Wednesday, July 31, 2013

The US student loan problem - facts, charts, thoughts

The US Congress is nearing a compromise on the issue of student loan interest rates. Apparently loan rates will be changed from fixed to floating with an overall cap (see story). While rates are important, there is a much bigger issue at hand. Now with the help of some great data from Barclays Research let's take a quick look at where we stand with the overall student loan problem and how we could potentially move forward. Here are six facts to consider:

1. There is about 1.2 trillion dollars worth of student loans outstanding with all but 15% of that owned or guaranteed by the government. The chart below shows the student loan amount held directly by the federal government. That balance is rising at about $110 bn per year.

2. Higher education still provides a clear financial edge, with the unemployment rate among college graduates at about half that of those with just a high school diploma. However when you add student loans into the mix, the financial advantage of college graduates is not as compelling. For example, while homeownership has declined across the board, the decline has been much sharper for those with student loans.

Source: Barclays

3. Not surprisingly, since 2008, the credit score of young people with student loans increasingly lags the score of those without this type of liability.

Source: Barclays

4. Based on the expected repayment schedule of outstanding student debt, an increasingly large volume of loans is forecast to be repaid each year. Yet since 2007 the actual repayments keep falling further behind the repayment expectations. Based in this trend, the situation for 2013 looks a bit scary.

Source: Barclays
5. Student loans now have the highest delinquency rate among all major consumer credit asset classes. Based on the latest data, the trend isn't encouraging.

Source: Barclays

6. While there is a perception that student loan delinquencies are limited to generation-Y borrowers, delinquencies are rising across all ages.

Source: Barclays

The data clearly shows that the risk to the taxpayers is on the rise and the strain on US consumers from student loans isn't going to improve any time soon. The unlimited availability of student loans has allowed colleges to sharply raise tuition and fees over the past few years - often simply because they could (as they kept on hiring). The rising cost of higher education in turn forced students to take out larger loans and in greater numbers, increasing the overall loan balances. This feedback loop is clearly unsustainable, particularly as household income growth remains weak. Higher delinquencies are inevitable and as long as the government funds this program, there really is only one way to arrest rising levels of student debt.

Consider the fact that the pay increases of Social Security recipients in the US are linked to the inflation rate. Of course the actual inflation rate that retirees experience is often higher than it is for younger generations. Pension recipients don't benefit to the same extent from declining prices of electronics, apparel, and a number of other products. Furthermore, the planned adjustment to increases using the so-called "chained CPI" will make the pay increases even smaller (see story). But American seniors on Social Security will have to get by.

Why then is it so difficult to ask US colleges and universities who benefit from taxpayer-funded loans to live by the same standards as the social security recipients? The US taxpayers should insist that any college with students who pay using federally backed student loans must agree to cap tuition and fees. It's time for institutions of higher learning to start living by the concept of "chained CPI" rather than to simply keep writing research papers on the topic.
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Tuesday, July 30, 2013

Japan's industrial production drops at the fastest pace since the Fukushima disaster

Japan experienced a surprisingly strong decline in industrial production in June, which many view as temporary.

Japan Industrial Production (source:

The Japan Times: - Industrial production fell in June by the most since March 2011, when the Great East Japan Earthquake and tsunami struck, as automakers cut output after a gain the previous month.

Output declined 3.3 percent in June from May, the Ministry of Economy, Trade and Industry said Tuesday, marking a steeper fall than any economist forecast in a Bloomberg survey in which the median of 29 estimates was for a 1.5 percent drop.

In May, output climbed the most since December 2011. Production slid 4.8 percent in June from a year earlier.

Tuesday’s report adds to the challenges facing Prime Minister Shinzo Abe, who must decide whether to proceed with the consumption tax increase even though it could slow down a rebound in the economy. Weakening production would undermine his calls for higher wages to bolster his reflation efforts after temporary boosts from monetary and fiscal stimulus.
Indeed this adds to the concerns described earlier (see post). Japan's new government needs to improve wage growth in order to keep up with rising prices. Without stable pay increases - which have been declining for years in large part due to demographics and Japan Inc.'s approach to cost adjustments - reaching sustainable inflation rate will be difficult. Yet higher wages could also reduce the competitiveness of Japanese companies. That is why this sudden drop in industrial production, if not corrected in July, could become an issue.

Update: This morning the report on July Markit Manufacturing PMI for Japan came out. Once again, the number was surprisingly weak.

