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Eurozone economic activity remains lively!

Eurozone

The sentix economic index maintained its positive gradient, rising for the fifth consecutive time and recording a number of 28.3.  The situation index stood at 37.3 and is the highest level since December 2007.  Surprisingly, there is an expectation are for a stagnation of the index, even a decline, as Germany has not fared well lately.  There was a Sentix Economic indexIHS Eurozone PMIslight propensity of fear, as investors pondered over a change of interest rate policy, in the backdrop of improved economic momentum as indicated by Markit Index readings, which pointed to a highly improved performance.  For example, the Eurozone composite output index stood at 56.3 and the Services Business activity index at 55.4.  This marks as the best quarter performance over the last 6 years.  While output was by no means robust, but business activity remained buoyed as there was a healthy inflow of new work, and job creation was stalwart at the behest of elevated business confidence.  The expansion of economic activity was witnessed in both the manufacturing and services sector, whereby they grew at the fastest rate since 2011.  Further, as per Eurostat, the retail trade volume was higher in May 2017 over a month earlier, with the seasonally adjusted rising by 0.4%.  In addition, the seasonally adjusted industrial production rose by 1.3% due to the increase in production of capital goods by 2.3%, consumer durable goods by 1.8% chiefly and non-durable goods by 1.2%.

While Eurozone overall appears to be on a positive recovery tract, the extent of recovery varies by country as evidenced by the spread of the unemployment rates, with Germany standing at 3.9% and Spain and Greece at the other end of the spectrum at 17.8% and 23.2% respectively.  This makes the economic gap between the North and South evident.  It needs to be pointed out that when the debt crisis grew in 2010, this disparity was a point of political contention that placed the concept of “Eurozone” into question.  Grexit was really the epicenter of the political debate when it was poised to cause political and economic upheaval not only in the Eurozone but also the global financial markets.  However, hope has emerged from those quarters, as EU commission has lately reiterated that Greece’s fiscal standing has improved, allowing for the country to return to the international bond market, which via financial discipline, should catalyze the economic recovery.  Falling yields have been a key indicator in this regard; for example, the 3-month treasury was lower at 2.33% mid-July, down from 2.7% a month earlier.  Greece may remain in the limelight of the economic recovery process, with a budget deficit of only 1.2% during 2017, much lower than the stipulated upper limit of 3% set by the EU fiscal rules.  Keeping in mind the improved economic performance, Eurozone creditors unblocked new loans worth 8.5 billion early July as part of the 86 billion-bailout plan.  These financial measures will alleviate any untoward pressures to economic recovery, as it is expected that the Greek economy is expected to grow 2.1% during 2017, which is above Eurozone average.

Political headwinds, poised by the German elections in September and Italy’s next spring, can give air to turmoil in the region, but it appears that pro-Eurozone message will reverberate in the backdrop of a broader improving economy.

The sentix economic index maintained its positive gradient, rising for the fifth consecutive time and recording a number of 28.3.  The situation index stood at 37.3 and is the highest level since December 2007.  Surprisingly, there is an expectation are for a stagnation of the index, even a decline, as Germany has not fared well [...]

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US Economy remains non-directional

US economy

IHS Markit Manufacturing PMI has been rather subdued during June, as new orders and employment growth exhibited a slowdown from a month earlier.  Nevertheless, the readings point to a sense of confidence for the year ahead as per survey respondents as the outlook was at its strongest level since February.  While Michigan Consumer Sentiment stood at 95.1, 2.1% lower than a month earlier and lowest ever since November 2016, but this reading has shown greater resilience as economists were postulating a reading of 94.5.  Reviewed from a long-term perspective, the average index value of consumer sentiment is highest since 2000. Cosnumer Sentiment In addition, as per recently released data by Bureau of Economic Analysis personal income increased $67.1 billion, or 0.4% during May while personal consumption expenditure growth was slower at 0.1% or $7.3 billion.   Analyst do see economic and policy uncertainty as a causal factor for possibly a peaking index, as improved performing economic indicators have been helping the sentiment.  For example, the 2.9 gain of the ISM index, amid fading expectations of a fiscal boost either via government spending on infrastructure or tax reforms, is stabilizing the outlook. ISM Manufacturing Outlook

