Sweet Futures – Squawk Trader (10-08-14)

Published on 10-08-2014

China’s Economy Just Overtook The U.S. In One Key Measure.

This was inevitable, but it still feels momentous. By one important measure, China’s economy is now the biggest in the world, topping the United States. China’s gross domestic product is worth $17.6 trillion, adjusted for China’s relatively low cost of living, compared with $17.4 trillion for the U.S., the International Monetary Fund estimated as part of its latest World Economic Outlook. The IMF expects this trend to continue indefinitely. (h/t to Business Insider for the news and the idea to use Google Public Data’s amazing charts. Here’s another way of looking at it — China’s share of the global economy is now slightly bigger than America’s, at 16.5 percent to 16.3 percent. It’s important to note that these figures are adjusted for the relative costs of living in both countries, known to fancy economists as “purchasing power parity.” It’s something economists do to try to make comparisons between countries more fair. It is crazy cheap to live in China and crazy expensive to live in the U.S., so a trillion U.S. dollars are worth a lot more in China than in the U.S. And that has something to do with the fact that China is manipulating its currency to be worth much less than the dollar. It does this to help make Chinese stuff cheaper than U.S. stuff on the global market. American politicians regularly pretend to be super angry about this, but don’t much mind getting all the cheap Chinese stuff. And China’s booming factory sector has, in turn, helped make China’s economy rapidly get bigger and bigger. In terms of sheer size, however — meaning, not adjusted for costs of living — the U.S. economy still dwarfs China’s, at $17.4 trillion to $10.4 trillion. GDP breaks down to nearly $55,000 per capita per year in the U.S., compared with less than $8,000 per person in China. Again, though, that $8,000 goes a long way.

Falling rates offer home buyers a push.

The upside to the selloff in stock markets is lower interest rates for the housing market. A drop in rates last week boosted mortgage applications for both refinances and home purchases, and interest rates continues to slide. Total mortgage application volume for the week ending October 3rd rose 3.8 percent on a seasonally adjusted basis from the previous week, according to the Mortgage Bankers Association (MBA). Refinance applications were 5 percent higher than the previous week, and purchase applications were 2 percent higher. On an annual basis, however, refinance applications are down 32 percent and purchase applications are down nearly 8 percent. “The purchase index reached its highest level since July,” noted Michael Fratantoni, chief economist for the MBA. “The increase was led by a 3.7 percent increase in government purchase volume for the week.” The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.30 percent from 4.33 percent for 80 percent loan-to-value ratio (LTV) loans, according to the MBA. With continued weakness in the stock market Tuesday, rates continued to drop, now nearing their lowest level of the year.  “The most prevalently-quoted conforming 30-year fixed rate for the very best scenarios has moved quickly from being worryingly close to 4.375 percent to being excitingly close to 4.0 percent,” wrote Matthew Graham of Mortgage News Daily. “The most interesting thing about the movement of the past two days is that there is no big-ticket headline motivating it. This is simply traders moving money for a variety of reasons. No one can know what all the motivations for that might be.” Lower rates seem to be the only bright side to the housing market today, which is experiencing a drop in demand due to higher home prices and fewer fall listings. While the gains are shrinking, prices are still rising, and higher mortgage insurance premiums are only adding to home buyer costs. All those factors have caused several banking analysts to lower their expectations for home values and home construction, heading into 2015.

Fed’s Evans, citing low inflation, urges patience on rates.

Chicago Federal Reserve Bank President Charles Evans today again urged the U.S. central bank to be “exceptionally patient” on raising rates, noting downside risks to both growth and inflation. With longer-term inflation expectations falling near post-crisis lows, Evans said he was “concerned about the possibility that inflation will not return to our 2 percent target within a reasonable period of time.” That, coupled with continued slack in labor markets, argues for “being patient about when we first increase the federal funds rate and being patient about setting the pace of rate increases once we have begun to move,” he said. The Fed has kept interest rates near zero since December 2008 and has bought trillions of dollars of long-term securities to push borrowing costs still lower. But with unemployment, at 5.9 percent last month, well down from its recession-era high, the Fed is planning to end its bond-buying stimulus later this month and most top Fed officials want to begin raising rates next year.

