Wednesday, August 31, 2011

31/08/2011: Irish Live Register - unemployment's up in August

Live Register data for August shows that the seasonally-adjusted number of signees increased from 448,000 in July to 449,600 in August - a rise of 1,600 mom. The same rate of increase was recorded in June.

In 3 months through August, Live Register rose by 5,700, while in preceding 3mo period (through May) it was up 3,300. Year on year LR rose 4,600 in July or 1.04%, in August, yoy increase was 2,500 or 0.56%.

Live Register-implied unemployment rate rose from 14.3% in July to 14.4% in August.

Charts to illustrate:

Some more details on the latest figures:
  • In August, the numbers of those 25 years and older on the LR has increased by 2,000 (+0.55%) mom from 366,100 in July to 368,100. Year on year, this category of LR is now up 7,100 or +1.97%. For the 3 months through August, the number of LR signees rose 2.24% compared to the 3 months through August 2010.
  • Number of persons under 25 years of age on LR has fallen 400 in August, compared to July and now stands at 81,500. The number is down 6.54% yoy (-5,700).
  • Numbers of casual and part-time workers on LR in August stood at 85,296 (down 569 on July) - first monthly drop in the series since May 2011. Part-time and casual workers numbers are now up 7,014 yoy (+8.96%).
  • Numbers of non-Irish nationals on LR has declined 290 in August, compared to July, from 79,285 in July to 78,995 in August. Year on year, August numbers are up 138 (+0.18%)
  • Numbers of Irish nationals on LR have also fallen in August from 390,999 in July to 390,719 in August. This follows 11,972 increase in June-July and 15,058 increase in May-June. Number of Irish nationals on the LR are now up 2,653 in August 2011 compared to August 2010 (+0.68%).
In unadjusted terms there were 469,713 on the LR in August 2011, up 2,790 (+0.6%) over the year. This increase was, per CSO, "slightly less than that recorded in July 2011 (+3,460 or +0.7%) and is far less than the increase of 30,198 (+6.9%) seen in the year to August 2010."

Per CSO: "The number of female claimants increased by 5,888 (+3.5%), to 172,860 over the year while the number of male claimants decreased by 3,098 (-1.0%) to 296,853. This compares with increases of 14,419 (+9.5%) and 15,779 (+5.6%) for females and males respectively in the year to August 2010." Which suggests that we are still in the second stage of jobs destruction, with services jobs going at a faster pace and with women (traditionally last to be laid off) continuing to suffer from jobs destruction.

Perhaps the most worrisome sign of the labour markets flat on the ground is that the number of long term claimants continued to increase with 40.8% of claimants in August 2011 on the Live Register for one year or more. In August 2010 long term claimants made up 31.8% of the total Live Register. Further, per CSO: "The number of male long term claimants increased by 30,488 (+28.3%) in the year to August 2011, while the comparable increase for females was 12,688 (+31.3%) giving an overall annual increase of 43,176 (+29.1%) in the number of long term claimants".

31/08/2011: Europe's economic, business & consumer confidence sink in August

Following a precipitous collapse of the US consumer confidence this month (see posts here and here for details), the EU has just posted a series of consumer, business and economic sentiment indicators that are showing a massive drop in overall economic activity across the board. Here are the details.

Starting with Economic Sentiment Indicator (ESI) first:
  • August ESI reading for EU27 came in at 97.3 (contraction territory) down from July 102.3. 3mo MA for the index is now at 101.4 and yoy the index is down 5.7%.
  • Euro area ESI is also in contraction zone at 98.3 for August, lowest since May 2010, down from 103.0 in July and off 3.8% yoy. 3mo MA of the series is now at 102.2.
  • ESI for Germany is still in expansion at 107.0 in August, but down from 112.7 in July and down on 3mo MA of 111.4. The index is now down 3.1% yoy. This is the lowest reading since July 2010.
  • ESI for Spain is showing deeper contraction in August, reaching 92.7, down from July 93.0 and registering uninterrupted contractionary performance since (oh, sh**t) September 2007. ESI, however is up in Spain yoy by 1.6%.
  • ESI for France latest reading is at 105.9 for July, which was down from 107.4 in June.
  • ESI for Italy signals recession at 94.1, down from 94.8 in July and off 4.8% yoy. 3mo MA is at 96.1 and the index has remained in contraction zone for consecutive May 2011.
Two charts to illustrate - one of complete historical series, and one of a more recent snapshot:
What the historical series show is a worrisome trend:
  • Before January 2001, Euro area average ESI reading was 102.1, post-introduction of the Euro, the average reading is 98.9. This implies a swing from shallow expansionary optimism in pre-Euro period average, to a shallow pessimism in post-Euro introduction period.
  • In Germany, prior to 2001, the average ESI was 103.9 and post January 2001 the average stands at 98.0
  • In Spain, prior to 2001, the average ESI was 101.9 and post January 2001 the average stands at 98.7
  • In France, prior to 2001, the average ESI was 99.4 and post January 2001 the average stands at 101.9 - the only major economy to buck the trend
  • In Italy, prior to 2001, the average ESI was 101.5 and post January 2001 the average stands at 99.5

Next, consider the Consumer Confidence Indicator (CSI):
  • CSI for the EU27 has fallen from -12 in July to -17 in August, the lowest reading since September 2009 and well below 3mo MA of -13.4. In August 2010 index stood at -11.
  • CSI for Euro area is also at -17 in August, down from -11 in July.
  • August reading is the lowest since June 2010, as Euro area consumers are generally less optimistic than the EU27 average. EU27 average historical reading is -11.1 and Euro area average historical reading is -12.0. Prior to January 2001 the historical averages were: -10.7 for EU27 and -11.3 for Euro area. post-introduction of the Euro, average historical readings are now at -11.7 for the EU 27 and -13.1 for the Euro area, suggesting that the Euro introduction was not exactly a boost to consumer confidence in either the EU27 or in the Euro area.
  • Germany's CSI came in at +0.5 in August, down from 1.4 in July. The index is now well below 3mo MA of 1.1 but is well above -3 reading attained a year ago.
  • Spain's CSI is now at -17, down from -13.4 in July and below 3mo MA of -14.1. In August 2010 the index stood at -19.8, so there has been a yoy improvement in the degree of consumer pessimism.
  • France's CSI stands at -18.4 (recall that France is the only large Euro area economy with strong focus on consumer spending) in July (latest data), down from 17.60 in June and an improvement on -25.8 yoy.
  • Italy's CSI is reading at -28.8 in August, down from -27.4 in July, down on -26.6 3moMA and well below August 2010 reading of -21.3.
Again, two charts to illustrate:

