Economic Insights – Monday 2nd May


  • Betting on St Leger?
  • US economy: it’s the cycle, stupid, isn’t it
  • China economy: mounting debt
  • Eurozone to the rescue?
  • Brexit: punters vs. polls

Chart 1: Oh no, it is that time of year again!


Source: @callum_thomas

This year will be different!

Yes, really! Chart 1 shows why the ‘Sell in May and go away’ meme remains in vogue although it is wonderfully ironic that investors in the US, especially on Wall Street, who do not really approve of holidays at any time, have latched on to the summer season of the City folk of a bygone era. In the good old days even the inside trading had to be suspended for Ascott, Wimbledon, the Lords Test, Henley, the Glorious 12th and so on until the flat racing season ended at Doncaster in Mid-September. Perhaps we wily Brits tricked foreigners into thinking St Leger was spelt with a ‘d’ in the middle and had some profound financial significance. Hey ho!

Anyway, we already know that 2016 will be different because anyone selling now will at best have made only very modest gains since January in US markets with some painful losses elsewhere (notably Japan, China and Italy). Furthermore, all major equity markets are down on their peaks in the Spring and Summer of last year. It is true that there were some ‘seasonal’ rallies in October and March but they were not sustained. The one notable exception to ‘prove the rule’ is Brazil’s Ibovespa, which has surged in seeming (seemly?) rapture over every new exposure of official corruption and I am indeed with the consensus that the time to cash in is right now (not least in view of the latest plunge in the April PMI survey).

This allows me to give a modest tootle of my own trumpet in the hope that regular readers recally my ‘witty’ exhortation last March to ‘sell in the Spring but not everything’! I coined this not to defy a hackneyed meme but because I was worried about a slowdown in the global economy and its impact on corporate earnings. This has, of course, proved prescient and is my main justification for the tootle. Again, I hope regular readers are in no doubt as to what I think will happen next: more of the same, including the prospect of further market falls.

At this point, I should make clear the distinction between investing in equity market indices and other related derivatives in contrast to trading individual stocks. A further distinction is between stockpicking to buy and hold (which is difficult even in rising markets) in contrast to trading individual stocks over relatively short periods. Here, I have to confess that I am alluding to our DAN-Trade service but will cofine myself to saying, before passing lightly on, that it has notched up quite a few hits since its launch last December.

Chart 2 Another seasonal thing?


Another month….another set of signs of slowdown

GDP numbers command less attention these days partly because they seem no longer to reflect fully economic activity and partly because they are subject to frequent revision, while some are regrded as fabricated. Anyway, the first cut of Q1 US GDP turned out at +0.5% annualised to be worse than expected even by the Atlanta Fed Nowcast. Some commentators insist that this merely repeats the seasonal pattern of recent years and, indeed the first Atlanta Fed Nowcast for Q2 is 1.8% annualised. However, Chart 2 may well show the pattern of Q1 softness in successive years but it also shows GDP to patchy overall with a downward trend since 2014. In fact, it is already possibe to predict that US GDP in 2016 as a whole will stuggle to match last year’s 2.4%.

The outlook is even less comforting when one starts digging into other indicators. Unemployment is still very solid at 5% but average earnings at 2.3% year on year are not gaining much from it. The Manufacturing Sector is flitting in and out of contraction but the Services Sector cannot compensate in terms of pay and productivity. Consumer confidence is sliding lower according to both the Conference Board and Reuters/University of Michigan surveys, both Personal Spending and Retail Sales measures are drooping and inflation seems stuck. Business investment is also depressed but companies are still borrowing to fund M & A and unproductive share buy-backs. There is a widespread evidence that the FOMC’s policies since the Crash have resulted in money flowing to the wrong places, especially into speculation on Wall Street and overseas stock markets. It seems that the FOMC dare not go back to more QE or forward to raising interest rates to more normal l;evels.  This is not yet a doomsday scenario but it suggests that the US economy will keep on slowing down this year and into next.

Chart 3 IMF tweaking the dragon’s tail


Source: IMF

Over the years the IMF has normally been quite placatory in response to China’s prickliness about anything that throws doubt on the success of Communist Party policies and last month China’s GDP growth forecast for 2016 was actually upgraded in the IMF’s World Economic Outlook. Needless to say, Q1 GDP was officially reported bang on target and there was other ‘good news’, some more credible than others, on Industrial Production, Exports, Retail Sales and Foreign Direct Investment. Meanwhile, PMI surveys both official and from Caixin/Markit point to a more nuanced economic outlook and a bounce-back in new loans confirms that the authorities are doing little to curb China’s debt binge. Chart 3 shows that even the IMF is now prepared to send out warning signals and one of my favourite Sino-observers, George Magnus, raised some disturbing issues on this theme in Saturday’s FT. Not least of the worries is that a combination of local government borrowing, banks’ and shadow banks’ book-keeping shenanigans and official turning of blind eyes means that credit growth is prpbably, according to Magnus, running at about 25-30% to levels that are already over 250% of GDP. This is not so much a replay of the 2008 credit stimulus that ‘saved the global economy’ (and China’s, by the way) but a continuation of it. Applying the brakes will be politically and practically almost impossible without enormous economic damage domestically and internationally and Magnus  is warning us all to be prepared for it to happen within the next three years.

