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Obama and His Big Mouth Put Taiwan on ISIS Radar

November 27, 2015 by EconMatters   Comments (0)

By EconMatters

One big news widely reported in Taiwan right now is that the national flag of the Republic of China (R.O.C. Taiwan) appears on ISIS web site video.  Above is a screenshot of the video with Taiwan's flag prominently displayed along side that of the U.S. and U.K.  The flags are supposedly in alphabetical order by country name.  The video was posted on ISIS web site on Wednesday, Nov. 25, 2015. 

According to a partial video on a Taiwan TV news show, ISIS also sends this errie message:

Our number only increases with faith.  And we are counting your banners, which our prophet says when it reaches 80, then the Blaze of War will find you.

You might wonder how ISIS came as far as seeing Taiwan as an equal threat as the U.S.? Taiwan's news media linked ISIS's sudden recognition of Taiwan to a statement made by U.S. President Obama at an Association of Southeast Asian Nations (ASEAN) summit in Malaysia last week. Obama said that Taiwan was one of the Asia-Pacific countries in a coalition against ISIS. 

It is true that Taiwan's military and Special Forces have heavy American military DNA. Due to the constant threat from China across a narrow straint, Taiwan has relatively heavy military defense (for a small island). A lot of Taiwan's defense miliary technology is supplied by the U.S. companies. Taiwan regularly sends military personnel to train in the U.S. while Taiwan's media reported U.S. Navy SEAL also sends trainers every so often to train one of the island's elite special forces units.  

In response to Obama's latest 'recognition', Taiwan governmnet simply said its current focus is on providing humanitarian assistance (i.e., We are NOT involved with Obama's 'Coalition').  Indeed, Taiwan's involvemetn with the chaos in the Middle East has been humanitarian aid to the region such as donating 300 prefabricated houses and nearly US$10 million in medical supplies to the refugees.

This stance is understandable as Taiwan had a ISIS panic attack when in February 2015, ISIS official Twitter channel twitted a picture of what looks like Taipei 101 Building (never confirmed) under atack.  This out-of-nowhere recognition by ISIS has prompted the Taiwan government to step up security measures, while President Ma Ying-jeou (馬英九) urged the public not to panic (Good luck with that).  

Ever since the Chinese Nationalists Party (KMT) retreated to Taiwan in 1949, it goes without saying that China has always viewed Taiwan as a renegade province that may be reclaimed by force if necessary.  In the 60+ years since then, the tiny island country has transformed itself quite successfully thanks to a series of financial and economic reforms by the Nationalist Party (KMT), while millions were killed by Mao's Cultural Revolution and the Great Leap Forward.  (On a side note, I'm not sure how the UK shadow chancellor thought it was funny to quote Mao in the Spending Review meeting.)

On the diplomatic front, Taiwan has sufferred many losses and betrayals.  Despite the fact that the Republic of China (Taiwan) was one of the the five founding and PERMANENT members of the United Nation (U.N.), Taiwan was ousted by the U.N. on Oct. 25, 1971 when U.N voted to recongnize Mainland China and to expel the R.O.C Taiwan. Since then, U.N. only recognizes the Communist China as the only lawful representative of China and has rejected calls to make Taiwan a member.  And Taiwan has almost always been excluded in any international economic pac (such as the TPP or AIIB) due to China's influeence.   

Taiwan instead strives to maintain extensive unofficial ties with countries that do not recognise it, focusing on trade, investment, culture and cooperation in non-political areas. Today, Taiwan has more than 100 representative offices in over 70 countries, including four offices in Australia (hense this detailed Taiwan brief on Australian Government site).

The sad fact remains that currently only 22 states (most of them you have never heard of) in the entire world recognize Taiwan as the Republic of China (ROC).  I guess the number should be 23 now, adding ISIS?     

Citizens in Taiwan actually do not appreciate Obama's sudden 'warm and fuzzy' officially putting the island on ISIS radar. After all, the U.S. does not even recognize Taiwan nor has helped Taiwan in anything of real economic or polical benefits.  And now Taiwan is a close ally of the U.S. in a coaltion against ISIS?  But of course.

ISIS already angered China after executing a Chinese captive last week.  Then, there's rising tension between China and U.S. over disputes in the South China Sea and The East Pacific.  So when Obama opens his mouth 'recognizing' Taiwan, ISIS jumps on it just to provoke China even more.

This is a chess match between ISIS, China and the U.S. using Taiwan as a game piece.  If ISIS strikes Taiwan (think the casualties at Paris in the much larger and stronger France), on whose hands will the blood be?

中華民國 是我永久的憂傷      

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Apple Stock is a 10 Year Short

November 25, 2015 by EconMatters   Comments (0)

By EconMatters

Holiday Melt Up in Stocks

Apple and most stocks do routinely well during the 4th quarter, and especially the last couple of months of trading after earnings are out, and the fund managers are pushing everything up with the goal of making their trading numbers by year end window dressing. It is amazing more people don`t realize this phenomenon and just buy December expiration calls on the SPY after the usual selloffs that happen in the third quarter, and wait for the holiday rally where stocks routinely melt up at year end.

$125 a Share

Apple almost touched $124 a share after earnings before some negative news came out regarding the supply chain which hinted at slower demand for I-Phones towards year end, and the stock reached its all-time high of almost $135 a share in late April of 2015. But if you are not already in at a good price for a long term short of Apple stock, then hope for one more run-up into year-end holiday trading to position yourself for the inevitable decline in this once Wall Street darling. Anything over $125 a share is an excellent price entry point to short this stock, and have a long term positive expected return on your investment from the short side. This stock should continue to put in lower highs and lower lows for the next five years, and ultimately continue lower for the next decade as this company eats through its massive cash reserves trying to come up with their next I-Phone blockbuster product in a declining margin world.

Large Institutional Ownership

Apple stock is a widely held stock by institutions, hedge funds and fund managers. This stock is basically a core holding in many fund managers portfolios, this is bad news once the bloom comes off of this rose, and investors start to see the long-term writing on the wall regarding increased costs and declining margins across the variety of Apple products it offers to consumers. In the end they are in a commoditized business, and this story never ends well judging by the history in this space over the last 50 years.

I-Phones Sales Hanging in There

I-Phones continue to hang on with newly created iterations with their slightly better bells and whistles but the improvements or differences between phone iterations are becoming less and less pronounced. Apple pulled the last big improvement in their phone out of the hat with finally giving in and producing a larger screen size for consumers. Sure there are still many I-Phone users who need to upgrade their phone, but I-Phones users are first adopters, that`s why they have I-Phones to begin with because branding and image are important to them so they don`t wait long to have the newest I-Phone. Stock prices are forward looking and the stock will move before the fundamentals fully become apparent to the overall market. By the time it becomes obvious that the trend in I-Phone sales is down for the foreseeable future, the stock will have long started its downward trek in price.

Smartphone Industry is a Mature Market

The cell phone and smart phone market is a mature industry, even basic and lower end smart phones essentially have the same comparable specs and features. And now that consumers have to pay full price for these small computers, consumers are going to think twice about shelling out $700 for a new I-Phone every year. Especially when the phones haven`t changed that much and they can get a pretty damn good equivalent smart phone for $50-$200 and in some cases even free with slightly older models. Once consumers get reoriented to the fact that they are basically buying the entire phone as no part is subsidized by their data provider, it is intuitive that I-Phone prices are going to come down to remain competitive in the market.

Margins Will Shrink for Entire Smartphone Segment

This is the next phase in the smart phone wars. First it was product innovation and differentiation. This phase as products become more and more alike is routinely followed by the price wars phase. And Apple has always tried to brand their way out of this problem by remaining the one premium branded product in the space. EconMatters view is that this may work for six more months but the writing on the wall will play out for Apple, and they will have to reduce prices just to stop the bleeding. As Apple is in for some brutal comps as I-Phones become too expensive relative to competitor offerings given the actual slight if any differences between smartphone specs. A consumer would find it difficult to justify paying $600 more for a phone when the only difference is a small icon on the back which will be covered up by a smartphone case nonetheless.

