NEW$ & VIEW$ (6 AUGUST 2013)

Big Positive Reversal in ISM Services

The ISM had a big positive reversal in July, rebounding from its lowest level in over three years back to the highest level (tied with February 2013) it has seen in over a year.  While economists were forecasting the headline index to rebound from 52.2 up to 53.0, the actual level came in at 56.0.  On a combined basis (accounting for each sector’s share in the overall economy), the ISM for July rose to 55.9, which was the highest level in nearly a year and a half.

Americans With Best Credit in Decades Drive U.S. Economy

Household net worth soared to a record high in the first quarter, Federal Reserve data show, and the financial-obligations ratio relating consumer debt to income matched the lowest in 33 years. Consumer loans are rising, and the American Bankers Association reports the share of delinquencies on bank cards is the smallest since 1990.

Total consumer borrowing climbed by $19.6 billion in May, the biggest gain in a year, as Americans charged more purchases on credit cards and increased school and automobile loans, Fed figures showed

Demand for Business Loans Increasing, Credit Eases

Almost a third of banks reported an increase in demand for commercial and industrial loans from small businesses and nearly 28% saw an uptick from larger and midsized firms, according to the Federal Reserve‘s July survey of senior loan officers, released Monday. Both measures improved from readings in the previous quarter’s survey.

Stronger demand was attributed to businesses’ desire to invest in plants, equipment or inventories.

The survey found banks were more willing to lend as well. Nearly 20% of respondents report that credit standards had eased at least somewhat for larger and midsized firms, though only 10% saw a loosening for small businesses over the past three months.

From a year earlier, credit conditions improved, the Fed survey found. Most banks that eased their business-lending policies cited increased competition for such loans. Several also saw a more favorable economic outlook.

Among households, demand for mortgage loans was similarly strengthening, but banks weren’t moving as quickly to ease their standards, especially for weaker borrowers.

German Orders Gain Most in Eight Months in Recovery Sign

German orders, adjusted for seasonal swings and inflation, increased 3.8 percent from a month earlier, driven by contracts for bulk items, the Economy Ministry in Berlin said today.

Basic-goods and consumer-goods orders both dropped 0.2 percent from the prior month.

Pointing up  Orders for investment goods climbed 6.8 percent from May, led by a 20.2 percent gain in orders from within the euro zone. The increase for the single-currency bloc was the largest since June 2007 and partly reflects contracts signed at the Paris Air Show last month, the ministry said.

Italian GDP falls but decline is slowing
Economists warn signs of recovery remain fragile

Istat, the national statistics bureau, said on Tuesday that gross domestic product fell 0.2 per cent in the second quarter following a 0.6 per cent contraction in the first three months of 2013. Year on year GDP is down 2.0 per cent.

The Bank of Italy forecasts that the economy will start growing in the final quarter of 2013 and post a 1.9 per cent contraction for the year as a whole.


George Magnus
Forget ‘taper’ risk: China is a bigger threat

(…) Europe is a bigger cause for concern. Claims that recent economic indicators portend a return to sustainable growth in southern Europe look way off the mark, and are overshadowed by the absence of aggregate demand, the unsustainability of debt levels and default risk, and the difficult politics of austerity.

Moreover, the new German coalition government, emerging after next month’s elections, is most unlikely to accede to demands for a change in Germany’s macroeconomic policies, or for the transfer mechanisms and fiscal backstops needed to build a credible banking union, and a more stable European banking system.

But the most immediate and transparent threat to markets is already evident in the funk in emerging market equity, local currency bond, and currency markets, as well as in global commodity markets. Predictably, China is centre stage.

(…) Analysts and investors have not yet embraced fully the idea that the China problem is not about a cyclical and easily countered economic detour, but about the implications of what a fundamental transformation of the country’s economic model means for China’s GDP growth and supply chains, and for global commodity markets and industries.

(…)  China’s top leaders understand this, but changing the model to one based on efficiency, innovation and a greater role for markets at the expense of the state, is easier said than politically done.

Even if they succeeded, making the change could only be done in the context of slower, sustainable growth, and policies designed to absorb or address overcapacity in heavy and commodity-intensive industries, and a rise in debt service problems, defaults, and non-performing loans.

This comprises an unequivocally deflationary risk for global markets, which is likely to challenge risk appetite again and push up the US dollar, especially against emerging market currencies, including even the renminbi. (…)

Industrial and mining commodity exporters face a daunting time as the share of property investment in GDP falls from a lofty 15 per cent. The income and wealth effects on sectors from steel and cement to white and luxury goods could affect up to 35-40 per cent of the economy. Against this backdrop, concerns about tapering are little more than the proverbial rounding error.

(Chart from Bespoke Investment)

FtAlphaville adds these charts from Capital Economics:

Here are the Services PMIs from Haver Analytics:


(…) in terms of increases from their lows the best-performing economy is the UK which is up by 20 points from its low followed by the US, followed by Russia and then by the global economy and finally Brazil. China, at a queue ranking value at the 0.7 percentile, is actually quite close to its cycle low (within one percentage point). China had been able to fight off much of the weakness in the financial crisis but now is finding itself becoming entangled in the difficulties of getting growth going in a slow-growth world. The advanced economies are beginning to create blowback effects on the Chinese economy which is so dependent on demand in countries overseas and is desperately trying to shift its economy to reduce that dependence.

(…) Part of this I think is to acknowledge that the developing economies in the past were able to improve their economies by hitching their wagons to domestic demand in the strong countries of the most advanced economies by running trade surpluses with them. With weaker demand in the advanced economies the developing economies are having more difficult time. They are probably going to be further pressured to reduce their historic tendency to run trade surpluses. While this is a story principally about the traded goods sector, there are clear implications for the economy as a whole and you see the response by looking at the services sectors which largely consist of nontradable goods. Perhaps the developing nations should seek to stimulate their services sectors to reignite growth in their manufacturing sectors instead of sitting around waiting for the business cycle to turn up in the advanced economies. The game of export-led growth no longer looks like it will play out in the future as profitably it had in the past.

And this from

Australia cuts rates to record low
Less dovish statement from RBA triggers rally in Aussie

(…) The central bank is hoping for further declines in the currency. “The Australian dollar has depreciated by around 15 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy,” Mr Stevens said.

In taking interest rates to a record low the central bank is seeking to spur activity in industries such as construction to offset a peak in resources investment, which has quadrupled as a share of the economy. However, consumers and businesses have been slow to respond to lower borrowing costs.

Mr Stevens has also adopted a more bearish tone when discussing the recovery in the non-mining economy. At a lunch in Sydney last week Mr Stevens warned that “a stronger trend in non-resources business investment looks like it is a while off yet”. (…)


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