Some historical trends concerning the Consumer Confidence Index:
  • As noted above, consumer confidence had shifted, on average, from cautious optimism in pre-Euro era to cautious pessimism since January 2001.
  • In Germany, before January 2001, consumer pessimism (average) stood at -7.26. Post January 2001, the average pessimism became deeper at -10.83. In effect, then, that 'exports-led' economic growth model for Germany has meant the wholesale historical undermining of consumer interests.
  • In Spain and Italy, the picture of long-term historical trends is identical to Germany, with levels of pessimism being higher than in Germany across entire history.
  • In France, consumer pessimism in pre-2001 period stood, on average, at -19.36 - deeper than in other Big 4 EU economies. Post 2001, average pessimism actually declined to -16.94, still the heaviest level of pessimism (on average) across the Big 4 economies.
Lastly, consider Business Confidence Indicator (BCI):
  • EU27 BCI has fallen from +0.1 in July to -2.50 in August, hitting the lowest reading since July 2010. The index is now down compared to +0.17 3mo MA and is below -2.10 reading in August 2010.
  • Euro area BCI has declined from +0.90 in July to -2.90 in August, behind +0.5 3mo MA. A year ago, BCI reading was -2.60, making current reading the lowest since July 2010.
  • Germany's BCI has declined from +9.60 in July to +4.60 in August, behind +8.67 3mo MA. A year ago, BCI reading was +3.80, making current reading the lowest since September 2010.
  • Spain's BCI remained unchanged in August at -13.90, behind +-12.27 3mo MA. A year ago, BCI reading was -13.0, making current and previous month readings the lowest since June 2010.
  • France's BCI has declined from +5.10 in June to +0.8 in July (latest data), making the latest reading the lowest since December 2010.
  • Italy's BCI has declined from -4.50 in July to -4.80 in August, behind -3.93 3mo MA. A year ago, BCI reading was -7.0.

  • Business confidence readings averaged -5.62 across the EU27 in pre-2001 period, and have since then fallen to -6.77 average reading for the period post-2001. BCI for the Euro area averaged -5.60 in pre-2001 period and -6.23 in post-2001 period. This, again, shows that the introduction of the Euro did not have a positive effect on business confidence.
  • In Germany and Italy, pre-2001 BCI averages were better than post-2001 averages, while in Spain there was an improvement in the levels of business pessimism post-2001. In France, pre-2001 average BCI was -6.59 and post-2001 average BCI is -6.41 - implying statistically identical readings.

Tuesday, August 30, 2011

30/08/2011: US Consumer Sentiment collapses in August

The US Conference Board Consumer Confidence index fell in August, confirming other readings of Consumer Sentiment in the US released earlier (see chart below). The Index now stands at 44.5, down from 59.2 in July.
  • The Present Situation Index decreased to 33.3 from 35.7.
  • The Expectations Index decreased to 51.9 from 74.9 last month.
  • US Consumer Confidence index is now at its lowest level since April 2009 (40.8).
  • Consumers claiming business conditions are "bad" increased to 40.6 percent from 38.7 percent,
  • Consumers' assessment of employment conditions was more pessimistic than last month. Those claiming jobs are "hard to get" increased to 49.1 percent from 44.8 percent, while those stating jobs are "plentiful" declined to 4.7 percent from 5.1 percent.
  • Those expecting business conditions to improve over the next 6 months decreased to 11.8 percent from 17.9 percent,
  • Those expecting business conditions to worsen over the next 6 months surged to 24.6 percent from 16.1 percent.
  • Those anticipating more jobs in the medium term future decreased to 11.4 percent from 16.9 percent, while those expecting fewer jobs increased to 31.5 percent from 22.2 percent.
  • The proportion of consumers anticipating an increase in their incomes declined to 14.3 percent from 15.9 percent.
Earlier-released University of Michigan Consumer Sentiment Index for August 2011 posted a decline from 63.7 in July to 54.9 - the lowest reading since May 1980 (see chart).