Japan’s official data is also viewd with widespread suspicion but over its accuracy rather than its excessive optimism. Subject to that qualification, the latest batch of dismal Industrial Production, Manufacturing PMI,Household Spending, Retail Sales and, worst of all, Deflation numbers suggest that the economy is once again in recession. Despite this, the Bank of Japan last week held whatever of its fire remains to much widespread surprise. It is not yet clear whether that was part of a central bank pact not to engage in currency wars or simply a sign that Governor Kuroda et al really have run out of ideas. It may be that the BoJ unilaterally or in concert with the FOMC and ECB is planning something drastic such as ‘helicopter money’ and it also raises the prospect that Japan’s decline is a blueprint for other debt-laden economies.

The UK also reported disappointing but not unexpectedly +0.4% quarter on quarter GDP growth for Q1. Once again the Services Sector accounted for almost all the growth but even this was not enough to avoid an increase in unemployment, albeit very modest, in the 3 months of December to February. Consumer Confidence has fallen back into more familiar negative territory and it appears consumers are reining back their spending, at least in shopping malls, from their binge in January but the mounting uncertainty over Brexit is more likely to be having more of an impact on business investment and hiring. Full year growth of 2% in 2016 now looks even more of a challenge.

Chart 4  EZ GDP 2002-16: back from the dead


Frederik Ducrozet @fwred 

It would be churlish, especially in the midst of the Brexit debate, not to acknowledge that the EZ was the top performing developed economy in respect of Q1 GDP (+0.6% quarter on quarter) to the extent that the peak level in 2007-8 has at last been surpassed (red line in Chart 4).  It has been, appropriately enough, a communal effort with only Italy still struggling. Germany has yet to report its Q1 data but Spain (again) and France (more surprisingly) have led the way so far while honourable mention must be made of Ireland. Unemployment is still dire at 10.2% in the EZ as a whole but is slowly getting better, even in Italy. Industrial Production remains disappointing everywhere but consumers appear to be doing their bit by spending more. The return of Deflation is, however, a major set-back and a new challenge to Mario Draghi in his de facto role as economic, if not yet political, supremo. He will, however, be relieved that Portugal has kept (just at BBB) its only investment grade rating from Canada’s DBRS, which will allow the ECB to keep propping up its debt. He has already stepped in to prop up Greece but the latest game of chicken between the Tsipras government, EU Commission, IMF, ESM bail-out fund, France, Germany and Uncle Tom Cobley and all must be another worry.

Brexit update

On Thursday everyone in the UK gets at least one vote in elections around the country. In Scotland the SNP seem set to reach their zenith before they start to suffer from being the party in power. The wheel of fortune may already have turned for Scots Tories if after a mere 30 years they become the second party again. Labour is also expected to fare badly in England and Wales at the hands of UKIP rather than the Tories but London still looks within its grasp. It would certainly bode ill for the referendum if the lightweight Brexiteer Zac Goldsmith pulled off a surprise.

The Brexit opinion polls continue to be finely balanced as Immigration becomes the key issue now that the Economic debate has been lost and won. It seems incredible that so many older voters, many of whom have cleaned up in the housing market, are willing to prejudice their children’s future further by voting Leave. In my family both generations have imposed three-line whips on each other to vote Remain.

So much is being written on Brexit that I will confine myself to three last charts:

Chart 5 an opinion poll from the Sun newspaper, which many readers may not have seen.

Chart 6 the latest probabilities based on betting at Betfair, showing most punters still do not believe the opinion polls

Chart 7 the GBP/USD exchange rate over the last seven months, showing that, in addition to other dollar-supportive factors, FX traders had become quite concerned about Brexit during most of March and April. They now seem to have changed their mind and, unless they do so again, the pound may not gain much from an actual Remain vote. A Leave vote would, of course, hit the pound hard at least in the short-term.

Chart 5 Brexit: the battleground revealed


Source: Sun newspaper

Chart 6 Brexit: Ordinary punters still betting on Remain


Chart 7 GBP/USD:  FX punters also betting on Remain for now 


Source: FXCM via





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