(-) U.S. Sets Duties as High as 26% on Wind Towers From China - Bloomberg
The wind-tower case highlights growing tension between the U.S. and China on economic and renewable-energy issues ahead of the U.S. elections in November. The Commerce Department on May 17 announced tariffs of 31 percent to 250 percent on Chinese solar-product imports, after companies including the U.S. unit of SolarWorld AG (SWV) said the products were sold below production cost. China on May 25 said it filed a complaint against U.S. anti-subsidy duties with the World Trade Organization in Geneva. — Bloomberg
(-) Korean Washer Exporters To Pay U.S. Duties As High As 71%
The U.S. Commerce Department proposed duties of as much as 71 percent on large, residential washing machines made in South Korea, concluding that government subsidies for the goods undercut U.S. producers. — Bloomberg
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Surreptitiously, protectionism is increasing.
Factory closures stir China labor disputes - Caixin Online - MarketWatch
A decision to close an optical components factory in Shenzhen triggered a nine-day walkout in March by more than 1,000 workers. Officially, employees at the Oclaro (Shenzhen) Technology Co. Ltd. plant staged the strike to protest possible severance pay problems after the shutdown, which the company said would be completed by 2015.
But on a deeper plane, the strike reflected gnawing frustrations in Shenzhen over the rapid disappearance of local manufacturing jobs. Companies are leaving the city — home to China’s oldest economic development zone — as labor and property costs rise.
Moreover, the Shenzhen municipal government has been encouraging factory closures in certain sectors, while promoting more high-tech manufacturing and the service sector.
China seen bringing forward stimulus plan - MarketWatch
China may loosen monetary policy and initiate stimulus in the near-term, leading to a rebound in the second half of the year. That’s the bullish side.
While we may see some stimulus measures implemented, the reality is that officials don’t have much wiggle room, especially when you have structural inflation.
As I said here, while stimulus measures will be implemented, their scope will be a fraction of what the China bulls expect.
On a slightly different note, I thought this was interesting as it confirms my view of a manufacturing renaissance in the U.S. (and worldwide according to the article) over the longer-term as China transforms from a manufacturing to consumer-based economy.
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The future of the global economy lies in China. The country is in the slow process of preparing for a period of sustainable expansion. If we were faced with a negative market environment in the coming quarters, I’m sure one could find diamonds and diamonds in the rough in regards to US manufacturing and transportation companies. Watch out for protectionism though! I believe that China’s stock market has bottomed and it is currently in the retesting phase.
Longer-term though, (U.S. manufacturing) company cash levels are very high, and emerging markets may provide the secular growth that is needed for the (manufacturing) sector to stage a renaissance in the years ahead. While I don’t believe this scenario is knocking at our door, it’s progressively getting closer.
—-(RCS Investments Macro Outlook Mid-2011 — June 16, 2011)
Premier Wen Says China Will Focus on Growth, Xinhua Reports - Bloomberg
I’m skeptical on the scope of help that officials can provide China’s economy given its structural inflation problem; however, with an oversold market, this news may cause a relief rally.
Investor’s are becoming more convinced that China’s growth will accelerate over the second half of the year. I’m not so sure.
Europe remains in the “Macro driver’s seat.”
“The more-vigorous pace of policy easing is pushing Chinese stocks into a bull market, Morgan Stanley said, as inflation is brought under control and the property market stabilizes. The ‘bear phase’ for equities is over, Hong Kong-based analysts led by Jonathan Garner, chief Asia and emerging-market strategist, said in a report dated yesterday.
‘With enhanced stimulus from Beijing, the economy should gradually recover in the second half,’ said Li Wei, a Shanghai- based economist at Standard Chartered Plc, which has the most- aggressive reserve-ratio forecast at 150 basis points of additional cuts through September.” (via China Slowdown to End in Third Quarter, Survey Shows - Bloomberg)
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Remember that most Wall Street analysts expected China to cut rates much sooner than they actually did. They neglect to account for structural inflation in the economy.
Cuts in China’s reserve ratio raises hopes that tightening has come to an end, however, I seriously doubt that the Chinese Central Bank or fiscal policy makers have much room to ease, barring a European catastrophe.
The outlook for China remains clouded with substantial risks to the downside. A long-term catalyst is at our door, the Eurozone situation will determine whether we have a global double dip, or if the recovery is set to continue (inflation would begin to cause headaches world-wide).
