Top 5 Economics Graphs of the Week - 23 Apr 2011

This week the focus goes to the giants of the emerging markets, the "BRIC" economies (the economic/investment one, not the political club). In this edition we review inflation, GDP, monetary policy and the stock markets of Brazil, Russia, India, and China. Also thrown in is a quick review of the monetary policy decisions over the past week.

1. BRIC Inflation
First up is a look at inflation, the BRIC economies are basically the key representatives of emerging markets. And if there's been one key theme for emerging markets, it's inflation. Inflation has been surging in the emerging market world over the past year, driven by a strong run-up in agricultural commodities, thanks to supply shocks paired with the steady increase in demand due to rising wealth in places like the BRIC economies. As I've noted before, inflation will be the key issue in emerging markets this year - mostly because of the monetary policy response, and the subsequent impact on GDP, and stock market returns. It is likely that we'll start to see a tapering off of inflation through the second half of this year - but if not, then things could get 'interesting'.

2. BRIC GDP
Over to GDP, the BRICs bounced back strongly from the great recession. China took a small hit, but charged back with large scale stimulus. India was more or less unscathed on its growth path. Brazil took a decent hit, but has subsequently returned to pre-crisis growth rates. Meanwhile Russia took a significant hit with the collapse of the commodity bubble and is still struggling to get back to pre-crisis levels as it takes on significant economic challenges. However, while the medium term outlook may be less than certain, the fundamentals still support the long term growth story. Also, while the pattern was similar to that of the developed markets' experience, on a relative basis emerging markets got off lightly.

3. BRIC Stock Indexes
Honing in on the stock markets of the BRIC economies, over the past 2 years Russian stocks have been the key performers (thanks in part to the rebound in commodity prices following the crash), while Indian stocks have been a distant second. Brazilian stocks have fallen slightly short of the S&P 500 and Chinese stocks remain weighed down due in part to the uncertainty around the monetary policy tightening cycle. The reigning intuition had been that since the BRIC economies are going to become the next big thing in terms of economic clout and contributors to global growth, then their stocks will also be the next big thing. But for a variety of reasons this may only be partially true. But interestingly, it also doesn't necessarily mean relative out-performance of US stocks since their are a lot of ADRs and large global companies that will reap rewards of said economic ascension, while benefiting from well developed capital markets and associated regulation and transparency.

4. BRIC Monetary Policy
On monetary policy, this (vis a vis inflation) is one of the key factors in the course of emerging market investments this year. The chart below shows that basically all of the BRIC economies are well into the monetary policy tightening cycle, with Brazil increasing rates again in the past week. Clearly, rising policy rates will have a negative short term impact on stocks since on the valuation front higher interest rates reduce the discounted cash flows due to a higher discount rate, but they also have the impact of slowing economic activity - even stalling it over the medium term. This explains much of the caution that investors have collectively shown in relation to emerging markets in recent times. And this is also why people should be watching developments there closely for signs that the worm may turn.

5. Monetary Policy
On the topic of monetary policy, the theme of global monetary policy tightening continued through the past week. The week saw interest rate increases from Thailand +25bps to 2.75%, Sweden +25bps to 1.75%, and Brazil +25bps to 12.00%. Of course there were also two reserve ratio hikes - showing that the inflation fight is not limited to the usual policy interest rate tools, with China hiking required reserves by 50bps and Turkey by 100bps. What was most interesting was the theme of a more global nature of policy tightening starting to come through. Sweden's move perhaps epitomized this, echoing the ECB's recent 25bp increase. So next week it will be particularly interesting to see what the US federal reserve has to say - indeed also Bernanke, in his post-meeting press conference.

Summary

So looking at the emerging giants that are the BRIC economies a couple of key themes stick out. First of all the long-term growth story remains intact, with no major damage to the fundamentals. However over the short-medium term the outlook is less than certain as the challenge of fighting rising inflation presents a tangible set of risks. The course of inflation, and thus monetary policy will perhaps be the key determinant of medium term investment returns. Interestingly, on the topic of monetary policy, the policy tightening cycle is well and alive, and is increasingly becoming a global theme. But there is some truth in the suggestion that emerging markets are a key driver behind this trend. So the main message - watch closely for a turn in the inflation worm.

