Posts
- Why Inflation is ridiculously low ? or this is just some trick by governments?
Saudi Arabia fiscal position weakening, but still strong
Oil prices making an impact
- On Friday, S&P downgraded credit rating and citing a pronounced negative swing in the fiscal balance sheet. Today, Moody's said that the Saudi government has cut back on expenditures, and that without such budget cuts and/or non-oil revenue increases, the Kingdom's creditworthiness will be affected. The rating agency added that volatile oil prices continue to when the government's balance sheet and that they see a deficit of 17% of GDP.
- In 2013, there was a large surplus of 7% of GDP but with oil prices quickly retreating, that surplus is being eroded quickly.
- The IMF warned recently that the oil rich countries of the middle east will run out of cash in 5 years or less will save from $50 a barrel. Saudi Arabia derives 80% of revenue from oil.
- To combat a shortfall of cash, S&P believes that Saudi Arabia will need to rely on more debt and draw down it's stockpile of cash from it's sovereign wealth fund. This could have a knock on effect of lowering demand for other assets around the world.
China Tells Eager Parents to Hold Off on the Baby-Making for Now
China ordered local family planning agencies to keep enforcing the country’s one-child policy, undercutting one province’s plans to start letting parents expand their families now, state media said.
- The policy, which the ruling Communist Party abandoned Thursday after 36 years, would remain the law until legislators amend it this spring, the Beijing News reported Sunday, citing a statement by the National Health and Family Planning Commission. Until then, local authorities shouldn’t "willfully" enact their own versions of the new two-child limit prescribed by party leaders, the health ministry said. The statement came after a family planning official from the central province of Hunan told local media the two-child limit would take effect immediately. The party’s Central Committee decided to allow all couples to have more children after the country’s labor force shrank for the first time and previous efforts to encourage births fell short of its goal.
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The changes are part of President Xi Jinping’s blueprint to manage the economy’s shift to slower, more balanced growth for the rest of the decade. The so-called five-year plan must be approved by the National People’s Congress, which usually make few changes to proposals handed down by the ruling party.
The health ministry estimates that about 90 million families would qualify for the two-child policy, helping to raise the population to an estimated 1.45 billion by 2030, compared with 1.37 billion now. Without the change, China’s population is expected to start declining after 2025.
Preventing that contraction may prove difficult giving the rising costs of raising children and decades of discouraging larger families. Fewer than 1.8 million of the 11 million couples eligible to have a second child under the previous policy relaxation in December 2013 applied for permission.
Nissan Raises Full-Year Profit Forecast as Demand Rises in U.S.
by Ma Jie and Masatsugu Horie
- Nissan Motor Co. raised its full-year profit forecast as Japan’s second-biggest automaker reaps benefits from an increase in U.S. demand and a weaker yen.
- Net income may rise 17 percent to 535 billion yen ($4.4 billion) in the year through March, Nissan said Monday. That’s up from the company’s 485 billion yen forecast made in May and in line with analysts’ estimates.
- Nissan is benefiting from a robust U.S. market that registered the fastest pace of sales growth in more than a decade, boosting demand for its Rouge crossovers and Altima sedans and offsetting weak sales in Japan and China. Low interest rates and gas prices have helped General Motors Co. post a record quarterly profit while Ford Motor Co. doubled its net income.
- “The strong U.S. demand is making up for weakness in many other markets, including Japan,” said Seiji Sugiura, an analyst at Tokai Tokyo Research Center. “But they can’t count on the U.S. forever because the market will peak out and their model mix will deteriorate.”
- Nissan raised its full-year revenue forecast to 12.25 trillion yen and operating income to 730 billion yen, citing strong demand in North America, “cost discipline” and gains from a weak yen. The automaker has based its forecast on 119.4 yen to a U.S. dollar, compared with an earlier estimate of 115 yen. Nissan cut its global sales target by 50,000 units to 5.5 million units, citing weak demand for commercial vehicles in China.
- The carmaker’s net income increased 38 percent to 172.8 billion yen in the quarter through September, beating analyst estimates.
by Ma Jie and Masatsugu Horie
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Trump’s Lament
- Donald Trump took aim at Japanese automakers benefiting from a weaker yen, remarking on “the biggest ships I have ever seen” loaded with Japanese cars in Los Angeles, while saying he will bring jobs back to the U.S. from Asia’s two largest economies.
- Japanese companies including Toyota Motor Corp. have enjoyed record profits under Prime Minister Shinzo Abe, who has been credited with weakening the yen. Nissan’s sales in the U.S. climbed 6.6 percent in the six months through September, outpacing the industry. Deliveries were boosted by demand for its Rogue crossovers.
- Shares of Nissan fell 2.1 percent to 1,240 yen in Tokyo, before the earnings announcement. The benchmark Nikkei 225 Stock Average declined 2.1 percent. China Sales
- In China, Nissan’s sales fell 2.6 percent in the six months through September, dented by a slump in light commercial vehicle demand as economic growth cools. A tax cut by the government starting October provided respite, boosting the company’s passenger car deliveries in the country by 19 percent.
- Nissan is struggling to boost sales in Japan after an increase in the sales tax last year dented consumer demand. Deliveries in its home market have declined for 16 straight months through September.
- At the earnings briefing on Monday, Nissan Chief Competitive Officer Hiroto Saikawa said the Japanese government fully supports the carmaker’s concern over the French state’s growing influence on its alliance with Renault SA, as tensions mount over control of one of the most successful automaker partnerships.
Oil Guru Who Called 2014 Rout Sees OPEC Production on Hold
by Sharon Cho
- OPEC will probably hold production steady at its meeting next month as the gap between supply and demand for oil closes, according to the analyst who correctly predicted last year’s rout in prices. “I don’t think they have to do anything,” Gary Ross, founder and chairman of PIRA Energy Group, said in an interview in Singapore on Monday, referring to the Organization of Petroleum Exporting Countries. Global consumption of crude will continue to grow while output from non-OPEC countries will decline next year, helping to bring the market toward equilibrium, he said.
