What is the outlook for the US economy?

We see plenty of rhetoric about challenges and changes but the two biggest players in the world economy are the United States and the US Dollar. So it is time for us to peer under the bonnet again and let me open with the result from the third quarter.

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the third quarter of 2019 , according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( BEA )

There are several implications here of which the first is simply that this is better than we are seeing in most places with Germany and Japan reporting growth rates much lower in the last 24 hours. In general this is , however, weaker than last year although the last quarter of 2018 was particularly weak.

A supporting element for the US has been a strong labour market.

 Real disposable personal income increased 2.9 percent, compared with an increase of 2.4 percent.

Has the easier fiscal policy of President Trump been a factor? Yes but we simply get told this.

federal government spending,

If we shift to a potential consequence which is rising debt well actually the ability of the US to repay it looks strong too.

Current dollar GDP increased 3.5 percent, or $185.6 billion, in the third quarter to a level of $21.53 trillion. In the second quarter, GDP increased 4.7 percent, or $241.4 billion.

As you can see there has been an element of inflating away the debt in there.

What happens next?

The now cast system uses the latest official data to look ahead and just like last year it looks like being a weak end to the year.

The New York Fed Staff Nowcast stands at 0.7% for 2019:Q4.

News from this week’s data releases decreased the nowcast for 2019:Q4 by 0.1 percentage point.

Negative surprises from lower than expected exports and imports data accounted for most of the decrease.

Another factor in play is that the labour market is not providing the push it was.

Earnings growth is still below late 2018 levels……Payroll growth was moderate in October, but remained solid year-to-date.

Money Supply

Back on the 22nd February I posted my concerns about the prospects for 2019.

So we can expect a slowing economic effect from it as we note that some of the decline will be due to the QT programme…….So we move on with noting that a monetary brake for say the first half of 2019 has been applied to the economy.

Of course that was then and this is now as the reference to the now ended QT programme. For example this happened at the end of last month.

the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

Yesterday saw Repo operations from the New York Fed which provided some US $73.6 billion of overnight liquidity and US $30.7 billion of 13 day liquidity. Thus the cash is flowing rather than being reduced and like so many things what was presented as temporary seems to keep going.

In accordance with the most recent FOMC directive, the Desk will continue to offer at least $35 billion in two-week term repo operations twice per week and at least $120 billion in daily overnight repo operations.

The Desk will also offer three additional term repo operations during this calendar period with longer maturities that extend past the end of 2019.  ( NY Fed )

That is for the next month and there will be more to come as they catch up with something we have been looking at for a couple of years now which is the year end demand for US Dollars.

These additional operations are intended to help offset the reserve effects of sharp increases in non-reserve liabilities later this year and ensure that the supply of reserves remains ample during the period through year end.

Returning to the money supply data you will not be surprised to read that the numbers have improved considerably. The outright fall of US $42 billion in the narrow money measure in March has been replaced by growth and indeed strong growth as both the last 3 months and 6 months have seen growth at an annual rate of the order of 8%. Back in February I noted that cash growth was strong and it was demand deposits which were weak and it is really the latter which have turned around. Demand deposits totalled US $1.45 trillion in March but had risen to US $1.57 trillion at the end of October.

Talk of the demise of what Stevie V called

Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

continues which is rather the opposite of official rhetoric.

Thus a monetary stimulus has been applied and for those of you who like to look at this in real terms might now that the inflation measures in GDP have faded making the impetus stronger for say the opening and spring of 2020.

Have the Repo operations influenced this? If you look at the September data I think that they have. But this comes with a cautionary note as QE operations do not flow into the monetary data as obviously as you might think and at times in the Euro area for example have perhaps taken quite a while.

Credit

By contrast a bit of a brake was applied in September.

Consumer credit increased at a seasonally adjusted annual rate of 5 percent during the third quarter. Revolving credit increased at an annual rate of 2-1/4 percent, while nonrevolving credit increased at an annual rate of 6 percent. In September, consumer credit increased at an annual rate of 2-3/4 percent.

Those sort of levels would have the Bank of England at panic stations. It makes me wonder if fears over the financial intermediation of the banks was a factor in the starting of Repo operations?

If you are wondering if car loans are a factor here we only get quarterly data and as of the end of the third quarter the annual rate of growth was 4.3% so definitely, maybe.

