prev

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate

Conclusion: While nothing to get excited about from an absolute perspective, the month of DEC was positive, on the margin, for Asian economic data. We look for this trend to continue as growth slows at a slower pace throughout the region over the intermediate term.

 

PRICES RULE

  • Equities: Asian equity markets closed up +0.9% wk/wk on a median basis… China and Vietnam were notable underperformers, down -1.6% and -4.2%, respectively.
  • FX: Asian currencies were unchanged wk/wk on a median basis vs. the USD… Indonesia’s rupiah underperformed, down -1.1%... India’s rupee is down -14% vs. the USD over the last 12 months, which compares to a median -0.6% decline for the rest of the region.
  • Sovereign Debt: Asian sovereign debt markets were relatively quiet wk/wk, with no outsized moves in either direction other than the -28bps compression in Indian 10yr yields.
  • Sovereign CDS: Asian 5yr sovereign CDS markets were also quiet wk/wk, narrowing -1.4% on a median percentage basis... Japanese swaps posted the only positive divergence, widening +4.7% or +7bps.
  • O/S Interest Rate Swaps: Asian 1yr swap rates broadly increased wk/wk, closing up +1.4% on a median percentage basis… Indonesia was a notable outlier, falling -10.6% or -65bps; this dramatic easing speculation rhymes with what we saw in the FX market… Indian swap rates are pricing in -77bps of cuts over the next year.
  • O/N Interbank Rates: Asian interbank rates were particularly mixed wk/wk, despite holding flat on a median basis. Australia (-20bps/-4.4%), China (+59bps/+17.4%), Hong Kong (-24bps/-61.3%), and India (+25bps/+2.9%) highlight the intra-regional divergence.

Full performance tables can be found at the conclusion of this note.

 

CHARTS OF THE WEEK

While nothing to get excited about from an absolute perspective, the month of DEC was positive, on the margin, for Asian economic data. We look for this trend to continue as growth slows at a slower pace throughout the region over the intermediate term.

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 1

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 2

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 3

 

KEY CALLOUTS

Growth Slowing:

  • China: Premier Wen Jiabao lent credence to our analysis which suggests Chinese continues to slow in 1Q by saying, “Business conditions may be relatively difficult this quarter.” He also said that “monetary policy will be fine-tuned as needed.” We interpret the combination of these two phrases to mean that no major changes to monetary policy should be expected in 1Q b/c Chinese policymakers are unlikely to be surprised by an incremental slowing of growth in the near-term.
  • China: Business Climate and Entrepreneur Confidence Indexes both ticked down in 4Q to 128.2 and 122, respectively.
  • India: Export growth slowed in NOV to +3.9% YoY from +10.8% prior.
  • South Korea: Manufacturing PMI slowed in DEC to 46.4 vs. 47.1 prior. Moreover, Export growth slowed slightly in DEC to +12.5% YoY from +12.7% prior.
  • Singapore: Real GDP growth slowed in 4Q to +3.6% YoY from +5.9% prior; QoQ SAAR growth also slowed: -4.9% vs. +1.5% prior.
  • Indonesia: Export growth slowed in NOV to +8.3% YoY from +17.8% prior.

Growth Slowing’s Bottom:

  • China: Manufacturing and Services PMIs ticked up in DEC to 50.3 and 56, respectively. The sub-indexes for New Orders, New Export Orders, and Order Backlog all increased MoM as well.
  • Hong Kong: Manufacturing PMI ticked up in DEC to 49.7 from 48.7 prior.
  • Taiwan: Manufacturing PMI ticked up in DEC to 47.1 from 43.9 prior.
  • India: Both Manufacturing and Services PMIs ticked up in DEC to 54.2 from 51 and 53.2, respectively.
  • Singapore: Manufacturing PMI ticked up in DEC to 49.5 from 48.7 prior. 
  • Indonesia: Consumer Confidence ticked up in DEC to 116.6 from 114.3 prior.
  • Australia: Manufacturing and Services PMIs ticked up in DEC to 50.2 and 49, respectively.