Source: Econoday
Markit: - “After a promising Q2, Japan’s manufacturing expansion slowed in July. The decelerating growth of output and new orders, combined with falling employment, painted a less encouraging picture than that indicated by previous surveys. Nevertheless, July marked the fifth consecutive month of expansion in the manufacturing sector.

“The weakness of the yen continued to act as a mixed blessing for Japanese producers; with exporters benefiting from improved international competitiveness, but importers suffering as their input costs continued to rise.”
Now that we have some indications about July, maybe the drop in June industrial output wasn't just a temporary blip. The Nikkei dropped 200 points in response as investors begin to reassess the sustainability of the recent pace of growth.
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Commodity prices under pressure

As oil prices retreated from the refinery demand driven spike (see post), the CRB BLS Spot Index of 23 commodity markets (see description) hit a new low for the year. Per earlier discussion (see post), the equity markets have been discounting the rally in crude and so far have been proven right.

Source: Barchart

Recent price declines in commodities are not limited to energy however. Corn, coffee, copper, and several other products are under pressure.


Deceleration in emerging markets' economic growth (particularly China) and increasing competition among commodity producing nations have been responsible for some of the declines. Tighter current or expected monetary policy, whether in India, China, Turkey, or in the US (accompanied by higher interest rates) has also added to weakness in a number of commodity sectors.
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Key factor driving corporate profit margins

Corporate margins in the US are no longer expanding at the rate they were in the first couple of years after the recession. In fact margins are now undergoing a gradual decline.
WSJ: - Revenue at the companies that make up the Standard & Poor's 500-stock index—excluding banks, whose profits have soared—is expected to creep up by just 1.1% in the second quarter from a year earlier, according to Thomson Reuters, which melds Wall Street analysts' projections with company reports.

Earnings, meanwhile, are expected to decline 0.6%. That would be the first profit decline for nonfinancial companies since last autumn and the first time in a year that earnings grew more slowly than revenue, a sign that margin widening is petering out.
Analysts are blaming this on weak economic growth and poor business spending. Some are pointing to the end of the refinancing binge that allowed corporate treasurers to capture falling interest rates. That game is now over and lower funding costs will no longer add to margins. If we step outside the US however, most nations - particularly emerging markets - are seeing even sharper downward adjustments to margin growth.

Source: JPMorgan

According to JPMorgan, profit margins are heavily impacted by changing trends in labor productivity gains, which have declined globally. Change in profit margins is in fact proportional to the deviations from longer term growth trend in productivity. And emerging markets have seen the highest correction to that trend, resulting in higher reduction in corporate margins.

Source: The Conference Board

The US actually exhibits a relatively stable productivity trend which had accelerated right after the recession but has since declined. That's why US margins grew sharply after the recession and have been in a gradual downward drift recently. Nations such as Hungary and Russia on the other hand saw an extreme adjustment in the productivity trend, resulting in collapsing profit margins.

Source: JPMorgan

As we begin to adjust to lower profit margins for US companies, we should keep in mind that the declines are sharper for most other nations. Going forward, while business spending and interest rates will certainly have an impact, it's the labor productivity gains that will ultimately drive adjustments in corporate margins.
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Monday, July 29, 2013

Treasury bill supply hits new lows

Since the beginning of the year the US treasury curve has steepened substantially, with yields on the short-end actually declining.

There are two key reasons for treasury bill rates staying at such suppressed levels.

1. In a rising rate environment, durations are cut and demand for treasury bills increases. Investors want to stay liquid without taking rate risk, and there isn't much else out there that can provide both.

2. There are simply fewer treasury bills out there. The supply of bills relative to the overall pool of treasury securities is at record lows. The US Treasury has focused on issuing more longer-term paper to lock in the ridiculously low rates that the Fed and others have been willing to take.
Source: DB
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Sunday, July 28, 2013

5 reasons the Fed's taper will begin in September

Little doubt remains at this stage that the Fed will begin slowing its securities purchases this September. The central bank under Bernanke's leadership has been highly focused on data and will consider the following 5 broad indicators to reach its decision.

1. Labor markets: As Bernanke recently pointed out, with respect to labor markets the hurdle for reducing purchases is lower than for raising rates. The FOMC will be looking for improvements in demand for labor in the US and will find it in these data:

Source: BMO Capital Markets

While the labor situation is still terrible by historical standards, it will be sufficient for the FOMC who will be looking for steady improvements. The strength in consumer confidence (see latest from U Michigan) will also be viewed as supportive of the stronger labor markets thesis.

