Why the global economy could be in trouble, again!

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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It might be seven years since the first signs that the world was about to go into crisis mode, but we’re not home and dry yet. In fact, recent cheers at nascent signs of a global economic recovery now look somewhat premature, analysts and politicians warn.

Fears of a setback were heightened on Monday following some surprise news from Japan: the world’s third-largest economy fell into recession after gross domestic product (GDP) shrank in the third quarter.

It came as British Prime Minister David Cameron warned that the global economy was showing worrying signs of wobble. Meanwhile, at the G-20 summit over the weekend, OECD Chief Economist Catherine Mann told CNBC the global economy should be growing at a much faster pace.

Read More UK PM warns on second global crash

Here, CNBC takes a look at some of the biggest economic pressure points:

Japan woes

Data published on Monday revealed that Japan’s economy contracted an annualized 1.6 percent in the July-September quarter, way below a Reuters forecast of a 2.1 percent gain.
The figures mean Japan is now back in a technical recession, after contracting a revised 7.3 percent in the second quarter following a hike in a controversial sales tax.

Read More Japan shocks as economy slips into recession

As a result, analysts now expect Japan’s Prime Minister Shinzo Abe to delay another planned rise in the levy – an austerity measure – until 2017, and maybe even call a snap election.

But it’s not all bad news for Japan, with Takuji Aida, chief economist at Societe Generale, saying that as delay to the sales tax hike would be bullish for the economy’s outlook.

“With the second consumption tax delayed, uncertainty over the economy will decrease and growth and inflation expectations will rise, leading to stronger corporate activity,” Aida said in a note.

Oil at lows

The news from Japan – which is the world’s fourth-biggest crude importer – put yet more pressure on oil prices, which have fallen dramatically in recent months. On Monday, Brent crude fell close to USD 78 a barrel.

Read More Cracks widen at OPEC as oil prices tumble

The fall below USD 80 has rattled nerves within the Organization of the Petroleum Exporting Countries (OPEC), amid calls for concrete action from the group, with both Kuwait and Iran raising concerns about the lows. This after the International Energy Agency (IEA), warned last week that weak demand, a strong dollar and booming US oil production meant “we have begun a new chapter in the history of the oil markets.”

“Investors are becoming reluctant to try and pick the bottom now, as are consumers, many of whom are holding off to see what OPEC does,” Investec Capital Markets analysts said in a note.

Low oil prices are something of a double-edged sword for the global economy: On the one hand helping to boost GDP, but on the other putting downward pressure on inflation. Price growth remains worryingly low in Europe and the UK and there are some concerns in the US, where long-term inflation expectations fell to financial crisis levels, according to the University of Michigan consumer sentiment survey on Friday.

Euro zone stagnation

Growth-sapping low inflation is particularly concerning in the euro zone, where prices grew by just 0.4 percent in October. The region is also battling high unemployment, which remained stuck at 11.5 percent in September.

There might have been some good news over recent days – with figures on Friday showing the euro zone’s economy grew more than expected, and data on Monday revealing that the trade surplus jumped to a record 17.7 billion euros (USD 22.1 billion) in September – but serious concerns about the region remain.

Despite beating forecasts, the 18-country bloc that uses the euro grew by just 0.2 percent on the previous quarter – a pretty flat figure.

“Overall, the Q3 picture was a touch better than feared,” Daiwa Capital Markets analysts said in a not. “But there seems little reason to expect the euro area recovery to progress much further in the near term unless the ECB (European Central Bank) and governments do more for growth.”

Read More ECB’s Draghi: Buying sovereign bonds is an option

Pressure remains on ECB President Mario Draghi to do more. The central bank has already launched a slew of stimulus measures to reverse disinflation – and a number of experts are now calling for a US Federal Reserve-style bond-buying program.

On Monday, Draghi reiterated that he was willing to do more to stimulate the euro zone economy if necessary, adding that such additional measures could include the purchase of sovereign bonds.

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Why a Santa rally might not be on the cards

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Many traders expect stocks to rally into the year-end, but the current complacency may be signaling that a late year Santa rally is not in the cards.

If the S&P 500 closes higher Tuesday, it will be the 43rd record high of the year. Stocks traded quietly on low volume Monday, with the Dow up just 13 points at 17,647 and the S&P 500 up 1 point at a record 2,041. The Nasdaq fell 17 points to 4,671, and the Russell 2000 was the worst performer—own 0.8 percent to 1,164.