Monday, August 29, 2011

29/08/2011: Mortgages Arrears - 2Q 2011 data

The Central Bank of Ireland today published the latest data on mortgage arrears and repossessions for 2Q 2011. Per CBofI data (note, much of the analysis is my own):
  • At the end of June 2011 there were 777,321 private residential mortgage accounts held in the Republic of Ireland to a value of €115.089 billion.
  • 55,763 accounts (7.2% of total) were in arrears for more than 90 days, up from 49,609 accounts (6.3% of total) at the end of 1Q 2011. Accounts in arrears have balances of €10.838 billion as of 2Q 2011, up on €9.599 billion a quarter before. Thus percentage of outstanding amounts that represent mortgages in arrears of 90 days and over is now 9.42% against 1Q 2011 percentage of 8.28%.
  • Percentages of loans in arrears more than 90 days have risen from 5.1% in 3Q 2010 to 5.70% in 4Q 2010 to 6.30% in 1Q 2011 and to 7.20% in 2Q 2011. Hence, the increases here are accelerating as of last quarter.
  • Percentages of loans volumes in arrears 90 days or more have risen from 6.64% in 3Q 2010 to 7.39% in 4Q 2010 to 8.28% in 1Q 2011 and to 9.42% in 2Q 2011. Again, increases here also accelerated, with 4Q2010 on 3Q2010 rising by 0.75pp, 1Q 2011 on 4Q 2010 rising by 0.89pp and 2Q 2011 on 1Q2011 rising by 1.14pp.
  • 69,837 residential mortgage accounts were categorised as restructured at the end of 2Q 2011, up from 62,936 restructured accounts at the end of 1Q 2011.
  • Of the restructured mortgages total, 39,395 are not in arrears and are "performing as per the restructured arrangement"
  • 30,442 of restructured mortgages "have arrears of varying categories (arrears both less than and greater than 90 days)"
  • Therefore, 95,158 accounts are either in arrears greater than 90 days or have been restructured and are not in arrears as at the end of June 2011.
  • Arrangements whereby at least the interest only portion of the mortgage is being met account for over half of all restructure types (52%).
Now, let me run though the figures in more aggregate detail. Take together all loans that are in arrears 90 days or more, plus repossessions and loans that are restructured, but are not in arrears. Clearly, these loans represent some indication of mortgages either at risk or defaulted. Let's call these such.
  • In 2Q 2011 a total number of 95,967 mortgages were either at risk or defaulted, up on 86,963 mortgages in 1Q 2011.
  • Between 1Q 2011 and 2Q 2011, the number of mortgages at risk or defaulted has risen by 9,004, which is a faster rate of increase than in the period between 4Q 2010 and 1Q 2011 when the rise was 6,665 mortgages.
  • In 2Q 2011, the percentage of all mortgages that were at risk or defaulted was 12.35%, up on 11.11% in 1Q 2011 and 10.21% in 4Q 2010.
  • In 2Q 2011 a total volume of mortgages at risk or defaulted was €17.493 billion, up on €15.774 billion of mortgages in 1Q 2011 and on €14.525 billion in 4Q 2010. Also, note that the rate of these mortgages increases is accelerating as well.
  • In 2Q 2011, the percentage of all mortgages value that was at risk or defaulted was 15.20%, up on 13.60% in 1Q 2011 and 12.45% in 4Q 2010.
Let me sum the above up: in 2Q 2011, the value of mortgages that were either in arrears 90days and over or were restructured and not in arrears accounted for 15.2% of the entire mortgages pool in Ireland.

Here's the summary:

Note that in the above table, the rates of risk increases are outpacing the rate of households deleveraging almost 15 times to 1.

We sooooo obviously don't have a mortgages crisis on our hands, that it all looks rather sustainable, ...if you stick your head deep into the sand bank... kinda like this...

29/08/2011: Residential Property Price Index: July 2011

Residential Property Price Index for Ireland for July 2011 was released earlier today by the CSO, showing continued deterioration in property prices across the board.

Per CSO: "In the year to July, residential property prices at a national level, fell by 12.5%. This
compares with an annual rate of decline of 12.9% in June and a decline of 12% recorded in the twelve months to July 2010." Chart below illustrates:
Residential property prices fell by 0.8% in the month of July. This compares with a
decline of 2.1% recorded in June and a decline of 1.3% in July of last year. To give a bit more granularity to the data:
  • RPPRI now stands at 75.1, down from 75.7 in June, and 3mo MA is 76.03, against June 3mo MA of 77.07.
  • Relative to peak property prices have no declined 42.45% against June to-peak decline of 42%.
Using 7 months of 2011 data, we can forecast expected declines in the index for 2011 as a whole:
Please note: this is a crude forecast. The result suggests that prices can decline to 75.3% of 2005 levels by the end of 2011 for all properties, with corresponding declines in House prices to 78.41%, Apartments to 57.47% and Dublin prices declining to 69.02%.

Let us make another set of important calculations. Recall that section 73 of the NAMA Act 2009 established the definition of the cut-off date for NAMA valuations. This date was later set at 30 November 2009. NAMA then applied an LTEV uplift on properties valued to that date. According to NAMA own business projections, the agency will require 10% increase in property values referenced to LTEV and November 30th 2009 cut-0ff-date to break even. In addition, NAMA claimed that its valuations are based on the consulting report they received from London Economics that timed property markets bottoming out to the latest Q1 2010.

Well, since the cut-off date, Irish residential property has now fallen a whooping 20.02% and relative to the end of Q1 2010, when NAMA expected the bottoming of the property cycle, the property values are down 16.28%. Ooops...

Back to the data:
  • Index for House prices stood at 78.1 in July, down from 78.6 in June (-0.64% mom) and down 12.25% yoy
  • House prices 3mo average index is now 79.03, down from 80.1 a month ago.
  • House prices are down 40.83% to peak
  • Apartments continued falling at precipitous rates, with Price Index for Apartments down to 57.6 in July from 59.4 in June. A decline of 3.03% mom and 15.67% yoy.
  • Apartments prices 3mo MA is now at 59, down from 59.93 in June.
  • Apartments prices are down 52.59% to the peak.

Having posted a bizarre increase from 70.5 in April to 70.8 in May, Dublin prices have fallen off the small cliff in June settling at the index reading of 69.1. July data shows Dublin prices flat at 69.1. This means that 3mo MA is now at 69.67, down from 70.13 in June. Relative to peak, prices in Dublin are down 48.62%. Year on year, July Dublin prices are down 11.86%, an improvement on annualized rate of decline of 12.64% in June, but worse than yoy change attained in May (-11.5%).

29/08/2011: Retail Sales and Consumer Confidence: July 2011

In the previous post, we looked at the latest data on retail sales for Ireland for July 2011 (here). Now, let's update the data for retail sales and consumer confidence.

Per ESRI latest data, consumer confidence in Ireland dropped from 56.3 in June 2011 to 55.9 in July, with 3mo moving average down to 57.2 in July from 57.9 in June.
As charts below indicate, Irish retail sales continue to underperform historical trends, but, crucially, are running well below the levels that would be consistent with the consumer confidence readings (both contemporaneous, lagged 1 period and 3mo moving averages):
The above suggests that we are still in - both, structural (consumer confidence and sales lags signals to the left range of the trend) and cyclical (below trend) - weaknesses in terms of retails sales and consumer demand.

