Aug. 6 (Bloomberg) --
"Asian stocks rose for the first time in four days, while the euro gained and debt insurance costs fell, after creditors said Greece is making progress on meeting bailout terms and U.S. payrolls climbed more than forecast.
The MSCI Asia Pacific Index added 1.6 percent as of 12:28 p.m. in Tokyo. The Nikkei 225 Stock Average rose 1.7 percent after companies led by Toyota Motor Corp. beat earnings estimates. Standard & Poor’s 500 Index futures were little changed after the gauge last week rose to its highest level since May. The euro gained against most of its peers, with the dollar declining to the lowest in a month against the shared currency. The cost of insuring Asian bonds against default fell to the lowest level since April.
Greece and its creditors agreed on the need for more budget cuts to comply with bailout terms after more than a week of meetings in Athens. The U.S. economy added twice as many jobs in July as the previous month, boosted by automakers. Toyota’s first-quarter profit rose to a four-year high as Japan’s biggest company rebounded from last year’s natural disaster.
“U.S. economic momentum has a pulse,” said George Boubouras, Melbourne-based head of investment strategy at UBS AG’s Australian wealth management unit. The Swiss bank oversees $1.5 trillion. “Despite no central bank action last week, it looks clear that both the Federal Reserve and the ECB will act and they have adjusted their language to be able to intervene.”
Asian Stocks
Almost 10 stocks rose for each that fell on the MSCI Asia- Pacific Index, which dropped for three days last week as the Federal Reserve refrained from adding fresh stimulus and the European Central Bank declined to intervene in bond markets. The benchmark traded at 12.2 times estimated earnings, compared with 13.5 times for the S&P 500 Index and 11.4 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
The Nikkei 225 advanced today the most since June. Toyota gained as much as 4.1 percent after the automaker’s profit climbed to 290.3 billion yen ($3.7 billion) in the three months ended June 30, 14 percent higher than analysts estimated. Deliveries almost doubled last quarter in Japan, led by the Prius hybrid, as government subsidies helped spur demand.
Hon Hai Precision Industry Co. jumped 6.6 percent in Taipei after saying it will renegotiate the price of its planned stake in Sharp Corp., which last week forecast widening losses. Foxconn Technology Co., a Hon Hai affiliate also planning to invest in the Japanese display maker, climbed 6.5 percent.
Euro Gains
The euro strengthened against 11 of its 16 peers after the so-called troika of the European Commission, European Central Bank and International Monetary Fund said discussions on Greece’s efforts to meet bailout targets were “productive.” Inspectors from the country’s creditors will return to Athens in early September to continue talks, according to the troika.
The Dollar Index dropped as much as 0.3 percent to 82.080, the lowest since July 4, before Federal Reserve Chairman Ben S. Bernanke speaks today on economic measurement at a conference in Cambridge, Massachusetts. The trade deficit in the U.S. probably shrank in June as cheaper oil reduced the import bill and slower global growth led to reduced demand for American-made goods, economists said before a report this week.
The cost of insuring the region’s corporate and sovereign bonds from default fell, according to traders of credit-default swaps. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan fell 4 basis points to 154, Credit Agricole SA prices show. The index is poised for its lowest close since April 3, according to data provider CMA. "
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Adam Haigh in Sydney at ahaigh1@bloomberg.net
Steven
Steven Morris CA (SA)
Mobie : 083 943 1858
Fax: 086 671 2498
E-Mail: steven@global.co.za
Website: www.stevenmorris.co.za
Monday, 6 August 2012
Friday, 3 August 2012
Asian Stocks Retreat, Yen Rises as Draghi Offers No Quick Fix
Aug. 3 (Bloomberg) --
"Asian stocks fell a third day, the yen strengthened and the cost of insuring bonds rose after central banks in Europe, China and the U.S. this week failed to deliver immediate measures to boost a slowing global economy. Sharp Corp. plunged after widening its loss forecast.