- Oil tumbled more than 48 percent last year as U.S. stockpiles and production expanded, creating a global oversupply that the International Energy Agency estimates will persist until at least the middle of 2016. OPEC’s strategy to defend market share has exacerbated the glut as the group, which kept its production target unchanged at 30 million barrels a day at the last meeting in June, exceeded the quota for the past 17 months. “There has to be a tightening of balances,” said Ross, who last year turned bearish on oil before prices shrank by almost half. While OPEC volumes have increased, both demand and production from outside the group have responded to low prices, he said.
by Sharon Cho
- Brent crude for December delivery was unchanged at $49.56 a barrel on the London-based ICE Futures Europe exchange at 12:50 p.m. Singapore time. Prices have decreased 14 percent this year. $70 Brent
- PIRA forecasts demand for crude to grow 1.7 million barrels a day in 2016, compared with 1.9 million a day this year. Output outside OPEC is expected to decline next year by “several hundred thousands of barrels a day,” Ross said. Among the 12 members of OPEC, production is predicted to increase only in Iran and Iraq. “Total non-OPEC crude and condensate production is forecast to fall below last year’s levels,” said Ross, predicting that Brent may rise to $70 by the end of 2016. “Supply growth is limited to OPEC, which grows just 500,000 to 600,000 barrels a day.” On average, Iran’s output will rise 300,000 barrels a day and Iraq’s will increase 240,000 barrels a day, compared with a year earlier, he estimated.
- OPEC, which supplies about 40 percent of the world’s oil, is scheduled to gather in Vienna on Dec. 4, when Iran will officially notify the group of its plans to boost production by 500,000 barrels a day as soon as international sanctions against the Persian Gulf state are lifted, Oil Minister Bijan Namdar Zanganeh said in an interview with Mehr news agency.
China Slide Toward Debt-Deflation Trap Needs 5-Year Plan Fix
- As China’s Communist Party leaders began rolling out a blueprint last week to manage a transition to more balanced growth over the next five years, they confront the immediate task of halting the economy’s slide toward a debt-deflation trap.
- The central bank stepped up efforts last month to avert that risk with a sixth interest-rate cut in a year. While easier policy helps tide over the short term, a long-term fix needs leaders to back reforms in the 13th five-year plan that slash excess industrial capacity, rev up new growth drivers and shift funding away from deadbeat state companies to vibrant private ones.
- China’s total outstanding borrowing has surged by two-thirds since 2008 to 208 percent of gross domestic product, producer prices have slumped for 43 consecutive months and the consumer price index began a downward trajectory in the middle of last year. The risk is a vicious downward spiral that traps companies as their assets lose value at the same time as real financing costs rise, forcing them to borrow more to stay afloat in a cascading downward plunge. "While monetary easing can help and is necessary, corporate and state enterprise reforms are critical," said Wang Tao, a China economist with UBS Group AG in Hong Kong. "To fundamentally address the issues, China needs to embark on more structural reforms to unleash new sources of growth, to retire excess capacity and close "zombie" companies and write off bad debt on banks’ balance sheets."
- Underscoring sluggishness in China’s old growth drivers, the official factory gauge signaled that manufacturing contracted for a third straight month. The purchasing managers index remained unchanged at 49.8 in October, the National Bureau of Statistics said Sunday, below the median estimate of 50 in a Bloomberg survey. A gauge of prices manufacturers expect to pay decreased to an eight-month-low of 44.4, NBS said. Readings under 50 indicate below-trend growth.
- A separate purchasing managers’ index from Caixin Media and Markit Economics improved to 48.3 in October. That beat the median estimate of 47.6 in a Bloomberg survey and rose from the final reading of 47.2 in the month earlier.
- Premier Li Keqiang has signaled China needs minimum growth of about 6.5 percent per year through 2020 to meet the goal of becoming a "moderately prosperous society." That could indicate the leadership’s readiness to accept the weakest period of expansion since the economy was opened up more than three decades ago. Lower Target
- Lowering the growth target to 6.5 percent would reflect the difficult economic transition underway as China shifts its growth toward services and higher value-added manufacturing and as "significant and sometimes painful structural reforms are needed," said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.
- Whether China can deliver that pace of growth depends on how much financial, state enterprise and land reform it can bring about, said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. Financial reform will increase volatility dramatically and state-owned enterprise reform and land reform will take on the two most powerful groups in China: state companies and local governments, he said. "These are politically difficult and very risky reforms but they are needed for China to find new growth engines," said Hu. "All the old growth engines are dead. This year, export growth is zero, property investment is zero, heavy industry and commodity producers have slumped."
- Policy makers should reduce debt by allowing thousands of heavily indebted and unprofitable enterprises to go bankrupt, says Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. "China has chosen to continue to inflate the debt bubble and to generate growth," he said. "But no country can do so forever."
- Shuttering inefficient state companies producing losses and now being kept afloat by favorable credit terms will free up capital for more profitable companies to expand, said Julia Wang, a Hong Kong-based economist with HSBC Holdings Plc in Hong Kong.
- So far, the central bank’s efforts to counter the risk of debt deflation have come up short. Former central bank adviser Yu Yonding says China is repeating mistakes it made in the 1990s, when it eased too little, too late, leaving producer prices in negative territory for almost three years.
- HSBC’s Wang agrees, saying the central bank has been "behind the curve" as it prioritized reining in debt. Should growth fail to reverse its downward momentum this quarter, she says it would take a "circuit breaker" of as much as a 300 basis point reduction in banks’ required reserve ratio, along with an explicit government statement saying it will front-load infrastructure investment to turnaround negative expectations about deflation and growth. "It takes time for the cost of debt deflation to appear via the shrinking of the balance sheet and the risk aversion of the banking system," she said. "It leads to another leg down in demand, and so on, in a downward spiral." Monetary Firepower
- In the short term, China retains a big monetary arsenal to help counter downward pressure on the economy. The benchmark one-year lending rate is by comparison with western nations still high at 4.35 percent, and it has about 23 trillion yuan ($3.6 trillion) in bank deposits locked up as reserves.