There are some reasons for a subpar sentiment.  Historical data shows that growth acceleration normally comes during the early phase of an economic expansionary cycle and not during the latter. If this trend is to continue then there is always a possibility that Donald Trump’s fiscal stimulus plans may under-deliver from the presaged 3-4% forecasted growth.  There could be multiple factors that could even, in fact, slow down the economy, such as rising inflation, FED continued tightening at an accelerated rate, or an appreciation in the crude oil market in the intermediate term. All combined have an effect on imparting an economic slowdown.  Public debt burden has soared by 11% during the last decade and the FED would continue acting consciously to reduce the federal budget deficit, reigning in growth prospects.  This approach would remain at odds with the expansionist program that the current administration has in mind.

There is a silver lining though to the current economic expansion that is aiding Trump is that its duration is one of the longest recorded after late 1940’s, the longest lasting for 10 years in 1990.  However, the rate of expansion is almost beleaguered and is the slowest recorded since that time at 2.1%.  While there are ominous signs, there is a possibility, as per research cited by Applied Global Macro Research, that expansion could linger on for another 2 years because historically recession has been said to occur around 5 years after peaking of non-financial corporations; this occurred during the third quarter of 2014.  Others may contend differently, for example, the term structure as of late has been favoring an imminent economic slowdown.  Moreover, if bond and stocks stand correlated, with bond acting as leading indicators, Scott Wren of Wells Fargo call for a stalling of the stock market is worth heeding to.  The S&P 500 target of 2,330, set last September stands eclipsed, as the index was trading as high as 2,436 last Monday.  While some retracements and sectoral shifts are possible, the index may correct slightly in the second half, as investors should target stocks weighted to economic growth, which again airs a sense of confidence on the economic well-being of the US economy, at least in the short term!

IHS Markit Manufacturing PMI has been rather subdued during June, as new orders and employment growth exhibited a slowdown from a month earlier.  Nevertheless, the readings point to a sense of confidence for the year ahead as per survey respondents as the outlook was at its strongest level since February.  While Michigan Consumer Sentiment stood [...]

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Bank of Canada should not be trigger happy to raise interest rates

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Ending May 2017, on a YoY basis, the consumer price index (CPI) grew 1.3%, slightly down from the previous month rise of 1.6%.  This has occurred in the backdrop of a correcting crude oil market, which has witnessed prices plateauing during the onset of 2017, before ultimately developing a negative gradient.  It mustn’t be forgotten that historically crude oil trade has been the mainstay of the Canadian economy and subsequently macroeconomic indicators.  Quite impressively, though, the economy grew at a rate of 3.7% during Q1 of 2017, but growth in Q2 is expected to be slower in the region of 3%.

Canadian CPI

As already stated, economic performance stays correlated to the crude oil price movements, which were on an uprise during most of 2016, and ever since the dawning of the current year has tapered.  With a certain lag, the performance of the Canadian economy followed a similar course, and lately, it appears lackluster, thus underscoring the reliance of Canadian economy on the crude oil market.  From a holistic standpoint, the performance of the economy remained under-par, even though consumer spending has been resilient.  In reality Bank of Canada’s hawkish approach, which is eyeing interest rate hike decision as early as July, does not seem justifiable.  The bank policy rate stood at 0.5% during 2015, which followed rate cuts in light of flailing crude oil export market, and the Canadian currency, loonie, collapsed in the aftermath.  However, there have been ameliorating impacts on the economy as well as consumer spending has increased and as per recently released data, sales of building material, garden equipment, and supplies sector has risen by 3.5%, which is the strongest in the last 2 years.  Further consumer spending increase is underscored by the fact that sale of home appliances and hardware has grown over eight consecutive months.  In addition, Canadian housing market has been generally robust but only slowed down in the metropolitan city of Toronto after the imposition of foreign buyers tax, is an apparent effort to rein in the market.

