24 May 2013
• Global consumer price inflation (CPI) fell from 2.3% year-on-year in March to 2.0% in April the lowest in 3 ½ years. The decline in CPI was especially pronounced in developed economies, from 1.2% to 0.8% attributed to weak economic activity and excess capacity. CPI in emerging economies declined to a lesser extent from 4.3% to 4.2%. A declining inflation outlook may facilitate a continuation of loose monetary policy. Lower inflation should also boost household disposable income in real terms.
• Minutes from the Fed’s most recent policy-setting (FOMC) meeting reveal that: “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.” Concerns were noted over the formation of an asset price bubble, although Fed chairman Ben Bernanke in his testimony to Congress stated that the prospect of lower economic growth was more dangerous than the risk of “overheating the economy”. Concerns were also noted over the long-term inflationary risks of extended quantitative easing (QE) but recent inflation data appears to signal a pronounced deceleration in inflation. While debate in the Fed is heating up over the timing and scale of the so-called “exit” from QE it is likely that any slowing in the pace of asset purchases would be relatively minor in order to gauge market reaction. This scenario is supported by Bernanke’s comment at the Congressional testimony that toning down QE would cause a large market correction.
• The Thomson Reuters/ University of Michigan US consumer confidence index increased sharply from 76.4 in April to 83.7 in May well above the 78.0 consensus forecast and the highest level since July 2007. The better than expected reading is attributed to improving employment prospects, rising home and equity market values and falling gasoline prices. Both the current economic conditions and forward-looking consumer expectations measures jumped, from 89.9 to 97.5 and from 67.8 to 74.8 a 7-month high, suggesting sustainable improvement in consumer confidence. According to Gennadiy Goldberg, US strategist at TD Securities: “Consumer confidence rose to a fresh post-crisis high in May, with sharply higher home, auto, and durable goods purchase expectations likely to have positive implications for the expected economic growth rebound later this year.” The index of auto purchase expectations increased from 131 to 145 the strongest reading since 2005. Consumer confidence is a key barometer of economic growth prospects with consumer spending contributing around 75% of GDP.
• The Mortgage Bankers’ Association weekly survey shows mortgage applications decreased by 9.8% on the week. The decline may be due to the recent increase in mortgage interest rates to their highest level since March, with the average interest rate for 30-year fixed mortgages increasing from 3.67% to 3.78% while the average rate for 15-year fixed mortgages increased from 2.88% to 2.96%. Rates have been moving steadily upwards since their low on 1st May but could potentially resume their downward trend if as expected the Bank of Japan’s radical quantitative easing programme raises Japanese demand for US fixed income securities. Low mortgage rates are helpful in boosting the US housing market seen as vital to the ongoing economic recovery. A research note from state-backed mortgage provider Fannie Mae noted that if the housing market “continues to grow at a sustainable, if not yet robust pace” it should help to propel economic growth in 2013 and 2014. The report refers to “housing acting as a significant contributor to growth.”
• According to economists surveyed in the National Association for Business Economics (NABE) May quarterly survey the US economy will grow by 2.4% in 2013 and 3.0% in 2014 unchanged from the previous survey’s forecasts. While government spending is expected to contract by more than previously expected due to the effect of automatic “sequester” tax increases and spending cuts, other forecasts were upgraded. The 2013 forecast for industrial production was revised up from 2.5% to 3.1%, the auto sales forecast increased from 15.2 million to 15.4 million, housing starts from 980,000 to 1.0 million, and core consumer price inflation excluding food and energy reduced from 1.7% to 1.5%. As a whole the data signals an improving outlook for the US economy.
• The National Association of Realtors reported US existing home sales increased in April by 0.6% on the month and 9.7% on the year to an annual rate of 4.97 million units the highest level in 3 ½ years. The median home sales price increased in April by 11.0% on the year to $192,800 the highest level since August 2008. Rising prices have encouraged sellers to put homes on the market with the inventory rising from 4.7 months’ supply in March to 5.2 months’ supply in April. Nonetheless this is viewed as a tight market, well below the traditionally balanced market of 6.0 months’ supply. Furthermore, 44% of all homes sold in April had been on the market for less than a month and only 8% had been on the market for a year or longer. The median time for a home to sell in April was just 46 days well below the 90 days prior to the property market’s peak in 2006. The data suggests the upward trend in prices remains intact
• The HSBC initial “flash” purchasing managers’ index (PMI) measuring activity in the manufacturing sector fell from a final reading of 50.4 in April to 49.6 in May below the key 50 level which demarcates expansion from contraction. The forward-looking new orders sub-index fell to 49.5 the lowest reading since September signaling slowing domestic as well as external demand. Qu Hongbin chief China economist at HSBC reported that: “A sequential slowdown is likely in the middle of the 2nd quarter, casting downside risks to China’s fragile growth recovery.” The recent deterioration in China’s economic data has prompted economists to lower their GDP growth forecasts with bank of America-Merrill Lynch cutting its forecast for 2013 from 8.0% to 7.6% and UBS from 8.0% to 7.7%. The government has set a growth target of 7.5% with a growing emphasis on household consumption at the expense of investment spending.