Not so Evans, who has previously said he prefers to wait to raise rates until 2016. On Wednesday morning, in an economic briefing sponsored by BMO Harris and Lakeland College, Evans reiterated his discomfort with calls for raising rates sooner than later. Rates should stay low, he said, even at the risk of inflation rising temporarily above the Fed’s 2-percent target. Evans rotates into a voting spot on the Fed’s policy-setting panel next year. Evans said he forecasts economic growth of 3 percent over the next 18 months, unemployment falling to 5 percent by the end of 2016, and inflation rising slowly back to 2 percent over the next three years. But downside risks to that forecast, including sluggish growth around the globe, remain, he said. Even more important, he added, is the risk of raising rates too hastily, which could choke growth and force the Fed to backtrack. “I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions,” he said, according to prepared remarks.

Split between hawks, doves to be evident in Fed minutes.

The Federal Reserve sent mixed messages at its policy meeting last month — keeping “considerable time” and “significant underutilization” in its statement while releasing a hawkish interest rate forecast for 2017. This split is expected to be also clear in the minutes of the Fed meeting, will mainly highlight what hawks and doves on the Fed policy committee argue about when no one is listening. The Fed will release the minutes of its Sept. 16-17 policy meeting at 2 p.m. Wednesday. The doves remain in charge for now, signaling no liftoff of short-term interest rates until mid-2015 at the earliest, but the voices of the hawks for an earlier move are getting louder, said Brian Bethune, chief economist at Alpha Economic Foresights. Both Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher dissented from the policy statement in favor of a quicker rate hike. Bethune said the minutes will be interesting to see if the hawks are starting to convince some other FOMC members. Any whiff of compromise would be market moving.

Sal Guatieri, economist at BMO Capital Markets, said there would be a “hint” at a possible compromise: the doves might remove the “considerable time” if the hawks accept a phrase that suggests the Fed won’t tighten so long as there is significant slack in labor markets. Other economists were more skeptical. “My sense is the hawks are getting more airtime, but I don’t think the impact is going to be material until we get out of the fall,” Bethune said. Hawks on the Fed likely argued that the labor market has shown tremendous improvement, said Carl Tannenbaum, chief economist at Northern Trust in Chicago. Doves may skirt the issue by focusing on inflation. Actual inflation has remained well below the Fed’s 2% annual target and inflation expectations have fallen back. Market-implied inflation forecasts have taken a nose dive and are below the level that triggered Fed bond-buying, said Gennadiy Goldberg, a strategist at TD Securities.  “Doves don’t have to rely on convincing [hawks] the labor market has a lot of slack,” Tannenbaum said.

Bethune predicted the Fed will not change the “considerable time” language until January. “It is like the part of the symphony where the instruments are somewhat dissonant and that’s going to continue for the next 2-3 months,” Bethune said. January would be an interesting time for a language change because the Fed policy committee will become dramatically more dovish next year, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. Plosser and Fisher rotate off the committee and three more dovish regional Fed presidents will join it. Only Richmond Fed President Jeffrey Lacker will represent the hawkish camp and Lavorgna thinks he’s softened a bit. On Thursday, Mario Draghi, the head of the European Central Bank and Fed vice chair Stanley Fischer will discuss developments in Europe and the U.S. at the Brookings Institution.

Russian Hardship on Display at Delis as Sausages Shrink.

There are many ways to measure the deepening financial crisis spreading across Russia. The ruble is sinking more than any other currency in the world, foreign reserves have plunged to a four-year low and the economy is teetering toward recession. Galina Mityaeva measures it in centimeters. The half stick of braunschweiger sausage that the 69-year-old retiree used to buy for her husband each week is now just too expensive. Cut it a little shorter, she instructs the deli counter clerks at the supermarket she shops at outside of Moscow — a quarter stick will have to suffice. “Every time I go to the store, food is more expensive,” Mityaeva said as she strolled through the grocery aisles on a recent afternoon. “People are angry right now. In the store lines, you can hear people complaining: ‘What can I afford to buy with 1,000 rubles?’” Seven months after President Vladimir Putin initiated his foray into Ukraine, triggering international sanctions against Russia and the capital flight that has fueled the ruble’s plunge, consumers across Moscow are feeling the squeeze. Annual inflation soared to a three-year high of 8 percent last month, led by a 17 percent surge in prices on meat and poultry, 28 percent on tobacco and 13 percent on international airfare and travel-related services.