The MSCI Asia Pacific Index lost 1.1 percent as of 1:50 p.m. in Tokyo, trimming its weekly gain to 0.7 percent. Japan’s Nikkei 225 Stock Average dropped 1.2 percent. Futures on the Standard & Poor’s 500 Index were little changed after the gauge yesterday fell 0.7 percent. Yields on Japanese government debt slid toward nine-year lows even as the cost of insuring the country’s bonds rose to a two-month high. Oil rallied 0.5 percent from the lowest close in three weeks.
European Central Bank President Mario Draghi yesterday declined to intervene in bond markets, while China’s central bank said it will pursue “prudent” policy, and the Federal Reserve a day earlier refrained from adding fresh stimulus. A U.S. jobs report today may show employers didn’t add enough workers in July to trim an 8.2 percent unemployment rate.
“What was delivered was a commitment to action but not immediately,” Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management, said about the ECB decision. “China has more scope to do more both in terms of monetary policy and fiscal policy, but it’s not doing much.”
Postponed Action
More than three shares fell for each that rose on MSCI’s Asia index after Draghi yesterday postponed action by demanding euro-zone governments turn to existing rescue funds before the ECB intervenes. Asian stocks had their biggest four-day advance this year after Draghi on July 26 said the central bank would do “whatever it takes” to preserve the euro.
Japanese equities fell the most among the region’s shares today. Sharp tumbled as much as 30 percent in Tokyo, the most since at least 1974, while Sony’s stock dropped 7.4 percent. The Japanese consumer-electronics makers slashed full-year earnings forecasts yesterday amid slumping demand for televisions and a strengthening yen.
The cost of insuring Japanese corporate and sovereign bonds from default jumped, according to traders of credit-default swaps. The Markit iTraxx Japan index rose 7 basis points to 192, headed for the highest close in two months, Citigroup Inc. prices show.
Japan’s benchmark 10-year note yield dropped toward the lowest since 2003 as investors sought safer assets. Yields fell four basis points to 0.73 percent, compared with the nine-year low of 0.72 percent reached last week.
The yen advanced against most of its major counterparts, gaining a second day against the dollar before a report today forecast to show the U.S. jobless rate held above 8 percent. Japan’s currency added 0.1 percent to 78.21 per dollar and 0.1 percent to 95.22 against the euro.
Jobs Data
American employers added 100,000 workers in July, following an 80,000 gain in June, according to economists’ estimates ahead of a Labor Department report today. Monthly jobs growth slowed to an average of 75,000 in the quarter through June from 226,000 in the previous period.
Oil rebounded from the lowest close since July 13 as a tropical storm formed near production platforms in the Gulf of Mexico. Crude for September delivery increased as much as 0.6 percent to $87.63 on the New York Mercantile Exchange after falling 2 percent yesterday. Prices are 2.8 percent lower this week and down 11 percent this year.
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net "
Steven
Steven Morris CA (SA)
Mobie : 083 943 1858
Fax: 086 671 2498
E-Mail: steven@global.co.za
Website: www.stevenmorris.co.za
"Asian stocks fell a third day, the yen strengthened and the cost of insuring bonds rose after central banks in Europe, China and the U.S. this week failed to deliver immediate measures to boost a slowing global economy. Sharp Corp. plunged after widening its loss forecast.
The MSCI Asia Pacific Index lost 1.1 percent as of 1:50 p.m. in Tokyo, trimming its weekly gain to 0.7 percent. Japan’s Nikkei 225 Stock Average dropped 1.2 percent. Futures on the Standard & Poor’s 500 Index were little changed after the gauge yesterday fell 0.7 percent. Yields on Japanese government debt slid toward nine-year lows even as the cost of insuring the country’s bonds rose to a two-month high. Oil rallied 0.5 percent from the lowest close in three weeks.
European Central Bank President Mario Draghi yesterday declined to intervene in bond markets, while China’s central bank said it will pursue “prudent” policy, and the Federal Reserve a day earlier refrained from adding fresh stimulus. A U.S. jobs report today may show employers didn’t add enough workers in July to trim an 8.2 percent unemployment rate.
“What was delivered was a commitment to action but not immediately,” Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management, said about the ECB decision. “China has more scope to do more both in terms of monetary policy and fiscal policy, but it’s not doing much.”