2. Money supply: Once again the view will be that broad money supply's relatively steady growth of above 7% per year will suffice.

3. Economic activity: While a number of indicators have been pointing to less than stellar growth, the Fed will consider (among other measures) the broadest indicator, the so-called Coincidence Index of Economic Activity. The index hides numerous problems with the economy but will nevertheless be an important data point for the central bank. And based on this indicator, the US is experiencing sufficiently steady growth. To support the steady growth thesis, the Fed will also consider surprisingly strong auto purchases and factory orders data (see Reuters story).

4. Financial stress:  The Fed's own indicators point to fairly benign financial conditions. This is not surprising given the relatively tight swap spreads and credit spreads, low VIX, strong equity markets, etc.

Supporting the US data on financial stress is the ECB's "Systemic Stress Composite Indicator" (below), which has declined to near record lows. Given the impact of the Eurozone crisis on US financial markets, the Fed will clearly consider that index as well.

ECB's Systemic Stress Composite Indicator (in the Eurozone)

5. Impact on interest rates: Certainly with the Fed exiting treasury purchases, the demand for US government paper should will be reduced, pushing yields higher. But given the recent fiscal tightening in the US (due in large part to the sequester), treasury issuance is expected to decline - at least in the near term (chart below). The Fed will view this decline in the federal government's borrowing needs as counteracting its reduction in purchases and keeping rates under control in the near term.

Source: Scotiabank Economics

Obviously, an exogenous shock such as a spike in oil prices could force the Fed to hold off. Also the US legislators' failure to raise the federal debt ceiling, which Bernanke called "a calamitous outcome", could take tapering off the table.
CIBC World Markets: - Any attempts to tie a budget deal to a repealing of Obamacare could throw a wrench into discussions, while inflexibility on either side could push negotiations to the eleventh hour. And with federal borrowing pressing up against the limit, wrangling over the debt ceiling—an apparent late summertime tradition—is set to heat up yet again.
The Fed doesn’t seem to be quite as blasé as markets are at this point about budgetary pitfalls. Bernanke recently stated that fi scal policy could “restrain” growth and the debt ceiling outcome could “hamper the recovery”. With Washington getting down to the political wire right around decision time for QE tapering, political wrangling could infl uence just how willing the Fed is to step off the stimulus pedal.
Aside from such events, the Fed is likely to shave off some $15-$20bn from its monthly purchases. With Bernanke likely departing early next year, the Fed is eager to wrap up this latest round of purchases soon and focus on the more traditional policy tools such as short-term rates and forward guidance (see discussion).
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The clock is ticking on Abe to implement labor reform before more workers go "over the cliff" on the wage curve

In their recent report Barclays Capital researchers suggested that Japan's prolonged deflation has at least in part been driven by demographics. For years Japan's "wage curve's" shape has been highly unusual relative to other developed economies. The "wage curve" for the purposes of this discussion is defined simply as per-capita wages versus workers' age at a point in time. And in Japan wages have consistently peaked around the age of 50.

Source: Barclays Capital

Here is how Japan's wage curve compared to that of European nations in 2006 and

Source: Barclays Capital

.... here is how it compared to the US in 2011.

Source: Barclays Capital

Now take a look at how quickly Japan's population is aging relative to the rest of the world. This is pushing increasingly large numbers of workers "over the cliff" on the wage curve.

As a result, Japan has been experiencing relentless downward pressure on wages, contributing to ongoing deflation.

Source: Barclays Capital

Barclays researchers argue that another key factor pushing wages lower has been the disappearance of "downward rigidity". In the US when things get tough, companies cut costs by laying off workers (volume adjustment). In Japan costs are more commonly reduced through wage cuts (price adjustment).

Source: Barclays Capital

When things improve however, wages don't go up to the original levels - at least not quickly enough. Employees, even when not needed, remain on the payroll, contributing to a stagnant labor force (low labor force mobility) and slow improvements in productivity.

Why has this problem with Japan's wage deflation become a major issue all of a sudden? Because recently the Bank of Japan's balance sheet has ballooned,

Source: BOJ

... resulting in weaker yen and finally a positive inflation number that is expected to grow further (BOJ's target is 2%).

