Mish's Global Economic Trend Analysis

Yuan Movements Highlight China's Attempt to Halt 10th Month of Export Contraction; Major Currency War Coming Up?
More Currency Intervention Madness: Sweden Draws Line in Sand with Euro
Core Capital Spending Down 10 Consecutive Months; Soft Rebound in 2016?

Yuan Movements Highlight China's Attempt to Halt 10th Month of Export Contraction; Major Currency War Coming Up?

Posted: 03 Jan 2016 08:42 PM PST

Chinese manufacturers see further deterioration in business conditions, down 10 consecutive months as noted in the latest Caixin China General Manufacturing PMI release.

Operating conditions faced by Chinese goods producers continued to deteriorate in December.

Adjusted for seasonal factors, the Purchasing Managers' Index™, operating conditions in the manufacturing economy registered below the neutral 50.0 value at 48.2 in December, down from 48.6 in the previous month. Business conditions have now worsened in each of the past 10 months. That said, the latest deterioration was modest overall.

Production declined for the seventh time in the past eight months, driven in part by a further fall in total new work. Data suggested that client demand was weak both at home and abroad, with new export business falling for the first time in three months in December. As a result, manufacturers continued to trim their staff numbers and reduce their purchasing activity in line with lower production requirements. Meanwhile, deflationary pressures persisted, as highlighted by further marked declines in both input costs and selling prices.

Manufacturing companies continued to cut their payroll numbers at the end of 2015 and at a moderate rate. According to panelists, lower staff numbers were the result of company downsizing policies and cost-saving initiatives. Fewer employees contributed to an accumulation of outstanding work in December, with the rate of growth quickening to an eight-month high.

December data signaled a further fall in average cost burdens faced by Chinese manufacturers. Moreover, the rate of reduction eased only slightly since November and remained sharp overall. Panelists that reported decreased input costs widely attributed this to lower raw material prices. Manufacturers generally passed on their cost savings to clients in the form of lower selling prices, while some companies mentioned that greater market competition had led them to cut their tariffs

China Manufacturing PMI

Chinese manufacturing has spent far more time in contraction than expansion since mid-2011.

Yuan Devaluation Continues

China is not exactly pleased to see manufacturers struggle and decided to do something about that last August. In a surprise August move, China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record.

Back in March, Chinese Premier Li Keqiang told the Financial Times: "We don't want to see further devaluation of the Chinese currency, because we can't rely on devaluing our own currency to boost exports."

That lie bit the dust in August. Not to worry, at the time of the devaluation, China said it was a one-time move.

Yuan-US Dollar Weekly Chart

Somehow that does not have the look and feel of a one-time move. But let's put things in proper perspective.

Yuan-US Dollar Monthly Chart

From August 2005 the yuan rallied from 8.09 per US dollar to 6.05 per US dollar in November of 2013. That's a yuan strengthening of just over 25%.

Since November of 2013, the yuan declined to 6.49 per US dollar. That's a weakening of about 6.8%.

Nonetheless, that move represents quite a reversal for hedge funds and others who believed the Yuan would continue to rally vs. the dollar.

More fundamentally, the reversal means China has joined the beggar-thy-neighbor approach of weakening a currency hoping to gain or at least stabilize exports.

Yuan weakening may also ignite protectionism in Congress. Donald Trump is campaigning on that issue right now.

Major Currency War Coming Up?

Japan, China, the ECB, Sweden, Brazil, and Switzerland have all been involved with direct or indirect attempts to weaken their currencies.

Realistically, it's safe to include the US in that list when the Fed was first country outside of Japan to slash rates to zero.

Mathematically, it's impossible for every country to weaken its currency vs. every other currency. That basic fact hasn't stopped a growing list of countries from trying.

With the end of QE coupled with rate hikes, the US is no longer in the debasement by force camp, but if the US economy weakens, the Fed is likely to do anything.

A huge currency crisis of some nature is undoubtedly coming up. The timing of the crisis and where it starts are both unknown.

Mike "Mish" Shedlock

More Currency Intervention Madness: Sweden Draws Line in Sand with Euro

Posted: 03 Jan 2016 10:11 AM PST

In an irrational attempt to sponsor inflation, the Swedish central bank, Riksbank, slashed interest rates to -0.35% and conducted several rounds of QE.

Those misguided efforts failed to produce the desired 2% rate inflation, so the central bank now threatens currency intervention while drawing a line in the sand with the valuation of the Swedish Krona vs. the Euro.

Bloomberg reports Sweden Seen Closer to Krona Intervention to Tame Exchange Rate.

Some of Scandinavia's biggest banks are warning investors not to underestimate the risk that the central bank is preparing to intervene in the currency market.

Nordea and SEB both say the Riksbank won't allow the krona to strengthen beyond 9 against the euro. It traded at 9.187 on Friday. The prediction follows a Dec. 30 warning from the central bank that it's ready to act if persistent krona strength gets in the way of its 2 percent inflation target.

With a benchmark interest rate already at an historic low of minus 0.35 percent and several rounds of bond purchases behind them, policy makers are under pressure to consider other measures to live up to their inflation mandate. Underlying inflation has been below the Riksbank's target since the beginning of 2011 and headline price growth has hovered below zero for much of the past three years.