Postponed Action
More than three shares fell for each that rose on MSCI’s Asia index after Draghi yesterday postponed action by demanding euro-zone governments turn to existing rescue funds before the ECB intervenes. Asian stocks had their biggest four-day advance this year after Draghi on July 26 said the central bank would do “whatever it takes” to preserve the euro.
Japanese equities fell the most among the region’s shares today. Sharp tumbled as much as 30 percent in Tokyo, the most since at least 1974, while Sony’s stock dropped 7.4 percent. The Japanese consumer-electronics makers slashed full-year earnings forecasts yesterday amid slumping demand for televisions and a strengthening yen.
The cost of insuring Japanese corporate and sovereign bonds from default jumped, according to traders of credit-default swaps. The Markit iTraxx Japan index rose 7 basis points to 192, headed for the highest close in two months, Citigroup Inc. prices show.
Japan’s benchmark 10-year note yield dropped toward the lowest since 2003 as investors sought safer assets. Yields fell four basis points to 0.73 percent, compared with the nine-year low of 0.72 percent reached last week.
The yen advanced against most of its major counterparts, gaining a second day against the dollar before a report today forecast to show the U.S. jobless rate held above 8 percent. Japan’s currency added 0.1 percent to 78.21 per dollar and 0.1 percent to 95.22 against the euro.
Jobs Data
American employers added 100,000 workers in July, following an 80,000 gain in June, according to economists’ estimates ahead of a Labor Department report today. Monthly jobs growth slowed to an average of 75,000 in the quarter through June from 226,000 in the previous period.
Oil rebounded from the lowest close since July 13 as a tropical storm formed near production platforms in the Gulf of Mexico. Crude for September delivery increased as much as 0.6 percent to $87.63 on the New York Mercantile Exchange after falling 2 percent yesterday. Prices are 2.8 percent lower this week and down 11 percent this year.
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net "
Steven
Steven Morris CA (SA)
Mobie : 083 943 1858
Fax: 086 671 2498
E-Mail: steven@global.co.za
Website: www.stevenmorris.co.za
Thursday, 2 August 2012
The Fed's Unconventional Monetary Policy
A Great Article written by Ruen Naidu from PSG !!
Enjoy
For now
Steven
"In response to the Great Recession, various central banks adopted unconventional policy measures once their traditional armoury was depleted i.e. policy rates were at the zero lower bound. As we approach the FOMC meeting next week, we highlight the various options available to the Federal Reserve, the impact thereof and the potential risks.
Once the Federal Funds rate was reduced to 0 to 0.25%, the Fed turned to its balance sheet to continue providing stimulus to the economy. The first such operation was the Large Scale Asset Purchase programme (LSAP) launched in November 2008 and also referred to as “Quantitative Easing 1” (QE1).
Within this programme, the Fed went on to buy $175 billion of agency debt and $1.25 trillion of mortgage backed and treasury securities. The second iteration of LSAP (QE2) was launched in November 2010 and included a programme of $600 billion in treasury security purchases. In return for the sale of these assets, banks received payment in the form of reserves at the Fed. The rationale behind quantitative easing is multi-faceted.
Firstly, in buying interest rate assets the Fed forces longer term interest rates lower and low rates encourage borrowing and investment.
Secondly, low interest rates provide incentive for investors to move out on the risk spectrum and invest in riskier assets such as equities. As equity prices rise, the wealth effect takes place and higher consumption ensues.
Thirdly, investors are driven into offshore markets in search of better yields thereby causing a weakening effect on the currency and this depreciation is expected to fire up export markets.
Fourthly, as government borrowing rates are reduced, there is more scope for expansionary fiscal policy. Effectively, these operations are intended to provide a boost to each component in the timeless identity: GDP = Consumption + Investment + Government spending + Net Exports. As a consequence of quantitative easing, the size of the Fed’s balance sheet grows larger with assets rising as security holdings are increased (see fig 1) and liabilities rise in line with the increase in bank reserves.
In the context of the Fed’s balance sheet, quantitative easing can be viewed as a method of portfolio rebalancing with longer term securities being swapped for reserves. Another balance sheet operation is the Maturity Extension Programme (MEP) also known as “Operation Twist”. Under this programme, the Fed buys longer term securities while simultaneously selling its holdings of shorter term securities. Operation twist is effectively a milder form of quantitative easing in that the size of the Fed’s balance sheet is left unchanged.