29/08/2011: Retail Sales for July - a mixed bag swinging in the headwinds

The volume of retail sales in Ireland declined by 0.6% in July 2011 yoy and there was a monthly change of -0.5%. The value of retail sales decreased by 0.5% yoy and there was a month-on-month change of -0.4%.
  • Current value of sales index reading is 88.7, down from 89.1 in June and below the 3mo running average of 88.8. The index is still ahead of the January 2011-to-date average of 88.3.
  • Value of sales index is now 25.65% below its peak in February 2008.
  • Value of retail sales index now reads 93.2, down from 93.7 in June. The index is now slightly below its 3mo running average of 93.3 but slightly ahead of 6mo running average of 92.8. The volume index average for January 2011-to-date is 92.3.
  • Volume of retail sales is now down 19.86% on its peak attained back in October 2007.

If Motor Trades are excluded, the volume of core retail sales fell by 2.3% in July 2011 against July 2010, while there was a monthly increase in sales volumes of 0.5%. There was an annual decrease of 1.2% in the value of retail sales and a monthly increase of 0.8%.
  • Value of core retail sales now stands at 95.7, up from 94.9 a month ago and ahead of 3mo running average of 95.3, but still below 6mo running average of 95.9. In comparison, 2010 average was 97.6 and 2011 running average to-date is 96.2.
  • Core retail sales in value are now 19.3% below their December 2007 peak.
  • Volume of core retail sales is now reading 99.1, up from 98.6 a month ago, and against 98.8 average for the 3mo and 6mo running average of 99.3. 2010 annual average is 102.3, while January 2011-to-date average is 99.5.
  • Volume of retail sales is now 15.3% below its November 2007 peak.

In July, Motor Trades (+7.1%) and Non-Specialised Stores (+0.4%) were the only two
categories that showed year-on-year increases in the volume of retail sales. Largest yoy drops were posted by Books, Newspapers and Stationery (-9.5%), Other Retail Sales (-6.9%) and
Pharmaceuticals Medical & Cosmetic Articles (-6.8%) in the volume of retail sales.

A follow up post will update on the data for consumer confidence and links to retail sales data.

Sunday, August 28, 2011

28/08/2011: Eurocoin August 2011 - signalling sharp contraction

Euro area leading economic indicator, eurocoin posted a sharp contraction in August, confirming rapid slowdown in the economic activity.
  • Eurocoin fell from 0.45 in July 2011 to 0.22 in August, a drop of 51.1% - the sharpest since August 2008. This marks third consecutive month of declines.
  • Eurocoin 3-mo running average is now at 0.40 and 6-mo average at 0.50. Year on year, the indicator is down 40.5%.
  • The leading indicator is now reading within the band of 1/2 standard deviation from zero, making current growth reading virtually indistinguishable from stagnation.
  • The indicator is now at the lowest level since September 2009.
  • Annualized rate of growth is now running at 0.88%.
  • Inflation - per ECB latest data, is running around 2.5%.

Updated charts relating Eurocoin to the ECB policy rates show lower expected fundamentals-determined repo rate at 2.5-3.5% based on Eurocoin and 2.75-3.25% based on HICP - both well ahead of the current rate of 1.5%.
The core drivers for Eurocoin decline in August were:
  • H1 2011 growth rates (see earlier post here)
  • H1 2011 slowdown in industrial production - impacting Germany and Italy and contraction in industrial production in France and Spain
  • PMI Composite indicator through July 2011 showing contracting activity in the Euro area and in particular - Italy and Spain, plus significant deterioration in German business confidence (see detailed post here) and close-to-contraction reading in France
  • Consumer confidence remaining in contractionary territory for the Euro area and, specifically, for France, Italy and Spain
  • Sharp sell-offs in the stock markets across all 4 major economies, and
  • Zero growth in exporting activity in the Euro area, with sharply falling exporting activity in Germany, zero exports growth in France, near zero growth in Italy and contracting exports in Spain
In short, all components of growth forecast are showing substantial deterioration, with 3 out of 5 main headline readings in contraction and 2 main readings in zero growth ranges.

Thursday, August 25, 2011

25/08/2011: BIS publishes a wish-list for global regulation of OTC derivativatives markets

The Committee on Payment and Settlement Systems and the Technical Committee of IOSCO released a report on over-the-counter (OTC) derivatives data that should be collected, stored and disseminated by trade repositories (TRs). The market for these instruments is current estimated at over $600 trillion. Details and report are available here.

Per BIS statement: "The committees support the view that TRs, by collecting such data centrally, would provide the authorities and the public with better and timely information. This would make markets more transparent, help to prevent market abuse, and promote financial stability."

I happen to agree with the above, subject to one core caveat: collecting data is not enough. It is imperative that data collected is organically integrated into analytical frameworks that actually have a meaningful connection to supervision. This, however, is hardly an easy (and low cost) measure to achieve.

The report implies:
  • minimum data reporting requirements and standardised formats
  • the methodology and mechanism for data aggregation on a global basis
  • these requirements and data formats will apply to both market participants reporting to TRs and to TRs reporting to the public and to regulators
  • new information currently not supported by TRs is also identified as being helpful in assessing systemic risk and financial stability, including: current exposure, netting and collateralisation details on bilateral portfolios of OTC transactions; current market values of individual open OTC derivatives transactions; information on collateral assets that are applied to OTC derivatives portfolios, including the valuation and disposition of these assets
Back in 2009, the G20 called for OTC derivatives to be centrally cleared and transactions reported to repositories by the end of 2012. In a number of cases, national markets regulators are already setting up such facilities, for example the Trade Information Warehouse for credit default swaps and the Equity Derivatives Reporting Repository, under the US DTCC.

The CPSS and the IOSCO latest call comes as the global authorities are trying to set international minimum standards to apply to derivatives markets from the end of 2012, when a global system of Legal Entity Identifiers (LEI tags) for individual transactions should come in place.