“We’re a little concerned by the fact that investors’ memories have become so short that volatility has just completely collapsed to multiyear lows a month away from an incredibly frightening roller-coaster ride. The bearish readings have slipped,” said Julian Emanuel, equity strategist at UBS. “A lot of people expect the year to end on a high note.”

Emanuel said he had expected a rally into year-end but the market’s recent behavior is making him more cautious. “I personally have never seen volatility get crunched like this so early before Thanksgiving. It usually happens at the end of December or in August,” he said.

Emanuel said he watches the 10-day realized volatility for the S&P 500, a reading of the close to close changes in the S&P over a 10-day period. It was at 3.38 Monday. “It’s extraordinary. The 200-day moving average is 10.8,” he said. “The range over the last two weeks have been the lowest they’ve been in aggregate in over five years.”

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According to Emanuel, the reading may not be signaling a selloff but rather just limited gains.

“The market to us just feels like upside, rather than a setback. It feels like the upside is capped because you have this combination of low volatility and very complacent sentiment, and Japan tells you the problems are still out there,” he said.

Stocks were boosted by big merger deals Monday but also held in check by the surprise news that Japan has fallen into recession, he said. Allergan is being acquired by Actavis for USD 66 billion, and Baker Hughes reached a USD 35 billion merger deal with Halliburton.

“If you look at the M&A announcements, it’s very healthy. If you look at the activity in the healthcare sector, that sector has the most cash along with technology and they are going to be spending it,” he said.

Read More ‘Major correction’ in 3 to 5 years, Icahn says

More energy deals are also expected as oil prices continue to weaken. West Texas Intermediate crude closed at USD 75.64 per barrel Monday, off 18 cents. Natural gas, meanwhile, jumped 8 percent on cold weather to USD 4.34 per million BTUs.

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Euro zone growth momentum has weakened: Draghi

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The euro zone’s economic growth has weakened over the summer months, European Central Bank (ECB) President Mario Draghi told European lawmakers Monday, but stressed that he was willing to do more to stimulate the economy if required.

Speaking at the European Union’s Parliament, Draghi also said there were early indications that efforts to ease credit conditions were working.

“We see early indications that our credit-easing package is delivering tangible benefits. Since the beginning of June forward money market rates have shown steep declines across the security spectrum,” he said.

Read More Why the global economy could be in trouble (again)

The bank’s governing council remained “unanimous in its commitment to using additional unconventional instruments if needed”, Draghi added.

His comments come after official figures showed the euro zone’s economy grew more than expected in the third quarter, giving investors cause to breathe a sigh of relief after a string of disappointing data points for the region. The 18-country bloc that uses the euro grew by just 0.2 percent on the previous quarter, data published Friday showed.

Euro zone GDP beats, Greece emerges from recession

But concerns about the health of the region’s economy remain. The region is battling high unemployment and growth-sapping low inflation is particularly worrying, with price growth of just 0.4 percent in October.

“We need to remain alert to possible downside risks to our outlook for inflation,” Draghi added on Monday.

The central bank has already launched a slew of stimulus measures in an effort to boost the economy by easing credit conditions. These include cutting interest rates to record lows and announcing plans to purchase covered bonds and asset-backed securities (ABS) – and there are calls for the ECB to do more.

Read More UK PM warns on second global crash

Draghi on Monday said that more measures, “could include changes to the size and composition to the Eurosystem balance sheet, if warranted, to achieve price stability over the medium term.”

Structural reform needed

The central bank president went on to push governments to commit to “concrete short-term commitments for structural reforms” and that monetary policy alone is not enough to encourage growth.

Draghi said next year, governments and European institutions had to work together to strengthen the region’s economy.

“This is why there is an urgent need to agree on concrete short-term commitments for structural reforms in the member states… and to launch work on a long-term vision to further share sovereignty ensuring the sustainable and smooth functioning of the European Union,” he said.

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Fed is looking at sharply rising labour costs

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In the first three quarters of this year, hourly compensations in the US nonfarm business sector rose at a rate of 3.1 percent, about three times the pace of advance observed in 2013. Over the same period, unit labor costs accelerated to an annual rate of 2.1 percent from 0.25 percent. [Unit labour costs are a difference between wages and labor productivity. They are usually thought of as a floor below the country’s inflation rate.]