Meeting Place:

Natalya Lomteva scoffs at the idea of taking a trip abroad, which she calls “impossible to afford.” A 20-year-old college student, she’s more focused on scrimping together the money to fund her pack-a-day smoking habit and finding restaurants that she can still afford. With temperatures dropping as winter approaches, an inexpensive place to gather with friends indoors takes on added value, she said. “During the summer, we could at least hang out at parks,” Lomteva said while nursing a cup of tea at a coffee house that she called a “cheap option” in the northwest Moscow district of Shchukino. She said that one of her favorite haunts, Beverly Hills Diner, has become too expensive after rising food costs pushed up prices on a menu dominated by hamburgers and other American-style fare.

Putin’s Popularity:

The surge in food prices accelerated after Putin placed a ban in August on some imports from the U.S. and Europe in retaliation for the economic sanctions against Russia. The 17 percent annual rate of inflation on meat, for example, is up from 11 percent in July and follows a 3 percent decline in prices at the end of 2013. Overall food inflation has almost doubled to 11 percent from about 6 percent last year. So far none of this has dented Putin’s popularity, which soared following his incursion into Ukraine. His approval rating rose to 86 percent in September from 65 percent in January, according to pollster Levada Center, which surveyed 1,600 people across Russia over four days. Putin’s policy makers have been trying to contain the surge in inflation, raising the benchmark interest rate to 8 percent and re-initiating dollar sales in the foreign-exchange market to shore up the ruble. It has plunged 17.9 percent to 40.04 rubles per dollar this year, driving up the cost of imports.

Bread, Milk:

Some products are disappearing altogether. A Sberbank-commissioned poll released earlier this week found that 17 percent of those Russians surveyed said items have begun vanishing from store shelves. Marina Khomenko, a 56-year-old teacher, said it’s become harder to find the Nivea cosmetics products she uses or C&A clothes she favors. Some prices have tripled, by her estimates. “Clothes can’t cost this much,” Khomenko said. Back at the supermarket outside of Moscow, Mityaeva, the retiree, reels off a laundry list of prices that she’s seen jump recently: bread, milk, cottage cheese, sour cream and chicken wings, among others. And then she remembers how much she’s now paying for medicine — 4,000 rubles ($100) a month to treat cardiac arrhythmia — and it sets her off again. That’s equal to more than one-third her monthly pension of 11,000 rubles.

Bad News Is Good News No More Amid Central Bank Doubts.

Bad news for the global economy is once again bad news for stocks. To Citigroup Inc.’s Steven Englander, that shows central bankers are running out of silver bullets on which investors can bet when confronted with downbeat economic information. They got fresh reasons for pessimism yesterday with the biggest decline in German industrial production since 2009 and another revision of the outlook for global growth from the International Monetary Fund. With memories fading of last week’s report on U.S. job creation, stocks fell worldwide. “The new information on global slowing may be less important than the realization that policy makers have few tools to deal with any kind of slowing let alone a major shock,” Englander, New York-based global head of Group of 10 foreign-exchange strategy, said in a report yesterday. A three-day slide in the MSCI World Index to the lowest in more than five months highlights the turn in sentiment. At previous points in the recovery, evidence of poor economic growth often buoyed equities by prompting investors to anticipate fresh monetary stimulus — hence, bad news became good news. Take the U.S. employment reports of July, August and September 2013: They were all weaker than economists predicted, yet the Standard and Poor’s 500 Index rose after each release. The thinking was that the data would help postpone a withdrawal of stimulus by the Federal Reserve.

Low Rates:

Now, interest rates have been at record lows for a while and central bank balance sheets are bloated from repeated rounds of quantitative easing. Even with scope to do more, the European Central Bank last week disappointed investors hoping for a bigger commitment to stimulus. While Fed officials are indicating no hurry to raise rates, Englander said rather than calming investors such a message now only emphasize the “tentativeness of the recovery, the potential sensitivity to rate hikes, the possibility of negative shocks from abroad and the view that full normalization remains years away.” These concerns will frame the discussions when finance chiefs flock to Washington for the IMF’s annual meetings this week. It will mean greater calls for fiscal support from the likes of Germany and for greater spending on infrastructure. Worries that easy monetary policies “have done more to create over-valuation of asset prices than for economic recovery will linger on,” said Kit Juckes, global strategist at Societe Generale SA. “Of course, without drastic monetary action we might not have had recoveries in the U.S., Japan and the U.K. at all, but a period of equity market nervousness may be upon us.”

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