Quick Macro Thoughts: Global/China
As we enter FY2009, the global economy continues into uncharted blue waters as policymakers around the world scramble to navigate a course through these turbulent times.
Globally the near term risk of inflation has been offset by the credit crunch and specter of recession. The October commodity shock has provided room for central bankers to ease further as we see Oil prices off roughly 60% from their ’08 highs. In the currency markets, investor uncertainty has continued to push the Dollar and Yen up while the NZD and commodity currencies lose ground.
The inability of either the Euro-zone or a China led AXJ to significantly decouple from the US in 2H08 is of note as US economic health and policy will continue to play a pivotal role in front running a global recovery and have significant impact upon regional markets.
The push for a US recovery in 2H’09 – 1H’10 is gaining momentum as US policymakers continue to display a strong commitment to addressing the systemic risk factors in the economy. US Fed Chairman Ben Bernake’s recent speech at LSE highlights the FED’s medium term course of action as core monetary policy has reached its finite limit at ZIRP. Despite Bernake’s comments as to whether the FED is pursuing a policy of Quantitative Easing or “Credit Easing”, the net effect of injecting artificial liquidity has begun to take form as we see spreads in key indicators begin to narrow. The 3 month LIBOR/OIS spread has contracted under 100bps and futures markets are even more optimistic as December spreads tighten to 50bp.
Liquidity alone will not address the ailing US economy as fundamentally asset deflation will lead the US down the same path as Japan in the early 90’s. The FED is actively seeking to address this dislocation with its proposed unveiling next month of the Term ABS Loan Facility. The adoption and success of the TALF facility will bear very close scrutiny as the Treasury’s TARP and FDIC’s TLG facilities are already online, leaving the FED truly as the lender of last resort.
Implementation aside, the moves by incoming President-elect Barack Obama and his economic team will be equally important as fiscal stimulus will be imperative to allay recessionary pressures and lead any meaningful recovery. A significant de-leveraging in corporate to consumer balance sheets coupled with early indications of a drop-off in capex will both be significant headwinds. Securing the remaining $350 billion of outgoing President Bush’s bailout funds to add to his own anticipated $800+ billion fiscal stimulus package will give the incoming administration some ammo to combat the current crisis.
Sequencing is imperative to note as any recovery will push from the Treasury repo markets through to other markets by order of increasing risk, although adverse feedback loops will create temporal shocks as markets realign.
If the unprecedented multi-faceted moves in US monetary, fiscal and trade policy gain traction quickly, signs of recovery on the horizon could evidence as early as summer when the initial tax stimulus begins passing through to US consumers.
A look to the yield curve displaying a positive parallel reset on the back of FED release from ZIRP will be a key turning point in credit markets.
Equity markets structurally will be depressed while the earnings cycle turns down. The potential for a recovery in earnings could materialize 4Q’09 although holiday numbers will likely be the more important tell.
In both Asian and European markets the drop-off in Capex will play a key theme as each economic zone respectively looks to maintain liquidity, stability, and stoke growth amidst an uncertain global environment.
Amidst the turmoil in global markets, China is facing its own unique set of challenges. While not yet in a crisis situation, the downside risks of deflationary slowdown have given cause for intervention by policymakers. President Wen’s Jan. 19th address at the State Cabinet meeting re-affirmed the central government’s commitment to maintain positive growth levels. 4Q’08 GDP numbers are expected Jan. 22nd but early estimates based on preliminary industrial data releases point to a bear case scenario of potentially negative QoQ growth. On the back of flat growth in 3Q’08 this will be the first QoQ decline since ’01.
To reflate GDP/economic growth China will need to drive at least one of its two primary growth engines in either exports or investments. The headwinds are mounting though as China faces the drop off in global demand, diminished outlook for capex and mounting deflationary pressures in the domestic Chinese real-estate market.
In a real-growth environment the drop-off in commodity prices would be a boon for any economy, however, in a recessionary environment diminished demand is no longer outpaced by commodity supply and so pricing power has shifted back to the demand side and will not be a tailwind until recovery in either exports or investment materializes.
Chinese policymakers are embarking on their own multi-front plan of attack aimed at addressing the fundamental displacements and driving headline growth. The $4 trillion RMB fiscal stimulus policy along with monetary policy loosening will hope to turn around private capex slowdown while also boosting increased public capex. The most important issue for China however will be stabilizing its real-estate sector as a pronounced fall-out in either real-estate investment or real-estate prices would be near disastrous as it is one of the core components of both investment and demand. A tool of last resort available to Chinese policy makers would be to let the RMB fall against the dollar. The international relations quandary it could pose however might offset top-line gains.
A close watch on Chinese policymakers and how quickly they will be able to inject fiscal stimulus as well as stabilize both the export and investment markets will be of regional and global importance over the course of 2009.
Key Dates:
Jan. 20th
|| USD || Inauguration of President-elect Barack Obama
Jan. 21st
|| GBP || BoE minutes
Jan. 22nd
|| CNY || China reports 4Q GDP
|| CNY || Dec. CPI, PPI, IP
|| USD || US Jobless Claims
|| USD || Housing Starts
|| JPY || BOJ minutes
Jan. 23rd
|| GBP || Great Britain reports 4Q GDP
Jan. 29th
|| APAC || Chinese New Year
Globally the near term risk of inflation has been offset by the credit crunch and specter of recession. The October commodity shock has provided room for central bankers to ease further as we see Oil prices off roughly 60% from their ’08 highs. In the currency markets, investor uncertainty has continued to push the Dollar and Yen up while the NZD and commodity currencies lose ground.
