UPDATE-GLOBAL ECONOMY WEEKAHEAD-Euro zone inflation, US jobs set to dominate

28 Sep 2015 | Author: | No comments yet »

Dollar rises on rate hike talk, Shanghai bounces.

An uptick in US economic growth increased expectations the Federal Reserve will raise interest rates by year-end and supported the dollar Monday, while Shanghai recouped early losses despite more disappointing China data.The increase helped maintain Japan’s currency as the best performer over the past three months in a basket of 10 developed-nation peers, climbing almost 8 percent.ANZ’s Warren Hogan believes there is ‘a global trade recession on now’, despite Janet Yellen, of the US Fed indicating a rate rise still to come this year. Most people think it’s a good thing if prices are rising more slowly (dis-inflation), or even falling (deflation), as that stretches the buying power of a paycheck whose growth has too often been stagnant in recent decades.

Dealers will closely watch the release of key US data this week, including employment, that will provide a better idea of when the central bank will announce lift-off. Thursday will also see the Bank of Japan release its Tankan survey of business confidence, with analysts forecasting a dip in reaction to China’s growth slowdown which has rattled global markets. First, these phenomena are often driven by persistent weakness on the demand side of the economy, leading to slow growth and a high unemployment rate, something that has been a big problem in advanced economies, including our own, in recent years (energy price movements, conversely, are often driven by supply changes). In early London trade, the benchmark 10-year Treasury yield was down about 1 basis point at 2.158 percent, while the two-year Treasury yield was steady at 0.699 percent. Second, lower inflation means higher real interest rates, which can slow growth (the real rate is the nominal rate minus the inflation rate, so less inflation means a higher real rate).

The Reserve Bank of Australia is believed by some economists to be likely to bow under the same pressure as Norway, where the collapse in energy prices mirrors the plunge in the iron ore price. Third, because debt is usually set in nominal terms, inflation that is too low prolongs the deleveraging cycle (higher inflation erodes nominal debt burdens more quickly), another big drag on demand. Their comments are likely to be in focus following remarks by Fed chief Janet Yellen last week that a interest-rate increase later this year would be appropriate. On Friday the Commerce Department said the US economy grew 3.9 percent in April-June, up from the 3.7 percent originally stated thanks to a boost in investment and consumer spending. Since about 2009, according to a detailed new analysis by Fed Chair Janet Yellen, the Fed has been missing its 2 percent inflation target to the downside, as the figure below (from Yellen’s paper; that’s her title, not mine) reveals.

The moves were unsurprising to ANZ chief economist Warren Hogan, who in the past week revised his forecast to factor in two further RBA rate cuts taking the cash rate to 1.5 per cent by May 2016. “There’s very little growth out there, there’s a lot of competition for it, there’s excess capacity in manufacturing, there might not be major problems in Europe or America or Asia financially but we’re just losing growth.” The actions of Norges Bank and Taiwanese policymakers were prompted by similar forces, Mr Hogan argued. “They’re for two different reasons, one because commodity prices are on their knees, and Taiwan because they’re caught in the crossfires of the region.” But both were consequences triggered by the slowdown in the global economy, which hurt both developed markets and advanced economies. The Fed left interest rates at record lows following a meeting this month that surprised markets with a dovish statement that expressed concerns about the global growth outlook. He does not believe the world has dipped into an economic recession as yet but “it does show you the way the world is operating right now”. “Another way I think about it, and have for a while, is the cyclical forces are just being overwhelmed by the secular forces,” he added, citing aging populations and the disruptive affect of technology.

The dollar is set to gain broadly.” Stock markets were mostly in the red on the prospect of higher US interest rates — which would hurt investment in the region — and fears over China’s long-running woes, which have sent world markets tumbling for weeks. Dudley, San Francisco Fed President John Williams and Yellen. “There are U.S. data and Fed officials speaking this week, but stocks dictate in the near term, with the yen being bought when equities decline,” said Junya Tanase, chief foreign-exchange strategist at JPMorgan Chase & Co. in Tokyo. Second, contrary to what is by far the most dominant theory of inflation dynamics, it’s increasingly missing its target as the labor market is tightening up.

