Economic and market themes: 2014-08-01 US, China, Argentina, France
This week’s economic and market themes piece is going to be a little shorter than usual because I have covered a lot of the major topics earlier in the week.
United States. Let’s start with the US. The jobs data today showed 208,000 jobs added in the month of July, which puts the rolling 3-month average at 245,000, just shy of my bogey for the period going forward between 250,000 and 350,000 jobs. The unemployment rate ticked up slightly to 6.2%.
The numbers were slightly below expectations but 2014 will still end up being the best since 1999 given the pace of job growth we have seen in the firsts seven months of the year. As I mentioned yesterday, wage growth is mediocre but rising and that’s a good sign.
At the same time, we got the personal consumption data as well. All of the data is still consistent with a 2.5% trend growth in the economy. Both personal income and disposable personal income were up 0.4%, in June, according to the Bureau of Economic Analysis. Personal consumption expenditures was also up 0.4% as the personal savings rate came in at 5.3%.
So, we are largely on the same course – no big changes.
China. In China, the recovery from the recent growth slump continues. Manufacturing activity expanded at the fastest pace in 27 months in July, with industry surveys in Asia showing a pick up in export orders that should boost China.
China’s official manufacturing purchasing managers’ index rose to 51.7 in July, which is the highest level since April 2012 and up from 51.0 in June. This was also above economist expectations for a reading of 51.4.
I think the data out of China illustrate the problem with reading cyclical data in the context of adverse secular financial trends. For example, the IMF is now saying that having studied the economies of 43 countries over 50 years, only 4 times has 5-year credit growth been higher than it is presently in China: in Brazil in 1994, and in Ireland, Sweden and Spain in 2008. The IMF is therefore warning that the potential for dislocation in the financial sector in China is heightened. Yet, we know that the reason growth is picking back up is exactly because credit growth is again on the upswing. So we have a dilemma. DO you sacrifice growth in the near term to deal with financial stability concerns in the long-term? This is the same question we face in the US.
For China, housing will prove to be a key facet here. According to a survey of 100 Chinese cities, new home prices fell 0.8% in July month-over-month. That’s faster than the 0.5% decline in June and the 0.3% drop in May, according to China Real Estate Index System. And May’s decline was the first month-on-month decline since June 2012. So, we are seeing an acceleration in month-on-month declines despite the expansion of credit. That is a signal that the bust and oversupply in housing may be so well advanced that it does not respond to credit easing. Watch this space.
Argentina. I don’t have a lot to add here myself except to say we know the sovereign restructuring process is broken due to a lack of commonly accepted principles and rules. There have been a number of commentators both warning that the Argentina default is not isolated from a legal standpoint and has negative implications for other countries and that a new legal framework is needed. Here are some articles I think deserve reading on this issue:
- Economists Call on Congress to Mitigate Fallout from Ruling on Argentine Debt | Press Releases
Gouging the Gauchos | Kitco Global Affairs with Nouriel Roubini
PIMCO | Viewpoints – Collective Action Clauses: No Panacea for Sovereign Debt Restructurings
Argentina’s second debt default could have been avoided | Business | theguardian.com
The Examiners: Adam Levitin on Argentina and Distressed Investors – Bankruptcy Beat – WSJ
Sovereign Restructuring after NML v. Argentina: CACs Don’t Make Pari Passu Go Away – Credit Slips
Greece Faces Off With Holdout Investors Over Debt – NYTimes.com
France. Last but not least here is France, the sick man of Europe. The Purchasing Managers’ Index fell to 47.8 from 48.2 in June. This is well below the 50 level that divides growth from contraction and is the lowest reading of the year for France. While industrial activity in Ireland, Spain, the Netherlands and Germany remains well into expansion territory, manufacturing activity in France is below even the numbers in Greece, where, as in France, the PMI data fell according to figures released today. There’s a reason anti-European Marine Le Pen has taken the lead in polling for next year’s presidential election.
My take here is that France and Italy are the countries to watch in Europe. Watch Italy because it is in a precarious position, perhaps the worst outside of Greece. And because it is so large, it matters for the Eurozone. Europe cannot allow Italy to fail. And a sovereign restructuring is as unthinkable now as it was when I was running through Italian default scenarios three years ago. Europe must find a solution for Italy.
And, as difficult as Italy is, France is equally problematic. It’s sovereign profile is arguably similar to or worse than Spain’s and its economy does not have the underlying growth potential that Spain’s does at this juncture. I consider France a member of the periphery. And this is important in terms of economics and politics, because France and Italy will side with the doves, the periphery and this will leave Germany increasingly isolated. The more France stagnates, the more aggressive a policy response we should expect from Europe come 2015. But ee should not rule out another sovereign crisis before 2015 is over.
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