However, rising inflation and falling wages could be a recipe for disaster. It's OK to take a pay cut when prices are falling, but it just doesn't work in a positive inflation environment. That is why, according to Barclays, the most important task for Japan's new government will be to implement labor reform in order to allow wages to rise with inflation.
Barclays: - As long as Japan targets 2% CPI inflation on a sustainable basis, it must create an economy conducive to higher wages. We believe this requires a determination to change the structure of the economy, especially the labor market.
Monetary policy has the power to raise prices and price variables such as nominal wages to a certain extent. However, monetary policy does not have the capacity to determine the relative relationship between nominal wages and prices ...

... So when considering whether Japan can escape deflation with an accompanying rise in real wages, there is a need to think about labor productivity in addition to monetary policy.
The task is daunting because it will require wage growth in the face of global competitive pressures, potentially resulting in rising unemployment. But without real labor mobility improvements, the unprecedented monetary policy experiment in Japan could prove ineffective. And Prime Minister Abe has three years to implement these reforms before more workers go "over the cliff" on the wage curve in the face of rising prices.
The Japan Times: - Sunday’s sweeping victory by the Liberal Democratic Party-New Komeito ruling bloc in the Upper House election put an end to the divided Diet and hopefully to the “revolving door” of prime ministers over the past seven years, as ridiculed by foreign media.

That is at least until the next Lower House election, which must be held within the next three years. ...
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Saturday, July 27, 2013

For many Americans rising home prices are no cause for celebration

Economists and the markets have been cheering the jump in housing prices and improving construction statistics. But for many Americans rising demand and higher house prices bring more bad news. Based on the latest data (report below) from the Joint Center for Housing Studies, Harvard University (JCHS), here are some sad facts about the housing situation in the US.

1. The number of homes for sale is still near record lows. That is driving up costs and quickly pricing many households out of the market.

2. The US actually has a large number of vacant homes that are not making it into the market. Vacant homes are often in areas with few job opportunities, making it impossible to renovate, sell, or rent.  Many are in places like Detroit and simply will never be sold.

Source: JCHS

3. We are seeing the confluence of tight housing conditions and weak household incomes. As JCHS points out "most types of households have seen their real incomes decline over the past decade". This is particularly true for growing households.

Source: JCHS

4. As a result, "the total number of households paying more than half their incomes for housing soared by 6.7 million from 2001 to 2011, a jump of 49 percent". Note that this is a problem for both homeowners and renters.

Source: JCHS

5. Housing shortages (discussed here) and rapid renter household growth are driving up rents. At the same time, millions of federal rental subsidies for low income renters are set to expire in the next decade.

Source: JCHS

6. On top of all this is the fact that households are now forming at a rate of about a million per year. The market is demanding a million new residential units each year. Unless construction can keep up and prices decline or incomes rise (neither seems likely right now), this trend will drive up the number of households with "housing cost burdens" (already over 40 million; see #4 above) - for both homeowners and renters.

JCHS housing report
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Friday, July 26, 2013

Cyclical vs. defensive equities performance points to diverging economies

In 2013 it became clear that global growth will remain weak for some time, resulting in downward pressure on cyclical shares. US cyclicals did well relative to defensive shares in 2012 after the QE3 announcement because it was thought that the combination of US stimulus and the ECB's backstop of periphery bonds would spur global growth. Yet cyclical sectors such as natural resources did not significantly benefit from these central bank actions. Defensive shares began to outperform. And after the start of the "taper talk", defensive shares really took off, while cyclicals were held back by sectors such as energy (see post) and homebuilders (see post).

Cyclical vs. defensive share performance in the US

But this malaise in cyclical shares is not limited to the US and varies considerably across global equity markets. Credit Suisse looks at the ratio of cyclical to defensive indices by country to determine which equity markets expect to see stronger growth in a particular country and which are likely to slow. Here is the result.

Source: CS

Not surprisingly these ratios roughly mirror growth expectations for various countries relative to recent growth (not relative to each other). What's striking here is the dispersion. The markets seem to accept that Abenomics-based stimulus in Japan will pull the nation out of the deflationary spiral and generate growth, albeit a temporary one. Japan's construction companies for example will clearly benefit in the short term from all the extra cash. China however is on the other side of the spectrum (see post), pulling down the overall global growth expectations.
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Homebuilder shares point to lost momentum in residential construction

Since the talk of scaling down the Fed's securities purchase program started, homebuilder shares have been underperforming the broader market. That underperformance has in fact increased over the last few days, in spite of strong homebuilder optimism numbers.

Source: Ycharts

This seems to contradict the fact that US house sales in total dollar terms are now at record levels.

