A rate hike in September is unlikely but why are markets so jittery?

Last Monday, Stanley Fisher who is the Vice Chair of the Federal Open Market Committee (FOMC) suggested that more time is needed before a rate hike can take place. If this is coming from a senior policy maker, it pretty much sums up that a rate hike will not be a done deal next month.

In addition, another member of the FOMC, Narayana Kocherlakota mentioned in his opinion piece in the Wall Street Journal yesterday that "raising US rates now would be a mistake." He argues mostly on the basis that the inflation rate is too low. For the past 3 years, the inflation target has been missed continuously. With inflation so low, higher interest rates will push real interest rates higher. Real interest rates are interest rates net of inflation. This in turn would discourage people from borrowing money and increasing the dollar`s value even further.

The Federal Reserve is mandated by Congress to promote price stability and maximum employment but only the latter has been achieved so far. Therefore, the FOMC should loosen its policy instead. Narayana Kocherlakota brilliantly ends his article by stating that "when the public comes to doube a central bank`s commitment to its goals, the economy could land in a permanent low interest rate trap. Consequently, central banks would be less effective in fighting recessions. (Think Japan)

Now, what if rates do increase, regardless of whether it is next month or by end of 2015? An economic disaster is set to happen based where emerging markets stand to lose the most.

Two main players are to be blamed, the strength of the greenback and the simultaneous devaluation of the yuan. Since the 07-8 crisis, China has been enjoying an unsustainable growth boosted by a massive amount of debt. No other emerging market has taken on debt as the same pace as China according to Morgan Stanley`s Ruchir Sharma.

So, why are other emerging markets suffering? Emerging markets are facing a hard time as they have jumped onto the bandwagon on China`s boom. These investments are mostly funded by cheap creditfrom the US. Now, as the US economy is recovering and China`s economy is slowing down sharply, the currencies are going in opposite direction. Imagine taking a loan in USD a few years back due to the low interest rates and then investing it in China. Well, everything was fine until now.
Now, picture having to payback the loan in yuan terms when the dollar is rising, yuan dropping and the risk of an interest rate hike in the very near future that interest rates would be hiked and increasing the gap between these two currencies. A disaster, no?

Now, let`s scale this up a bit to see how severe the situation is. Corporate borrowers in the developing world have borrowed $1.3 trillion in dollar denominated bonds since 2010. The biggest borrowers are China, Brazil, Russia, Mexico and South Korea. A change in interest rates (and exchange rate) no matter how small it may seem would be a catastrophe.

The FOMC must consider all stakeholders in its rate hike decision. A moral hazard is about to take place and the next recession is set to start in China.

RBA monetary policy minutes

The RBA (Reserve Bank of Australia)`s monetary policy minutes can be found here. It is somewhat a summary of the monthly monetary policy.

UK CPI accelerates by a mere 0.1%

The consumer price index (CPI), a leading indicator of inflation grew by 0.1% in July. The other key points are:

• A smaller fall in clothing prices on the month compared with a year ago was the main contributor to the rise in inflation.
• Falling prices for food and non-alcoholic beverages partially offset the rise.
• CPIH (not a National Statistic) grew by 0.4% in the year to July 2015, up from 0.3% in June 2015.

The full report can be viewed here. 

Japan`s prelim GDP contracts

Japan`s prelim GDP contracted by 0.4%. Bloomberg has a write up on this.

TPPA will push pharmaceuticals prices up

As the Trans-Pacific Partnership (TPPA) Agreement between the United States and Malaysia is about to be finalised, there is this one disadvantage which I wanted to point out. The cost of medicine is expected to go up due to patent laws. A dozen years is required before generic copies are allowed to enter the market.

On share buybacks

A Share buybacks is a common action taken by corporations mostly to improve their ratios. In addition, a buyback is expected to push up the share price. This in turn, help executives meet their targets.

In last week`s The Economist, it was mentioned that the supply of equities may soon stop shrinking. A slowdown is expected in the second half of the year as profits have been out of steam and firms have less cash to deploy. 

The Harvard Business Review has a good article regarding this issue. 

Prelim UoM consumer sentiment down to 92.9

The preliminary University of Michigan (UoM) consumer sentiment dropped to 92.9 in August. This is the second month in a row that the index fell. Bloomberg has a write up on this.

US PPI accelerated by 0.2%

Producer prices increased by 0.2% as indicated in the producer price index (PPI) report. The full report can be found here.

French and German prelim GDP red

The French prelim GDP for the second quarter had no growth.

The full report can be found here.

In Germany, the prelim GDP grew by 0.4%. Reuters has a write up on the German economy.

