1/4/15: Irish Manufacturing PMI: March 2015

Markit/Investec Manufacturing PMI for Ireland came out today showing continued and robust growth in the sector (or in the sub-sample of the sector covered by the survey).

Per Markit: "The Irish manufacturing sector registered a further strong improvement in operating conditions during March, helped by a series-record rise in employment. Job creation was linked to a further sharp increase in output requirements amid strong new order growth. The recent weakness of the euro against both the US dollar and sterling led to a first increase in input prices in three months."

Balmy conditions in the sector have meant that the PMI slipped somewhat from the scorching hot reading of 57.5 in February to a hot and humid 56.8 in March. Trend is flattening out, as expected, given the already surreal readings and the fact that the index has been over 50.0 for 22 consecutive months and within statistically significant difference from 50.0 for 19 months straight.

Aside from the above, anecdotal evidence - from one of the larger trade bodies - suggests that externally trading SMEs are now showing serious uptick in their exporting activity due to improved exchange rate environment.

Cited by Markit employment outlook strength is confirmed by today's Live Register data for February 2015 which shows:

1. Significant declines in Live Register y/y
2. Broad declines in Live Register across duration of registrations (long- and short-term supports); and
3. Broad declines in Live Register by occupation, with all occupations posting decreases in LR.

So on the net - good news.

1/4/15: Export@Google March 2015

My recent conversation about the state of the global markets, economy and everything for Export@Google event last month

This is now available on youtube: https://www.youtube.com/watch?v=wnoH_ndAQRI

1/4/15: Russian Manufacturing PMI: March 2015

Russian Manufacturing PMI (Markit & HSBC) for March came in with new disappointment: the indicator slipped to 48.1 from 49.7 in February. This marks the second lowest reading in the series since June 2009 (the lowest reading since June 2009 was recorded in January this year at 47.6).

from Markit release: "production and new business both recorded mild declines. Employment also fell, but at a weaker rate with consumer goods producers recording modest growth. There was some positive news on the inflation front, as input and output prices continued to rise, but to much slower degrees than seen at the start of the year".

Overall trend toward deepening contraction in the Manufacturing remains:

Ironically, February improvement in PMI to 49.7 (still below 50.0) means that 3mo average for Q1 2015 is now at 48.5 which is better than 3mo average for Q1 2014 (48.3), if only marginally. This is despite the fact that in March 2014, PMI was reading 48.3 against 48.1 in March 2015.

As reminder, Russian Manufacturing PMIs first slipped below 50 in July 2013 and remained below 50 in 15 months out of the last 21 months.

31/3/15: Six out of Seven Signs the US Economy is Weaker in Q1

That economic recovery in the U.S. - the engine for growth in far away places, like Ireland, the hope of the IMF, the beacon of the dream that debt stimulus is a fine way to repair structurally weakened (let alone devastated - as in the Euro area) economies is... err... coughing diesel:

Source: @M_McDonough

In basic terms, five out of six tracked Economic Surprise sub-indices are in the red now, with four of them in the red for some time. And the overall Bloomberg Economic Surprise index is in the red, and has been in the red for most of the Q1. And the overall index is falling in steep ticks... which is not good... not good at all.

31/3/15: Three Strikes of the New Financial Regulation: Part 2: Dubious Economics of FTT

My new post on the mess that is Europe's Financial Transactions Tax is available on LearnSignal blog: http://blog.learnsignal.com/?p=169

31/3/15: The Most Effective QE of all QEs

In the previous post I shared my view of the QE. Here is the best, most succinct summary of the effectiveness of the 'most effective' of all recent QEs: the US example via @Convertbond:

Nails it.

31/3/15: QE for the People

ECB's QE programme launched this month is targeting wrong policy and likely to fuel an already massive bubble in stocks and bonds. It is also unlikely to help generate real economic growth, as it simply transfers more wealth to the financial markets.

Look at the facts: 

• The Eurozone is suffering from structural stagnation that is driven by the lack of investment, anaemic domestic demand and policies, including taxation and enterprise regulation, that reduce entrepreneurship and make jobs creation and productivity growth (especially Total Factor Productivity) excessively costly.
• Overall household and corporate indebtedness in the Euro area remain high despite several years of deleveraging.
• Bank lending markets fragmentation contrasted by booming equity and bond markets shows that the problem is not in the lack of liquidity, but in over-leveraging present in the economy.

