The Fed not blinking
July 6, 2012 in Uncategorized
“The upwards moves in interest rates by Jean-Claude Trichet in hindsight seems to have been the wrong ones, but that could have happened to anyone. The interest rates on deposit facilities was cut to zero percent from 0.25 percent, this would encourage banks to lend. But will they? Who knows?”
Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. Yesterday was that one day before the market junkies get their single biggest number for the month, the non-farm payrolls data. Normally it is a little quieter than it was, from a data flow point of view, but there was no shortage of action yesterday, it came flying in all directions after midday. Some we were sort of expecting, the ECB (European Central Bank) cut rates to an all time low, whilst others we did not expect, the PBOC (People’s Bank of China) lowered the deposit rates across the board, and also lowered lending rates at the same time. I wouldn’t say obviously. The Chinese news was a positive surprise (I think), but there was no change to the reserve ratio requirements rate. And whilst the Chinese release was not expected, a Bank of England announcement that they would continue their asset purchase program, adding another 50 billion Pounds to it, was expected. Quantitative easing or QE is what this is chaps.
Session end the Jozi all share index managed to hang on to good gains, 182 points up on the day to close at 34223, 0.54 percent better on the day. Banks added almost exactly that percentage gain, Telkom slid by about the same amount. I promise that we will talk about that ADSL pricing sometime soon, or perhaps I should just point you in this direction, Techcentral deputy editor Criag Wilson wrote this piece: Rock. Telkom. Hard place. Resource stocks added a less exciting quarter of a percent, general retailers were on a tear, up 1.81 percent, MTN had a cracking day, up the same amount as general retailers. And in fact MTN is within touching distance of their 52 week high, which is possibly a “normalised” high, if I could put it that way. I guess the overhang of the Turkcell allegations are closer to going away, if I could put it that way.
Ye Olde Worlde. Listened carefully to the ECB press conference afterwards, we all admired the way that ECB chief Mario Draghi conducts himself. He comes with such an impressive resume and track record. Perhaps the only disappoint was that there was less clarity with regards to the bond purchasing program that would have helped the bond yields of both Spain and Italy to get lower. But rates were cut to an all time Euro low, to 0.75 percent. The upwards moves in interest rates by Jean-Claude Trichet in hindsight seems to have been the wrong ones, but that could have happened to anyone. The interest rates on deposit facilities was cut to zero percent from 0.25 percent, this would encourage banks to lend. But will they? Who knows? Have a read through the Introductory statement to the press conference. I guess the biggest disappointment was the bond purchases, that would have helped Spain and Italy. And that is why I think that the market received this news negatively, the Spanish equities market was crushed nearly three percent, the Italian stock market was down two percent. Not good.
Byron’s beats converges on Beijing central. 39o 54′ 50″ N, 116o 23′ 30″ E for a look at the rates decision from yesterday:
- The Chinese central bank is unconventional to say the least. Well according to the West anyhow but who is to say what is right or wrong. Yesterday they did an unexpected cut lowering the one year lending rate by 0.31% and the deposit rate by 0.25%. Banks can also lend at 70% of the benchmark which is down from 80% previously which makes loans more affordable for borrowers.
This is the second time rates have been cut in a month as the authorities take advantage of less than expected inflation numbers. The market didn’t like it however. China has been known to implement stimulus just before a slew of negative economic data. Market participants expect that the authorities have had a glimpse at the June figures and have made this cut as an urgent reaction. Maybe they saw less than expected inflation numbers as well. It is funny how markets work, bad news seen as good news seen as bad news.
I’d have to say that net net this is good news. We know China is hitting a speed bump. We also know there is a lot of room for easing. We also know that this economy is still growing very fast and when it is stimulated the reactions will be more extreme. For example when the deposit rate decreases in a nation which has a saving culture, millions of people will be incentivised to spend instead of save. There are also growth opportunities which need investments. So when interest rates decrease, better places to put money do exist. This, as opposed to Europe, where money is cheap but the alternatives are fewer.
But most importantly these rate cuts further liberalise the Chinese consumer who are supposed to be the next big growth theme, not just for China but for the whole globe. Consumer based growth is sustainable and even more powerful than an industrial growth spurt. As more and more Chinese people experience the joys of consumption it will spread like wild fire. It’s addictive, contagious and often customers are the best advertisements. I’ve already convinced three of my friends to buy iPads. Fashions, fads, must haves and must do’s will be embraced into their everyday lives.
Of course this is just my opinion and admittedly I have never been to China. But I know human nature and I know that, judged by the numbers we have seen, this is already take effect. The base is still low and there is tons of potential.
