Jacksonville?

May 15th, 2016 9:34 pm

Via the FT:

by: Alistair Gray in New York

Forget the bright lights and fast pace of living in two of the world’s greatest metropolises, city living for a new generation of financial workers is now more Jacksonville in Florida and Warsaw in Poland than New York and London.

The US and British cities synonymous with banking, insurance and deal-making have lost an estimated 42,000 jobs — or 6 per cent of the sector — in the past five years as soaring costs have encouraged businesses to shift to cheaper locations.

While financial employers have been lowering headcounts in the two cities to cut expenses, about four-fifths of the positions have survived but migrated elsewhere, consultancy Boyd estimated in figures prepared for the Financial Times.

The cost of operating a back office in the two cities has increased 10-12 per cent in the past 18 months, about four times the rate of inflation, according to Boyd.

Post-crisis regulation and rock-bottom interest rates are squeezing revenues of banks, insurers and other financial services groups, leaving them reliant on cost-cutting to boost profits. IT workers and support personnel such as accounting, procurement and human-resources have led the exodus from the costliest centres.

“My clients have come to the conclusion that lots of these people don’t need to be in Midtown Manhattan or the City of London,” said Alan Johnson, managing director of Johnson Associates, a financial services pay consultant. “It doesn’t make sense any more.”

He said he expected New York and London to “lose a lot more” jobs in finance, adding: “You’ve got to overpay people because it’s so expensive to live there.”

Boyd estimated the main US financial centre had lost 27,000 staff in the past five years — leaving it with 331,000 positions — and the UK capital had lost 15,000 — leaving it with 358,000 posts.

In North America locations in upstate New York were becoming more attractive choices, the consultancy said. Montreal, which is seeking to woo the finance sector with tax incentives, has emerged as a favourite alternative, attracting 5,000 jobs in the sector since 2011 and employers including Morgan Stanley and State Street. Its annual operating costs are 40 per cent lower than in New York, Boyd said.

Other preferred options include Jacksonville in Florida, where operating costs are 23 per cent lower than in New York. The city has gained more than 4,000 jobs, including Macquarie, Deutsche Bank and Ernst & Young.

In Europe, Warsaw has attracted 4,000 jobs in the financial sector in the past five years, Boyd estimates. Annual operating costs in the Polish capital are 60 per cent lower than in London.

They are 47 per cent lower in Madrid, which is estimated to have attracted 2,500 positions in the period.

John Boyd, principal at the consultancy, said: “Comparative economics are ruling the site selection process within the financial services sector like never before.”

Posted in Uncategorized | Comments Off on Jacksonville?

Record Low 10 year Yields in Australia

May 15th, 2016 7:17 pm

Via Bloomberg:

Australian bonds rose, pushing the benchmark 10-year yield to a record low, as signs of weaker growth in key trade partner China intensified concern that the South Pacific nation will struggle to turn its economy around without more policy stimulus.

The yield fell as low as 2.215 percent, 30 basis points below its level at the end of April. The Reserve Bank of Australia, which this month cut its cash rate to an unprecedented 1.75 percent, has said core inflation will probably miss the bottom of its 2 percent to 3 percent target range this year and may undershoot into the middle of 2018.

Bonds are rallying globally after sustained easing in Japan and Europe and on a pullback in expectations for the U.S. central bank to lift its benchmark again. Bloomberg’s monthly gross domestic product tracker for China shows growth slowed to 6.88 percent in April, from 7.11 percent in March, after industrial production, retail sales and investment data released on Saturday were all weaker than economists had forecast.

The Aussie 10-year bond yield was 51 basis points higher than comparable U.S. securities. The Bloomberg Australia Sovereign Bond Index had climbed 2 percent in May as of Friday, poised for its best monthly advance since January 2015. Over the past month it is the best performer among investment-grade developed markets.