Experience in other countries that recently deployed QE shows that current measures by the ECB are unlikely to provide sufficient stimulus to drive growth to the new (and higher) ‘normal’: 

• Japan, the US, and the UK experiences with QE show that monetary policies are useful to the real economy only when they are combined with either expansionary fiscal policies or real investment increases or both.
• Even in such cases where QE has been successful, sustainability of QE-triggered growth has been weak in the presence of structural debt overhangs (Japan) and had to rely on structural drivers for growth present prior to the deployment of QE (the UK and the US).
• In the Euro area, the idea is to combine QE with austerity policies and in the presence of dysfunctional financial markets. Such a program could increase misallocation of resources via bidding up financial assets prices over and above their long term fundamentals-justified levels. 
• Bank of England created £375bn over the course of its QE programme. By the Bank of England’s own estimates, QE in the UK pushed up share and bond prices by around 20%. But because around 40% of stock market wealth is held by the wealthiest 5% of households, QE has made that wealthiest 5% better off by around £128,000 per household. 
• You might want to check this post on the potential effects of QE on the real economy: http://www.zerohedge.com/news/2015-03-28/finally-very-serious-people-get-it-qe-will-permanently-impair-living-standards-gener 

In short: the QE, as currently being carried out by the ECB, benefits the less-productive holders of financial assets, not the poor, nor the entrepreneurs, nor the real enterprise.

There is an alternative policy, a policy of “Quantitative Easing for the People”, an idea of distributing QE money directly to the citizens of the Euro area.

This is a more efficient approach for stimulating the real economy precisely because it puts liquidity directly at the point where it is needed most and can be used most efficiently, absent intermediaries, to address real structural problems present in the economy.

The plan is identical to the ECB current plan in terms of funds allocated: €60 billion will be created each month for 19 months. The amount each national central bank will create can also depend on its share of capital in the ECB, just as the current ECB QE programme envisages.

Each Eurozone citizen can receive ca €175 on average each month for 19 months. 

• The funds are taxable income, so there is a benefit to the Exchequers, allowing the governments to engage in expanded investment programmes or more efficiently close some of the budgetary gaps, while buying more time to implement structural reforms.
• The funds (net of tax) can be used by households to accelerate debt deleveraging and/or repair their pensions funds and/or fund consumption.
• As the result, “QE for the People” will stimulate domestic demand (consumption, investment and Government investment), while increasing the rate of debt deleveraging.
• In addition, “QE for the People” can help improve banks’ balancesheets by increasing loans recovery (as households repay loans). In contrast, ECB QE will not have such an effect as it will be taking off banks balancesheets zero risk-weighted Government bonds.  Thus, “QE for the People” can be seen as a more efficient mechanism for repairing financial system transmission mechanism than ECB own QE policy.
• The quantum of stimulus implied by the “QE for the People” proposal is significant. Take Ireland, for example. “QE for the People” means annual benefit of around EUR8 billion in direct stimulus (depending on how Ireland's share is estimated). In 2014, Irish Final Domestic Demand grew by EUR6.15 billion. So the direct effect of this measure for just one year would be equivalent to more than full year worth of real economic growth.

19 economists from across Europe and outside signed last week’s FT letter proposing this plan (with some variations) to stimulate the real economy in the euro area. The original letter is available here: http://www.basicincome.org/news/2015/03/europe-quantitative-easing-for-people/. 

This note posits my personal view of the alternative policy, somewhat at variance with the letter itself on the specific modality of Government involvement in the funding and Government receipt of the QE funds over and above normal tax capture (which I do not support). 

27/3/15: Russia Goes for Fiscal Cuts: Amended Budget 2015

Russian Duma passed (in first reading) amendments to the Budget 2015.

The new Budget is based on average oil price of USD50 pb, with expected GDP growth of -3% against inflation of 12.2% and USD/RUB exchange rate of RUB61.5. These are major revisions to the base assumptions.

