Friday, August 22, 2014

Argentine peso hits record lows on increased uncertainty

Argentina is showing signs of stress, as the official exchange rate has the US dollar now quoted 8.4 pesos - a new record.

Chart shows USD appreciating against ARS (source: Investing.com)

The "parallel" exchange rate also hit a record, with the dollar quoted at 14 pesos - a 67% premium to the official rate. Note that before the first devaluation in 2002 (see this NY Times story) it was one peso to the dollar.


Source: Dolar Blue

As discussed earlier (see post), this peso decline should not be a surprise. The latest development in the default saga however is Argentina's recent attempt to pay the "non-holdout" bondholders by allowing them to convert to local bonds.
NY Times: - The government moved on Wednesday to push legislation through its Congress that would give foreign investors in the country’s debt the ability to swap their defaulted bonds for new ones subject to local law, thus skirting a United States court order that has blocked its ability to make bond payments.
But it seems quite unlikely that these investors will want to convert, leaving this matter unresolved.
NY Times: - But the draft of the legislation, which was first announced on national television late Tuesday by Cristina Fernández de Kirchner, Argentina’s president, has raised more questions than answers among investors who are looking for a solution to the country’s debt predicament.
The uncertainty, combined with deteriorating economic fundamentals is sending depositors and investors out of the country, pressuring the peso. Foreign reserves are likely to dwindle materially by the end of the year as a result, further exacerbating the crisis.
_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

Tuesday, August 19, 2014

Deutsche Bank: Ignoring food price pressures could be a mistake

Economists and central bankers tend to be less focused on what consumers pay at the grocery store because food and energy prices have historically been more volatile - remember, it's just "noise". However what they can't ignore is how shoppers view inflation - i.e. inflation expectations. And food prices have a significant impact on households' views on future inflation.
Deutsche Bank: - ... food prices factor significantly into households’ perceptions of overall price pressures. This is illustrated in the following figure, which shows year-ahead inflation expectations from the University of Michigan Survey of Consumer Sentiment versus CPI food. In fact, it is worth noting that CPI food demonstrates a higher degree of correlation with one-year price expectations than either the headline or core metrics — and it similarly surpasses energy, core goods, core services and shelter. ...  while forecasters are focusing on service-sector inflation in general and shelter inflation more specifically, they should be careful to not ignore mounting food price pressures, because this category could provide important insight toward the evolution of inflation expectations. If food price inflation accelerates, as we project, the stability of inflation expectations could degrade - and this would be a vexing development for monetary policymakers.
Source: Deutsche Bank
_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

A look behind the headline housing starts report for the United States

As discussed in yesterday's post on residential construction, today's report on US housing starts indeed showed significant improvements.

Investing.com

However, this is only part of the story. The number of housing starts for single-family units remains to a large extent range-bound (see chart). A great deal of the new housing growth instead is coming from multi-family construction (see chart). And that's driven by the rapidly rising demand for rental housing in the US, as shortages become more pronounced (see post). Rental vacancies are now at the lowest level in 17 years and falling.



This demand is also visible in the latest report on inflation, which came out today as well. Rent expenses are now growing considerably faster than the CPI as well as US wages - a dangerous trend.

Rent inflation vs. Core CPI

The trend of rental units dominating housing starts growth is likely to continue as homeownership rates decline. Adequate supply of new multifamily housing will be critical in years to come.


_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

Monday, August 18, 2014

Signs of improvement in residential construction

Despite tepid wage growth in the US and Dodd-Frank-driven headwinds for mortgage lending (see post), two signs point to moderate improvements in residential construction.

1. The homebuilder optimism index recovered more than forecast.



2. Lumber futures have risen materially from their lows in June.

Sep lumber futures contract (barchart.com)

At this point it is difficult to say whether this construction improvement relates to new home purchases or new rental units. Given the looming rental market shortage in the US (see post), we are certainly going to see more apartments built in the near-term.

And while nobody expects a major boom in construction employment across the country, there is definitely room for improvement.

US construction jobs

_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

Sunday, August 17, 2014

10-year JGB yields near 0.5%

The 10-yr government bond yield in Japan is now around 0.5%, following an almost linear decline that started in 2006. The only way to rationalize buying 10-yr JGBs at 0.5% is believing that Japan will have a deflationary environment over the next decade and/or the central bank will absorb (or even monetize) the bulk of new issue bonds.



Moreover, these record low yields will do some serious damage to the Government Pension Investment Fund, which invests two thirds of its assets into local bonds. A significant portion of the population will tap the pension fund in the next 10 years. There will also be pain for Japan’s insurance industry that now faces a nasty asset/liability mismatch.

