Category Archives: Currencies

Mtg Purchase Apps, Chicago PMI, ADP, Euro Comment

Posted on by

This is still going nowhere, and, most recently, trending lower, and obviously not responding positively to the ultra low rates of the last several years:

MBA Mortgage Applications
er-9-30-1
Highlights
After surging in the prior week following the FOMC’s decision against a rate hike, mortgage activity fell back in the September 25 week. The purchase index fell 6 percent in the week but still remains up strongly year-on-year, at plus 20 percent. The refinance index fell 8.0 percent in the week. Rates continued to move lower in the week with the average 30-year mortgage for conforming loans ($417,000 or less) down 1 basis point to an average 4.08 percent.

er-9-30-2
Yet another negative shock.

And note that it all went bad after the collapse in oil prices:

Chicago PMI
er-9-30-3
er-9-30-4
er-9-30-5

This is their forecast for Friday’s number, and the downward trend since November continues for both ADP and the BLS payroll series:

ADP Employment Report
er-9-30-6
Highlights
ADP’s call for Friday’s September employment report is on the high side but only slightly, at 200,000 for private payroll growth vs Econoday expectations for 190,000. ADP’s call for August, an initial 190,000 now revised to 186,000, proved much stronger than the initial government total of 140,000. Today’s result won’t likely shake up the outlook for Friday’s employment report where another month of moderate improvement is expected.
er-9-30-7

From ADP:

Goods-producing employment rose by 12,000 jobs in September, off from 15,000 the previous month. The construction industry added 35,000 jobs in September, almost double the 18,000 gained in August. Meanwhile, manufacturing dropped into negative territory losing 15,000 jobs in September, the worst showing since December 2010.

Revealing CNBC headline, as ultimately ‘purchasing power parity’ does hold. That is, high inflation means the value of the currency is falling, and longer term currencies that experience high inflation depreciate vs currencies with low inflation. That is, high inflation policy is not the stuff of strong currencies, regardless of interest rates.

So what the headline is implying, at best, is that the ECB policy response will be to lower rates/do more QE to promote inflation, and thereby weaken the currency. It is also probably implying that a lower rate and QE per se make
the euro weaker.

My narrative is a bit different. I see the deflation as further supporting the euro area’s record high and growing trade surplus, a force which fundamentally drives the euro higher, as non residents continuously sell their currencies to buy euro to pay for imports from the euro area. This ultimately drives the euro higher, as happened with the yen for the 2 decades it ran large and persistent trade surpluses, along with a zero rate policy, and far more QE than the ECB or the Fed has done.
er-9-30-8

Share

quick macro update

Posted on by

It all started when the FICA tax cuts and a few of the Bush tax reductions were allowed to expire at the end of 2012, followed by the sequesters a few months later 2013. That resulted in 2013 GDP growth of a bit less than 2% or so that might have been closer to 4% without the tax hikes and spending cuts.

Going into 2014 GDP I suggested growth might be closer to 0 than to the 3.5% being forecast. It again printed about in the middle averaging a bit over 2% (with some ups and downs…), and then towards the end of 2014 the price of oil collapsed and it was discovered there had been $hundreds of billions of planned capital expenditures that would be cut, domestically and globally, after which I again suggested GDP growth for the year- this time 2015- would now be near 0, and in fact could well be negative. Additionally, it was revealed the extent to which it was the large and growing oil capex expenditures up to that time that had been supporting at least 1% GDP growth up to that point. And so far GDP growth for 2015 has been less than 2014, even after 2014’s recent downward revisions, and along with slowing GDP has come slowing corporate revenues and earnings growth. All subject to further revisions, of course, which lately have been downward revisions.
macro-8-24-1