Source: The ISI Group

And D.R Horton, the largest US homebuilder by volume,  recently beat analysts earnings estimates with strong construction volume and higher prices charged.
Reuters: - Homebuilder D.R. Horton Inc (DHI.N) reported a better-than-expected profit as it sold more homes at higher prices in quarter ended June.

Demand for homes has remained strong despite a recent rise in mortgage rates as a shortage of homes available for sale has enabled builders to raise prices.

D.R. Horton, which sells homes priced between $100,000 and $600,000, said average selling price rose 15 percent in the third quarter.

Orders — a key indicator for builders, who do not book revenue until they finish a house — rose 12 percent to 6,822 homes.
The market yawned in response, with DHI shares still down 25% in the past 3 months. What's going on?

Source: BigCharts

According to D.R. Horton's there is "no question" that higher rates have affected demand. Homebuilders have seen a slowdown in order growth.
Bloomberg: - PulteGroup, based in Bloomfield Hills, Michigan, said second-quarter orders fell 12 percent on a lower community count. D.R. Horton said orders increased 12 percent, which was below analysts’ forecast for 28 percent growth, according to Adam Rudiger, an analyst at Wells Fargo & Co. in Boston.

Rising mortgage rates contributed to increased cancellations and a dropoff in traffic in June, according to Fort Worth, Texas-based D.R. Horton. Borrowing costs have surged in the past two months on expectations that the Federal Reserve will scale back bond purchases. The 30-year average fixed mortgage rate was 4.31 percent in the week ended today, up from a near-record low of 3.35 percent in May, Freddie Mac said.

We got our first indication today that consumers are feeling the effect of rising rates on their purchasing power,” Peter Martin, a San Francisco-based analyst with JMP Securities LLC, said in a telephone interview.
Orders are rising, but not nearly as fast as was implied by stock valuations. The equity markets have priced in a significant momentum in residential construction growth over the past couple of years. Now higher mortgage rates are taking some of that momentum out, which is showing up in homebuilder underperformance. It's an interesting consideration for the Fed, as the September decision on securities purchases looms large.
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Thursday, July 25, 2013

PBoC's cold turkey approach to China's credit addiction

It seems that aside from halting the yuan appreciation (see discussion) Beijing has decided to use fiscal rather than monetary tools to stimulate the economy.
Bloomberg: - Chinese Premier Li Keqiang said the nation will speed railway construction, especially in central and western regions, adding support for an economy that’s set to expand at the slowest pace in 23 years.

The State Council also yesterday approved tax breaks for small companies and reduced fees for exporters as it pledged to keep the yuan’s exchange rate “basically stable at a reasonable and balanced level,” according to a statement after a meeting led by Li. China plans a railway development fund, the government said.
Once again, the rationale to maintain a relatively tight monetary stance is to make sure that the shadow high yield deposit business and property speculation doesn't grow out of control (see post). Applying the brakes too suddenly however is quite dangerous, particularly for a nation that in recent years has become addicted to credit. The broad measure of credit (sometimes called "social financing") is now nearly double the GDP.

Source: JPMorgan

Tight and uncertain monetary policy could have a severe adverse effect on China's weakened economy by forcing an uncontrolled unwind of credit. And PBoC's policy remains both tight and uncertain. The overnight interbank (SHIBOR) rate has risen by 35bp in the past week. Most central banks would spend months fretting over such an adjustment. Other short-term rates have risen even more.

PBoC's attempt to force an abrupt end to credit addiction could easily offset any economic benefits of speed railway construction or tax breaks. Bursting such a massive credit bubble is a delicate process, which China's central bank is not executing in a controlled manner.
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Glimmers of hope in the euro area

Given the persistent weakness in credit growth across the Eurozone (see discussion), the latest quarterly ECB survey of banks brought some welcome news. It seems that demand for loans is declining slower than in Q1 and credit tightening in the euro area is subsiding.

Loan demand of course is still in bad shape and is undergoing a sharp decline, but the survey shows a slowdown in the rate of contraction. More importantly banks seem to think that loan demand should stop declining or even start improving in the third quarter. Of course these expectations have been consistently wrong in the past, but at least the trend is positive.

Source: ECB

The tightening of lending standards is moving in the right direction as well, and banks expect improvements going forward.

Source: ECB

Separately, though potentially related to signs of thaw in credit conditions, the Eurozone Markit PMI also showed improvement.

Source: Markit

Given the prolonged economic weakness in the area, it was good to finally see an upbeat report from Markit.
Chris Williamson, Chief Economist, Markit: - The best PMI reading for one-and-a-half years provides encouraging evidence to suggest that the euro area could – at long last – pull out of its recession in the third quarter.