Deflating the Inflation II:

  • Taiwan: WPI slowed in DEC to +4.3% YoY from +5.3% prior.
  • India: Inflation readings continue their downtrend in the week ended 12/24: Food Inflation slowed to -3.4% YoY; Primary Articles Inflation slowed to +0.1% YoY. Energy Inflation, which tracks the benchmark Wholesale Price Index far more tightly than the other two indexes, actually accelerated to +14.6% as crude prices remain elevated amid geopolitical tension.
  • Indonesia: CPI and Core CPI slowed in DEC to +3.8% YoY and +4.3% YoY, respectively.
  • Thailand: CPI and Core CPI slowed in DEC to +3.5% YoY and +2.7% YoY, respectively.
  • Philippines: CPI and Core CPI slowed in DEC to +4.2% YoY and +3.4% YoY, respectively.

King Dollar:

  • India: Subir Gokarn, deputy governor of the Reserve Bank of India, said flat-out: “The monetary cycle has peaked.” While not at all a surprise, we do think his additional commentary confirms our view that the RBI is in a box as it relates to monetary policy: “The RBI is very concerned about the impact of rupee depreciation on inflation… The central bank remains more comfortable using open-market operations to inject liquidity for now, because cutting the cash reserve ratio would send a premature signal that the monetary policy stance has changed.” To that tune, Indian banks are taking advantage of RBI liquidity at an accelerating rate, borrowing an average of $22 billion a day from the central bank in DEC (up from $17.5 billion in NOV). We remain the bears on the Indian rupee, which has fallen -16.4% vs. the USD from its cycle peak in early AUG.

Counterpoints:

  • Taiwan: CPI accelerated in DEC to +2% YoY from +1% prior.

Other:

  • China: As it relates to what’s going to drive Chinese growth on the margin in 2012, Chinese Commerce Minister Chen Deming said that, “China will roll out measures to boost consumption this year.” This rhymes with Premier Jiabao’s commentary from earlier in the week: “China will continue to focus on rebalancing growth, restructuring the economy and increasing consumer and investment demand to support the real economy.” Deming continues: “The ministry will encourage companies to invest and make acquisitions overseas. China will also increase imports of energy products, raw materials, technologically advanced equipment, key components, and consumption goods this year.”
  • China: China’s aforementioned top-down 2012 strategy outlook is consistent with persistent, central bank-induced CNY strength (just off an 18yr high vs. the USD); as such, we’ve seen reduced hedging activity in recent weeks: 1yr USD/CNY forwards are now trading at a -0.4% discount to the spot rate – up from -1.3% on 12/29. The offshore USD/CNY rate is now trading at a [slight] premium to the onshore rate for the first time since mid-SEP.
  • China: Attempting to skirt a cash crunch ahead of Lunar New Year and the peak month for credit extension (JAN), the PBOC injected the most liquidity into the Chinese banking system this week as it has in eight weeks ($8.1B). Little-by-little, Chinese policymakers are doing what they can to engineer a soft landing, though we continue to believe they need more clarity on the inflation front (i.e. what Bernanke/Dudley/Evans are going to do next) in order to justify a major inflection.
  • Japan: Japan, which needs to rollover $3 trillion in maturing sovereign debt this year (on top of another $566 billion in new issuance), has to refinance 31.2% of its outstanding sovereign debt load in 2012. That, combined with repeated warnings for incremental downgrade(s) – which may trigger ~$80 billion in Japanese bank capital raises – suggest that 2012 may be the year Japan has a sovereign credit event. Our thorough analysis of the JGB market suggests otherwise, but it is an intermediate-term tail risk we are monitoring. Prime Minister Yoshihiko Noda has recently vowed to overhaul the nation’s tax and social security systems and legislation proposing to double the 5% consumption tax in a few years is currently being debated in the Diet. Its passage may be critical to maintaining investor confidence in this market.
  • Taiwan: Ahead of the JAN 14 presidential election, both of the leading candidates pledged to introduce capital gains taxes on transactions of properties to curb speculative buying. Look for the measure(s) to weigh on Taiwan’s real estate market going forward. Prices, which have doubled since 2000, are just shy of record levels.
  • Thailand: In a classic show of fiscal and monetary prudence, Thai policymakers debated and ultimately resisted the urge to monetize $35 billion of legacy sovereign debt accrued from bank bailouts following the 1997 Asian Financial Crisis. Instead, they will protect the handshake of their currency by charging commercial lenders fees and drawing on central bank profits, if any.

