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Big Week Ahead

  
  Analysis
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Two G7 central banks meet and at least half a dozen emerging market central banks. There is a European Summit and perhaps a political effort to reinvigorate the UK-EU trade talks, which seem to be crashing on the shoals of stubbornness. The ECB offers its most generous long-term targeted loan that is bound to see earlier loans rolled into this new one. Further evidence that the world’s largest economy has taken a baby step toward recovery.
Let’s unpack next week’s events. But first, note that the events will take place as the recovery in risk assets appears to have come to an end with a flourish last week.  That correction, which seemed overdue, appears to have more room to run. Also, the Covid virus continues to spread globally, and businesses, investors, and policymakers are sensitive to the so-called second-wave as countries and states re-open. Below are thumbnail sketches of the events and data that shape the macro picture.
  • EU Summit: The European Council (heads of state) hold a virtual meeting on June 18 to ostensibly discuss the EU’s  May 27 Recovery Fund proposal.   Some have heralded the proposal as a key turning point in the evolution of Europe, and the possibility of a so-called Hamiltonian moment, a major set toward fiscal union, has been suggested.  We have been less sanguine; recognizing the potential scaffolding for a greater union, but also that projecting emergency actions into the future is fraught with danger.  Austria and Denmark, which have pushed back against grants instead of loans, could be won over by assurances that their rebates will remain intact.  Others, including Eastern and Central European members, may be more difficult to persuade. Although expectations are running high, we suspect an agreement will remain elusive, in which case another try will be at the July summit, which, with a little luck, could be in person.  Disappointment could weigh on the euro.

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Japan Quarterly Business Sentiment Index survey (Q2): large Japanese companies worst in 11 years

  
  Analysis
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Business Sentiment Index (BSI) survey conducted by the Ministry of Finance and the Economic and Social Research Institute (a part of Japan’s Cabinet office) is conducted quarterly.

Business sentiment among large Japanese companies minus 47.6 (from -10.1 in Q1)
  • worst result in 11 years
  • 3rd quarter in a row in negative territory
For medium-sized companies, negative 54.1
  • and for mid- to small-companies minus 61.1
  • each also at their worst ever
Data out a little earlier.
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Quarterly Business Sentiment Index (BSI) survey, conducted May 15

  • This survey analyses business leaders’ assessments of and forecasts for the economy
  • Its purpose is to get information for tracking economic trends
  • It covers about 15,000 companies that have established their headquarters or principal offices in Japan and have capital stock of 10 million yen or more

Venezuela asks Bank of England to sell its gold

  
  Analysis
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Venezuela is asking the Bank of England to sell part of the South American nation’s gold reserves, send the proceeds to the United Nations to help with the country’s coronavirus-fighting efforts

Reuters with the report, citing “two sources with knowledge of the situation”.
  • It was not immediately evident how much gold Venezuela was asking the Bank of England to sell.
  • Venezuela’s information ministry and central bank did not respond to requests for comment.
  • The Bank of England said it does not comment on individual customer relationships.
Venezuela asks Bank of England to sell its gold

IMF on coronavirus and the global economy – damage this year; sharp, rapid rebound

  
  Analysis
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Comments from International Monetary Fund managing director Kristalina Georgieva over the weekend on the impact on the global economy

  • could damage global economic growth this year
  • a sharp and rapid economic rebound could follow
  • “There may be a cut that we are still hoping would be in the 0.1-0.2 percentage space”
  • full impact of the spreading disease would depend on how quickly it was contained – “I advise everybody not to jump to premature conclusions. There is still a great deal of uncertainty. We operate with scenarios, not yet with projections, ask me in 10 days”
  • If the disease is “contained rapidly, there can be a sharp drop and a very rapid rebound”, in what is known as the V-shape

UK virus researchers estimate 250,000 people in Wuhan will have coronavirus in 13 days

  
Analysis, Economy
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It will spread to nearby cities and countries next

It will spread to nearby cities and countries next
A UK expert on the transmission and evolutionary dynamics of infectious diseases has published a paper with four colleagues that estimates transmission parameters for the Wuhan coronavirus and it’s terrifying.
Dr Jonathan Read estimates that only 5.1% of infections in Wuhan are identified and that an explosion in the number of cases is less than two weeks away.
By February 4, he writes that “our model predicts the number of infected people in Wuhan to be greater than 250,000 (prediction interval, 164,602 to 351,396).”
Based on travel patterns, his team predicts the cities with the largest outbreaks elsewhere in China to be Shanghai, Beijing, Guangzhou, Chongqing and Chengdu. The countries with the greatest risk of importing it are Thailand, Japan, Taiwan, Hong Kong, and South Korea.

