NEW$ & VIEW$ (12 JUNE 2013)

Global Tumult Grips Markets

The tectonic plates of the world economy are shifting, raising the question of whether markets are experiencing a bumpy return to a new normal or new period of volatility.

The big questions hanging over markets and the global economy now: Is this is the inevitably bumpy beginning of a welcome return to normal—a world in which the U.S. economy doesn’t need big and repeated doses of imagemonetary stimulus, Japan grows again and China’s economy gently slows to a sustainable speed?

Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called “escape velocity”?

Shaken Global Markets

And these charts from Bespoke Investment:



Reuters’ Analysis: Emerging market crunch may cause Fed to think twice  If currency turbulence in emerging markets escalates into full-scale investor flight, the Federal Reserve may have a fresh headache in deciding when to slow its dollar printing policy.

India’s Slower Industrial Growth Adds Policy-Change Pressure

Production at factories, utilities and mines rose 2 percent from a year earlier after a revised 3.4 percent gain in March, the Central Statistical Office said in New Delhi today. Another report showed consumer prices climbed 9.31 percent in May from a year earlier, exceeding the median 9 percent estimate in a Bloomberg News survey.

Asia’s third-largest economy expanded at the weakest pace in a decade in the year ended March, hurt by an uneven global recovery and moderating investment. The rupee fell to a record low this week, a drop that may make imports costlier and stoke price increases that have narrowed the Reserve Bank of India’s scope for a fourth straight interest-rate cut on June 17.

Export slowdown threatens emerging Asia’s credit-fuelled boom

Export growth throughout Asia has sagged in recent months, hit by slackening demand from the United States, Europe and China and by slumping commodity prices. Leading indicators are also pointing to weaker factory activity in the coming months. (…)

Malaysia’s trade surplus fell to its lowest level in April since the 1997 crisis with a surprise 3.3 percent year-on-year fall in exports announced last week. The country could soon run its first trade deficit in 16 years.

Exports from the Philippines, which already runs a trade deficit and last month reported the fastest annual economic growth in Asia of 7.8 percent, plunged 12.8 percent in April from a year earlier. Indonesia reported a trade deficit in April after exports contracted for a 13th straight month. Thai exports have slowed, contributing to a record trade deficit in January.

Underlining broader Asian trade weakness, China posted on Saturday its lowest export growth in almost a year in May. China’s economy has been a major source of export demand for other Asian nations, but that is expected to fade as the world’s second-largest economy begins shifting to a slower growth path. (…)

Protectionism Surges to Worst Since Crisis as G-8 Nears

Four-hundred-thirty-one new protectionist measures were imposed from June 2012 to this month compared with 141 steps taken to liberalize commerce, said GTA, which was created in 2009 by University of St. Gallen professor Simon Evenett in Switzerland. Another 183 practices aimed at restricting trade are in the pipeline.

Euro-Zone’s Woes Stretch to Finland  The prime minister warned more budget cuts may be needed to halt an inexorable rise in the debt level because of the stagnant economy.

Eurozone Industrial production up by 0.4% in euro area

In April 2013 compared with March 2013, seasonally adjusted industrial production grew by 0.4% in the euro area (EA17) and by 0.3% in the EU27, according to estimates released by Eurostat, the statistical office of the European Union. In March production rose by 0.9% in both zones.



Total industry numbers firmed up nicely during Feb-April when IP rose at a 6.6% annualized rate on strong energy production and a 20.6% annualized rate of growth in capital goods during the same 3 months. Meanwhile, consumer goods production kept declining.

Fingers crossed  As Current Quarter Looks Worse, Higher Hopes for Second Half  Forecasts for second-quarter economic growth started off weak and are getting weaker as new data come in. And to that, many economists say what they’ve been saying throughout much of the recovery: stronger growth is just around the corner.

(…) The forecasting firm Macroeconomic Adviserslast week lowered its estimate for second-quarter growth in the nation’s gross domestic product to a 1.2% pace from 1.4% because of lower-than-expected consumer spending on some services. After April’s wholesale inventory numbers, released Tuesday, economists at Barclays lopped one-tenth of a percentage point off their calculation and now predict 1.1% growth. (…)

But not to worry, many forecasters say. The economy is expected to pick up as the effects of the tax hikes and spending cuts abate and rising wealth — from a resurgent housing market and improving stock market — boosts consumer spending.

Macroeconomic Advisers, for example, sees 2.4% growth in the third quarter and significantly faster expansion after that — 3.4% in the fourth quarter and an average of 3.25% in both 2014 and 2015. (…)

Of course, economists have been expecting the U.S. economy to turn a corner for a while now, only to be foiled by actual events. In November 2011, for example, the Federal Reserve forecast GDP growth as high as 3.5% this year. The actual result will likely be about a full percentage point below that. (…)

Auto  Auto Makers Diverge From Weakening Factory Sector


The inventory of cars held at the wholesale level hit exceptionally low levels in April, the Commerce Department said Tuesday. The ratio of inventory to vehicle sales dropped to 1.43, down from 1.44 the prior month. That’s now at its lowest level since April 2007, before the recession began.

