NEW$ & VIEW$ (18 DECEMBER 2013)

Low Inflation Tests World’s Central Banks Inflation is slowing across the developed world despite ultralow interest rates and unprecedented money-printing campaigns, posing a dilemma for the Fed and other major central banks as they plot their next policy moves.

U.S. consumer prices rose just 1.2% in November from a year earlier, according to Labor Department data released Tuesday.

Meanwhile, annual inflation in the euro zone was 0.9% in November, the European Union’s statistics office said Tuesday. And central banks in Sweden and Hungary cut interest rates, the latest efforts elsewhere in Europe to boost struggling economies as inflation remains low. (…)

Central bankers worry about inflation falling too low because it raises the risk of deflation, or generally falling prices, a phenomenon that is difficult to combat through monetary policy. Some economists believe weak or falling prices can lead consumers to delay major purchases, exacerbating an economic slowdown. Even without deflation, very low inflation can be a sign of weak demand that weighs on wages, corporate profits and growth.

Low Inflation Tests World Central Banks


The CPI less food and energy, also called core inflation, increased 0.2% (1.9% annualized rate) on a seasonally adjusted basis, after 3 months of consecutive 0.1% montlhy gains.

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.2% annualized rate) in November. Median prices have been rising by 0.2% in 7 of the past 8 months,

Over the last 12 months, the median CPI rose 2.0%, the trimmed-mean CPI rose 1.6%, the CPI rose 1.2%, and the CPI less food and energy rose 1.7%


Mug Is The Fed Driving You To Drink? 



Gasoline prices will reach $3.15 by the end of the year, according to Andy
Lipow, president of Lipow Oil Associates LLC. “We’re going to see significant increases in gasoline inventories the next few weeks,” he said. “Refiners will maintain their high rates of utilization while demand declines toward its seasonal low in January and February.”


Although low oil prices don’t necessarily mean low inflation anymore (chart from BMO Capital):



U.S. Productivity Slows, Labor Costs Rise

Revised Q3 data show labor productivity among nonfarm firms rose 3.0% annualized in the quarter and unit labor costs fell 1.5%. But the quarterly data mask a clear slowing trend in productivity this year (0.3% y/y) and a pickup in unit labor costs (2.1%). The former hints at further strength in employment, as the low-hanging productivity fruit of recent years is largely picked. But, it also implies higher unit labor costs and somewhat firmer inflation in 2014. (BMO Capital)


The deceleration to zero productivity growth, which has a direct link to profit margins, will finally incentivize the business sector to invest organically in their own operations with belated positive implications for capex growth. (David Rosenberg)

Keep in mind that the current low labour participation rate technically means that the supply of labour is tight. And this:

On December 4th Barack Obama called for a higher federal minimum wage. He has previously suggested that it rise from $7.25 to $10.10.

Even though

In 1979 7.9% of workers toiled at or below the federal minimum wage; last year 2.8% did. From January 1st 21 states will have a minimum wage higher than the federal one. More may introduce one next year; others will raise theirs further. (The Economist)

Add that:

Mortgages To Get Pricier Next Year

Consumers can expect to pay more to get a mortgage next year, the result of changes meant to reduce the role that Fannie Mae and Freddie Mac play in the market.

The mortgage giants said late Monday that, at the direction of their regulator, they will charge higher fees on loans to borrowers who don’t make large down payments or don’t have high credit scores—a group that represents a large share of home buyers. Such fees are typically passed along to borrowers, resulting in higher mortgage rates. (…)

In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don’t have down payments of at least 20% and who have credit scores of 680 to 760.

A borrower seeking a 30-year fixed-rate mortgage with a credit score of 735 and making a 10% down payment, for instance, would pay fees totaling 2% of the loan amount, up from 0.75% now. The 2% upfront fee could raise the mortgage rate by around 0.4 percentage points.

Borrowers with larger down payments could also be affected. Fees for a loan with a 690 credit score and a 25% down payment would rise to 2.25% from 1.5%. (…)

The changes follow other announcements in recent weeks that could raise loan costs for some borrowers. The Federal Housing Administration, a government agency that guarantees loans with down payments as small as 3.5%, said earlier this month that it would drop the maximum loan limit in around 650 counties. In San Bernardino, Calif., for example, the loan limit will fall to $335,350 next month from the current level of $500,000.

Separately, the FHFA said Monday it would study reducing the loan amounts that Fannie and Freddie guarantee by around 4%, bringing the national limit to $400,000 from its current level of $417,000. Those changes won’t take effect before October 2014, the agency said.

