Takeaway: QE3 will likely prevent Chinese policymakers from countering their economic slowdown with further easing measures.



  • On balance, Chinese GROWTH data continued to slow in AUG, while the INFLATION data (CPI) posted a hawkish inflection point.
  • While we don’t currently view a breach of the State Council’s +4% target as a probable risk over the next 2-3 months, we do see risk that Chinese inflation accelerates meaningfully into and through 1H13 if the Fed goes to QE3. Furthermore, if the Fed announces QE3 on Thursday, the action would be a meaningful step forward in the Fed’s aggression towards achieving its mandates, based upon how elevated domestic inflation expectations are relative to previous iterations of QE/OpTwist.
  • QE3 will likely prevent Chinese policymakers from countering their economic slowdown with further easing measures. That will equate to an incremental drag on global growth – particularly relative to consensus expectations that we believe are currently baking in some form(s) of meaningful policy accommodation in China over the intermediate term. It’s important to note that China alone has accounted for 43.9% of global real GDP growth since 2008, after only accounting for 15.9% in the five years prior.


On NOV 11, 2010, we published a note titled, “CHINESE INFLATION DATA CONFIRMS WHAT WE SHOULD ALREADY KNOW: QE2 WILL SLOW GLOBAL GROWTH”. The conclusion of that note was two-fold:


  1. “The latest Chinese economic data suggest China may continue with its latest round of tightening measures, as inflation and speculation continue to be a concern. Further, we are starting to see confirmation that QE2 will incrementally slow global growth.”
  2. “Quantitative Easing = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]”


As the following chart of world Real GDP and CPI trends suggests, that call proved equally as prescient as the Growth Slows as Inflation Accelerates call our team made in 1H08.




Almost two full-years and countless data points later, we are at a similar juncture with respect to the outlook for global GROWTH and how that outlook may be impacted by POLICY decisions out of the Federal reserve. Today, Global Macro analysis remains as reflexive and proactively predictable as it was then: GROWTH and INFLATION data lead future POLICY adjustments; those POLICY adjustments lead future GROWTH and INFLATION data.


Regarding China specifically, the country’s AUG GROWTH data came in broadly weaker as the AUG INFLATION data accelerated (CPI). Below is a compendium of the reported AUG economic data (New Loans, Money Supply, FDI and Property Prices are all out later this week). The following three charts highlight the deltas in the series we think are most important to focus on at the current juncture.


  • AUG CPI: 2% YoY from 1.8%
    • Food: 3.4% YoY from 2.4%
    • Non-Food: 1.4% YoY from 1.5%
  • AUG PPI: -3.5% YoY from -2.9%
  • AUG Industrial Production: 8.9% YoY from 9.2%
    • Steel Products Production: 2.4% YoY from 7.3%
    • Cement Production: 7.2% YoY from 4.4%
    • Processing of Crude Oil: 2.6% YoY from 0.3%
    • Electricity Production: 2.6% YoY from 2.3%
  • AUG YTD Urban Fixed Assets Investment: 20.2% YoY from 20.4%
    • Real Estate YTD: flat at 20.9% YoY
    • Construction YTD: 15% YoY from 19.6%
    • Local Projects YTD: 21.6% YoY from 22%
    • Mining YTD: 18.6% YoY from 18.8%
    • Manufacturing YTD: 23.9% YoY from 24.9%
    • Sources of Funds for Fixed Assets Investment:
      • State Budget YTD: 26.9% YoY from 30.5%
      • Domestic Loans YTD: 7.1% YoY from 6.7%
      • Domestic Loans Earmarked for Real Estate Investment YTD: 11.2% YoY from 8.8%
  • AUG Retail Sales: 13.2% YoY from 13.1%
  • AUG Exports: 2.7% YoY from 1%
    • To US: 3% YoY from 0.6%
    • To EU: -12.7% YoY from -16.2%
  • AUG Imports: -2.6% YoY from 4.7%; lowest since OCT ‘09
  • AUG Manufacturing PMI: 49.2 from 50.1; lowest reading since NOV ‘11
    • Input Prices: 46.1 from 41
    • New Orders: 48.7 from 49
    • New Export Orders: flat at 46.6
    • Employment: 49.1 from 49.5
    • Output: 50.9 from 51.8
    • Backlogs of Orders: 45.1 from 41.9
    • Imports: 47 from 45
  • AUG Services PMI:
    • SA: 47 from 45
    • NSA: 56.3 from 55.6
  • AUG HSBC Manufacturing PMI: 47.6 from 49.3; lowest reading in the YTD
  • AUG HSBC Services PMI: 52 from 53.1
  • AUG MNI Business Sentiment Indicator: 47.5 from 49.7
    • New Orders: 47.5 from 52.3
    • Production: 44.7 from 49








While we don’t currently view a breach of the State Council’s +4% target as a probable risk over the next 2-3 months, we do see risk that Chinese inflation accelerates meaningfully into and through 1H13 if the Fed goes to QE3 (upcoming FOMC decisions: 9/13 and 10/24). As we penned in the conclusion our JUL 25 note titled, “CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY”:


“We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.”


It’s important to note that Chinese interest rate markets are pricing in LESS, NOT MORE, monetary easing amid the acceleration of QE expectations in recent weeks:




We’ve written a compendium of work outlining why we don’t think Bernanke will be able to announce QE3 before the NOV elections in the US; the two most recent notes worth reviewing are listed below:



All that being said, what we think Bernanke will/should do is often divergent from the path he has chosen to take. As such, the more wrong we are on what he does with respect to US monetary policy over the immediate-to-intermediate term, the more right we will be on global growth (slowing). $150 crude oil on the back of the Federal Reserve’s “shock and awe” interest rate cuts helped produce a global economic recession during the last US presidential election year; will Bernanke go for [black] gold this time around?