A point of concern for the Canadian economic growth, as per Canadian Centre of Policy Alternatives (CCPA) is the racking up of corporate debt to the tune $1 trillion.  As per their report, Canada is at the forefront in terms of private debt accumulation when compared to all the advanced economies.  This is not good for consumers, because excessive debt results in scaling down of corporate operations, or curtailment of expansions, which results in a cut in expenditure in plant and equipment.  Thus, the required plow back effect in the economy is lower, resulting in lesser job creation, and ultimately lowered disposable income brought about with stagnating wage rates.  This ultimately manifests itself in economic indicators failing to meet their required macroeconomic objectives, inflationary target certainly being one. Thus, corporates need to take their fair share of onus, and as recent evidence suggests, they should refrain from losing focus by investing in unrelated ventures such as real estate, which has is the case as of late.  This issue here becomes two folds, first it inflates the real estate sector, primarily the housing market, to unsustainable levels, but more importantly, the resources that would have been better utilized in creating jobs and uplifting wage rates, allowing for a sustainable long-term growth, are diverted into ventures which give rise to market instability.  For example, it is envisaged that rising interest rate could mean a cost base increase of $130/month for the average Canadian, which would have been better buffered if wage rates outweighed this increased cost of living, leading to long-term sustainability.

Ending May 2017, on a YoY basis, the consumer price index (CPI) grew 1.3%, slightly down from the previous month rise of 1.6%.  This has occurred in the backdrop of a correcting crude oil market, which has witnessed prices plateauing during the onset of 2017, before ultimately developing a negative gradient.  It mustn’t be forgotten [...]

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Some short term meltdown expected in the US housing market!

US housing market

Adding to the confidence to the US economy was the unexpected resale to the third highest level in over a decade.  Inventory shortages have been steadily pushing up median prices and in May, and stood at $252,800 in June this year, surpassing last Junes number of $247,600 and was a healthy rise of 5.8% from May 2016 number, which stood at $238,900.  This number is a little surprising, given that Reuter was forecasting a decline of 0.5% to an overall estimate of 5.55 million, yet the sales stood at 5.62 million level during May.  The main reason ascribed to these healthy numbers is the continuing job market, which has been steadily reducing the unemployment rate, which now stands at a 16 year low.  Further, the recent downgrades in mortgage rates are helpful in accelerating home sales.  It is estimated that compared to one year ago, when it took 4.7 months to clear inventory, now this number stands at 4.2 months, exhibiting to a certain tightness in the market, which is allowing for the median price to remain robust.  However, inventory availability concerns are acute and NAR’s chief economist has remarked, “We have a housing shortage, we may even use the term housing crisis in some markets.”

US housing market
Total housing inventory grew 2.1% to 1.96 million existing home in May, but this still is 8.4% rate slower than a year ago, when it grew by 2.14 million and marks a continuous 24 consecutive monthly decline.  This is obviously reducing unsold inventory to new lows, but at the same time is taking prices to an unsustainable level specifically for the first time buyers.  NAR economist Lawrence Yun has added that current aggregate demand in the housing sector is indicative of a higher sales potential of the market, but would-be buyers have to wait.  This phenomenon is most pronounced in single-family housing who are experiencing restrictive choices, as prices have continuously escalated.  Having said this, single-family home sales have been steadily increasing and in May stood at a 4.98 level, nudging upwards from the April number of 4.93.  Compared on a YoY basis the growth was at 2.7%, when it stood at 4.85 million, as the median home price stood at $254,600 in May starkly up by 6% from a year earlier.

Observers link, the shortage in housing, primarily being driven by tight labor market conditions, which is actuating a heightened aggregate demand function, and also investors are holding up sales of properties, which again is restricting supply.  The restricted supply function is again bidding up the equilibrium housing prices

 

Adding to the confidence to the US economy was the unexpected resale to the third highest level in over a decade.  Inventory shortages have been steadily pushing up median prices and in May, and stood at $252,800 in June this year, surpassing last Junes number of $247,600 and was a healthy rise of 5.8% from [...]

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Hawkishness is the way forward for the US economy!

