10/08/2011: Industrial Production and Turnover: June 2011

Industrial production for June confirms the trend spotted here few months ago: Irish economic recovery (or rather the nascent signs of it) is now running out of fuel.

Industrial production has been a bright spot on our economy's horizon, primarily thanks to the MNCs. In annual terms:

• 2010 index of production for Manufacturing Industries rose to 110.1 up on 2009 level of 101.7 and regained the 109 mark reached in 2007.
  
• All Industries index too reached to 108.7 - above 108.4 in 2007.
  
• Modern Sectors - MNCs-dominated area of industrial production - were the core drivers, starting with the reading of 111.2 in 2007, falling only slightly to 109.8 in 2008, then climbing to 112.6 in 2009 and rocketing off to 124.7 in 2010.
  
• Meanwhile Traditional Sectors were just beginning to lift their head in 2010: after posting the reading of 104.7 in 2007, the sector fell to 100.4 in 2008, followed by a collapse to 86.2 in 2009 and a slight rebound to 87.8 in 2010.

All of these positive dynamics are now changing and not on a monthly volatility - along a new trend.

First the latest data on Production indices:

• Manufacturing sectors production have risen to 111.4 in June, relative to May 2011, however, the index remains flat since June 2010. The 6mo average and the 12mo average for the series are both at 111.2.
• All Industries index for production is now at 109.9, slightly up on May 109.3, but again, the series are not going anywhere in the medium term. The index is basically flat since June 2010 and 6mo average is at 109.5, while 12 months average is at 109.6.
• Modern sectors index for production volumes is now at 125.6, up from 123.8 in May. Again, as above, this is now flat on July 2010 with the 6mo average of 124.9 and 12 months average of 125.6
• Traditional sectors posted a monthly contraction in June to 89.8 from 91.8 in May. Again, the index is broadly flat since August 2010 and 6mo average for the series is at 89.3, although 12 months average is at 88.9

Chart below illustrates:

One continued trend has the widening gap between the Modern sectors and Traditional sectors. The gap between two series increased from 32 points to 35.8 points in May to June 2011. However, as the chart below illustrates, this gap is now trending along the flat since September 2010.
Turnover data paints a slightly different picture. First, consider annual indices:

• Manufacturing Industries turnover peaked in 2007 at 106.9 before falling to 93 in 2009. 2010 saw the index regaining some of the lost ground at 97.5
• Transportable Goods Industries turnover peaked at 107.3 in 2007 before falling to the trough of 92.8 in 2009 and then rising to 97 in 2010.

Now, on to monthly readings:

• Manufacturing Industries turnover index stood at 98.6 in June 2011, down from 99.5 in May. The index average over the last 6 months stands at 98.7 and for the last 12 months the index average is 99.5. In other words, once again, we are seeing a relative flattening of the trend for already shallow gains since the trough.
• Transportable Goods Industries turnover index fell from 99.1 in May to 98.3 in June and confirms the relatively flat trend over the last 12 months.
• In line with the above, New Orders Index has fallen from 99.8 in May to 99.3 in June. Again, as the chart below shows, the series is running along the flat trend since mid 2010
  

Overall, while monthly changes on volumes were somewhat in-line with previous growth trends (except for Traditional sectors), the volumes growth is now appearing to have established a flat trend since mid 2010. Exactly the same applies to Turnover indices (which are also showing monthly deterioration) and to the New Orders index.

10/08/2011: Bank of Ireland Interim Results H1 2011

Bank of Ireland interim results are out today, confirming, broadly speaking several assertions I've made before. You can skip to the end of the note to read my conclusions, unless you want to see specifics.

The numbers and some comments:

• Operating profit before impairments down from €479mln to €163mln. Profits before tax rose to €556mln compared to €116mln a year ago. Please remember that PCAR tests assumed strong operating profit performance for the bank through 2013. BofI net loss was €507mln reduced by the one-off gains of €143mln. While it is impossible to say from these short-run results if PCAR numbers are impacted, if deterioration in underlying profit takes place, ceteris paribus, recapitalization numbers will change.
• Impairment charges fell from €1,082mln to €842mln - which is good news. The decline is 22.2% - significant, but on a smaller base of assets and contrasted with 72% drop off in operating profit.
• Residential mortgages impairments shot straight up from €142mln to €159mln against a relatively healthier mortgages book that BofI holds. This 11% rise overall conceals a massive 30% increase in Irish residential mortgages impairments in 12 months. Again - predicted by some analysts before, but not factored fully into either PCAR tests or banking policies at large. Despite claims by Richie Boucher that these are in line with bank expectations, the bank expects mortgages arrears to peak in mid-2012. This is unlikely in my view, as even PCAR tests do not expect the peak to happen until 2016-2017. In addition, the bank view ignores the risk of amplified defaults should the Government bring in robust personal bankruptcy reform. The PCAR indirectly accounted for this, but in a very ad hoc way.
  
