Chicago Fed National Activity Index Steadies
The Federal Reserve Bank of Chicago reported that its National Activity index was little changed at -0.02 during June. That came after rising to -0.03 in May from April’s -0.73. The three-month moving average also was steady last month versus May at -0.26, after April’s weakening to -0.47. During the last twenty years, there has been a 70% correlation between the Chicago Fed Index and the q/q change in real GDP.
The National Activity Diffusion Index, which measures the breadth of movement in the monthly series, also was steady at -0.11. That was down from the peak of 0.47 in April 2018. (…)
The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.
(Stimulating deal!
White House and Congress Reach Deal on Spending, Debt Ceiling Congressional and White House negotiators reached a bipartisan deal to raise federal spending and lift the government’s debt limit.
Congressional and White House negotiators reached a deal to increase federal spending and raise the government’s borrowing limit, securing a bipartisan compromise to avoid a looming fiscal crisis and pushing the next budget debate past the 2020 election.
The deal for more than $2.7 trillion in spending over two years, which must still pass both chambers of Congress and needs President Trump’s signature, would suspend the debt ceiling until the end of July 2021. It also raises spending by nearly $50 billion next fiscal year above current levels.
The agreement forgoes the steep spending cuts initially sought by the administration, providing for about $320 billion in spending over two years above limits set in a 2011 budget law that established automatic spending cuts, known as the sequester. (…)
The accord also marked another example of Washington’s rising tolerance for deficits, among both Democrats, who prize domestic spending, and Republicans, who consistently seek more money for the military.
A key sticking point in the negotiations was how to pay for the cost of the spending increases. The deal extends small cuts to Medicare beyond fiscal year 2027 and extends fees collected by Customs and Border Protection, amounting to $77 billion worth of savings to offset the cost. Those routine budget accounting moves fall short of the $150 billion in spending cuts originally sought by the administration. (…)
Stimulating deals!
Central Banks Are in Sync on Need for Fresh Stimulus Central banks around the world are poised to unleash the most synchronized monetary stimulus since the financial crisis one decade ago
(…) “We see the economy as being in a good place and we’re committed to using our tools to keep it there,” Federal Reserve Chairman Jerome Powell told Congress July 10, indicating the U.S. central bank is ready to cut interest rates later this month.
The European Central Bank also sent a clear easing signal in the minutes of its June meeting, which said there was broad agreement among officials that they “needed to be ready and prepared” to reduce rates and resume asset purchases to provide more stimulus.
Already some central banks in the Asia-Pacific region have lowered rates this year, including Australia—which has cut rates twice to 1%—New Zealand, India, Malaysia and the Philippines. Central banks in Korea and Indonesia reduced rates last week, as did South Africa’s. (…)
“What central banks are trying to do is get ahead of the curve. We have not seen a substantial deterioration in the economy,” said Neil Shearing, chief economist at consulting firm Capital Economics. (…)
For now, fine-tuning rates may be enough. The global economy is slowing but doesn’t appear to be near a recession or destabilizing crisis, and unemployment is quite low in most developed economies. Inflation has weakened below the 2% target that most large central banks consider optimal but the danger of outright price declines, known as deflation, appears remote. (…)
Central bankers have morphed from being data-dependent to being risk managers as trade wars boost uncertainty.
Goldman Sachs:
Our own assessment remains that the justification for rate cuts at the current juncture is tenuous in terms of the Fed’s own mandate. We were unconvinced of the need for easier policy even at the time of the June 18-19 FOMC meeting, and virtually all of the information since then has come in on the stronger side. President Trump postponed the threatened tariff escalation versus China, all of the major economic reports—including payrolls, retail sales, the manufacturing surveys, core CPI, and UMich 5-10 year inflation expectations—have surprised on the upside, and financial conditions have eased further since the meeting. Our outlook for the next year is for real GDP growth in the 2%-2½% range, unemployment falling below 3½%, and core PCE inflation rising to 2%+. (…)
The FOMC’s primary rationale for a rate cut is that the trade war and the global slowdown have increased uncertainty about the outlook, and this uncertainty is weighing on capital investment. This argument is logically sensible and supported by anecdotal evidence from the Beige Book and to some degree by the recent data shown in Exhibit 2. But so far measures of uncertainty are not particularly elevated, and capex expectations—while much lower than in 2018—remain roughly in line with the expansion average. As a result, this risk to growth looks fairly mundane at this point, in our view.