Darius Dale

Senior Analyst

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 4

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 5

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 6

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 7

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 8

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 9

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 10

 

Weekly Asia Risk Monitor: Growth Slows at a Slower Rate - 11


The Topping Process Part II: Selling TLT Trade Update

Conclusion: From a fundamental perspective, the Treasury bond market offers limited upside.

 

Position: Closed our long position in the long-end of the U.S. Treasury bond market (TLT).

 

Concurrent with our recent sale of the Treasury curve flattener (FLAT), we’ve decided to also part ways with the long bond by selling our iShares Barclays 20yr-plus Treasury Bond Fund (TLT). Simply put, we think the topping process is underway in both securities, meaning that there is a meaningful amount of asymmetry to the downside from a risk/reward perspective.

 

From a fundamental perspective, the Treasury bond market offers limited upside – especially given our call for the slope of U.S. economic growth to bottom out in 1Q. Moreover, we think our dovish intermediate-term outlook for inflation is largely priced into the long end of the Treasury yield curve. Recall that in late 2010, long-maturity Treasury yields ripped ahead of the 1Q11 jump in reported inflation. A similar lead time in this cycle supports our view that lower-highs in CPI over the intermediate term is largely priced in at current yield levels.

 

The Topping Process Part II: Selling TLT Trade Update - 1

 

Using 10yr yields as a proxy, a quantitative breakout above TREND resistance at 2.03% would be incremental confirmation of the intermediate-term growth scenario we have laid out in recent months. That would likely coincide with a breakdown of the TLT ETF through TREND support at $117.07. In the event we receive the aforementioned quantitative signals in the coming weeks, our next step(s) would be to consider a Treasury curve steepener and/or shorting long bonds. 

 

For now, we are content to wait and watch.

 

Darius Dale

Senior Analyst

 

The Topping Process Part II: Selling TLT Trade Update - 2

 

The Topping Process Part II: Selling TLT Trade Update - 3


The Week Ahead

The Economic Data calendar for the week of the 9th of January through the 13th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - 1. calendar

The Week Ahead - 2. calendar


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

EMPLOYMENT DATA MORE POSITIVE FOR QSR THAN CASUAL DINING

Today’s employment data was a positive for restaurants, in particular QSR.

 

With the exception of the 45-54 YOA cohort, which saw a sequential deterioration in employment trends in December, the age groups we monitor saw a sequential improvement in employment trends last month.  The chart below illustrates the national employment trends by age bracket.  For QSR, in particular, the sustained strength in employment trends among 20-24 year olds is encouraging for 4Q11 sales.  The restaurant industry is a prime beneficiary of improving employment trends as our macro team’s KING DOLLAR theme (strong dollar = strong consumption = strong America) continues to play out.

 

EMPLOYMENT DATA MORE POSITIVE FOR QSR THAN CASUAL DINING - Employment by Age

 

 

The restaurant industry is still hiring but there is a notable divergence forming between quick service and casual dining employment growth trends in November, as the chart below shows (this data set is released on a lag).  Casual dining employment growth seems to have stalled at just under 2% while QSR employment growth continues to accelerate. 

 

EMPLOYMENT DATA MORE POSITIVE FOR QSR THAN CASUAL DINING - restaurant employment

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


The Topping Process: Short TIP Trade Update

Conclusion: Our soon-to-be released 1Q12 macro theme of Deflating the Inflation II portends negatively for the price of Treasury Inflation-Protected Securities.

 

Position: Short Treasury Inflation-Protected Securities (TIP). 

 

If there’s one thing Old Wall St. fails to understand it’s that being perma-anything in the Macro arena will get you carted out the back door over a long enough duration. Mean reversion and spread risk remain arguably the two most dominant drivers of price within, and across, asset classes.

 

Having authored the Inflation Accelerating call late in the summer of 2010 – a time when “deflation” and “double-dip” were the #1 and #2 topics de jour  on the Street – we are in a unique position that should help our clients prepare for what’s next.

 

Specifically, we understood that Burning the Buck to near-record lows would fuel a reflation rally in commodities that would eventually become corporate margin pressure that was ultimately passed through to end-consumers as higher price points/less discounting on a YoY basis.