• The pace of increase in new home prices abated slightly on a month-on-month basis. Among the 70 cities in the national survey the highest monthly increase reduced from 3.2% in March to 2.1% in April. Among 1st-tier cities monthly price increases slowed in Beijing, Shanghai, Guangzhou, and Shenzen from 2.7% to 1.8%, 3.2% to 2.0%, 2.5% to 2.1%, and 2.8% to 1.8%. Property curbs imposed in March including caps on price increases on new development projects and a 20% capital gains tax from 2nd-hand house transactions appear to have partially succeeded in stemming the housing price bubble. However, the impact has been less pronounced than on previous occasions. Transactions have only decreased by 18.5% on the month compared with declines of more than 35% in May 2010 and February 2011 when property transaction curbs were last imposed. Given the government’s determination to avoid a housing bubble it is unlikely the central bank will loosen monetary policy despite a weakening in the broader economy and falling inflationary pressure.
• Japan’s trade deficit widened more than expected in April to ¥879.9 billion well above the ¥620 billion consensus forecast. While export competitiveness was boosted by a sharply weaker yen with exports rising 3.8% year-on-year imports increased by an even greater margin, rising 9.4% on the year. The currency depreciation has made the country’s imports significantly more expensive outweighing the export gain. Nonetheless export data was encouraging with exports marking the 2nd consecutive year-on-year increase signaling improved Japanese competitiveness as well as recovering global demand. Exports to the US increased 15% on the year to the highest since October 2008 with strong demand for Japanese cars. While exports to the Eurozone remained weak the pace of decline moderated to -3.5% on the year in April, from -4.7% in March and -9.6% in February.
• Japan’s government upgraded its economic assessment for the 1st time in 2 months, citing an improvement in exports and industrial output. The assessment was changed from the economy is “showing signs of picking-up while weakness can be seen in some areas” to “The Japanese economy is picking-up slowly”, dropping any mention of “weakness”. The report states: ”We expect the economy to continue to recover as exports improve and as economic stimulus and monetary policy steps bolster sentiment.” Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda can claim a large part of the credit for the upgrade in economic assessment through their so-called “Abenomics” policy of radical monetary easing and fiscal stimulus. Since Abe took office in November the yen has depreciated to a 4 ½ year low and the Nikkei 225 equity index has rallied by 75%.
• The Eurozone’s current account surplus increased from €14.6 billion in February to €25.9 billion in March the largest surplus in over 6 years. The surplus increased rapidly from 1.5% of GDP in the 4th quarter last year to 2.4% in the 1st quarter, equivalent to €56 billion and the largest current account surplus since the formation of the Eurozone. Encouragingly the “peripheral” economies exhibited a dramatic improvement with their current account balances now close to balancing and in Irerland’s case moving strongly into surplus, suggesting an improvement in competitiveness. Over the 12 months to end March the Eurozone surplus measured €155.1 billion up significantly from €33.2 billion in the previous year.
• UK consumer price inflation (CPI) declined by more than expected from 2.8% in March to 2.4% below the 2.6% consensus forecast and the lowest in 7 months. On a month-on-month basis CPI declined from 0.4% to 0.2% also below the 0.3% forecast. Core CPI excluding food, alcohol, tobacco and energy also fell from 2.4% on the year to 2.0% versus expectations of 2.3%. Meanwhile producer price inflation (PPI) fell even more steeply signaling further declines in CPI in the months ahead. PPI decreased from 2.0% to 1.1% on the year the lowest since 2009 and well below the 1.4% forecast. On a month-on-month basis PPI was negative -0.1%. The numbers support the Bank of England’s forecast revision made last week that CPI would hit its 2% target earlier than previously estimated. The pound dropped on expectations the improving inflation outlook paves the way for more aggressive monetary easing.
• The Office of National Statistics (ONS) reported that the year-on-year increase in UK house prices accelerated from 1.9% in February to 2.7% in March. Prices in the South East and London increased by 3.3% and 7.6% over the same period. Rightmove reported that in terms of asking prices this has been the strongest start to the year since 2004 with prices rising 9.1% since end December. The resurgent residential property market is corroborated by rising mortgage lending which according to the Council of Mortgage Lenders increased in April by 4.0% on the month to £12.1 billion one of the strongest months for lending since 2008. Rising property prices provide a substantial boost to household wealth and in turn consumer spending which accounts for over 70% of GDP.
FAR EAST AND EMERGING MARKETS
• While the yen’s rapid depreciation is helping to reflate Japan’s economy, its traditional trading partners may be losing out. South Korea normally records a trade surplus with Japan but in April registered its 4th consecutive trade deficit for the year to date, measuring ¥248.2 billion ($2.4 billion), up substantially from ¥88.8 billion in January and up 45.7% on the year. While the yen has lost 20% against the US dollar since September it has lost an even greater 34% against the Korean Won unnerving Seoul policy makers who are concerned the country’s exports may lose out against Japanese competition in overseas markets. Park Sung-wook a research fellow at the Korea Institute of Finance said: “The won’s strength against the yen is feared to sap Korean firms’ profitability and worsen the country’s balance of payment on weaker exports.” Exports account for around 50% of the Korean economy and the range of exports is very similar to Japan’s.