The US Dollar

The official view is expressed like this.

NEW YORK (Reuters) – President Donald Trump on Tuesday renewed his criticism of the Federal Reserve’s raising and then cutting of interest rates, saying the central bank had put the United States at a competitive disadvantage with other countries and calling for negative interest rates.

He wants lower interest-rates and a lower US Dollar. What we have seen is a trade-weighted index which has risen from 116 in February of last year to above 129 as I type this. So not much luck for the Donald

Comment

As you can see things are better than some doom mongers would have us believe. The monetary situation has picked up albeit with weaker consumer credit and there is the fiscal stimulus. But that is too late for this quarter and there are ongoing issues highlighted by the weak data we have seen out of China this week which the New York Fed summarises like this.

China’s monthly economic activity data is steady at a lower level.

Then there is the ongoing sequence of interest-rate cuts around the world which rose by 2 yesterday as Mexico and Egypt got on the bandwagon. That makes 770 for the credit crunch era now.

Meanwhile for those who have equities the Donald thinks that life is good.

Hit New Stock Market record again yesterday, the 20th time this year, with GREAT potential for the future. USA is where the action is. Companies and jobs are coming back like never before!

 

 

 

 

 

 

What happens when an economic butterfly flaps its wings in China?

One of the accepted truisms of the modern era is that the economic world is shifting eastwards to the Pacific. The emerging vibrant nations there will push forwards and eclipse the old sclerotic developed nations in the west. Well out of that it is true that the western world has looked sclerotic but 2015 has not been especially kind to economies in the Pacific region. It was only on Wednesday that I analysed the problems and travails of the Japanese economy the same problems and travails that so many told us would be cured by the Abenomics arrows of the current government.

But there is an even bigger story in the Pacific region right now and that is the emerging crisis in China. This morning has seen disappointing news from the business survey about its important manufacturing sector.

Flash China General Manufacturing PMI™ at 47.1 in August (47.8 in July). 77-month low.

Eyes will immediately turn to the 77 month low part if the number which takes us back towards the beginning of the credit crunch and we all know what happened then. As to the number then officially 50 is the benchmark for contraction expansion but even if we use 49/51 to allow for uncertainty we can see that Chinese manufacturing is slowing according to this measure.

If we look into the detail I note that output is dropping as are orders and stocks/inventories are rising which suggest further trouble ahead. Thus the accompanying notes from Dr. He Fan, Chief Economist at Caixin Insight Group indicate someone who has either drunk too much Kool-Aid or took the Matrix style red pill.

But overall, the likelihood of a systemic risk remains under control and the structure of the economy is still improving…… This will lead the market to confidence and renew the vigour of the economy.

This means that there is now quite a gap between this survey and the official one as we wonder if fear stops companies from reporting the truth to officials

Unemployment in China

There has long been doubt over China’s economic statistics and The Economist has pointed out some obvious issues.

The registered urban jobless rate is just 4.1% now. This would seem to point to economic vigour, but the problem is that it has sat at that precise level, without moving, since late 2010. And it has stayed within an absurdly narrow range of 4.0-4.3% since 2002, even at the depths of the global financial crisis.

It adds some research from the National Bureau of Economic Research which uses other survey data.

They find that China’s unemployment rate averaged 10.9% from 2002-2009, nearly seven percentage points higher than the registered jobless rate over that period.

There are issues actually with both approaches and some now consider this to be better.

Another alternative is a surveyed unemployment rate that in its methodology more closely resembles the unemployment rates reported by developed economies. According to this, China’s jobless rate is now 5.1%

Now unemployment statistics have their flaws wherever we look as I am again reminded of Yes Minister telling us that manipulation of them was a common theme in the UK back in 1983. But we move on realising that we have evidence China is slowing but that the picture is far from crystal clear.

Commodity Prices

These are another potential signal for slow down signs in China and the price of crude oil has been very weak again this week. As I type this WTI (West Texas Intermediate) has dropped below US $41 and Brent Crude is in the low US $46s. Whilst there was a rally yesterday Dr.Copper’s price is 27% lower than a year ago. Iron Ore has been more stable  recently at US $55.60 according to The Australian but I note that this is for delivery to Tianjin and I think most would not be especially keen to visit there right now. From CNN.

