ABC News (Australia)is reporting that, “A Reserve Bank official says the head of the European Central Bank, Jean-Claude Trichet, is leaving a Sydney meeting of central bankers early to attend an ECB council meeting.” I expect this means investors could anticipate some market moving news related to troubled EU nations over the next few days.
According to CNBC, James Bullard,President Federal Reserve Bank of St. Louis, indicated in an interview today that *he does not believe the Fed will begin hiking interest rates, until after they start selling off some assets. He anticipates that the Fed could begin selling assets during the second half of this year. Bullard had this to say on asset sales, “Maybe you get in the second half of 2010 or something like that, if things are going pretty well, maybe then you’d sell a little bit at that point and you’d try to see how the market reacts.”
In investors’ minds Bullard’s comments will likely reduce the probability of a near-term rate hike, and also help define the parameters for future hikes. I presently do not anticipate that we will see a Fed rate hike until November 2010 at the absolute earliest.
*I heard this reported on CNBC, but have not yet found the quote to support this statement.
According to the China Securities Journal Yao Jingyuan, chief economist of China’s National Bureau of Statistics, said “Money supply is too big and that’s leading to excess liquidity.” He went on to say, “I would prefer reserve hikes to rate hikes because rate hikes could cause hot money to flow back.” Jingyuan’s comments are further evidence that Chinese officials will hold-off on rate hikes for as long as possible to avoid hot-money inflows, and will likely continue hiking reserve requirement ratios while using open market operations to remove excess liquidity. Also keep in mind that Chinese New Year will begin on February 14th.
Intellectual property, mobile internet technology and national censorship make an incendiary mix for global business and consumerism. This was brought to center stage recently with the escalating disagreement between Google and the Chinese government over privacy rights for online content. The clash of swords has most recently become a truly intergovernmental affair as well with U.S. Secretary of State Hillary Clinton’s policy speech on global internet rights and the just announced cooperation between Google and the National Security Agency in the search for the hackers behind the intrusion into some customers’ personal emails. Once Google felt its property rights had been impinged, its first headline-making reaction was to immediately provide unfiltered search results to its individual Chinese customers, reversing the policy of acquiescence to China’s political and cultural internet censorship by which it had abided since entering the country.
Yet, l’Affaire Google could have even wider implications for a burgeoning technology taking the world by storm: the eReader. These devices have the ability to carry libraries of books and other information inconspicuously across borders, an issue that no government has apparently considered a discrete policy matter to date.
In China’s case, the threat to the censorship regime could be too big for the government to ignore, both in terms of the potential quantity of subversive material and the ease of dispersing it. As one traveler’s first-hand commentary puts it, “You’ll be fine, as long as it’s not a suitcase full of books and then it’d kinda start looking like you’re smuggling in anti-Chinese propaganda.” Well, the eReader is a suitcase full of books that can be loaded onto the internet and sent via email without requiring any access to the Chinese firewall.
The next question for the broader global business community is whether they will face governments that refuse to honor their asserted intellectual property rights if they do not bind themselves to national censorship requirements. Nor can this be viewed as a purely China vs. World conflict. Western countries including Germany, Canada, and France, for instance, qualify free speech rights in relation to some material regarded as derogatory or anti-social. The implications, like the communication capacities of the devices, are likely to grow virally. Will China be manufacturing components for the key weapons in breaking down its own firewall? And would consumers start requesting confiscation refunds as part of their eReader warranties?
I finally caved and opened a Twitter account for Fiat Economics: https://twitter.com/FiatEconomics
I plan on using this to post short timely financial/economic musings that pop into my head throughout the day. The expect some days will have many while others will be rather slow.
“Unless further measures are taken to reduce the [U.S.] budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” -Moodys
This quote came from a note Moody’s released on Wednesday that went largely unnoticed by investors.
You can find the FT Article Here
In order for the U.S. to shift course we will need to see major reductions in spending coupled with an increase in taxes, that will probably resemble that of the 1970’s, where the highest tax bracket went north of 70%. Today’s growth is coming at a price, which will eventually need to be paid.