- Such ammunition may enable China to "muddle through" for a long time but will not prevent growth from grinding down to an average of about 5 percent per annum to 2020, says Andrew Polk, an economist with the Conference Board in Beijing. And cutting interest rates actually risks exacerbating deflation because the outcome will be more funds flowing to state enterprises that build additional excess capacity, pushing prices even lower, said Polk. "Right now the structural problem of overcapacity is overpowering the cyclical fixes they are using to address demand," he said ahead of the release of five-year plan communique. "We just see a long-term deceleration because of the stalled reform program."
Russian Plane's Midair Breakup a Puzzle in Modern Jet Era
- Investigators examining the crash of a Russian passenger jet in the Egyptian desert have an advantage over recent high-profile probes -- with the impact zone readily accessible, the debris field unencumbered by jungle or water and plane’s flight recorders already located.
- With wreckage spread over a wide area, there’s also little doubt that the plane broke up in the sky. Reading the recorders, known as black boxes, should help with the complex task of explaining how an airliner built to withstand extreme turbulence and equipped with computerized flight limits to ensure it maintains control could have been ripped to pieces. “They’ve got the wreckage, they’ve got the recorders, they’ve got the air-traffic-control recordings,” said Paul Hayes, safety director at London-based aviation consultancy Ascend Worldwide. “Assuming the recorders are in good condition they should have initial views within a week.”
- The Metrojet Airbus Group SE A321 plummeted into a remote area of Egypt’s Sinai peninsula 23 minutes after leaving the Red Sea resort of Sharm el-Sheikh on a flight to St. Petersburg, killing all 224 people aboard. Wreckage was found in an area about 8 kilometers long and 4 kilometers wide (5 miles long by 2.5 miles wide), suggesting the aircraft broke up at high altitude, Alexander Neradko, the head of the Russian Federal Aviation Authority, said in an interview with Rossiya-24 state television. Difficult Investigations
- The easily accessible wreckage and the intact recorders should help investigators compared to more difficult crashes. After Air France Flight 447 disappeared over the Atlantic Ocean en route from Rio De Janeiro to Paris in 2009, the search for the recorders took two years. In the case of Malaysia Air Flight 370, which went missing two years ago, the wreckage itself has yet to be located, except for a small piece from the wing that washed up on shore this summer. For the crash of Flight MH17 over Ukraine, the probe was hindered by political conflict that limited access to the site of the wreckage and possibly contributed to evidence being tampered with.
- To find out what happened, investigators of the Metrojet crash will start with listening to the cockpit voice recorder. The more complex task is synchronizing those recordings with information from the flight data recorder to piece together what happened to the plane. Egyptian authorities have said they have the equipment required to do that decoding.
- If the airplane did indeed break up at high altitude, investigators will be looking at causes of similar crashes such as bombs, missiles, on-board explosions and structural failures. “It’s very hard to pull one of these things apart in flight. Very hard,” said John Cox, a former U.S. airline pilot who has participated in accident investigations. Not Credible
- While the Islamic State’s Sinai affiliate claimed responsibility for shooting the plane down, Egyptian and Russian officials said those claims weren’t credible. Only the most sophisticated ground-based missiles can reach 31,000 feet (9,450 meters), the cruising altitude at which the Metrojet encountered problems and began to fall.
- That doesn’t rule out a bomb like the one that detonated aboard Pan Am Flight 103 as it was carrying holiday travelers from London to New York on Dec. 21, 1988. A small explosive device smuggled aboard in checked luggage blew out the side of the Boeing Co. 747 and it came apart over Scotland, according to the U.K.’s Air Accidents Investigation Branch report.
- So far, neither Egyptian nor Russian officials have said there’s any evidence of a bomb. Explosive devices cause telltale pitting on nearby metal and also leave chemical residue, according to the U.S. National Transportation Safety Board, so an examination of the wreckage should tell investigators whether or not that was the cause.
- One area investigators will pay close attention is damage to the Metrojet A321 when its tail struck the runway while landing in Cairo in 2001. The plane was repaired and returned to service, according to Ascend Worldwide Ltd., a London-based company that gathers data for insurers.
- There have been at least two similar accidents caused by improper repairs after tail damage. Tail Strikes
- China Airlines Flight 611, a Boeing 747 flying from Taiwan to Hong Kong on May 25, 2002, broke apart when a repair failed, causing an explosive decompression, according to Taiwan’s Aviation Safety Counsel. All 225 people aboard died when it fell into the Taiwan Strait. The jet’s tail had been repaired 22 years earlier, according to the investigation.
- Japan Airlines Flight 123 crashed into a mountain in Japan on Aug. 12, 1985, after a repair to its tail came apart, destroying key flight control surfaces. Seven years earlier, its tail had been repaired after striking the ground during touchdown, according to Japan’s Aircraft Accident Investigation Commission. The crash killed 520 out of 524 people on board.
- In both cases, part of the structure that holds in air at high altitudes, known as the aft pressure bulkhead, was damaged when the planes’ tails scraped the runway. Some photos of the wreckage in Egypt appear to show that the plane’s tail section fell separately from the rest of the plane. The Russian airline rejected the idea that tail repairs could have caused the crash, saying also that the plane had been properly maintained.
- Another cause of midair breakups has been explosions in aircraft fuel tanks, according to Steve Wallace, former chief of the U.S. Federal Aviation Administration’s accident investigation division. TWA Flight 800, another 747, crashed into the Atlantic Ocean near New York on July 17, 1996, as a result of such an explosion, killing all 230 aboard, according to the NTSB. “Unless there’s something that says ‘obvious,’ you generally have to wait until you get the reports from the recorders,” said Robert Mann, a former American Airlines executive who is president of R.W. Mann & Co. and an aviation consultant, said in an interview.
Jeep Sales Keep Soaring as Shoppers Dismiss Poor Quality Ratings
Is Jeep the new Jaguar?
- Last month, Consumer Reports readers ranked the sport utility vehicle line the second-least-reliable in the U.S. market, leading only Fiat. If quality alone mattered, Jeep would be doomed to the bargain bin.