• The Bank of Ghana unexpectedly raised its benchmark interest rate by 100 basis points to 16%. The central bank’s Governor Kofi Wampah attributed the rate hike to a sharp depreciation of the local currency, the cedi, and the impact this may have on inflation. Consumer price inflation has been rising steadily, increasing from 10.4% year-on-year in March to 10.6% in April the highest in nearly 3 years. Unfortunately rising interest rates are unlikely to shore-up the currency whose weakness has more to do with lax fiscal policy. The country’s budget deficit increased to 12.1% of GDP last year significantly above its 6.7% target.
• SA’s leading economic indicator eased from +0.9% year-on-year in February to +0.3% in March, while on a month-on-month basis registered a reading of -1.1%. The largest negative contributors were lower exported commodity prices and a decline in the number of residential building plans passed. The data confirms expectations for lackluster GDP growth in 2013, which despite the current weakness in the rand and the effect this may have on inflation, should prompt the SA Reserve Bank to keep interest rates unchanged over the foreseeable future.
• The Forward Rate Agreement (FRA) market shows expectations for a further interest rate cut by the SA Reserve Bank have diminished. Last week the market was pricing in the probability of a cut in the benchmark repo rate. However, labour unrest and rand weakness have since removed this probability. The FRA market is currently pricing in no change in the repo rate over the next 12 months and a modest rise of 50 basis points in early 2015.
• SA’s consumer price inflation (CPI) remained unchanged in April for a 3rd straight month at 5.9% year-on-year slightly above the 5.8% consensus forecast. On a month-on-month basis CPI increased by 0.4% with the largest contributors being alcoholic beverages up 1.2% on the month, food and non-alcoholic beverages up 0.5%, and transport costs up 0.5%. The rand’s weakness has so far had limited impact on inflation although its recent move beyond R/$ 9.50 may cause CPI to breach the SA Reserve Bank’s 3-6% target range during the 3rd quarter.
KEY MARKET INDICATORS (YEAR TO DATE %)
|JSE All Share||+6.59|
|JSE Fini 15||+8.27|
|JSE Indi 25||+17.35|
|JSE Resi 20||-7.15|
• The US dollar has reclaimed the key $/€ 1.30 level versus the euro suggesting a potential change in the dollar’s long-term trend.
• The rand has fallen through successive support levels at R/$9.30 and R/$9.50 suggesting a potential acceleration in the rand’s depreciation.
• The JP Morgan global bond yield is expected to make a final major downward move to a new low in the 2nd half of the year before the major bull trend which started in the early 1980s is completed.
• The shorter dated R157 SA Gilt yield has broken lower from its medium-term trading range of between 5.25-5.75% to a new trading range of 5.00-5.55% but like global bond yields is also likely to be in the final phase of its major bull trend.
• Ultra-loose central bank monetary policy has led to increased demand for riskier assets. The Leuthold risk-aversion index is trading close to 30 year lows.
• US and global equity markets have risen in many cases to all-time record highs suggesting a strong bull trend and further gains in the near-term. However, the S&P 500 index is forming a “rising wedge” pattern which often precedes a trend reversal.
• The Nikkei exhibits the most bullish pattern from a technical viewpoint with the recent descending “flag pattern” signaling a likely continuation of the recent upward move to a potential target of 15,000.
• The Coppock Curve is a long-term momentum indicator with an excellent track record in identifying major market bottoms. It shows that the March 2009 low was a long-term low unlikely to be broken.
• The Brent crude oil price has broken below $104 signaling a further downward correction to $90 and thereafter an extended downside target of $80.
• Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below key support of $7,500 suggesting a downside move to the 2011 low of $6,500.
• The Economist’s world food index has tripled since its base in 1999-2001 and continues to threaten rising global food price inflation. However, agricultural prices have fallen steadily since mid-2012 which suggests a gradual leveling-off in the strong long-term upward trend.
• Gold has broken below the key $1550 level suggesting the end of the 11-year bull trend.
• The All Share index has broken to new highs suggesting the long-term upward trend is intact. Financials are likely to outperform Industrials which in turn are expected to outperform Resources. The retail sector has broken down from its bull trend making the sector susceptible to substantial downside. Small cap stocks still offer good value relative to the All Share and likely to continue their outperformance in 2013.
• Unlike many previous policy initiatives ECB President Mario Draghi’s Outright Monetary Transactions (OMT) policy unveiled last September has had a lasting impact. OMT’s pledge of unlimited sovereign bond purchases, in order to reduce distressed sovereign bond yields to sustainable levels, has been an unmitigated success. Italian and Spanish 10-year bond yields have decreased steadily since OMT was introduced from 5.7% to 3.9% and from 6.8% to 4.2%. Neither the inconclusive Italian general election nor Cyprus’ bail-out have derailed the steady decline in yields, which prior to OMT might have been the case.
• Financial markets have stabilized, peripheral economies are able to fund themselves in the bond markets at current yields, the interbank market is functioning normally and bank lending is gradual rising. Eurozone “break-up” fears appear to have dissipated leading to a steady and sustainable increase in investor confidence.