Friday, August 28, 2015

28/8/15: Core Retail Sales for July: Less of a Cheer, More of a Smile

With much of hullabaloo around it, the Retail Sales figures for July were published today. The CSO headline on the matter read: "Retail Sales Volume increased by 11.6% in July 2015". Which is, of course, correct... to a point. The figure references sales inclusive of automotive sales. And it references volumes of sales.

So here are the actual retail sales figures, for retail sales excluding motors.

First, consider seasonally-adjusted sales allowing m/m comparatives:

  • Value of core (ex-motors) retail sales increased 0.3% m/m in July and this only partially (albeit substantially) corrects for 0.3% decline m/m in June. Compared to 2005 average level, value of sales today is only 1.09% higher, which is... before inflation is factored in. 3mo MA of Value indices in July was down 0.03% on 3mo MA average through June, while a month ago the same was 0.7% higher. In other words, there is nothing 'convincing' in the value of sales data. And this is concerning, because retailers don't get their revenues and profits from volumes of sales. They get them from value of sales.
  • Volume of retail sales (ex-motors) was up 0.64% m/m in July, having previously posted a decline of 0.12% in June. So July volumes of sales significantly over-compensated for June decline. Which is good news. Compared to 2005 average, July figure is 12.1% higher for the volume of sales, which means that deflation has resulted in more sales by volume, but barely any change in value: selling more stuff but getting less per unit sold is the retailers' margin nightmare and it has been going on for some years now. But the good news on Volume run out when you consider 3mo MA: 3mo MA through July was down 0.12% compared to 3mo MA through June, having previously been up 0.7%. So on 3mo MA basis (smoothing a bit volatility) value and volume of retail sales both fell in July.
  • Meanwhile, the never-ending exuberance of Irish consumers, as measured by Consumer Confidence Index posted some moderation in July, falling 3% m/m. Still Consumer Confidence in July 2015 is 97% (that's right - 97%) higher than the 2005 average. You really gotta wonder...
Two charts to illustrate the above trends:

As can be seen from the chart above, there is now divergence in the series for Value (rising slower) and Volume (rising faster) of core retail sales. This, with Value of sales running now persistently above the trend (suggesting risk of downward correction in the future), whilst Volume series running along the trend. Volume is converging with Consumer Confidence, while Value is diverging. Closer look at the latter next:

 And now to y/y data based on unadjusted series:

Per data charted above y/y changes were:

  • Value of core retail sales rose 3.40% y/y - which is a good performance, but not exactly stellar. In June, y/y increase was 2.0% and in July 2014 y/y rise was 1.2% which means this July growth was stronger. However, pre-crisis average y/y growth rate in Value of retail sales was 6.93% and this means that current rate of increase is just under 1/2 the rate of average rise in pre-crisis years. Smoothing out some volatility, 3mo average through July was 99.3 which is stronger than 3mo average through April 2015 (93.6) and is up 3% on 3mo average through July 2014. These are good figures, no arguing there.
  • Volume of retail sales, predictably, was up 6.7% y/y in July - double the rate of growth in Value of sales and above the pre-crisis average rate of growth of 6.2%. Volume of sales gained in July in annual rate of growth compared to June (4.7%) and compared to July 2014 (3.2%). And on 3mo average basis, the index was up 6% y/y for 3mo through July - double the rate of growth in Value.
  • Hence, overall we have the same picture in unadjusted data: rates of growth in Value of sales are healthy, but not spectacular, while rates of growth in Volume are strong. Volume is diverging from Value and there is nothing new here - it has been thus since the end of 2013.

Good news is that on 3mo average basis, May-July 2015 figures were

  • Positive in y/y terms for majority sub-sectors in value terms (excluding Food, Beverages & Tobacco and Motor Fuel) and for all sub-sectors in volume terms
  • The picture was a bit more fragmented for 3mo change through July compared to 3mo change through April, as shown in the table below.

