Sector Analysis Update

Looks like the deficits got high enough in the US and Euro zone to reverse things, and I’d guess UK and Japan as well even though the charts don’t yet show the reversal because past deficits of this magnitude would have been more than sufficient and there recent data is showing signs of a turn.

This is all usually indicative of a multi year upturn, who magnitude depends on the extent private credit expansion kicks in.
In the past the ‘borrow to spend’ private credit expansions have been helped by a variety of ‘peculiar’ events, including the credit expansion due to sub prime and other housing frauds most recently, the dot com era’s borrowing to fund impossible business plans, the credit expansion driven by the S and L frauds in the 80’s, emerging market credit expansion before that, etc. etc.

This time might be different/less robust if credit expansion channels are kept honest and fiscal policy tightened.

Non-Mfg ISM

With deficit spending running at about 7% of gdp modest growth should continue, with the ‘hand off’ coming when private sector credit expansion kicks in, which could be a while.


Karim writes:

Slowing, but still firmly in expansionary mode.
15 industries expand, 2 contract, 4 unch.


What respondents are saying…

  • “The general upswing in the economy, albeit minor, has had a positive effect.” (Arts, Entertainment & Recreation)
  • “Pricing pressures continue to increase as we see the economy begin to improve. Orders are still lagging in our industry.” (Professional, Scientific & Technical Services)
  • “Slow pace, but better than last year at this time.” (Accommodation & Food Services)
  • “Funding issues and cash flow issues continue to affect public sector procurement. Almost all capital acquisitions have been suspended.” (Public Administration)
  • “We have seen a slight improvement in business activity over the past month.” (Wholesale Trade)


June May
Composite 53.8 55.4
Activity 58.1 61.1
Prices Paid 53.8 60.6
New Orders 54.4 57.1
Employment 49.7 50.4
Exports Orders 48.0 53.5
Imports 48.0 56.5

ECB bought 4billion last week

Looks like my story is unfolding. OK Spanish auction as well. Assuming equity markets were down say 20% from the highs pricing in half the risk of default, they should adjust upward by most of that as default risk fades:

The European Central Bank bought €4bn ($5bn) in eurozone bonds last week, the same as in the previous two weeks, indicating it had fallen into a pattern of low-level intervention in sovereign debt markets, the FT reports.

GE chief gives vent to frustration over China

GE chief gives vent to frustration over China

June 29 (FT) — General Electric chief executive Jeff Immelt told Italian industrialists at a dinner on Wednesday that he was worried about the way Beijing was treating foreign companies. “I am not sure that in the end they want any of us to win or any of us to be successful,” said the man who runs the largest manufacturing company. “After 30 years of progressive market reforms, many foreign businesses in the country feel as though they have run up against an unexpected and impregnable blockade,” Joerg Wuttke, former head of the European Chamber of Commerce, complained in the Financial Times in April. The American Chamber of Commerce in Beijing has made similar statements, while a new survey of European companies released this week by the European Union Chamber of Commerce in China showed that almost half expect even more problems with regulators during the next two years.

GE has moved production out of China.

FDI (foreign direct investment) alters fx reserves and currency levels, as does domestic inflation.

ISM

Yes, I think we have a nice L shaped economy with modest GDP growth and modestly improving employment, so far mostly evidenced by the increased hours worked that you’ve been pointing out. Acceleration happens when/if some aspect of private sector credit growth takes off.

If euro solvency risks are indeed fading, it should be back to an ok market for stocks (which could have a large one time shift upwards to reflect the reduced euro risk), and low rates from the Fed until something changes.

Like Japan, the budget deficit may be large enough to keep it all from collapsing but not enough for the kind of growth that would trigger higher rates from the Fed.


Karim writes:

Data off recent peaks but still firmly in expansion territory:
Anecdotes mixed:

  • “Component lead times are increasing sharply.” (Computer & Electronic Products)
  • “Market had begun to change, but it is now declining again.” (Wood Products)
  • “BP oil spill will impact business conditions over the next few months.” (Fabricated Metal Products)
  • “The economy continues to be sluggish, with orders 8 percent to 10 percent below last year.” (Nonmetallic Mineral Products)
  • “Retail sales are strong for both the domestic and international markets.” (Food, Beverage & Tobacco Products)


June May
Index 56.2 59.7
Prices paid 57.0 77.5
Production 61.4 66.6
New Orders 58.5 65.7
Inventories 45.8 45.6
Employment 57.8 59.8
Exports orders 56.0 62.0
Imports 56.5 56.5

Q2

Q2 ended

ECB rolled it all over

Greece weathered the quarter end storm without going parabolic as in previous spikes, as ECB buying continues to provide the secondary market liquidity that enables dealers to buy the auctions.

Euro back up towards 1.24

This would be the time for equity markets to bottom and start discounting fading solvency risk

Might get a temporary pull back on tomorrow’s employment report but seems a weak economy is already fully discounted by US equities, probably also well beyond the actual weakness.