• So mortgages arrears in Ireland are now running at 4.55% for owner-occupiers and 7.84% for buy-to-let mortgages, with 3,900 mortgage 'modified' in the period and 5,000 more in process of 'modifications'.
• Past-due loans stood at €5.743 billion in H1 2011 down from €5.892 billion in H2 2010. However, impaired loans rose from €10.982 billion in H2 2010 to €12.311 billion in H1 2011. So overall, past-due and impaired loans accounted for 16% of the loan book (at €18,054 million) in H1 2011 against 14% of the book (€16,874 million) in H2 2010. (see table below)

• Total volumes of mortgages held by the bank is now €58 billion down from €60 billion in H1 2010. However residential mortgages held in Ireland remain static at €28 billion, so there appears to be no deleveraging amongst Irish households despite some writedowns of mortgages in the year to date.
• SME and corporate loans volumes dropped from €31 billion a year ago to €28 billion in H1 2011.
• Property and construction loans declined €1 billion to €23 billion of which €19 billion is investment loans (down €1 billion) and the balance (unchanged yoy) is land.
• So far, as the result of deleveraging, bank assets book became more geared toward residential mortgages (52% as opposed to 51% a year ago), less geared toward SME and corporate sector (25% today as opposed to 26% a year ago) and unchanged across Property and Construction (20%), but slightly down on consumer loans (3%). In other words, the bank is now 72% vested into property markets against 71% in H1 2010.
  
• With only 1/2 Bank of Ireland's assets sourced in Ireland, impairments were reduced by 22% by its operations abroad, which contributed to almost 50% reduction in its underlying pretax loss. This suggests that as the bank continues to sell overseas assets, its longer term exposure to Ireland will expand, implying that the positive impact of the disposed assets on the bottom line will be reduced as.
• Table below breaks down impaired loans and provisions, showing - as the core result that overall impaired loans as % of all loans assets is are now at 11%, against 9.2% at the end of December 2010.
• Coverage ratios are generally determined by the nature of the loan assets and the extent and quality of underlying collateral held against the loan. Across the bank, impairment provisions as a percentage of impaired loans declined from 45% in H2 2010 to 44% at H1 2011. The coverage ratio on Residential mortgages increased from 67% to 72% over the period. However, Residential mortgages that are ‘90 days past due’, where no loss is expected to be incurred, are not included in ‘impaired loans’ in the table below. This represents added risk due to potential inaccuracies in valuations on underlying collateral and/or value of the assets. If all Residential mortgages that are ‘90 days past due’ were included in ‘impaired loans’, the coverage ratio for Residential mortgages would be 29% at
  30 June 2011, unchanged from 31 December 2010. Which, means that risk offset cushion carried by the bank would not have increased since December 2010. In H1 2011, the Non-property SME and corporate loans coverage ratio has increased to 42% from 40% on H2 2010. The coverage ratio on the Property and construction loans was 38% at 30 June 2011 down from 42% at 31 December 2010 primarily due to an increase in Investment property loans which are ‘90 days past due’ that are "currently being renegotiated but where a loss is not anticipated".
  
  

• Per bank own statement: ‘Challenged’ loans include ‘impaired loans’, together with elements of ‘past due but not impaired’, ‘lower quality but not past due nor impaired’ and loans at the lower end of ‘acceptable quality’ which are subject to increased credit scrutiny.
• Table below highlights the volumes of challenged loans.
• Pre-impairment total volume of loans stood at €111.902bn of which €24.464bn were challenged - a rate of 21.9%. In H2 2010 the same numbers were €119.432bn, €23.787bn or 19.9%. In other words, they really do know how to lend in BofI, don't they? Every euro in five is now under stress according to their own metrics.
  

• Per bank statement, deposits remain largely unchanged at the bank at €65 billion (through end of June), same as at the end of December 2010.
  
• This is offset by the fact that parts of its UK deposits book has grown over this period of time, implying contraction in deposits in Ireland. The bank statement shows Irish customer deposits at €34 billion in H1 2011, down from €35 billion in H1 2010. The UK deposits overall remained static at €21 billion (due to stronger Euro against sterling, with sterling deposits up from 18bn to 19bn year on year).
• With ECB/CBofI funding BofI to the tune of €29 billion, the above figures imply that the bank in effect depends on monetary authorities for more funds than its entire Irish customers deposits base, which really means that it is hardly a fully functional retail bank, but rather a sort of a hybrid dependent on the good will of Euro area subsidy.
  
• Loans to deposits ratio fell to 164% - massively shy of 122.5% the Regulator identified as the target for 2011-2013 adjustments. Which means that the scale of disposals will have to be large. This in turn implies higher downside risk from disposal of performing assets (selection bias working against the bank balance sheet in the future). The bank needs to sell some €10 billion worth of loans and work off €20 billion more by the end of 2013 to comply with PCAR target to reduce its dependence on ECB funding.
  
• Reliance on the Central Bank funding is down €1 billion to €29 billion - and that is in the period when the Irish Government put €3 billion of deposits into BofI.
  
• The Gov (NTMA) deposits amount to €3 billion and were counted as ordinary deposits on the Capital markets book, in which case, of course, the outflow of the real Irish deposits from the bank was pretty big. BofI provides an explanation for these numbers on page 2o of its report, stating: "Capital Markets deposits amounted to €9.7 billion at 30 June 2011 as compared with €9.2 billion at 31 December 2010. The net increase of €0.5 billion reflects the receipt of €3 billion deposits from the National Treasury Management Agency (which were repaid following the 2011 Capital Raise in late July 2011) partly offset by loss of deposits as a result of the disposal of BOISS whose customers had placed deposits of €1 billion with the Group at 31 December 2010 and an outflow of other Capital Markets deposits of €1.5 billion during the six months ended 30 June 2011."
  
• Hence, excluding Government deposits, the bank deposit book stood at €62 billion. Factoring out Gov (NTMA) deposits into the loans/deposits ratio implies the ratio rising to 172% from 164%.
  
• Wholesale funding declined €9 billion to €61 billion with some improved maturity (€3 billion of decline came from funding >1 year to maturity, against €6 billion of decline in funding with <1 year in maturity). The bank raised €2.9 billion in term loans in 2 months through July 2011 - a stark contrast to the rest of the IRL6 zombies.

• Net interest margin - the difference between average lending rates and funding costs - fell from 1.41% in H1 2010 to 1.33% in H1 2011 as funding costs rose internationally and as Irish households' ability to pay deteriorated further. Net interest income was down 14% as costs of deposits rose.
  
• In addition, the cost of the government guarantee of Bank of Ireland's liabilities rose 58% from H1 2010 to €239mln in H1 2011.
  
• By division, underlying operating profit before impairment charges fell in all divisions.
• Cost income ratio shot up from 61% a year ago to 83% in H1 2011.
• It's worth noting the costs base at the bank: Operating expenses were €431mln for H1 2011, a decrease of €36mln compared to H1 2010. Average staff numbers (full time equivalents) = 5,519 for H1 2011 were 101 lower on H1 2010. The staff numbers, therefore, are really out of line with decreasing business levels

• Bank Core tier 1, and total capital ratios were 9.5% and 11.0% respectively, against 31 December 2010 Core tier 1, and total capital ratios of 9.7%, and 11.0%. Were €3.8 billion (net) equity capital raising completed at 30 June 2011, the Group’s Core tier 1 ratio would have been 14.8%. Note that, much unreported: "A Contingent capital note with a nominal value of €1.0 billion and which qualifies as Tier 2 capital was issued to the State in July 2011." This comes with maturity of 5 years. The note has a coupon of 10%, which can be increased to 18% if the State wish to sell the note. If the Core tier 1 capital of the Group’s falls below 8.25%, the note automatically converts to ordinary stock at the conversion price of the volume-weighted average price of the ordinary stock over the 30 days prior to conversion, subject to a minimum conversion price of €0.05 per unit.

Summary:

• Overall, BofI confirmed with today's results that it is the only bank that we can feasibly rescue out of the entire IRL6 institutions, as impairments in BofI decline is contrasted with ca 30% rise in impairments at the AIB over the same H1 2011.
• However, severe headwinds remain on mortgages side and provisioning, funding and costs.
• The figures for impairments and 'challenged' loans show that the bank faces elevated risks on at least 22% of its loans.
• The figures on funding side show that the bank is still far from being a functional self-funding entity.
• The figures on deposits side show that it continues to lose business despite shrinking its margins to attract depositors.
• The figures on staffing and costs side show that the bank management has no executable strategy to bring under control its operating costs.
• The figures on lending side show the the bank is amplifying its exposure to property rather than reducing it, in effect becoming less diversified and higher risk.
• The figures on deleveraging side show that the bank risk profile can be severely adversely impacted by the CBofI-mandated disposals of assets.
  