New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. There was a whole slew of US data, the ADP employment number beat expectations, the weekly jobless claims were lower than anticipated and although the ISM services index missed expectations, it is clear that the US economy is in far better shape than the folks across the Atlantic. The Dow managed to do a there and back again, after a poor start, but still closed in the red, down 47 points to 12896 on the day. The broader market S&P 500 lost nearly half a percent, whilst the nerds of NASDAQ ended about flat, just marginally better.
Let us check out those ADP numbers. Who are ADP? And why are these numbers even considered important? Well, as per their website: “It is a measure of employment derived from an anonymous subset of roughly 500,000 U.S. business clients. During 2011, this subset averaged about 344,000 U.S. business clients and represented over 21 million U.S. employees working in all private industrial sectors.” So, this is an estimate then of the whole workforce, through the ADP numbers of their payroll systems! A guesstimate really, but a very good one.
Here is the release from their website: June 2012 ADP National Employment Report. However remember that last month there was a much better read on ADP than there was on the Labor department’s non-farm payrolls number. I will tell you something interesting that I came across, the perception is that government is too big in America. BUT, the WSJ has a piece that suggests that if the government had not been firing people left right and centre, the unemployment rate would be closer to 7.1 percent. Wow. That is pretty amazing really. But still, the same article (admittedly old, from May) titled Unemployment Rate Without Government Cuts: 7.1%. That part is most interesting, because this is directly in contrast to what the Republican types are saying, “big government” is getting smaller. But by smaller, there are still too many government employees, 20.3 million folks!
So, this tees us up for the actual number, non-farm payrolls. The expectations that I can see are for an improvement of 100 thousand jobs, versus a 69 thousand gain last month. I get the sense that NOBODY pays as much attention to the revisions as they should. Hopefully the manufacturing trend will change, the last three months have seen losses for that industry. But May and April have both been pretty awful employment months, the Greek issue was pretty big too. Weekly hours worked has been unchanged over a year, to 33.7 hours. Average hourly earnings was lower in May than in April! And then there is of course the unemployment rate, which is a household survey, so that could be interesting from a mainstream point of view. For those interested, 8.2 percent is the current rate, 12.7 million Americans are currently unemployed. That is more than the whole population of Greece (10.8 million) and just less than Zambia (13 million people). That puts the sheer size and scale of the American economy into context.
Currencies and commodities corner. Who are Statoil? Well, they are a Norwegian company that is the world’s 13 largest oil and gas company by revenue, listed in both Oslo and New York. The business is relatively young as far as energy majors go, founded in 1972 only, and recently merged with the oil and gas part of Norsk Hydro (made sense from that name). As far as I can tell, the Norwegian government has a 64 percent stake in the business. This is a global business, which operates in 36 countries around the world, closest to us here is Mozambique and Angola, no guesses as to why. So where is this all going? Well, as per the release from the Statoil website: Statoil preparing to halt production after notice of lockout. Yech. “For Statoil, the shortfall in production will be around 1.2 million barrels of oil equivalent per day.” Not good for global consumers I am afraid, unions are demanding higher wage increases and earlier retirement. I am not too sure if union members all want a paid for holiday to Corsica. Pfff… really Sasha.
So now you see where that was all going, just as the Iranians are having to store oil in ships going around in circles looking for someone to buy, the Norwegian bosses are adamant that the warmer weather is a good time to negotiate and implement a lockout. An industrial lockout is different from a strike, because the company closes operations and workers lose pay. This type of action is only instituted on workers if management feel they have to muscle terms of wage negotiations. Not something that you would see here.
All this though has resulted in a shortage of supply, Iran oil is a no go for everyone, and now Norwegian oil production is about to grind to a halt. And that is why oil prices have gone higher in recent days, with NYMEX last at 86.50 Dollars per barrel, and 99.49 Dollars per barrel for North sea Brent, that is why you see the price between the two having moved further apart, the lockout. At one stage yesterday Brent had topped 101 Dollars a barrel. Since the lows of 20 June (Brent was under 90 Dollars a barrel), the oil price has moved steadily North.
The gold price last traded at 1604 Dollars per fine ounce, the platinum price is lower at 1468 Dollars per fine ounce. Dr. Copper is slightly lower from yesterday, the price last at 347 US cents per pound. The Rand is last at 8.16 to the US Dollar, 12.66 to the Pound Sterling and 10.10 to the Euro. We have started slightly better here, heading back towards all time highs.
Sasha Naryshkine and Byron Lotter
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