In addition, the authorities also want to develop a standardized international product classification system to provide better sorting of transactions and underlying data, with potential links to higher level risk analytics.

IOSCO previously published a discussion paper on the role of securities regulators with regard to systemic risk which:
  • Identifies transparency and disclosure as an important tool for dealing with systemic risk, including product transparency and financial sector stress tests. To meet these requirements, the authorities "would need aggregate data on, inter alia, (i) each entity's current gross exposure and exposure net of collateral (in order to assess both the absolute size of its exposures and its relative importance for the markets under consideration); (ii) each entity's current gross exposures and exposure net of collateral to each of its major counterparties (in order to quantify interconnectedness); and (iii) aggregate exposures of all counterparties in terms of specific asset classes, products, currencies, reference entities and underlying sectors." This data can help evaluate potential "knock-on effects of financial distress at any one institution and identify concentrations of risk among groups of closely related institutions".
  • Measuring counterparty exposure will require data regarding bilateral positions, market values of open positions, netting arrangements, collateralisation and disposition and valuation of collateral
  • Determining bilateral positions will require "data on the full set of open trades between a pair of counterparties and their economic characteristics, including all terms that are required to calculate and assign a value to a trade such as effective and termination dates, notional amounts, underlier reference data, counterparty information, coupon amounts and schedules, and other salient economic terms specific to individual types of transactions (e.g., restructuring clauses for credit default swap ("CDS") contracts and reference interest rates for interest rate swaps)"
  • Determining the effect of netting arrangements will require "data on the set or sets of positions whose gains and losses can be netted against one another in determining amounts owed to any counterparty".
It is, perhaps, revealing to read in the paper candid assessment of the two panels that current reporting infrastructure simply cannot cope with the data required for risk analysis (including higher level systemic risk analysis) in relation to the overall derivatives markets.

"Existing TRs, not track and report market values of open positions with regular frequency. ...existing major TRs are organised along asset-class lines while counterparty risk is managed at the bilateral portfolio level. For example, in computing current exposure, gains in a counterparty's position in one derivative product may be netted against losses in another derivative product. ...TRs as currently implemented would be unable to provide a complete set of information for determining current exposures, and ...some data gaps would still remain. For example, gathering information about collateral and reliable market value for non-cleared OTC derivatives is a challenge. Similarly, it is challenging to create an effective system for capturing information on bilateral netting arrangements."

So on the net - the consultative process launched by today's announcement should be a very interesting one and I will be covering it here. In addition, myself and industry research co-author are working on a paper for the QJ of Central Banking which will touch on some of the issues relating to the above.

25/08/2011: Irish Exports - long term composition

In light of the recent stellar performance of our exports (see my note on the latest figures here), it's worth taking a look at the overall exports and trade balance composition by broadly-defined sectors. Here are some historical facts.

First for some interesting long-term trends:
  • Back in 1973, 5 broad sectors: Total food and live animals (0), Beverages and tobacco (1), Crude materials, inedible, except fuels (2), Mineral fuels, lubricants and related materials (3) and Animal and vegetable oils, fats and waxes (4) accounted for 26.8% of our exports by value. By 2002 that number shrunk to 8.6%. The overall importance of these sectors rose to a local peak in 2007 at 12.75% and in 2010 the sectors contributed 12.1% of our exports. Using the data for the first 5 months of 2011, the current running contribution of these sectors to our overall exports stands at 11.2%, despite continued CAP supports and strong agri-food prices.
  • Annual contribution of the two sub-sectors related to ICT manufacturing: Office machines and automatic data processing equipment (75) and Electrical machinery, appliances etc., n.e.s. (77) to our exports stood at 13.05%. This share rose to an absolute peak of 34.03% in 2001 and had since fallen to 8.6% in 2010. Based on 5 months data for 2011, current contribution of the two sub-sectors to exports is running at 7.15%.
  • Annual contribution of the two sub-sectors related to pharma and medical products and preparation industry: Organic chemicals (51) and Medicinal and pharmaceutical products (54) started with a barely noticeable 4.35% back in 1973, rising to just 7.8% in 1987 before taking off to reach 48.9% in 2010. The two sub-sectors contributed 51.5% of our total value of exports in the first 5 months of 2011.
Other sectors evolution is plotted below:
However, it is worth remembering that various exporting sectors are also importers - both of inputs into exports production and goods for consumption and capital investment. So consider the composition of our trade balance by each broad sector contribution:
The chart above hardly needs much commenting. Ireland's trade balance is pretty much now made up of pharmaceuticals and medical products. back in the 1970s, on average, we were net importers of Organic chemicals (51) & Medicinal & pharma products (54) with the two sub-sectors contributing 3.74% deficit to our trade balance. By 2010, the two sub-sectors own trade surplus stood at 86.1% of Ireland's overall trade surplus and in the first 5 months of 2011 the same proportion stood at 97.3%. Let's, say, our potency is Viagra, folks.

Which, of course, brings us to the point of recalling that scary moment which awaits us in 2012, when Viagra starts going off patent... and the overall patent cliff that the industry is facing globally.

In the mean time, our flagship domestic exporting sectors: Total food and live animals (0), Beverages and tobacco (1), Crude materials, inedible, except fuels (2), Mineral fuels, lubricants and related materials (3) and Animal and vegetable oils, fats and waxes (4) continue to contribute negatively to our overall trade balance. These sectors yielded 2.62% negative contribution to trade surplus in 2010 and in the first 5 months of this year they own trade deficits are running at 4.85% of our total trade surplus. By the way, if you think this is a new development, the same was true in the 2000-2009 (-0.23%).

2011 so far is also the first year when we are registering negative contribution to the trade balance from Office machines and automatic data processing equipment (75) and Electrical machinery, appliances etc., n.e.s. (77). Back in the 1970s these flagships of manufacturing were contributing 25.86% of our overall trade balance. In the 1980s 26.5%, in the 1990s 35.6% and in the 2000s +20.5%. In 2010 they accounted for 6.28% of the trade balance, but in the first 5 months of 2011 their contribution turned to negative 2.1%.

Some interesting stats to keep in mind when we talk about successes of our exporting sectors.

25/08/2011: National forecasts and systemic upward biases

New research, published today by NBER shows that national growth and budget forecasts in the Euro area tend to overestimate growth and revenue stability than in other advanced economies and are prone to provide more biased estimates in the period of economic expansion.

The paper, titled Over-optimism in Forecasts by Official Budget Agencies and Its Implications, and authored by Jeffrey A. Frankel of the Kennedy School of Government, Harvard University and published as NBER Working paper 17239 (link here):
"... studies forecasts of real growth rates and budget balances made by official government
agencies among 33 countries.

In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons.

This over-optimism in official forecasts can help explain excessive budget deficits, especially the
failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary."

In contradiction to the Franco-German recent mantra on fixed and centralized budgetary systems, the author states that: "Many believe that better fiscal policy can be obtained by means
of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland’s Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP."

In contrast, own budgetary discipline and honesty in forecasts pays off: "One country, Chile, has managed to overcome governments’ tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile’s official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession."

25/08/2011: German Index of Business Climate post another sharp contraction in August

Germany's Ifo index of business climate posted another large-scale contraction in August according to the latest reports.
  • Index of Business Climate now stands at 108.7 (still in the expansionary territory), down from 112.9 in July. 2Q 2011 average for the index is 114.3 and 3Q 2011 (to-date) average is now at 110.8. Year on year, Business Climate index is down 2.4 points. This is the second consecutive monthly contraction.
  • Business Situation index also registered a contraction to 118.1 in August from 121.4 in July - a second monthly contraction in a row.
  • Index of Business Expectations fell precipitously, reaching 100.1 in August, down from 105.0 in July, marking the 6th consecutive month of declines. Index average for 2Q 2011 is 107.1 and 3Q 2011 (to-date) average is 102.6. Business Expectations are now down 8.9 points on August 2010.
All-in the latest reading continues to signal rapid slowdown in business activity, although the levels of the index remain in expansion territory.

Wednesday, August 24, 2011

24/08/2011: Few thoughts on today's Gold price correction

Following a dramatic rise over the recent weeks, gold registered a correction today. At this moment in time, gold for December 2011 delivery is down 5.76% on the day and is priced at USD 1,754.00 / oz. Here's a snapshot:
Of course, one day movement can be many things:
  • A sustained correction (with market settling at lower levels and running along a flat trend)
  • A short-term correction (with a return to, perhaps more sustainable, upward trend)
  • A bear trap (with relatively prolonged period of downward corrections followed by a return to positive trend) and so on
While it is extremely hazardous to profess any explanations for specific daily (and generally high frequency) changes, here are some of the reasons that are being advanced by various analysts as to the possible drivers of today's correction:
  1. The margins theory (see zerohedge comment here): CME raised margins on gold for the second time in the month, having hiked them first 22% and now raising them 27% again (new account margins are now at USD9,450 and maintenance accounts at USD5,500). This second rise follows 26% hike on margins by the Shanghai Gold Exchange (+26%) on Monday to 12%. In theory, margins increases should symmetrically rise costs for short and long positions on gold futures. Which can lead to closing of some positions. In practice, however, two things occur. Firstly, short positions face lower margin exposures than long positions - the difference being small, alas. Secondly, margins increases themselves might be dramatic, but on absolute terms they are still small, unless you are opening highly levered new accounts. The margins theory, in my view, helps explain the physical move in prices, but not the behavioral drivers for investors' reaction. More likely, in my view, is the possibility that two consecutive, short-spread margin hikes signal to the investors that CME is actively trying to prevent gold going parabolic, to contain speculative momentum. If so, current correction is welcome, as it triggers retrenchment of speculative leveraged investors.
  2. The talk about Euro area demands for the collateral on Greek (and Portuguese and Irish... and may be Italian and Sapnish...) loans from EFSF/ESM/alphabet soup. FtAlphaville speculates on this (here). There can be indeed a push for such a move, though I doubt it will result in actual sales of gold reserves. Even if the sales were to take place, European peripheral gold will most likely be placed 'discretely' to other central banks and treasuries, plus the IMF in fear of destabilizing official reserves elsewhere. The last thing Europe will want to do is to dent its own (German, French & UK) wealth and anger a bunch of governments in Asia, plus the US & IMF - all of which are deeply into gold holdings.
Incidentally, couple of days ago I commented on twitter that CME margins increases are long-term positive for gold, if they are successful in cooling off speculative leveraged investors.

My guess - and I stress that this is a guess - is that the current correction can turn out to be relatively deep, but it will not alter long term (9-12 months) upward trend for gold. The reason is simple: US, UK, Japan and Europe are poised to print money. In part, this is already factored into previous highs for gold. In part, the uncertainty about the quantities of QE to be deployed, are offering both the upside and the downside scenarios for the gold price relative to peak.

If, however, the global QE does not materialize, stock markets and corporate debt markets will likely to slip into serious bear sentiment. Which will push gold back onto near-parabolic trend up.

As far as today's short-term correction goes, my view is that it was 'helped' by the shifts of liquidity into equities with markets posting another day of strong upsides.

For a longer-term lesson to be learned: today's correction shows clearly the perils (for ordinary investors) of rushing into an asset with a single large-scale purchase. Instead, gold should be treated as a long-term allocation aimed at real wealth preservation and hedging. Such allocation should be built over time, with sustained - volatility-reducing - strategic long positions. Not with attempts to 'time' the market or based on impulsive buy-ins based on expected capital gains.

And, of course, the volatility shown by today's gold price movement, as well as an even more dramatic volatility in equities and fixed income shown over recent months, highlight the need for conservative, long-term investment strategy based on proper risk management and diversification.