 U.S. mortgage applications fall in latest week: MBA

Applications for home mortgages fell last week, dropping to a multi-year low, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.5 percent to 374.6 in the week ended December 13.

The index has fallen for six of the past seven weeks. Mike Fratantoni, MBA’s vice president of research and economics, said the index dropped to its lowest “in more than a dozen years… as interest rates increased going into today’s Federal Open Market Committee meeting.”

The MBA’s seasonally adjusted index of refinancing applications fell 4.3 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, lost 6.1 percent. (Chart from CalculatedRisk)


 Japanese Exports Rise

The volume of merchandise exports in November—seen as a more reliable gauge of underlying strength than value terms—rose 6.1% from a year earlier, the Ministry of Finance announced Wednesday. The increase was the sharpest in a year and a half, and compares with a 4.4% rise in October.

Exports to Asia rose 5.9% in volume terms, the most in more than two and a half years, offsetting a slowdown to the U.S. and Europe.

Japanese manufacturers exported a total 512,432 automobiles in November, up 9.4% from a year earlier, the fastest rise in about a year and a half. They also shipped 67,000 motorcycles, up 7.0%, faster than the previous month’s 4.5% rise.


From CEBM Research:

The adjusted new orders manufacturing PMI between 2011 and 2013 have been significantly lower than in 2010 and remained range-bound. No sign of a breakthrough has yet been observed.

Consumption is a relatively positive component in 1Q14, as consumption
experienced a significant decrease due to the anti-corruption movement in 2013. However, based on our survey, general consumption, including
department stores, retail and restaurants, are not very strong, as the CEBM Consumption Index has hit a 6-year low. Therefore, an upside trend in consumption in 1Q14 is limited.


The volume of transactions in Canton Fair leads exports by 6 months.
Transaction volume Y/Y at this autumn’s Canton Fair is lower than the Fair this spring. Given this correlation, exports in 1H14 are not likely to

Another indicator for weakening exports is US GDP. Except 1H13, when the abnormally high growth of exports may have been due to false foreign trade to take advantage of interest rate arbitrage, US GDP Y/Y and China’s exports Y/Y are correlated. Because US GDP Y/Y is likely to be lower in the first half of 2014 and higher in the second half, Chinese exports are unlikely to accelerate in 1H14.


From National Bank Financial:

Year-on-year export growth has stabilized at around 8% overall, or
roughly 5% excluding exports to Hong Kong. And with the yuan now at an all-time high in real effective terms according to latest data from the Bank of International Settlements, it will be a tall order for exporters to increase growth over the coming years.



Samsung Shifts Plants From China to Protect Margins

Samsung Electronics Co. (005930) built the world’s largest smartphone business by tapping China’s cheap and abundant workforce. Not for much longer: it’s shifting output to Vietnam to secure even lower wages and defend profit margins as growth in sales of high-end handsets slows.

By the time a new $2 billion plant reaches full production in 2015, China’s communist neighbor will be making more than 40 percent of the phones that generate the majority of Samsung’s operating profit. The Suwon, South Korea-based company’s second handset factory in Vietnam is due to begin operations in February, according to a Nov. 22 statement on the local government’s website. (…)

“The trend of companies shifting to Vietnam from China will likely accelerate for at least two to three years, largely because of China’s higher labor costs,” said Lee Jung Soon, who leads a business-incubation team of the Korea Trade-Investment Promotion Agency in Ho Chi Minh City. “Vietnam is really aggressive in fostering industries now.” (…)

Intel, the world’s largest chipmaker, opened a $1 billion assembly and testing plant in Ho Chi Minh City in 2010. Nokia said its facility near Hanoi producing Asha smartphones and feature handsets became fully operational in the third quarter. LG Electronics Inc. (066570), Samsung’s smaller South Korean rival, is building a new 400,000 square meter complex to make TVs and appliances as part of a $1.5 billion investment plan. (via Grant Williams)

China November Homes Prices Rise as Shenzhen Posts Record Gain

Shenzhen and Guangzhou posted increases of 21 percent from a year earlier, while prices climbed 18 percent in Shanghai and 16 percent in Beijing, data from the National Bureau of Statistics showed today. Prices rose from a year earlier in 69 of 70 cities tracked by the government last month, it showed.

The value of November home sales climbed to the highest in almost two years, to 720.4 billion yuan($119 billion), the statistics bureau said last week.


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