Thus, overall, there are some good news in the retail sales figures. Do they warrant a huge wave of congratulatory backslapping exercises in the media? No. Do they warrant much of optimism that the sector is experiencing a big revival? Not exactly. 

28/8/15: Gold & Silver: Does technical analysis beat the market?

An interesting piece of research co-authored by Brian Lucey on efficacy of technical analysis in gold & silver markets:

"This paper studies whether intraday technical trading rules produce significant payoffs in the gold and silver market using three popular moving average rules."

And the conclusions are (emphasis is mine): "The initial results show that the SMA, WMA and EMA trading rules generate significant negative payoffs using the parameters common in the literature in the high-frequency gold and silver markets. This suggests that there is no significant profit to be gained from technical trading in the gold and silver markets. However, our parameter sweep results show that there are a number of parameter combinations that generate significant profit in the gold market, but none in the silver market. Further, the best performing rules have different parameters to those used the existing literature. We show that longer run averages should be used by investors on intraday data and that investors need to employ different parameters when utilising technical analysis on daily and intraday data. In order to examine whether investors could have actually utilised the best performing rules, we perform an in- and out-of-sample test and show that only the SMA rule for gold generates significant profits in the in-sample as well as the out-of-sample period. All of the other best rules in the in-sample period generate either insignificant or negative payoffs in the out-of-sample period."

28/8/15: Inflation Expectations: Euro and U.S.

Having earlier posted a chart on Central Banks balancesheets expansion (see here), here is an interesting chart plotting inflation expectations (5yr5yr swaps - effectively markets expectations for 5 years from now inflation average over subsequent 5 years)

The above shows that although there has been an uplift in Euro area inflation expectations over the course of 2015 to-date, consistent with QE carried out by the ECB, the expectations have tanked since the start of Q3 2015 in line with those in the U.S.

More ominously, expectations remain in the territory where neither the Fed nor the ECB are capable of convincingly exiting monetary easing.

While the U.S. expectations are closer to target (at 2.23%) but still weak, Euro area expectations are exceptionally weak at 1.63%. Gotta do some more printing (for ECB) and less talking about tapering (for both the Fed and the ECB)...

28/8/15: Patents & R&D expenditure effects on equity returns in pharma industry

Martina Feyzrakhmanova and myself have a new paper out with Applied Economics Letters titled "Patents and R&D expenditure effects on equity returns in pharmaceutical industry". Working paper (ungated version) is available here:

28/8/15: CBR and Ruble: Fiscal Balance in Oil's Shadow

As I noted earlier this month, Russia has officially entered the recession. The key drivers for 3.4% contraction in 1H 2015 were the same as the key pressures on growth back in 2H 2014: oil prices, investment collapse on foot of high interest rates, inflationary environment that restricts CBR's room for cutting rates, and sanctions (or rather geopolitical risks and pressures, linked in part to sanctions).

That said, in June and early July there were some hopes for economy starting to stabilise, although fixed investment was down 7.1% y/y in June, marking 18th consecutive month of y/y declines. These are now once again under pressure and the cause is... oil price.

Here is how closely paired has Russian Ruble been to oil prices in trend terms since July 2014, although correlation was weaker in preceding period. Overall, as the chat shows, there are two very distinct periods of Ruble valuations catch up with oil prices: June 2014-February 2015 and mid-July 2015 through present.

Russia's Central Bank is switching between little concern for Ruble to interventions and back to staying out of the markets appears to be more than a simply random walk. Instead, it is a game consistent with rebalancing Ruble valuations to fit budgetary dynamics.

The reason for this is that (as shown in the chart above) Ruble strengthening above oil-linked fundamentals earlier this year was an actual threat to budgetary dynamics, and over the last couple of weeks, correcting valuations of Ruble re-established closer connection to oil prices. Hence, in July, CBR managed to deliver a shallower cut to interest rates (-50bps) compared to June (-100bps).