Though Sweden has resorted to extreme policy measures, its negative rates and quantitative easing have been overshadowed by far more dramatic monetary stimulus programs from the European Central Bank. Against the euro, Sweden's krona has strengthened about 4 percent over the past 12 months.

"If the exchange rate strengthens earlier and more rapidly than forecast, it will be more difficult to push up inflation towards the target," Governor Stefan Ingves said on Dec. 30. "The Riksbank is therefore highly prepared to intervene on the exchange market whenever we deem it necessary." The comments pushed the krona off a nine-month high versus the euro.

Krona vs. Euro Monthly

Since February 2009 the Krona strengthened from a high of 11.788 per Euro to 9.1725 to the Euro. That's an increase of 22%. Swedish shoppers are no doubt pleased to get more for their money but the central bank isn't pleased at all.

Why the panic? The Krona is right where it was between 2004 and 2008 before it weakened dramatically.

Was 2009-2010 Nirvana for Sweden following that weakening?

Failure to Learn

Brazil begged for inflation, got it in spades and now is very unhappy.

Japan tried to hit an inflation target of 2% for decades and failed. In the process, Japan accumulated the highest debt-to-GDP ratio of any advanced country.

Switzerland instituted a currency peg and unleashed massive volatility when it was forced to abandon the peg.

Why does the Riksbank think it will succeed when nearly every currency intervention in history has failed?

The answer is simple. Central bankers are trained, arrogant fools. They believe in all kinds of things the market has proven does not work.

Challenge to Keynesians

The simple fact of the matter is "Inflation Benefits the Wealthy" (At the Expense of Everyone Else) .

Those who disagree can respond to my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"

Mike "Mish" Shedlock

Core Capital Spending Down 10 Consecutive Months; Soft Rebound in 2016?

Posted: 03 Jan 2016 06:28 AM PST

Core Capital Spending Down Every Month Since January

Year-over-year core capital spending by manufacturers has been in negative territory for the last 10 months. Core capital spending is defined as nondefense capital goods, excluding aircraft.

The current year-over-year decline is about 1.78%. Part of the decline is due to the oil industry collapse. Another part is due to corporations deciding to invest in share buybacks rather than their actual businesses.

Core Capital Spending Since 1994

Big declines in core capital spending occurred in the last two elections, but this dip does not yet measure up.

Signs of a Soft Rebound?

The Wall Street Journal discusses the 2016 forecast in Will Business Spending and Profits Rebound This Year?

Unconvincing Forecast

The text of the article does not sound as convincing. Here are a few snips.

The Federal Reserve had enough confidence in the economic recovery to raise interest rates in December, but it remains unclear whether global growth will be buoyant enough to reverse weak business investment.

Many big companies are reining in spending. 3M Co. , with thousands of products from Scotch tape to smartphone materials, forecasts capital spending roughly unchanged from 2015. Telecom companies AT&T Inc. and Verizon Communications Inc. both plan to hold capital spending generally level in the coming year. Meanwhile, industrial giants like General Electric Co. and United Technologies Corp. are aggressively cutting costs and seeking to squeeze more savings from suppliers.

Capital expenditures by members of the S&P 500 index fell in the second and third quarters of 2015 from a year earlier, the first time since 2010 that the measure has fallen for two consecutive quarters, according to data from S&P Dow Jones Indices. Another measure of business spending on new equipment—orders for nondefense capital goods, excluding aircraft—was down 3.6% from a year earlier in the first 11 months of 2015, according to data from the U.S. Department of Commerce.

More broadly, only 25% of small companies plan capital outlays in the next three to six months, according to a November survey of about 600 firms by the National Federation of Independent Business. That compares with an average of 29% and a high of 41% since the surveys began in 1974.

"Our guys are in maintenance mode," said William Dunkelberg, chief economist for the trade group. "This recovery still stinks."

"This Recovery Still Stinks"

That sentence corresponds with my take.

However, the Journal notes a December tax bill makes permanent the research-and-development tax credit and faster capital-equipment write-offs for small businesses and a highway bill provides $305 billion of federal funding for roads and other transportation projects over five years.

Chad Moutray, chief economist of the National Association of Manufacturers, had this to say: "The tax legislation eliminates annual uncertainty over whether these incentives will be renewed. You can start planning for what you're going to be investing in 2016 and 2017, and that's huge."

Backwards?

It seems to me Moutray has things backwards. Any uncertainty over whether incentives would be removed should have pushed demand forward, not backwards.

If companies thought tax credits would expire, they would have had a tendency to spend in 2015, not 2016.

Is Moutray is just another cheerleader like we see at the National Association of Realtors?

Yet, the Journal quotes Robert Sires, CEO and owner of Bay State Cable Ties LLC, a Crestview, Florida maker of nylon cable who said "I delayed some purchases, not knowing what would happen" with the tax situation.

That statement would make perfect sense if we were talking about new credits for 2106, not extensions to credits expiring in 2016.

Banana Peels

Sires next comment, and also the end of the Wall Street Journal article gets back on track: "Still, customers have been cautious recently, placing smaller orders. Everybody feels like they're standing on a banana peel," said Sires.

All in all, the Journal seems rather unconvinced about the "Soft Rebound" thesis, and I am even more skeptical.

Mike "Mish" Shedlock

Economy News

3.1.16

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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