Sources:
1. Trading Economics www.tradingeconomics.com
2. OECD Statistics stats.oecd.org
3. Yahoo Finance finance.yahoo.com
4. CentralBankNews.info www.centralbanknews.info
5. CentralBankNews.info www.centralbanknews.info

Article Source: http://www.econgrapher.com/top5graphs23apr11.html

Rising Inflation Poses a Threat to Investment Yields

Leafing through reports from the IMF (International Monetary Fund) and BIS (Bank for International Settlements), I came across a few interesting charts and comments on inflation. Not to over do the inflation theme, it's worth highlighting some of the trends in inflation around the world because of the significant importance it has on how global economic prospects will evolve. Perhaps more importantly, the course of inflation will have significant financial market and investing implications.

http://seekingalpha.com/article/259106-rising-inflation-poses-a-threat-to-investment-yields

Top 5 Economics Graphs of the Week - 18 September 2010

This week we look at some of the monetary policy decisions that were announced, then review the consumer spending stats in the US before checking in on inflation in the US as well as the UK. We wrap-up with a snapshot of the commodities market.

1. Monetary Policy Review
This week there were a few interest rate decisions out; the Reserve Bank of New Zealand held rates steady at 3.00% citing global growth as well as the earthquake impact. The Reserve Bank of India increased rates again; lifting the repo rate +25bps to 6.00% (and the reverse repo rate +50bps to 5.00%) as inflation concerns continued. The Swiss National Bank left the 3-month libor target rate unchanged at 0.25%, judging current levels to be appropriate. The Central Bank of the Republic of Turkey held its 1-week repo rate at 7.00% but cut the overnight borrowing rate -25bps to 6.25%. There was also the Bank of Japan of course, which intervened in the currency markets this week for the first time in 4 years, as the strong yen started to put pressure on the Japanese economy. So basically same story here as usually mentioned - a very de-synchronized approach to monetary policy across the globe at the moment as we carry on through the uneven recovery.

2. US Retail Sales
US retail sales beat expectations in August, rising 0.4% month on month vs consensus 0.3%, and more or less flat vs July's growth rate. Core retail sales grew 0.6% vs expected 0.4%, and previous 0.2%. The strong sectors were gasoline station sales, food & beverages, and clothing; while the weak sectors were health & personal care, sporting goods & hobby stores, general merchandise, and nonstore retailers. So the numbers are relatively positive - at this stage of the recovery a small positive or even just a plain positive is a win; but retail sales are still tracking well below trend.

3. US Inflation
US CPI came in flat year on year again, with headline inflation rising 1.2% year on year vs 1.3% in July, and core rising 1.0% - the same as July and June. Basically nothing to see here right now, this is the quiet part on the inflation front; the only real price pressure is coming from energy and food prices, but there is currently a baseline of demand that will probably stop the situation from falling into deflation. If any where the outlook is probably for a few more months of flatness, with a gradual increase.

4. UK Inflation
UK inflation rose 3.1% in August, placing it above the Bank of England's target 2.0% for the 8th consecutive month. The situation in the UK is a little different from the US one, there are a few one-offs in the CPI results still, but the outlook is for relatively persistent inflation around 3%. The Bank of England quarterly inflation outlook poll showed UK consumers expect prices to increase by 3.4% over the next 12 months, up from 3.3% in the May results, and the highest since August 2008. So the UK situation isn't terrific; relatively high inflation with relatively stagnant growth.

5. Commodities
Since we looked at some CPI stats in this edition, it would be rude not to look at where commodities are tracking. If there is any reason for inflation to be underpinned at least, this is it. The dichotomy of economic growth rates in the global economy between dynamic emerging markets and mature developed markets is having an interesting effect. China and other emerging markets still has a strong appetite for commodities as it invests in infrastructure, and continues manufacturing - for exports as well as meeting the growing domestic demand. This will ultimately be good for the global economy, but it will also drag up inflation rates around the world as commodity input prices feed their way through the value chain.

Summary

So we looked at some of the monetary policy decisions last week and saw what will be characteristic of the global economic recovery as it plays out over the next couple of years, i.e. de-synchronised monetary policy, as a result of an uneven recovery and resulting political pressures. We then looked briefly at retail sales in the US and saw that people are still spending, and reviewed inflation results from the US and UK and noted that although inflation is currently flat-lining in these developed economies, the outlook will be for at least a gradual increase. Indeed if you think about the dynamics in play in the commodities markets, the possibility of the strong emerging markets dragging up not only global growth, but global inflation starts to get interesting...

