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Markets

Yield Curve: Widely Watched Recession Signal May Be Falsely Lit by Growth

A decades-old recession predictor is flashing warning signs, but a flattening yield curve doesn’t necessarily portend falling stock prices. The yield curve, the gap between short- and long-term government bond yields, has narrowed to near 11-year lows in recent months, raising fears the U.S. economy may be headed for a slowdown.

Yet new Credit Suisse data offer evidence that stocks often continue churning out gains several months after the yield curve inverts. The S&P 500 has risen around 16% in the 18 months following an inversion of the curve, going back to 1978, according to a Credit Suisse analysis released this month. Stocks have also managed to push higher over longer time periods, rising an average of 14% in the 24 months following an inversion of the curve and 9.5% in the 30 months afterward.

That pattern suggests the current nine-year bull run is likely to show resilience. With several analysts saying that the recent flattening of the yield curve has mostly been driven by monetary policy and continued growth—and not by fears of an imminent slowdown in expansion. WSJ

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Economics & Trade

China: Why the US trade war is not the only cause for concern over China’s economy

A close look at China’s regional economic performance suggests that the economy is in worse shape than its headline figures imply even before the full impact of the trade war with the US has been felt. Central government figures gave a national inflation-adjusted growth rate of 6.8 per cent for the first half of the year, compared with 6.9 per cent in the same period last year. However, a review of local economic data by the South China Morning Post has found signs of a broad slowdown in the world’s second biggest economy, with some parts of the country stagnating or even contracting.

It is a challenging situation for Beijing to manage and makes China vulnerable in the face of escalating trade hostilities from US President Donald Trump. China’s official manufacturing purchasing managers’ index fell to a five-month low of 51.2 in July, the National Bureau of Statistics said on Tuesday. According to the inflation-adjusted growth figures for the first six months of the year from 29 provinces, only 15 fared better than the national average, compared with 21 during the same period last year. The number of provinces below the national average rose from seven to 12 during the period. SCMP

China: China Factory Gauge Cools as Trump Trade Tensions Begin to Bite

The manufacturing purchasing managers index fell to 51.2 in July from 51.5 in June and a tad lower than the forecast of 51.3 in a Bloomberg survey of economists. The non-manufacturing PMI, covering services and construction, stood at 54, the statistics bureau said Tuesday, compared with 55 in June. Levels above 50 indicate improvement.

Factories are faced with challenges both at home and abroad, with slower credit growth denting demand and the imposition of the first round of tariffs in the trade war with the U.S. The government last week unveiled a package of fiscal support including tax cuts and acceleration of bond issuance for infrastructure investment, and there are signs the campaign to curb leverage is being softened.

The U.S. is expected to keep ratcheting up tariff pressure, and there’s little sign of talks on the horizon between the two governments that would alleviate the tension. The next tranche of higher tariffs on a further $16 billion of China’s exports to the U.S. could arrive as soon as Aug. 1. The yuan has declined by more than 6% since early June as a stronger dollar combined with signs of a domestic slowdown. IW

EZ: Eurozone GDP slows again; inflation rises to 2.1%

The eurozone’s economy slowed further in the three months through June, as exports sputtered and business confidence weakened on worries over future relations with the currency area’s largest trading partners. The loss of momentum in 2018 contrasts with the U.S., where growth accelerated during the second quarter. The U.S. growth differential was the widest since the second half of 2014, the two economies having expanded at roughly the same pace since then.

The European Union’s statistics agency Tuesday said the combined gross domestic product of the 19 countries that use the euro–the broadest measure of the goods and services they produce–increased at an annualized rate of 1.4% in the second quarter, down from 1.5% in the first. In the U.S., growth according to the same measure was 4.1%.

While Eurostat didn’t provide any details of how different parts of the economy performed, previously released data and business surveys point to a fall off in export growth during the first half of 2018 and a waning of business optimism that appears to be linked to growing trade tensions between the U.S. and the EU, as well as uncertainties about access to U.K. markets after that country leaves the bloc next year. Higher oil prices are another headwind, since they eat into households’ spending power. MW 

Venezuela: Once oil wealthy, Venezuela’s largest state struggles to keep the lights on

Across Maracaibo, the capital of Venezuela’s largest state, residents unplug refrigerators to guard against power surges. Many only buy food they will consume the same day. Others regularly sleep outside. The rolling power blackouts in the state of Zulia pile more misery on Venezuelans living under a fifth year of an economic crisis that has sparked malnutrition, hyperinflation and mass emigration. OPEC member Venezuela’s once-thriving socialist economy has collapsed since the 2014 fall of oil prices.

Zulia, the historic heart of Venezuela’s energy industry that was for decades known for opulent oil wealth, has been plunged into darkness for several hours a day since March, sometimes leaving its 3.7 million residents with no electricity for up to 24 hours. The six state-owned power stations throughout Zulia have plenty of oil to generate electricity but a lack of maintenance and spare parts causes frequent breakdowns, leaving the plants running at 20 percent capacity.