As European Austerity Ends, So Could the Euro - Bloomberg
This is a good corollary to my previous post. Another bout of monetary easing may be on the horizon and risk assets would likely benefit, initially.
However, investors would begin pricing in government officials mischevious plans of inflating the debt away. The result? Stagflation as hard assets (raw materials) move higher in price as confidence in the global monetary system lessens.
Slowing global growth with increasing prices would lead to increasing misery as the middle class (savers and financially prudent households) continues to receive the short-end of the stick, to put it mildly. I’ll be sure to cover these dynamics in my next macro outlook due sometime in late June/ early July.
German government moves to allay fears of inflation after Bundesbank comments - The Washington Post
BERLIN — The German government moved Friday to allay domestic fears of runaway inflation after hints by the central bank that it would soften its conservative monetary policy. Comments by Bundesbank officials earlier this week were interpreted by economists as a major shift in the central bank’s postwar stance.
This prompted mass-market daily Bild to front its Friday edition with the headline “Inflation Alarm!,” invoking Germany’s post-World War I national trauma of rampant inflation…
Bundesbank chief Jens Weidmann sought to squash what he described as an “absurd discussion,” insisting that “citizens can rely on the vigilance of the Bundesbank.”
The ECB’s mandate to keep eurozone inflation just below 2 percent “can in individual cases mean that inflation in Germany temporarily lies above the average and at the same time is under the average in other euro countries,” Weidmann was quoted as telling the daily Sueddeutsche Zeitung. — Washington Post
(via Merkel resists calls to put growth before reforms - chicagotribune.com)
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Recent news; such as the Bundesbank softening its stance on inflation, the EU relaxing stringent deficit rules, as well as support for wage increases in Germany to support domestic demand, are signs that Germany is getting the message from the rest of Europe, growth must accompany austerity measures.
However, Merkel made clear again today that there will be no Eurobonds. As I said here, “we’ll budge here and there, but we’re not fundamentally changing our fiscal stance. No Eurobonds or a backtrack of austerity.”
Maybe it’s Germany sounding tough, but not backing it with action. In fact, we are seeing a trend of Germany extending more of a helping hand. The Bundesbank softening its stance on inflation is a big deal (a fundamental change in monetary stance). Perhaps this is setting the stage for monetary easing from the ECB while fiscal adjustments take place.
Furthermore Merkel is actually getting heat at home for not extending growth measures to the rest of Europe. The North Rhine-Westphalia election in 3 days will be interesting to see if Germans may be changing their mood to further austerity.
Technicals and Economic Data ahead:
Stocks have certainly seen some weakness recently. However, the bulls are likely to come out from the woodwork as the S&P500 approaches the 50-day moving average and major support in the form of the April 2011 highs.
Economic data this week will likely hold the key (keep an eye on that Spanish bond yield as well). NFIB Small business index due tomorrow as well as a slew of Fed officials (Tuesday and Wednesday — what will they have to say about last week’s weak job report?). The big indicators for the week are International Trade as well as the inflation indexes.
Weaker Inflation metrics may give investor hope for additional QE.
Fed’s Dudley says economy not out of woods yet - The Fed - MarketWatch
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Dudley is certainly right to remain cautious with the economic outlook. Unfortunately, their cure for this uncertainty, continued loose monetary policy (along with continuing war games between Iran and the U.S./Israel), will only breed more uncertainty as oil prices continue their treck higher.
China's Wage Hikes Ripple Across Asia - WSJ.com
These are the stories that convince me that the Fed’s policy of easy money will eventually come home to roost. China’s economy is changing just as much as ours.
Rising wages will result in higher global inflation and will trigger a giant global margin squeeze in the medium-term and the top of the Treasury market in the long-term.
I view recent upward movements in Treasury yields as buying opportunities. Consumers’ purchasing power remains weak. Any increase in prices on the commodity/raw material side will be met with anemic debt plagued consumer demand. Companies have the most to lose here as their historically very high profit margins are at serious risk of mean reverting.
Wage dynamics also alert me of the risk of sticky inflation. Stagflation will be a problem for emerging market economies for the foreseeable future in my view.
Fed holds rates, says inflation rise is temporary - MarketWatch
Is the Fed acknowledging that a deflationary shock will bring inflation back down? I can’t see how inflation will be temporary if the economy keeps growing and emerging markets demand more raw materials to support their higher growth rates.