Moreover, we have broader reservations about the argument that cuts are needed to insure against downside risk. Our new analysis of the role of credit markets in the transmission of monetary policy to the real economy shows that near-term downside risk from financial conditions shocks is already low, and further easing would have only small incremental positive effects. But medium-term downside risk could well rise with a further policy-driven improvement in credit market sentiment, because the latter is strongly mean-reverting. (…)
- Financial conditions in the Eurozone have also been easing.
Source: Natixis (via The Daily Shot)
The People’s Bank of China added liquidity today using unconventional tools. Its medium term lending facility provided CNY200 billion while its targeted medium term lending facility added CNY297.7 billion, both for one year at interest rates of 3.3% and 3.15%, respectively. TMLF funding can be rolled over twice and so is viewed as a three year liquidity injection with an annual interest rate of 3.15%. (…)
We consider this liquidity management exercise to be the start of the easing cycle:
- The newly added liquidity is cheaper in terms of interest costs. Borrowing via MLF and TMLF for one-year at 3.3% and 3.15%, respectively, is cheaper than interbank borrowing at 3.1% for three months.
- The injection via MLF and TMLF, though, was a net absorption of liquidity, and saw the three-month interbank interest rate move lower, from 3.4% on Monday to 3.1% today.
- The use of MLF and TMLF replaces regular open market operations – the duration of the liquidity injection is longer and therefore liquidity in the market should be more stable.
(…) The Chinese economy will need more liquidity and lower interest rates in 2H19 to support investment in infrastructure projects. (…)
FYI:
The new Fortune Global 500 list goes live this morning [yesterday], and marks an important world power transition. The number of companies on the list based in China, including the 10 in Taiwan, reached a record 129—exceeding for the first time the number of companies based in the U.S. (121).
The Fortune Global 500 ranks companies on size, and of course, size is not everything. Many of the largest Chinese companies are state-owned enterprises which owe their heft to government-supported monopolies in the world’s most populous market, and aren’t necessarily the world’s most dynamic companies. Nevertheless, the list signals a significant global power shift. Ten years ago, there were only 43 Chinese companies on the list. Twenty years ago, there were just eight. And a boatload of fast-growing private Chinese companies are rapidly working their way up the ranks. (…)
You can find the full list here. (Fortune)
U.S. CONSUMER WATCH
Credit card spending grew in the second quarter. (The Daily Shot)
Source: @FT, @trevornoren; Read full article
But weekly data suggest a deceleration in July:
NATIONAL SECURITY
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Congress Moves Toward Ban on Buying Chinese Buses, Railcars China’s push to gain a bigger foothold in U.S. public-transit systems could derail in Congress, as lawmakers move toward a ban on use of federal funds to buy Chinese buses and railcars
(…) Advocates say the ban is needed to protect an American industry from subsidized Chinese competition. They also claim cameras, location trackers and other gear in Chinese buses and trains could provide surveillance and strategic information to China’s authoritarian government.
“It’s in the national interest to make sure we have viable rail and bus industries and to protect us from spying and sabotage of our public transportation system,” said Rep. Harley Rouda (D., Calif.). (…)
Their intent is to shut China out of the U.S. market, since about a third of capital expenditures by local transit agencies come from the federal government. (…)
So far, CRRC manufactures only passenger railcars in the U.S., a field that has no U.S. competitors. But the Chinese company also makes freight cars, and its U.S. rivals fear CRRC’s potential to overrun the sector. CRRC says it has no plan to make freight cars in the U.S. (…)
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Trump Touts Tech Industry Support for Huawei Exemptions Easing Huawei blacklist could help revive trade talks with China
(…) “The CEOs expressed strong support of the president’s policies, including national security restrictions on United States telecom equipment purchases and sales to Huawei,” the White House said. “They requested timely licensing decisions from the Department of Commerce, and the president agreed.”
Derek Scissors, a resident scholar at the conservative American Enterprise Institute, said the White House action suggests Mr. Trump sees the company mainly as leverage against Beijing and not a genuine threat. (…)
As the U.S. considers special licenses for Huawei, China appeared to be taking steps to increase purchases of U.S. farm products.