FED interest rate hike decision

The FED moves cautiously in slowly bidding up the Federal fund rate for the second time during 2017 bring it to 1% and 1.25%.  Federal Open Market Committee cited mixed economic data as the reason for this measured increase.  In addition, FED’s now plans to wind down its $4.5 trillion balance sheet, by reducing its holding of government agency debt, Treasury, and mortgage-backed securities.  Further, the reinvestment of payments would be actuated after exceeding of the 6 billion dollars per month cap. A cautious statement has emanated from the FED because economic data has not been overly convincing.  For example, the 1st quarter GDP was disappointing; inflation targets remain unmet with inflationary pressures rather soft, while payroll gains have been slower than in the recent past.  Unarguably the economy is reaching full employment levels, at 4.3% unemployment rate, as this has allowed for a steady increase in household spending; business investment has also remained on a positive trend, posting an expansion.    The committee has made a due note of the fact that both the Consumer Price Index (CPI)  Personal Consumption Index (PCI) have remained below the target threshold of 2%, posting a reading of 1.5% and 1.9% respectively.  While the FED has concurred that the risk to the economy remains balanced, the inflationary target can only be met, at best, in the medium term while GDP growth rate to reach 2.2% in 2017.  Long-run estimates of the unemployment rate are 4.6% and FED officials have now lowered their expectation of long-term inflation to 1.7%, which is a morale deflator.

Some review the recent FED move as a “hawkish surprise” because the shrinking of the balance sheet and rising interest rate would lead to a further flattening of the yield curve.  The term structure is already on a negative slope, with the difference between the long-term US treasury yields and short-term Treasury yields approachingUS Treasury Yields precarious levels.  In addition to the payment proceeds reinvestment over the $6 billion cap, the FED has also assigned a cap on mortgage debt at $4billion, and a commitment has been shown for the runoff program to continue until the size of the balance sheet is brought to a manageable level of $2-$2.5 trillion.  So overall with some monetary tightening at the behest of wobbly economic data, and term structures not very convincing, it remains to be seen when the economy takes a hiatus from its recent upward trajectory, as the current trend of rate heightening is set to continue.  The dot-plot, which charts an expectation of FOMC of where the federal fund will be called for another increase in 2017, taking the rate to at least 1.4%.  In addition, with only 1 dissenting voter, Neel Kashkari of Minnesota, the FED funds futures market is giving a 35% probability of an increase.  While this process of normalization is set to continue, with the rate reaching 2.9% by 2019, below the long-run average of 3%, the ramifications could be excruciating, when we consider that GDP growth rate is at par with the pre-recessionary conditions of 2008.  It was a quick reversal of growth rate that threw the economy into meltdown and with the term structure acting as an accurate leading indicator; is not the writing surely on the wall even for the average observer.  The only question probably remains only of timing!!!!

The FED moves cautiously in slowly bidding up the Federal fund rate for the second time during 2017 bring it to 1% and 1.25%.  Federal Open Market Committee cited mixed economic data as the reason for this measured increase.  In addition, FED’s now plans to wind down its $4.5 trillion balance sheet, by reducing its [...]

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A very strong macroeconomic impetus can lift the Euro!

European and German flag

When compared on a YoY basis the GDP growth posted an increase of 0.6% during Q1 in the Euro Area.   In addition, as per Eurostat, the seasonally adjusted retail trade volume showed an appreciation.  Compared to April 2017 the adjusted sales index grew by 2.5% in Euro Area.  Along with these recorded readings, Eurozone economic growth continued to run at the quickest pace over the last 6 years ending May as per Eurozone PMI Composite Output Index with a very healthy reading of 56.8.  The latest output expansion supported by strong incoming business, which is one of the steepest rises in the last six years.  PMI’s exhibited optimism on a one-year outlook, a reading that has risen to the highest level ever since the data for this series was first collected during July 2012.  This data also shows congruency to the Sentix Economic Index.  The situation index recorded the highest upturn since 2008, based primarily on hard macroeconomic indicators, and puts Eurozone progress on a positive bearing, as assessment is not based on “volatile expectations.”  This index is the highest since post-crisis level.  Unemployment, that has been a plague of the Eurozone, as indicative of high unemployment rate in France and Spain, has witnessed signs of abatement, ever so slightly.