_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

Further signs of China's slowing property markets

China's official housing index now shows home price appreciation slowing faster than some had anticipated.

Source: Investing.com

Other indicators are also pointing to weakness in China's housing markets. For example the number of cities with falling prices has spiked sharply.

Source: Scotiabank

Furthermore, the steel rebar futures in Shanghai - an important real-time indicator of construction demand - remain under pressure.

Jan steel rebar futures in Shanghai (barchart.com)

Related to the trends in residential housing, China's commercial floor space and the number of commercial buildings sold has declined materially recently (based on official reports).

Source: National Bureau of Statistics

There is no question that Beijing has the wherewithal and the will to support the housing market should things unravel faster than the government likes. Nevertheless, given how pervasive property markets are in the nation's overall economy, concerns among global investors are rising with respect to China's housing slowdown.
Scotiabank: - On the theory that where there’s smoke there's fire (and it’s not just because I’m BBQing), weak company financing and concerns surrounding potential defaults in the shadow banking sector coupled with — and likely driven by — further evidence of falling property prices will only amplify the concerns.


_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

Rate hike expectations in the UK shift further into 2015

The UK's latest inflation report has shifted the expectations of the first rate hike by the Bank of England.
The Guardian: - August inflation report laid bare the dilemma over the timing of the first rise faced by the Bank's policymakers, who are struggling to reconcile rapidly falling unemployment and record employment with very weak wage growth [see chart].

On the one hand, members of the Bank's rate-setting monetary policy committee (MPC) revised down their estimate of spare capacity in the economy to 1% of GDP from a May forecast of 1-1.5%, as employment growth rockets.
The Overnight Index Swap (OIS) curve shift shows the impact of the inflation report on the timing of the first 25bp hike.



When combined with the current geopolitical uncertainty, the UK inflation report should keep the BOE on hold well into 2015. The fear of rate normalization has been pervasive across major central banks and dovish attitudes are likely to prevail at Jackson Hole (see quote). Once again, the longer the central banks delay the start of this process, the more difficult and disruptive the exit will ultimately be.

_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:

The Beveridge Curve hysteresis and the long-term unemployed

The US Beveridge Curve has undergone a full cycle, with the job openings rate now matching the highest level over the past decade. Yet the return path has been consistently shifted from the trajectory the curve took going into the recession. We now have far more unemployed and underemployed workers for the same level of job openings.



According to CIBC, if this Beveridge Curve gap were to close (the pre-recession and the post-recession paths converged), the unemployment rate would drop to 5.7%. It means that the US already has the jobs to bring the unemployment rate close to the FOMC's long-term forecast but many of those openings remain unfilled.

Source: CIBC

The Beveridge Curve is exhibiting what's known as "hysteresis", most commonly observed in magnetic properties of materials. Here is a good explanation of the process:
Once magnetic field is applied to a piece of metal, the metal will "remember" the orientation of the magnetic particles. When the field is reversed, it takes more strength to undo the existing magnetism before the piece changes polarity. ... This process is typically associated with a curve like the following, where the X axis shows the force being applied (e.g. the magnetic field) and the Y axis shows the effect (e.g. the magnetic orientation of a piece of metal subjected to the field): 
In labor markets the concept of taking "more strength to undo the existing magnetism before the piece changes polarity" is equivalent to requiring more job openings than in the past to return the same number of people to work as was lost during the recession.

The Beveridge Curve downward path has created a tremendous number of long-term unemployed and the nation is having a tough time reabsorbing them back into the workforce - even as job openings improve sharply.



Part of the reason is that companies and even government agencies are uneasy about hiring someone who has been out of work for too long even when there is a significant need to add more employees. Furthermore, many of those in the chart above lack the skills that employers are now looking for (or their skills are viewed to have "gone stale"). In contrast, short-term unemployment levels are now around pre-recession lows.

Note that the downward spikes represent temporary retail holiday hiring
that hasn't been properly seasonally adjusted. 

What we want to watch closely going forward is whether the Beveridge Curve gap begins to close (the top of the hysteresis curve), which would be a possible sign of long-term unemployed workers' "reabsorption". For now however, the skills gap is keeping many without work or out of the labor force altogether.

_________________________________________________________________________



SoberLook.com
Sign up for our daily newsletter called the Daily Shot. It's a quick graphical summary of topics covered here and on Twitter (see overview). Emails are distributed via Freelists.org and are NEVER sold or otherwise shared with anyone.


From our sponsor:
Related Posts Plugin for WordPress, Blogger...
Bookmark this post:
Share on StockTwits
Scoop.it

*** Please help keep Sober Look going by viewing the following messages from our sponsor: