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.

30/07/2011: Detailed analysis of Retail Sales figures for June 2011

The volume of retail sales rose +0.2% in June 2011 compared with June 2010 and +1.1% mom. The 3mo average for the volume index is now at 93.07, while the 6 mo average is 92.3. Both below the current monthly reading. June reading marks the second consecutive monthly increase in the index. 2010 average is 93.3, while 2011 average to-date is 92.3, behind that of 2010.

The value of retail sales rose +0.4% in June 2011 when compared with June 2010 and there was a month-on-month increase of +0.7%. The value index now stands at 89.4 (marking the second consecutive month of increases) against 3mo average of 88.7 and 6mo average of 88.3. Compared to 2010 average of 88.9, the 2011 average to-date is now at 88.3.


Thus, the volume of retail sales in June 2011 stood at 94.1 down 16.73% relative to the peak. Current monthly reading for the value index is 23.59% below the peak for the series.
Couple of charts for quarterly changes:

Of course, the problem with the above data is that it is distorted by the motor sales volumes and values, especially pronounced due to the expiry of the Government incentive scheme for new motors purchases in June 2011. Hence, ex-motors data paints a dramatically different picture of continued deterioration in retail sales.

Excluding Motor Trades, the volume of retail sales fell 4.2% in June 2011 when compared with June 2010, while there was a monthly decrease of 0.1%. Thus, June marked a 5th consecutive month of declines in the colume of retail sales ex-motors. The index is now at 98.2, below 3mo average of 98.5 and 6mo average of 99.45 and well below 2010 average of 102.2.

Ex-Motor Trades there was an annual decrease of 3.2% in the value of retail sales and a
monthly decrease of 0.5%. Index reading of 94.6 in June 2011 stands below 3mo average of 95.3 and 6mo average of 96.2 as well as 2010 annual average of 97.6. The index has now declined (mom) for 3 months in a row.

In year on year terms, volume index retail sales ex-motors are now down 14 moths in a row and in terms of value index for 36 months in a row. In 2010, index of volume of retail sales ex-motors posted an average monthly decline of 0.28%, while in 2011 to-date the same figure is 0.03, while the latest 3mo average is 0.67% decline. For value of sales ex-motors, the average monthly decline was 0.24% in 2010, against 0.08% average monthly decline in 2011 to-date and 0.8% decline in 3 months to-date. So clearly, last 3 months suggest increased rate of deterioration on both 2010 and H1 2011 averages.


Relative to peak, the volume of retail sales ex-motors has now fallen 13.33%, while the value of retail sales ex-motors is down 19.42%. Both series continue their downward trajectory.


So overall, in June 2011, Motor Trades were up +21.9% yoy in volume. Alongside motor sales, sales of Electrical Goods (+5.2%) and Furniture & Lighting (+2.6%) were the only three categories that showed year-on-year increases in the volume of retail sales this month. Fuel (-12.0%), Hardware Paints & Glass (-10.4%) and Other Retail Sales (-8.1%) were amongst the ten categories out of 14 total that showed year-on-year decreases in the volume of retail sales this month.

In terms of value of retail sales, Motor Trades posted an annual increase of 18.3% - the only category of sales that posted an annual increase in value. Hardware & Paints (-10.9% yoy), Other Retail Sales (-6.0%), Bars (-5.8%) were the categories with largest (above 5%) declines in the value. Overall, 13 categories out of total 14 have posted yoy declines in value of retail sales.

My previous analysis of the Consumer Confidence indicator from the ESRI and high level dynamics in retail sales (see link here) shows that these trends toward continued pressures in the retail sector are expected to continue over coming months.

30/07/2011: High level data on Retail Sales & Consumer Confidence

Let's update the latest stats on retail sales in Ireland and consumer confidence - a separate, more detailed post will look on the specifics of the retail sales data.

The volume of retail sales rose 0.2% in June 2011 yoy and +1.1% mom. However, all of the increases were accounted for by motor sales.

The value of retail sales rose +0.4% in June 2011 yoy and +0.7% mom. Again, all effects are due to motor sales increases.

Provisional estimates for Q2 2011 show the volume of retail sales fell by 1.7% yoy and rose 1.8% qoq. Once again, the figures were dramatically improved by motor sales.

Consumer confidence, measured by the ESRI index have posted a dramatic drop in June from 59.4 in May to 56.3. Index is now 5.38% down qoq, 5.219% down mom and 17.084% down yoy.

So while overall retail sales indices signal some slight improvements in conditions, consumer confidence indicator shows that in months ahead there is likely to be renewed pressure on retail sales. In fact, of course, there is no divergence between the two sets of indicators, as retail sales continue to fall when taken on ex-motors basis.

Longer-term averages also suggest further softening in the retails sales
Three months moving averages are now:

• Index of Value of retail sales up 0.49% qoq, 0.189% up mom and 1.743% down yoy
• Index of Volume of retail sales up 1.276% qoq, 0.253% up mom and 2.218% down yoy
• Consumer confidence is up 23.291% qoq, 5.426% up mom and 8.299% down yoy.