Unknown Marin-Dell dairy truck, San Francisco Mar 1 1945
What on earth happened to holiday sales?
• US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)
The optimism surrounding the outlook for U.S. consumers was taken down a notch as retail sales slumped in December by the most in almost a year, prompting some economists to lower spending and growth forecasts. The 0.9% decline in purchases followed a 0.4% advance in November that was smaller than previously estimated, Commerce Department figures showed today in Washington. Last month’s decrease extended beyond any single group as receipts fell in nine of 13 major retail categories. While disappointing, the drop followed large-enough gains at the start of the quarter that signaled consumer spending accelerated from the previous three months as the job market strengthened and gasoline prices plunged. Continued improvement in hiring that sparks more wage growth will be needed to ensure customers at retailers such as Family Dollar Stores also thrive.
“Maybe the optimism a month ago got a little too heated,” said Guy Berger, U.S. economist at RBS. “It’s a weak number but it follows some really strong ones and I don’t think it changes my general feeling on how the economy and consumers are doing.” Treasury yields and stocks fell as a deepening commodities rout and the drop in sales spurred concern global growth is slowing. The Standard & Poor’s 500 Index retreated 0.6% to 2,011.27 at the close in New York. The 30-year Treasury bond yielded 2.47% after declining earlier to a record-low 2.39%. Electronics merchants, clothing outlets, department stores and auto dealers were among those posting sales declines in December, today’s report showed. Cheaper fuel helped push receipts at gasoline stations down by the most in six years. T
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But but but indeed.
• US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)
But but but… US retail advanced sales dropped a stunning 0.9% MoM (massively missing expectations of a 0.1% drop). The last time we saw a bigger monthly drop was June 2012. Want to blame lower gas prices – think again… Retail Sales ex Autos and Gas also fell 0.3% (missing an exuberantly hopeful expectation of +0.5% MoM) and the all-important ‘Control Group’ saw sales fall 0.4% (missing expectations of a 0.4% surge). Boom goes the narrative. Advance Retail Sales massively missed For Dec…
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“.. no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds.”
• The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)
Today’s 0.9% decline in December retail sales apparently came as a shock to bubblevision’s talking heads. After all, we have had this giant “oil tax cut”, and, besides, the US economy has “decoupled” from the stormy waters abroad and is finally on its way to “escape velocity”. The Wall Street touts and Keynesian economic doctors have been saying that for months now – while averring that all the Fed’s massive money printing is finally beginning to bear fruit. So today’s retail report is a real stumpe – –even if you embrace Wall Street’s sudden skepticism about government economic reports and ignore the purported “noise” in the seasonally maladjusted numbers for December. All right then. Forget the December monthly numbers. Why not look at the unadjusted numbers in the full year retail spending report for 2014 compared to the prior year.
Recall that the swoon from last winter’s polar vortex overlapped both years, and was supposed to be a temporary effect anyway – a mere shift of consumer spending to a few months down the road when spring arrived on schedule. On an all-in basis, total retail sales in 2014 rose by $210 billion or a respectable 4.0%. But 58% of that gain was attributable to two categories – auto sales and bars&restaurants – which accounted for only 28% of retail sales in 2013. And therein lies a telling tale. New and used motor vehicle sale alone jumped by $86 billion in CY2014 or nearly 9%. Then again, during the most recent 12 months auto loans outstanding soared by $89 billion. Roughly speaking, therefore, consumers borrowed every dime they spent on auto purchases and took home a few billion extra in spare change.
The point here is that no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds. Yet that has been the essence of the retail sales rebound since the Great Recession officially ended in June 2009. Auto sales, which have been heavily financed by borrowing, are up by about 70%; the balance of non-auto retail sales, where consumer credit outstanding is still below the pre-crisis peak, has gained only 22%. Stated differently, the only credit channel of monetary policy transmission which is still working is auto credit. Yet as indicated earlier this week, that actually amounts to a proverbial “accident” waiting to happen. On the margin, the boom in auto loans, which are now nearing $1 trillion in outstandings, is on its last leg. The latest surge of growth has been in “subprime” credit based on the foolish assumption that vehicle prices never come down; and that the junk car loan boom led by fly-by-night lenders is nothing to worry about since loans are “collateralized”.
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• Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)
Switzerland’s franc soared by almost 30% in value against the euro on Thursday after the Swiss National Bank abandoned its three-year old cap at 1.20 francs per euro. In a chaotic few minutes on markets after the SNB’s announcement, the franc broke past parity against the euro to trade at 0.8052 francs per euro before trimming those gains to stand at 88.00 francs. It also gained 25% against the dollar to trade at 74 francs per dollar.
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Huh? ” ..looking at economic data, “we’re certainly not seeing anything that’s unnerving us.”
• What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)
The U.S. consumer, that dynamo of the global economy, just took a step back. Relax. It’s not that bad, economists say. News Wednesday that U.S. retail sales unexpectedly declined in December reverberated through financial markets, but few economists read the report as a sign of trouble for the nation’s economy. In fact, many economists say the U.S. economy is doing just fine. So why did the markets react the way they did? The answer, in part, is that the report added to a wall of worry confronting investors. Topping the 2015 angst-list are the plunge in oil and other commodities, as well as slowdowns in China and Europe.
“It feels like a global recession when you look at the markets,” said David Hensley, director of global economics for JPMorgan. But looking at economic data, “we’re certainly not seeing anything that’s unnerving us.” For the moment, the 0.9% decline in December retail sales reported by the Commerce Department has pushed back market expectations for when the Federal Reserve will start raising interest rates. It also has bond investors betting that inflation will stay low. Forecasts change all the time. But before anyone panics over one economic number, here are four reasons to stay optimistic about the U.S. economy, which is still in the driver’s seat of global growth.
• December sales figures aside, U.S. consumers aren’t running scared. Yes, last month’s decline was the biggest in a year. But consumer spending probably rose at an annual rate of more than 4% during the fourth quarter as a whole, according to Ted Wieseman at Morgan Stanley. The first quarter of this year is looking just as good, Wieseman wrote in a note today to clients.
• The U.S. jobs market is perking up. Less than a week ago, investors were cheering news of another big rise in U.S. payrolls. In all, the economy added about 3 million jobs last year. “The U.S. is doing great relative to the rest of the developed world,” said Jim O’Sullivan at High Frequency Economics.
• The plunge in oil and other commodities is mostly good news for consumers. Cheaper oil means cheaper fuel. And most economists say that’s good for global growth. The plunge in oil, for example, largely reflects an increase in supply, from shale and the like, rather than a decrease in demand. U.S. production of crude oil rose to 9.19 million barrels a day last week, the highest in Energy Information Administration weekly estimates going back to 1983.
• Bond yields are hitting new lows, but that doesn’t necessarily mean the entire world is about to sink into a deflationary spiral in which prices, wages and output fall in tandem. In fact, many economists predict wages in the U.S. will finally start rising this year. “It’s just a matter of time before wage growth picks up,” said Mohamed El-Erian.
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“The Street’s estimates are based on a price of roughly $75 a barrel for oil ..”
• Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)
Most Wall Street analysts are basing their 2015 earnings estimates for oil companies on a questionable number: the price of oil itself. Exxon Mobil, which has, by far, the largest market value of any oil producer, illustrates this point perfectly. The consensus among sell-side analysts polled by FactSet is for the company to earn $5.18 a share this year, down 40% from an estimated $7.27 in 2014. The expected decline in earnings springs from the crash in oil prices amid slowing demand, increased U.S. supply and OPEC’s strategy of defending its market share by refusing to cut production. But Oppenheimer analyst Fadel Gheit, who’s based in New York, has diverged wildly from his peers, predicting a 2015 EPS estimate of only $2.65 for Exxon Mobil.
“The Street’s estimates are based on a price of roughly $75 a barrel for oil,” which is where the analysts think oil will end up after recovering from its drop. Oppenheimer’s estimates are updated every Friday, based on current oil prices, not on where the firm’s analysts think the price may eventually settle. Gheit’s estimates from Friday were based on prices of $51.68 a barrel for West Texas crude and $55.20 for Brent crude. Based on the consensus 2015 estimate and Tuesday’s closing stock price of $90, Exxon Mobil would trade for 17.4 times this year’s earnings. That’s not an outrageously high valuation. However, based on Gheit’s estimate, which in turn is based on what’s actually going on in the oil market, the stock would trade for about twice as much: 34 times earnings.
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What do they expect?
• Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)
Oil resumed its decline after the biggest gain since June 2012 as U.S. crude production increased, bolstering speculation a global supply glut that spurred last year’s price collapse may persist. Futures dropped as much as 1.3% in New York. U.S. output surged to 9.19 million barrels a day last week, the fastest pace in weekly records dating back to January 1983, the Energy Information Administration reported yesterday. Crude may fall below a six-month forecast of $39 a barrel and rallies could be thwarted by the speed at which lost shale production can recover, according to Goldman Sachs. Oil slumped almost 50% last year, the most since the 2008 financial crisis, as OPEC resisted cutting output even amid the U.S. shale boom, exacerbating a surplus estimated by Kuwait at 1.8 million barrels a day.