 

Meanwhile, the consensus storytelling of “no wage growth = no inflation” has evolved into: “transitory supply-side shocks as a result of geo-political tension (crude oil) and ‘rapid’ emerging market demand”. Emerging market demand? The MSCI Emerging Market Index crashed -20.4% in 2011 as “rapid” emerging market demand slowed dramatically. The “BRIC” markets all finished down in a range of -18% to -25% as their demand for materials, like bricks, slowed alongside their domestic economic growth.

 

As Keith suggested on in the live Q&A segment of our daily Morning Macro call, “In Macro, your best short ideas are usually borne out of the realization of your best long ideas – of course after ceding the appropriate amount of time to the topping process.” Looking at TIPS/inflation hedges specifically, we think that topping process is beginning to draw to a close – appropriately well after we initially authored the bearish call on commodities in 2Q11.

 

Now we are in beginning to enter a sweet spot where our bottom-up view (our models point to lower-highs in CPI over the intermediate term) is supported by our top-down, quantitative view (King Dollar breakout; CRB Index breakdown). Together, those signals suggest that investors are likely to start to demand a lower premium for inflation protection over the intermediate term.

 

Where could we be wrong on the slope of U.S. CPI? While QE3 is always a possibility, we interpret the U.S. dollar’s quantitative setup (Bullish Formation) as: whatever the Fed does (if anything during this pivotal election year amid strengthening U.S. economic data) is likely to be trumped by the ECB, the BOE, the BOJ and other foreign central banks. That spread risk is bullish for the USD, as no currency is priced in a vacuum of itself.

 

The Topping Process: Short TIP Trade Update - 1

 

Additionally, the potential for geo-political risk to create another oil price shock is a factor we must consider. It is, however, rather difficult to interpret how much of that is already baked into the current prices of crude oil and TIPS. Moreover, just like with long-term TAIL growth and inflation forecasting, we have no edge on what is coming down the pike next from the unstable EMEA region. In either scenario, anyone who tells you otherwise is sacrificing analytical integrity for the sake of compensation.

 

For now, we are short TIP for a trade and will look manage the immediate-term risk.  A breakdown through the TREND line would give us further conviction in this thesis.

 

Darius Dale

Senior Analyst

 

The Topping Process: Short TIP Trade Update - 2


Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting

Positions in Europe: Short France (EWQ)

 

Asset Class Performance:

  • Equities: European indices were up with a negative divergence from the periphery week-over-week. Top performers: Finland 4.1%; Austria 5.0%; Russia (MICEX) 3.8%; Germany 2.7%; Sweden 2.5%. Bottom performers: Cyprus -10.4%; Hungary -5.1%; Spain -3.2%; Greece -3%; Italy -2.9%
  • FX: The EUR/USD fell -1.87% week-over-week. Divergences: RUB/EUR +2.36%; CZK/EUR -1.20%, Romanian LEU/EUR -0.66%
  • Fixed Income: 10YR sovereign yields broadly increased w/w, led by Spain +66bps to 5.69%; Belgium +51bps to 4.60%; and Greece +47bps to 35.43%. Italy’s 10YR is now up to 7.14%! 

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 1. yields

 

 

Call Outs:

  • Overnight deposits at the ECB continue to make higher highs (€455.3 Billion).
  • Unicredit fell -38% this week, and its market cap has now dropped by €8 billion since the announcement of a €7.5 billion capital increase. 
  • Major bond auctions from Germany and France proved successful. Germany issued €4B of 10YR bonds at 1.93%, with strong demand, and France issued €8B of 10-30 year maturities with the 10YR average yield at 3.29% vs 3.18% on December 1. Yet, Italian 10YR yields closed Friday at 7.14%!
  • A downgrade of France’s AAA credit rating should be priced in at this point. That said, a downgrade will force Eurocrats to answer questions on the EFSF as a AAA rated facility, and push up yields on further EFSF issuance.
  • France re-engages in Financial Transaction Tax talks. Expected to make a decision by the end of January, France does not have the backing of the EU but some support from Germany and Italy, while Britain is vehemently against it. We think approval could be a huge headwind for France’s already ailing banking industry.