And that's folks, is the best bank we've got of all IRL6!

10/08/2011: Was US markets panic behind Irish banks shares crash?

I've just crunched through some interesting data on VIX and Irish Financials index IFIN and there are some interesting results.

To remind you - VIX is in effect a market-based metric of risk in the US markets.

The main premise advanced by the proponents of the argument that US financial crisis drove Irish financial crisis is that panics in the US have caused irrationally pessimistic revaluations of the Irish financial equities and thus led to the collapse of the banks shares in H2 2007- H2 2009.

To assess this, I divided daily data from VIX and IFIN into three periods. Pre-crisis period covers data from January 2000 through July 2007. Financial crisis period covers data from August 2007 through December 2009, while Sovereign crisis period runs from January 2010 through today.

Given the nature of data, VIX data for intraday spreads is only available since September 2003.

Table below summarizes core stats on the data:
Several features worth highlighting in the above:

• IFIN data shows declining positive skew over the evolution of the crises, while VIX shows growing positive skew. This suggests that rising US risk aversion (VIX) was becoming structural over time as crises progressed from financials to sovereigns, while Irish financials were moving from positively skewed distribution in the pre-crisis period (positive non-risk premium to Irish financials) to progressively smaller positive skew in the crises periods. This is not consistent with the risk spillover from the US to Ireland story.
• Intraday variation in Irish financials remains smaller than in VIX, but shows qualitatively similar dynamics to VIX. However, increase in intraday variation during the crises is much stronger in the Irish financials than in VIX, which again suggests that risk pricing in the US markets had little to do with Irish financials risk-pricing. Notice that intraday spreads are highly non-normal in their distribution with third and fourth moments off the charts.
  
• 1-month dynamic correlations between VIX and IFIN remained negative across all periods (implying that rising US risk was associated with falling IFIN valuations), but relatively weak (at maximum mode of 0.35 on average). median correlations show a bit more dynamism during the crisis, rising from -0.41 in pre-crisis period to -0.51 during the Financial crisis period and declining to -0.45 in Sovereign crisis period. However, these are not dramatic either. In fact, positive skewness was reinforced during the Financial crisis period, while negative kurtosis declined in absolute value.

Chart above summarises the entire series of data, showing historically relatively weak, but negative (as expected) correlation between the values of Irish financial shares and the risk levels in the US markets.

Chart below breaks this down into three periods:
What's interesting in the above chart is that:

1. Correlation remains negative but explanatory power significantly declines in the period of Financial Crisis (so the picture is the opposite of the claim that the US 'panic' spilled over into Irish markets), while the slope remains relatively stable.
2. More interestingly, the relationship completely disappears since the onset of the Sovereign crisis. basically, once the IFIN hit 4,000 levels, there is no longer any meaningful connection between Irish financial shares prices and risk attitudes or perceptions in the US markets. Guess what - that magic number was reached around 29/09/2008.

Chart below plots 1mo dynamic correlations between VIX and IFIN
While correlations tend to stay, on average, in the negative territory, as the table above shows, they are not significantly large. In fact, overall during the Financial crisis period there were 318 instances of the correlation equal to or exceeding (in mode) 0.5 - or 51% of the time. In pre-crisis period this number was 42% and during the Sovereign crisis so far - 45%. But there is a slight problem in interpreting this 51% as the spillover effect from the US. During the Financial crisis period, pre-Lehman collapse, higher correlations took place 58% of the time, while post-Lehman collapse they took place 45% of the time. So overall, it appears that US risk attitudes (aka 'panics') were more related to adverse movements in IFIN before the Big Panic took place than during and after the Big Lehman's Panic set on.

Interestingly, there is also no evidence that changes/volatility in the US attitudes to risk had any significant serious impact (adverse or not) on volatlity Irish financial shares valuations, as shown in the chart below:
In no period in our data is there a strong relationship between changes (volatility) in US risk attitudes and the Irish financial shares valuations volatility.

A note of caution - these are simple tests. The data shows a number of problems that require serious econometric modeling, but overall, so far, there is no strong evidence to support the proposition that Irish banks shares or financial shares have been significantly and systematically adversely impacted by the US 'panic' or by 'Lehman collapse'. Our banks problems seem to be largely... our banks own problems...