Prices rose yesterday as a relative strength index rebounded after more than two weeks below 30, a level that typically signals the market is oversold. “You tend to arrive at points every now and then in major trends like this where you just see a little bit of short covering and profit taking,” Ric Spooner at CMC Markets in Sydney, said. “Supply is still the general theme.” Oil is leading this week’s slide in commodities after a decade-long bull market led companies to boost production and a stronger dollar diminished their allure to investors. The Bloomberg Commodity Index of 22 energy, agriculture and metal products decreased to the lowest level since November 2002 on Jan. 13, extending a 17% loss last year.
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“.. output rose in November as the number of new wells coming online fell by 73%.”
• US Oil Output Advances To Record Even as Prices Decline (Bloomberg)
Drillers that unlocked the shale oil boom in the U.S. are finding it hard to shut off the nozzle. U.S. crude production rose even as prices slumped to the lowest in more than five years and the number of rigs targeting oil decreased. In North Dakota’s prolific Bakken shale formation, output rose in November as the number of new wells coming online fell by 73%. The increases illustrate how improvements in horizontal drilling and hydraulic fracturing technology may prop up U.S. crude production even as companies cut spending, idle rigs and lay off thousands of workers with oil prices down more than 50% since June. “We have an oversupply of crude,” Michael Hiley, head of energy OTC at LPS Partners said yesterday.
“Production keeps going up. There is not a great correlation between the rig count and production because drilling has gotten more efficient over the last several years.” Output climbed to 9.19 million barrels a day last week, the most in Energy Information Administration weekly estimates going back to 1983. Strong production helped push crude inventories to a seasonal record, EIA data showed. Crude has slumped 9% in 2015 after declining 46% in 2014 as shale oil lifted U.S. supply and OPEC maintained production. Last week, U.S. oil rigs declined by the most since 1991. Producers including Continental and ConocoPhillips say they will cut spending.
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“.. in the coming few weeks,”
• Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)
Iraq will double exports within weeks from its northern Kirkuk oil fields and continue boosting output further south amid a global market glut that’s pushed prices to their lowest level in more than five and a half years. Crude shipments will rise to 300,000 barrels a day from the Kirkuk oil hub, where authorities are also upgrading pipelines between fields, Fouad Hussein, at Kirkuk provincial council’s oil and gas committee, said. “There is a need to install a new pipeline network” to increase exports from the area, Hussein said. Kirkuk, which currently exports about 150,000 barrels a day, will boost shipments to 250,000 barrels a day and then to 300,000 “in the coming few weeks,” he said. Iraq, holder of the world’s fifth-largest crude reserves, is rebuilding its energy industry after decades of wars and economic sanctions.
The country exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesman Asim Jihad said Jan. 2. The exports, pumped mostly from fields in southern Iraq, included 5.579 million barrels from Kirkuk in that month, he said. [..] State-owned Missan Oil plans to boost its production to 1 million barrels a day in 2017 from an average output of 257,000 barrels a day in 2014, according to Director-General Adnan Sajet. Output exceeded 93 million barrels in 2014, up 10 million barrels from the previous year, he said yesterday. Iraq’s government also awarded a contract to an unspecified international company to more than double the capacity of the southern Basra oil refinery to 300,000 barrels a day, according to an e-mailed statement from the office of Deputy Prime Minister Rowsch Nuri Shaways. The refinery can currently process about 140,000 barrels a day.
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“U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion ..” “Premier Oil also announced an estimated $300-million impairment charge for the second half of this year ..”
• Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)
The ongoing rout in oil markets is putting high-profile industry names on the back foot, with Shell announcing major changes to operations this week – and BP expected to follow suit. BP is expected to announce significant job cuts across the 20 oil fields in owns in the North Sea – just off the coast of the U.K. – on Thursday, according to media reports. It currently employs 4,000 workers in the area. Meanwhile, Anglo–Dutch multinational Royal Dutch Shell announced that it had decided to shelve the construction of a new petrochemicals complex in Qatar, was due to be a tie-up with the country’s state-owned oil firm.
In the exploration sector – the first to be hit by falling oil prices – U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion, and warned there had been “major steps taken to strengthen the business to adapt to current market conditions.” Rival exploration firm Premier Oil also announced an estimated $300-million impairment charge for the second half of this year on Wednesday, with delays and cost-cutting plans expected in the development of some of its new oil fields. Weak global demand and booming U.S. shale oil production are seen as two key reasons behind the price plunge, as well as OPEC’s reluctance to cut its output. Both WTI and Brent crude prices have crashed by around 60% since mid-June last year and oil stocks have been crushed, underperforming the wider benchmarks.
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“As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago ..”
• Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)
The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices. By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel. “For the oil and gas industry, it’s scary,” Osakwe said in an interview after he was laid off last month from a unit of Halliburton, which he joined in September 2013. “I was blind to the ups and downs associated with the industry.”
