China, Germany, Productivity, NFIB Index, Redbook, Wholesale Trade

A few thoughts:

China’s US Tsy holding had been falling perhaps because they were selling $ to buy Yuan to keep it within in the prior band.

Pretty much all exporting nation’s currencies have already weakened vs the $, including the Yen and Euro, so this is a bit of a ‘catch up.’

In a weakening global economy from a lack of demand (sales) and ‘western educated, monetarist, export led growth’ kids now in charge globally, the path of least resistance is a global race to the bottom to be ‘competitive’. And the alternative to currency depreciation, domestic wage cuts, tends to be less politically attractive, as the EU continues to demonstrate.

The tool for currency depreciation is intervention in the FX markets, as China just did, after they tried ‘monetary easing’ which failed, of course. Japan did it via giving the nod to their pension funds and insurance companies to buy unswapped FX denominated securities, after they tried ‘monetary easing’ as well.

The Euro zone did it by frightening China and other CB’s and global and domestic portfolio managers into selling their Euro reserves, by playing on their inflationary fears of ‘monetary easing’-negative rates and QE- they learned in school.

The US used only ‘monetary easing’ and not any form of direct intervention, and so the $ remains strong vs all the rest.

I expect the Euro to now move ever higher until its trade surplus goes away, as global fears of an inflationary currency collapse are reversed and Euro buying resumes as part of global export strategies to export to the Euro zone. And, like the US, the EU won’t use direct intervention, just more ‘monetary easing’.

Ironically, ‘monetary easing’ is in fact ‘fiscal tightening’ as, with govts net payers of interest, it works to remove interest income from the global economy. So the more they do the worse it gets.

‘No matter how much I cut off it’s still too short’ said the hairdresser to the client…

The devaluations shift income from workers who see their purchasing power go down, to exporters who see their margins increase.
To the extent exporters then reduce prices and those price reductions increase their volume of exports, output increases, as does domestic employment. But if wages then go up, the ‘competitiveness’ gained by the devaluation is lost, etc., so that’s not meant to happen.

Also, the additional export volumes are likewise reductions in exports of other nations, who, having been educated at the same elite schools, respond with devaluations of their own, etc. etc. in a global ‘race to the bottom’ for real wages. Hence China letting their currency depreciate rather than spend their $ reserves supporting it.

The elite schools they all went to contrive models that show you can leave national deficit spending at 0, and use ‘monetary policy’ to drive investment and net exports that ‘offset’ domestic savings. It doesn’t work, of course, but they all believe it and keep at it even as it all falls apart around them.

But as long as the US and EU don’t have use of the tools for currency depreciation, the rest of the world can increase it’s exports to these regions via currency depreciation to lower their $ and Euro export prices, all of which is a contractionary/deflationary bias for the US and EU.

Of further irony is that the ‘right’ policy response for the US and EU would be a fiscal adjustment -tax cut or spending increase- large enough to sustain high enough levels of domestic spending for full employment. Unfortunately, that’s not what they learned in school…

The drop in expectations is ominous, particularly as the euro firms:

Germany : ZEW Survey

ZEW’s August survey was mixed with a slightly more optimistic assessment of the current state of the economy contrasting with a fifth consecutive decline in expectations.

The current conditions gauge was up 1.8 points at 65.7, a 3-month high. However, expectations dipped a further 4.7 points to 25.0, their lowest mark since November 2014.

The drop in unit labor costs and downward revision of the prior increase gives the Fed cause to hold off on rate hike aspirations:

United States : Productivity and Costs

A bounce back for output gave first-quarter productivity a lift, up a quarter-to-quarter 1.3 percent vs a revised decline of 1.1 percent in the first quarter. The bounce in output also held down unit labor costs which rose 0.5 percent vs 2.3 percent in the first quarter.

Output in the second quarter rose 2.8 percent vs a depressed 0.5 percent in the first quarter. Compensation rose 1.8 percent, up from 1.1 percent in the first quarter, while hours worked were little changed, up 1.5 percent vs 1.6 in the first quarter.

Looking at year-on-year rates, growth in productivity is very slight at only plus 0.3 percent while costs do show some pressure, up 2.1 percent in a reading, along with the rise in compensation, that will be welcome by Federal Reserve officials who are hoping that gains in wages will help offset weakness in commodity costs and help give inflation a needed boost.

Up a touch but the trend remains negative:


Redbook retail sales report still bumping along the bottom:


A decline in sales growth and rise in inventories is yet another negative:

United States : Wholesale Trade

A build in auto inventories as well as for machinery drove wholesale inventories up a much higher-than-expected 0.9 percent in June. Sales at the wholesale level rose only 0.1 percent in the month, in turn driving the stock-to-sales ratio up 1 notch to a less-than-lean 1.30. This ratio was at 1.19 in June last year.