The Fed is well aware of the risks posed by these balance sheet operations. The risks surrounding the exit process are quite clear as the Fed may find it difficult to reduce the size of its balance sheet without triggering a violent rise in yields on long term-treasury debt and mortgage backed securities. Other concerns include market functioning in the treasury securities markets. As the Fed becomes a larger holder of treasury notes and bonds, there are fewer of these securities available to the rest of the market. Since, treasury securities are used as collateral in short term money markets, a large reduction in the supply of these assets may impede the credit extension process.
As a consequence of the Fed’s balance sheet operations, the amount of excess reserves in the banking system rose and the risk of excessive credit extension became evident. In order to prevent this outcome from materialising in an uncontrollable fashion, the Fed began paying interest on excess reserves (IOER) at a rate of 0.25%. The idea of reducing the IOER rate has been raised with the aim being to release a portion of the excess reserves into the real economy. Such action has already been taken by the ECB at their most recent meeting. The Fed will be very cautious about such a change in policy due to potentially hazardous consequences for money market funds due to their reduced profitability in a world of zero interest on excess reserves.
A third type of tool employed by the Fed falls under the category of “communication strategies”. Monetary policy effectiveness is very closely aligned with the ability of the central bank to manage inflation expectations. By committing to “maintaining exceptionally low levels for the federal funds rate at least through late 2014”, the Fed has attempted to induce higher inflation expectations. One possibility is for the Fed to extend this guidance to a later point. There are two main observations that suggest this strategy would not be particularly effective.
Firstly, an unchanged federal funds rate is already priced into the market as far out as 2015.
Secondly, questions will be raised regarding the continuity of this commitment given that Ben Bernanke’s term ends in January 2014. Despite these issues, there are no significant costs or risks to this strategy.
Given that recent economic developments point to lower global growth and, inferentially, lower rates of inflation and slower employment growth, the markets are primed for further action by the Fed in the form of QE3. The members of the FOMC will decide on whether or not the benefits gained from unconventional policies outweigh the potential risks of any such action. Also noteworthy is the fact that each new policy measure has had a smaller impact on risk markets. This fact may lead the Fed to delay further action until they are prompted to act due an occurrence of a fat-tail event. "
"The PSG Angle is an electronic newsletter of PSG Asset Management. To subscribe or read more, please go to to www.psgam.co.za".
Steven
Steven Morris Chartered Accountant (SA)
3 Bickley Road
Sea Point
Cape Town
8005
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
Enjoy
For now
Steven
"In response to the Great Recession, various central banks adopted unconventional policy measures once their traditional armoury was depleted i.e. policy rates were at the zero lower bound. As we approach the FOMC meeting next week, we highlight the various options available to the Federal Reserve, the impact thereof and the potential risks.
Once the Federal Funds rate was reduced to 0 to 0.25%, the Fed turned to its balance sheet to continue providing stimulus to the economy. The first such operation was the Large Scale Asset Purchase programme (LSAP) launched in November 2008 and also referred to as “Quantitative Easing 1” (QE1).
Within this programme, the Fed went on to buy $175 billion of agency debt and $1.25 trillion of mortgage backed and treasury securities. The second iteration of LSAP (QE2) was launched in November 2010 and included a programme of $600 billion in treasury security purchases. In return for the sale of these assets, banks received payment in the form of reserves at the Fed. The rationale behind quantitative easing is multi-faceted.
Firstly, in buying interest rate assets the Fed forces longer term interest rates lower and low rates encourage borrowing and investment.
Secondly, low interest rates provide incentive for investors to move out on the risk spectrum and invest in riskier assets such as equities. As equity prices rise, the wealth effect takes place and higher consumption ensues.
Thirdly, investors are driven into offshore markets in search of better yields thereby causing a weakening effect on the currency and this depreciation is expected to fire up export markets.
Fourthly, as government borrowing rates are reduced, there is more scope for expansionary fiscal policy. Effectively, these operations are intended to provide a boost to each component in the timeless identity: GDP = Consumption + Investment + Government spending + Net Exports. As a consequence of quantitative easing, the size of the Fed’s balance sheet grows larger with assets rising as security holdings are increased (see fig 1) and liabilities rise in line with the increase in bank reserves.