It’s hard to blame him. The oil industry has been on a tear for most of the past decade, with just a brief timeout for the financial crisis. As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago, according to data kept by Rigzone, an employment company servicing the energy industry. Stunned by the sudden plunge in the price of oil, energy companies have increasingly resorted to layoffs to cut costs since Christmas, shocking a new generation of workers, like Osakwe, unfamiliar with the industry’s historic boom and bust cycles. Workers who entered the holiday season confident they had secure employment in one of the country’s safest havens now find themselves in shrinking workplaces with dimming prospects. [..]
There’s no firm number yet on how many oil industry workers are losing their jobs, or how many more cuts might be coming. Halliburton said last month it was laying off 1,000 staff in the Eastern Hemisphere alone as it adapted to a shrinking business. Suncor, a Canadian oil company, said this week it will cut 1,000 jobs in 2015, a day after Shell said it would cut 300 in the region. Other companies have announced layoffs, but many are making the cuts without public fanfare. The effects are being felt beyond the oil companies as cutbacks trickle down to suppliers and other companies that thrived along with $100 oil. The biggest drilling states – Texas, North Dakota, Louisiana, Oklahoma, Colorado – are expected to feel the most pain. The Dallas Federal Reserve estimates 140,000 jobs directly and indirectly tied to energy will be lost in Texas in 2015 because of low oil prices.
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“North Sea oilfields could be shut down if the oil price fell by just a few more dollars ..”
• Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)
The potential impact of the oil price slump on Scotland was underlined as a leading energy expert warned on Wednesday that North Sea oilfields could be shut down if the oil price fell by just a few more dollars. The rising sense of crisis about the plummeting price – which has fallen 60% in the last six months – prompted the Scottish government to promise an emergency taskforce to try to preserve jobs in the offshore energy sector. Meanwhile, Mark Carney, the governor of the Bank of England warned that the Scottish economy was heading for a “negative shock”. The oil industry consultancy Wood Mackenzie said that at the current price for Brent blend, of $46 a barrel, some UK production was already failing to break even, and further falls could endanger output.
Robert Plummer, a research analyst with the firm, said that at $50 a barrel oil production was costing more than its value in 17 countries, including the US and UK. Plummer told Scottish Energy News: “Once the oil price reaches these levels producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply.” Concern about cutbacks was heightened Wednesday when Shell announced it was scrapping a $6.4bn (£4.2bn) energy project in the Middle East because it was no longer commercial, with oil prices falling to six-year lows. Plummer said that if oil prices fell to $40, a small but significant part of global supply would become “cash negative”, although some operators would choose to keep producing oil at a loss rather than stop production.
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So many projects will be shelved.
• Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)
Qatar Petroleum and Royal Dutch Shell called off plans to build a $6.5 billion petrochemical plant in the emirate, saying the project is no longer commercially feasible amid the upheaval in global energy markets. The companies formed a partnership for the al-Karaana project in 2011 and planned to operate it as a joint venture, with state-run QP owning 80% and Shell the remaining 20%. They decided not to proceed after evaluating quotations from bidders for engineering and construction work, the companies said yesterday in a joint statement. The expected capital cost of the petrochemical complex planned in Ras Laffan industrial city “has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” they said.
Al-Karaana is the second petrochemical project in Qatar to be canceled in recent months due to unfavorable economics. Industries Qatar, the state-controlled petrochemical and steel producer, halted plans to build a $6 billion plant in September. Qatar, an OPEC member and the world’s biggest exporter of liquefied natural gas, is seeking like other energy producers in the Persian Gulf to diversify its economy away from oil and gas exports and building factories to make petrochemicals, aluminum and steel. “The region is beginning to reduce its capital expenditure for petrochemical and hydrocarbon expansion, and that is expected given that oil prices have plunged,” John Sfakianakis, Middle East director at Ashmore Group Plc, said in a phone interview.
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“This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.”
• Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)
The European Court of Justice has declared legal supremacy over the sovereign state of Germany, and therefore of Britain, France, Denmark and Poland as well. The ECJ’s advocate-general has not only brushed aside the careful findings of the German constitutional court on a matter of highest importance, he has gone so far as to claim that Germany is obliged to submit to the final decision. “We cannot possibly accept this and they know it,” said one German jurist close to the case. The matter at hand is whether the European Central Bank broke the law with its back-stop plan for Italian and Spanish debt (OMT) in 2012. The teleological ECJ – always eager to further the cause of EU integration – did come up with the politically-correct answer as expected. The ECB is in the clear.