 

Posted in Uncategorized | Comments Off on Record Low 10 year Yields in Australia

Trump and the Mighty Greenback

May 15th, 2016 3:00 pm

Via the FT:

by: Sam Fleming and Shawn Donnan in Washington

Donald Trump has drawn scorn from economists for his threats to launch a trade war with China and to renegotiate the terms of US sovereign debt. Less noticed, however, have been the Republican presidential candidate’s apparent threats to dismantle another decades-old American orthodoxy: the “strong dollar” policy.

The property developer has been consistent in recent months in warning against a strong exchange rate, even though the US has — notionally at least — adhered to a “strong dollar” policy since the 1990s.

In August last year Mr Trump declared the dollar was “hurting” the US and leading to “huge disadvantages” for companies’ competitiveness. “It sounds good to say ‘we have a strong dollar’. But that’s about where it stops,” he told one interviewer.

Mr Trump doubled down on that message earlier this month, saying that while he loved the concept of a strong dollar, it risked causing havoc for the US economy while delighting China, which he and others accuse of engaging in years of currency manipulation aimed at gaining a competitive advantage over American manufacturers.

To some in the Washington economic policy establishment this is dangerous talk.

“I think if Donald Trump is elected president we should very much expect that his administration would use exchange rate policy to try and get a smaller trade deficit,” said Robert Kahn, a senior fellow at the Council on Foreign Relations who served as a senior official at the US Treasury under then treasury secretary Robert Rubin.

Such a policy would likely lead to retaliation by trading partners, argued Mr Kahn, potentially resulting in lower growth, weaker trade and a weaker dollar. It could also undermine the status of the dollar as a global reserve currency.

Ted Truman, a fellow at the Peterson Institute for International Economics and former head of the Federal Reserve’s international finance division, said if the words become a key pillar of Mr Trump’s campaign, they could start to impact financial markets. “The best thing to do is say nothing at all,” he said.

US presidents have generally avoided commentary on the dollar or repeated variations of the phrase first coined by Mr Rubin in 1995 that “a strong dollar is in the interest of the United States”. The main reason is the view that it is counterproductive to try to fine-tune currency policy by attempting to talk up or down the value of dollar.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said there had been broad continuity in the US executive branch’s currency strategy through the Clinton, Bush and Obama regimes. “Trump could change that,” he added.

Asked on Friday about Mr Trump’s comments on the dollar, Jack Lew, the treasury secretary, deployed his mantra that the strong dollar was a reflection of the US’s relative strength. “If other countries move towards competitive devaluation it will start a chain reaction,” he said at a Washington breakfast. “Pretty soon you are in a battle over shares of a shrinking global pie.”

Yet in reality, US officials’ strong dollar rhetoric has tended to accompany private concerns when a rising currency has been hurting US exporters. That has certainly been the case in recent years, with the dollar’s gains playing a role in inhibiting the Fed from increasing rates more rapidly.

In March 2015 Janet Yellen, the Fed chair, said the currency’s level reflected in part the strength of the US economy, but added that it was one reason for a weakening in export growth, which she expected to exert a “notable drag” on the economy. In March this year the Fed pared back its forecasts for rate increases, citing global economic and financial risks — central to which is a surging dollar.

The Fed was also accused of setting off an international currency war in the wake of the 2008 crisis after it used quantitative easing to increase the monetary supply, which had the effect of weakening the dollar.

Some economists are less critical of Mr Trump’s views on the dollar. “Mr. Trump’s repudiation of the strong dollar mantra certainly elevates economic realism over empty rhetoric,” said Eswar Prasad, an economist and author of “The Dollar Trap”, a book about the greenback’s rise as a global reserve currency.

“His symbolic delinking of dollar strength from US economic strength could have the salutary effect of liberating future presidential candidates and Treasury secretaries from having to make ritualistic commitments to a strong dolla

Posted in Uncategorized | Comments Off on Trump and the Mighty Greenback

Should Banks Pay Borrowers?

May 15th, 2016 10:25 am

Via the FT:
By Patricia Kowsmann in Lisbon and
Jeannette Neumann in Madrid
Updated May 15, 2016 12:54 a.m. ET

As interest rates in Europe fall near or below zero, lawmakers and consumer advocates in Spain and Portugal are attacking an ancient tenet of finance by insisting that lenders can owe money to borrowers.