(more…)

Some geopolitical comments from China and France are hitting the news wires

  
Analysis, Politics
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Speaking on the Middle East risks

France’s foreign minister is saying:
  • if tensions are not diffused today than there is a real risk of war in Middle East
  • there is still room for diplomacy on Iran crisis
  • Iran must refrain from reacting, start broader talks
  • says Soleimani was a key player in destabilizing the region
  • latest decision by Iranians enables them to enrich uranium without constraints
  • we can question the validity of nuclear deal in long-term
  • decision on triggering Iran nuclear deal dispute mechanism process will be made in coming days
meanwhile China is saying:
  • US unilateral use of force has violated international law and destabilizes the region
  • Urges US not to use a further force in Middle East, calls on all parties to exercise maximum restraint

Finally, the Trump administration has said that they would provide closed-door briefing on Iran to the full US Senate on Wednesday.  Secretary of State Pompeo, defense secretary Esper and CIA director Haspel, and Joint Chiefs of Staff chairman Milley will address the Senate.

I guess the earlier tweet by Pres. Trump will be stepped up with some more formal communication.
Speaking on the Middle East risksFrench Foreign Minister says

International Monetary Fund wants Indian government to be more credible, transparent on fiscal numbers

  
  Analysis
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New Delhi needs to become more “transparent” on the fiscal numbers as it is a “laggard” among the G20 peers on this front, a senior official from the International Monetary Fund said here on Wednesday.

The government has been missing its budgeted fiscal targets for the past few years and there is a need for a “credible fiscal consolidation” which is more ambitious as well, the official said, adding this is more so as government has not addressed how it will make up for the massive Rs 1.45 lakh crore tax giveaways in the form of corporate tax cuts.

The comments come amid allegations of the budget math not adding up with some pointing to a Rs 1.7 lakh crore hole in the estimates, and also over 100 economists questioning the official data computation.

“Fiscal transparency should be increased. It is fairly difficult for the private sector to get the full picture on fiscal standing,” the fund’s deputy director Anne-Mary Gulde said speaking at an NSE event here. 

“India is somewhat lacking in a programme on G20 data initiative on fiscal transparency where comparative countries have all made greater progress,” she added.

She said there is also a need for more credible fiscal consolidation as such a move will help reduce the relatively high level of debt and free up financial resources for the private sector. (more…)

Forces of Movement at the Start of Q4 19

  
  Analysis
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The world’s largest economy appears to have grown by about 2% in Q3 at an annualized pace, the same as in Q2, and in line with what many Fed officials understand to be trend growth.  The strength of the US labor market underpins consumption, the powerful engine of the US economy.  The latest readings of both the labor market and consumption will highlight the economic data in the week ahead.
The strength of the recent housing data (starts and sales) suggest that the decline in interest rates is beginning to have some traction in the particularly sensitive sectors of the economy.  It seems that the economic conditions that foster residential investment also favor auto sales.   US light vehicle sales have averaged 16.93 mln a month a seasonally-adjusted annual basis.  In both 2017 and 2018 average sales averaged about 17.15 mln.  Lower interest rates and greater average incentive (industry estimates average in September of $4.2k compared with $4.0k in September 2018) would favor a gain on the 16.97 mln pace seen in August.  However, there is a quirk in the calendar that warns the report may disappoint. The weekend before Labor Day (September 2) was captured in August’s report.
Auto sales and jobs growth are cyclical.  The 12-month moving average of US vehicle sales peaked in February 2016 at 17.57 mln.  With all the revisions, it may be hard to keep track of it, but the 12-month average of non-farm payroll growth peaked in February 2015 at 260k.  In a revealing but straightforward way, it illustrates where the US economy is in the business cycle.  US job growth is slowing.  The average monthly job growth this year has been 158k.  In the first eight months of 2018, an average of 234k jobs were created.  The quarterly average has steadily fallen this year, and it will again if the jobs growth reported on October 4 is less than 178k.  The median forecast in the Bloomberg survey calls for 140k after August’s 130k.  Weekly jobless claims were flat between the survey periods.  Some survey data has warned of weakness.  The GM strike and government census hiring could impact the September jobs report in opposite directions.
The takeaway message is lower interest rates (10-year yield is about 30 bp lower year-over-year) and lower oil prices (~15% year-over-year) maybe helping the US economy extend its recovery in the face of the end of the fiscal stimulus, tax hikes (on imports), and trade certainties and uncertainties.  The economy may show sufficient rigor and price pressures sufficient firmness that a consensus toward a standing pat after two cuts may gain currency.  At the same time, the Fed will likely provide some details of its assessment of the banking system’s reserve demand at the October meeting.  Given the extent of the confusion among investors, it would be instructive for the Fed to separate its operational issues, the plumbing, if you will, from the conduct of monetary policy proper.  Arguably a way to do that is not to announce a change in both simultaneously, i.e., at the October meeting.
When the US money market calm returns as we expect, then let’s assume for the sake of the exercise that the fed funds effective rate averages 1.85%.  A 25 bp rate cut would bring it to 1.60%. The implied yield of the January 2020 futures settled last week at 1.5750%.   At this juncture, the market appears to accept the Fed’s framing of the issue as a midcourse correction that will extend the record-long recovery.
II