The opinion is a green light for quantitative easing next week, legally never in doubt. The European Court did defer to the Verfassungsgericht in Karlsruhe on a few points. The ECB must not get mixed up with the EU bail-out fund (ESM) or take part in Troika rescue operations. But these details are not the deeper import of the case. The opinion is a vaulting assertion of EU primacy. If the Karlsruhe accepts this, the implication is that Germany will no longer be a fully self-governing sovereign state. The advocate-general knows he is risking a showdown but views this fight as unavoidable. “It seems to me an all but impossible task to preserve this Union, as we know it today, if it is to be made subject to an absolute reservation, ill-defined and virtually at the discretion of each of the Member States,” he said.
In this he is right. “This Union” – meaning the Union to which EU integrationists aspire – is currently blocked by the German court, the last safeguard of our nation states against encroachment. This is why the battle is historic.”His opinion is a direct affront to the German court. It asserts that the EU court has the final say in defining and creating the EU’s own powers, without any national check,” said Gunnar Beck, a German legal theorist at the University of London. “This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.” Germany’s judges have never accepted the ECJ’s outlandish claims to primacy.
Their ruling on the Maastricht Treaty in 1993 warned in thunderous terms that the court reserves the right to strike down any EU law that breaches the German Grundgesetz or Basic Law. They went further in their verdict on the Lisbon Treaty in July 2009, shooting down imperial conceits. The EU is merely a treaty club. The historic states are the “masters of the Treaties” and not the other way round. They set limits to EU integration. Whole areas of policy “must forever remain German”. If the drift of EU affairs erodes German democracy – including the Bundestag’s fiscal sovereignty – the country must “refuse further participation in the European Union”.
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“In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”
• ECB Stimulus Already Priced Into Market (CNBC)
The markets have already priced in the quantitative easing that the European Central Bank is expected to do next week and he doesn’t think it will be very powerful, David Malpass, president of Encima Global, told CNBC Wednesday. Therefore, he believes the markets are entering a phase of global rebalancing. “People will get tired of just being in the U.S. and will take a look at some of the emerging markets, oil, the euro and so on,” Malpass said in an interview with “Closing Bell.” David Hale, chairman of David Hale Global Economics, agrees the market has been discounting the anticipated QE for several weeks.
“Bond yields in Europe are at record low levels. Leaving aside the last few days, stock markets have been resilient. So I do think the expectation of this happening is now broadly in the market because of both comments by [ECB President Mario] Draghi and other members of the monetary policy council.” The European Central Bank meets next Thursday, and Draghi has said the bank is ready to start full-blown quantitative easing. Hale expects a “decent” amount of QE but said he doesn’t think it will work well enough to be stimulative. “The bond yields are already low, and remember the ECB is going to finance all those bond purchases with bank financing,” he said. “In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”
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Sort of like Switzerland. Only, the koruna will plummet, not rise.
• Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)
Currency traders are taking aim at the Czech Republic amid speculation that policy makers will have little choice but to weaken the koruna as it seeks to avert deflation. A measure of volatility jumped this month by the most among 31 major peers as the koruna fell to a six-year low of 28.5 per euro. The exchange rate is so far away from the 27-per-euro cap imposed by the central bank more than a year ago when inflation was the bigger threat that Goldman Sachs says it’s now “odds on” that the ceiling gets adjusted to 30 per euro. “I expect the koruna to tumble much further,” Bernd Berg, director of emerging-market strategy at SocGen, said. “The economy is on the brink of deflation. This has increased the likelihood of a dovish monetary-policy reaction.”
While neighboring Poland and Hungary have room to cut interest rates to curb deflation, the Czech Republic’s options are limited because its borrowing costs are already close to zero at 0.05%. Central-bank Governor Miroslav Singer entered the debate yesterday, seeking to play down the prospect of a lower currency limit by saying it may only become necessary if there were a “long-term increase in deflation pressures.” Singer’s comments in a blog on the Czech National Bank’s website helped the koruna rally late in the trading day, though it’s still 1.5% lower against the euro this year, the biggest loss among 31 major currencies after Russia’s ruble.
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“.. their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.”
• Germany Gets Walloped By Its Own Austerity (Bloomberg)
The euro region is suffering from austerity fatigue, exemplified by polls showing Greece on the verge of dumping its government for one with less enthusiasm for spending cuts. Germany has been the principal architect of fiscal rectitude and the main opponent to any relaxation of deficit rules. What’s happening in the heartland of German industry, however, suggests it’s not just Germany’s neighbors who are threatened by its economic intransigence. The backbone of the German economy is formed by about 3.7 million small- and medium-sized enterprises, defined as those with annual sales no greater than 50 million euros ($60 million) and known as the Mittelstand. It turns out their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.