High five  But sales have been tapering off lately (Chart from Barclays via Zerohedge)


The labor markets continue to take baby steps toward improvement. Businesses are filling slots when they can, and hiring might be stronger except that companies face difficulty filling certain slots. More workers are willing to jump ship, another sign of progress.

Data from the Bureau of Labour Statistics showed the recruitment rate remained at 3.3 per cent and the quitting rate was 1.7 per cent of total employment, up a little on the month before but still well below levels enjoyed before the recession.

Main hiring community feeling a bit less bad…
Small Business Sentiment: Highest Level Since May 2012

The latest issue of the NFIB Small Business Economic Trends is out today (see report). The June update for May came in at 94.4, which, despite a 3.2 point gain, remains in the lowest quartile of this indicator across time at the 22nd percentile in this series. A more optimistic view is that the index is its highest since its 94.5 reached twice since the onset of the Great Recession, first in February 2011 and 15 months later in May 2012. The index ended a sustained, 14-year cycle above this level in January 2008, the month after the onset of the Great Recession.

Click to View

The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months compared to the prior three months was unchanged at a negative 4 percent, the best reading in nearly a year but still more firms reporting declines than gains.

(Bespoke Investment)


A high rate may be a risk in the very long run – but right now the risk is that it may be too low

Ingram Pinn illustration

Investors are fleeing debt that protects them against inflation, amid signs that the Federal Reserve is preparing to trim its bond purchases.

The rout has sent the yield on 10-year Treasury inflation-protected securities into positive territory for the first time since December 2011. When bond prices fall, yields rise. The selloff in TIPS shows that investors believe the U.S. recovery is on track and that the risk of an inflationary spike is receding. (…)


TIPS are bonds or notes issued by the U.S. government that provide a shield against inflation. If the consumer-price index goes up, the principal on TIPS goes up, too. That boosts semiannual interest payments and repayment of principal at the date of maturity. (…)

The yield on TIPS—reflecting the so-called real, inflation-adjusted, yield on 10-year Treasury securities—traded at 0.07% on Tuesday afternoon, according to Tradeweb. That compares with a recent low of minus-0.74% on April 5. That means investors were willing to lock in a small negative return to reduce the risk that inflation would erode their purchasing power. (…)

TIPS investors have been hit by a double-whammy of headwinds in recent weeks: tame inflation in the U.S. and comments from Federal Reserve officials indicating they are making plans to cut back purchases of Treasurys and mortgage bonds.

Investors in mutual funds and exchange-traded funds that buy TIPS have pulled $7.2 billion out of the funds this year, according to Lipper, flushing out more than the $5.2 billion of new money the funds received in 2012. (…)

Confused smile  All this when the economy is on a firmer footing, austerity is out the window, the unemployment rate is declining, many inflation gauges remain firm and the Fed Chairman says that it would tolerate inflation up to 2.5%. Go figure!

Pointing up  Caterpillar Workers Approve Contract

Union workers for Caterpillar Inc. in Wisconsin on Tuesday approved a revised contract that will freeze hourly wages for existing workers for the next six years and establish a lower pay scale for new hires. (…)

Although workers secured some tactical victories by improving benefits and some contract provisions, the Peoria, Ill., company largely succeeded in putting a ceiling on wage increases for the next several years and aligning the Steelworkers’ contract with the contracts in place for other Caterpillar workers.


3 thoughts on “NEW$ & VIEW$ (12 JUNE 2013)

  1. Denis,

    I’ve noted several times in the past while, you’ve referred to an unchanged inflation rate. Yet looking at the PCE core rate, there has been a definite decline over the past 6 – 9 months or so (y/y). I think even the total PCE is down somewhat too.
    Also, the TIPS’ negative yield has been one of the side effects of ZIRP, I would contend. The reversion to a positive yield is a reaction to the potential end of ZIRP and the 60 odd bps backup in nominal rates, perhaps.

    • Hi Stewart,
      Headline inflation as per the CPI and PCE has clearly declined in 2013 creating a strong consensus that inflation is dead. The contrarian in me seeks to verify if this new wisdom is valid. First, both the CPI and PCE have some flaws that sometimes can blur the true underlying trends. The Cleveland Fed’s measures of median CPI and 16%-trimmed-mean CPI have continued to rise at a 2% annual rate so far in 2013 (see DRIVING BLIND). By the way, so has the core CPI even though I have yet to see anybody else mention it (last 4 months: +0.3, +0.2, +0.1, +0.1). Finally, MIT’s Billion Dollar Project’s daily inflation index (using daily online prices) has also kept rising at a brisk pace. First 4 months on 2013: +1.6% which is a 6.6% annualized rate. It is up 2.1% YoY. Note that it has a pretty good correlation with total CPI since 2008 (see It also has some flaws but, in all, I am not ready to call inflation dead as everybody is. One could also say that the bond market agrees with me…

      Finally, I doubt the Fed wants much lower inflation. Deflation is too dangerous. Bernanke has recently said he would tolerate 2.5% inflation. Perhaps he’s looking at the same stats as I am…Anyway, higher inflation is eventually needed to bring down the debt load.

      Remember Bob Farrell’s rule no.9: When all the experts and forecasts agree — something else is going to happen.

      Best regards


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