
|
-4.55
|
-7.45
|
-4.81
|
-7.95
|
-9.03
|
-8.74
|
-8.83
|
Delivery Time
|
-4.55
|
0.00
|
-1.92
|
-5.68
|
-5.17
|
-3.52
|
-0.30
|
Inventories
|
-17.27
|
-8.51
|
1.92
|
-14.77
|
-1.80
|
-5.73
|
-2.91
|
Number of Employees
|
1.82
|
3.19
|
8.65
|
13.64
|
10.85
|
3.73
|
8.62
|
Prices Paid
|
7.27
|
7.45
|
9.62
|
27.27
|
20.90
|
21.53
|
24.71
|
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