That’s the unavoidable conclusion of a report published by the German Savings Banks Association yesterday. The association polled more than 330 of the country’s 416 savings banks in October, and examined more than a quarter of a million SME balance sheets. For German companies that did invest last year, only 19.7% cited “expansion” as their motivation, down from 27.5% in 2013 and the lowest outcome since 2010. More than half of the companies instead were replacing old machinery. Investment itself remains stagnant, stuck at about 340 billion euros or 11.7% of gross domestic product. For small and medium-sized enterprises, this weakness of investment was not due to a lack of external financing or insufficient equity. The continuing economic difficulties experienced by many partner countries in the Monetary Union as well as geopolitical crises have reinforced the wait-and-see attitude of many enterprises.
Only 16% of the business managers at the banks said their customers’ businesses got better in 2014, less than half the number who said a year earlier that they were seeing improvements. Some 18% said things had gotten worse, versus just 4.6% in 2013. Companies in the west of Germany, which are typically the most dependent on exports, were worse hit than those in the eastern federal states, the association said. In response, companies are retrenching. Some 46% of the bank respondents said they provided less investment financing for their customers last year, with just 16% upping their credit allocations. By contrast, more than 64% of companies expanded their equity bases, adding to 59% in both 2012 and 2013.
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What goes for Germany goes for Japan: “Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan ..”
• Weak Capex Spending Spells Trouble For Japan (CNBC)
The majority of Japanese companies appear unwilling to spend, latest government data showed on Wednesday, adding to doubts over the economy’s ability to recover amid slowing growth across the world, particularly in China. Core machinery orders, a leading indicator of capex spending, grew 1.3% on-month in November, a reversal from October’s 6.4% decline, but well below expectations for a 5.0% rise in a Reuters poll. Year-on-year, machinery orders dropped 14.6%, below the Reuters poll estimate of a 5.8% decline. At the same time, the Cabinet Office cut its assessment of machinery orders, citing signs that the economic recovery is stalling, Reuters reported.
“Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan,” said Taro Saito, director of economic research at NLI Research Institute. “The trend to hoard cash rather than invest is not good for the wider Japanese economy.” Still, he reckons capital spending is on a modest recovery trend now that the second consumption tax hike initially scheduled for October 2015 was shelved until April 2017. The first hike from 5% to 8% in April 2014 was too brutal, he said. Japan’s economy contracted in the two quarters following April’s tax hike, tipping the country into a technical recession.
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We are just leaving the madness. “The fuel for the fire over the last several years has been stock repurchases, and that has been fueled for the most part by the zero interest rate environment.”
• Market Madness Started With End Of Fed’s QE (CNBC)
For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington. Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring. Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding. So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring. “Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group.
“It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended.” Indeed, the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October. That month marked a momentary collapse in bond yields on Oct. 15, a day that also saw the Dow Jones industrial average plunge some 460 points at one juncture before slicing its losses. The day, and the general tenor of markets as the Fed ended QE amid a global Ebola and economic growth scare, helped make October the most volatile month of 2014.
In second place for monthly volatility was December, according to a Tabb Group analysis, as investors pondered the meaning of “patient” in a Fed statement on when it planned to raise rates and waited for a Santa Claus rally that failed to materialize. January has proven to be an even bumpier month as investors evaluate an oil plunge that sent a gallon of gasoline below $2 in some locations but has raised question about longer-term effects on corporate bottom lines and business investment. Then came Wednesday’s disappointing retail sales numbers, all of which raised concerns about whether Wall Street is capable of negotiating its way through rough times with only zero-bound short-term interest rates as a backstop. “The assumption that low energy prices were unambiguously good was called into question with December retail sales,” said Art Hogan at Wunderlich Securities. “I think it’s all connected, but I’d be hard-pressed to tie it just to monetary policy.”
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Threat to the EU.
• Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)
Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey, a surprise move that the European Union’s energy chief said would hurt its reputation as a supplier. The decision makes no economic sense, Maros Sefcovic, the European Commission’s vice president for energy union, told reporters today after talks with Russian government officials and the head of gas exporter, Gazprom, in Moscow. Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions. About 40% of Russia’s gas exports to Europe and Turkey travel through Ukraine’s Soviet-era network.
Russia, which supplies about 30% of Europe’s gas, dropped a planned link through Bulgaria bypassing Ukraine amid EU opposition last year. Russia’s relations with the EU have reached a post-Cold War low over President Vladimir Putin’s support for separatists in Ukraine. Sefcovic said he was “very surprised” by Miller’s comment, adding that relying on a Turkish route, without Ukraine, won’t fit with the EU’s gas system. Gazprom plans to deliver the fuel to Turkey’s border with Greece and “it’s up to the EU to decide what to do” with it further, according to Sefcovic. “We don’t work like this,” he said. “The trading system and trading habits – how we do it today – are different.”