 

Charts of the Week: 

-Below we show the charts of Eurozone confidence and Manufacturing and Services PMIs for the month of December.  As forward looking indicators they present a mixed outlook for the region. Eurozone Confidence was largely flat to negative and the PMIs, despite a notable positive inflection month-over-month, have yet to confirm a trend.  We think the shortcomings of a “fiscal union” and the lack of an adequate bazooka to ring fence sovereign and banking issues should weigh on confidence to the downside in the coming months and mute any improvements we may see in the employment and inflation picture.

 

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 2. confidence

 

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 3. pmi

 

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 4. pmi

 

Germany (EWG) - We’re getting more constructive on Germany on recent data, however are very aware that despite Germany’s strong fiscal position and employment base, the country’s capital markets are not immune to the region’s sovereign and banking contagion risk. After all, German equities were down last year -20% despite a similar strong fiscal and employment position. DAX is holding TRADE and TREND lines of support.

 

 

Key Regional Data This Week:

Positives (+)

Eurozone CPI 2.8% DEC Y/Y vs 2.9% NOV

Eurozone PPI 5.3% NOV Y/Y vs 5.5% OCT

Germany Retail Sales 0.8% NOV Y/Y (exp. 0.7%) vs -0.6% OCT

Eurozone Unemployment Rate 10.3% NOV (inline) vs 10.3% OCT

 

Negatives (-)

Germany Factory Orders -4.3% NOV Y/Y (exp. -1.2%) vs 5.2% OCT  [-4.8% NOV M/M (exp. -1.8%) vs 5.0% OCT]

Eurozone Retail Sales -2.5% NOV Y/Y (exp. -0.9%) vs -0.7% OCT  [-0.8% NOV M/M (exp. -0.4%) vs 0.1% OCT]

 


ECB Meeting Preview: On Hold

On Thursday January 12th the ECB convenes to announce its main interest rates. We expect the ECB to be on pause given the actions it took at the last meeting in December, namely the 25bps cut to the main interest rate to 1.00%, issuance of the 36 month LTRO, and reduction in the required reserve ratio from 2% to 1%.

 

We do expect macro fundamentals to deteriorate in 2012, which will warrant further cuts, however we expect the committee to give pause to review the impact of the measures taken in December. Headline inflation has moderated, which is favorable to the committee’s 2% target in 2012. We expect the ECB’s SMP facility to remain critical to fill sovereign demand and dampen yields and funding conditions to remain tight across banks.

 

 

Interest Rate Decisions:

(1/5) Romania Interest Rate CUT 25bps to 5.75%

 

 

CDS Risk Monitor:

-On a w/w basis, CDS was largely up across the Europe, with a positive divergence from the periphery.  Spain saw the largest gain at +55bps to 448bps, followed by Italy +26bps to 529bps, and Portugal +23bps to 1,113bps.

 

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 5. CDS

 

Weekly European Monitor: The EUR Drifts Lower Ahead of ECB Meeting - 6. CDS

 

 

EUR-USD

-We’d short the cross at $1.31 for an immediate term TRADE. The EUR/USD remains broken long term TAIL ($1.40) and intermediate term TREND ($1.42) in our models and we think the lack of resolve from the newest proposals for a fiscal union will encourage greater downside. 

 

 

The European Week Ahead:

 

Monday:  Franco-German Summit in Berlin.  Jan. Eurozone Sentix Investor Confidence; Nov. Germany Current Account, Trade Balance and Industrial Production; Dec. UK House Prices (Jan 9-13)

 

Tuesday:  Dec. UK BRC Shop Price Index; Dec. France Business Sentiment; Nov. France Manufacturing and Industrial Production; Q4 Russia Consumer Confidence (Jan 10-13)

 

Wednesday:  Hungarian President meets with the IMF in Washington to discuss loans. 2011 Germany Budget and GDP; Dec. Germany Consumer Price Index; Q3 Italy Deficit to GDP; Jan. Russia Weekly CPI; Nov. UK Trade Balance

 

Thursday:  Eurozone Announces Rates; Nov. Eurozone Industrial Production; Dec. Germany Consumer Price Index – Final; UK Announces Rates; Dec. UK NIESR GDP Estimate; Nov. UK Industrial and Manufacturing Production; Dec. France Consumer Price Index

 

Friday:  Nov. Eurozone Trade Balance; Dec. UK PPI Input and Output; Dec. Spain Consumer Price Index – Final; Jan. Russia Money Supply

 

 

Matthew Hedrick

Senior Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next