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Fundamental Analysis : 31-August-2015

Discussion in 'Fundamental Analysis' started by Lily, Aug 31, 2015.

  1. Lily

    Lily Forum Member

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    Let's begin with another look at the Fed's September policy decision. While many in the financial media point to the market selloff and economic issues in China as the reason for the delay in liftoff, the FOMC is likely to focus on two other (related) measures instead.

    1. The latest US dollar strength as well as other factors have created tighter financial conditions that will put a damper on growth and cap inflation.

    [​IMG]
    Source: Goldman

    2. Inflation and inflation expectations have declined to levels that are sure to make some Fed officials uneasy. Yes, many officials are saying the situation is transient and these infaltion measures are moving back up. The charts below however should make most central bankers nervous about raising rates. It's not just the absolute levels but also the trends that will add to the the FOMC's concerns. How much lower will these inflation indicators fall before we have an indication that disinflationary pressures are "transient"?

    Core PCE (YoY) is at the lowest level in 4 years.

    [​IMG]

    Moreover, here is the core PCE excluding housing - which is at the lowest level since the Great Recession.

    [​IMG]
    Source: Deutsche Bank

    Speaking of stronger dollar, Goldman sees significant drag on US GDP growth from higher trade deficit.

    [​IMG]
    Source: Goldman
    In fact the current tightening in financial conditions could hamper growth well into Q4 and Q1. There is no question that the US economy remains resilient (as discussed last week). However, the nation will face near-term headwinds "imported" from abroad.
    [​IMG]
    Source: Goldman, h/t @vexmark

    Turning to the Eurozone, inflation expectations have also been trending lower. In fact we are near the pre-QE levels.
    [​IMG]
    Source: Scotiabank

    The euro has strengthened significantly recently, especially on a trade weighted basis. This, combined with the weakness in energy has lowered inflation expectations.

    [​IMG]
    Source: @enlundm

    We see some of these trends making their way into official inflation numbers, as Spain for example moves back into deflation.

    [​IMG]
    Source: Tradingeconomics

    The ECB has a great deal more buying to do in order to boost inflation.
    [​IMG]
    Source: ECB

    Outside of the disinflationary pressures, the Eurozone economy continues to show signs of improvements. Here are a couple of data points.

    1. Portugal's consumer confidence is at the highest level in over a decade.
    [​IMG]
    2. Spain's retail sales growth remains strong.
    [​IMG]
    There is one outlier of course. Here is Greek business and consumer confidence. The banking system will need to be restructured before we see improvements here.
    [​IMG]
    Source: Tradingeconomics
    Elsewhere in Europe, Sweden's economy is showing signs of improving momentum as well. Retail sales (YoY) chart is shown below.
    [​IMG]
    Source: Investing.com
    Switzerland's deflation worsened recently - no matter how one measures it. This is the price of an overly strong currency. Swiss firms must be itching to move more operations abroad.
    [​IMG]
    Source: @acemaxx, SNB

    Turning to China, it seems the PBoC is indeed maintaining a new "peg" of around ¥6.4 to the dollar. China's officials support that view. So what was the purpose of the 3% yuan repricing? There is no evidence that the yuan is any closer to being a "free floating" currency than before the adjustment.

    [​IMG]
    Source: barchart
     
  2. Lily

    Lily Forum Member

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    The nation's economic rebalancing continues as the services sector is starting to dominate.

    [​IMG]
    Source: Scotiabank

    China will continue to lose market share of manufacturing to nations with cheaper labor markets. Here is an example.

    [​IMG]
    Source: @pdacosta

    New Zealand's business confidence has taken a hit as a result of lower commodity prices - particularly meat and dairy.

    [​IMG]
    Source: Investing.com

    The New Zealand dollar continues to move lower as a result.

    [​IMG]
    Source: Investing.com

    In Australia we still see strong momentum in property prices. Here is Sydney for example. I am not sure how this is sustainable in the current environment.

    [​IMG]
    Source: @BullionBaron

    Brazil's economy remains a disaster as the nation officially enters a recession. This slowdown will be deeper and longer than what we saw during the Great Recession.

    [​IMG]

    Africa's "frontier" economies will struggle as China slows.

    [​IMG]
    Source: ‏@JavierBlas2, @cornishft, FT

    Turning to fixed income markets, here are a couple of recent trends.

    1. We've had increased volatility in longer-dated treasuries this year (chart shows long-bond futures). A year ago Janet Yellen was complaining about collapsing volatility in financial markets, telling markets they are not taking into account the uncertainty in Fed's policy trajectory. Well, Chair Yellen got her wish.

    [​IMG]
    Source: Deutsche Bank

    2. For those who follow technical trends, here is a nice "wedge" for the 2-year treasury yield. More volatility on the way?

    [​IMG]
    Source: Investing.com @SoberLook

    In credit markets, subprime auto ABS (asset-backed securities) still look frothy and vulnerable to an economic slowdown. Auto loans are longer in duration with average FICO scores declining.

    [​IMG]
    Source: @MatsGlettenberg

    Turning to crude oil markets, the bounce I discussed last week finally came. This is the largest 2-day jump in years. The sentiment was so negative, a violent reversal was only a matter of time. The rally of course is not sustainable.

    [​IMG]
    Source: barchart

    Part of the reason for the rally was that US rig additions we've seen over the past few weeks are stalling, ...

    [​IMG]
    Source: ‏@SoberLook

    ... as US production begins to slow.

    [​IMG]

    Now, some trends in other commodities markets.

    1. This is a longer-term chart of the CRB BLS Metals sub-index, showing falling global growth expectations.

    [​IMG]
    Source: barchart

    2. We've had some new action in grains. US wheat futures are pressured by global overproduction and strong dollar.

    [​IMG]
    Source: barchart

    3. On the other hand oats futures have experienced the largest jump in years. Watch the financial media scramble to figure out why...

    [​IMG]
    Source: barchart

    4. Finally, lumber futures remain under pressure as exports to China continue to lag.

    [​IMG]
    Source: barchart

    Turning to Food for Thought, we have 5 items this morning:

    1. US population growth continues to decline.

    [​IMG]
    YoY population growth in the United States

    2. 2016 Republican Presidential Nomination Quinnipiac Poll shows Ben Carson in second place now.

    [​IMG]
    Source: @SoberLook
    Source: ‏‏@paul1kirby
     
  3. Lily

    Lily Forum Member

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    Below is the RCP national poll average of the 2016 Democratic presidential nomination odds over time.

    [​IMG]
    Source: @conradhackett, WSJ

    3. Here is an excellent example of lying with charts. This Latin America fund looks amazingly steady and yet the recent losses have been worse than at any time since 2008 - all tanks to a bizarre construction of the y-axis.

    [​IMG]
    Source: ‏ @mcaseyjr

    4. While some in the US worry about banks being "too big to fail", it's Europe that has a major problem with behemoth banks. Here are major banks' balance sheets as a percentage of their home nations' GDP.

    [​IMG]
    Source: ‏@Fmirw

    5. Since the start of Syria's civil war 4 years ago, over half the nation's population has been killed, displaced or fled the country.

    [​IMG]
     

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