The Chinese state-run news agency, Xinhua, reported Sunday that some Chinese firms have asked U.S. companies about the prices of their agricultural products. These firms have also submitted applications to the State Council, requesting the cabinet remove the tariffs imposed on these goods so that the companies may make these planned purchases, the report said, citing unnamed government agencies. (…)
Xinhua and China Central Television also reported that the U.S. recently exempted 110 Chinese industrial imports from hefty tariffs and said it is encouraging U.S. companies to continue to provide goods for “relevant Chinese companies.” (…)
Huawei’s U.S. based research arm, Futurewei, slashes more than 70 per cent of workforce
China’s Huawei Technologies Co Ltd said it is slashing more than 600 jobs at its Futurewei Technologies research arm in the United States after being placed on a trade blacklist by the U.S. government.
Futurewei, which employed 850 people in the United States, began laying off workers on Monday, Reuters reported earlier, citing employees, including one who spoke as he left the company’s Silicon Valley campus. (…)
CHERRY BLOSSOMS!
The pits: How China’s U.S. tariff jab choked a cherry import boom
(…) Across China’s metropolises, the appetite of a burgeoning middle class for expensively fresh U.S. cherries has become a symbolic casualty of China’s festering, tit-for-tat trade battle with the United States. A business that grew to nearly $200 million in 2017 from zero in 2000 has now withered to little more than a tenth of its volume peak, customs data shows.
With import tariffs for U.S. cherries set at 50%, Beijing has relaxed regulations allowing imports from Central Asia – a region that just happens to be central to President Xi Jinping’s epic ‘Belt and Road’ infrastructure project, an intercontinental initiative worth hundreds of billions of dollars. (…)
Supplies from Uzbekistan leapt to nearly half of the May total, Reuters’ calculations show, from zero a year earlier, while the U.S. share of the cherry import pie shrank to 38% from nearly 80% in May 2018 – and a near monopoly in May 2017. (…)
For Victor Wang, the China representative of U.S. Northwest Cherry Growers, it’s now a case of trying keep head above water.
Wang said it took 17 years of marketing and government lobbying to help make U.S. cherries some of the most coveted fruits in China – at one stage his suppliers were even exporting more to China than across the border to Canada. But that all changed in 2018, when two rounds of Chinese tariff hikes added 40 percentage points to import charges. (…)
He said many Chinese media and business partners, including Chinese e-commerce giant Alibaba (BABA.N), have declined to provide coverage or to run promotions.
Alibaba confirmed that U.S. cherry promotions were halted but rejected any suggestion that was related to U.S.-China tensions. It said the move was due to “market-related factors”, including seasons, holidays and unspecified business opportunities. (…)
(For a graphic on ‘China’s cherry imports by origin, May 2017-2019’ click tmsnrt.rs/2jZrJFi)
EARNINGS WATCH
From RBC:
We estimate that roughly 70% of the [77] S&P 500 companies that have reported so far have described demand as healthy, up from 65% last week. More importantly, among the 20 companies currently in the “mixed or weak” category, half have said that conditions are improving or are expected to improve in the back half of the year. This is a positive shift from our last update, when we pointed out that among the early reporters, only 2 of the 7 in the mixed/weak demand camp pointed to signs of improvement.
So far, a third of the companies that have reported 2Q19 results have emphasized cost savings initiatives and restructuring plans in their earnings calls (down from 45% in our last update).
[Financials see] evidence of a strong consumer, little to worry about in terms of credit quality, decent loan growth, a reduction in the asset sensitivity of balance sheets, a resilient corporate backdrop, and a commitment to buybacks and dividends.
1 thought on “THE DAILY EDGE: 23 JULY 2019”
Pumping the Bubble & turning off the water supply
“I’d be very, very careful about growing further the balance sheet of central banks,’’ Sergio Ermotti said in a Bloomberg TV interview on Tuesday, ahead of the European Central Bank’s policy decision this week. “We are at a risk of creating an asset bubble
https://seekingalpha.com/article/4259242-feds-idea-treasury-repo-facility-will-work
Also see: If the banks currently holding all those excess reserves realize the internal contradiction here, sleight of hand or what have you, of an administered rate set above market rates, they’re not going to buy the Fed’s Treasuries in the first place and it’s not going to work.
https://seekingalpha.com/article/4259242-feds-idea-treasury-repo-facility-will-work
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