Forecast government deficit for 2015 has now widened from RUB431 billion (0.6% of GDP) estimated back in October 2014 to RUB2,700 billion or 3.7% of GDP.

Budget forecast that the economy will contract 3% (to RUB73.5 trillion or USD1.27 trillion) in 2015 is a sharp deterioration on October 2014 estimates for GDP growth of 1.2%. Still, this is very optimistic. Earlier BOFIT forecast Russian economy to contract by more than 4% in 2015 on foot of assumed oil price of USD55 pb, and the Central Bank of Russia estimated 4% drop in GDP for 2015 on foot of USD50-55 pb assumption. See latest forecasts for the Russian economy here http://trueeconomics.blogspot.ie/2015/03/26315-bofit-latest-forecasts-for.html and for external trade here: http://trueeconomics.blogspot.ie/2015/03/26315-russian-imports-outlook-2015-2016.html

In December 2014, budgetary forecasts were for GDP decline of 0.8% and inflation averaging 7.5% with oil at USD80 pb.

The key pressure will fall onto the Russian oil revenues reserves fund (one of the sovereign wealth funds) which currently has liquid assets of USD98 billion, but under the Budget 2015 amendments will see this depleted by USD53 billion by year end.

As expected (see my note linked above), public sector wages were not cut in nominal terms, but surprisingly (analysts expected nominal rises in wages below inflation rate), public sector wages were completely frozen in the amended budget. As expected, pensions rose in nominal terms (5.5% y/y), but the increases fell below expected inflation rate, so real pensions will fall.

In a related report (http://beurs.com/2015/03/24/rusland-moet-besparen-maar-wil-niet/60374), Russia is to cut Interior Ministry (police) ranks by 110,000 with 78,700 cuts in 2015. This comes on top of cuts of 180,000 since 2011 - a part of large scale restricting of the police force that also included rebranding of Russian 'militzia' into 'police' and a score of measures aimed at reducing corruption. It is also worth noting that reductions are in line with May 12, 2014 Presidential decree that limits overall level of employment by the Interior Ministry to 1.1 million - at the time, this meant reductions of 180,000.

And reserves are still going to run low (http://www.themoscowtimes.com/article.php?id=517902)...

Despite the aggressive measures, in my opinion, Russia still needs some positive upside in the economy to meet the budgetary targets. My view is that even if oil prices reach an average of USD55-60 pb in 2015, the deficit is likely to be around 3.5-3.7%, so with Budget amendments penciling in USD50 pb price, things are very tight and prone to adverse risks. The good news - state sectors' wage inflation (running in 20% territory over recent years) will be scaled back via inflation and nominal freezes. Bad news is, this too is unlikely to be enough. 

27/3/15: That Russian Liberal Opposition: Facts Piling Up...

Recently, I wrote about the sorry state of the Russian liberal democratic opposition (http://trueeconomics.blogspot.ie/2015/03/21315-two-pesky-facts-and-russian.html) and Putin's strong showing in public ratings. Here is another data set, this time reflecting this week's data:

Q: Imagine that next Sunday there will be presidential election in Russia. Which politicians would you give your vote to? President Putin's share of the vote:

Source: http://fom.ru/Politika/

Here's the link to longer-dated series: http://bd.fom.ru/pdf/d12ind15.pdf and a snapshot from the same (I omit spoiled votes and those who are not planning to vote):

I have trouble spotting viable liberal opposition that can be supported by a democratic regime change. But may be I am just not seeing something... like it or not, but these are the numbers we have...

27/3/15: Euro Area Growth Indicator up in March, but...

Latest Eurocoin (Banca d'Italia and CEPR) leading growth indicator for euro area economy came in at a slight improvement in March to 0.26 from 0.23 in February, posting the highest reading since July 2014. The average quarterly growth forecast now implied by Eurocoin is at around 0.25-0.3% q/q with the risk to the upside.

This is the first monthly reading since July 2014 that puts Eurocoin into statistically significant growth territory and also the first monthly reading for positive growth momentum based on 6mo moving average.

However, as the chart below indicates, y/y we are still in weak growth territory and, to a large extent, this growth is supported by dis-inflationary momentum, rather than by nominal growth.

