WHAT “NEW NORMAL”?
Seems that the so called “new normal” was in fact only temporary
The European Union’s statistics agency said retail sales rose 0.3% in March from April.
Euro area sales have not broken the sideway channel of the last 12 months, unlike the extended eurozone. Quarterly, EA18 sales volume was up 0.5% (2.0% annualized) in Q1 after falling 0.5% (2.0%) in Q4. EU28 sales volume jumped 1.2% (4.9%) in Q1 after being unchanged in Q4. Core sales volume jumped 1.2% (4.9%) in EA18 in Q1 after –0.4% in Q4. (More details here)
Speaking of channels, U.S. weekly chain store sales seemed to be breaking their 12-month channel as well, until last week’s –2.0% print:
China Economy Holds Steady in April
Signs of further loss in economic momentum were not observed during CEBM’s April survey. Both automakers and steel mills observed sales recoveries in April. The CEBM Industrial Sales vs. Expectations Index improved significantly to -17.1% in May from -32.9% in April.
Looking at the economy by industry, container freight shipments and sales from home appliance retailers exceeded expectations. Sales of passenger cars and steel mill sales experienced a recovery. The real estate sector continues to put downward pressure on growth. According to our survey, sales transaction volume in tier-1 and tier-2 cities decreased further in April. In order to fulfill sales targets and boost liquidity, real estate developers have started to discount prices. Meanwhile, used home sales transaction volume has deteriorated significantly. In addition, according to our commercial bank survey, overdue loans outstanding rose in April, as did lending rates. (CEBM Research)
As China Daily reports, earnings growth remains positive but is at the slowest since Q3 2012…
OECD Cuts Global Forecast The OECD once again lowered its forecast for global economic growth, and called on the ECB to immediately cut its benchmark interest rate to end a period of low inflation in the euro zone.
(…) The OECD said the global economy is in a less perilous state than it has been in recent years, and that policy makers “can now switch from avoiding disaster to fostering a stronger and more resilient recovery.”
But it added that growth is still more likely to be weaker than forecast, and faces a number of potential impediments, ranging from the impact on developing economies of a normalization of U.S. monetary policy, to instability in China’s financial system and the relatively new danger posed by rising tensions between Russia, the U.S. and the European Union over the future of Ukraine.
The research body raised its growth forecast for the euro zone, but warned there is a risk that it will slip into deflation—or a period of self-reinforcing price declines—unless the ECB acts swiftly.
In unusually direct language, the OECD said the ECB’s main refinancing rate “should be reduced to zero” from 0.25% now, while policy makers should “possibly” cut the deposit rate “to a slightly negative level.” The research body said interest rates should not be raised from those levels until the end of 2015 at the earliest.
“In particular, we call on the European Central Bank to take new policy actions to move inflation more decisively toward target and to be ready for additional nonconventional stimulus if inflation were to show no clear sign of returning there,” said Rintaro Tamaki, the OECD’s acting chief economist. He noted that new, longer-term funding for banks and purchases of government and company bonds known as quantitative easing may be necessary. (…)
The OECD cut its growth forecast for China, and said expected rates of economic expansion are “undoubtedly more sustainable.” But it fretted that the extent of the slowdown and “the fragility of the banking system” are uncertain, and said authorities might need to simultaneously ease monetary policy to support fading growth, while using “prudential measures” to gradually cool credit growth and placing limits on the rise of local government debts.
The research body also cut its growth forecast for Japan, and said that while elements of the government’s strategy to escape deflation appeared to be working, it had yet to undertake more fundamental reforms to raise the economy’s growth potential, and urgently outline the steps it will take to reduce its budget deficit and begin to lower its debts. (…)
U.S. RECESSION, MARKET TOP NOT VISIBLE:
Even if investors are investing irrationally, Omega Advisors says that they don’t see the telltale signs of a market top. They acknowledge that the duration of this bull market is well above average (it will soon be the second longest running bull run since the end of the Great Depression), but “bull markets don’t die of old age.”