Banks in the two countries, struggling to recover from recessions that shook their financial systems, are fighting back, with billions of dollars in mortgage interest payments potentially at stake.

Portugal’s central-bank governor, in a reversal, has rushed to defend the banks against a proposed law that would require them to pay borrowers when interest rates turn negative. Banks in both countries are rewriting new mortgage contracts to warn homeowners that they could never profit from subzero rates.

In Spain and Portugal, banks typically tie interest rates on mortgages to the euro interbank offered rate, or Euribor, a fluctuating rate banks pay to borrow from each other. In addition, interest rates in both countries include a fixed percentage of the loan, called the spread. In much of Europe, by contrast, fixed mortgage rates are common.

Euribor began turning negative last year after the European Central Bank cut interest rates below zero—charging lenders to hold deposits—to stimulate the Continent’s economies. That has pulled mortgage rates into negative territory in a few isolated cases in Portugal.

The vast majority of Spanish and Portuguese mortgage holders still pay interest, because Euribor hasn’t dropped enough to wipe out the spreads. But while lenders consider further steep drops unlikely, they are taking steps to protect themselves just in case.

Europe already has a precedent: Banks in Denmark are paying thousands of borrowers interest on their home loans, nearly four years after the central bank introduced negative interest rates. Danish banks have increased some fees to compensate but never mounted serious legal objections.

In Spain and Portugal, bank executives said they would pay borrowers when pigs fly.

“In no case could a client receive interest payments” because that would go against the nature of a loan, Banco Bilbao Vizcaya Argentaria SA Chief Executive Officer Carlos Torres Vila said at a news conference in April after the bank released its earnings. In the most extreme case, he said, a borrower would pay zero interest.

Portuguese bank executives are similarly categorical in private. In the few cases in which interest rates went negative, Portuguese banks lifted the rate to zero.

Consumer groups said banks are contractually obligated to stick to the terms of a variable-rate loan, which by definition rises and falls with changes in interest rates. If rates fall far enough below zero, these groups said, the banks should make interest payments to borrowers, just as they would charge clients more if interest rates rose.

The Left Bloc, an ally of Portugal’s Socialist government, introduced legislation in January that would oblige lenders in such cases to pay up. As Parliament debates the bill, Lisbon-based consumer rights group Deco has instructed customers to check their loan contracts and complain if they don’t benefit from negative rates.

“It was the banks that chose to fix loan rates to Euribor, not customers,” Paulino Ascenção, a Left Bloc lawmaker, said. “It’s a matter of principle and trust to follow the rules of the contracts.”

Portugal’s central-bank governor, Carlos Costa, stepped into the fray last month, reversing an earlier position and siding with the banks.

Last year, he had issued a recommendation that lenders apply negative Euribor in calculating loan interest, which would be following the rules of the contracts. Back then, Mr. Costa told lawmakers last month, he couldn’t have imagined that Euribor would keep falling.

Now that it has, he argued, the banking system is at risk.

Portuguese banks would take a collective €700 million ($796 million) hit to their interest margins annually if the country’s six-month Euribor rate, which now stands at minus 0.144%, were to fall to minus 1%, the central bank estimates. Even if banks could limit interest rates to zero, they would lose €500 million from the difference between what they pay to depositors and what they make from lending, the central bank said.

“We have to find a fair balance between the expectations of the borrowers and the need to safeguard the stability of the financial system,” Mr. Costa told lawmakers.

He now advocates a zero-interest floor on existing loans. For new loans, he said, a negative Euribor rate should be calculated as zero, allowing lenders to fully profit from the spread. The government has yet to endorse his position, but banks have moved on their own to put it into practice.

In Spain, most mortgages are tied to 12-month Euribor, which is at minus 0.012%. That rate would have to fall a lot further to offset the lowest spread on mortgage loans, which were locked in at an average of 0.5% to 0.75% during the country’s property boom a decade ago.

In that event, Spanish bankers said two rulings—one by a Madrid city judge in 2014 and one by a Madrid provincial court last year—would give legal backing to their refusal to pay interest to borrowers.