08/08/2011: What VIX tells us about today's markets meltdown

Let's chart what I called the Roy Lichtenstein-styled "KABOOM" moment for the markets today. Recall that by definition the CBOE Volatility Index (VIX) is "a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility."

Now, basically, VIX is as close to a pure price risk bet as we have. Again per CBOE: reported VIX index values represent "market estimate of expected volatility that is calculated by using real-time S&P 500 Index (SPX) option bid/ask quotes. VIX uses near-term and next-term out-of-the money SPX options with at least 8 days left to expiration, and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index."

Now to the charts.

Starting from the top, we have actual VIX itself - today's close at 48.00 which was:

• Still well below the historical max of 80.86 attained on 20/11/2008
• Well ahead of the historical average of 20.35 or January-2008 to present average of 27.21 or the average since January 2010 of 21.11
• Today's close VIX reading was 63rd highest daily reading for the entire history of the series and the highest since January 2010
• All 64 top readings (equal or above that attained today) were recorded in the period since January 2008.
  

Today's intraday spread of 35.65% is below Friday intraday spread of 45.52. However, the two readings are quite extraordinary:

• Intraday spread average for historical series is 3.01%, while since January 2008 through present intraday spread averaged 9.06%.
• Today's spread was 7th highest in history of the series, the 5th highest since January 2008 and the second highest (after last Friday's) since January 2010.
• Friday's intraday spread was the 5th highest daily spread in the history of the series and the 4th highest since the crisis start (January 2008)

To see just how extraordinary last couple of days are, consider two time horizons for volatility in VIX itself:
and a shorter horizon:
3mo dynamic standard deviation for today's close is only 433rd highest reading in the series history and the 60th highest since January 2010, while 1mo dynamic standard deviation is the 56th highest over entire history and the 5th highest since January 2010.

However, in terms of daily percentage changes, today's rise of 50% is the fourth highest daily increase since the beginning of the VIX history and the highest since January 2008.

In terms of 1mo dynamic semi-variance (measuring only variance for the days of increasing VIX index, in other words - only for those days when risk rises), the last chart above clearly shows that we are in for a treat in these markets.

07/08/2011: Emergency G7 Summit - Policy Dilemma

My latest column in the Globe & Mail on the topic of G7 emergency summit: link here.

04/08/2011: Live Register for July 2011

Live Register data is out today for July.

Per CSO: "The standardised unemployment rate in July 2011 was 14.3%, up slightly from a rate of 14.2% in June. The monthly increase in the standardised unemployment rate was caused by an increase of 1,500 (+0.3%) in the seasonally adjusted number of persons signing on the Live Register. The latest seasonally adjusted unemployment rate from the QNHS was 14.0% in the first quarter of 2011."

Mapping this:
Again, quoting CSO: "Since May 2010 the seasonally adjusted Live Register total has remained within the range of 440,700 and 448,200, indicating that while there have been fluctuations, the overall trend in the Live Register has remained relatively flat over this period."
Of course, the statement above can be checked against a shorter-term horizon trend: year on year there has been an increase of 2,400 in seasonally adjusted LR or 0.54%. In June 2011 the same figure was 4,600 or +1.04%, suggesting that the July bounce up is rather shallow. 3mo moving average for current period is up 1.13% on previous period. This confirms CSO statement.

In July 2011 there were 470,284 people signing on the Live Register representing an increase of 3,460 (+0.7%) over the year. Adjusting for seasonality, total number of signees was 447,900 in July against 446,400 in June - a rise of 1,500 down from a previous monthly increase of 2,500.
Similarly in unadjusted terms, July increase was less than that recorded in June 2011 (+5,066 or +1.1%) and far less than the increase of 34,403 (+8.0%) seen in the year to July 2010.

CSO highlights that "On a seasonally adjusted basis there were monthly increases of 1,300 females and 300 males on the Live Register in July 2011. The number of female claimants increased by 6,150 (+3.7%), to 172,514 over the year while the number of male claimants decreased by 2,690 (-0.9%) to 297,770. This compares with increases of 15,280 (+10.1%) and 19,123 (+6.8%) for females and males respectively in the year to July 2010." Again, the trend is relatively clear here with later stages of unemployment driving up female signings to LR, while emigration is most likely driving male exists in the early stages of the process.

Another structural problem we face is that of long-term unemployment: "The number of long term claimants increased by 45,508 in the year to July 2011, bringing to 40.4% the proportion of claimants that have now been on the Live Register for one year or more. In July 2010 long term claimants made up 31.0% of the total Live Register."