Beware of Spaceship Office Space

Beware in the history of building new office palaces or naming stadiums as this occurrence often through history signals the turning point in company fortunes. The list is long of company hubris at the top of the market spending out the wazoo for plush nice new office space only to have to move out of said office space or sell this luxury space at rock bottom prices in distressed times only a few years later. I expect this to be no different with Apple`s new spaceship offices in California. How many stadium naming rights deals have come undone over the years due to being taken over entirely or bankruptcy? The list is formidable to say the least! Candidly Bay Area real estate is probably in a bubble right now both on the commercial and residential side. And with the bubble in Unicorn and early stage financing of technology startups starting to show signs of cracking, it appears that technology stocks in general of many companies are going to experience difficult times based upon unrealistic expectations and cheap money evaporating that created unsustainable valuations. Thus let us label Apple stock as the signature leader in the decline of this bubble; the tech bubble bursting version 3.0.

The Electric Car Savior

This isn`t a surprise to Apple executives, why do you think they are working so hard on coming up with the next revolutionary product? This is why Apple is contemplating how far they can get into the automotive space, how profitable are heads up displays, or entire futuristic technology dashboards, can they profitably build an electric car without going bankrupt in the process due to cash flow drain? Investors are not going to stick around and wait to see if Apple can invent the next blockbuster product. Once the earning`s pain comes, this stock is going to get punished with 15% plus shellacking’s on future earnings releases over the next five years. I do think electric cars are inevitable replacements for the combustion engine, but is Apple really going to outcompete German engineering in this area? Is Apple going to produce more electric vehicles ten years from now than BMW? Does this seem like a positive expectancy investment?

Grow Old Gracefully

I think the most optimistic case for Apple stock is that they can just grow old gracefully so to speak and produce high quality products for their core competency in existing product offerings. I admire their research and innovative spirit looking for the next big technological breakthrough, but this requires cash, and it is a good thing they have stored a lot of nuts for this rainy day, because they are going to bleed through cash reserves over the next ten years like nobody`s business seeking the next I-Phone holy grail product. I hope for their sake they find it because their existing business is a commoditized product model, and margins are going to come down during the same time as the company`s overall cost structure is going to go up significantly.

Bear Market Environment

Apple stock has had some massive declines on several occasions over the last 10 years of this bullish market environment. Look for the stock to move around a lot as it continues to put in lower highs and lower lows in a continual downtrend over the next decade. Apple stock is a long-term short for the patient investor. There will be several short shark attacks as institutional investors bail after miserable earnings releases over the next 10 years. But just wait until interest rates rise and we are in a full out bear market environment for the real declines in this stock. The sheer size of this stock in portfolio holdings is impressive, so not a lot of buyers left in this name, but this represents a whole heck of a lot of potential future sellers in this name on substantive negative news.

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The Republican Party

November 24, 2015 by EconMatters   Comments (0)

By EconMatters

Extremism & Democracy

The Republican Party has been hijacked by the right wing Christian conservatives, the gun toting NRA extremists, the Tea Party extremists and the racially and culturally narrow-minded factions across the country. The party is a complete mess, it really has lost its way, and is destined to lose the Presidential Election to Hillary Clinton. The emergence of front runners in the Republican campaigning season of Donald Trump and Ben Carson speaks volumes regarding how far this party has lost its way.

Donald Trump

Pictures of Christian evangelicals putting their hands on Trump`s forehead during prayer make baby kissing look respectable on the campaign trail. Trump obviously got into the race as the attention whore that he is just because there are cameras involved, and this is what he does. The fact that he started polling well probably shocked this branding clown more than anybody, and then he started getting serious in pandering to every worst-case extremist tendency that so aptly defines the Republican party today. He basically has done the Democrat`s job in converting any remaining Republican moderates to the other side. Hillary Clinton and the Democratic Party should send Donald Trump a large thank you note after the election, he has made their job a lot easier. Donald Trump`s incessant pandering to every extremist group and their requisite views has basically confirmed what the Democrats have been saying and portraying about the Republican party for years. That they are a bunch of racist, homophobic, right-wing, gun-toting, tea-party simple minded extremists.

Ben Carson

Ben Carson could have been a breath of fresh air for the party, but no he had to start opening his mouth on the campaign trail. And he has said some pretty stupid things on the campaign trail. Things I thought a competent neurosurgeon was incapable of thinking or enunciating, let alone speak in public. The guy is basically an incompetent, senile idiot who if the Republican Party had any real platform with legitimate candidates would have been marginalized months ago on the campaign trail. I never realized how specialized competencies can be until this guy opened his mouth, and the incongruence between the thoughts rattling around this man`s brain, and what he did for a profession is astounding.  I am not sure how one can make it through basic medical school with such thoughts. He may have early stage Alzheimer’s or dementia of some sort. At any rate just another of the long list of un-electable Republican Party candidates.

Fiscal Conservatism

The Republican Party needs an overhaul, they need to get back to the core values of pro-business and job creation, entrepreneurial beliefs that once made this party a formidable political entity. They need to concentrate on fiscal conservatism as this will be sorely needed in about three years when all the entitlement spending really starts hitting the accounting books of the government. They need to focus on promoting lower taxes, simplifying the tax code, and cutting waste from bloated governmental programs like the military. In short, the government needs to be much more efficient in where and what they spend the taxpayer receipts on. The US has spent so much money supporting the military industrial complex over the last 20 years that the overkill factor is off the charts. I know the importance of having a strong military but the current spending is just comically ridiculous given the juxtaposition of the United States Military capabilities and the next nearest competitor.

Inefficient Capital Allocation

It is obvious that a large portion of this spending needs to be reassigned to more productive and efficient uses in the economy. This is where the Republican Party needs to steal a Democratic idea and really overhaul the healthcare industry. It doesn`t take rocket science to realize the quality of healthcare for the average citizen in the Scandinavian countries versus the United States and what these countries spend on the Military to realize poor capital allocation policies.

There is no reason that every American shouldn`t be able to walk into any healthcare facility at a moment`s notice and have all their medical needs met free of charge given the immense resources of this country. It is obvious that the entire healthcare system needs to be overhauled, costs are out of control and have been for decades; most of this is due to structural inefficiencies and the interplay between drug companies, insurance companies and the government – this relationship structure is broken.

It will require a lot of money and focus but this is going to happen by necessity if for no other reason as the current system will eventually implode. Since this is going to happen eventually, the Republicans might as well adopt this issue from the Democrats now that they have really screwed up the healthcare system with their failed attempt to fix it. Ideas go back and forth between the Party Platforms all the time, the Republicans need to steal this issue back from the Democrats.

The party needs to be much more inclusive from a sexual orientation, cultural values, and ethnicity standpoint. This is a no-brainer, it is an election after all, and sheer numbers count. But the real reason is that wake up Republicans America isn`t like your grandfather`s age, and that era ain`t coming back. Cities are multicultural landscapes with large populations of culturally and ethnically diverse people often with common goals of seeking a higher quality of life. In short, to be simplistic here good capable hard working, smart people come from many diverse ethnic and cultural backgrounds – yes even illegal immigrants. Get over it Republicans by giving this issue solely to the Democrats, you are essentially committing political suicide – you have become a stereotype, a caricature of a political party that is destined to lose elections.

Never Going to Attain Unanimity of Thought

Americans have diverse views on many issues, it is hard getting two people to agree on anything these days. All Republicans are not going to agree with each other on all the issues, some may be sympathetic to some issues and vehemently opposed to others. The key is to move to the center and have enough of the issues that are really important to voters to broaden the appeal of the party. Focus on policies promoting economic growth, lower taxes, and spending tax receipts more efficiently and not on one`s sexual orientation in the bedroom. The Republican Party has too many extremist views on far too many issues to be electable right now on the presidential stage. Right now it appears that Hillary Clinton is going to be our next President, and that means another four years of underachieving from a pro-growth business standpoint. And frankly, she is the only candidate I have seen who is even remotely qualified to run for President in this circus show of a campaign.