- Instead Jeep is, by any other measure, a massive hit. The iconic brand is closing in on a second-straight year as the fastest-growing major auto line in the U.S. Sales in the market rose 23 percent this year through September, outpacing second-place Subaru’s 14 percent, after soaring 41 percent last year. Jeep, along with Ram, is the main moneymaker for the third-largest automaker in the U.S., Fiat Chrysler Automobiles NV. “Jeep reminds me of the European sports cars of the late ’50s and ’60s,” said Michelle Krebs, an analyst with Autotrader.com. “They were just nightmares in terms of quality and reliability, but people still loved them. Jeep is unique. People of all ages really aspire to owning one. It has a certain cachet, regardless of the surveys.”
- America’s renewed affection for trucks and SUVs, deepened by available credit, affordable fuel and the latest technology, is pushing auto sales to the highest level in at least a decade, helping fuel Jeep’s expansion.
- When automakers report October sales on Tuesday, the industry may show a 10 percent jump in car and light-truck deliveries, to 1.41 million, the average of four analyst estimates. The annualized rate, adjusted for seasonal trends, will probably be 17.6 million, the average of 13 estimates in a Bloomberg survey. The projected gains include 14 percent for Ford Motor Co., 12 percent by General Motors Co. and 13 percent for Fiat Chrysler, led by the 31 percent gain that TrueCar projects for Jeep. Long Road
- It would be Fiat Chrysler’s 67th consecutive monthly sales gain, a run that owes a lot of its resiliency to Jeep. The brand’s go-anywhere image was born on the battlefields of World War II and popularized in the 1980s SUV boom with the debut of the original Cherokee. Todd Goyer, a Jeep spokesman, declined to comment.
- Brand sales have been helped by longtime stalwarts, Wrangler and Grand Cherokee, but also relatively newer ones, like the resurrected Cherokee, which went on sale in 2013, and the Renegade, which started selling in the U.S. this year.
- It isn’t just Consumer Reports. J.D. Power ranked Jeep below industry average in this year’s survey of issues in the first 90 days of ownership. Only Subaru, Smart, Chrysler and Fiat ranked lower. Jeep placed third from the bottom in J.D. Power’s vehicle dependability study, a longer-term look at quality. Jeep outpaced only Land Rover and, once again, Fiat.
Teflon Brands
- Teflon-coated auto brands aren’t new, they just tend to be niche. Jaguar was a small but infamous blend of beauty and dubious dependability. It’s since evolved into a brand with above industry average reliability and aspirations of BMW-like volume.
- Last month, Consumer Reports withdrew its recommendation for Tesla Motors Inc.’s Model S after owners complained about quality issues as minor as a squeaky roof and as mission-critical as an electric motor that needed replacing. Despite the complaints, Tesla owner satisfaction remains high and demand outstrips supply. Through September, Tesla had already topped last year’s 31,655 deliveries.
- Jeep’s resiliency isn’t just a U.S. phenomenon. Globally, sales rose 39 percent last year, topping 1 million for the first time. As recently as 2009, Jeep was forecasting global sales of 800,000 for 2014.
- A year ago, Sergio Marchionne, Fiat Chrysler’s chief executive officer, said Jeep would sell 1.9 million vehicles by 2018. Last week he said that target “is probably understated.”
- David Kelleher said he has been selling Jeeps at his store just west of Philadelphia since 2007. Ratings from Consumer Reports, whether positive of negative, have much less influence, he said, than what shoppers’ friends and neighbors might say. “Build a Jeep, they’ll come,” he said.
Modi Fires Back at Critics Who Say Intolerance Rising in India
by Unni Krishnan & Bibhudatta Pradhan
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Indian Prime Minister Narendra Modi fired back at critics who say intolerance is rising under his government.
- The main opposition Congress party has no right to talk about intolerance because it presided over anti-Sikh riots in 1984 that left about 3,000 people dead, Modi told a campaign rally in Bihar on Monday. Congress leaders were blamed for fomenting the violence days after former leader Indira Gandhi was assassinated by Sikh bodyguards. “Till now tears from the eyes of victims of Sikh families have not been dried," Modi said. “You are enacting drama.”
- India has seen tensions rise in recent months, with some members of Modi’s ruling Bharatiya Janata Party making inflammatory comments after a mob killed a Muslim man over rumors that he slaughtered a cow, an animal sacred in Hinduism, and ate beef. Hindus make up about 80 percent of India’s population, with Muslims accounting for 14 percent.
by Unni Krishnan & Bibhudatta Pradhan
- Concerns are growing that tension between religious groups may hijack Modi’s economic agenda. In a report last week, Moody’s Analytics said Modi must keep his members in check or risk losing domestic and global credibility.
- Central bank Governor Raghuram Rajan weighed in on Saturday, saying in a speech that tolerance is important for faster growth. Finance Minister Arun Jaitley responded the next day, saying in a Facebook post that India “remains a highly tolerant and liberal society," and the mob murder was a “stray incident."
- Congress party chief Sonia Gandhi, Indira Gandhi’s daughter-in-law, plans to lead supporters to petition India’s president on Monday to take action against rising intolerance. Dozens of writers, scientists and artists recently returned national awards to protest a climate of intolerance epitomized by the killing of scholars who had been criticized by Hindu groups.
- Election results in Bihar will be tallied on Nov. 8. A victory could help Modi further his goal of controlling India’s upper house of the national parliament and passing stalled economic proposals.
FBI Takes a Bullet in Banks' $50 Billion Fee War With Retailers
by Elizabeth Dexheimer & Robert Schmidt
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Perhaps the FBI should have stuck to catching bank robbers, rather than weighing in on bank cards.
- Last month, the nation’s premier law enforcement agency issued a seemingly innocuous fraud alert telling shoppers to use a PIN with new credit cards embedded with computer chips. Though the goal was to promote security, the bureau instead found itself ensnared in a decade-long dispute between banks and retailers, in which about $50 billion in annual fees are at stake. The blowback from both sides has been intense.
- Banks said they were blindsided by the notice and forced the bureau to retract it. Next, a senior Democratic senator demanded to know why the alert mysteriously disappeared, asking if the Federal Bureau of Investigation was “taking appropriate steps to protect consumers.” A merchants group then accused the “banking lobby” of lying to the agency. “The FBI has accidentally stepped in a hot-button political issue,” said Nick Holland, who tracked the incident as an analyst at Javelin Strategy & Research, a consulting firm that focuses on the payments industry. Lobbyist Armies
- Welcome to the fight over credit-card swipe fees, one of the more antagonistic, long-running battles in Washington where retailers like Wal-Mart Stores Inc. and Target Corp. vie against financial firms including Visa Inc. and JPMorgan Chase & Co. Both sides retain armies of lobbyists, trade associations and public relations specialists to push their agendas. The fight over personal identification numbers, or PINs, is the latest front.