Meanwhile, in the first half of 2014 the euro began falling against the $ as well as other currencies. The fall coincided with the ECB threatening and then following through with negative rates and QE, much to the consternation of global portfolio managers, including Central Bankers, pension funds and hedge funds, who collectively proceeded to lighten up on their euro allocations. And along the way, issues surrounding Greece further frightened the portfolio managers into further selling of euro assets. This relentless selling pressure drove the euro down, particularly vs the US dollar. Specifically, a euro based portfolio manager might, for example, sell his euro securities, and then sell the euros to buy dollars, and then use the dollars to buy US stocks. Or a CB might manage its reserves such that the % of euro assets declined vs dollar assets. And a hedge fund might simply buy the $US index, which is about half dollar/euro and a way to sell euro and other currencies vs the dollar. All of this, along with several other ways to skin the same cat, constituted euro selling that drove the dollar up and the euro down, and at the same time produced buyers of US stocks.

Fundamentally, however, the opposite was happening. The euro area had a (small) trade surplus, which was removing euro from global markets, but not as fast as the sellers were selling, and the euro went ever lower. But as it did this it made the euro area that much more ‘competitive’ (euro area goods and services were that much less expensive in dollar terms) which resulted in an ever larger trade surplus, with the latest release showing a record trade surplus of about 24 billion euro per month. And at the same time, the increased euro exports helped support the economy and generated forecasts for improved future growth, all of which supported euro stocks.

It now appears the curves (finally) crossed, with the euro area trade surplus now exceeding the euro portfolio selling which seems to have run its course, which caused the euro to bottom and start to appreciate. This started generating adverse marks to market for those short euro and long US stocks, for example, who subsequently began reversing their positions by buying euro and selling US stocks. And the strong euro also threatens euro area exports and therefore output, employment, and GDP forecasts, causing euro stocks to sell off as well.

So far I’ve left out what turned out to be the catalyst for this reversal- China. When China moved to allow the yuan to trade lower against the dollar, it was deemed a credible threat to both euro and US exports, and world demand in general, which set off the latest wave of selling.
macro-8-24-2
macro-8-24-3

So what’s next?

More selling of US stocks and buying euro to reverse those positions. Hedge funds might move quickly, but, for example, pension funds often do their reallocating at quarterly and annual meetings, so it could all take quite a bit of time.

Additionally, buying of euro will drive the euro up, as there is no ‘excess supply’ being generated. Quite the reverse, in fact, as the trade surplus works to make euro that much harder to get. That means the euro will appreciate until the trade surplus reverses (whether there is any causation or not…), which should prove highly problematic for the euro economy and euro stocks. The other side of this coin is the weaker dollar that should lend some support to the US stock market, though a collapsing euro area economy with it’s associate debt issues and political conflicts might do more harm than the weak dollar does good, not to mention the weakening domestic demand in the post oil capex world with no relief in sight from other sectors.

Lastly, the stock market has been maybe the best leading indicator, and probably because of it’s direct effect on perceptions of wealth and its influence on spending and investing decisions. And the Fed doesn’t target stocks,
but it doesn’t ignore them either, as it too recognizes the influence it can have on output and employment, especially on the downside.

Of course all of this can be reversed for the better with a simple fiscal expansion, as the underlying problem remains- the Federal deficit is too small in the absence of sufficient private sector deficit spending needed to offset desires to not spend income. (Yes, it’s always an unspent income story…)

But politics, at least for now, renders that sure fire remedy entirely out of the question.

Share

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

Posted on by


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
er-8-11-1

Highlights
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
er-8-11-2

Highlights
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:

er-8-11-3


Redbook retail sales report still bumping along the bottom:

er-8-11-4


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

United States : Wholesale Trade
er-8-11-5

Highlights
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.

Share

macro update

Posted on by

Saudis remain price setter:

saudi-june

Main theme: deflationary biases

Greece is a deflationary event, as EU aggregate demand is further restricted, with no sign of any possibility of fiscal relaxation.

Oil fell as Saudis increased discounts, further reducing global capex and related asset prices.

US oil production that gets sold counts as GDP, and for Q3 both production and prices look to be lower. Yes, the lower price also reduces the deflator, but the fall in the price of oil relative to other prices reduces GDP.