The quality of employment is not improving either. "There were 85,865 casual and part-time workers on the Live Register in July, which represents 18.3% of the total Live Register. This compares with 16.9% one year earlier when there were 79,072 casual and part-time workers on the Live Register. In the year to July 2011 the number of casual and part-time workers increased by 6,793 (+8.6%), with the number of males increasing by 4,015 (+9.6%) and the
number of females increasing by 2,778 (+7.4%)."

• There were no notable changes in July patterns in terms of LR signees under- and over-25 years of age. Year on year, numbers of LR signees 25 years and older increased by 7,500 or 2.09%, while number of signees under 25 years of age has declined 5,100 or -5.86%.
• Numbers of casual and part-time workers rose seasonally adjusted 6,793 year on year in July (up 8.59%)
  

Per CSO analysis: "In July Irish nationals accounted for 83.1% (390,999) of the number of persons on the Live Register. Of the 79,285 non-Irish nationals, the largest constituent group
on the Live Register continued to be nationals from the EU15 to EU27 States (41,732), followed by the UK (19,006). In the year to July 2011 the number of Irish nationals on the Live Register increased by 3,387 (+0.9%), while the number of non-Irish nationals increased by 73 (+0.1%)."

04/08/2011: PMIs, Exports-led Recovery and Jobs - July 2011 data

Based on Manufacturing PMI (see detailed post here) and Services PMI (details here), let's chart Irish economy's progress on the road to the recovery.

First, consider the issues of employment and core PMIs:
So in terms of economic activity, we have moved:

• In Manufacturing from the recovery with mild jobs creation in January 2011 to both employment and output contractions in July 2011.
• In Services, a jobless recovery in January 2011 remains such in July with July reading showing accelerated joblessness and slower growth in output.

Summary of employment indices is extremely worrying at this stage:
Now, in terms of exports-led growth:
While exports performance continues to the upside in both Services and Manufacturing, in both sectors, exports growth is associated with declining employment, not rising. This is now an established trend with both June and July showing jobs declines amidst exports growth in both sectors, in contrast with May, when exports growth in both sectors supported fragile jobs creation.

So far, since January 2008, there were:

• 17 months of jobs-destruction associated exports increases in Services, against just 6 months where jobs creation was associated with exports growth
• 20 months of jobs destruction during coincident exports expansions in Manufacturing, against just one month when jobs creation underpinned exports growth.

Good luck to ya all who hope for an exports-led recovery to yield significant reductions in unemployment any time soon.

04/08/2011: Services PMI for Ireland - July 2011

NCB Economics released Services sector PMI for Ireland for July. I posted on latest data for Manufacturing PMI yesterday (here).

Unlike Manufacturing PMI, Services sector data points to continued expansion, albeit at a slower pace. Headline numbers are:

• Overall Services sector business activity stood at 51.7 (above 50, but not statistically significantly) in July, down from 52.4 in June. Year-to-date average is now at 52.1, against YTD 2010 average of 51.0 and well ahead of YTD average for 2009 of 36.8. 3mo average through July 2011 is 51.5, below 3mo average through April 2011 of 52.1. Hence, overall, disappointing result, but still remaining in the expansionary territory consistently since December 2010.
  
• New Business sub-index in July fell marginally to 49.2 from 49.4 in June, marking third consecutive month of below 50 readings. YTD 2011 average is now at 50.0 and marginally below 50.2 reading for January-July 2010, but well ahead of the abysmal 36.2 reading for the January-July 2009 average. 3mo average through July, however is firmly in the contraction zone at 48.9 against 3mo average through April at 51.9.

A more recent snapshot of data:
Other sub-indices also showed renewed weaknesses:

• Backlogs of work posted a sharp monthly decline from 44.5 in June to 43.9 in July, suggesting severe weaknesses in the short-term pipeline. The sub-index is now in the contraction territory for every month since July 2007.
• New export business crossed over into contraction territory for the first time since December 2010, with July reading of 49.6 from June reading of 53.1. Year-to-date average for 2011 is now at 53.7, dangerously close to 53.6 reading in the same period of 2010. Most recent 3-mo average is at 52.4, down from previous 3mo average of 54.6.
• Business expectations reading was the only one that posted positive change, rising from 60.3 in June to 62 in July - a high and strong reading for the indicator. However, 3mo average through July 2011 - at 61.5 - is still below 3mo reading through April 2011 (66.5).