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Federal Reserve

November 23, 2015 by EconMatters   Comments (0)

By EconMatters

Rate Hike

The Federal Reserve has been telegraphing to markets that they are going to raise the fed funds rate by 25 basis points next month at its December Fed Meeting. The financial markets think they are serious this time and have been pricing in this 25 basis point rate hike for the past 6 weeks. The real question is that since the Fed has told us that they are Data Dependent for the past 7 years regarding changes to monetary policy, what has really changed in the economic data for the positive? Why now of all times do they decide to raise rates? Are they raising rates for the right reasons? These are just some of our concerns as the Federal Reserve embarks upon their final FOMC Meeting on December 16th2015.

John Williams

It is hilarious watching Federal Reserve Bank of San Francisco President John Williams flip flop on rate hikes faster than a politician on an issue after a new poll comes out. It has become obvious that this Fed member has no views of his own regarding monetary policy, he is basically Janet Yellen`s mouth piece, and is not an independent Fed member. If one just reads his statements over the course of 2015 regarding possible rate hikes, with an economy that hasn`t dramatically changed much in 2015, one would demand immediate and supervised drug tests on a monthly basis. Maybe I am being too hard on this guy, and that he has a difficult job of navigating Fed Policy politics, but he sure is coming across as an incompetent and unqualified board member that adds no real value to the committee.

Neel Kashkari

Any maybe that is why Neel Kashkari, has been chosen as head of the Federal Reserve's regional bank in Minneapolis to make everyone else appear more qualified in comparison. I am not sure why this Fed move hasn`t garnered more attention by the mainstream financial media, but what has Neel Kashkari ever done that makes him qualified to be a Federal Reserve Board member? And yes it is too easy a cynical softball setup for the peanut gallery to shout out “He worked at Goldman Sachs!” here. But he has accomplished very little in the Hedge Fund community, Investment Banking, his small time as a Portfolio manager at PIMCO, he made an unsuccessful run for governor of California in 2014, and was an unsuccessful aerospace engineer at TRW Corp. So unsuccessful in fact at TRW Corporation that he went to Wharton to get his MBA to reinvent himself at Goldman Sachs.

It seems the only thing this guy has succeeded at is kissing up to Hank Paulson while at Goldman Sachs, which landed him a high profile position at the Treasury Department during the TARP bailout program, by the way another colossal failure both in terms of policy creation and implementation. The guy has literally failed at every job he has ever done, and keeps getting promoted to better jobs with higher required responsibilities and required competencies. It is not like this guy has written extensively on monetary policy in his career or has a PhD in economics from a respected academic institution. This guy was literally pushing defense stocks on CNBC a couple of years ago while learning Portfolio Management at PIMCO. I realize that often employment success in life is knowing the right people and connections, but this is the Federal Reserve we are talking about, and not the Vice President of some obscure department in a sleepy corporation. Consequently the Peter Principle is alive and well at the Federal Reserve, has the Federal Reserve become one giant example of the Peter Principle?

Inconsistent Message

This brings us back to the fact that the Fed now is so motivated to raise rates just to show that they can actually raise rates, even when it is obvious to everyone in financial markets that there is no need to raise rates here. In fact, the Fed should have raised rates 3 or 4 years ago, and at the very least last year when GDP was more robust during the second half of 2014. In short, for the near term the Fed missed their opportunity window to raise rates, according to the economic data and overall global economic environment – them being ‘Data-Dependent’ and all.

Therefore, this rate rise is purely for show, the Federal Reserve has had 7 plus years to raise rates and they pick the time when China is struggling, and the ECB, Japan, and almost every other EM country is trying to weaken their currency. And they are going to do it, as they have extended so much credibility the last 6 weeks talking up this rate cut, that they would become a complete laughing stock by their most diehard supporters if they bailed out on this one. The Federal Reserve isn`t even consistent with their messaging within the same calendar year. As the reason they couldn`t raise rates back in June, another heavily telegraphed Fed Rate Rise Meeting, was because the US Dollar was too strong. They were worried about the effects of a strong dollar on the US Economy from a trade and corporate profits standpoint; not to mention its effects on emerging markets. Hello Federal Reserve, just six months later we have the same conditions with a strong US Dollar, it is not like anything has changed from a data standpoint to now suddenly merit a 25 basis point rate hike. I realize it is easy for me to sit back and criticize their actions, but it seems that from a logical reasoning standpoint if they can raise rates now, then they should have raised rates back in June.

Reasons Not to Raise Rates

The main reason the Federal Reserve shouldn`t raise rates now is that the ECB, which the Euro makes up the largest part of the US Dollar Index, is going full scale nuclear on devaluing their currency for trade competitive advantages over the United States. The second reason is that Emerging Markets haven`t shown a real pickup yet from their latest stimulus attempts, and are still hampered by being in the early stages of financial reform and structural rebalancing. The third reason is that commodities are being hammered with a strong dollar, further reinforcing deflationary pressures from a “Data-Dependent” standpoint given that the Fed wants to stimulate ‘inflation’ in the economy. The fourth reason is that there really is no need to now, that ship has sailed about 5 years ago, for all we know we have reached the other side of the business cycle, and are headed back into recession.


In fact, there can even be a case for QE4 as the inflation in the economy is coming mainly from Housing, (not enough affordable housing), and healthcare. Thus buying new bonds and lowering interest rates further might stimulate the housing industry in helping additional buyers move from apartment living into buying their first home; thereby lowering the steep rise in apartment rents of the last several years. This might also stimulate loan growth for both commercial builders and banks now that some have started to up their commitment to consumer home loans. Moreover, with regard to healthcare, raising rates isn`t going to promote or reduce inflation as this inflation is purely institutional to the absolute structural nightmare that is the healthcare industry today. A major overhaul will be required in the healthcare business over the next five years. The recent college try at reform has been a total and unmitigated disaster; we have only begun to see the fallout from this failed policy initiative.

The Gang that couldn`t Shoot Straight

The Federal Reserve is increasingly looking like the scared kid who is egged on to show his bravery by jumping from a high cliff to regain his ‘manhood’ in the eyes of the cool kids only to make a reckless decision with negative consequences. Yes the Federal Reserve needed to raise rates, but they probably should have started 7 years ago. After 7 plus years of being ‘Data Dependent’ why now?

In case the Fed hasn`t been paying attention, the world has devolved into a full out currency war, what the ECB has done to devalue the Euro in 2015 is not in the United States best interests. It makes for bad Fed Policy to raise rates now, it puts the US at a competitive disadvantage. All one has to do is look at the hit to the retail sector from the drop in tourism spending of this year due to the stronger dollar and compare this with the latest economic upturn in the European economic data with a weaker Euro to realize that currency devaluation as a strategy works and confers a strategic advantage for countries.

Really Federal Reserve, you pick now of all times to raise rates? I think I know why Neel Kashkari was recently selected to head the Federal Reserve's regional bank in Minneapolis, he makes the rest of the brain dead zombie Fed Members feel ‘comfortable’ and not threatened by actually making competent and sound monetary decisions for the US economy.

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Current Copper Price Below Cost of Production

November 21, 2015 by EconMatters   Comments (0)

By EconMatters

Long Dollar Trade

One of the common trades in financial markets these days is going long the US Dollar and shorting Commodities, especially the precious and industrial metals. This has been a bad year for commodities, and this trade has picked up steam with large fund flows the last 6 weeks.

Schizophrenic Fed & Employment Reports

This all turned around after the poor employment report of October 2nd, followed by some trade unwinding thinking the Federal Reserve may be on hold for the remainder of the year after the dismal October Employment Report. This resulted in about eight days of currency unwinds and around October 14th, Investors started putting the Long Dollar Trade back on as they realized the Fed still wanted to raise rates, and since China seemed to stabilize from a crashing standpoint, Fed Speak became hawkish to telegraph to financial markets that the December meeting was a potential live meeting for a rate rise. This trade really picked up speed when the November 6th Employment Report came in much stronger than anticipated with a robust 271,000 new jobs created for the previous month.