Midsize Spanish lender Bankinter SA did pay interest last year on mortgages tied to the Swiss franc iteration of the London interbank offered rate, or Libor. A Bankinter spokesman called the payments a one-time concession to a small number of clients, not a legal obligation.

Two Spanish consumer groups, OCU and Adicae, dispute the bankers’ views of the court rulings. Both argue that it is the essence of a variable-rate loan to follow interest rates whether they rise or fall into negative territory. If Spanish law favors the banks, consumer advocates said, why are some starting to require new borrowers to handwrite a declaration of understanding that they will never receive interest payments from the lender?

A lawyer for a big Spanish bank said lenders are taking extra pains to avoid confusion after judges, in cases unrelated to negative interest rates, ruled that some mortgage contracts hadn’t clearly stated that the bank was setting an interest-rate floor.

Juan Ignacio Sanz, a lawyer and banking professor at Spain’s ESADE business school, said: “The banks included these clauses because they had doubts.”

—Charles Duxbury in Stockholm contributed to this article.

Write to Patricia Kowsmann at [email protected] and Jeannette Neumann at [email protected]

 

Posted in Uncategorized | 1 Comment »

One Metric Says Equities Ain’t Rich yet

May 15th, 2016 10:19 am

Via Bloomberg:

  • Earnings yield vs bond yields still flashing bullish signals
  • The gap is part of the dividend case on American equities

A year of profit stagnation has left the S&P 500 Index’s price-earnings ratio flirting with some of its its highest readings since the Internet bubble. Judged against bonds, though, stocks remain stubbornly cheap.

Plotting the index’s per-share earnings against the yield on the 10-year Treasury note, a technique sometimes referred to as the Fed Model, shows the S&P 500 is still less expensive than any time during the 2002 to 2007 bull market. Stock valuations are held down in the comparison by some of the lowest bond payouts ever.

The stock market’s still-healthy earnings yield underpins a number of bull cases, including ones based on dividends that are funded by corporate profits. The average payout by S&P 500 companies is 2.18 percent, about 0.5 percentage point higher than the 10-year yield and a wider gap than 94 percent of the time since 2002.

“It puts a floor beneath the market to some degree,” Marshall Front, chief investment officer at Front Barnett Associates LLC in Chicago, said. “It’s a relative analysis that provides you with a perspective on how equities are priced relative to a risk-free rate, and if investors expect a reacceleration of earnings, then it could presage a significant move in the equity market.”

The model is far from universally beloved on Wall Street. Critics such as AQR Capital Management LLC founder Clifford Asness have contended the technique doesn’t work because inflation affects stock valuations and interest rates differently.

To investors like Goodhaven Capital Management LLC’s Larry Pitkowsky, comparisons between earnings and Treasury yields don’t hold as much water as they once did. The Federal Reserve’s quantitative easing program and sustained period of near-zero interest rates pushed bond yields artificially low, he said, skewing the difference between the two.

“The real question here is with Treasury yields. With the 10-year at this level, stocks would have to trade at something around 50 times earnings for this metric to say stocks are topping,” Yousef Abbasi, global market strategist at JonesTrading Institutional Services LLC in New York, said. Still, he said, “it has been and continues to be one of the support pillars for equities.”

Swings in stocks have gotten wider in the past two weeks as a 15 percent rebound in the S&P 500 that began in mid-February lost steam. Rallying equities haven’t been enough to faze the bond market, where the yield on the 10-year Treasury has fallen 57 basis points to 1.7 percent from the start of the year.

With the fourth straight quarter of declining profits behind them, equity investors remain wary of U.S. stocks despite the S&P 500 nearing all-time highs. The benchmark index has inched up 0.1 percent on the year amid falling earnings, bringing the price of the gauge to as much as 19.5 times earnings, the highest since 2010.

The comparison between stock and bond yields offers a way to look at valuation metrics in terms of how much owners of each instrument can expect to get back in profits or interest payments on the money they invested.