Sentix Economic index
Eurozone Markit PMI

While continuingly improving economic conditions would allow for a move away from current negative interest rate regime, but this scenario appears a distant possibility as per recently chaired Monetary Policy decision-making meeting of ECB held in Tallinn.  Here the participants unequivocally decided that the key ECB interest rates would continue to remain at the existent level, well past the horizon of net asset purchases.  Thus, as per ECB’s governing council, the current asset purchases program of Euro 60 billion will at least run during the end of December and probably much further down, with inflation, employment rate and the GDP growth rate as the correct gauge for monitoring progress and growth.  The principal payment of the maturing securities, under the asset-purchasing program, will continue to be reinvested, and if the economic situation becomes less favorable, then scope in terms of size and duration of the program is extendable.

While the ECB remains highly circumspect of the development of improving macroeconomic indicators, it would be hasty to think that the Euro can make a healthy rebound in the currency markets on its own strength.  We can expect a reasonably long period of consolidation to follow, for example, against the US dollar, before cracks in the counterpart economies and prolonged consolidation in the Eurozone, allows the Euro to propel like a springboard.  Nevertheless, as the ECB makes its views clear on its expansive monetary policy, a situation helping the Euro can only come about with some sort of normalization in the interest rates.  It is only in the long-term horizon, possibly 2017 Q4 or 2018 Q1 when tangible readjustments in the currency markets will allow for a re-equilibration of currencies, but that too in a non-negative interest rate environment.

When compared on a YoY basis the GDP growth posted an increase of 0.6% during Q1 in the Euro Area.   In addition, as per Eurostat, the seasonally adjusted retail trade volume showed an appreciation.  Compared to April 2017 the adjusted sales index grew by 2.5% in Euro Area.  Along with these recorded readings, Eurozone economic [...]

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Australian government lack of commitment can be divisive for the market!

Australian Property Crash

In the backdrop of UBS data, market participants have started discounting a drop in the real estate sector as they see a top having had emerged.  While the data perpetuates falling prices, it does not see at a rate as fast as the drop in activity; thus disproportional to sales.  Retrospectively the housing market has been the mainstay of the economy and has outstripped the rate of growth of the economy by a healthy 6%.  Stating the variables that have led to this are mainly state and local planning regulations, allowing for superannuation, foreign investment rules, all have played a fair share in making the market to grow at an impressive rate of 12.9%.  From a primary cyclical level, the housing market has been growing for 4 consecutive years, and now an approaching peak has the potential to send shudders.  UBS has underscored that demographics are not mitigating the risk in the economy because household debt is reaching a level of unsustainability.  This risk of collapse would be severer in impact for the median income holders who normally have all their investment tied up in a single asset rather than high-income owners who have the flexibility to diversify their portfolio.  Further, these risks remain heightened on the consequence of an interest rate hike by the RBS, in an effort to normalizing them and moving away from abnormally low rates.  This then could position the housing market on a precipice, which would give rise to speculation and lead to market volatility while setting it up for a collapse.
 
As stated earlier, that a housing downturn will not affect investors equally; there is a political dimension to its performance as well.  Housing analysts are of the view that it would be imprudent for market dynamics needlessly influence a market when government regulations have actually played a protectionist role.  In an effort to keep the market stable Murray financial inquiry has proposed addressing negative gearing, capital gain tax concessions and borrowing on superannuation funds.  Polls have been somewhat divided as 54% of the respondents have favored tax breaks, while 28% have not.  Further, acquiring superannuation by first-time borrowers has not won widespread popularity.  Analysts feel that the government has also had to bear its fair share of the burden, as analysts have been rather skeptical of the decision by the government to stay silent on such an important matter.  For example, they could have easily addressed it and affected affordability via the supply of land, ameliorating infrastructure costs and reducing commercials cost for making transactions.  Rather the government has been reticent, slowing reacting to the market needs, as each governmental layer has acted alone trying to address smaller pie of a big problem.  They should have rather acted cohesively to be more effective in addressing the market needs.  But there is a sense of clarity in government stance, as it is not escalating any expectations on a housing affordability package in the upcoming May 9th budget and this is yet another sign of bearish precedence gaining in the market.

