Since the start of this year I have been a proponent of the belief that China will once again begin to gradually appreciate their currency as exports recover, and inflation begins to creep back into the Chinese economy. As the chart below illustrates, investors in the CNY NDF market appear to share this view. But, excluding the curve from 3/10/09, significant RMB appreciation always seems to be six months away. The magnitude of the appreciation has grown from September, but is still six months off. In addition to inflationary fears, speculative capital inflows have buffeted China due to interest rate differentials and the expectations of eventual RMB appreciation, placing further pressure on the currency. What I believe this data shows is that appreciation in China is inevitable, while the actual timing and magnitude remain in question. But, I do expect we will see the Chinese government reinitialize the RMB’s gradual appreciation within the next six months. This move will be expedited if export growth remains robust, while inflation continues to rise.
RMB NDF Curves
Source: Bloomberg
After a bit of a lull in 2009, M&A activity–a gauge toward GDP growth–has begun to gain some momentum this year. Unsurprisingly, this uptick in M&A activity coincides with gains in business and professional services employment; a series that includes lawyers and bankers.
M&A Activity vs. Business and Professional Services Employment
Source: Bloomberg
The upward trend for M&A is generally expected to continue as companies continue spending cash they have hoarded since the onset of the economic crisis. More M&A should continue to bode well for business and professional services employment,;try running a M&A deal without several teams of lawyers… And of course without senior bankers, and their hoards of junior banker minions working almost non-stop to create a mountain of pitch books, there would be no deals. So which companies will these bankers be targeting? Below is a table from Gridstone Research that highlights the top 35 commercial and industrial companies with the largest cash, short-term investments and marketable securities positions:
Source: Gridstone Research
Sophia Drossos, the co-head of global FX strategy at Morgan Stanley, believes Canada will soon begin tightening rates based on the Central Bank’s inflationary concerns. Sophia said, “We’re looking for them to deliver 50 basis points rate hikes in the second quarter, and the market is slowly coming around to our point of view because the fundamentals in the data have been so strong.” She went on to say, “We think the rate-hike cycle is going to start in June and continue through the end of the year, and we’re looking for 125 basis points rate hikes, and the market’s only pricing in about 60.”
Canadian Dollar:
Source: Bloomberg
*The CAD has been one of the G10’s best performing currencies in 2010, only behind the Japanese Yen. The worst performer has been the British Pound.
Recently I have found plenty of enjoyment looking through old Popular Science magazines online. Today I came across an article from 1981 in which the author was very serious about a new service rolling out that would deliver data directly to your TV via phone lines or antennas (traffic, scores, weather, etc…). I am assuming back in 1981 this technology was eventually superseded by computers and the internet, but comparing it to the functions of today’s Tivos, digital cable boxes, and other TV hardware, this article couldn’t have rang more true if penned in 2001 (20 years after it was originally published). Better late than never I suppose. The article goes into detail about the pros and cons of three competing services that will all be vying for your business. But, in any case enjoy some screen shots:
Take a look at the interface… (Looks like the Giants still couldn’t catch a break):
There’s more: (Fresh Direct 1.0?):
Sources: http://www.popsci.com/archive-viewer
Non-farm payrolls fell -36K, handily beating the latest consensus forecast of -68K. The unemployment rate was steady at 9.7%. The market can expect some volatility from government census worker hirings over the months ahead. The effect should be positive for the next couple months, but eventually turn negative as these workers are let go.
One of the bigger surprises in the report was a +1,000 increment in manufacturing payrolls, versus and expected decline of -15,000. Manufacturing’s is a much smaller portion of the U.S. economy compared to years past, but still holds much of the economy’s cyclicality.
Looking at temp employment, one of my favorite leading indicators toward payrolls, we can see a strong upward trend beginning in September 2008. As the chart below illustrates, temp employment, the white line, began falling well before total payrolls, the white line, during the recent economic crisis. But, since September temp employment has begun to surge. Temp employment growth could eventually lead to a jump in total payrolls, as companies who are optimistic, yet uncertain, about the future tend to hire temps before actually filling full time positions. Temps are also the first employees to be let go as companies become pessimistic, yet uncertain, about the future. 284K temps have been hired since September’s low.
Total Payrolls (orange line) vs. Temp Employment (white line)
Source: Bloomberg
Pending home sales, generally considered a good leading indicator for final home sales fell -7.6% in January, supporting recent weakness in both existing and new home sales. This result was well below the consensus forecast calling for a monthly increment of 1.8%. This data reiterates my view that that the housing recovery will face significant headwinds over the months ahead as interest rates begin to rise and the newly extended home buyer tax credit proves to be impotent in bringing new buyers into the market.
Several weeks ago Fitch warned that out of all Europe’s AAA rated sovereigns the UK was the most vulnerable to lose this rating. But, most analysts believe this would not be an issue as the government would implement austere fiscal policies reigning in large deficits and a growing debt load. Such policies do not come without political backlash, which is why a fear of no majority in the British Parliament is raising concerns that Britain will be unable to enact the necessary policies to stabilize spending. As you can see from the falling pound these risks are now being priced into the market, and trading will likely be volatile until the market receives a clearer picture of the upcoming elections, and whether or not parliament will be able to make these tough decisions without a majority if this does occur. The UK is no stranger to financial strife. In 1976 the UK received a loan from the IMF on the back of concerns over its debt and large budget deficits.
UK Budget Deficit (% of GDP)
Source: Bloomberg
Fiscal Deficit
Source: Bloomberg
Debt to GDP
Source: Bloomberg
GDP Growth
Source: Bloomberg
Debt Coming Due % of GDP
Source: Bloomberg
The February’s manufacturing ISM slipped to 56.5, versus a 58.4 a month prior. Disappointing the latest Bloomberg consensus forecast of 58.0. Any level over 50 signifies expansion in the sector. I continue to believe that as inventory restocking begins to slow the ISM manufacturing index will suffer as 2010 progresses. That is without a new source of demand for manufactured goods, which does not appear to be on the short-term horizon.
Looking at the ISM’s components, prices paid fell to 67.0 from 70.0, the employment index climbed to 56.1 from 53.3, and the new orders index declined to 59.5 from 65.9. A jump in the employment index could bode well for this Friday’s employment report, which could be battered by weather related effects.
Manufacturing ISM & ISM Employment Index
Source: Bloomberg