Those that ascribe to the model see an advantage to owning the equity market, where the S&P 500 yields 5.2 percent in earnings. The gap to the Treasury yield, while narrower than at the start of the bull market, is almost seven times wider than its smallest point in 2007.

Part of the bull case derived from earnings yield is what it says about companies’ ability to maintain or grow dividends. A relatively high yield suggests investors seeking regular cash outlays may continue to be willing to buy stocks as a riskier, but more profitable, alternative to lower-yielding asset classes like bonds.

“The spread between the dividend yield and the 10-year Treasury is in some ways more important in today’s world,” Michael Purves, chief global strategist at Weeden & Co LP in Greenwich, Connecticut, said by phone. “During risk-off periods, investors can consider the dividend yield relative to the 10-year yield, which provides a lot of buffer for downside protection.”

Posted in Uncategorized | Comments Off on One Metric Says Equities Ain’t Rich yet

Implicit and Explicit Guarantees in China

May 15th, 2016 10:15 am

Via the FT:

Implicit guarantees are ubiquitous in China, but one company went a step further when it appealed to the central bank to give an explicit reassurance to creditors that the government will not permit any default.

China City Construction Holding Group Co saw yields on its Hong Kong-traded “dim sum” bonds spike recently after a surprise privatisation, highlighting the ways moral hazard distorts capital allocation in the world’s largest economy.

CCCC was previously owned by a unit of the housing ministry, but a private equity fund took control late last month following a complex asset restructuring.

In response to the market jitters, CCCC sent a letter to the People’s Bank of China’s financial stability department titled ‘Urgent request to stabilise the enterprise’s financial situation and avoid creditor turmoil’.

The letter appealed to the central bank to act since the restructuring had caused “excessive anxiety” among investors. Though no longer state-owned, CCCC emphasised its close ties to the government as evidence that default was unthinkable, even hinting at the existence of sensitive and secret political duties.

“Our group is charged with a special mission (due to discipline reasons it’s not convenient to elaborate) and has continuously received a high degree of trust from the party and the country,” the company wrote in a letter dated May 12, images of which circulated on social media on Friday. “For this reason, we absolutely cannot collapse.”

The incident highlights the extent to which implicit guarantees — real or imagined — influence which companies can obtain financing in China and at what price. In addition to its ownership by the housing ministry, investors had also drawn comfort from the fact that CCCC’s chairman, Yu Lian, was a member of the China People’s Political Consultative Conference, a political advisory body.

The letter called on the PBoC to reassure investors about the company “from the perspective of upholding social stability”, an appeal to the government’s aversion to the spectre of public protests by angry investors. A series of bond defaults this year, including ones by state groups, have roiled China’s bond market in recent weeks, increasing the spread between government debt and riskier paper.

Most Chinese state-owned enterprises are overseen by the State-owned Assets Supervision and Administration Commission, the cabinet agency charged with overseeing state groups. But other SOEs remain scattered throughout various agencies, a legacy of the planned economy period, when each government ministry controlled enterprises associated with that ministry’s administrative function.

The CCCC restructuring stemmed from a directive by China’s cabinet last July ordering government ministries to cut ties with industry associations and other quasi-administrative bodies. In response, the housing ministry disbanded the parent organisation of the China City Development Academy, a city planning consultancy that owned 100 per cent of CCCC, and ordered CCCC to find new owners.

The restructuring transferred a 99 per cent stake in CCCC to Beijing Kind Agriculture Capital Management Co Ltd, a private equity fund that counts three of China’s four largest state-owned commercial banks as its investors. That means that CCCC is, in some sense, still a state-owned enterprise. But the fact that CCCC is no longer directly controlled by a cabinet-level agency cast doubt on whether the government would backstop the company if it were unable to meet obligations.

CCCC has Rmb17bn ($2.6bn) in debt, according to the letter. Most of this is held domestically, according to Wind Information. But the company insists it is financially healthy, with Rmb23bn in net assets.

“We have no financial default, our repayment ability is normal, the company is healthy, the change in shareholding is not a ‘scandal’, it’s not a ‘loss of credit’, it’s not an ‘error’,” said the letter.