The inability of either the Euro-zone or a China led AXJ to significantly decouple from the US in 2H08 is of note as US economic health and policy will continue to play a pivotal role in front running a global recovery and have significant impact upon regional markets.
The push for a US recovery in 2H’09 – 1H’10 is gaining momentum as US policymakers continue to display a strong commitment to addressing the systemic risk factors in the economy. US Fed Chairman Ben Bernake’s recent speech at LSE highlights the FED’s medium term course of action as core monetary policy has reached its finite limit at ZIRP. Despite Bernake’s comments as to whether the FED is pursuing a policy of Quantitative Easing or “Credit Easing”, the net effect of injecting artificial liquidity has begun to take form as we see spreads in key indicators begin to narrow. The 3 month LIBOR/OIS spread has contracted under 100bps and futures markets are even more optimistic as December spreads tighten to 50bp.
Liquidity alone will not address the ailing US economy as fundamentally asset deflation will lead the US down the same path as Japan in the early 90’s. The FED is actively seeking to address this dislocation with its proposed unveiling next month of the Term ABS Loan Facility. The adoption and success of the TALF facility will bear very close scrutiny as the Treasury’s TARP and FDIC’s TLG facilities are already online, leaving the FED truly as the lender of last resort.
Implementation aside, the moves by incoming President-elect Barack Obama and his economic team will be equally important as fiscal stimulus will be imperative to allay recessionary pressures and lead any meaningful recovery. A significant de-leveraging in corporate to consumer balance sheets coupled with early indications of a drop-off in capex will both be significant headwinds. Securing the remaining $350 billion of outgoing President Bush’s bailout funds to add to his own anticipated $800+ billion fiscal stimulus package will give the incoming administration some ammo to combat the current crisis.
Sequencing is imperative to note as any recovery will push from the Treasury repo markets through to other markets by order of increasing risk, although adverse feedback loops will create temporal shocks as markets realign.
If the unprecedented multi-faceted moves in US monetary, fiscal and trade policy gain traction quickly, signs of recovery on the horizon could evidence as early as summer when the initial tax stimulus begins passing through to US consumers.
A look to the yield curve displaying a positive parallel reset on the back of FED release from ZIRP will be a key turning point in credit markets.
Equity markets structurally will be depressed while the earnings cycle turns down. The potential for a recovery in earnings could materialize 4Q’09 although holiday numbers will likely be the more important tell.
In both Asian and European markets the drop-off in Capex will play a key theme as each economic zone respectively looks to maintain liquidity, stability, and stoke growth amidst an uncertain global environment.
Amidst the turmoil in global markets, China is facing its own unique set of challenges. While not yet in a crisis situation, the downside risks of deflationary slowdown have given cause for intervention by policymakers. President Wen’s Jan. 19th address at the State Cabinet meeting re-affirmed the central government’s commitment to maintain positive growth levels. 4Q’08 GDP numbers are expected Jan. 22nd but early estimates based on preliminary industrial data releases point to a bear case scenario of potentially negative QoQ growth. On the back of flat growth in 3Q’08 this will be the first QoQ decline since ’01.
To reflate GDP/economic growth China will need to drive at least one of its two primary growth engines in either exports or investments. The headwinds are mounting though as China faces the drop off in global demand, diminished outlook for capex and mounting deflationary pressures in the domestic Chinese real-estate market.
In a real-growth environment the drop-off in commodity prices would be a boon for any economy, however, in a recessionary environment diminished demand is no longer outpaced by commodity supply and so pricing power has shifted back to the demand side and will not be a tailwind until recovery in either exports or investment materializes.
Chinese policymakers are embarking on their own multi-front plan of attack aimed at addressing the fundamental displacements and driving headline growth. The $4 trillion RMB fiscal stimulus policy along with monetary policy loosening will hope to turn around private capex slowdown while also boosting increased public capex. The most important issue for China however will be stabilizing its real-estate sector as a pronounced fall-out in either real-estate investment or real-estate prices would be near disastrous as it is one of the core components of both investment and demand. A tool of last resort available to Chinese policy makers would be to let the RMB fall against the dollar. The international relations quandary it could pose however might offset top-line gains.
A close watch on Chinese policymakers and how quickly they will be able to inject fiscal stimulus as well as stabilize both the export and investment markets will be of regional and global importance over the course of 2009.
Key Dates:
Jan. 20th
|| USD || Inauguration of President-elect Barack Obama
Jan. 21st
|| GBP || BoE minutes
Jan. 22nd
|| CNY || China reports 4Q GDP
|| CNY || Dec. CPI, PPI, IP
|| USD || US Jobless Claims
|| USD || Housing Starts
|| JPY || BOJ minutes
Jan. 23rd
|| GBP || Great Britain reports 4Q GDP
Jan. 29th
|| APAC || Chinese New Year
posted by howa at
1/18/2009