Continued printing and easy policy will set the stage for L-T inflation due to the aforementioned factors. I wrote about this WAY back here and have begun incorporating some effects of continued easing in my latest outlook (See Monetary Policy and Inflation sections).
China’s Inflation Goal to Relax Price Controls - Bloomberg
“China set a 2012 target for inflation that’s higher than economists’ forecasts, leaving room for fiscal and monetary stimulus and an easing of government controls on the cost of resources such as energy.
Premier Wen Jiabao yesterday unveiled a goal of about a 4 percent increase in the consumer price index, the same target as last year. By comparison, analysts at Bank of America Corp. forecast 3.5 percent and those at Goldman Sachs Group Inc. predict 3.1 percent. The gauge rose 5.4 percent in 2011.” — Bloomberg
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(RCS): So inflation goals are being pushed higher. While this does allow for more stimulus and monetary easing, it does raise the risk of further social disruptions from increasing food prices.
Weekly Bull/Bear Recap: January 16-20, 2012
Bull
+ Jobless claims plunge 50K to their lowest level in almost 3 years and clearly demonstrate a strengthening labor market. Increased confidence means increased credit use = strengthening recovery. Banks and homebuilders have been leading the ongoing S&P 500 rally.
+ Manufacturing shows more signs of stabilization, not an imminent recession. The Empire Manufacturing Survey rises more than 5 points, while the 6-month outlook surges 10 points. Last week’s ghastly rail traffic report (intermodal) was nothing more than an aberration. This week’s report shows a sharp rebound, outperforming last year by 7.4%. Industrial Production rebounds 0.4%, lead by manufacturing’s best performance since December 2010 (+0.9% vs. -0.4% in November).
+ Inflation is cooling and will give the Fed leeway to initiate further monetary policy (it’s becoming a worldwide phenomenon: Goldilocks environment coming up?). If economic conditions slow, the bears won’t be able to seize control of the market as the Fed will act as a bullish albatross over their machinations.
+ Risk markets power higher for the week, while copper breaks out of its consolidating triangle to the upside, a sign that the global economy is poised to reaccelerate. Chinese data strengthens the “further stimulus” and “soft-landing” thesis. Furthermore, markets are sensing continued progress in the Eurozone crisis. Confidence is making a comeback, as the German ZEW investor survey hints at a turning point for the Eurozone’s largest economy.
+ The housing market continues its recovery. Mortgage applications for purchase rise 10.3% after an 8.1% increase in the prior week; the result is higher home sales. Furthermore, record low mortgage rates are spurring refinancing applications, surging 26.4% this past week to their best levels since August. More refinancings = more disposable income for the consumer due to lower monthly mortgage payments. Finally, the NAHB housing market index rises 4 points to its best reading in 4.5 years.
Bear
- Sentiment is nearing euphoric levels. Retail investors and even financial advisors are expecting stock prices to move higher. The wall of worry that characterizes bull markets has crumbled. Remember rule number 5 by Bob Farrell, “The public buys the most at the top and the least at the bottom.”
- Meanwhile, this earnings season has seen the lowest percentage of companies beating analysts estimates since the 3rd quarter in 2008; I don’t need to tell you what happened thereafter. Furthermore,…
- … the EFSF is hit with a downgrade. Authorities brush it off. More downgrades are coming. The political tide is turning against the Euro . Marine La Pen of the anti-euro National Front party is making serious gains in the polls. François Hollande is closer to winning the French presidency and will demand a renegotiation of the euro fiscal compact. On the Greek front, “Even members of the committee concede the process (Greek private sector involvement negotiations) is unlikely to succeed in time for the crunch date: a 14.5bn bond repayment falling due on March 20.” Finally, if things were all hunky dory, why is the IMF asking for $500 billion? —-The news trend keeps getting worse.
- ISCS and Redbook weekly consumer metrics are showing a serious slowdown, even after last month’s disappointing Retail Sales report. Furthermore, national gas prices have risen roughly 3.6% and the consumer is already feeling it. Bloomberg’s Consumer Comfort Index falls to -47.4.
- While China’s GDP numbers beat analyst expectations, they portray significant weakening in the country’s export and real estate sectors. Furthermore, persistently high inflation will limit the amount of stimulus authorities can administer.
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