Meanwhile, Citigroup foreshadowed the capital drain on emerging markets to continue because of slowing activity in China, exacerbated by renewed US dollar strength and the need to lower rates in response, fostering currency weakness in emerging markets. At the heart of economists’ theory on what drives inflation is the negative relationship between slack — the under-utilization of resources, including labor — and inflation. Shanghai staged a recovery after a morning sell-off, ending 0.27 percent higher despite data showing China’s crucial industrial companies saw profits fall 8.8 percent in August — hit by last month’s shock yuan devaluation, weak demand and plunging stocks. Australian equities are in a correction, having fallen below 5000 points for the first time in two years on Wednesday, recovering to around 5050 points by the end of the week.

Elsewhere, Spanish government bond yields fell 6 basis points – outperforming euro zone peers – following news that Catalan separatists won a parliamentary majority in a regional election on Sunday. Fresh off a plane from Los Angeles, Stan chief executive Mike Sneesby says that Hollywood studios are keen on the local Netflix rival’s new original Australian comedy – . Mr Sneesby also revealed that Stan is on the verge of hitting 400,000 gross sign-ups, claiming that 70 per cent of users who have taken its free first-month trial are still staying on as paying customers. Chinese President Xi Jinping on Friday sought to shore up confidence in the world’s number two economy, saying he was confident it would post “healthy” growth in the future.

The subscription video on-demand service, which is a 50-50 venture between Nine Entertainment Co and Fairfax Media, publisher of The Australian Financial Review, held private preview screenings for , which will feature guest cast members Tim Minchin and Jake Johnson, at QT Sydney last week ahead of the show’s launch in late October. He told a joint press conference with US President Barack Obama after White House talks that China had moved from “speed-based growth to quality-based growth”.

Mr Sneesby said he had not anticipated overseas interest in No Activity: “We made the show for Australians, for Stan, it’s such an important part of our strategy.” But he added: “The feedback from every studio executive was overwhelming. In 2013, slack explained about half a percentage point of the downside miss, but now, given that according to the metrics, the economy is just about at full employment, slack is allegedly playing a negligible role. Chinese authorities are trying to rebalance the economy — which accounts for one out of every eight dollars of worldwide GDP — from one reliant on exports and government investment to one where domestic consumption is the main driver.

The response was always ‘this is absolutely hilarious’ and ‘who is buying this internationally?’.” Mr Sneesby, who still has to convert that interest into a sale, said that Stan’s Wolf Creek series, which is currently in the development stage, and is earmarked for a six-part TV series has also garnered interest from the United States. “We will take those shows; we will commit the dollars up front and take some risk on the production of the show. The latter just means that because the dollar has appreciated in value relative to the currencies of those with whom we trade, we can buy more of their goods for at lower prices. The ambitious model replicates that of Netflix, which has been hugely successful with a string a original productions, including House of Cards, Orange is the New Black and Unbreakable Kimmy Schmidt. Exact subscriber numbers across the burgeoning streaming market are hard to come by, with a report by technology analysts Telsyte suggesting the Australian market has already hit 2 million subscribers – Netflix generally agreed upon as the clear market leader. Citi estimated in August that Netflix had 1.6 million customers in Australia, with 900,000 paying, while at the time Stan was estimated to have 332,000 users with 153,000 paying.

Stan launched in January this year, joining Foxtel’s joint venture with Seven West Media, Presto and incumbent minnow Quickflix, which has since suspending trading on the ASX to attempt a restructure and head off potential insolvency. Exchange rate dynamics are a function of relative global growth rates, plans of other central banks, and in some periods, currency manipulation by trading partners trying to boost their trade surpluses at the expense of our trade deficits.

Our position and our objective is to be the preferred streaming service for Australians and in any household where they don’t pick Stan as number one, then we certainly want to be the number two.” Netflix reported its second quarter financial results in July showing it had added 2.3 million paying international customers in the quarter taking overseas subscription numbers to 21.6 million, while at home it add 742,000 additional paid memberships to reach more than 41 million. Its slack variable is the difference between the actual unemployment rate and the estimated full employment rate (the lowest unemployment rate consistent with stable prices). But the actual jobless rate is biased down right now for reasons explained here, and second, no one knows the level of the unemployment rate associated with full employment.

But while Yellen’s carefully drawn evidence helps us solve one mystery, it brings us no closer to the much bigger one: How does one logically get from her revealing account of the missed target to her stated desire to raise rates before the year ends?

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