Sefcovic said he arrived in the Russian capital to discuss supplies to south-eastern EU countries after Putin scrapped the proposed $45 billion South Stream pipeline. The region, even if Turkey is included, doesn’t need the volumes Gazprom is planning for a new link, he said. Ukraine makes sense as a transit country given its location in Europe and the “very clear specified places of deliveries” in Gazprom’s current long-term contracts with EU customers, Sefcovic said. “I believe we can find a better solution,” Sefcovic said.
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They’ll be fine.
• Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)
Russia will unseal its $88 billion Reserve Fund and use it to acquire rubles, the government’s latest effort to stem the country’s worst currency crisis in almost 17 years and limit its effects on the ailing economy. “Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy.” Russian officials are running out of options to stem the ruble’s plunge as oil prices below $50 a barrel and sanctions imposed over the conflict in Ukraine push the country to the brink of recession. Policy makers have already raised interest rates by the most since 1998 and introduced a 1 trillion-ruble ($15 billion) bank recapitalization plan. The risk for policy makers is that using the reserves to fight the ruble’s slide will worsen its standing with investors.
Economy Minister Alexei Ulyukayev said today there’s a “fairly high” risk that the country’s credit rating will be cut below investment grade for the the first time in a decade. “This should be viewed just as the continuation of the desire to present a united front in dealing with events in the foreign-currency market,” Ivan Tchakarov, chief economist at Citigroup in Moscow, said. Russia may convert the equivalent of as much as 500 billion rubles from one of the government’s two sovereign wealth funds to support the national currency, Siluanov said, calling the ruble “undervalued.” The Finance Ministry last month started selling foreign currency remaining on the Treasury’s accounts. The entire 500 billion rubles or part of the amount will be converted in January-February through the central bank, according to Deputy Finance Minister Alexey Moiseev. The Bank of Russia will determine the timing and method of the operation.
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“Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles”
• China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)
China’s shadow banking industry staged a comeback in December as equity investors and local governments contributed to a surge in credit, underscoring challenges for a central bank trying to revive growth without exacerbating risks. Aggregate financing was 1.69 trillion yuan ($273 billion), the People’s Bank of China said in Beijing today, topping the 1.2 trillion yuan median estimate in a Bloomberg survey. While new yuan loans missed economists’ forecasts, shadow lending rose to the highest in monthly records that began in 2012. With economic growth headed below 7%, the central bank cut interest rates for the first time in two years in November. While manufacturing and factory-gate deflation have worsened, the main stock market index surged about 30% since the rate reduction was announced on Nov. 21.
“This highlights the dilemma for the PBOC: the real economy is still weak, and loan demand is weak, but speculative activity is rampant in the stock market, and local governments need funding,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “I believe the PBOC will further postpone rate and RRR cuts, and instead will resort to targeted measures of injecting liquidity.” New yuan loans, which measure new lending minus loans repaid, were 697.3 billion yuan, missing the median estimate of 880 billion yuan. The M2 gauge of money supply rose 12.2% from a year earlier, compared with the median estimate of 12.5%. December’s entrusted loans increased to about 458 billion yuan, according to PBOC data compiled by Bloomberg — the most on record for the company-to-company credits that are brokered by banks.
Trust loans increased to 210 billion yuan, the most since March 2013. The contrast between new yuan loans and aggregate financing “shows that financial liquidity is not sufficient to support economic activity,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong. “IPOs have been active, and shadow banking is reviving.” The outstanding balance of margin-trading loans on the Shanghai and Shenzhen stock exchanges rose to a then-record 1.02 trillion yuan on Dec. 30, according to data compiled by Bloomberg. That was up from 757 billion yuan on Nov. 21. Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles.
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“.. Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%.”
• Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)
After months of preaching monetary discipline to fend off inflation, Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%. Close observers shouldn’t have been surprised. India’s central banker, who famously predicted the 2008 global crisis, warned in an op-ed just yesterday that several of the world’s major economies were “flirting with deflation,” with dire implications for emerging markets like his. The threat of global “secular stagnation” – combined with lower prices in India – no doubt prompted him to act. The question is why Rajan’s peers across the region don’t appear to appreciate the danger. Just today, South Korea’s central bank courted its own deflationary funk by holding benchmark interest rates steady at 2%, even as consumer prices advance at the slowest pace since 1999.