Chinese emergency workers were working to extinguish four fires Friday that broke out at the site of last week’s fatal blasts in the northern city of Tianjin, the state-run Xinhua News Agency reported.

This is in addition to the millions of dead fish which have washed up on local shores.

Although of course fans of the economics of Paul Krugman will see this as a boost to GDP.

Underlying all this are fears for the western corner of the South China Territories who at least had a better day in the Ashes cricket at the Oval yesterday.

Currency Wars

The recent devaluations which I discussed on August 11th have stopped with the Yuan  stable for now at 6.39 to the US Dollar. However there have been impacts ricocheting around the emerging markets or EM complex. From RANsquawk.

Deutsche Bank note that 17 countries have seen their currencies depreciate by >3% since devalued the last monday

We also have the complex issue of the petro-currency nations hitting trouble which is interrelated. Yesterday saw Kazakhstan devalue as the currency world swings its axis but I would like to point out that this is a zero-sum game and ironically a recent riser has been the Euro as it nudges 1.12 to the US Dollar. The UK Pound £ has been strong for the past couple of years something that you get to write relatively rarely.

Equity Markets

These generate headlines but underlying the situation is modern central banking theory which operates to boost asset prices often explicitly. We have plenty of countries offering implicit support via QE policies but more than a few offering explicit support such as Japan,Switzerland and now China. From The Australian.

the more than $US90 billion the Beijing government has earmarked to rescue its stock market.

Today it has not gone so well as the Shanghai Composite Index fell by 4.2% to 3510. However there was a lot of speculation that The Plunge Protection Team did appear at the close. From Lim Chee Tiong.

ALERT: Here comes plunge protection team … spike

Although whilst a close above 3500 was achieved the PPT was unable to keep the market above various averages which chartists consider important. So watch this space! Although markets of course can spin on a sixpence.

Comment

Sometimes things are not as you might think at least for short periods and on this front I bring you this from Simon Rabinovitch.

So much for mini-stimulus. China to try mini-recession: will shut 10000 factories, 9000 construction sites week before Sep 3 military parade.

Although rumours are already swirling of more stimulus and monetary easing. From Live Squawk.

Speculation surrounds PBoC RRR cut could come this weekend, last cut was 50bp on Sat June 27, the third in 5 months.

Like all weekend moves it would have the advantage of catching the lazy western capitalist imperialists on the hope as they take time off to relax. Although it would appear that an old enemy is already on the case. From The Japan Times.

Finance Minister Taro Aso said Friday that recent moves by China to allow its currency to depreciate are a concern and could pose problems for Tokyo.

The China Equity Market Syndrome Is Bubbling Up

It was only yesterday that I pointed out that central banks ( Riksbank and the Bank of England) were starting to publicly admit to worries about Greece. The logic here is that some form of default would upset the world’s financial system via contagion effects. However something potentially much more systemically important is happening in the Far East to no fanfare and indeed not much attention. There have been many column inches devoted to the concept and possibility/probability of financial bubbles building in China but so far much fewer about the reality of one showing signs of bursting.

Regulatory Action

One sign of turmoil and official concern is action by regulators and my attention was drawn to this from earlier today. From the South China Morning Post.

the China Securities Regulatory Commission (CSRC) has set up a team to look at “clues of illegal manipulation across markets”.

Let us move to the China Daily which broke the news to us westerners at least.

The country’s securities watchdog announced late Thursday it will investigate suspected manipulation of the stock market as experts fail to explain worst collapse in years.

Zhang Xiaojun of the China Securities Regulatory Commission (CSRC), said the investigationwill focus on such activities occurring simultaneously in multiple markets. The CSRC has tracked irregularities between securities and futures trading.

The CSRC will transfer any criminal cases to the police, Zhang said.

Have you noticed that the regulator the CSRC only seems to have got interested when the equity market has had the “worst collapse in years”? The bubbilicious surge which preceded this decline never bothered it like this! Such behaviour concerns our suspicion that as far as equity markets are concerned the official view virtually everywhere is to sing along with Yazz.

The only way is up, baby
For you and me, baby
The only way is up
For you and me

Margin Trading

A feature of such problems is the advent and then increase in the amount of margin trading – where trading is financed by borrowed money – which the CSRC implicitly confirmed earlier this week when it did this. From the South China Morning Post.