New Zealand retail trade survey for Q2

The New Zealand retail trade survey for the second quarter indicated that retail sales grew by 0.1%. In comparison, the first quarter had a growth of 2.3%. The full report can be found here.

China`s fundamentals are not right

Here are a couple of issues I noticed while browsing China`s fundamentals on Bloomberg Terminal:

1) GDP growth has been static since late 2013.
2) Construction sector is down since late 2013.
3) A sharp decline in external trade since mid-2008 and it has never reached pre-crisis levels.
4) Economic activity is down since late 2008.

Total exports have dropped by 8.3% this year while imports have declined by 8.1%. These data were obtained from Bloomberg Intelligence.

US unemployment claims: 274 thousand

The weekly unemployment claims increased by 5 thousand this week to 274 thousand.

US retail sales rose in July

Core retail sales remained at a 0.4% growth while retail sales grew at a pace of 0.6% compared to a zero growth in June. Bloomberg said the rise in retail sales shows a rising demand for everything.

UK labour market

The average earnings index fell to 2.4% compared to 2.8% in the previous period. While the unemployment rate was steady at 5.3%, employment declined by 63 000 according to Bloomberg. 

Other key points include: 

• There were 22.76 million people working full-time, 352,000 more than for a year earlier. There were 8.27 million people working part-time, little changed compared with a year earlier.
• The employment rate (the proportion of people aged from 16 to 64 who were in work) was 73.4%, little changed compared with January to March 2015 but higher than for a year earlier (72.8%).
• There were 1.85 million unemployed people (people not in work but seeking and available to work), 25,000 more than for January to March 2015 but 221,000 fewer than for a year earlier.
• There were 1.01 million unemployed men, 130,000 fewer than for a year earlier. There were 838,000 unemployed women, 92,000 fewer than for a year earlier.
• The unemployment rate was 5.6%, little changed compared with January to March 2015 but lower than for a year earlier (6.3%). The unemployment rate is the proportion of the labour force (those in work plus those unemployed) who were unemployed.
• There were 8.99 million people aged from 16 to 64 who were economically inactive (not working and not seeking or available to work), little changed compared with January to March 2015 and with a year earlier.
• The inactivity rate (the proportion of people aged from 16 to 64 who were economically inactive) was 22.1%, little changed compared with January to March 2015 and with a year earlier.
• Comparing April to June 2015 with a year earlier, pay for employees in Great Britain increased by 2.4% including bonuses and by 2.8% excluding bonuses.

The full report can be found here. 

China`s industrial output falls to 6%

China`s industrial output growth fell to 6.0% in July, down from 6.8% in June. Reuters has a write up on China`s factory output.

US prelim unit labour costs up by a mere 0.5%

The second quarter prelim unit labour costs increased by a mere 0.5% compared to the first quarter`s 6.7% growth. Bloomberg has a write up on this while the official report can be found here.

German ZEW economic sentiment declined again

The German ZEW economic sentiment decreased by 4.9 points to 25.0. The press release can be found here.

NAB business confidence drops

Business confidence dropped according to the National Australian Bank, with key jitters resulting from China`s economic developments. The NAB business confidence index dropped to 4 after recording a level of 8 in the previous period. ABC has a write up on this.

FOMC Lockhart`s speech

The Federal Open Market Committee (FOMC) member, Dennis Lockhart who is also the President of the Federal Reserve Bank of Atlanta spoke to the Atlanta Press Club on economic progress. His speech can be found here.

China`s CPI: 1.6%

China`s consumer price index (CPI) was at 1.6% in July, thanks to pricier pork as reported by Bloomberg. This means that inflation is picking up slightly after the threat of deflation for months.

US employment situation

The non-farm payroll report indicated that 215 thousand jobs were created in July, compared to 231 thousand in June. The unemployment rate remained steady at 5.3%. Average hourly earnings saw a growth of 0.2%. This was static in June.

Bloomberg has a write up on the employment change while the official report can be found here.

BoJ monetary policy statement

The Bank of Japan`s (BoJ) monetary policy statement can be found here.

RBA monetary policy statement

The Reserve Bank of Australia`s (RBA) monetary policy statement can be found here. I`ve not had the time to read it yet as the statement is more than 60 pages.

Weekly unemployment claims: 270 thousand

The unemployment claims stood at 270 thousand this week compared to 267 thousand claims in the previous week. The report can be found here.

BoE inflation webcast

The press report for the Bank of England (BoE) inflation report can be found here.