Accommodative monetary policer remains the key forward and the ECB remain stuck in the proverbial 'monetary policy corner':

In March, the main factors behind the Eurocoin increase were: an improvement in household and business confidence, plus gains in share prices. In other words, there is no organic driver for growth - both confidence indicators and share prices may have only indirect link to real economic activity.

27/315: Irish Retail Sales: February 2015

Core retail sales for February 2015 (excluding motors):

• Value of core retail sales in Ireland rose 0.22% y/y in February, having posted 0.67% growth in January - a significant slowdown in growth. 3mo average index for retails sales in value has rise 1.1% y/y in December 2014-February 2015 period compared to the same period a year ago. 6mo average through February 2015 is up 1.23% y/y. This is weak growth at best, given the levels of activity in the sector: 3mo average through February 2015 is down 33.93% on peak and down 3.64% on pre-crisis average.
• Volume of core retail sales fared, as usual, better, boosted by extremely low inflation in prices. Volume index rose 4.52% y/y in February 2015, after posting 4.61% growth in January 2015 (a slight slowdown in the pace of growth). 3mo average through February 2015 is up 4.8% y/y, and 6mo average is up 4.3% y/y. Still, compared to peak, volume of sales is still 25.3% below pre-crisis highs, although it is up 9.3% compared to the pre-crisis average.

As chart above clearly shows, the divergence between the Consumer Confidence Index and Value of retail sales activity remains in place, while Volume index is co-moving with the Confidence indicator. (more on this below).

Based on links between reported Consumer confidence and actual retail sales, Volume of retail sales is currently trending at relatively average levels (see chart below, green dot marking current reading), while Value indicator is trending well below the average reading consistent with reported Consumer confidence (see light orange dot marking the current reading).

Overall activity in the retail sector, however, is still improving. The chart below shows my own Retail Sector Activities Index (RSAI) that takes into the account trends in volume and value indices, plus the trend in consumer confidence. Currently, the main drivers for this improvement are: deflationary dynamics boosting volumes of sales and still elevated readings for Consumer Confidence.

However, rates of growth in both Volume and Value indicators are weaker than pre-crisis averages and are worryingly weak in Value terms (remember, retail sector profits and employment levels are predominantly the functions of value of sales, not volume of sales):

Finally, onto correlations: table below sums up correlations for each index, showing negative correlations between Consumer Confidence Index and Value and Volume of Retail Sales indices for the period from June 2008 through present (from the start of the crisis). It is worth noting that correlations have moved into positive territory from around 2012 on, although the latest readings suggest some temporary weakening of these.

Conclusions: setting aside Consumer Confidence readings, value and volume of retail sales indices are rising. However, as in previous months, increases in volume of sales are not matched by increases in value of sales, suggesting that overall sector activity improvements are driven primarily by deflationary price dynamics and only in the second order by improving demand. According to Consumer Confidence, we have been back in 2007 levels of activity since the start of Q2 2014. This is simply not supported by the annualised growth rates recorded in both Volumes of sales and Values of sales. Meanwhile, the levels of sales indices remain deeply below their pre-crisis peak readings and in value of sales terms, below pre-crisis average.

I will look at sub-sector decomposition of the retail sales indices performance once we have data for March, so we can strip out monthly volatility and look at quarterly comparatives.

27/3/15: Debt, Glorious Debt, Deluge of Debt... and Negative Yields

In the article on global debt woes forthcoming in one of the financial letters I contribute to in April, I will be looking more in depth at the problems brewing in the global asset markets. But for now, couple of interesting (additional) points.

According to Pictet, the share of global debt that is trading at negative yields has now risen to 8% of the total debt outstanding. For the Euro markets, 19% of all debt traded is now negative yielding, for debt denominated in Swedish SEK - 33% and for for Swiss CHF denominated debt - 44%.

If this is not enough to raise your hair, here is what investors think of the bonds markets:

Source: @lebullmarche

Per above, two core concerns are now taking over the worry-ranks for institutional investors: valuations bubble in bonds markets (up from 17% to 30% between January and March 2015) and Supply and quality of issuance of new debt (up from 6% in January to 26% in March).