Sources:
1. Reserve Bank of New Zealand www.rbnz.govt.nz & Reserve Bank of India www.rbi.org.in & Swiss National Bank www.snb.ch & Central bank of the Republic of Turkey www.tcmb.gov.tr
2. US Census Bureau www.census.gov
3. US Bureau of Labor Statistics www.bls.gov
4. Trading Economics www.tradingeconomics.com
5. Thomson Reuters/Jefferies www.jefferies.com

Article Source: http://www.econgrapher.com/top5graphs18sep.html

Econ Grapher - China Update - August Data

In this report we look at the rise in inflation in the economy of China, followed by continued monitoring of the rise in consumer spending and domestic demand. Then we review the potential rebound in industrial production; looking also at its links with international trade. Finally we note how along with the trends in trade, how loan growth is playing into the dynamics of the global economy and the Chinese economy.

1. China Inflation
China's inflation rate rose to 3.5%, matching consensus, and up on July's 3.3% increase. The chart below shows the inflation rate rising in line with the sharp increase in the future prices expectation index, which is currently at 70.3, vs just 11.4 a year ago. The increase is as to be expected given fundamentals, and if past experience is a guide then the picture below is for further inflation to come - which will put pressure on the PBOC in setting interest rates.


2. Chinese Consumers - Retail Sales
The Chinese consumer showed further strength in August, with retail sales rising 18.4% year on year, reaching 9.75 billion yuan year to date. The trend is evidently upward, with the peak period close to spring festival yet to come (Chinese new year is in early February 2011). This chart is always an interesting one to monitor as it provides a good proxy for Chinese consumer spending, or the domestic demand component of China's economy. It heralds a shift in wealth, economic dynamics, as well as vast opportunities as per capita incomes rise.


3. China Industrial Production and PMI
Industrial production showed a rebound in August as hinted at by the PMI figures released earlier this month; industrial production grew 13.9% year on year, trumping forecasts for 12.9% and previous 13.4%. The rebound in PMI and industrial production is promising for the economy, but it could yet be too early to pick a halt to the decline; but one thing's for sure, and that's the recent rebound in trade - which could be triggering a second wave of activity.


4. China Trade Surplus
Indeed, China's trade figures showed continued strength in exports with exports growing 34.4% year on year to about $139 billion (July $145.5 billion), and imports growing 35% to $119 billion (July $116.8 billion), leaving a trade surplus of $20 billion (slightly down from $28.7 billion in July). The results show the rolling trade surplus picking up firmly, turning around the downward trend. One promising part of the results was that imports were growing faster year on year vs exports - which points to China's potential to start driving global growth and economic activity. The imports may also point to stronger domestic economy driven demand, as well as inputs for production and re-export.


5. Chinese Banks - New Loans
Finally, China saw a strong expansion in lending in August, with new loans by banks totaling 545.2 billion yuan. Year over year the figure was 134.8 billion stronger than in 2009, and up a strong 18%. The continued expansion of credit shows a contrasting strength in economic prospects as loan growth remains stagnant or even contracts in Europe and the US. But there is the need to remain vigilant about loan quality, and the perennial optimism and insistence of the banks about the triviality of stress tests is not cause for comfort- there is the potential that with such rapid and consistent loan growth that loan quality may have suffered in some cases; so keep an eye on loan impairments and bad debt provisioning.


Summary

As a brief summary we saw inflation rise again, but thought about how it could go higher yet. We reviewed the increasingly interesting retail spending data, and its implications for the outlook for domestic demand in the Chinese economy. Then we saw signs of a rebound in industrial production - as heralded by the PMI figures - and thought about how this may link in with the figures we're seeing in international trade. On the topic of international trade we thought about China's role in the global economy as it shows somewhat counter-cyclical growth in credit and lending - in contrast to more developed nations. The overall message is one of relatively strong activity in the Chinese economy, with a reasonably positive outlook - economic growth wise; but there are risks for the economy particularly around the aggressive expansion policies and inflation.

Sources
1. National Bureau of Statistics www.stats.gov.cn & People's Bank of China www.pbc.gov.cn
2. National Bureau of Statistics www.stats.gov.cn
3. National Bureau of Statistics www.stats.gov.cn & CFLP www.chinawuliu.com.cn & Markit/HSBC www.markiteconomics.com
4. China Customs www.customs.gov.cn
5. People's Bank of China www.pbc.gov.cn

Article Source: http://www.econgrapher.com/13sep-chinaupdate.html

China International Trade Review - August 2010

China reported further strength in exports in July, with exports rising 38.1% year on year to $145.5 billion (up from $137 billion in June). This surge drove the trade balance up to a 19 month high at $28.7 billion as imports remained relatively flat at $116.8 billion (up 22.7% off last year). The results point to some potentially interesting trends underway in global trade.