The decline in oil prices has also directly lowered income earned from oil sales, royalties, etc. plus ‘multipliers’ as that lost income would have been ‘respent’ etc. This loss has been at least 1% of GDP and completely ignored by analysts who have been over forecasting growth by several % since oil prices declined.

And the more than 50% decline in drilling due to the lower prices = declining production as oil (and gas) output from existing wells declines over time. This means both less GDP and higher imports, a negative bias for the dollar.

Trade flows remain euro friendly and are taking over the price action, and trade will continue to put upward pressure on the euro until the trade surplus is reversed.

The stronger euro vs the dollar initially helps US stock psychology via earnings translations, etc. but hurts euro zone stocks, exports, GDP, etc. reversing this year’s growth forecasts. And a weaker euro zone economy is also a negative for the US.

Oil capex is down and not coming back until prices rise, and the US budget deficit is down further as well, and I see nothing else stepping up to replace the reduced private and public deficit spending that was offsetting the demand leakages (unspent income) inherent in the institutional structure that grows continuously. So unlike last year, when oil capex did the heaving lifting, I expect any bounce in Q2 gdp from Q1 to be modest and transitory.

The Fed may raise rates some not because of the state of the economy, but due to fears that current policy somehow risks some kind of financial instability. No discussion, of course, that Japan has had a 0 rate policy for over 20 years with perhaps the highest level of financial stability in the history of the world, perhaps indicating that a 0 rate policy promotes financial stability…

Employment seems to have begun to decelerate as well, with fewer new jobs each month and claims beginning to rise.

Unlike the last recovery that ended suddenly with a financial crisis that cut off credit, this one is ending with a fall off in aggregate demand from oil capex due to the Saudis cutting oil prices, so the sequence of events has not been the same. But, as always, it’s just a simple unspent income story.

Share

Greece loses the gambit

Posted on by

It now looks to me like Greece has lost the wrestling match.
gw

The other EU members are very sensitive to market reactions.

The question was whether the EU economy needed Greece, and the answer is now looking more and more like ‘no’.

Not a good position for Greece to find itself after posturing as if it is needed.

That is, Greece forced a test of that question and appears to have the leverage the possibility that they were needed gave them.

The euro did fall, which was extremely worrisome even though it did help exports. There is always the fear, particularly in Germany, of a currency collapse that brings inflation with it. At least so far, that hasn’t happened, with the euro holding about 5% above the lows and recovering from the initial knee jerk reaction from today’s referendum.
eur-usd-2
Real GDP forecasts remain positive, helped quite bit by the lower euro, and while high, unemployment has stabilized.

The camp claiming that Greece has been dragging down the entire EU economy is getting more support from the same data.

And so now while Greece isn’t being formally ousted, it will see it’s economy continue to deteriorate if it doesn’t agree to troika terms and return to ‘normal funding’ via securities sales at low rates under the ECB’s ‘do what it takes’ umbrella, and rejoin the rest of the members.

If the govt starts paying in IOU’s payments get made for a while, however they will be discounted ever more heavily with time, raising the cost of re entry to ‘normal’ funding, and the EU counts those as additions to deficit spending which could cause the terms of re entry to be that much steeper.

And any movement by Greece to use alternative funding will be taken as reason not to return Greece to ‘normal’ funding under the ECB umbrella.

Share

Greece

Posted on by

Not much to say that hasn’t already been said.

I saw nothing good coming out of a yes or no vote and I still see it that way.

And watch for the follow up polls on the demographics of the vote- who voted, what they say they knew about what they voted for, etc. etc.

The no vote along with the payment past due to the IMF give cause to the ECB to no longer consider Greek govt obligations as ‘eligible collateral’ for ECB loans, and maybe not count as assets for purposes of determining a bank’s equity capital. These measure could cause banks to not be able to attract euro deposits and loans, and therefore those banks would not allow their depositors to withdraw euros or transfer balances to other banks until the deposits could be replaced.

Varoufakis stated an agreement with the troika would be reached within 24 of a no vote. If so, since both what the troika offered and what Greece countered with are negatives for the Greek economy the chances of any material improvement are not good.