While energy costs in Indonesia are rising due to the lifting of fuel subsidies, economist Daniel Wilson of ANZ warns that prices overall are set to slow or fall: “Disinflation synchronisation is in sight and it will be severe,” he says. From Beijing to Bangkok, Asian central banks seem too blinded by longstanding inflation fears to recognize the trends inexorably pushing prices downward. In a world of plunging commodity prices and weakening global demand, Asian economies that have traditionally depended on exports are going to have to do all they can to gin up growth. Since most of the tools available to governments – increasing spending, lowering trade barriers, loosening labor markets – can’t have an immediate impact, the burden falls on central banks to act. That’s the only sure way to ease strains in credit markets, relieve hard-pressed borrowers and boost investments.
So why aren’t they? An overly doctrinaire fear of inflation explains much of the reluctance. Take the Philippines, where consumer prices are rising just 2.7% and the economy is growing 5.3%. On Dec. 12, central bank Governor Amando Tetangco said cheaper oil gave him “some scope” to leave interest rates unchanged. Since then, Brent crude has fallen to about $48 a barrel, the World Bank has downgraded its 2015 global growth forecast to 3% from 3.4% and Europe has neared a new crisis. Last week, the Philippines government sold $2 billion of 25-year debt at a record-low yield of 3.95%. Markets aren’t always right, but it sure seems time for Tetangco to move the benchmark rate below 4%.
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“.. whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable.” Well, better be careful then?!
• Specter Of Fascist Past Haunts European Nationalism (Reuters)
When up to a dozen world leaders and roughly 1.5 million people gathered in Paris on Sunday to mourn the murder of 10 editors and cartoonists of the satirical newspaper Charlie Hebdo and seven other people by three French-born Islamic radicals, they wanted to demonstrate that Europe will always embrace liberal and tolerant values. But the more telling event may turn out to be a counter-rally that took place at a 17th-century town hall in Beaucaire, France, that was led by Marine Le Pen, the leader of the far-right National Front. In Beaucaire, the crowd ended Le Pen’s rally by singing the French national anthem and chanting, “This is our home.” Le Pen is at the forefront of a European-wide nationalist resurgence – one that wants to evict from their homelands people they view as Muslim subversives.
She and other far-right nationalists are seizing on some legitimate worries about Islamic militancy – 10,000 soldiers are now deployed in France as a safety measure – in order to label all Muslims as hostile to traditional European cultural and religious values. Le Pen herself has likened their presence to the Nazi occupation of France. Le Pen herself espouses an authoritarian program that calls for a moratorium on immigration, a restoration of the death penalty and a “French first” policy on welfare benefits and employment. Long after World War Two, fascism is a specter that still haunts the continent. But whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable. The borderline between the kind of populism they espouse and the outright fascism of the 1920s and 1930s, when Adolf Hitler and Benito Mussolini espoused doctrines of racial superiority, is a slippery one.
Scholars continue to debate whether Mussolini was even fascist – or simply an opportunistic nationalist. The real aim of today’s would-be authoritarians – politicians who appeal to the public’s desire for an iron hand – is to present themselves as legitimate leaders who are saying what the public really thinks but is afraid to say. And these far-right leaders are indeed increasingly popular. The card they are playing is populism presented as an aggrieved nationalism. They depict Europeans as victims of rapacious Muslim immigrants. Le Pen, Britain’s Nigel Farage of the U.K. Independence Party and others aim to come across as reasonable and socially acceptable, while sounding dog whistles to their followers about immigrant social parasites who are either stealing jobs from “real” Europeans or living off welfare.
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“This new acceleration is about 25% higher than previous estimates ..”
• Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)
The rate at which the global oceans have risen in the past two decades is more significant than previously recognised, say US-based scientists. Their reassessment of tide gauge data from 1900-1990 found that the world’s seas went up more slowly than earlier estimates – by about 1.2mm per year. But this makes the 3mm per year tracked by satellites since 1990 a much bigger trend change as a consequence. It could mean some projections for future rises having to be revisited. “Our estimates from 1993 to 2010 agree with [the prior] estimates from modern tide gauges and satellite altimetry, within the bounds of uncertainty. But that means that the acceleration into the last two decades is far worse than previously thought,” said Dr Carling Hay from Harvard University in Cambridge, Massachusetts.
“This new acceleration is about 25% higher than previous estimates,” she told BBC News. Dr Hay and colleagues report their re-analysis in this week’s edition of the journal Nature. Tide gauges have been in operation in some places for hundreds of years, but pulling their data into a coherent narrative of worldwide sea-level change is fiendishly difficult. Historically, their deployment has been sparse, predominantly at mid-latitudes in the Northern Hemisphere, and only at coastal sites. In other words, the instrument record is extremely patchy. What is more, the data needs careful handling because it hides all kinds of “contamination”. Scientists must account for effects that mask the true signal – such as tectonic movements that might force the local land upwards – and those that exaggerate it – such as groundwater extraction, which will make the land dip.
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