On profitability side:

• Output prices signaled continued and deepening deflation at 42.3 in July from 43.5 in June, marking 4th consecutive month of dropping output prices.
• Input prices also eased in index reading, but remain at inflationary levels, with July reading of 50.6 down from June 51.8.
• So prices wedge acted to reduce further profit margins. Profitability sub-index of PMI has moved to 44.9 in July, marginally better than June 44.8, but still deeply below 50.
  

Derived index of profit margins in Manufacturing and Services - computed by me, based on NCB data - now show a slowdown in the rate of profit margins depletion in Manufacturing, but widening in Services:

• Profit margins index in Manufacturing in July stood at -15.01, down from -16.22 in June and well below 12 months average, the 3mo average and comparable readings for 2010.
• Profit margins index in Services had reached deeper into contraction territory with -16.40 reading in July against -16.02 reading in June. The 12mo average stands at -14.6.

So just as in the case of Manufacturing, Services PMI signals disappointing results for July 2011 and weak signals for forthcoming months.

04/08/2011: Safe Haven within a small open economy

Some interesting news flow on the Swiss Franc side today with the Swiss National Bank announcing that it will intervene in the markets across not just one instrument, but three, simultaneously. CHF had seen dramatic appreciation against the Euro and the USD in recent months (see charts below), with current valuations of CHF, according to SNB: "threatening the development of the economy and increasing the downside risks to price stability in Switzerland."

In line with this, SNB announced that it will (1) move target 3-mo Libor rates closer to the range of between 0% and 0.25%, down from the current range of 0% to 0.75%, (2) will "very significantly increase" the supply of CHF, and (3) will hike required deposits for Swiss banks from CHF30 billion to CHF80 billion.

Funny thing, folks, shortly after the announcement, CHF fell against the Euro by 1.8% to CHF1.1061/Euro, and against the dollar +1.4% to CHF0.7761/USD. Yet, with the latest rumors from the US - about QE3 - the USD promptly fell back against the CHF to 0.7701/USD and erased most of the euro gains to CHF1.1054/Euro.

The problem, of course, is that for all the firepower deployed, SNB has little power to shift the prevalent investor sentiment that, at the time of expected QE3 and continued uncertainty about the Euro area sovereigns, CHF - alongside other small currencies - represents, in the minds of investors, a safe haven. This, of course, is the dilemma of the Swiss franc - a safe haven within an small and open economy: too well-run to join the basket cases across its borders, too small to defend...

And so to end with some good background on what's going on with CHF recently - read this.

03/08/2011: US ISM & Irish PMIs (Manufacturing)

On August 1, US Institute of Supply management monthly manufacturing activity index for July posted the worst performance since July 2009, falling 4.4 points to 50.9 (barely above 50 mark of zero growth). The new orders sub-index dropped into contractionary territory and employment index suffered significant drop. Factory gate prices also contracted signaling a decline in profit margins going forward.

Meanwhile, Irish manufacturing PMIs (published by NCB) for July similarly came in with disappointment. Here are the updated numbers:

• Overall Manufacturing sector PMI declined to 48.2 in July (below 50, signaling contraction of activity), down from 49.8 in June and marking the second consecutive month of contracting sector activity.
• 12-mo average for PMI is now at 52.3, while 3mo average is at 49.9 against previous 3mo average of 56.1.
• In 3-mo to July 2010 PMI stood at 56.1.
• The July reading is the worst since January 2010

• On seasonally adjusted basis, output sub-index also posted second consecutive month of contracting activity with July reading of 49.8, slightly up on June 49.3
• New orders activity was also contracting at 47.9 in July, down from also contractionary 48.7 in June. New orders 12-mo average is now at 53.1 and 3 mo average at 49.8, while previous 3 months average was 58.1.
• New export orders activity continued to grow at a slowing pace, down to 51.3 in July from 51.5 in June and 58.7 in May. 3mo average through July now stands at 53.8 against 3mo average through April at 59.9.

Other sub-indicators:

• Backlogs of work contracted at faster pace of 41.1 in July down from 41.8 in June - the worst reading since August 2009. Sharp decrease in July was mainly reflective of a strong drop in new orders
• Stocks of purchases and suppliers delivery times were all signaling contracting activity
• Stocks of finished goods also signaled tighter manufacturing activity
• Per NCB note: "Attempts by firms to improve cash flow led to a marked reduction in stocks of purchases in July, with the rate of depletion the fastest since August 2010. Stocks of finished goods also fell, although the rate of decline was only slight. Post- production inventories have reduced in each month since May 2008."
  