While the answer to that question remains uncertain at the current juncture, we do know that if he does pull the trigger on Thursday, the action would be a meaningful step forward in the Fed’s aggression towards achieving its mandates. The Fed’s proprietary 5yr breakeven index is currently at 2.48% (down from 2.8% in MAR) and the TIPS breakeven index is currently at 2.04% (down from 2.2% in MAR). In the past, the Fed has typically gone to QE/OpTwist around 2-2.2% on their index and following a 80-100bps cyclical decline on the more-volatile TIPS index.




Best of luck out there this week,


Darius Dale

Senior Analyst

MCD: The Bigger Picture

Takeaway: Put the focus back on the core menu and worry less about expanding it.

McDonald’s (MCD) has faced pressure from the overall global macroeconomic environment this year. It’s not like high unemployment in the US and the problems facing Europe are helping sales on a global basis. But McDonald’s faces issues other than the global macro problems out there as sales slow; companies like Five Guys and Shake Shack are slowly creeping in and taking away share from MCD.


We believe McDonald’s needs to refocus its attention to its core business. All the expansion over the years has left this segment vulnerable and management needs to make changes to its strategy in order to succeed. Simplifying the menu rather than expanding it would be one positive step in the right direction, as well as toning down the company’s overall complex strategy. Perhaps then we’ll be less bearish on the stock than we are now.



MCD: The Bigger Picture - MCD chart

Crushing The Insurance Industry

The Federal Reserve’s perpetuation of near-zero percent interest rates has been a bane for the insurance industry. With the Fed keeping rates to 0% until 2015 at Thursday’s FOMC meeting, the insurance industry is really in a bind that will be difficult to overcome.


Consider that insurance companies have investment portfolios similar to those of public pension plans around the United States. To meet their obligations, they’re expected to earn a certain rate of return per year – maybe 8%. In a normal rates environment, you’d be able to buy some Treasuries and earn 3-4% off those instruments alone, meaning you wouldn’t need to put up a lot of risk in stocks and derivatives markets to earn the difference to 8%.



Crushing The Insurance Industry - KIE



Instead, Treasuries are offering little-to-no return and continue to go lower. This forces the insurance company to look elsewhere for yield and it’s tough to find these days. The portfolio manager is forced to go further out on the risk curve in order to satisfy that 8% return; maybe he needs to buy some risky junk bonds or invest in some tech IPO that just hit the market. Or maybe he can’t because it’s simply too risky and there’s a need to preserve capital.  


And should this happen, the company is really in trouble. Profits go down, jobs get lost and claims risk becomes heightened all because the investment portfolio can’t maintain this set percentage it has to meet. This is just one of the many problems (and effects) with the current interest rate policy at the Federal Reserve.


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Takeaway: Better than expected headline but worse underlying metrics

  • In our 9/4/12 note, “LV STRIP: JULY DECEPTION” we had projected a strong headline revenue growth rate of high teens for July due to low slot and table hold last year – actual Strip gaming revenues grew 27% with an additional boost from very high baccarat hold and better baccarat volume
  • The important metrics – slot volume and ex baccarat table drop – fell 7% and 13%, respectively.  This was actually worse than our projection of -3% and -2%, respectively.  Two fewer weekend days versus last year did play a role but the numbers were still bad.
  • July represented the 4th consecutive month of slot volume declines.  For tables, July was the worst monthly decline for non-baccarat drop since August 2009.  



European Banking Monitor: Draghi’s Rally

Takeaway: Draghi's "unlimited" asset purchases tip credit markets scales yet long-term Eurozone structural flaws remain.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


 * Last week saw the largest single week of improvement in credit default swaps ever for EU sovereign credits on the heels of the ECB's Draghi pledging "unlimited" asset purchases via the new Outright Monetary Transactions Program (OMTs). Spanish, Italian, German and French banks as well as sovereign credit default swaps were sharply lower, reflecting optimism that the ECB will avert the crisis.


For more on the OMTs see our notes:

Draghi’s Newest Rescue Plan Revealed in September ECB Presserfrom 9/6

Weekly European Monitor: Buying Timefrom 9/7


Draghi also announced that with the new buying program the SMP is terminated, effectively meaning that that there will be no more buying but that the existing holdings will be retained until their maturities expire. We will therefore discontinue our reporting of the SMP data and replace it with the OMTs.


OMT Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.



If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor Italian, German, French and British bank default swaps were down approximately 20% across the board last week, on ECB commentary


European Banking Monitor: Draghi’s Rally - 11. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 18 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.


European Banking Monitor: Draghi’s Rally - 11. euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Draghi’s Rally - 11. facility


Takeaway: Macau jumped out nicely in September, adding credibility to our double digit growth expectation for the month.

Average daily table revenues were HK$789 million, 17% higher than last year at this time and higher even than August’s HK$775 million and July’s HK$735 million.  Taking into account the number of weekend days remaining and about HK$1 billion in slot revenue, we are now projecting full month GGR of HK$23.0-24.5 billion.  That range would represent YoY growth of 12-18%.  Growth in that range would be the highest since April 2012.




We are not hearing anything out of the ordinary with regard to hold percentage with the exception of some of the LVS properties that seem to be holding below normal.  Wynn has apparently held very high to start the month. 


Overall, we believe the numbers are a positive for the Macau and with our daily checks on the Mass floors (all strong), we remain very constructive on the near-term performance of the Macau stocks.  Depending on how much marketing and liquidity pumping is performed by Sands Cotai, the high end of our growth range is certainly within reach.



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