UK manufacturing output fell in June

The UK manufacturing production grew by a mere 0.2% in June. The key points include:

• Total production output is estimated to have increased by 0.7% between Quarter 1 (Jan to Mar) 2015 and Quarter 2 (Apr to June) 2015. Manufacturing, the largest component of production, is estimated to have decreased by 0.3% between these periods.
• The largest contribution to the quarterly growth came from mining & quarrying, which increased by 6.3%, the highest since Quarter 4 (Oct to Dec) 1993.
• Total production output is estimated to have increased by 1.5% in June 2015 compared with June 2014. There were increases in 3 of its 4 main sectors, with the largest contribution coming from mining & quarrying, which increased by 6.3%.
• Manufacturing output increased by 0.5% in June 2015 compared with June 2014. The largest contribution to the increase came from the manufacture of transport equipment, which increased by 7.2%.
• Total production output is estimated to have decreased by 0.4% in June 2015 compared with May 2015. There were decreases in 2 of the 4 main sectors, with the largest contribution coming from mining & quarrying, which decreased by 3.8%.
• Manufacturing output increased by 0.2% in June 2015 compared with May 2015. The largest contribution to the increase came from the manufacture of basic metals & metal products, which increased by 4.9%.
• In the 3 months to June 2015, production and manufacturing were 9.2% and 4.8% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.
• The preliminary estimate of GDP, published on 28 July 2015, contained an estimated increase of 1.0% for production in Quarter 2 (Apr to June) 2015. This release of data estimates that production increased by 0.7% between Quarter 1 (Jan to Mar) 2015 and Quarter 2 (Apr to June) 2015. The impact on the previously published GDP estimate for Quarter 2 (Apr to June) 2015 is less than 0.1 percentage points.

The full report can be found here. Reuters also has a write up on the industrial output. 

Update on Citadel

The Wall Street Journal  has an excellent write up on Citadel and the hedge fund`s boss, Ken Griffin.The fund survived the 2008 crisis after disastrous losses and is now expanding aggressively. Ken Griffin said it took him some 3 years to make back the losses.

Ben Bernanke, the former Federal Reserve Chair is a part-time consultant in the hedge fund.

Other interesting bits about his hedge fund include:
- The leverage ratio is 7:1. For every $1 invested by customers, Citadel borrows $7.
- An ex-Amazon employee with a machine learning background was hired as the mathematical techniques have applicability in financial markets.

The interview with Ken Griffin can be found here.

Unemployment rate in Australia increases to 6.3%

The unemployment rate in Australia increased to 6.3% in July compared to a rate of 6.1% in June. The employment change however indicated a positive growth, with 38.5 thousand new jobs were created. The labour force report can be found here.

The Australian dollar is expected to depreciate against major currencies after today`s hike in unemployment.

UK services industry signals strong growth

The services PMI (purchasing managers index) was at a level of 57.4 in July, a tiny drop from June`s 58.5. Any level above 50.0 indicates an expansion in the industry.

However, employment rose at the slowest rate since 2013. The full report can be found here.

New Zealand unemployment rate rises to 5.9%

The unemployment rate rose to 5.9% in the June quarter compared to 5.8% recorded in the previous period. In addition, 7000 more people were employed in the second quarter, bringing the employment change to 0.3%.

The labour report can be found here.

GDT index down

The GDT index dropped to -9.3%.

UK construction output slows down in July

The UK construction PMI dropped to 57.1 in July after hitting a level of 58.1 in June. Residential building expanded at the slowest rate since mid-2013. The full report can be found here.

In addition, Reuters has a write up on the construction industry as well.

WSJ: Foreigners frosty on Australian debt

The Wall Street Journal has an article today regarding Australian bonds. (note: this article is for paid subscribers)

Basically the article highlighted the woes Australia is currently facing which include:
- plunge in commodity prices.
- increase in unemployment.
- risk of a property bubble.

The Australian dollar has declined sharply against the US dollar while the yield advantage over US Treasurys is getting narrower. These in turn, are discouraging foreign purchases of Australian bonds.

RBA rate statement

The cash rate remained unchanged at 2.00% while the Reserve Bank of Australia`s (RBA) rate statement can be viewed here.

Australia`s trade balance deficit widens

The trade balance deficit widen to 2.93 billion in June compared to 2.68 billion in the previous period. This is however better than what economists were predicting. The full report can be found here.

Australia`s retail trade up by a bit

Retail sales accelerated by 0.7% in July compared to a 0.4% growth in June. The full report can be found here.

UK manufacturing PMI up slightly

The manufacturing PMI (purchasing managers index) increased slightly to 51.9 in July after recording a level of 51.4 in June. Reuters has a write up on the manufacturing industry.

The full PMI report can be found here.

China`s manufacturing PMI at a two year low

China`s manufacturing PMI (purchasing managers index) dropped to 47.8 in July, indicating a contraction. What is worrying is that both domestic and foreign demand have dropped. The full report can be found here.