The revival is being led by a broad-based upturn in manufacturing, where growth surged to a two-year high. Increased goods production was reported in Germany, France and across the rest of the region as a whole.

There are also promising signs of stabilisation in the service sector, which hints at some much– needed upturns in domestic demand. Rising service sector activity in Germany is being accompanied by slower rates of decline in France and elsewhere across the region.
Going forward, the biggest challenge for the area, in addition to stabilizing credit growth, will be to halt the relentless rise in unemployment. Labor laws have to undergo reforms in a number of countries and competitiveness has to improve. Without progress on the jobs front, recovery from the current recession is unlikely to be sustainable.
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Wednesday, July 24, 2013

Janet Yellen vs. Larry Summers. Who will be the next Fed Chairman?

Within the next few months the Obama administration is expected to announce a nominee for Ben Bernanke's replacement. Two names have been bounced around recently:  Janet Yellen and Larry Summers. According to Google Trends, here is what Google news searches look like over time for these two candidates.

Source: Google Trends

Not surprisingly, researchers at Credit Suisse have recently picked up on this trend.
CS: - ... Fed Vice Chair Janet Yellen was seen as the most likely successor to Bernanke. But within the past couple weeks, former Treasury Secretary Lawrence Summers’ name has come up as a serious contender for the post.
Yesterday Ezra Klein published a nice article on the topic, listing 5 different considerations that may drive this shift toward Larry Summers.
Ezra Klein, WP: - The word among Federal Reserve watchers right now is that the choice is down to Janet Yellen or Larry Summers as Ben Bernanke’s replacement. I can’t find anyone who really thinks it’ll be Roger Ferguson, Tim Geithner, Alan Blinder, or some other dark horse.

People dismissed Summers’s chances a month or two ago, but he’s increasingly viewed as the leading candidate today — and opinions on this, for reasons I don’t fully understand (though I suspect have to do with a bunch of elite trial balloons going up at the same time), have really hardened in the last 72 hours.
According to Klein, Summers has a key advantage in the fact that Obama knows and likes him. The President also tends to surround himself with his ex colleagues and friends and he doesn't personally know Yellen. Another potential negative for Yellen, who is a highly accomplished economist, is her fairly dovish stance on monetary policy.
CS: - Yellen’s rhetoric occasionally comes across as more dovish than Bernanke’s, and some wonder whether, as chair, she would advocate tolerating a higher rate of inflation in pursuit of job growth.
While her public stance has been consistent with the FOMC majority, some in the Obama administration may view her dovish statements of the past as a potential hurdle for what is sure to become a contentious confirmation process. Right now the bet is on Larry Summers.
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US manufacturing follows the same pattern for the 4th year

US manufacturing rebounded in July, as it follows the pattern repeated over the past four years.

Source: Markit
Markit's report however emphasized caution:
Chris Williamson, Chief Economist, Markit: - The U.S. manufacturing sector picked up momentum again in July, with output, order books and employment all growing. The goods-producing sector acts as a bellwether of the wider economy, and the upturn in July therefore bodes well for the pace of GDP growth to have picked up again in the third quarter after a likely easing in the second quarter.

The pace of manufacturing growth nevertheless remains well below that seen at the start of the year, in part reflecting weaker demand from many export markets, notably China and other emerging economies. Employment growth is disappointingly weak as a result, as firm focus on cost-cutting to boost competitiveness.
This stabilization in manufacturing will add to the ammunition for the more hawkish members of the FOMC, who will argue for a reduction in securities purchases starting in September.
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Tuesday, July 23, 2013

More bad news on China's economy

The widely followed Markit PMI report of China's manufacturing for July was disappointing, coming in at an 11 months low.

Source: Econoday

Growth across developing economies has become a problem, and China is no exception.

Source: Markit/HSBC

HSBC: - The lower reading of the July HSBC Flash China Manufacturing PMI suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking. This adds more pressure on the labour market. As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth.
The "fine-tuning" that HSBC is referring to is some type of stimulus from Beijing. The PBoC however has trouble introducing additional liquidity. The central bank views such action as conducive to more shadow banking, which the authorities have been trying to curb (see post). Any significant "fine-tuning" is therefore unlikely - in fact money market rates are no longer declining (chart below). With exports remaining weak (see post) and no central bank easing, growth is expected to be anemic - at least by China standards.
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