For all practical purposes debt relief- the write down of Greek debt- does next to nothing positive for the Greek economy, since the existing debt is already long term and at very low interest rates.

The EU has a general problem of low aggregate demand and both the troika’s and the Greek govt’s proposals are likely to further reduce public and private sector spending.

The Greek govt resorted to nationalism to promote it’s desired ‘no’ vote. Success with this tactic will only promote more of same across the EU, where in many places it’s already taken root. And let’s just say nationalism isn’t generally a force for ‘peace on earth and good will towards men’ etc.

All of this remains supportive for euro exchange rates. Unlike govt debt crises of the past which were about debt in foreign currencies, this time there won’t, for example, be any selling of euro to get the currency needed to make debt payments, as the debt is of course already in euro. So good luck to whoever is doing the selling on this news:
eur-usd

Share

Comments on Greece

Posted on by

So the euro is down a % or 2 because of the Greek debt drama. Generally currencies go down on debt drama when the debt is in a foreign currency and it’s feared the govt will have to sell local currency to get the fx to make the payments. For example, the peso might go down should there be concern over Mexico paying the IMF in dollars. But with Greece this isn’t the case, as there’s no fear they will sell euro to get euro to make payments. But the players sell euro anyway, because that’s what you do when there is a debt crisis. Then they have to buy them back, with no state selling to help them cover.

What’s been exposed yet again is a world that doesn’t understand its monetary systems, including central bankers who don’t understand banking, as well as the mainstream media and all of the politicians and their finance ministers talking and doing the big stupid at the expense of their electorate, which also doesn’t understand it enough to have any awareness whatsoever of the total lack of expertise at the highest levels.

Meanwhile, at the macro level, deflationary policy continues including negative rates, QE, tight fiscal, structural reforms, and all that goes with it. And debt defaults, should they happen are also deflationary. And all of this deflationary bias is also evidenced by most all market prices.

Share

Greece reading IOU’s to pay public sector workers

Posted on by

Yes, this is viable operationally, as it going back to drachma.

However, there’s a lot that can go wrong, as demonstrated by prior episodes of inflation, high interest rates, high unemployment, and currency depreciation.

Not to mention the temptation of the channels of mass corruption also too often employed in the past by local leaders, which will be an immediate consideration at the referendum.

Greek pension funds ration payouts

(FT) — Haris Theoharis, formerly the head of Greece’s independent revenue collection office, said the government was preparing to issue IOUs next month to pay more than 600,000 public sector workers as a first step towards readopting the drachma.

He said a team from the national accounts office at the finance ministry was working on a “drachma plan” at the office of prime minister Alexis Tsipras.

“The first stage is to replace euros with IOUs that could be sold at a discount, for example, and used to pay taxes,” Mr Theoharis told the FT. “It would take several months to implement the return of the drachma.”

A government spokesman denied the existence of such a team.

Share

Euro area trade, Greece comment

Posted on by

The latest trade release is very euro friendly. The lower euro, forced down by selling and not by trade, has increased the euro area trade surplus and with sellers largely exhausted, the euro goes up until the trade surplus goes away..
er-trade-1

er-trade-2

So Tsipras rejected this latest offer which, based on his earlier offer, indicates he wouldn’t even accept his own offer if the troika agreed to it, but would put it to a popular vote next week.

Note the restructure terms, for all practical purposes, are functionally equal to what could be called the debt forgiveness Tsipras wanted.

Juncker makes last-minute offer to Greece: Sources

By

June 30 (Reuters) — “The offer published on Sunday incorporated a proposal from Greece that would set value-added tax rates on hotels at 13 percent, rather than at 23 percent as originally planned in the lenders’ proposals. It was not immediately clear whether there would be any additional changes.

If the offer were accepted, the euro zone finance ministers could adopt a statement saying that a 2012 pledge to consider stretching out loan maturities, lowering interest rates and extending an interest payment moratorium on euro zone loans to Greece would be implemented in October.”

Share