Steve Massocca’s Things I Saw Today 4/11/18

Things I Saw Today

So at around 7:30 PDT/10:30EDT last night, President Xi Jinping made the following comments:

China’s Xi announces plans to open up China – CNBC

  • CNBC reports China President Xi Jinping in a keynote speech at the Boao Forum for Asia discussed plans to further open up the Chinese economy. Those measures included lowering import tariffs for autos and other products, enforcing the legal intellectual property of foreign firms, and improving the investment environment for international companies.
  • The market focus was mostly on whether there would be any reactions to the recent escalation in US-China trade tensions (which there were not).

Which led to this…

S&P futures +27.9 to 2,619.1, +1.07% vs settlement

Which led to many wondering why the Chinese President after much tough talk seemed to be reversing course quite quickly, perhaps this might explain part of it…

Trade war should not extend to financial war – Financial News

  • PBOC adviser Sheng Songcheng tells the Financial News that a trade war should not extend to a financial war, cautioning against yuan manipulation. Sheng notes that an exchange rate devaluation would cause many problems and would not be worth the trouble (increasing capital outflow pressure and intensifying trade conflicts).
  • According to Sheng, the contribution to economic growth from net exports is small. Although currency depreciation may boost the price advantage of exports in the short term, it is not conducive to improving product quality or competitiveness. Argues that focus on trade imbalances is narrow, and that China’s services deficit with the US is growing. He also opposes a sharp appreciation of the yuan.

Yuan to lose ground on trade dispute – Reuters

  • A Reuters poll shows the outlook for emerging Asian currencies has brightened for the coming year as the trade dispute between the US and China has further underscored a weak dollar view, but that uncertainty has also dulled the yuan’s allure.

The market seems to be ignoring growing concern over the health of the economy…

Cracks in synchronized global growth theme – WSJ

  • WSJ the latest to scrutinize the synchronized global growth theme. It noted that in the US, measures of manufacturing and services activity have lost momentum, retail sales have fallen for three straight months, construction spending decelerated at the start of the year, and auto sales have largely plateaued.
  • The paper also highlighted the weakness in German February industrial output, the decline in manufacturing activity in 21 out of 30 countries in March, and the recent dip below zero for the first time since August in the Citi global surprise index.
  • The article, which noted the flat yield curve, weakness in copper and underperformance of industrial stocks, said that while there is little fear of an imminent global recession, investors now have to consider that the “global growth surge may be turning into a synchronized stall.”

Global debt surges to record $237T last year – Bloomberg

  • Bloomberg cites data by the Institute of International Finance, which finds global debt rose to a record $237T in Q4’17, more than $70t higher from a decade earlier.
  • It says among mature markets, household debt as a percentage of GDP hit all-time highs in Belgium, Canada, France, Luxembourg, Norway, Sweden and Switzerland.
  • It says this is a worrying signal, with global rates tightening. Ireland and Italy are the only major countries where household debt as a percentage of GDP is below 50%.
  • It notes however that the ratio of global debt-to-GDP fell for the fifth consecutive quarter as global economic growth accelerated with the ratio below the high of Q3’16.

Much attention has been given to the widening TED spread (the difference between Libor yield and the yield on the T-bill of matching maturity, Figure IA), and the Libor OIS spread over the past few months as the spreads have winded out. The interest in these spreads are a consequence of the fact that a widening of these two related spreads are generally considered to be associated with an enhanced credit risk to the economy. This report will attempt to address the question: does the expansion of the TED spread & the Libor-OIS spread in the current situation mean that the credit risk within the economy is increasing?

  • “The Fed is likely to raise interest rates this afternoon at their December meeting, and are projected to raise rates several more times in 2018. The problem is that the current yield curve has compressed to a dangerously low level. Looking at Figure II we find that each time the yield has gotten to 0.5% on the spread between the 10 year and the 2 year government benchmark rate a recession eventually occurred, sometimes taking several years. The three month goes back to the 1950’s as does the 10 year note but the 2 year only goes back to 1984. However, whichever spread one prefers approaching slightly above 1% on the 3 month has produced the same result a recession was not far behind. The last 7 recessions or all the recessions since the 1950’s fit this same pattern.

Eurozone is already heading back into recession: The Telegraph highlighted the run of recent data softness in Germany, the exporting powerhouse of the Eurozone, which could portend weakness for the whole of the Eurozone. It pointed out that if this run of data proves to be more than a blip it could expose the lack of progress in reforms and the limited policy options available. The article also argued that Germany’s trade surplus has drained demand from the rest of the continent, the ECB is out of policy responses and the banking system is not in good shape.

Eurozone investor sentiment drops on ‘deep concern’ over trade: The FT reported on the latest Eurozone investor sentiment data, which showed that confidence fell for the third month in row, with the Sentix Eurozone index down to 19.6 in April versus prior 24 and compared with 32.9 at the start of the year. The article highlighted that the fall in sentiment came amid deteriorating Sino-American relations. In addition, it noted that the German outlook has also soured markedly, with the headline index down to 24.4 in April from 29.1 in March and the expectations reading dropped to its lowest level since October 2014.

However, central bankers seem quite concerned about economic health…

BOJ Governor Kuroda press conference

    • Kuroda reiterated that “it is way too early” to discuss exit strategies, reaffirming the overshoot commitment. There was also some discussion about risk factors, such as the scheduled consumption tax rate hike to 10% from 8% in October 2019, which could dampen private consumption. Kuroda downplayed such concerns, suggesting that the increment will be less than the previous hike, while there will be some exemptions this time, such as on food and other daily necessities.

ECB’s Coeure says no need for central bank to adapt policy after recent weak data – Reuters

  • Reuters cited remarks by ECB’s Coeure, who on Monday said the central bank does not need to adapt its monetary policy after recent weakness in some Eurozone economic indicators.
  • Coeure said the economy was not seeing a slowdown, but rather a largely anticipated correction after reaching multi-year highs, and will not result in the ECB revising down its forecasts.
  • Coeure further added that though future monetary policy would depend on economic indicators, policy was on a long-term path and would remain highly accommodative for a long time.

Dallas Fed President Kaplan says central bank has to be gradual, patient in raising rates – Reuters

  • Reuters cites Dallas Fed President Robert Kaplan (non-voter) who says the US economy will be relatively strong this year, but the Fed will have to be gradual and patient in raising the federal funds rate in light of headwinds.
  • Kaplan expects the US to grow by 2.5%-2.75% this year, unemployment to go lower and inflation to gradually pick up toward the 2% target. He expects 2019 growth to be a little weaker, and will trend down to 1.75% by 2020.
  • Kaplan adds his base case is for the Fed to still hike rates three times this year but that it’s too soon to judge the impact of the recent trade rhetoric on the US economy, and he expects a lot of continuity under Chairman Powell.
  • He also expects recent financial market volatility to continue but says that he is quite hopeful that despite the latest tensions around trade, the rhetoric will de-escalate. He adds business investment should be stronger on tax reforms.

Will markets also become equally concerned?

Steve Massocca |
Wedbush Securities | 2 Embarcadero Center, 6th Floor | San Francisco | CA | 94111 | | Member: NYSE / FINRA / SIPC


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