The biggest piece of news here is in China where the trade data have rattled investors, leading them to believe that a big slowdown in growth is coming. I have already posted on this. I do want to highlight Europe where the news flow seems a bit downbeat, especially in the wake of the Italian downgrade by S&P. My view here is more sanguine as I keep pointing to second derivative numbers as a sign of imminent recovery. Nonetheless, the news flow is bad enough that I remain wary of getting too bullish on this projected recovery story. At any point, the numbers could reverse. But policy makers are actively trying to boost the economy with German elections around the corner. The fall in the euro from dovish policy may be modestly beneficial to the periphery and growth.
In the US, I see a deceleration in growth coming from three sources. First, there is the sequester, which will bite more in FY 2014 starting in the fall. This along with potential budget battles makes me less positive on the US in the latter half of the year. While my earlier predicted recession is not on the horizon yet, it cannot be definitively ruled out. Second, the increase in interest rates is going to be a headwind to borrowers that is not counterbalanced by an increase in interest income as financial institutions are not likely to pass on the boost to savers. Third, the housing recovery is going to be negatively impacted by the increase in rates, with mortgage rates now at a 2-year high. All of this leads me to believe that the Fed’s economic forecast is too bullish and that downward revisions and continued QE are coming.
Links below
Why China’s June trade data are almost unremittingly bad | FT Alphaville
People are freaked out about this China trade data miss. They think China could miss GDP growth targets for the first time in 15 years.
Euro Falls to 3-Month Low Against Dollar – WSJ.com
This fall is a direct result of the ECB’s dovish policy tack.
Chinese growth drives Burberry sales – Telegraph
High-end consumers in China seem to still be doing OK.
China Money Rate Drops to Six-Week Low as PBOC Avoids Draining – Bloomberg
Is this a sign that policy makers are dialing back the tightening? With credit markets volatile and export markets declining, we will have to watch carefully what the policy response will be.
U.S. mortgage applications drop with rates at 2-year high: MBA | Reuters
The lack of a housing accelerator to the US recovery is going to put a lot of pressure on growth since wages are stagnant or falling. Expect a deceleration in the US, making the Fed’s tapering timetable more difficult.
Senate to scrutinize Chinese purchase of pork producer Smithfield | Reuters
China faces a different level of scrutiny when making US asset purchases. Think back to the failed Occidental Petroleum purchase. Anti-Chinese protectionism is going to make this acquisition difficult.
Economists React: China’s Surprise Trade Dip – China Real Time Report – WSJ
Why austerity theory is the economist’s atomic bomb – Independent.ie
The Psychology Behind Freemium
Ben Bernanke and the Fed: Lost in translation – Ben White and Patrick Reis – POLITICO.com
This is the key line: “”senior Democrats close to the White House say Yellen is far from a lock and that Summers, deeply experienced in global crisis management, is just as likely, if not more so, to get the job.
Obama knows Summers well, these people say, a very important factor in the current White House. Summers served as chairman of the White House National Economic Council during the administration’s first two years. And while they may not be best friends, Obama and Summers would also not be working together on a day-to-day basis, mitigating any possible personality conflicts.”
Berlin says EU proposals for failed banks not legally viable | Reuters
“Berlin is reluctant to accept the creation of a new agency in Brussels or elsewhere with powers to overrule its own national authorities on the sensitive issue of bank closures, arguing that it has no legal basis in the current EU Treaty.
Mindful of elections in Germany on Sept. 22, Berlin would also oppose any fund that requires it to pick up part of the bill if a bank in another EU state ran aground.”
Leeds building society launches ‘zero interest’ mortgage deal | Money | The Guardian
The days of ‘financial innovation’ are back as low rates are spurring lenders to go all out. I take this as a sign of froth that needs to be watched.
Moody’s upgrades outlook on UK banking sector from negative to stable | Business | guardian.co.uk
A New Stock-Flow Model for Greece Shows the Worst Is Yet to Come « Multiplier Effect
I’ve been saying Greece is stabilizing. This model says the opposite.
Euro-Finanzminister setzen Griechenland Ultimatum – manager magazin
The euro zone is back to threatening Greece. This German article details the interaction. I think it’s pretty clear that Greece is not benefiting from staying in the euro zone. If they could do it again, would they leave?
Le déficit budgétaire de la France continue de déraper – LExpansion.com
The French budget deficit GREW 3 billion euros to 72.6 billion euros in the last fiscal year through May. This shows you what a shrinking tax base from lower GDP does to budgets.
S&P Cuts Italy Rating to BBB – WSJ.com
Wage deflation charts of the day | Felix Salmon
Dropbox Now Has 175 Million Users, Up From 100M In November 2012 | TechCrunch
Dropbox gets cloudier with API for syncing data, not just files — Tech News and Analysis
Extended confusions at the ECB | Money Supply
Draghi and the art of making ‘rates on hold’ sexy | Money Supply
ekathimerini.com | Greece wins release of aid, stays lashed to tight conditions
U.S. NSA spied on most Latin American nations – Brazil paper | Reuters
“The U.S. National Security Agency has targeted most Latin American countries in their spying programs, with Colombia, Venezuela, Brazil and Mexico ranking among those of highest priority for the U.S. intelligence agency, a leading Brazilian newspaper reported on Tuesday.”