Instead, what usually happens is that there is a lot of slack left in the economy from the previous recession which is gradually put to work during as the economy expands. When the Fed starts to worry about the amount of excess capacity in the product and labor markets it will increase interest rates to slow things down and keep inflation under control, with a slowdown usually following within the next year. Omega Advisors points out that an inverted yield curve almost always precedes a recession, and right now the yield curve looks fine.
This chart only has one problem: the current steepness of the curve is solely the result of the Fed’s ZIRP policy keeping short rates through the floor. What would short rates be in a normal environment against 10Y Treasuries yielding 2.6%? Then again, what would long rates be in a normal environment? Probably not far from 3.7%, the Y/Y growth rate in nominal GDP.Who’s driving blind here?
The surprise strength in Treasurys is confounding bond-market bears: In 2014, U.S. government bonds have gained more than the Dow Jones Industrial Average.
The bond action is the latest sign of anxiety among investors surveying the outlook for U.S. and global growth. (…)
But bonds haven’t yet behaved as bearish investors expected. On Monday, the yield on the 10-year Treasury note fell in early U.S. trading to 2.566%, its lowest since Nov. 1, before rebounding to 2.611%. The Treasury yield has dropped from 3% at the end of 2013.
Soft economic data and harsh winter weather have thwarted many forecasters’ expectations of a steady rise in yields as the Federal Reserve reduces its monthly bond purchases. A standoff in Ukraine, reversals in developing markets such as Turkey and Brazil and a slowdown in the once-roaring U.S. stock rally all have conspired to prod more investor cash into safe-harbor bonds. (…)
Goldman Sachs Group Inc. strategists expect the 10-year yield to hit 3.25% by the end of the year, unchanged from their initial forecast at the start of January. J.P. Morgan Chase & Co. expects the 10-year yield to end this year at 3.4%, down from 3.65% forecast at the start of 2014.
Net bets held by hedge funds and other short-term investors that U.S. interest rates will rise hit $1.134 trillion for the week that ended April 29, up from $849.5 billion at the end of 2013, according to Jeffrey Young, U.S. rates strategist at Nomura Securities International in New York.
That represents the biggest amount since tracking started in March 1995, Mr. Young said. Net bets include wagers on prices of Treasury-bond futures and euro-dollar futures falling, minus the value of wagers on those prices rising.
But expectations of a U.S. rate breakout have been foiled this year, as they largely have since the financial crisis. The 10-year Treasury rate hasn’t hit 4% since April 2010. Even some investors who have been saying bond prices are unsustainably high have pointed to Friday’s bond-market rally in the wake of the strong jobs report as evidence a bet against Treasurys is a risky one.
“You had everything you wanted for fixed income to get killed,” hedge-fund manager Paul Tudor-Jones said Monday at the Sohn Investment Conference. “And yet, at the end of the day, bonds closed up.” (…)
Steven Major is global head of fixed income research at HSBC
(…) Longer-dated bond yields are lower than where they started the year partly because the overwhelming consensus has been positioned for higher yields. If the incoming data start to respond to last year’s tighter monetary conditions and expectations of tightening are priced-out, there is scope for intermediate-to-long yields to fall further.
The actors in an over-indebted economy behave differently with higher expected rates. They are more sensitive to small shifts in interest rate expectations because it will affect their decision to invest or consume.
Some five years into the “recovery” the output gaps have not closed. Borrowing to consume today means debt repayments and interest charges will reduce future consumption. Lower-than-anticipated inflation means the burden of repayments on households is greater in real terms. The conventional approach that forecasts a cyclical recovery using historical precedents and narrow views of slack based on domestic unemployment, will find the transmission mechanisms are, in current conditions, working in the opposite direction to what the models predicted.
Companies will not be keen to invest or employ new staff unless the expected returns are higher than offered in the bond market. Banks will not take the risk of lending if returns adjusted for risk are better in bonds or cash.
Meanwhile, pension funds have been locking in the more attractive long-term yields to match against liabilities that stretch out into the future. The S&P 500 has risen 18 per cent over the past year and the index has almost doubled from the low point in 2008, so the equity into bond switch is more compelling for those looking to reduce future risk.
Bond bears expecting yields to rise this year should consider that there was already a tightening of monetary conditions last year. What appears to be a conflict between the economy and bond yields can be logically explained by viewing the matter from a bond market perspective.