The Fed is well aware of the risks posed by these balance sheet operations. The risks surrounding the exit process are quite clear as the Fed may find it difficult to reduce the size of its balance sheet without triggering a violent rise in yields on long term-treasury debt and mortgage backed securities. Other concerns include market functioning in the treasury securities markets. As the Fed becomes a larger holder of treasury notes and bonds, there are fewer of these securities available to the rest of the market. Since, treasury securities are used as collateral in short term money markets, a large reduction in the supply of these assets may impede the credit extension process.
As a consequence of the Fed’s balance sheet operations, the amount of excess reserves in the banking system rose and the risk of excessive credit extension became evident. In order to prevent this outcome from materialising in an uncontrollable fashion, the Fed began paying interest on excess reserves (IOER) at a rate of 0.25%. The idea of reducing the IOER rate has been raised with the aim being to release a portion of the excess reserves into the real economy. Such action has already been taken by the ECB at their most recent meeting. The Fed will be very cautious about such a change in policy due to potentially hazardous consequences for money market funds due to their reduced profitability in a world of zero interest on excess reserves.
A third type of tool employed by the Fed falls under the category of “communication strategies”. Monetary policy effectiveness is very closely aligned with the ability of the central bank to manage inflation expectations. By committing to “maintaining exceptionally low levels for the federal funds rate at least through late 2014”, the Fed has attempted to induce higher inflation expectations. One possibility is for the Fed to extend this guidance to a later point. There are two main observations that suggest this strategy would not be particularly effective.
Firstly, an unchanged federal funds rate is already priced into the market as far out as 2015.
Secondly, questions will be raised regarding the continuity of this commitment given that Ben Bernanke’s term ends in January 2014. Despite these issues, there are no significant costs or risks to this strategy.
Given that recent economic developments point to lower global growth and, inferentially, lower rates of inflation and slower employment growth, the markets are primed for further action by the Fed in the form of QE3. The members of the FOMC will decide on whether or not the benefits gained from unconventional policies outweigh the potential risks of any such action. Also noteworthy is the fact that each new policy measure has had a smaller impact on risk markets. This fact may lead the Fed to delay further action until they are prompted to act due an occurrence of a fat-tail event. "
"The PSG Angle is an electronic newsletter of PSG Asset Management. To subscribe or read more, please go to to www.psgam.co.za".
Steven
Steven Morris Chartered Accountant (SA)
3 Bickley Road
Sea Point
Cape Town
8005
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
The dreaded double-dip recession looms again !! - South African Perspective
A good Article I have just read from Gareth Stokes, Enjoy !!
For now
Steven !!
"How many of you remember the economic debates in the immediate aftermath of the 2008/9 global recession? I attended dozens of presentations where the “shape” of the recession and subsequent recovery were debated at length. We are looking at a “V-shaped” recession – shouted one camp – adamant that the markets would bounce back immediately from their lows and power ahead to previous records…
A “U-shape” is more likely, opined the next lot… They said that the global economy would remain depressed for quite some time, followed by a rapid recovery. Of course, none could say for sure how long the slump would continue.
As you reflect on the many guesses as to the “shape” of the recovery you cannot help but feel sympathy for economists. They have a thankless task… They are always shooting at moving targets, and there is little hope their growth, inflation or exchange rate predictions will be spot on. The difficulty in forecasting macroeconomic variables is evidenced by the vast majority of economists predicting interest rates would stay unchanged prior to the July 2012 Monetary Policy Committee meeting. Instead, we got a 50 basis point cut!
It is only with hindsight that we will know what “shape” the economic recovery took. And – to be honest – we can only think about the shape of this recovery once it actually occurs. Midway through 2012 it seems a full recovery is as distant a prospect as when the crisis hit almost five years ago.
Is South Africa following the Euro-zone into a second recession?
There is little doubt the domestic economy is stuttering. Instead of building on its post-recession momentum GDP looks certain to come in lower than expected this year – perhaps even dipping below the 2.5% level. It is no wonder then that Dave Mohr, economist at Citadel Private Client Wealth Management, painted a rather gloomy picture in his presentation titled: Can local slowdown slip into recession?