In the backdrop of UBS data, market participants have started discounting a drop in the real estate sector as they see a top having had emerged.  While the data perpetuates falling prices, it does not see at a rate as fast as the drop in activity; thus disproportional to sales.  Retrospectively the housing market has [...]

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While the Trump Administration dally’s the US market shows nerviness!

FED interest rate hike decision

What will be the role of fiscal spending on new macroeconomic patterns?

FOMC in its last meeting has been ambivalent with regard to economic projections, citing risk associated with “unemployment and inflation as broadly balanced.”  However, most saw risk to the GDP forecast and inflation weighted to the upside.   An important variable looked at with much anticipation is the spread between the 2 year and 10 year Treasury bond yield and how the commodity market will react in response to the US response to the ensuing Syrian conflict.  The differential of the 2 year and 10 year treasury bond yield exhibits consumers expectations on long term inflation rate, bringing about an increase in long term nominal interest rates vis a vis short term interest rates.  The spread between the 2-year and 10 year treasury yields has gradually fallen ever since the Trump election in November of last year.  This narrowing of yields or a decrease of yield spread gives the notion that investors are becoming very circumspect of the economic climate and are less optimistically inclined towards business conditions.

It would certainly be interesting to note how the FED would react to the possibility if the long end of the curve does not rise, as it would certainly not make any sense for it to keep on raising interest rates if possible economic slowdown would ensue as a result.  An inverted yield curve means that long-term bond prices are rising faster than short-term bond prices and is a harbinger of recession.  From an Intermarket perspective, some jitters appear on the horizon, as S&P and DOW Industrials have declined from there all time high levels.  For example, with a P/E ratio of 25, the S&P is trading much above its historical levels, and possibly is reaching an unsustainability level.  Gold has also been exhibiting a sense of upsurge, as it is higher by 13% from its December lows and earlier last week it broke its 200-day moving average.  A phenomenon that has not been witnessed since US elections.  The FED has not made any bones about reduction of its balance sheet from a whopping $4.5 trillion in portfolio and mortgage notes to $2.5 trillion over the next 5 years.   Gary Dorsch of Global Money Trends, does point out that the current bull market is 97 months old much higher than the average from the 54-month average.  He recounts that stock market just does not die out of old age, but rather it is a combination of overvalued equities or excessive tightening by the FED disrupting business cycle.  From an empirical standpoint he does point to the reality that S&P automotive index is already down by 7.5%, which may not fundamentally mean well for the metal indexes, but it does throw light on the vulnerabilities at the macro-economic scale.   Further, the Dollar index has also hit resistance as it continually goes through a consolidation phase.  Obviously, which side it picks would be difficult to ascertain with assurance, but the confluence of factors are against dollar dynamics and so are the long-term fundamentals.

For many investors, it may be too late to hitch a ride, because financial trends may have already started to unfold as investors stay blind sighted.

FOMC in its last meeting has been ambivalent with regard to economic projections, citing risk associated with “unemployment and inflation as broadly balanced.”  However, most saw risk to the GDP forecast and inflation weighted to the upside.   An important variable looked at with much anticipation is the spread between the 2 year and 10 year [...]

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The Canadian Central Bank remains circumspect!

Canadian-Housing-Economy

The Canadian Central Bank remains circumspect!

Earlier last week with remarks by Trump that USD is too strong, and with rising oil prices appreciated the loonie to a 6 week high @ 75.5 US cents. Both key data releases, of manufacturing and residential, exhibited better than expected activity during the commencement of the year. Manufacturing sales was above expectations as volume rose by 0.1%