Trading Algos & Paper Markets

Oil has also been hit along with the metals but it has inventory issues to contend with and is in the midst of a price war for market share. But there is no such price war in the metals industry, and although China`s weakness has no doubt tempered demand, the precious and industrial metals are basically being hammered down in the paper markets by fund flows in this Long Dollar Trade. This trade has become such a reflexive trade, that if the US Dollar is strong, the trading algos just start attacking Gold, Silver, Copper, Aluminum, Platinum and Palladium. These metals by and large trade as a group with slight differences in the charts based upon any unique demand characteristics of the given metal.

Soft Demand

Demand hasn`t really fluctuated much for any of these metals the last six weeks, China and the global economy are just sort of trudging along with China`s rebalancing and the global economy growing somewhere in the area of 3.5%. But what has changed the last 6 weeks is the large fund flows into the US Dollar all trying to front run the Federal Reserve, and shorting the Euro, (which makes up the largest component in the US Dollar Index), with traders also front running Mario Draghi who has been telegraphing more future stimulus for the European Union.

No Shale Technology for Copper Mining

But at some point every asset has a price, it really comes down to price, markets often over shoot in one direction or the other, but ultimately, what is a ‘fair price’ given the dynamics in the market. Copper is an interesting market because it is being slammed down with Gold and Oil, and the supply side of the Copper market has had its issues in 2015, with supply constraints limiting new supply on the market. Most of the pressures have come from the demand side of the equation with China`s rebalancing. But Copper doesn`t grow on trees, and is actually rather difficult to get out of the ground and process from a cost perspective. The steps involved in actually processing Copper to get it in a marketable form are rather extensive and involve considerable resources. And with six straight weeks of slamming down by traders we have reached the low level of $2 on the Nymex December Futures contract.

Marginal versus Production Processing Costs

There are various estimates for what the Marginal Cost of getting Copper out of the ground is before supply is taken offline completely. But it is reasonable to assume that Copper is currently being priced well below the long term Production Cost of Processing the Industrial Metal, and a large component for this trend is strictly fund flows in the Long Dollar Trade.

Path Forward for Copper

I am not sure how much this trade has left in it for the near term, who literally knows with asset prices and financial markets these days. But my intuition is that this Long Dollar Trade will probably be pushed into the European Central Bank Decision regarding more stimulus measures and the Fed December Meetings regarding a 25 basis point hike. Also, two other contributing factors are the December 4th Employment Report and traders wanting to take profits before the actual event in early December.

Buy the Rumor, Sell the News

And given the fact that the Federal Reserve is probably going to go out of its way to talk dovish with a 25 basis point rate hike, almost a “One and Done” intended messaging given what the rest of the world is doing in this robust currency devaluation game; it probably means that traders buy the rumor, and sell the US Dollar hard after the actual news of a rate hike, at least in the near term.

Short Covering Rally

This is when traders will probably really unwind these Fund Flows with buying Gold hand over fist, covering the substantial shorts in the market, and simultaneously putting new money to work in Gold and the rest of the Industrial and Precious Metals. And if it starts getting cold Oil might even get a bid along with these commodities. We shall see how this all plays out in the market, but $2 Copper could be setting up for an ample short covering rally before 2015 ends!

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South Africa raises rate 25 bps on higher risks to inflation

November 21, 2015 by CentralBankNews   Comments (0)

    South Africa's central bank raised its benchmark repurchase rate by a further 25 basis points to 6.25 percent to prevent a rise in inflation expectations and more generalised inflation in light of growing downside risks from persistent exchange rate depreciation, higher electricity tariffs and a rise in food prices from drought.
    The South African Reserve Bank (SARB) has now raised its rate by 50 basis points this year and said four members of its monetary policy committee had voted to raise the rate while two members had preferred to retain the policy stance.
    "Complicating the decision was the deteriorating economic outlook," SARB Governor Lesetja Kganyago said, adding that the risks to the outlook were now considered to be on the downside while they were more of less balanced at the previous meeting in September.
    While changes to SARB's forecast for inflation was only minor, Kganyago underlined that the upside risks were now more pronounced and expected to outweigh the possible downside risks from lower global oil prices and a subdued pass-through of changes to the exchange rate.
    "While these factors cannot be dealt with directly through monetary policy, the concern of the Committee is that failure to act could cause inflation expectations to become unanchored and generate second-round effects and more generalized inflation," he said.
    Despite the rate rise, SARB still considers its policy stance to be accommodative and future actions will continue to focus on anchoring inflation within the bank's 3-6 percent range while remaining sensitive to the fragile state of the country's economy.
    The forecast for headline inflation this year was trimmed to 4.6 percent from a previous forecast of 4.7 percent and the forecast for core inflation was unchanged at 5.5 percent.
    For 2016 inflation was seen at 6.0 percent, down from 6.2 percent and core inflation at 5.5 percent, up from 5.4 percent. For 2017 headline inflation was forecast at an unchanged 5.8 percent and core inflation at 5.4 percent, up from 5.3 percent.
    Headline inflation in October was 4.7 percent, up from 4.6 percent in September.
    The forecast for Gross Domestic Product growth in 2015 was trimmed to 1.4 percent from 1.5 percent and 1.5 percent for 2016 from 1.6 percent. For 2017 GDP was forecast to expand by an unchanged 2.1 percent.
    In the second quarter of this year, South African's GDP grew by an annual rate of 1.2 percent, down from 2.1 percent in the first quarter.
    The Rand has been on a weakening trend since mid-2011 when it was above 7 to the U.S. dollar. The rand has experienced volatile trading in recent years, not only due to expectations about U.S. monetary policy but also domestic factors, such as labor unrest.
    Since the last meeting by the central bank's monetary policy committee in September, the rand has depreciated 3 percent against the dollar and today it was trading at 14.12 to the dollar,  down 17.8 percent this year alone.
    "As before, the extent to which Fed tightening has been priced into the exchange rate remains uncertain," SARB said, adding that volatility and overshooting of the exchange rate is likely ahead of and in the immediate aftermath of any change to U.S. rates.


    The South African Reserve Bank issued the following statement by its governor, Lesetja Kganyago:

"Since the previous meeting of the Monetary Policy Committee (MPC), the inflation forecast has remained relatively unchanged but the risks to the forecast have increased. The key risks are a marked depreciation of the rand; worsening drought conditions and their likely impact on food prices; and the possibility of additional electricity tariff adjustments. At the same time the economy remains weak despite an improved performance in the manufacturing sector, but both the mining and agricultural sectors appear to have contracted further in the third quarter.

Although global financial markets have stabilised somewhat since the previous meeting, the outlook for emerging markets in particular remains challenging. The US Fed is likely to raise its policy rate in December, and further volatility in financial markets can be expected in the lead-up to this.

The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas measured 4,7 per cent in October, following two consecutive months at 4,6 per cent. Food and non-alcoholic beverages inflation surprised again on the downside at 4,8 per cent, with a contribution of 0,7 percentage points to the overall CPI outcome. Services price inflation remained unchanged at 5,6 per cent, while goods price inflation increased to 3,7 per cent from 3,6 per cent previously. The Bank’s measure of core inflation, which excludes food, fuel and electricity, measured 5,2 per cent, down from 5,3 per cent in the previous two months.

Producer price inflation for final manufactured goods increased from 3,4 per cent in August to 3,6 per cent in September. The main pressure came from the category of food, beverages and tobacco products which contributed 2,0 percentage points to the outcome. Food and agricultural crop price developments are expected to sustain the upward trend in PPI in the coming months.

The latest inflation forecast of the Bank shows a slight near-term improvement, while the medium-term forecast is marginally higher. Inflation is now expected to average 4,6 per cent in 2015, and 6,0 per cent and 5,8 per cent in the next two years. The anticipated breach of the upper end of the target range in the first quarter of 2016 is now expected to average 6,4 per cent, compared with 6,7 per cent previously. The trajectory for the rest of the year is also slightly lower than previously forecast, with the temporary breach in the fourth quarter of 6,1 per cent. The forecast for 2017 follows a slow downward trend, with inflation still expected to measure 5,7 per cent in the final quarter. The changes in the forecast are due to a lower starting point for the forecast, lower international oil price assumptions, and an adjustment to fees for higher education which are more or less offset by a more depreciated starting point for the real effective exchange rate.