With CBR continuing to stick to its June 2016 forecast for inflation to fall to 'under 7%' by then and hit 4% in 2017 compared to July 2015 CPI at 15.6%, Russia went on to issue its first CPI-linked bonds / linkers amounting to RUB75 billion (OFZ-IN, 8 year notes) at 91% of nominal, on cover of RUB200 billion (more than 25% of demand coming from foreign investors). Real yield at issuance was 3.84% - relatively high-ish, implying underpricing of the bond in a market with relatively hefty demand and forward expectations for significant easing in inflation. Something is slightly amiss here.

In line with up-down interventions, the CBR continued to trend flat on foreign exchange reserves. End of June, total Russian FX reserves stood at USD361.575 billion, and by end of July these fell to USD357.626 billion. As of last week, the reserves were back up at USD364.6 billion.

Weekly data from CBR does not allow for compositional analysis of reserves, but looking at the monthly data the pattern repeats.

Actual liquid FX reserves and gold stood at USD347.1 billion at the end of July against USD350.957 billion at the end of June. This is barely up on end-April period low of USD345.373 billion, although well within the FX- and gold-valuations range of change.

Meanwhile, data through July 2015 shows net purchases of dollars of USD3.76 billion against USD3.831 billion in June and USD2.531 billion in May by CBR. Overall, from January 2015 through July 2015, CBR bought (net) USD7.8 billion and there were no net purchases/sales of euro.

All of the above suggests that CBR will likely resume rate cuts if Ruble firms up from its recent valuations. Two weeks ago, RUB/USD was at 64.947 (72.197 to Euro), peaking at 70.887 four days ago (82.373 to the Euro) and currently at 66.8875 (74.984 to Euro), not exactly warranting a move by the CBR yet, but back in the relative comfort zone for the Bank to sit on its hands once again.

28/8/15: Central Banks' Activism in a Chart

Having been out of contact due to work and summer break commitments, I will be updating the blog over the next few days with interesting bits of information that have been overlooked over the last 10 days or so. So stay tuned for numerous updates.

To start with, here is a picture of the Central Banks' monetary activism to-date:

Source: @Schuldensuehner 

The chart above sets 2005 = 1000 and indexes the uplift in Central Banks' balancesheets expansions: Fed almost x5.6 times; PBoC almost x6.4 times, ECB almost x2.3 times and heading toward x3.3 times under the ongoing QE, BoJ almost x2.1 times... not surprisingly, the old Fed 'put' is now pretty much every Central Bank's default option...

Much of this mountain of money printing has gone to grease the wheels of sovereign debt markets. Much of the resulting revaluation of financial assets is simply not sustainable under the premise of the Central Banks' 'puts' withdrawal (monetary tightening).

In simple terms, the ugly will get uglier and we have no idea if it will get any better thereafter.

Monday, August 17, 2015

17/8/15: Euro: The Land Where Growth Goes to Die

So we have had a massive QE - even prior the current one - by the ECB. And we are having a massive QE again, courtesy again, of the ECB. And the bond markets are running out of paper to shove into the… you've guessed it… the ECB. And the banks have been repaired. And we are being fed our daily soup of alphabet permutations (under the disguise of the European Union 'reforms' and policy initiatives): ESM, EFSF, EFS, OMT, EBU, CMU, GMU, TSCG, LTRO, TLTRO, MRO, you can keep going… And what we have to show for all of this?

2Q 2015 growth is at 0.3% q/q having previously posted 0.4% growth in both 4Q 2014 and 1Q 2015. This is, supposedly, the fabled 'accelerating recovery'.

So what do we have? Look at the grey lines in the chart above that mark period averages. Pre-euro period, GDP growth averaged 0.9% in quarterly terms. From 1Q 2001 through 4Q 2007 it averaged 0.5%. Toss out the period of the crisis when GDP was shrinking on average at a quarterly rate of 0.1% between 1Q 2008 and through 1Q 2013 and look at the recovery: from 2Q 2013 through 2Q 2015 Euro area economy was growing at an average quarterly rate of less than 0.27%.