CCCC and the PBoC did not respond to requests for comment on Friday.

Posted in Uncategorized | Comments Off on Implicit and Explicit Guarantees in China

Hedging Brexit

May 15th, 2016 10:01 am

Via Bloomberg:

  • PFA is hedging against Brexit’s fallout on the Danish euro peg
  • Danish central bank says any bets against the peg will fail

The man overseeing about $83 billion in Danish pension savings says the threat of a British exit from the European Union is now simply too big to ignore.

Christian Lage, chief investment officer at PFA in Copenhagen, says Denmark’s biggest commercial pension fund is using similar currency hedges to guard against the krone fallout of a so-called Brexit to those used when Switzerland jettisoned its euro cap.

Though Denmark, unlike Switzerland, was able to defend its euro peg after resorting to extreme monetary measures, the experience was existential enough to alter the way institutional investors view the sanctity of the country’s currency regime. Denmark now faces a repeat of that crisis as Britain’s June 23 vote on EU membership looms, Lage said.

“If the vote and subsequent talks lead to a very negative outcome, we could see a massive inflow into Danish kroner,” Lage said in an interview. “And we need to manage our risk accordingly.”

Brexit Polling

Bloomberg’s latest poll of polls shows the “leave” and “remain” camps tied at 41 percent, but calculates a 77.7 percent probability that the U.K. will still be an EU member after the June referendum.

Banks in Denmark have started advising investors on how to position themselves for a possible Brexit. According to Nykredit, a British exit “could force another Danish rate cut.”

“In the short run, the risk remains that the upward pressure on the krone could become so great that the central bank would have to respond to cutting the deposit rate” back down to minus 0.75 percent, representing a reversal of a 10 basis point January rate increase.

But confidence in Denmark’s peg is currently “sky high,” so the risks of an extreme scenario are limited, according to Tore Stramer, an economist at Nykredit in Copenhagen.

More Negative?

At Handelsbanken, Copenhagen-based chief economist Jes Asmussen has warned that a Brexit would potentially force Denmark to go lower than minus 0.75 percent. Though that isn’t his main scenario, it would mark a step into a no-man’s land of monetary policy that even the Swiss haven’t explored. Nordea’s chief economist for Denmark, Helge Pedersen, says an obvious scenario in the event of a British exit from the EU would be a mass retreat by investors into so-called safe haven assets such as the krone.

While a Brexit is not PFA’s main assumption, the tail risk is significant enough to make the hedge worthwhile, Lage said. The Danish krone’s peg to the euro will probably hold, “but the entire system will be tested just like the Swiss did,” he said. What’s more, the hedge is cheap, adding to its appeal in the face of the risk, he said.

But the step remains controversial as Denmark’s central bank explicitly warns funds betting against the peg that they’re on the wrong side of a losing trade. The bank made about 2 billion kroner ($305 million) fighting speculators, it said in March.

Other funds have been persuaded by the central bank’s guarantee. At Sampension, which oversees about $38 billion in Danish pension savings, the head of fixed income, Kasper Ullegaard, says there’s no plan to put in place a krone hedge.

Posted in Uncategorized | Comments Off on Hedging Brexit

China Weekend Data is Weak

May 14th, 2016 11:10 pm

Via the WSJ:
By Mark Magnier
Updated May 14, 2016 4:32 a.m. ET
2 COMMENTS

BEIJING—China’s industrial-production and investment data came in below expectations in April, despite Beijing’s aggressive easy-money policies in the first quarter, pointing to continued weakness in the world’s second-largest economy.

Industrial output rose 6.0% year-over-year in April, compared with 6.8% growth in March, the National Bureau of Statistics said Saturday. This was below a median forecast of 6.6% growth by 15 economists surveyed by The Wall Street Journal.

Fixed-asset investment in urban areas grew by a weaker-than-expected 10.5% year-over-year in the January-to-April period, compared with an annual increase of 10.7% for the first three months of 2016.