Zulia used to produce 70 percent of Venezuela’s milk and meat but without power to milk cows and keep meat from spoiling, the state’s production has fallen nearly in half. Small businesses are also affected. In an industrial park in Maracaibo’s outskirts, 80 percent of the 1,000 companies based there are affected by the power cuts. R

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Politics & Policy

Firearms Policy: States sue to block sale of 3D-printed weapon designs online

The fight to keep 3D-printed gun designs off of the web continues as a number of states said on Monday that they would be jointly suing the Trump administration, Reuters reports. In a press release, Washington State Attorney General Bob Ferguson said today that the states have requested an injunction to block online publication of the designs and have filed a lawsuit. Joining Washington in the endeavor are New York, New Jersey, Pennsylvania, Connecticut, Oregon, Maryland and Washington, DC.

In June, the Department of Justice settled with Defense Distributed and the Second Amendment Foundation. It agreed to waive a 2013 restraint and allow the company to publish its 3D printable gun designs, which Defense Distributed said it would begin doing on August 1st.

Three groups — the Brady Center to Prevent Gun Violence, Everytown for Gun Safety and the Giffords Law Center to Prevent Gun Violence — attempted to prevent the designs from going online later this week, but a federal judge blocked their motion last Friday. The states challenging the Department of Justice’s settlement claim that not only is it a violation of their Tenth Amendment rights, but it also violates the Administrative Procedure Act since certain required administrative steps haven’t yet been taken. engadget

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Monetary Policy

BoJ: Japan defies global move to roll back crisis-era stimulus 

The Bank of Japan made clear it would not join the world’s other major central banks in rolling back crisis-era stimulus policies on Tuesday, announcing it would maintain “extremely low” interest rates for an extended period. After being forced three times in a week to intervene to cap bond yields amid expectations policymakers would signal a willingness to tighten its easy money regime, the central bank instead declared it was strengthening the framework for “continuous powerful monetary easing”.

“This will fully counter speculation among some market participants that the bank is heading towards an early exit or an increase in rates,” Haruhiko Kuroda, BoJ governor, said at a news conference in Tokyo. Analysts agreed he had bought himself at least six to nine months before the market again began to speculate about further changes to the programme.

Analysts have warned that the BoJ’s vast monetary stimulus programme might not be sustainable over the long-term. The size of the BoJ’s balance sheet, as a percentage of GDP, is 98 per cent, compared with the US, which is just over 20 per cent. FT

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Finance

FinTech: Commonwealth Bank Completes New Blockchain-Enabled Global Trade Experiment

Seventeen tonnes of almonds have successfully been shipped and tracked from Sunraysia in Victoria, Australia, to Hamburg in Germany in a blockchain-based collaboration between Commonwealth Bank and five Australian and international supply chain leaders. Commonwealth Bank demonstrated a new blockchain platform underpinned by distributed ledger technology, smart contracts and the internet of things (IoT) to facilitate the trade experiment, tracking the shipment from packer to end delivery in parallel to existing processes.

The platform digitises three key areas of global trade – operations, documentation and finance – by housing the container information, completion of tasks and shipping documents, on a purpose-built blockchain. Partners were able to view and track the location of the shipment as well as view the conditions, such as temperature and humidity inside the container, via four IoT devices. This level of data provided partners in the supply chain with a greater level of transparency and efficiency regarding the location, condition and authentication of the goods being transported. At the documentation layer, the blockchain-enabled supply chain allows partners to upload and access key documents, such as bill of lading, certificates of origin and other documents required by customs, which streamlined these processes. CommBank

Fintech: Wall Street catches the digital bug

At Morgan Stanley and Goldman Sachs, the theme arose a handful of times on the earnings call, in the context of automated tools for financial advisers (Morgan Stanley) and the push into consumer banking (Goldman). At the big retail banks, meanwhile, it seemed that digital was all executives wanted to talk about. The word got six mentions at JPMorgan Chase, 11 at Wells Fargo, 18 at Citi and 29 at Bank of America.

The preoccupation with digital reflects the steady rise of independent apps and platforms, many of which have spent years chiselling away at the banks’ market shares in areas such as consumer loans, wealth management and checking accounts. Many of the biggest brick-and-mortar banks were slow off the mark in developing tools of their own. But now the message from Wall Street seems emphatic: we’ve caught up, and we’re crushing it.

BofA, for instance, talked about crossing the 25m threshold during the quarter, in terms of active users of its mobile app. And the big banks aren’t just building their own. Goldman talked about its acquisition in April of Clarity Money, a personal finance start-up, which gave it access to more than 1m users. FT

FinTech: Human Bankers Are Losing to Robots as Nordea Sets a New Standard

Something interesting happened in Swedish finance last quarter. The only big bank that managed to cut costs also happens to be behind one of the industry’s boldest plans to replace humans with automation. Nordea Bank AB, whose Chief Executive Officer Casper von Koskull says his industry might only have half its current human workforce a decade from now, is cutting 6,000 of those jobs.

While many in the finance industry have struggled to digest that message, the latest set of bank results in Sweden suggests that executives in one of the planet’s most technologically advanced corners are drawing inspiration from Nordea. At SEB AB, CEO Johan Torgeby now says that “whatever can be automated will be automated.”

Nordea, which is the only global systemically important bank in the Nordic region, saw total costs drop 11 percent in the second quarter from a year earlier as staff numbers fell 8 percent to about 29,300. By comparison, Barclays Plc, which has roughly the same market value as Nordea, had almost 80,000 employees at the end of 2017, according to the latest figures. B

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