Meanwhile, monetary policy is now stuck firmly in the proverbial sh*t corner since 2012:

You'd call it a total disaster, were it not for Japan being one even worse than the Euro area… and were it not for the nagging suspicion that all we are going to get out of this debacle is more alphabet soups of various 'harmonising solutions' to the crisis... which will get us to becoming a total disaster pretty soon. Keep soldering on...

Saturday, August 15, 2015

15/8/15: Irish Universities: None in Top 100, One in Top 200 & Top 300

Academic Ranking of World Universities 2015 are out (see details here: and Ireland is not exactly shining.

Only 3 Irish Universities are ranked in top 500:

TCD managed to post flat performance on 2014, reaching its highest Institutional rank since 2003. Which is the best news we had.

Meanwhile, UCD ranking fell pretty substantially, with university ranked in 201-300 place in 2014 now ranked in 301-400 place:

UCC posted second consecutive year of declines in 2015, although it stayed within the 401-500 ranking group.

I will be blogging on data coming out of the survey more later this month, but for now, top line conclusion is: things are not getting better in top Irish Unis relative performance.

Time for more self-congratulatory government talk, promises and awards… and let's get few more Unis designated, just because stretching already scarce resources thin is, obviously, the best way to achieve greatness...

15/8/15: EEU: Kyrgyzstan the latest addition

On August 12, Kyrgyzstan became a member of the Eurasian Economic Union (EEU), joining Russia, Kazakhstan, Belarus and Armenia. Kyrgyzstan is the least developed of the EEU economies, relatively proximate only to Armenia in the group.

15/8/15: Russian External Debt: Big Deleveraging, Smaller Future Pressures

Readers of this blog would have noted that in the past I referenced Russian companies cross-holdings of own debt in adjusting some of the external debt statistics for Russia. As I explained before, large share of the external debt owed by banks and companies is loans and other debt instruments issued by their parents and subsidiaries and direct equity investors - in other words, it is debt that can be easily rolled over or cross-cancelled within the company accounts.

This week, Central Bank of Russia did the same when it produced new estimate for external debt maturing in September-December 2015. The CBR excluded “intra-group operations” and the new estimate is based on past debt-servicing trends and a survey of 30 largest companies.

As the result of revisions, CBR now estimates that external debt coming due for Russian banks and non-financial corporations will be around USD35 billion, down on previously estimated USD61 billion.

CBR also estimated cash and liquid foreign assets holdings of Russian banks and non-bank corporations at USD135 billion on top of USD20 billion current account surplus due (assuming oil at USD40 pb) and USD14 billion of CBR own funds available for forex repo lending.

Here are the most recent charts for Russian external debt maturity, excluding most recent update for corporate and banks debt:

As the above table shows, in 12 months through June 2015, Russian Total External Debt fell 24%, down USD176.6 billion - much of it due to devaluation of the ruble and repayments of maturing debt. Of this, Government debt is down USD22.1 billion or 39% - a huge drop. Banks managed to deleverage out of USD59.9 billion in 12 months through June 2015 (down 29%) and Other Sectors external liabilities were down USD88.8 billion (-20%).

These are absolutely massive figures indicating:
1) One of the underlying causes of the ongoing economic recession (contracting credit supply and debt repayments drag on investment and consumer credit);
2) Strengthening of corporate and banks' balance sheets; and
3) Overall longer term improvement in Russian debt exposures.

Friday, August 14, 2015

14/8/15: IMF on Two Unfinished Bits of Greek Bailout 3.0

IMF's Ms. Christine Lagarde statement on Greece:

Key points are:

1) Per Lagarde, “of critical importance for Greece’s ability to return to a sustainable fiscal and growth path", "the specification of remaining parametric fiscal measures, not least a sizeable package of pension reforms, needed to underpin the program’s still-ambitious medium-term primary surplus target and additional measures to decisively improve confidence in the banking sector—the government needs some more time to develop its program in more detail." In other words, the path to Eurogroup's 3.5% long term primary surplus target on which everything (repeat - everything) as far as fiscal targets go, hinges is not yet specified in full. The Holy Grail is not in sight, yet...