Retail sales—a traditional bright spot—grew by a less-than-expected 10.1% in April compared with a year earlier, slowing from March’s 10.5% year-over-year rise, the statistics bureau said.

“We’re seeing that growth engines are losing momentum, and the growth outlook has turned soft as well,” said Commerzbank AG economist Zhou Hao. “It’s clear the government wants to manage down or re-anchor market expectation.”

Property results improved last month, although the sharp rise in a relatively few top-tier markets, such as the southern city of Shenzhen—where housing prices have risen more than 60% year-over-year so far in 2016—and Shanghai, while smaller markets languish, has raised concern that some markets are overheating.

Housing sales rose 61.4% year-over-year during the January-to-April period, the statistics bureau said Saturday. This compared with a 60.3% year-over-year increase for the first quarter of 2016, and 16.6% growth for all of 2015. Property investment grew 7.2% year-over-year in the January-to-April period, compared with a 6.2% annual rise in the first quarter of 2016.

Economists said they don’t expect Beijing to ease monetary policy in reaction to the April data, although another bout of market volatility could change that. On Saturday, the central bank said on its website that monetary policy remained unchanged, pledging to maintain a “prudent” policy and use flexible tools to ensure adequate liquidity.

The April data comes as Beijing is already dialing back stimulus measures after hitting the accelerator in the first quarter to bolster growth. For the January-to-March period, China’s economy grew by 6.7% compared with a year earlier, its slowest quarterly pace since 2009.

Weak domestic and global demand have prompted Chengdu Aiminer Leather Products Co., a shoe manufacturer in the southwest city of Chengdu, to reduce staff through attrition and search for new markets, said Liu Qiongying, the company’s president. However, he said large companies are suffering at least as much as smaller firms and often are slower to adapt—something he described as a silver lining.

“In the past, when the economy was booming, huge companies dominated,” Mr. Liu said. “Now we at least have more of a chance.”

The central bank Saturday also said a sharp drop in April bank lending was the result of local governments tapping the bond market, rather than going to financial institutions for funds. Last month, banks lent a less-than-expected 555.6 billion yuan ($85.1 billion). This followed 1.37 trillion yuan in bank loans in March, and a record 4.6 trillion yuan for the first quarter of 2016—more than was released during the depth of the financial crisis in early 2009.

Fiscal spending also decelerated in April with 4.5% year-over-year growth compared with 15.4% in the first quarter. China set an annual fiscal spending growth target of 6.7% this year and a 2016 fiscal deficit target of 3% of gross domestic product, up from 2.3% in 2015.

Less than a week ago in the official People’s Daily newspaper, an anonymous “authoritative” person criticized recent stimulus-driven policy and said China needs to return to its reform agenda.

Economists said April’s weaker industrial production and investment figures are consistent with the recent slowdown in Asia and the U.S., but the decelerating retail sales were a concern given consumer confidence has been quite stable in China. Slower wage growth this year could weigh on consumption, they said.

China’s economy continues to battle significant headwinds, including rising debt levels and the economic drag of too many factories pumping out more products than there is demand for. Coal consumption, steel production and exports were weaker in April, while the official and Caixin purchasing managers’ indexes came in weaker than expected last month.

China has announced plans to cut coal and steel production by some 10% and pare 1.8 million jobs over the next five years, although these industries currently have between 30% and 40% excess capacity, say industry analysts.

“Overcapacity is still there and reducing it is quite slow and difficult given concerns over the job market,” said Commerzbank’s Mr. Zhou. “There’s a long-term slowdown and stimulus will only do so much.”

—Liyan Qi and Esther Fung

Posted in Uncategorized | Comments Off on China Weekend Data is Weak

Listening to the Yield Curve

May 13th, 2016 4:42 pm

Via the FT:

by: Adam Samson

A measure of the US Treasury yield curve flattened on Friday to levels not seen since early March, reviving once again anxiety about the health of the world’s most important economy.

The spread between 10-year and 2-year US Treasury notes tightened on Friday to as low as 94.9 basis points, the lowest level on an intraday basis since March 8. It would also be the lowest closing level since December 2007, according to Bloomberg data, writes Adam Samson in New York.