This sharply rising price of labour since the beginning of the year is caused by an increasing demand for labour services, as the jobless rate declined by nearly a full percentage point and the number of unemployed fell by 1.2 million.

Will this evidence move the Fed to begin its process of “normalizing” interest rates?

It should. But if that is not enough, here are a few more issues to show that the U.S. monetary policy may soon have to begin its long journey toward a neutral position.

Read More Fed’s Dudley: Still too early to raise rates

The first thing to note is that a sustained increase in hourly compensations is signaling rising demand-supply imbalances in US labour markets. Since last August, for example, the recorded unemployment rate has been steadily moving below its structural level of 6.1 percent, reaching 5.8 percent in October.

That structural unemployment rate is based on the long-term trend growth of the economy (aka “potential growth rate”). Its more complicated technical names are “non-accelerating inflation rate of unemployment (NAIRU)” and a “full employment unemployment rate.”

Hitting the speed limits?

Put more simply, October’s 5.8 percent unemployment rate implies that the U.S. economy is operating above its non-inflationary potential, and that it is beginning to hit its physical limits (in terms of labor and capital) to growth.

It certainly looks that way. America’s 2.3 percent economic growth in the first three quarters of this year is 0.4 percentage point above the potential growth rate of 1.9 percent estimated during the post-crisis period from 2009 to (and including) 2013.

Capacity strains in the US economy look much stronger if the growth potential is approximated as a sum of growth rates of labor supply and labor productivity over the same five-year period. That gives a potential growth rate of 1.56 percent and indicates that the US economy is now running 0.74 percentage point (2.3-1.56) above its non-inflationary growth capacity.

Now, one can quibble – and many people do – about the various estimates of the potential growth rate of the US economy. It is, however, difficult to argue with the fact that a steady increase in the US labour demand has been pushing up wage costs in the first nine months of this year. The numbers for that period show that the labor productivity growth doubled from the same interval of 2013, but that still could not prevent accelerating unit labor costs.

What lies ahead?

Riding on growing jobs and incomes, and easy credit conditions, the US economy is poised to maintain its forward momentum in the coming months. Under these circumstances, businesses will have little difficulty in passing their rising labor costs on to consumers to protect their profit margins.

Read More Fed’s Kocherlakota repeats 2015 rate hike would be inappropriate

I am sure the Fed is well aware of these risks to price stability.

The problem, as always, is to act in time to prevent rising inflation expectations when – as is the case now — the headline inflation indicators still look relatively well behaved.

Fed’s speed: How fast from 0.08% to 4%?

But the Fed cannot stay put until signs of gathering price pressures can no longer be ignored. If it did that, the Fed would quickly find itself well behind the curve and unable to avoid the next round of the inflation-recession cycle.

The reason is simple: Fed’s actions are subject to long and variable lags, because it can take anywhere from three to five quarters for interest rate changes to begin affecting the real economy.

And here is the first stretch of the distance the Fed’s policy change will have to travel.
At the close of trading last Friday, the effective federal funds rate was at 0.08 percent, roughly what it was a year ago, and well below the official target of 0.25 percent. Making a heroic assumption that the US inflation will remain at about 2 percent for the foreseeable future, the Fed would have to bring the federal funds rate close to 4 percent – just to keep its policy stance neutral, i.e., neither tight nor loose.

So, how soon will the Fed begin to move in that direction?

I believe the first steps could come much sooner than the middle or latter half of next year the markets currently expect.

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As I wrote in an earlier column, last August marked a turning point in the Fed’s money supply decisions. Since then, the monetary base shrank by $203.9 billion (that is 25 percent of the Fed’s pre-crisis balance sheet), and its current annual growth has been cut to 5 percent from 19 percent during the third quarter.

That was a quick piece of work.

Investment thoughts

Accelerating unit labor costs is a signal the Fed is unlikely to ignore. Rapid and large withdrawals of excess liquidity are also a sign that the Fed is acting more decisively than aficionados of the “forward guidance” seem to be expecting.

Fixed-income assets remain crossed out in my book. At this point, a careful review of equity portfolios would be a good idea. Prospects of a tightening monetary policy always suggest defensive investment postures.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

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Why oil is more likely to test $50 than $100 again next yr

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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When oil and gasoline prices are soaring, oil analysts like myself try to assuage the fears of consumers with the old saw: There is no better cure for high prices than high prices.