One way to answer this question is to consider the consumer and business confidence indexes as measured by the Bureau for Economic Research (BER). Unfortunately the latest movements in confidence numbers are consistent with those experienced prior to the severe market slowdown of early 2008. “The confidence numbers tend to lead what is going to happen to the ‘hard’ numbers,” said Mohr. “From a domestic perspective the BER confidence numbers cannot rule out the possibility of a recession.”
This sombre outlook repeats across multiple sectors of the domestic economy. New car sales have improved, but remain well below their 2006/7 peak. Building activity, whether residential or non-residential, has shown virtually no sign of life. “We have had not experienced a recovery in the building sector to date,” said Mohr. But a long-term graph of house price growth suggests the lack of recovery is a Godsend. House prices are still extremely high in historic terms and South Africa’s “correction” has been mild compared with those in areas of the US and UK. “Nobody can guarantee that house prices will not fall further, but at least there is some support there,” he concludes.
Property experts might interject at this point… Real house price growth has been in decline since early 2008, which suggests we are only four years into a cycle that typically plays out over several years.
Will Mr and Mrs Consumer join the party?
South Africa remains heavily dependent on consumers for its economic growth. Although the gap between income growth and inflation is narrowing it seems consumers still have capacity to spend. “We should still see some real growth in consumption expenditure – financed from the higher than inflation wage settlements reached in 2011,” says Mohr. Wage settlements should come in above inflation through 2012 too.
Consumers will also find solace in the relatively soft outlook for core inflation going forward. It seems likely that the Reserve Bank’s 3% to 6% target range will not be breached on the upside – with the result the bank might consider another 50 basis point interest rate cut in November this year. The level of household debt to disposable income remains at elevated levels, but there has been a significant improvement in the debt service bill to household disposable income!
The problem is that consumers are struggling with administered price increases such as electricity, fuel and municipal rates to name a few. In two weeks time we will have a clearer picture of Eskom’s electricity increases for 2013 to 2015. If these come in higher than expected the consumer will take a heavy knock!
Alarming debt trends
Mohr also raised concerns over the recent increase in unsecured lending. He observes that the level of unsecured debt would double quickly at its current 30% per annum growth rate. “Banks are pushing into this space because of regulation – and there is a strong possibility of some sort of credit bubble developing in the [mid and low income] segments of the market,” he says.
It is unlikely South Africa will dip back into recession based on a mild Euro-zone recession scenario. However – the 2012 and 2013 growth forecasts offered by the Reserve Bank, National Treasury and the private sector are a touch ambitious. Against the continued global economic malaise we can look forward to further interest rates cuts – there is simply no other policy option to stimulate growth. “In the event of a world economic slump due to a Lehman-type moment in Europe, a weak rand should act as a shock absorber against deflation and economic collapse,” concludes Mohr. "
REF: Gareth Stokes, FAnews Online Editor
Kind Regards
Steven
Steven Morris Chartered Accountant (SA)
3 Bickley Road
Sea Point
Cape Town
8005
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
For now
Steven !!
"How many of you remember the economic debates in the immediate aftermath of the 2008/9 global recession? I attended dozens of presentations where the “shape” of the recession and subsequent recovery were debated at length. We are looking at a “V-shaped” recession – shouted one camp – adamant that the markets would bounce back immediately from their lows and power ahead to previous records…
A “U-shape” is more likely, opined the next lot… They said that the global economy would remain depressed for quite some time, followed by a rapid recovery. Of course, none could say for sure how long the slump would continue.
As you reflect on the many guesses as to the “shape” of the recovery you cannot help but feel sympathy for economists. They have a thankless task… They are always shooting at moving targets, and there is little hope their growth, inflation or exchange rate predictions will be spot on. The difficulty in forecasting macroeconomic variables is evidenced by the vast majority of economists predicting interest rates would stay unchanged prior to the July 2012 Monetary Policy Committee meeting. Instead, we got a 50 basis point cut!