The forecast for core inflation is marginally higher, with an expected average of 5,5 per cent in 2016, and 5,4 per cent in 2017, mainly due to the more depreciated exchange rate assumption.

The BER inflation expectations survey is only due for release in December. The median inflation forecast of analysts polled in the latest Reuters Econometer survey is similar to that of the Bank, and also declined marginally since the previous survey. The breakeven inflation rates, while having improved since the previous meeting, remain above the upper end of the target range.

Divergent global developments continue to create a challenging environment for monetary policy. Although the US recovery appears to be sustained with further improvements in the labour market, the strong dollar poses downside risks to both growth and inflation. The UK economy also remains on its recovery path. By contrast, the recovery in the euro area is much weaker, although the outlook is more favourable than it was earlier in the year. The Japanese economy has contracted for two consecutive quarters, with positive, but slow growth expected in the coming quarters.

The Chinese economy shows signs of stabilising, aided by policy stimulus, but the medium-term outlook remains a concern. There is still some uncertainty regarding the extent to which services output and consumption has compensated for the decline in industrial output and investment. A tail-risk of a hard landing remains, which would have a significant impact on countries with direct trade linkages, particularly those in Asia, as well as on commodity prices.

Russia and Brazil remain in recession, while the strong performance of the Indian economy has been sustained following a number of structural reforms. The outlook for sub-Saharan Africa, while still positive, has deteriorated in the wake of lower commodity prices, and further weakening could create greater headwinds for South African manufactured exports to this region.

Global inflation trends are also benign, with concerns about deflation abating in most advanced economies. Despite significant currency depreciations in commodity- producing economies in particular, inflation pressures have generally been surprisingly contained, with a few exceptions. Emerging markets have had differing experiences: a number of countries in Latin America, particularly commodity producers, have tightened policy in recent months in response to incipient inflationary pressures, while others with low inflation, particularly in Asia, have loosened policy further.

In the advanced economies, monetary policy divergence is expected to continue. Monetary policy is set to remain accommodative in the euro area and Japan, with possible further quantitative easing, against a backdrop of slow growth and benign inflation pressures. In the US, inflation and labour market dynamics, as well as Fed communication, suggest that in the absence of any major surprises or shocks, an increase in the policy rate can be expected in December. Market expectations are for monetary policy tightening in the UK to commence sometime in the second half of 2016, later than previously expected.

Although volatility in global asset markets has moderated amid improving risk sentiment, emerging market foreign exchange markets have been relatively volatile and vulnerable to capital outflows. In the past three months South Africa has also seen net portfolio outflows: since the end of August, according to the JSE data, non-resident sales of equities amounted to R25,9 billion, while net bond sales amounted to R5,9 billion.

The rand exchange rate has been particularly volatile, even compared to its peers, as domestic factors also impacted on the currency. Since the previous meeting of the MPC, the rand has appreciated by about 1,0 per cent against the euro but has depreciated by around 3,0 per cent against the dollar, and by 1,5 per cent on a trade-weighted basis. As before, the extent to which Fed tightening has been priced into the exchange rate remains uncertain. Nevertheless, a high degree of volatility and overshooting of the exchange rate may be expected in the lead-up to, and in the immediate aftermath of the start of the US interest rate cycle. Fed communication of future moves will be key. To date, the indications are that a moderate policy hiking cycle will be pursued.

The domestic economic growth prospects remain subdued amid weak business confidence, but a further contraction in the third quarter is not expected. The Bank’s forecast for GDP growth has been revised down marginally for 2015 and 2016 to 1,4 per cent and 1,5 per cent, but remains unchanged at 2,1 per cent for 2017. The estimate of short-term potential output remains unchanged at 1,8 per cent for this year, rising to 2,1 per cent in 2017. The Bank’s composite leading business cycle indicator declined further in August, consistent with the fragile outlook.

The manufacturing sector recovered somewhat in the third quarter, mainly due to a surprisingly strong performance in September, and is expected to have contributed positively to GDP growth. However, the Barclays PMI declined further in October, and has been below the neutral level of 50 for three consecutive months, suggesting a constrained outlook for the sector. The mining sector is expected to subtract from GDP growth following a further contraction in the third quarter, while the continuing drought points to a third successive quarterly contraction for the agricultural sector. The outlook for the construction sector is constrained following significant declines in new building plans passed, and reflected in a 9 point drop in the FNB/BER Building Confidence Index.

Against this backdrop, formal sector employment trends remain disappointing. According to the Quarterly Employment Statistics survey of Statistics South Africa, employment in the formal non-agricultural sector declined in the second quarter of 2015, as the private sector continued to shed jobs. Although the Quarterly Labour Force Survey indicates an increase in the number of persons employed in the third quarter, the number of unemployed persons rose sharply in the quarter as the number of new entrants increased. Consequently, the official unemployment rate increased to 25,5 per cent in the third quarter.

There are minimal demand side pressures in the economy, with consumption expenditure by households continuing to be inhibited inter alia by low consumer confidence, declining disposable income growth and slow employment growth. The latest retail trade sales data suggest that household expenditure may have lost further momentum in the third quarter. Durable goods sales remain under pressure, as indicated in the intensification of the downward trend in motor vehicle sales in recent months.

Consumption expenditure is also constrained by the continued slow growth in credit extension to households by banks. Unsecured lending remains subdued, and is likely to be impacted further by the recently announced caps on interest rates by the DTI, while the decline in growth in instalment sale credit and leasing finance is indicative of the softer motor vehicle sales. Credit extension to corporates remains robust, particularly commercial mortgage finance, which reflects in part a switch away from funding in the bond market by property funds.

The recent Medium-Term Budget Policy Statement signalled a continued commitment to fiscal consolidation by government, although at a slower pace. Most of the expanded deficit is attributable to lower expected tax revenues in response to the weaker growth outlook.

Trends in wage growth remain a concern, and contribute to the persistence of inflation at elevated levels. Year-on-year growth in salaries and wages per worker accelerated to 8,7 per cent in second quarter of 2015, and after adjusting for labour productivity increases, total unit labour costs increased from 4,3 per cent to 5,1 per cent. By contrast, the average wage settlement rate in collective bargaining agreements recorded by Andrew Levy Employment Publications recorded a moderation to 7,7 per cent in the first three quarters of the year, compared with 8,1 per cent in 2014.

Apart from the exchange rate, the main upside risks to inflation come from possible electricity tariff and food price increases. Eskom’s Regulatory Clearing Account (RCA) application to Nersa to claw back excess expenditure of R22,8 billion is likely to lead to a further tariff increase, although the quantum and timing is uncertain. This is in addition to the 12,2 per cent tariff increase already built into the inflation forecast for next year. No provision is made for the RCA application in the forecast at this stage, but it is regarded as an upside risk.

A higher food price trajectory has been incorporated in the forecast for some time, but food price inflation has surprised on the downside in recent months, despite sharp increases in maize and cereals prices earlier in the year. However, the increased intensity of the drought which has led to downward revisions of the domestic maize crop estimate, as well as incipient pressures evident in both the PPI and CPI, suggest that an acceleration in food price inflation is likely, adding to the upside risk to the inflation outlook.

By contrast, international oil price developments are expected to remain benign with current spot prices below US$45 per barrel, somewhat lower than those assumed over the forecast period. Although petrol prices have contributed to a succession of downside inflation surprises in recent months, the beneficial impact of lower international oil prices on domestic petrol prices has been offset to some extent by the depreciation of the rand. The latest data suggest that, should current trends continue, a small drop in the petrol price can be expected next month despite the further depreciation of the rand.

Although the inflation forecast is relatively unchanged since the previous meeting, the upside risks to the inflation outlook are more pronounced. As noted, these risks relate to the persistent exchange rate depreciation, electricity tariffs and food prices, and are assessed to outweigh possible downside risks from lower international oil prices and subdued exchange rate pass-through. While these factors cannot be dealt with directly through monetary policy, the concern of the Committee is that failure to act could cause inflation expectations to become unanchored and generate second-round effects and more generalised inflation. Although core inflation has remained steady and inflation expectations to date have been relatively anchored, they remain at uncomfortably elevated levels.