The CSRC has also relaxed rules on using borrowed money to speculate on stock markets, letting brokerages set their own tolerance level on margin calls and allowing the roll-over of margin lending contracts.

This may be behind the sharp rally on Tuesday although phases like this do experience sharp short-covering rallies which are known by the unpleasant phrase “dead cat bounces”. The more a market depends on borrowed money or margin trading the more likely these become as things become more tightly wired and vulnerable. Reuters puts it thus below.

Much of the selling of Chinese stocks has been driven by “margin calls”, when a brokerage that has extended credit to an investor to buy stocks demands more cash or collateral because prices have fallen.

The official attempts to stop this are looking increasingly desperate. From Bloomberg.

Under new rules announced Wednesday by the country’s securities regulator, real estate has become an acceptable form of collateral for Chinese margin traders, who borrow money from securities firms to amplify their wagers on equities.

So you can finance the equity bubble from the property bubble! What could go wrong?

Paranoia Alert

I think that this from the South China Morning Post is rather extraordinary even for China.

Were foreign puppet-masters really behind the tanking Chinese stock market?

It echoes some imagery from the later Dune novels and there is more.

In a cartoon published on Tuesday by thepaper.cn, a state-owned digital media outlet that aims to engage with a young audience, an old Chinese woman is depicted as saying she wants to thank the government for helping to rescue the market. She also blames “foreign ghosts” for willing it to crash.

The cartoon immediately went viral on Weibo and WeChat, China’s two most popular social media networks.

Of course China would be far from the first country to make scapegoats of foreigners.

Actually the cause may be much nearer to home

On the lines of what goes up (especially at that rate) must come down I was interested to see this from J Capital Research in the Financial Times.

The sucking sound you hear is the average person’s bank account being drawn off into the hands of the red elite. Stay tuned, but maintain a safe distance.

Indeed the elites seem to have been behaving rather like the evil capitalist imperialists.

Ultimately, market participants all understand that the A-share bubble has been engineered to distract the average person from sinking values and illiquidity in the property markets. The pools of cash owned by Chinese people are regularly redirected to the asset classes that the government needs to rise and that elites are tapped into,

An interesting view of what is perceived to be capitalism but is really just another version of central planning.

Moving from the financial to the real economy

Iron Ore

This is another market which has been affected by margin trading and we should not be surprised that it has been unsettled by events if we recall how big a player China is in it. From Reuters.

China uses more than a billion tonnes of iron ore a year to make steel – 14 times the consumption of the United States

That is an extraordinary number is it not? Well perhaps traders are mulling it now.

the price of the raw material fell by 5 percent.

Iron ore delivered to China .IO62-CNI=SI stood at $55.80 a tonne, its weakest since late April,

This gives us link to the real economy as we know that the overall trend for Iron Ore prices have put Iron Ore solidly into a bear market. There is an implication here for the underlying strength of the Chinese economy and also for the western end of the South China Territories (Australia).

Monetary policy hints at fears for the real economy

This situation is one where the Chinese economy is plainly showing signs of slowing and what it does not need is what is happening in its equity markets. We have seen a variety of easing moves by the People’s Bank of China in 2015 with the latest interest-rate cut coming as recently as last Saturday.

The problem is a familiar one to the Greek crisis and it is that when there are worries about solvency providing liquidity and lowering interest-rates help little. If you have to pay 1% per annum less it does not help a lot if you have investments which have just lost more than 20% over the past three weeks. The situation gets worse by an order of magnitude each time the investor has geared the position by borrowing funds.

Comment

On the surface it may seem that there is little to worry about here. After all the Chinese stock market has rallied strongly and indeed more than doubled since last summer. But the catch is that the ordinary or retail investor only tends to get in on the tail end of such moves and of course any margin trading is especially vulnerable to declines and bear markets. There will be cross currents from other struggling markets like Iron Ore for institutional traders and for the ordinary person from the troubles in the property market.

Accordingly as we stand right now it looks as though the Chinese elite did not learn much at all from the problems of the evil capitalist imperialists. If they also slam into a credit crunch then on a world scale it will have much more impact than what is happening in Greece.