The succinct analysis of commodity market dynamics likely makes motorists irate, as they pay USD 100 or more to fill up the family SUV. They fail to appreciate how efficient market forces can be, even at that particular moment of pain.

However, that is precisely why oil prices are falling now—and will likely continue to fall in the coming months to as low as USD 50 per barrel!

On Thursday, in its weekly inventory report, the US Department of Energy reported that oil production in the United States rose to its highest level in 29 years to just over 9 million barrels per day. To put that in perspective, the US is now nipping at Saudi Arabia’s heels, with that country currently producing about 9.6 million barrels per day.

The surge in US oil production is due to the immense success of a reborn technology: hydraulic fracturing (better known as fracking), which has liberated millions of barrels of oil and millions of cubic feet of natural gas from fields that were thought to be bereft of fossil fuels.

Opponents of the practice have their work cut for them given the tremendous impact the drilling is having on oil and natural gas prices.

Read More: Saudi America? Close…but no cigar: Analysts

The second part of the low oil price story involves several key pipeline upgrades that actually changed the flow of oil, bringing it from the middle of the country to the Gulf Coast, where it is needed to supply the majority of the country’s refineries.

The changes have been so impactful that, at times, Gulf Coast storage facilities have been nearly filled to capacity. The U.S. has virtually ended imports of crude oil from West African countries, such as Nigeria, which used to be a key source of supply.

Read More: US oil output booms—now refiners have to catch up

OPEC members are now scrambling to prop up oil prices, and find buyers for their oil. During the past several months, tankers of oil have sat idling, waiting to sail to port to unload their cargo. Saudi Arabia, Kuwait and Iran are in a battle to secure sales to China and other Asian buyers at the expense of other countries in the cartel.

It is not helping their cause that Alaska North Slope crude oil is now being exported to South Korea on a regular basis now. That started in September.

Adding to the supply glut has been the return of Libya’s oil production, despite a raging civil war with two competing governments asserting governance over the country. Also, even as ISIS forces roll through Iraq, exports continue to rise to record post-Iraq war levels.

Read More: Oil prices collapse as OPEC stands back, while US booms

The Kurds were finally able to strike a deal with Baghdad that will allow exports from Northern Iraq to surge, as well, in the coming months. If that’s not enough, North Sea production is set to rise over 11 percent in December, due to upgrades to the system there.

In other words, increasing amounts of crude oil are hitting the global market, left, right, and center.

Several OPEC members are now calling for a production cut to be announced at their upcoming meeting, but they are looking for Saudi Arabia to carry the load, which is not going to happen. Based upon bewildering statements by the Saudi oil minister this week, the Saudis do not appear inclined to cut.

Read More: Saudi minister: It’s all ‘misunderstanding,’ no ‘price war’ talk

Market share is more important to them because they want to maintain their relevance. With their low cost of production, they believe they can sweat out the higher-cost competition, including U.S. frackers.

So, the OPEC meeting on Thanksgiving Day will likely end in discord and cause another leg lower for oil prices.

By next March, US oil production will be nearing the 9.5 million barrel per day level, and possibly higher. With the winter coming to an end then, the global market enters a slack demand period, which will increase the downward pressure on prices.

Oil producers of all stripes will be staring down prices near the USD 50 level. Russia’s President Putin is already preparing for a “catastrophic” oil price drop.

Something will have to give. Saudi Arabia and other OPEC members will be forced to curtail production or US oil producers will have to throw in the towel as they await a price rebound. The US needs to be careful what it wishes for, in terms of setting back the march toward energy independence.

The surging production trends will have consequences, in addition to the huge benefit to consumers. After all, as the saying goes, there is no better cure for low prices than low prices.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Can Asia’s pricey consumer plays keep rising?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Asia consumer stocks appear expensive, but some analysts think they can rise further, getting a boost from falling commodity prices.

“Food prices have fallen very sharply over the last couple of months. The market may have actually ignored this because people are focusing on oil prices,” Nirgunan Tiruchelvam, director for Southeast Asia consumer research at Standard Chartered, told CNBC.

Read More Is Singapore haunted by the ghost of retail therapy past?

For example, corn and soybean prices are down around 26-30 percent from their peaks this year, with many agricultural commodities priced at five-year lows, with the declines far outstripping the US dollar’s recent strength against regional currencies, he noted.