The general approach of the MPC is to attempt to see through exogenous shocks and react to second-round effects. However, shocks of a persistent nature, for example extended periods of currency depreciation or drought, or multi-year increases in electricity prices make it more difficult to disentangle these first and second round effects.

In the absence of demand pressures, the MPC had to decide whether to act now or later. On the one hand, given the relative stability in the underlying of core inflation, delaying the adjustment could give the MPC room to re-assess these unfolding developments at the next meeting, and avoid possible additional headwinds to the weak growth outlook. On the other hand, delaying the adjustment further could lead to second-round effects and require an even stronger monetary policy response in the future, with more severe consequences for short-term growth.

Complicating the decision was the deteriorating economic growth outlook. Although the change to the growth forecast was marginal, the risks to the outlook, which were more or less balanced at the previous meeting, are now assessed to be on the downside.

Against this difficult backdrop, the MPC decided to increase the repurchase rate by 25 basis points to 6,25 per cent per annum effective from 20 November 2015. Four members preferred an increase, while two members favoured an unchanged stance.

Despite the increase, the MPC still views the monetary policy stance to be accommodative. The continuing challenge is for monetary policy to achieve a fine balance between achieving our core mandate of price stability and not undermining short-term growth unduly. Monetary policy actions will continue to focus on anchoring inflation within the target range while remaining sensitive, to the extent possible, to the fragile state of the economy. As before, any future moves will therefore be highly data dependent."


Japan maintains policy stance, sees moderate recovery

November 21, 2015 by CentralBankNews   Comments (0)

    Japan's central kept its monetary policy stance steady, confirming that it will increase the country's monetary base by about 80 trillion yen on an annual basis, and repeated that it expects the economy to continue its moderate recovery despite exports and production being hit by the slowdown in emerging economies.
    The Bank of Japan (BOJ), which embarked on Quantitative and Qualitative Easing (QQE) in April 2013 and expanded the target by 10-20 trillion yen in October last year, also repeated that it will continue with QQE with the aim of reaching its target of 2 percent inflation.
    Last month the BOJ once again pushed back its expectation for when inflation will reach its target to the second half of fiscal 2016 from the first half of fiscal 2016, which begins April 1.
    The BOJ and the government's efforts to boost economic growth and inflation has been dealt a setback by the fall in oil prices and the slowdown in China, with the economy falling into its fourth recession in five years and inflation hitting zero percent in September.
    In the third quarter of this year Japan's Gross Domestic Product contracted by 0.2 percent from the second quarter, the same result as in the second quarter. On an annual basis the economy expanded by 1.0 percent, the same rate as in the second quarter.
    In last month's semi-annual economic outlook, the BOJ cut its forecast for economic growth in the current 2015 fiscal year to an average of 1.2 percent and to 1.4 percent for fiscal 2016, with growth in fiscal 2017 then expected to fall to only 0.3 percent as consumption is once again is likely to be hit by a planned increase in sales tax on April 1, 2017.
   The forecast for inflation in the current fiscal year was cut to 0.1 percent and to 1.4 percent for fiscal 2016.

    The Bank of Japan issued the following statement:

  1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:[Note 1]
    The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.
  2. With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to continue with the following guidelines:[Note 1]
    1. a)  The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-10 years.
    2. b)  The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 90 billion yen respectively.
    3. c)  As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen respectively.
  3. Japan's economy has continued to recover moderately, although exports and production have been affected by the slowdown in emerging economies. Overseas economies -- mainly advanced economies -- have continued to grow at a moderate pace, despite the slowdown in emerging economies. Exports and industrial production have recently been more or less flat, due mainly to the effects of the slowdown in emerging economies. On the domestic demand side, business fixed investment has been on a moderate increasing trend as corporate profits have continued to improve markedly. Against the background of steady improvement in the employment and income situation, private consumption has been resilient and housing investment has been picking up. Public investment has entered a moderate declining trend, although it remains at a high level. Financial conditions are accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is about 0 percent. Inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, although some indicators have recently shown relatively weak developments.
    1. With regard to the outlook, Japan's economy is expected to continue recovering moderately. The year-on-year rate of change in the CPI is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices.
    2. Risks to the outlook include developments in the emerging and commodity-exporting economies, the prospects regarding the debt problem and the momentum of economic activity and prices in Europe, and the pace of recovery in the U.S. economy.
    3. Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.[Note 2]

    [Note 1] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, and Mr. Y. Funo. Voting against the action: Mr. T. Kiuchi. Mr. T. Kiuchi proposed that the Bank will conduct money market operations and asset purchases so that the monetary base and the amount outstanding of its JGB holdings will increase at an annual pace of about 45 trillion yen, respectively. The proposal was defeated by a majority vote.

    [Note 2] Mr. T. Kiuchi proposed that the Bank will, with the aim to achieve the price stability target of 2 percent in the medium to long term, continue with asset purchases and a virtually zero interest rate policy as long as each of these policy measures is deemed appropriate under flexible policy conduct based on the examination from the two perspectives of the monetary policy framework. The proposal was defeated by an 8-1 majority vote. Voting for the proposal: Mr. T. Kiuchi. Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, and Mr. Y. Funo.


Hungary maintains rate, on hold for extended period

November 21, 2015 by CentralBankNews   Comments (0)

    Hungary's central bank left its base rate steady at 1.35 percent, as expected, and repeated its guidance from October that it would maintain the current rate "for an extended period" as long as its current assumptions are consistent with inflation returning to its target.
    The National Bank of Hungary (MNB), which ended its easing cycle in July after cuts this year totaling 75 basis points, said the country's economy continues to grow but there is still unused capacity that is having a disinflationary impact and inflation remains below its target.
    Hungary's economy expanded by 0.5 percent in the third quarter, the same rate as in the first and second quarters, for annual growth of 2.3 percent, down from 2.7 percent in the second quarter, and below expectations due to slower external demand that hit industrial production.
    Domestic demand continues to contribute to growth, the MNB said, but government investment is likely to fall as funding from the European Union drops. But this is expected to be offset by a gradual pick-up in private sector investment and the central bank's Funding for Growth schemes.
    Hungary's inflation rate returned to positive territory in October with headline inflation rising to 0.1  percent compared with minus 0.4 percent in September and zero percent in August.
    Core inflation - 1.5 percent in October - is expected to rise gradually due to higher wages and demand but the MNB repeated that the persistently low cost environment will contain consumer prices so they will first rise to levels around the inflation target at the end of the forecast horizon.
    Last month the bank's deputy governor, Marton Nagy, said the central bank may keep rates at their current level until 2018 or even 2019, and first expects to reach its inflation objective by the end of 2017.
    The MNB targets inflation at a midpoint of 3.0 percent, within a range of plus or minus 1 percentage point.

    The National Bank of Hungary issued the following statement:


"At its meeting on 17 November 2015, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 1.35%.
In the Council’s assessment, Hungarian economic growth continues. A degree of unused capacity remains in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. Inflation remains substantially below the Bank’s target.
The annual consumer price index and core inflation both rose in October. As a result, inflation returned into positive territory. The Bank’s measures of underlying inflation indicate moderate inflationary pressures in the economy. Core inflation is likely to rise gradually as a result of an expansion in domestic demand and rises in wages, but the persistently low cost environment contains the increase in the consumer price index. The stabilisation of inflation expectations around the target is likely to contribute to price and wage-setting being consistent with the inflation target over the medium term as the output gap closes. Inflation is expected to remain substantially below the 3 per cent target over the coming months, and is only likely to rise to levels around 3 per cent at the end of the forecast horizon.
Based on preliminary GDP data, Hungarian economic growth continued in the third quarter of 2015, at a lower rate than expected. Due to a slowdown in external demand, industrial production weakened slightly in the third quarter relative to the previous period, which may have contributed to the slowdown in economic growth. The dynamics of retail sales have been stable in recent months, with their volume increasing across a wide range of products. Employment rose further while the unemployment rate fell. Domestic demand is making an increasing contribution to economic growth. Government investment is likely to fall as funding from the EU declines considerably, the impact of which is expected to be offset by the gradual pick-up in private sector investment and the Bank’s Growth Supporting Programme. The latter also helps to restore market-based financing and achieve a lasting turnaround in lending over the longer term.
Overall, sentiment in global financial markets has been mixed over the period since the Council’s latest policy decision. During the period, the main factors affecting global appetite for risk were the ECB’s communication suggesting that it would adopt a looser monetary policy stance looking forward, continued uncertainty about the interest rate increase by the Fed, and concerns over growth prospects in emerging economies.
Conditions in Hungarian financial markets were characterised by increased volatility, with the forint depreciating slightly against the euro. The domestic CDS spread and long-term government bond yields have been broadly unchanged since the previous policy decision. Market yield expectations moved in line with the Bank’s guidance that the central bank base rate would be held constant over an extended period. The targeted monetary policy instruments introduced by the Bank also facilitate a decline in long-term yields and, consequently, a loosening of monetary conditions. Forward-looking money market real interest rates are in negative territory and are likely to decline even further as inflation rises. Hungary’s persistently strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. In the Council’s assessment, a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.
In the Council’s assessment, there continues to be a degree of unused capacity in the economy. Inflationary pressures are likely to remain moderate, while the negative output gap is expected to close only gradually over the policy horizon. If the assumptions underlying the Bank’s projections hold, the current level of the base rate and maintaining loose monetary conditions for an extended period, over the entire forecast horizon, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 2 December 2015."


Kenya holds rate, stance anchors inflation expectations

November 21, 2015 by CentralBankNews   Comments (0)

    Kenya's central bank left its Central Bank Rate (CBR) unchanged at 11.50 percent, as expected,  saying the current policy measures "are appropriate to maintain market stability and anchor inflation expectations."
    The Central Bank of Kenya (CBK), which has raised its rate by 300 basis points this year, said recent "turbulent conditions" in financial markets had now abated and a decline in 3-month annualized non-food, non-fuel (NFNF) inflation indicated "moderating demand pressures."
    Last week CBK Governor Patrick Njoroge said the central bank's tighter policy had helped bring down inflation expectations and inflation was "back in control," raising expectations that the bank would maintain rates today.
    On Oct. 13 the central bank placed Imperial Bank Ltd, the country's 19th largest bank, in receivership for a year due to "unsafe and unsound business conditions," worrying some of its depositors while there was also pressure in markets due to the government's borrowing plan.
    Two days later the central bank sought to calm market concern, saying the banking system was safe and robust and it was ready to use all instruments to provide adequate liquidity.
    Kenya's headline inflation rate rose to 6.72 percent in October from 5.97 percent, but this remained within the government's target range while NFNF inflation rose to 4.8 percent from 4.7 percent due to an increase in some food prices and the comparison to last year.
    The government targets inflation in a range of 2.5 percent to 7.5 percent.
    But the CBK said 3-month annualized NFNF inflation declined to 2.5 percent in October from 3.4 percent in September, and the foreign exchange market had also been stable since September while the current account deficit had narrowed on lower cost of oil imports and lower consumer imports.
    Kenya's shilling began depreciating sharply in March this year but after hitting 106 to the U.S. dollar in early September, it has been firming since early October. Today the shilling was trading at 102.2 to the dollar, down 11.4 percent since the beginning of the year.
    The central bank's foreign exchange reserves rose to US$6.777 billion, or 4.3 months of imports, from $6.116 billion at the end of September, with the increase due to purchases of foreign exchange on the market and funds from the government's syndicated loan, the CBK said.

    The Central Bank of Kenya issued the following statement:

"The Monetary Policy Committee (MPC) met on November 17, 2015, to review market developments and the outcomes of its previous monetary policy decisions. Since the MPC meeting of September 2015, turbulent conditions emerged in the financial markets, primarily due to pressures on the Government borrowing plan and the placement of Imperial Bank Limited into receivership. These adverse conditions have now abated. The following developments were also noted:

 In September and October 2015, liquidity conditions were tight with short-term interest rates remaining above the Central Bank Rate (CBR). The significant rise in Treasury bill rates also reflected Government domestic borrowing. However, a notable improvement in liquidity conditions has been recorded in November, with the interbank and Treasury bill rates declining. The distribution of liquidity was also enhanced through Reverse Repos, thus addressing the temporary shortages in segments of the market.

 The fiscal measures taken by the National Treasury, including the issuance of a syndicated loan in November, have eased pressures on Government domestic borrowing and interest rates. The Central Bank of Kenya (CBK) is working closely with the National Treasury to strengthen the coordination of monetary and fiscal policies to support overall macroeconomic stability.

 Although the banking sector is liquid and well capitalized, credit and liquidity risks— largely from market segmentation—remain. The CBK is closely monitoring the sector and continues to address and support financial stability. In particular, it notes the recent reduction in short-term interest rates and expects them to be transmitted to commercial lending rates.

 Overall month-on-month inflation increased to 6.7 percent in October 2015, from 6.0 percent in September, but remained within the Government target range. Month-onmonth non-food-non-fuel (NFNF) inflation rose marginally to 4.8 percent in October from 4.7 percent in September. The rise in inflation was largely due to increases in the prices of some food items, and a significant base effect. However, the 3-month annualised NFNF inflation declined to 2.5 percent in October from 3.4 percent in September, indicating moderating demand pressure due to the impact of the monetary policy measures.

 The foreign exchange market has been stable since September supported by CBK’s monetary policy operations. Furthermore, the current account deficit narrowed, mainly due to a lower oil import bill, and a slowdown in consumer imports. Diaspora remittances remain strong.

 The CBK’s foreign exchange reserves stands at USD 6,777.2 million (4.3 months of import cover) from USD 6,115.9 million (3.9 months of import cover) at the end of September. The build-up in reserves was supported by purchases of foreign exchange from the market and proceeds of the Government’s syndicated loan. These reserves, together with the Precautionary Arrangements with the International Monetary Fund (IMF), continue to provide an adequate buffer against short-term shocks.

 The CBK’s Market Perceptions Survey of November 2015 showed that private sector firms expect growth to be resilient in 2015 and to pick up in 2016 supported mainly by infrastructure investments. The Survey also showed that inflation expectations are moderating supported by lower oil and food prices. However, respondents flagged a rise in U.S. interest rates as a risk to the inflation outlook through its impact on the exchange rate. In addition, the El Niño rains remain a threat to stability of food prices if it disrupts the food supply chains.

 Global economic growth has been weaker than expected, but indications are for a gradual pickup in 2016, driven mainly by the U.S. economy. However, the prospects for slower growth in China could lower growth in emerging and frontier market economies. In addition, the financial markets remain uncertain in respect of the timing of the increase in U.S. interest rates and the easing of monetary policy in the Euro Area.

The Committee concluded that the monetary policy measures in place are appropriate to maintain market stability and anchor inflation expectations. The MPC therefore decided to retain the CBR at 11.50 percent. The CBK will continue to use the instruments at its disposal to maintain overall price and financial sector stability. "


Indonesia holds rate, cuts RR, vigilant in easing policy

November 21, 2015 by CentralBankNews   Comments (0)