- Retailers have long fumed about the cost of accepting credit cards -- about 2 percent of each transaction. Those swipe fees, also known as interchange, are set by Visa and MasterCard. Most of the money ultimately goes to banks, which say they use it to fund security and technology upgrades and cardholders’ beloved reward programs. Merchants counter that reducing the payments will lower prices at the register.
- By weighing in on PINs, the FBI inadvertently backed a retailer strategy to slice interchange fees, according to Holland and other analysts tracking the payments industry. But that’s difficult to understand unless one is steeped in the intricacies of the complex policy debate.
- On one side, banks oppose setting PINs for credit cards, partly because their research shows it will anger shoppers by slowing them down at the register. And that might prompt them to pay other ways. The firms also are concerned merchants will use the extra security feature to argue credit cards are essentially like debit cards, which use PINs and carry a much lower swipe fee. ‘Wake-Up Call’
- Merchant groups say PINs are about protecting shoppers, and that the FBI’s warning proved that. They deny playing any role in getting the bureau involved. “The FBI’s alert should be a wake-up call to the banks,” said Brian Dodge, a spokesman for the Retail Industry Leaders Association.
by Elizabeth Dexheimer & Robert Schmidt
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Pointing Fingers
- Both retailers and banks concede it’s a fight over fees wrapped in an argument about security. Still, they each blame the other side for that. “Clearly money is behind it," Mallory Duncan, general counsel at the National Retail Federation, said of the banks’ resistance to issuing cards with PINs.
- It’s the merchants who are being disingenuous in backing PINs, said Sam Geduldig, a partner at CGCN Group who lobbies on behalf of a coalition of card companies. “You can’t even engage in a serious discussion about consumer security without some of the retailers turning it into a backdoor, nonsensical argument about interchange,” he said.
- The FBI’s Oct. 8 warning was timed to coincide with the U.S. rollout of chip cards, which consumers have been getting in the mail to replace cards that only had a magnetic strip on the back. Chip technology makes it virtually impossible for criminals to create counterfeit cards using a stolen account number. Before cyber attacks surged, retailers resisted that rollout because they didn’t want to replace costly credit-card readers. Now they are advocating PINs, which would make it even harder for criminals to take lost or stolen cards on shopping sprees. Often Unavailable
- A day after its alert was taken down, the FBI released a revised version, omitting the PIN recommendation. FBI spokeswoman Carol Cratty declined to comment on the flap except to say that the bureau had reissued the statement “to clarify the security safeguards associated" with chip cards.
- Asked at an Oct. 22 congressional hearing about why the consumer alert was withdrawn, FBI Director James Comey said the first version was “a miss on our part” because the bureau didn’t realize that few stores or cards are equipped to handle the use of PINs. “We withdrew because our worry was we’re going to confuse a whole lot of people who are going to roll into places saying, ‘Where is the chip and PIN?’” he told the House Judiciary Committee. “And it isn’t widely available.”
- The change is now facing scrutiny from Senator Richard Durbin, a longtime supporter of the retail industry who sponsored a controversial provision in the 2010 Dodd-Frank Act that required a reduction in swipe fees for debit cards. The Illinois Democrat wrote Comey, inquiring about the role of the bankers’ association in getting the notice changed. Durbin wondered whether the FBI was being hoodwinked by the banks. “Is the FBI aware that payment card networks and banks in the United States have an incentive to dissuade consumers and merchants from using PINs?” Durbin wrote. “Is the FBI concerned that this incentive may cause card networks and banks to set security specifications that seek to maximize fee revenue instead of maximizing fraud prevention?” Comey must respond to Durbin by Nov. 15. This time, at least, the bureau will know that both banks and merchants are ready to pounce on every word.
Crude Oil Facing Further Falls As Inventories Mount
Crude oil traders are again preparing for falls as the latest API inventory data points to a 4.1 million barrel build in oil stocks.
- The tumultuous path of crude oil has been an interesting study in markets as the black gold again appears to be swirling around the drain hole. Recent figures released by the American Petroleum institute signal a build in oil stocks when the official EIA figures are released later. WTI prices have subsequently been under pressure as the market grapples with the risk of further over-supply. The current stockpile sits at around 480 million barrels and its negative implication increases as every day passes.
- Regardless of your view on the current “war” between OPEC and US shale producers, the reality is that the continual inventory builds indicate more about the broader macro-economy then they do about the state of the global oil industry. Crude oil has always been a vastly superior measure of economic activity, with a focus on trade and transport, then any of the “massaged” economic stats that emanate from government.
- Subsequently, taking a look at world fuel consumption tells us that the global economy has a significant amount of ground to make up before we can consider ourselves “recovered” from the grips of the financial crisis. Domestic demand for liquid fuels is still relatively lacklustre and static and demonstrates none of the economic strength that market pundits (and the Fed) would have you believe exists.
- The unfortunate reality is that WTI crude oil is likely to remain under pressure whilst the US economy underperforms. Given that the recent US Core Durable Goods Orders result slipped to -0.4% m/m, I wouldn’t be expecting that to occur any time in the medium term. Subsequently, expect to see the key $40.00 level come back into focus in the coming months as the extent of US economic softness becomes apparent.
- Also complicating matters is a report that the US government intends to open up the Strategic Petroleum Reserve (SPR) to effectively “dump” the market to cover their budget deficit. This single act of recklessness will not only add to the downward pressure but will also draw questions of why the nation would seek to partially liquidate a state asset during a period of severely depressed prices .
- Given that the SPR has historically been tapped during periods of elevated prices to signal additional supply it would beggar belief that the price signalling mechanism would be employed when crude is in the doldrums. Subsequently, one would have to conclude that the deal was struck as part of the recent debt ceiling negotiations and that no thought was put to the economic consequences of “calling” crude prices lower.