“This has a very important impact on the operating margins of the F&B (food and beverage) companies in Southeast Asia because their principal products are priced as consumer products but their raw materials are priced as commodities,” he said. “There could be a very high chance of an earnings surprise for a number of these companies.”

Many analysts have recently given regional consumer stocks the cold shoulder recently, citing high valuations and doubts about whether the rising middle class will step up spending quite as quickly as expected.

EGShares Emerging Markets Consumer (ECON), for example, is trading at more than 22 times earnings, while trading essentially flat with its level two years ago.

Read More Some fried chicken with your macroeconomics?

Others are also bullish on Asia’s consumers.

“The Asian consumer growth story is far from over,” Capital Economics said in a note Wednesday, noting emerging Asia’s consumer spending has grown by an average of just over 7 percent every year since 2000.

But it doesn’t believe all Asian consumer markets will be created equal.

“Prospects are best in the Philippines and India, where strong income growth should continue to support rapid consumer spending growth. Consumers in Vietnam and China should also do well,” it said. “By comparison, consumer spending growth will be more sluggish in economies with high household debt, like Thailand, and those where income growth is likely to be sluggish, such as Taiwan and Korea.”

Read More Are low oil prices here to stay?

Tiruchelvam, however, expects Thailand’s consumers could continue increasing their spending, at least on food and especially meat, with increased refrigerator penetration. Around 73 percent of Thai households with electricity have a refrigerator, according to Standard Chartered data. Within Southeast Asia, fridge penetration may grow by 50 percent over the next five years, Standard Chartered forecast in a July report.

To be sure, some expect Asia’s consumption growth will be sluggish.

“The continued headwinds from deleveraging in the developed world have meant that domestic demand growth in developed markets has been relatively weak since the crisis, which in turn has weighed on the region’s export growth trend,” Morgan Stanley said in a note last week.

Read More Bumper crop brings food price relief for consumers

That’s weighed on corporate sales and investment, slowing wage growth, Morgan Stanley said.

“There are risks of a formation of a loop of slower domestic demand growth, weaker inflation, higher real interest rates and debt servicing burden, downward pressures on asset prices, continued rise in nonperforming loans formation and further slowdown in aggregate demand,” it said.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

China industrial production up 7.7%, below view

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A slew of data out of China on Thursday suggested continued slack in the world`s second largest economy, which looks on track to undershoot the government`s annual 7.5 percent growth target, say economists.

Chinese industrial production and retail sales data missed expectations in October, extending a trend of below-view indicators amid a backdrop of slowing growth.

Industrial production rose 7.7 percent on year in October, below expectations for an 8 percent increase in a Reuters poll. Meanwhile, retail sales rose 11.5 percent on year, slightly below expectations for an 11.6 percent rise.

Fixed asset investment for the January-October period increased 15.9 percent, in line with expectations.

“The data confirm the domestic side of the economy is quite weak,” Alaistair Chan, economist at Moody`s Analytics told CNBC, noting that most of the downturn continues to be driven by the housing sector.

A breakdown of the industrial production data shows that businesses linked to the housing market, including cement, iron and glass, are doing poorly, Chan said.

“We were looking for a small bounce in growth in the fourth quarter but that may not happen anymore, considering the government seems willing to see the slowdown play out without much stimulus,” he said.

China`s economy slowed to 7.3 percent in the third quarter, its weakest rate since the first quarter of 2009.

Shen Jian Guang, Greater China Chief Economist at Mizuho Securities Asia agrees the property sector remains the main drag on the economy.

“[It`s] the main source of weakening in the economy. That`s why the PBoC (People`s Bank of China) has injected the money and asked the banks to reduce mortgage rate and support first-time home buyers. I think the strategy is to make the housing market recover and [let it] compensate for the decline in manufacturing and infrastructure investments.”

Blame APEC

Other economists say the Asia-Pacific Economic Cooperation (APEC) summit in Beijing, held from November 5-11, is primarily to blame for the softer economic data.

“The APEC summit [had] a negative impact on China`s activities as the government took aggressive measures before and during the summit to achieve a blue sky,” said Ting Lu, chief China economist at Bank of America Merrill Lynch.

Read More China`s central bank resists calls for stimulus

“These measures involve suspending many industrial and construction activities in and around Beijing,” he said.

November will be affected by the APEC summit as well, said Lu, but there will be a rebound in December.

“We expect more easing measures in coming weeks partially in response to the weak data in November, but Beijing won`t over-react,” he said.