The flattening in the yield curve suggests longer-term borrowing costs are moving closer to shorter-term costs, and signals investor concerns about the longer-term outlook for the economy. A worse situation would be an inverting in yield curve, something that remains far away, which would indicate investors reckon the Fed may have to reduce short-term rates because of an economic slowdown.

While economic researchers are mixed on whether a prolonged period of low interest rates has impaired the yield curve’s power as a recession harbinger, the flattening is just the most recent sign of investors’ uneasiness over the strength of the US economy.

It comes even as stronger than expected retail sales data for April released on Friday suggests that US economic growth for the current quarter is on track to bounce back from a poor first quarter.

Financial markets have staged a stunning recovery from a bruising start to the year, with the S&P 500 index rallying 12.7 per cent from its mid-February lows. Other signs of strain have eased as well, for instance, the risk premium investors demand to hold the debt of the lowliest rated US groups has tumbled by around a quarter over the same time frame as crude oil prices have surged.

Wall Street investment banks broadly expect modest economic growth this year as the labour market remains strong and trouble in the energy and manufacturing sectors appears to be contained and offset to some extent by consistent consumption growth.

But caveats abound.

For one, corporate America probably remained lodged in an earnings recession for the third-straight quarter in the first three months of 2016 — the longest such run since the financial crisis as the largest US groups struggle under the weight of a strong dollar and sputtering growth in other developed and emerging markets.

Bears are also quick to point out that the recovery in junk bonds, which has been led by a rally in speculative-rated energy debt that has strengthened with oil prices, could be pre-mature. After all, they say, fundamentals look downright grim.

The global default tally has climbed to 62 issuers for 2016, which is the highest level at this time in the year since 2009, according to data from Standard & Poor’s. At the same time, speculative-grade downgrades have been running at 55 a month year-to-date, far higher than the 29 a month rate over the same period in 2015, S&P data show.

Stanley Druckenmiller, a billionaire former hedge fund manager, warned earlier this month that the Federal Reserve’s low-rate policies has created significant market risks as companies take advantage of cheap borrowing costs to issue large amounts of debt.

Worse, much of the debt has gone to “financial engineering”, buying back stock, launching dividends, and other investor-friendly programmes, rather than the investment that has traditionally been the foundation of economic expansions, Mr Druckenmiller warned.

And then of course there is the matter of historic precedence: The 83-month economic expansion (assuming the economy expanded in April and May) is the fourth longest on records going back to 1857, data from the US National Bureau of Economic Research show. It is also far longer than the median 30 month expansion over the same period.

Bottom line? Only time will tell whether the expansion has the fuel to power on. Caveat emptor.

Copyright The Financial Times Limited 2016. All rights re

Posted in Uncategorized | Comments Off on Listening to the Yield Curve

Weekend Data Preview

May 13th, 2016 12:56 pm

Via Robert Sinche at Amherst Pierpont Securities:

CHINA: The Bberg consensus expects that April Industrial production growth will have slowed to 6.5% YOY from 6.8% in March, but still the 2nd strongest YOY growth rate since June 2015. And the consensus expects that Retail Sales growth will have inched up to 10.6% YOY in April from 10.5% in March, holding the real (CPI-adjusted) gain to about 8.0%.

RUSSIA: Real GDP for 1Q is expected early next week, with the Bberg consensus expecting a moderation of the downturn with growth at -2.0% YOY from -3.8% YOY in 4Q, which would be the least negative outcome since 4Q2014; the cycle low was -4.5% YOY in 2Q2015.

IRELAND: Lower energy prices, stronger EZ demand growth and a competitive wage structure have helped Ireland establish a record surplus over the year ended January, and February Trade data should continue that trend.

UK: The Rightmove (Asking) House Price Index slowed to 7.3% YOY in April and the May reading will show if the expected slowdown is materializing.

US: Something obviously seems amiss here…

 

Posted in Uncategorized | Comments Off on Weekend Data Preview

« Previous Entries
Next Entries »