- Irrespective of the political idiocy, one thing is for certain, WTI crude prices are heading south. It is highly probable that the key $40.00 a barrel level could be in focus within the next month. In fact, our forecasting places prices within the $39.45 - $42.00 range by the end of 2015.
- Investing.com - Oil prices fell on Tuesday, extending losses into a third week, on worries over a supply glut and with U.S. inventory data expected to show another increase in crude stocks.
- U.S. crude was down 1.42%, at $43.36 a barrel while Brent fell 0.77% to $47.18 a barrel.
- An expected further build in U.S. crude stocks and a glut of refined products again raised concerns of an oversupplied market.
- A report from the U.S. Energy Information Administration on Wednesday was expected to show that commercial crude stockpiles rose for a fifth straight week, by an average of 3 million barrels to 479.6 million.
- Also weighing on prices was news that U.S. congressional leaders had proposed to sell 58 million barrels of oil from U.S. emergency reserves to help pay for a budget deal, although the sales would happen only between fiscal years 2018 and 2025.
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Forex technical analysis: EURGBP scoots higher
by Greg M
- Hurts the GBPUSD (or GBPUSD helps lead EURGBP higher) The EURGBP is on the move higher. Support trend line was tested at hte 0.7109 level earlier today and we are now seeing the EURGBP make new session highs. The pair is approaching the 100 hour MA (blue line) and trend line at the 0.7175 level).
- The move higher in the EURGBP is helping to push the GBPUSD back to the downside...Or is it the GBPUSD move lower, helping the EURGBP move higher? In either case, the two pair seem to be tied at the hip as the GBPUSD fell sharply, while the EURGBP was breaking higher. For the GBPUSD, the move lower extended the range for the day to new session lows. It also erased all the gains from the better UK data this morning and makes the 100 day MA test, look more like a test and a failure.
- What makes me really cautious, however, is that the price for the GBPUSD tested 1.5400 and is right back up to 1.5430-39 currently. Meanwhile, the EURGBP scooted to 0.7164 and is now back at 0.7145. So do I trust the market? Not a whole lot. It seems to be perhaps driven by flows, stops. The trend line in the EURGBP did hold the line and did provide a level where traders could define and limit risk, but the recent push seems a little more random and flow driven (liquidity light too?).
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Forex technical analysis: AUDUSD flat lines before RBA decision
by Greg M
No change expected, although they could cut...
- The RBA will announce there latest decision on rates in the new trading day (10:30 PM ET/02300 GMT). The expectation is for no change at 2%, but with a bias for a cut to 1.75%. The lower quarterly CPI inflation report, slower growth from China and the recent mortgage rate hikes should keep the RBA leaning more toward increased stimulus. The question is the timing.
- Technically, looking at the daily chart, the price in October tested and held against the 100 day moving average (blue line in the chart above). At the highs in October,, the price also tested the 38.2% retracement of the move down from the may high to the September low. That level came in at 0.7380. The 100 day moving average currently comes in at 0.72923. The current price is down at 0.7138. Even if the RBA refrains from easing I would not expect that 100 day MA to be tested today.
by Greg M
- Upside targets on "no change" would be centered on the 0.7158 (50% of the move up from the end of September low - see daily chart above). The next level that would need to be cleared would be a topside trend line on the hourly chart at the 0.7168 level (and moving down), the 200 hour MA (green line in the chart below currently at the 0.7178 level) and the 50% of the move down from the October 23 high at the 0.71787 level (see chart below). A move above that string of resistance would open up the upside and have traders looking toward a move above 0.7200 toward 0.7211.
- On the downside, the AUDUSD did move above the 100 hour MA in the Asia-Pacific session and apart from one hourly bar above the MA line, the price has remained above that MA line. The current level for the 100 hour MA comes in at 0.7123. A move below that level, and staying below it, would give traders a license to sell. Below that and the 0.7100-10 area and the lows from Friday at 0.7083 and 0.7061 will be targeted. Below those levels and traders will be looking toward 0.7000. The low prices from end of September at 0.6935 and the beginning of September 0.6886 remain other targets but I would expect buyers on dips toward those levels.
Forex technical analysis: USDJPY moves away from hourly MAs
Above 100 and 200 hour MA
- The USDJPY is trading at new session highs and moving little by little away from the 100 and 200 hour MAs at the 120.62-66 area. The price moved back above those MAs in the NY session and has remained above. The key target above remains the 200 day MA at the 121.028 level today. The price moved above that MA last week and and the week before as well, but each time above, the price reversed back down. Friday, the price moved right to the Oct 23/26th highs and reversed.
- If the price is to go higher this week - and trend away from the converged MAs - that MA needs to broken and stayed broken.
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Nasdaq leads the charge
by Greg M
The major US stock indices are closing with solid gains today.
- The Nasdaq is leading the move up 1.45%. The S&P is up 1.19% and the Dow industrials rose by 0.94%. The Dow is now back up on the year. In the US debt markets, yields were also higher:
- 2 year 0.753% +3 bp
- 5 year: 1.561% +4 bp
- 10 year: 2.18% +4 bp
- 30 year: 2.95% +3 bp WTI Crude fell 1.01% to $46.11
- Gold also fell in trading today and in the process has fallen back below the 100 day MA (blue line in the chart below). The 50% retracement level is also being tested in trading today.
by Greg M
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Nasdaq leads the charge
The major US stock indices are closing with solid gains today.
- The Nasdaq is leading the move up 1.45%. The S&P is up 1.19% and the Dow industrials rose by 0.94%. The Dow is now back up on the year. In the US debt markets, yields were also higher:
- 2 year 0.753% +3 bp
- 5 year: 1.561% +4 bp
- 10 year: 2.18% +4 bp
- 30 year: 2.95% +3 bp WTI Crude fell 1.01% to $46.11
- Gold also fell in trading today and in the process has fallen back below the 100 day MA (blue line in the chart below). The 50% retracement level is also being tested in trading today.
