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.

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.

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, ...do 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.