Looking to the chart below it's clear where the strength is coming from; exports. It is interesting that exports continue to go from strength to strength as international trade volumes continue to recover. Indeed the latest result on the export front is the highest on record, this means that somewhere out there someone is still buying, and this will help put somewhat of a floor under the Chinese economy (but then again we all know how rapidly and totally global trade can drop if bad times resurface).


Probably the most concerning aspect, if any, in the data is the static import growth; sure imports are at relatively high levels since the slump, and are generally higher than pre-crisis levels (345 vs 312 in 2008 on a rolling quarterly basis), but it does show China having a slightly lower impact on driving global trade. As a barometer of China's spending (and potentially even its economic health), as well as a high frequency indicator of global trade; Chinese imports will be important to watch over the coming months, particularly if any further strength comes through to the Yuan.

Sources
Econ Grapher Analytics www.econgrapher.com
China Customs www.customs.gov.cn
Bloomberg www.bloomberg.com

Article Source: http://www.econgrapher.com/11aug-chinatrade.html

3 Tiered Economic Recovery: a Stock Index Survey

Is there a 3 tiered global economic recovery under way? And how might stock market performance look?

The other day I noted in a comment on seeking alpha (an extension of ideas in the latest top 5 graphs article) the possibility for the existence of a 3-tiered global economic recovery. The basic idea is that there are 3 tiers in this recovery, with emerging markets leading (and developing economies following):

1. Emerging Markets
2. Lucky Developed Economies
3. Unlucky Developed Economies

Basically this is simplifying the notion of an uneven recovery down to 3 categories (also could be called fast, medium, and slow). The lucky/unlucky comment is a bit facetious, but it refers to the divergence in prospects between developed economies such as Australia, South Korea, Poland, Canada, and New Zealand; and the older developed economies such as most of Europe, the UK, US, and Japan. While the first tier contains most emerging markets.

This divergence is driven by a number of factors such as existing and new vulnerabilities created by fiscal positions and government borrowing. But it also refers to factors (the lucky part) such as a fundamentally strong economy, and benefit from recovering commodity prices, and to a lesser extent global trade volumes.

Of course there are risks to all 3 tiers, and you only need to look at 2008 to see how correlated things can get, but I reckon the 3 tiers accurately captures the way the recovery will unfold for the various economies: fast growth, average growth, and low growth (or stagnation).

Stock Market Returns
So enough hypothesizing and proselytizing, let's do as the article title suggested; survey the stock market returns of the supposed 3-tiers. First up is Tier 1 - Emerging Markets; the category which is mostly to see the highest growth rate... The Chart below shows (with ETFs used as proxies where I couldn't find index data) tier 1 has been clocking up some pretty high annual returns (chart shows year on year % change on a weekly basis). But of course it's matched with higher volatility. Note the correlations in the past 2 years.


Next up is tier 2. The first thing to note is that returns are generally lower over the past 5 years than tier 1, another notable point is the higher correlation across the period vs tier 1. The generally lower returns relative to tier 1 will in part reflect the dichotomy of growth prospects (or potential growth rate).


Last but not least is the tier 3 economies, the unlucky ones. The bounce back has been and gone by a quick glimpse at the chart below, and the fundamentals tend to support that notion. Within this group there are those such as Japan and the EU, who may be more vulnerable with greater structural issues to deal with; especially in terms of fiscal positions. Also note that returns are generally lower than both tier 1 and 2; reflecting lower yet potential growth rates.


So what? So we can make a few generalizations like tier 1 generally had higher returns and higher volatility, and generally lower correlations prior to the crisis. But once the crisis hit all markets started behaving pretty similarly (to state the obvious). But there are some clues emerging e.g. looking at the tier 1 and 2 charts you can see the beginnings of a decline in correlations, with each market starting to move slightly different to the rest (in contrast to tier3).

So if I were to pick where things might go, I'd say tier 3 markets will generally show low performance in line with low growth prospects, and possibly lower correlations. Tier 1 will likely show the highest returns, but retain its characteristic volatility; and the past will probably look somewhat like the future in that respect. Tier 2, though, may present a more balanced mix of volatility and returns, tier 2 has reasonable growth prospects, and most tier 2 markets possess the desirable traits of developed economies i.e. good legal system, rule of law, democracy, stability, investor protections, etc. In any event this supposed 3-tier recovery concept will be an interesting one to think about as the fragile, gradual, and uneven global recovery unfolds...

Sources
Econ Grapher Analytics www.econgrapher.com
Yahoo Finance (Historical Index Levels) finance.yahoo.com

Article Source: http://www.econgrapher.com/7june-3tieredrecovery.html