UBS happy with EURUSD shorts as their stop remains intact
- This week their trade remains the same and they say that they are planning to add ahead of 1.1090. Their first target is the Friday low at 1.0987, then 1.0950
- In GBPUSD the 1.5500/10 level is on their radar and they prefer to fade rallies ahead of it (don't know if this note was out before or after the test earlier). They suggest a stop above 1.5520
- Separately, on their BOE rate hike push back to May 2016 they say that they moved because of the slightly lower growth profile forecast based on external risks and domestic growth easing
- While Feb is not off the cards fully, they want to see more than just the manufacturing data improving
- Last week they wanted to sell rallies to 0.7280 with a stop above 0.7310. that proved a good trade and now they want to sell rallies between 0.7150 an d0.7200 with a stop above 0.7280. They're hoping to see it move below 0.7000
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Look no further than UBS for how to trade EURUSD, USDJPY and AUDUSD
by Ryan L
UBS note their short term/Intraday trading ideas
Some ideas from UBS out today. Are they going to be winners?
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EURUSD
- Doesn't see value in shorts at current levels so they say short at 1.1060, add at 1.1085, stick your stop at 1.1110 USDJPY
- They note profit taking ahead of FOMC and BOJ. BOJ is the bigger deal in their eyes and the pair will stay supported into the meeting. Suggest buying dips closer to 120.50 with a stop under 120.00. They note resistance at 121.70 & 122.00
by Ryan L
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AUDUSD
- The pair has been subdued despite the ECB and PBOC news and cuts. They say sell dem rallies to 0.7280 with a stop through 0.7310 and BTFD below 0.7200 with a stop below 0.7250
- My view is that the stop on the EURUSD short is a little wide, depending on how long you are playing the trade for. I certainly don't see it as a great level to sell looking for a longer term trade, unless it develops further as a resistance point over the coming sessions
- I like the idea behind the USDJPY trade and it's a similar trade (albeit in reverse) to the one I played last month in buying the BOJ disappointment dip into the FOMC. The risk this time is that there's far less time in between the meetings, so you may not get a decent margin of profit built up to ride any volatility
- AUDUSD longs looks to be a fair call with 0.7200 looking like decent support. For the short trade I might look to 0.7295/0.7300 as my entry as we're finding resistance today around the 0.7265/70 level, so a break above there would likely go through 0.7280 easily anyway
The strongest and weakest currencies as NY traders enter for the day
by Greg M
- The GBP is the strongest. The NZD is the weakest.
- The GBP is the strongest currency as NY traders enter for the week, while the NZD is the weakest.
- The catalyst for both is PMI data. The UK PMI was stronger. Over the weekend China PMI stats were weaker. Weaker data tends to weaken the AUD and NZD currencies.
- The USD is mixed - falling marginally against the EUR, GBP CHF, up against the CAD and NZD, and unchanged vs JPY and AUD.
- The ranges for the major currency pairs remain low (volatility low). The EURUSD has a range of 50 pips vs a 22-day average of 102. Even the GBPUSD which rallied on the better than expected PMI, only has a 72 pip trading range vs 106 average over 22-days (22 days is around a month's worth of trading).
by Greg M
- US Markit PMI will be released at 9:45 AM ET (estimate, 54.0 unchanged). The US ISM manufacturing will be released at 10 AM with an estimate of 50.0 vs 50.2. ISM prices paid is estimate to come in at 38.8 vs. 38.0. Construction spending for the month of September is expected to rise by 0.5% vs. 0.7% last.
- At 8:30 AM ET,RBC Canada Manufacturing PMI will be released for October. Last month the index came in at 48.6. Feds Williams speaks at 12 PM ET. In the new trading day tomorrow, the RBA is expected to announce their interest rate decision.
Nobody knows what the RBA board will do on Tuesday ... the board itself doesn't know
- In the Australian press today (Sydney Morning Herald), Peter Martin writes on tomorrow's Reserve Bank of Australia monetary policy meeting
- Nobody knows what the Reserve Bank board will do on Tuesday, for the very simple reason that the board itself doesn't know.
- ... very good argument for cutting rates is balanced by a good one for staying put. If I were having a bet on the outcome, I would make it a small one.
- Normally, the Reserve Bank would cut its cash rate to compensate. It targets ends (the retail rates that are actually charged) rather than means (the cash rate needed to bring the ends about). But the unspectacular truth is that, overall, the big four haven't whacked up rates that much. Westpac put up its rates the most, 0.20 percentage points for all variable mortgage holders, and before that 0.27 points for investment loans, making a total for investment loans of 0.47 points. When taken together, Westpac's hikes probably lifted its average margin 0.25 points, near what the Reserve Bank typically uses to adjust its cash rate.
- But there's a big "but". Westpac's hikes apply only to mortgage rates and then only to variable mortgage rates. Its other customers, perhaps half of them, aren't paying any more than they were. To compensate for what Westpac has done, the Reserve Bank wouldn't need to cut its rate anything like 0.25 points, and to compensate for what the others have done it would need to cut even less. And about 20 per cent of mortgage holders aren't with the big banks and so don't need to be compensated.
- The best guess is that, all up, the big four have done the equivalent of tightening rates 0.10-0.12 points. It's something worth taking into account, but not necessarily something worth cutting rates 0.25 points to compensate for. The banks' moves mean the Reserve Bank can cut rates without firing up the housing market
- That's probably true, and a potent argument for cutting on Tuesday in order to direct the bulk of the benefit to businesses rather than real estate. But on the other hand, the RBA would be delighted if the banks had managed to crimp runaway lending to housing investors and wouldn't want to do anything to give those investors comfort.
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On the surface the economy is weak
- Headline growth for the year to June was just 2 per cent, much less than we are used to. But the Reserve Bank believes much of the low result was due to a fall in export volumes caused by temporary disruptions to production. Elsewhere, the news on employment is encouraging, consumer credit is climbing, and non-mining business investment is growing more strongly than expected.
- And then there's the Turnbull effect. Our change of prime minister has made us feel better about the future, according to the surveys; meaning there might be less need to cut rates to lift spirits.
- But none of these effects are that strong. A further cut in the cash rate from 2 to 1.75 per cent could be just what's needed to turn these small pieces of good news into something better. Inflation is ridiculously low
- The headline measure is just 1.5 per cent, meaning the Reserve Bank board could easily afford to cut rates without worrying about prices, but it doesn't mean it has to. The decision is up to it.