2) "…I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own. Thus, it is equally critical …that Greece’s European partners make concrete commitments in the context of the first review of the ESM program to provide significant debt relief, well beyond what has been considered so far." In simple terms, for all the lingo pouring out of the Eurogroup tonight, Greece has not been fixed, its debt remains unsustainable for now and the IMF - which ESM Regling said tonight will be expected to chip into the Bailout 3.0 later this autumn - is still unsatisfied with the programme.

"Significant debt relief" - off the table so far per Eurogroup - is still IMF's default setting.

14/8/15: Two Facts About Irish Minimum Wage

Having recently spoken about the issues of minimum wage, especially in the Irish context, here are some facts, based on Eurostat latest data.

Firstly - about the level of minimum wages in Ireland relative to the EU counterparts.

In monthly terms, Irish minimum wage comes in at EUR1,462 per month (1Q 2015 data). Despite some claims that we have the second highest minimum wage in Europe, this puts us in the 5th position just below 4th ranked Germany (EUR1,473 per month) and ahead of the sixth ranked France (EUR1,458 per month). It is worth noting that Denmark, Italy, Cyprus, Austria, Finland and Sweden have no national minimum wage.

However, when comparing minimum wages in different countries, it is worth looking at figures, adjusted for Purchasing Power Parities (controlling for cost-of-living differences, albeit imperfectly). Chart below shows these:

In terms of PPP-adjusted figures, Irish minimum wage is 6th highest in the EU at EUR1,238 per month (PPP). This is quite significantly ahead of the UK (ranked 7th at EUR1,114 per month PPP-adjusted), but below France (at EUR1,337 per month PPP-adjusted).

Another possible comparative is in terms of 'replacement rate' for minimum wage earners - in other words, how much worse-off (relatively-speaking) minimum wage earners are compared to, say, average wage earners. Chart below illustrates that:

Per chart above, minimum wage earners in Ireland earn on average around 41.6% of the gross average wage on a monthly basis. Comparable, but slightly more than their counterparts in the UK.

What the above two charts illustrate is that Irish minimum wage is not set at an extremely high level, as some claim. 

They also show that crucial point for people earning minimum wages is the cost of living in Ireland, rather than just the level of wages they earn. 

My view, within the context of the Irish minimum wage debate is that we must focus more of our efforts on the cost of living side, less on incrementally increasing minimum wage. And more crucially, there is little point, in my opinion, to increase minimum wage by a small (token) amount, as variability of hours worked and zero hours contracts offered will erase much of the benefit to be gained by those still holding minimum wage jobs after the wage increase. 

Sadly, for politicians, small/marginal give-aways to well-defined groups of voters bring in political returns. Large-scale, longer-term reforms bring in dissatisfaction of vested interest groups & lobbies. No prizes for guessing what path Irish Government will opt for ahead of the elections...

Update: with thanks to Seamus Coffey ( @seamuscoffey) here are two charts detailing tax burden for minimum wage earners:

Given the levels of progressivity in Irish tax system, it is quite un-surprising that Irish minimum wage earners are carrying low tax burden on tax side, which does push after-tax minimum wage in Ireland to higher poll position in the league tables. On the other hand, the Eurostat data on which my analysis was based uses 39 hour weeks for computing minimum wage earnings, without adjusting for working days. Which, probably, pushes our minimum wage earners' annual incomes down (especially given the prevalence of low hours and zero hours contracts in some sectors).

Thus, as a note of caution, all of the above data should be read as all economic data should be read: with caution and without attempting to make sweeping generalisations.