Tuesday, August 23, 2011

23/08/2011: Trade Figures for June - an awesome performance by the sector

Latest trade stats are out for June 2011 for Ireland and the results are, overall, excellent:
  • The seasonally adjusted trade surplus increased by 7.54% mom (a whooping 22.45% yoy) to €4,079m. This is the highest monthly surplus ever recorded in nominal seasonally-adjusted terms.
  • Compared to June 2009, trade surplus increased 7.48% (+€283.8 million) and compared to June 2010 trade surplus is up 22.45% (+€747.9 million).
  • The non-seasonally adjusted trade surplus in June 2011 was €4,473m comprising exports of €8,343m and imports of €3,870m. Per CSO: "This is the highest trade surplus since June 2001.
  • Imports came in at a weak €3,821 million in seasonally-adjusted terms in June 2011, down 7.48% on June 2010 and up 2.83% on June 2009.
  • Exports posted the best seasonally-adjusted performance since February 2011, reaching €7,900 million in June 2011, up 5% (+374.6 million) mom. Exports rose 5.89% yoy (+€439.1 million) and 5.18% (+€388.90 million) on June 2009.
As chart above shows, trade surplus has broken through short-term flat trend that run from roughly speaking January 2009. Which, of course is the good news. Build-up of inputs imports in April 2011 is now exhausted, as indicated by the fact that we have moved to a much more intensive position in exports as determined by imports volumes (chart below). This suggests that trade surplus can shrink in months to come as rebuilding of inputs inventories set in. Regardless, however, June figures are truly spectacular.
For H1 2011:
  • Imports stood at €24,934.4 million, up 8.47% (+€1,946.4 million) year on year
  • Exports were at €46,244.9 million, up 5.43% (+€2,423 million) yoy and
  • Trade surplus stood at €21,310.3 million, up 2.29% (+€476.4 million)
The above, of course, provides a backdrop for the claims that our exports-led recovery (which is roaring ahead) is going to underwrite overall economic recovery (which is not happening). Just think, the entire trade surplus increase for 6 months this year would be barely enough to cover 2.6% of our fiscal deficit through June 2011.

Per CSO (using final figures through May) for the first five months of 2011 compared with those for 2010:
  • Exports increased by 6% to €38,565m:
  • Exports of Medical and pharmaceutical products increased by 14% or €1,362m,
  • Exports of Organic chemicals rose by 7% or €582m and
  • Exports of Dairy products increased by 47% or €217m.
  • Imports increased by 12% to €21,123m
  • Imports of Other transport equipment (including aircraft) increased by 34% or €497m
  • Medical and pharmaceutical products by 22% or €318m and
  • Imports of Petroleum rose by 17% or €305m.
These figures were achieved against improving terms of trade (lower TT readings) through May (the TT data is lagged 1 month behind the Trade data), as shown in the chart below:
As the result of this, long-term relationship between terms of trade and exports implies that June performance was actually below exports levels consistent with current reading of terms of trade. This suggests that in July and August there is some room for exports increases despite the slight deterioration in the terms of trade month-on-month in June.
On the net, therefore, very positive set of figures on trade from Irish exporters! something truly worth cheering.

23/08/2011: July Banks Survey - Euro area credit supply - Expectations

3 months forward expectations for lending conditions in Euro area, based on July 2011 data from the Banks Lending Survey run by ECB indicate that:
  • Overall lending standards by Euro area banks are expected to tighten in 3 months following July 2011 by 9% of survey respondents - a number that has been rising now consecutively for 3 quarters.
  • Overall lending standards are expected to ease by just 2% of survey respondents, down from 5% reporting back in April 2011.
  • The respondents expect virtually no change in lending conditions for SMEs
  • Lending to large enterprises is expected to tighten over the next 3 months by 10% of the banks surveyed, while only 3% are expecting lending to ease.

23/08/2011: July Banks Survey - Euro area credit supply - costs & controls

In the previous two posts I looked at the supply of credit to enterprises and the core drivers for changes in banks lending within the Euro area over the 3 months through July 2011. Here is a quick snapshot of what these changes mean on the ground.

The survey question this relates to is: Over the past three months, how have your bank's conditions and terms for approving loans or credit lines to enterprises changed?
  • Bank margins on average loans to enterprises have tightened across 19% of the banks in 3 months through July 2011, while 18% of the banks reported easing of the average margins. Thus, overall margins remained largely unchanged across 57% of the banks - same as in 3 months to April 2011. However, in 3 months to April 2011, the percentage of the banks reporting easing of conditions on margins exceeded the percentage of the banks reporting tightening by 3 percentage points. This compares against zero percentage points differential in 3 months through July 2011 (note - these are adjusted percentages, compensating for respondents' errors).
  • Number of the banks reporting tightening of margins on riskier loans exceeded numbers reporting easing by 23 percentage points in 3 months to July 2011.
  • Non-interest rates charges have tightened in 2 percentage points more banks than eased
  • Size of the loans granted tightened in 7% of the banks and eased in 3%, with 84% reporting no change in 3 months through July 2011.
  • Collateral requirements have become tighter in 6% of the banks, while the requirements eased in 4%, suggesting de-accelerating rate of collateral requirements barriers growth.
  • There was tightening of loans covenants reported by 9% of the banks and 6% reported easing. In previous quarter, the comparable numbers were 5% and 4%, implying tighter covenants are getting tougher.

While margins and non-interest rate charges are running at virtually no change since early 2010, there is a slight uptick in pressures in these credit costs. Collateral requirements remain on moderating tighter path, while riskier loans are posting second consecutive quarter of tightening of the margins.

Overall, these responses paint a mixed picture of costs of the bank lending to enterprises and suggests that market funding and capital and liquidity concerns drive banks lending dynamics in the Euro area, rather than costs and conditions structures.

22/08/2011: July Banks Survey - Euro area credit supply - drivers

In the previous post I highlighted some new developments in Euro area banks lending to the SMEs and larger enterprises (post link here). In this post, let us consider the data (through July) from the ECB's Banks Lending Survey for the core drivers of the structural stagnation and renewed weaknesses that have emerged in the Euro area credit supply.