    Indonesia's central bank maintained its benchmark BI rate at 7.50 percent but lived up to its guidance from last month that it had room to ease its policy by lowering the reserve requirement by 50 basis points to 7.50 percent to "boost bank financing capacity to support escalating economic activity during the third quarter and beyond."
    Bank Indonesia (BI), which cut its rate by 25 basis points in February, also repeated its view from October that continued improvement in macroeconomic stability is "making room for monetary policy easing" and that it remains confident that inflation will be at the lower end of its target while the current account deficit is seen at 2 percent of Gross Domestic Product.
    However, BI is also acutely aware of the uncertain conditions in global financial markets from the expected increase in U.S. rates along with what it described as "the diversity of monetary policies form ECB, BoJ, and PBoC," and said it would "remain vigilant in easing its monetary policy," tempering any expectations for a series of rate cuts.
    The BI's guidance from October had raised expectations among some economists that it would ease its policy stance today while others had expected the BI to keep its policy steady given the concern that the rupiah's exchange rate could weaken in response to a rate cut, dealing a setback to the central bank's efforts to bring down inflation following a jump last year after the government cut fuel subsidies, pushing up fuel prices.
    Indonesia's inflation rate immediately jumped to 8.36 percent in December last year and has remained well-above the BI's target of 4.0 percent, plus/minus 1 percentage point this year.
    But in October the inflation rate eased to 6.25 percent from 6.83 percent in September, for a year-to-date rate of 2.16, BI said, adding that core inflation eased further to 5.02 percent in October, reflecting appreciation of the rupiah, limited domestic demand and anchored inflation expectations.
    Last month the rupiah appreciated after renewed optimism about the economic outlook for the country following new government policy packages, intervention by the BI to stabilize the currency, and what it described as a "dovish announcement" by the U.S. Federal Reserve in September.
    During the third quarter the rupiah appreciated on average by 5.35 percent to 13,873 to the U.S. dollar but it is still down 9.4 percent this year, trading at 13,737 today.
    Indonesia's economy expanded by an annual 4.73 percent in the third quarter, up from 4.67 percent in the second quarter, due to higher government spending, but sluggish growth in trading partners and low commodity prices "precipitated a deeper contraction in exports," BI said.
    Although it expects growth to continue in the fourth quarter as government infrastructure projects gains momentum, the BI said growth was projected "at the lower end of the 4.7-5.1% range for 2015. Last month the BI had only forecast growth in the 4.7 to 5.1 percent range.
    For 2016 growth is expected to increase to 5.2 to 5.6 percent.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 17th November 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility rate at 5.50% and the Lending facility rate at 8.00%. The Board of Governors also decided to lower the primary reserve requirement in Rupiah from 8.0% 7.50, effective on 1st December 2015
Bank Indonesia considered that the macroeconomic stability has continued to improve, making room for monetary policy easing. Bank Indonesia is confident that the 2015 inflation will be maintained at the lower end of the 4±1% inflation target, with the current account deficit is projected at 2% of GDP. With the lingering uncertainty in the global financial market, stemming mainly from the expected Federal Funds Rate (FFR) hike as well as the diversity of monetary policies from ECB, BoJ, and PBoC, Bank Indonesia will remain vigilant in easing its monetary policy. In this respect, lowering the primary reserve requirement is expected to boost bank financing capacity to support escalating economic activity during the third quarter and beyond. Moving forward, Bank Indonesia will consistently maintain coordination with the Government in order to reinforce the structure of the economy, thereby facilitating stronger economic growth and preserving macroeconomic and financial system stability.
The global recovery remains uneven, while pressures on global financial markets demand vigilance. The US growth was moderate in line with limited manufacturing gains and a week export. Conversely, the labour sector showed signs of improvement, with lower unemployment along with rising income growth and nonfarm payroll. Consequently, such conditions reignited expectations of an imminent FFR hike in December 2015. The economic recoveries of Europe and Japan are still considered weak, driving the 2 countries to ease their monetary policies. China’s economic slowdown, as indicated by the PMI contraction along with a decrease in export, is also conducting monetarey policy easing. China’s government, in addition, is also conducting financial market reform, as well as renmimbi internationalisation. 
Economic growth accelerated in the third quarter of 2015, with the trend projected to continue into the fourth quarter. Third quarter growth was recorded at 4.73% (yoy), surpassing that posted last period at 4.67% (yoy). This was mainly due to stronger government consumption and investment, in line with significant progress in terms of government infrastructure projects. In addition, government capital spending increased by 38.8% by October 2015. Household consumption remains strong, as reflected by an improved purchasing power. From an external standpoint, however, persistently low commodity prices and sluggish growth in trade partner countries, such as the United States, China and Singapore, precipitated a deeper contraction in exports from Indonesia. By region, economic conditions on the island of Java improved, while limited growth was reported on Sumatra. Conversely, economic growth in Eastern Indonesia slowed, while Kalimantan experienced negative growth for the first time in a decade. Bank Indonesia expects the national economic grains to endure into the fourth quarter as government infrastructure projects gain momentum. Furthermore, private investment is predicted to increase due to the recent Government policy packages, including deregulations to support the investment climate. In general, domestic economic growth was projected at the lower end of the 4.7-5.1% range for 2015, and is expected to increase to 5.2-5.6% on 2016.
A sound non-oil and gas trade balance preserved the current account gains during the reporting period. The current account deficit in the Indonesia Balance of Payments (BOP) stood at USD4.0 billion (1.86% of GDP) in Q3/2015, improving from USD7.0 billion (3.02% of GDP) in Q3/2014 and USD4.2 billion (1.95% of GDP) in Q2/2015. The improvements stemmed from gains in the non-oil and gas trade balance as imports decreased sharply in line with limited domestic demand. On the other hand, non-oil and gas exports experienced a less pronounced decline due to lower commodity prices, despite positive growth in real terms. The oil and gas trade deficit remained stable as a smaller gas surplus was offset by a smaller oil deficit. Meanwhile, the Indonesia trade balance recorded a positive devolepment, with a surplus of USD1.01 billion in October 2015. Furthermore, the capital and financial account also maintained a surplus despite widespread uncertainty overshadowing global financial markets. The surplus declined, however, compared to the previous period and was insufficient to fully offset the current account deficit. Consequently, the position of reserve assets stood at USD100.7 billion at the end of October 2015, equivalent to 7.1 months of imports or 6.6 months of imports and servicing public external debt, which is well above the international adequacy standard of around three months.
The Rupiah rebounded after intense depreciatory pressures were felt in the third quarter. In Q3/2015, the Rupiah depreciated on average by 5.35% (qtq) to a level of Rp13,873 per USD due to external factors, namely concerns over the normalisation policy of the Federal Reserve as well as Yuan devaluation in China. Nonetheless, the Rupiah strengthened in October 2015 on positive sentiment for EM due to a dovish announcement relayed at the FOMC, coupled with optimism regarding the economic outlook of Indonesia after the Government released a series of policy packages and Bank Indonesia intervened on the foreign exchange market to stabilise the Rupiah. Rupiah appreciation averaged 4.47% (mtm) to a level of Rp13,783 per USD. Moving forward, Bank Indonesia will continue to maintain exchange rate stability in line with the currency’s fundamental value. 
The Consumer Price Index (CPI) experienced deflation in October 2015, bringing national inflation for the year to within the target corridor of 4±1%. Deflation was recorded at 0.08% (mtm) or 6.25% (yoy) in line with volatile food deflation after foodstuff prices were corrected due to increased supply. Consequently, inflation from January to October 2015 stood at 2.16% (ytd) or 6.25% (yoy). Volatile food deflation was backed by an increase in foodstuff supply. Furthermore, core inflation and administered prices were also considered low compared to historical trends. Core inflation was recorded at 0.23% (mtm) or 5.02% (yoy) in line with Rupiah appreciation, limited domestic demand and anchored inflation expectations. Administered price inflation remained low, contributed by cheaper diesel prices and the knock-on effect of lower 12 kg LPG canisters since September 2015. Based on conditions through to October 2015, Bank Indonesia confirmed that inflation in 2015 will fall towards the lower end of the 4±1% target, supported by strong policy coordination with the government to control inflation locally and nationally. In addition, low inflation through to October 2015 was also indicative of maintained price stability.
Financial system stability remained solid, underpinned by a resilient banking system and relatively stable financial markets. Banking industry resilience endured, with credit, liquidity and market risks well mitigated. In September 2015, the Capital Adequacy Ratio (CAR) remained well above the 8% minimum threshold at 20.4%, while non-performing loans (NPL) were low and stable at 2.7% (gross) or 1.3% (net). In terms of the intermediation function, credit growth was recorded at 11.1% (yoy), higher than that of the previous month, while deposit growth on September 2015 was recorded at 11.7% (yoy). Looking forward, credit growth is predicted to continue accelerating in line with an increase in economic activity and the looser macroprudential policy stance adopted by Bank Indonesia, along with the lower primary reserve requirement. "