ECB Villeroy says ECB policy produced results
by G Michalowski
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French economy is not growing fast enough.
- French growth to be slightly above 1% 2015
- France recovery is consumer led. Business leaders have yet been confident to increase business investments.
- In favor of European budget committee.
- December easing depends on serious analysis.
- There is a strong commitment to active monetary policy
- ECB avoided deflation despite lower oil and commodities and inflation expectations are higher even if they are still too far from the targeted goal.
- The exchange rates is not a target we assign. It is an element that goes into ECBs analysis of inflation.
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Money, money, money: More from guest economist John Hearn
by Mike P
It's all about the meaning of money today as guest economist and eminent monetarist J B Hearn brings us his latest blog, further to the one I posted on Friday
Money, Money Supply, Money Creation and Monetary Demand.
I have had several requests to qualify and quantify these terms.
I tell my students that if they want to impress people at parties then they should recite Walker`s definition of money:
"...that which passes freely from hand to hand in full payment for goods, in final discharge of indebtedness, being accepted equally without reference to the character or credit of the person tendering it, and without the intention on the part of the person receiving it to consume, enjoy or otherwise use it than by passing it on sooner or later in exchange"
- It is a showstopper of a definition and it explains that an efficient money has to be generally acceptable in transactions, a useful unit of account and it can maintain its value into the future.
- Like all economists I will move to the next stage by making an assumption that before today`s fiat money there was only one type of money and that was gold. The difference between early forms of money like gold money is that gold had both value in use and value in exchange whereas fiat money has no value in use, just value in exchange.
- The story goes that in the 17th century Jewish emigres from Europe set themselves up as goldsmiths in London. They worked with gold and had vaults to keep it safe. By the time we get to the English Civil War, which started in 1642, the Goldsmiths realised an opportunity to earn more by offering to look after peoples gold. As time went by so goldsmith`s paper receipts were used as money as they were being passed from one person to another in trade and were effectively transferring the ownership of gold. Goldsmiths soon realised they could improve their service by offering more than one receipt in different denominations e.g. 1, 10, 20 etc. This meant that goldsmith`s receipts were taking on all the characteristics of money. However all this money was backed 100% by gold so goldsmiths were just depositories and no new money had been created.
- As people were using goldsmith receipts as money there was a lot of gold surplus to requirements in their vaults, and a lot of respectable borrowers and governments who wanted to borrow money. Seeing another opportunity the goldsmiths turned themselves into bankers and started lending out some of the gold that was laying idle in their vaults. The people who borrowed the money were unlikely to want the gold as the goldsmiths receipt is as good as money and a lot easier to use in trade. At the point that borrowers are happy to use receipts so new money is being created as there will now be more money receipts in circulation than gold to back them.
- Gradually as confidence builds so more new money is created and by the time we reach the early 20th century we have a monetary system which is fractionally backed by gold with private banks and the Bank of England involved in money creation. The current system is similar except that the Bank of England has suspended your access to gold, or some may say even stolen gold from its rightful owners, and the money supply is now fractionally backed by cash not gold
- If we come right up to date how do we separate the money supply from monetary demand? It is reasonably simple in as much as the money supply is a stock concept whereas monetary demand is a flow concept. At one point in time it is relatively easy to make a crude estimate of the total money supply by adding cash in circulation to all bank current accounts. In the banks accounts it will be possible to identify the proportion of cash they are holding to total assets.
- We now have a money supply that is comprised of a cash base and credit money and a banking system with a ratio of cash to assets of about 5% cash and 95% credit money. In the past the banks had been requested by the Bank of England to hold an 8% cash to total assets ratio, but this was abandoned early in the 1970`s. However this ratio is now determined by an estimation of expected customer demand for cash. It is necessary to keep sufficient cash so that the bank does not end up like Northern Rock which was unable to satisfy unexpectedly high demand for cash.
by Mike P
- During normal times there is a fairly consistent relationship between the amount of cash held by banks and the amount of loans they create. This means that a change in the cash base can influence the amount of loans a bank can support: more cash means potential for more loans and less cash means that the loan book will shrink. Although it is much more complicated than set out here we can deduce a multiplier calculation that will maintain the same cash ratio if the size of the cash base changes. This simple example makes the point.
- Suppose there is a single bank with many branches and no cash drain to the public when changes occur. The bank has decided to keep 12½% of its assets in cash and a new deposit in cash of £1000 is made at the bank. Using the formula 1/ cash base ratio = multiplier, what effect will this change have upon bank lending? If you get the answer £7000 then you understand credit creation, if you do not then you have a little more work to do.
- Double entry bookkeeping at the bank means that a new loan is also a new deposit, but at the end of the day it is only an increase in the money supply if there has been a net increase in loans. A further point to note is that once created the money is used repeatedly in trade and becomes divorced from the original money creation process. Unfortunately this means that banks are too important to fail as the destruction of deposits removes the unit of account required in trade. However there may be good reason to sack the board and the management and this is one of the useful things a Central Bank can achieve in its regulatory role.
- We have now covered money, money supply and money creation and we need to explain how the money supply measures up against monetary demand. Remember that money supply is a one point in time stock concept while monetary demand is an overtime flow concept and because the same units of money are passed on time and time again in trade we can deduce the following: if the money supply is £100 and over a period of time it is used in £500 of transactions then the velocity of circulation of money is 5 i.e. on average each unit of money has been used 5 times and money supply x velocity of circulation = monetary demand.
- I have stated in other writings on my blog that a Central Bank can control the level of monetary demand in an economy. Whether they choose to or not is another matter. They have three main options: they can manage the amount of cash in the system, or they can manage the level of bank lending using interest rates, or they can try to influence the velocity of money circulation. They have total control over the supply of cash if we ignore counterfeiting.
- They have much less control over bank lending and by using interest rates they can create distortions like the current asset bubbles. Lastly they have virtually no control over velocity which is influenced more by people`s perceptions of inflation and deflation. Taking everything into account the Bank of England should manage cash and the volume of money, but unfortunately chooses to try and manage the ones it cannot manage as well.