On profit margins side:

• Again per NCB note: Increased oil and commodity prices led to a further rise in input prices. Despite easing for the fourth month running, the rate of cost inflation remained sharp, and faster than the long-run series average." Specifically: input prices sub-index stood at 59.3 in July, down from 63.5 in June. 3mo average through July now stands at 63.9, while 3mo average through April was 75.1 - an improvement in the rate of inputs costs growth, but these continue on the upward trajectory.
• As NCB note: "In response to higher input prices, manufacturers raised their output charges. However, strong competition and weakening demand meant that the rate of inflation was only slight." Again, output prices sub-index fell to 50.4 in July, from 53.2 in June and 12mo average now stands at 52.8, while 3 mo average is at virtually identical 52.6. This is down from the previous 3moo period (through April 2011) which was 57.4.
• So profit margins are continuing to deteriorate (second chart below).
  

Per chart above last, employment conditions continued to deteriorate in Manufacturing, with sub-index for employment moderating contractionary signal to 49.1 in July from 48.3 in June. This marked third consecutive month of employment sub-index below 50. While 12mo average stands at 50.2, 3mo average through July is now at 49.1, contrasted robustly by 3mo average through April 2011 at 54.0. Same period (3mo through July) of 2010 averaged 49.5 reading.

This, of course is disheartening. The chart below updates the pace of 'recovery' in Manufacturing for July data:

Please note: data is sourced from NCB publication, while all charts and statistical details as well as analysis are supplied by me.

01/08/2011: Should President Obama play a harder ball with the Republicans?

In the wake of the US debt 'deal' pre-announcement, I have been seeing comments, including that from Paul Krugman in the NYT today (here) which appear to suggest that President Obama's agreement to accept parts of the Republican's proposals represents a surrender of the presidential authority and, more improtantly, such a limit on presidential authority is somehow a bad signla concerning consistency of macroeconomic policy in the US.

In particula, Prof Krugman states: "In fact, if I were an investor I would be reassured, not dismayed, by a demonstration that the president is willing and able to stand up to blackmail on the part of right-wing extremists. Instead, he has chosen to demonstrate the opposite."

Now, this argument would be fine, if Mr Obama had a record worth taking a stand on. He does not. Here are two charts on US debt based on IMF WEO database.

So both in terms of debt to GDP ratio and absolute current dollar denominated debt levels, Mr Obama might do well running away from his previously established record. Whether he did this via the latest debt deal or not is a separate issue altogether, but Mr Krugman's statement that President Obama should have exhibited more intransigence as the means for encouraging investors confidence in his administrative abilities is bizarre, to put it mildly. Mr Obama has no record worth defending. He has a record worth abandoning.

30/07/2011: US debt woes - some cool grpahics from NY Times

Several people asked about some of the assumptions I used in my post on US debt after the debt-ceiling increases.

While I outlined all of the assumptions in the original post, some of them are motivated by the following excellent infographic on US debt problems presented by the NY Times - link here. The subsequent post will show some comparatives for the US debt crisis.

These are reproduced here, with some commentary.

Note that in the entire debate about the US debt limits, I am of the view that the issue at hand is not the ceiling itself, by the level of the US overall indebtedness. In other words, if the US raises debt ceiling, in my opinion, it avoids immediate crisis, but loads the 'spring' of unsustainable debt levels even more.
Again, the above is irrelevant from my point of view. The US can simply print money or issue IOUs to cover its own debts in the short term. In reality, however, any more debt piled onto the US economy is going to be unsustainable and warrants a downgrade.

Clearly, the argument that the Republican presidencies are more fiscally conservative does not hold. Since Ronald Regan (who at the very least delivered on the stated objective of facing up to the USSR), US Republican presidents have accumulated $7.6 trillion worth of debt, or $633 billion worth of new debt per annum, on average, with George Bush, Sr at $375 billion annually, while his son - George W Bush, Jr at $625.5 billion per annum on average. Ronald Reagan accumulated new debt at ca $237.5 billion per annum on average.

In contrast, 2 Democratic administrations have managed to rake up $3.8 trillion worth of new debt, averaging $175 billion per annum on average for Bill Clinton and $800 billion per annum for Barak Obama.

Hence, Obama now holds an absolute record in fiscal profligacy, followed by George W. Bush (Jr), then by George Bush, Sr and Ronald Reagan. Bill Clinton is the least profligate of all US presidents since 1981.
Lastly, take a look at the source for my assumptions on the yields used in the post linked above:
So my assumptions of 3.5-4% post-debt deal are pretty close to what we can expect on the back of a 1 notch downgrade for the US debt.

Please see the following post on more comparatives for the US debt and economic dynamics.