It is only with hindsight that we will know what “shape” the economic recovery took. And – to be honest – we can only think about the shape of this recovery once it actually occurs. Midway through 2012 it seems a full recovery is as distant a prospect as when the crisis hit almost five years ago.
Is South Africa following the Euro-zone into a second recession?
There is little doubt the domestic economy is stuttering. Instead of building on its post-recession momentum GDP looks certain to come in lower than expected this year – perhaps even dipping below the 2.5% level. It is no wonder then that Dave Mohr, economist at Citadel Private Client Wealth Management, painted a rather gloomy picture in his presentation titled: Can local slowdown slip into recession?
One way to answer this question is to consider the consumer and business confidence indexes as measured by the Bureau for Economic Research (BER). Unfortunately the latest movements in confidence numbers are consistent with those experienced prior to the severe market slowdown of early 2008. “The confidence numbers tend to lead what is going to happen to the ‘hard’ numbers,” said Mohr. “From a domestic perspective the BER confidence numbers cannot rule out the possibility of a recession.”
This sombre outlook repeats across multiple sectors of the domestic economy. New car sales have improved, but remain well below their 2006/7 peak. Building activity, whether residential or non-residential, has shown virtually no sign of life. “We have had not experienced a recovery in the building sector to date,” said Mohr. But a long-term graph of house price growth suggests the lack of recovery is a Godsend. House prices are still extremely high in historic terms and South Africa’s “correction” has been mild compared with those in areas of the US and UK. “Nobody can guarantee that house prices will not fall further, but at least there is some support there,” he concludes.
Property experts might interject at this point… Real house price growth has been in decline since early 2008, which suggests we are only four years into a cycle that typically plays out over several years.
Will Mr and Mrs Consumer join the party?
South Africa remains heavily dependent on consumers for its economic growth. Although the gap between income growth and inflation is narrowing it seems consumers still have capacity to spend. “We should still see some real growth in consumption expenditure – financed from the higher than inflation wage settlements reached in 2011,” says Mohr. Wage settlements should come in above inflation through 2012 too.
Consumers will also find solace in the relatively soft outlook for core inflation going forward. It seems likely that the Reserve Bank’s 3% to 6% target range will not be breached on the upside – with the result the bank might consider another 50 basis point interest rate cut in November this year. The level of household debt to disposable income remains at elevated levels, but there has been a significant improvement in the debt service bill to household disposable income!
The problem is that consumers are struggling with administered price increases such as electricity, fuel and municipal rates to name a few. In two weeks time we will have a clearer picture of Eskom’s electricity increases for 2013 to 2015. If these come in higher than expected the consumer will take a heavy knock!
Alarming debt trends
Mohr also raised concerns over the recent increase in unsecured lending. He observes that the level of unsecured debt would double quickly at its current 30% per annum growth rate. “Banks are pushing into this space because of regulation – and there is a strong possibility of some sort of credit bubble developing in the [mid and low income] segments of the market,” he says.
It is unlikely South Africa will dip back into recession based on a mild Euro-zone recession scenario. However – the 2012 and 2013 growth forecasts offered by the Reserve Bank, National Treasury and the private sector are a touch ambitious. Against the continued global economic malaise we can look forward to further interest rates cuts – there is simply no other policy option to stimulate growth. “In the event of a world economic slump due to a Lehman-type moment in Europe, a weak rand should act as a shock absorber against deflation and economic collapse,” concludes Mohr. "
REF: Gareth Stokes, FAnews Online Editor
Kind Regards
Steven
Steven Morris Chartered Accountant (SA)
3 Bickley Road
Sea Point
Cape Town
8005
Mobile :+27 83 943 1858
Facsimile : 0866 712 498
E-mail : steven@global.co.za
Website : www.stevenmorris.co.za
Most Asian Stocks Drop, Oil Retreats Before ECB Meet; Corn Rises
Aug. 2 (Bloomberg) --
"Most Asian stocks fell and oil retreated as investors awaited a policy announcement by the European Central Bank after the Federal Reserve pledged more support for the U.S. economy if necessary. Corn rallied.