I should note that before the financial crisis rating agencies were releasing reports reaffirming sub-prime assets AAA credit ratings, however, with a caveat. The caveat was that this rating would be secure so long as there was no decline in home prices. But, at this point in time you would have been hard pressed to find an economist on Wall Street–even the optimistic ones I was working with–who were not calling for a decline in home prices. The rating agencies realized the consequences of downgrading these assets, and likely did not want to be known as the spark that caused the biggest financial crisis since the great depression. Instead they waited until it became completely apparent to everyone that these assets were in no way investment grade (as they subtly alluded to with their caveat) and waited to downgrade until the damage was already done. It looks like they do not want to repeat this mistake.
January’s non-farm payrolls fell by -20K, compared to a Bloomberg consensus forecast of an increase of +15K. December’s release was revised down to -150K from -85K, while November’s number was revised up to +64K from its original release of +4K. January’s unemployment rate unexpectedly fell to 9.7%, from 10.0%–driven by a shrinking workforce. Keep in mind that once the labor market begins to improve many of these discouraged workers will begin to move back into the labor force, having the opposite effect on the unemployment rate.
Looking at the details; manufacturing payrolls rose in January 11K, after 25 months of declines, this echoes improvements in the ISM, which I believe could come under some pressure during the first half of this year (for more on this please see my piece being published later today). The service sector added 40K jobs. The construction sector lost an additional 75K jobs, likely due to cold weather, which likely also show up in the month’s construction activity indices and housing starts.
Government jobs declined -8K, mostly due to losses on the state and local front, which was offset by a 33K increase on the federal front–a portion of which are temporary census workers. There was some good news on the temporary job front–generally accepted as a good forward looking indicator–, which rose 52K during the month.
Finally, a longer average workweek (33.3 hours from 33.2) may indicate companies are moving some part-time employees back to full time, which could be an eventual prelude to hiring. At the same time, average hourly earnings rose 0.3% during the month. Combined this should help bolster personal income during the month by around 0.5%.
I do not believe this report will have any major impact on the FOMC’s next meeting scheduled for March 16th. While unemployment improved the Fed is still fully aware of the amount of slack in the system, and the relatively tepid growth outlook for the U.S. in 2010.
Janurary’s non-manufacturing ISM release rose modestly to 50.5 versus 49.8 in December. This was just below the Bloomberg consensus forecast of 51.0. The employment index rose to 44.6 from 43.6, while the prices paid index climbed to 61.2 from 59.6. The new orders index took a bit of a bounce in January moving to 54.7 versus 52.0 a month prior, which could help to bolster the index next month. Growth in the service sector, unlike manufacturing, has been relatively subdued over the past six months with the index bobbing around the 50 break-even point since August. This report is further evidence of uneven economic growth and the fragility of the current economic recovery.
Concerns over the future impact Chinese policies could have on the real estate sector have nearly halted transactions in the sector as buyers expect prices will begin to fall. According to the China Securities Journal, the volume of second-hand property transactions fell nearly 70% m/m in January, with new sale transactions falling by more than 45%. This news likely will not bode well for the Chinese real estate sector, especially companies like EHouse (EJ) who rely on volumes.
Further aggravating China’s real estate sector were comments by Beijing’s vice-mayor picked up by China Daily who said “I want to make it clear – Beijing is determined to curb the price hike.” He added, “I believe Beijing’s property price will not experience wide fluctuation this year.”
January’s Manufacturing ISM Index rose to 58.4, now coming in above 50 for six consecutive months. The this reading was much better than the Bloomberg consensus forecast of 55.5 with individual estimates from 53.5 to 58.0.
Looking at the ISM’s sub-indices; prices paid rose to 70.0 in January from 61.5 in December; the employment index climbed to 53.3 from 50.2; & the new orders index rose to 65.9 compared to 64.8 a month prior.
Markets are trading higher on the news, especially material companies, as manufacturing surveys around the world showed strong than expected gains.