New Homes StartWith tightening tendency expected from the Federal Reserves in the hike of the federal fund rate, there was an expectation for the Bank of Canada to take a more hawkish approachManufacturing Sales Volume, given the improved performance of the economy. However, the central bank has been rather cautious and not tempered with the interest rate for now. With the overnight rate left unchanged at 0.5%, the central bank has upgraded its forecast for this year from 2.1% to 2.6%. Accordingly, the bank expects the output gap to reduce during the 1st half of 2018. Even though the macroeconomic numbers are uplifting, the Central Bank is being very circumspect, citing ‘material slack,’ uneven export growth and business investment challenges as not overly convincing. They are also of the view that consumer spending and residential investment are transient improvements and this data would have to become much more consistent in nature to start relying on. Obviously, the cautious approach emanates from the developments from across the border whereby the US trade policy has been crying for protectionism.  This could adversely affect Canadian not so consistent productivity numbers. Canadian exports are bound to shudder on the prospects of border adjustment tax targeting Canadian goods. Lobbyist

the border whereby the US trade policy has been crying for protectionism.  This could adversely affect Canadian not so consistent productivity numbers. Canadian exports are bound to shudder on the prospects of border adjustment tax targeting Canadian goods. Lobbyist are vying to protect trade relationship under the NAFTA, which Donald Trump would like to address in an aim to protect US jobs.

Obviously, the need of the day would be for Canadian businesses to diversify beyond United States, and see that as an eye opening opportunity in order to avert any long-term issues related to productivity rates, which certainly have not been superlative; which is rather a point of concern. The Bank is also wary of the fact that the Canadian economy has endured false starts in recent years. While it is a forecast that the economy would continue to chug at ~2.5% during the remainder of the year, more and more economic slack would need to be absorbed before the Central bank can think of raising rates as early as 2018 which may also strengthen the loonie in the long run.

Earlier last week with remarks by Trump that USD is too strong, and with rising oil prices appreciated the loonie to a 6 week high @ 75.5 US cents. Both key data releases, of manufacturing and residential, exhibited better than expected activity during the commencement of the year. Manufacturing sales was above expectations as volume rose by [...]

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Chinese Business Activity on rebound!

chinas flag

The latest Markit Business Outlook survey has indicated that there is renewed confidence in the economy as sentiments have risen to a 2-year high. The optimism tilts towards the manufacturing sector, as firms forecast a higher output in the year ahead. The upshot of this is that companies are anticipating higher business revenues, which is an increase China Business Activity Expectationsof 17% from October. This in turn forebodes improved business conditions across China, both in the manufacturing and services sector. This environment obviously sets up the precedent for capital expenditure by Chinese firms, which is expected to climb to +13% in autumn, and the highest level since October 2014. Annabel Fiddes, Economist at HIS Markit has commented, “Projections of stronger growth in the next year coincide with forecasts of strengthening inflationary pressures. Furthermore, both input costs and output charges are expected to increase at the quickest pace in four years. Price rises look set to be stronger at manufacturers, who are particularly vulnerable to price movements for energy and commodities.”

While the above numbers delineate one side of Chinese economy, the warning signal to be borne in mind is that China debt to GDP ratio stands at 250%, of which corporate debt itself is 170% of the GDP, which speaks of a highly leveraged and a debt fueled economy. The country rather than dialing back its credit-fueled growth model, has continued to support credit driven expansion to meet its GDP growth target rate targets. Over the recent past, a lot of credit was injected into the state-owned sector while investment in infrastructure has continued. Critics have cited their concern of this fundamentally unsustainable growth model with its heavy reliance on debt weighted investments funding an export drive which increases default probability. In an effort to reorient the economy to sustainability, Chinese lawmakers are emphasizing a shift towards to technologically driven innovative model which would add more value to the economy. In time, this would also enable China to overcome a middle-income trap that it finds itself trapped. To recalibrate the economy, lawmakers realize the need to emphasize on technologically driven innovation that would allow higher capital gains allowing the common man to raise his disposable income allowing for an overcoming of the a middle-income trap; approaching Western Europe or the United States, where innovation has allowed these economies to make leaps and bound. However, it is to be borne in mind that it is difficult to incubate innovation, in an environment lacking proper institutions supporting growth. It is the really the relative lack of these institutions which is deemed an obstacle for the Chinese growth model and a challenge to be overcome by its government.

The latest Markit Business Outlook survey has indicated that there is renewed confidence in the economy as sentiments have risen to a 2-year high. The optimism tilts towards the manufacturing sector, as firms forecast a higher output in the year ahead. The upshot of this is that companies are anticipating higher business revenues, which is [...]

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