About three stocks retreated for every two that rose on the MSCI Asia Pacific Index, which lost 0.2 percent as of 1:03 p.m. in Tokyo. Standard & Poor’s 500 Index futures rose 0.2 percent after the gauge dropped 0.3 percent yesterday. The euro traded for $1.2247, up 0.2 percent, while South Korea’s won weakened from a four-month high. Oil slipped 0.2 percent after its biggest gain in two weeks yesterday amid shrinking U.S. stockpiles. Corn futures gained for the first time in three days.
The ECB will announce a policy decision today following President Mario Draghi’s pledge last week to do “whatever it takes” to keep the euro together. The Fed signaled its readiness to support the economy even as it refrained from adding to bond purchases yesterday. The Asia-Pacific gauge fell for a second day after recording it’s biggest four-day gain this year through July 31.
“Investors are being cautious, taking into account the possibility of their expectations being betrayed,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd., which has 33 trillion yen ($420 billion) in assets. “Asian markets are hoping but not completely believing that the ECB will do more.”
To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net "
Steven
Steven Morris CA (SA)
Mobie : 083 943 1858
Fax: 086 671 2498
E-Mail: steven@global.co.za
Website: www.stevenmorris.co.za
"Most Asian stocks fell and oil retreated as investors awaited a policy announcement by the European Central Bank after the Federal Reserve pledged more support for the U.S. economy if necessary. Corn rallied.
About three stocks retreated for every two that rose on the MSCI Asia Pacific Index, which lost 0.2 percent as of 1:03 p.m. in Tokyo. Standard & Poor’s 500 Index futures rose 0.2 percent after the gauge dropped 0.3 percent yesterday. The euro traded for $1.2247, up 0.2 percent, while South Korea’s won weakened from a four-month high. Oil slipped 0.2 percent after its biggest gain in two weeks yesterday amid shrinking U.S. stockpiles. Corn futures gained for the first time in three days.
The ECB will announce a policy decision today following President Mario Draghi’s pledge last week to do “whatever it takes” to keep the euro together. The Fed signaled its readiness to support the economy even as it refrained from adding to bond purchases yesterday. The Asia-Pacific gauge fell for a second day after recording it’s biggest four-day gain this year through July 31.
“Investors are being cautious, taking into account the possibility of their expectations being betrayed,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd., which has 33 trillion yen ($420 billion) in assets. “Asian markets are hoping but not completely believing that the ECB will do more.”
To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net ; Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net "
Steven
Steven Morris CA (SA)
Mobie : 083 943 1858
Fax: 086 671 2498
E-Mail: steven@global.co.za
Website: www.stevenmorris.co.za
BREAKING NEWS - US Fed bias shifts towards further action
FT.COM
The US Federal Reserve kept policy on hold at its August meeting but showed a strong bias towards further action to support the economy.
The rate-setting Federal Open Market Committee continued to forecast that it would keep interest rates low until late 2014, dashing market hopes that it might extend that date into 2015.
The Fed also held off an further round of quantitative easing – or QE3 – under which it would buy more securities in an effort to drive down long-term interest rates. But it issued a powerful statement of its willingness to do more if the economy disappoints
The US Federal Reserve kept policy on hold at its August meeting but showed a strong bias towards further action to support the economy.
The rate-setting Federal Open Market Committee continued to forecast that it would keep interest rates low until late 2014, dashing market hopes that it might extend that date into 2015.
The Fed also held off an further round of quantitative easing – or QE3 – under which it would buy more securities in an effort to drive down long-term interest rates. But it issued a powerful statement of its willingness to do more if the economy disappoints
Wednesday, 1 August 2012
Breaking News - Chinese manufacturing growth slows
China’s manufacturing sector deteriorated slightly in July, confounding expectations for a recovery as the government steps up support for the weakening economy.
The country’s official purchasing mangers’ index, an important gauge of industrial activity, inched down to 50.1 in July from 50.2 in June, just above the 50 line which separates expansion from contraction. Wednesday’s PMI reading indicates that China’s factories have made a slow start to the second half of the year.
The country’s official purchasing mangers’ index, an important gauge of industrial activity, inched down to 50.1 in July from 50.2 in June, just above the 50 line which separates expansion from contraction. Wednesday’s PMI reading indicates that China’s factories have made a slow start to the second half of the year.
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