The survey question we are considering here is: "Over the past 3 months, how have the following factors affected your bank's credit standards as applied to the approval of loans on credit lines to enterprises?"

  • When it comes to the cost related to the bank's capital position, the percentage of banks reporting tighter (higher) costs was 6%, while the percentage of banks reporting easing of capital cost conditions was zero.
  • There were zero banks reporting easing in capital costs conditions in April 2011 and January 2011.
  • 2010 average for the percentage of banks reporting tighter cost conditions in excess of those reporting easing of conditions at the end of July (6%) was identical to the 2010 annual average.
  • As shown in the chart below, bank's ability to access market funding remains on downward trend for second quarter in a row. At the end of July, the percentage of banks reporting tightening of access to market financing was 9%, same as for the three months through April 2011 and up on 4% in H2 2010.
  • At the same time, percentage of banks reporting easing of access to market funding dropped from 2% in 3 months to October 2010, to 1% through January 2011, to 0% in 6 months since January 2011.

And a summary plot of banks access to funding markets, showing new tightening trend:

When it comes to the banks' liquidity positions, the story is also that of continued and deepening deterioration:
  • 10% of banks in the survey stated that their liquidity conditions tightened in 3 months through July 2011, up from 8% in 3mo through April 2011 and 6% in 6 months before that.
  • Only 1% of banks stated that their liquidity positions have eased (improved) in 3 mos through April 2011, the same percentage as in 3 mos through April 2011 and down from 3% in 3 months through January 2011.
Meanwhile, banks competition is now running along a flat trend:
  • In 3 months through July 2011, 82% of the banks in the Euro area reported no change in competitive pressures from other banks, up from 79% in 3 months to April 2011, while 1% reported tightening and 8% reported easing of competition.
  • The same story, but less dramatic, holds for competition from non-banks and for competition from market (non-banks) financing.
  • The percentage of banks that observed tighter expectations of general economic activity in the end of July 2011 was 15%, as contrasted by just 4% that reported easing expectations.
So in summary, despite (or perhaps because of) the regulatory and recapitalization measures deployed, in 3 months to July 2011, Euro area banks continued to shrink supply of credit to Euro area enterprises because their funding conditions, liquidity positions, capital costs and expectations for economic activity were getting tighter. In the meantime, competition in European banking sector, having eased significantly from the peak crisis period, is running at generally depressed levels and along relatively flat trend.

Surely these are not the signs consistent with stable improvement or the end of the crisis?

Monday, August 22, 2011

22/08/2011: July Banks Survey - Euro area credit supply to enterprises

There are rumors circling euro area banks about the impeding liquidity crunch and rising risk profiles. In this light, it is illustrative to take a look at the latest Banks Lending Survey data from ECB to see if there are new trends emerging in terms of credit supply.

This post will look at some data from the Surveys covering lending to enterprises, while the follow up posts will deal with the core drivers of changes and with banks' lending to the households.

First, consider the aggregates (all data through July 2011) - with Chart below illustrating:
  • Overall in terms of lending to the euro area enterprises, 8% of banking survey respondents indicated that lending conditions have tightened or considerably tightened over 3 months through July 2011, while 5% indicated that their lending conditions eased or eased considerably.
  • The percentage of respondents who indicated tightening of conditions remained unchanged in July compared to June, but is up from 5% reported in May. Year on year, percentage of respondents reporting tighter lending conditions dropped by 4 percentage points, while percentage of those reporting easing of conditions rose 4 percentage points.
  • 87% of respondents indicated that their lending conditions were unchanged in 3 months through July 2011, down from 89%.
  • Over 3 months through July 2011, percentage of the banks reporting tighter lending conditions (8%) was below 9.25% 2010 average and significantly below 35% and 49.5% averages for 2009 and 2008.
  • The percentage of banks reporting easing of lending conditions in 3 months through July 2011 (5%) was above 2010 average of 3.75% and above 2008 and 2009 averages of 0.75% each.

For SMEs (Chart below illustrates):
  • Percentage of the banks reporting easing of considerable easing of lending conditions in 3 months through July 2011 was 3%, which is 3 percentage points above same period last year, but is unchanged from June and down from 4% in both April and May.
  • Percentage of the banks reporting tighter or considerably tighter lending conditions was 7% in 3 months through July 2011, up on 6% in May and June, but down from 15% in April. The percentage of banks reporting tighter lending to SMEs in 3 months through July 2011 was 7 percentage points lower than a years ago and at 7% compares favorably against 11.75% average for 2010 and 35.5% and 39% averages for 2009 and 2008 respectively.

For larger corporate loans (Chart below):
  • 9% of the banks reported tightening of lending conditions to large enterprises in 3 months through July 2011, which is 6 percentage points below the level of responses recorded in July 2010. However, the current percentage remains relatively close to 2010 average of 10.5%, although it is substantially down from 37.75% and 52.5% averages for 2009 and 2008.
  • Month-on-month, tighter conditions in July 2011 (9%) were less prevalent than in June (11%), but more prevalent than in May (7%).
  • Easing or considerable easing of lending to large enterprises was reported by 7% of the banks, up from 5% a month ago and 4 percentage points above the same level in July 2010.
  • Easing of conditions in 3 months through July 2011 (7%) is now ahead of the same figure for 2010 average (4.25%) and well ahead of both 2008 and 2009 averages of 0.5% and 0.75%.
On the net, data shows some stabilizing momentum in credit supply, but this momentum is extremely anemic. Overall, more lenders continue to tighten lending conditions for large enterprises and SMEs.

Saturday, August 20, 2011

20/08/2011: Yielding to Fear or Managing Wealth

Here's a copy of my presentation from August 18th in the Science Gallery covering some of my views on gold (announcement here). All disclosures were made in the announcement and at the beginning of my presentation - do not accept this as either an advice to take any investment action - as usual. You can click on individual slides to enlarge.