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Schedule for Week of September 22, 2019

  
  Analysis
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The key reports this week are August New Home sales, and the third estimate of Q2 GDP.

Other key indicators include Personal Income and Outlays for August and Case-Shiller house prices for July.

For manufacturing, the Richmond and Kansas City Fed manufacturing surveys will be released this week.

—– Monday, Sept 23rd —–

8:30 AM ET: Chicago Fed National Activity Index for August. This is a composite index of other data.

—– Tuesday, Sept 24th —–
 

Case-Shiller House Prices Indices9:00 AM ET: S&P/Case-Shiller House Price Index for July.

This graph shows the nominal seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the most recent report (the Composite 20 was started in January 2000).

The consensus is for a 2.1% year-over-year increase in the Comp 20 index for July.

9:00 AM: FHFA House Price Index for July 2018. This was originally a GSE only repeat sales, however there is also an expanded index.

10:00 AM ET: Richmond Fed Survey of Manufacturing Activity for September.

—– Wednesday, Sept 25th —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

 

New Home Sales10:00 AM: New Home Sales for August from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the sales rate for last month.

The consensus is for 665 thousand SAAR, up from 635 thousand in July.

—– Thursday, Sept 26th —–

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 211 thousand initial claims, up from 208 thousand the previous week.

8:30 AM: Gross Domestic Product, 2nd quarter 2018 (Third estimate). The consensus is that real GDP increased 2.0% annualized in Q2, unchanged from the second estimate of 2.0%.

10:00 AM: Pending Home Sales Index for August. The consensus is 0.6% increase in the index.

11:00 AM: the Kansas City Fed manufacturing survey for September. This is the last of the regional surveys for September.

—– Friday, Sept 27th —–

8:30 AM: Durable Goods Orders for August from the Census Bureau. The consensus is for a 1.2% decrease in durable goods orders.

8:30 AM: Personal Income and Outlays for August. The consensus is for a 0.4% increase in personal income, and for a 0.3% increase in personal spending. And for the Core PCE price index to increase 0.2%.

10:00 AM: University of Michigan’s Consumer sentiment index (Final for September). The consensus is for a reading of 92.0.
Read more at https://www.calculatedriskblog.com/2019/09/schedule-for-week-of-september-22-2019.html#ufpCwOoLSeldtU2e.99

Markets eventually need to deal with the China reality

  
  Analysis
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The situation in Saudi Arabia and focus on the Fed has took the spotlight away from China’s economic worries to start the week

China
  • China’s Premier Li says maintaining economic growth of 6% or more is very difficult
  • China Industrial Production in August 4.4% y/y (expected +5.2%)
  • China Retail sales for August: 7.5% y/y (expected +7.9%)
I still don’t think markets are paying much attention to the message emanating from China to start the new week, and that may be a sign of complacency.
Industrial production slowed to its weakest in 17 ½ years while retail sales slumped more than expected and the PBOC is still showing no signs of easing its lending rates just yet – as evident by today’s MLF operations.
Prospects of a trade deal may sound attractive for risk sentiment but it isn’t going to be a massive game changer to the slowing Chinese economy in my view. Domestic demand is weakening and that will continue to eat away at global economic growth.
Markets may be a bit distracted for the time being amid oil news, central bank focus, and hopeful optimism surrounding trade talks. But don’t expect that to stay the course for too long. The longer the ramifications of the above go unnoticed, the greater the hit it will have on markets when reality snaps back in.
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