Copyright 2011 cnbc.com

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Will snap elections derail Abenomics?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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If Japanese Prime Minister Shinzo Abe were to call a snap election, it could extend the country`s stock rally, but analysts say it would undermine confidence in his ability to put the economy back on a stable path in the longer-run.

Speculation is building that Abe is considering dissolving the lower house of parliament, the more powerful of the two chambers, and announcing a snap election in mid-December if he decides to postpone the 2015 sales tax hike.

“A snap election could have the virtue of giving the government a stronger mandate,” Marcel Thieliant, Japan economist at Capital Economics wrote in a note.

“But it would not be a long-term positive if coupled with a delay in the tax hike… [because it] would probably be seen as a watering down of a key element of Abenomics and could weaken momentum for further reform,” he said.

The rationale for timing the snap election after a decision to delay the tax hike is to maximize the Liberal Democratic Party`s (LDP) chances of securing as many seats possible, says Martin Schulz, senior economist at Fujitsu Research Institute.

“I`m totally unhappy with this. The LDP is back to their old ways of calling snap elections here and there to maximize some election wins, and looking at short-term issues,” said Schulz.

“Everything promised by Abenomics – structural reforms, long-term stability, rebalancing the economy – that`s all forgotten in this,” he said.

Japan`s planned second sales tax hike to – 10 percent from 8 percent – is controversial due to the fragile state of the economy.

Advocates argue that a tax hike is necessary to slow the rise in Japan`s public debt, which at twice the size of its economy is the worst in the developed world. Meanwhile, opponents say that another round of fiscal tightening would weigh further on consumer spending and derail the economy.

Responding to speculation over a possible delay in the second sales tax hike, Japanese Finance Minister Taro Aso on Wednesday said that it had not “been decided at all”. Shortly after, however, he noted that Japan`s economy was in need of “some form of stimulus.”

In April, the sales tax was raised to 8 percent from 5 percent, the first such increase in almost two decades, knocking the wind out of the economy.

Contrary to Schulz, Nizam Idris, head of strategy for fixed income and currencies at Macquarie Bank says a snap election should be read as Abe`s determination to maintain the reform path.

“If you take a step back, the decision to call a snap election says Abe is not getting the support for another hike in the sales tax so he needs a stronger mandate,” he said. “Abe is still intent on going forward with the reforms,” he added, noting that a snap election would be supportive of dollar-yen.

Greg Gibbs, head of Asia Pacific markets strategy at RBS says it is unclear whether this is good or bad for the yen.

“On the one hand, a fresh term could afford Abe more time to deliver on his reform agenda and boost confidence in the economy,” he said. “On the other hand, if he is putting on ice a key plank of his fiscal reform …it suggests that Abe is slipping back into the political mould of securing power for its own sake rather than exercising it boldly to achieve a better long-term outcome for his nation even if it may not have popular support.”

“If the market is questioning the agenda and resolve of the Abe government to deliver on economic and fiscal reforms, then it may be negative for the JPY ,” he added.

As for Japanese stocks, Jonathan Garner, strategist at Morgan Stanley says while the prospect of an election brings about uncertainty for investors, which suggests volatility in the near-term, “a renewed and extended mandate for Abe, particularly if this involved delaying or abandoning the second consumption tax hike, would be a medium-term market positive.”

Garner says an Abe victory in a snap election would increase the probability of the Topix reaching the bank`s “bull case” target of 1,865 by September 2015.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Why you can’t believe all the bad stuff about China

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Worries over China`s economic risks – from ghost towns to slowing growth – may keep market watchers up at night, but at least one analyst believes many of the bugbears are reasons to be bullish.

“The single greatest aspect of conventional wisdom about China today that we don`t understand is the near-universal concern about under-utilized infrastructure… ghost cities, empty airports, and deserted highways,” Bernstein Research said in a note dated Tuesday.

But at the beginning of their life, infrastructure assets should be poorly utilized, the report noted.

“No sensible economic planner approves, no sensible banker finances and no sensible builder constructs Just-in-Time infrastructure,” Bernstein said. “On a 30-year view of fixed asset investment, low levels of utilization (and poor ROIC) in the early years is a necessary part of the process.”

Indeed, with that burst of infrastructure investment now ending, China`s economic growth rate is likely to slow, especially as the mainland rebalances toward services, Bernstein said.

“A long-term 7 percent GDP (gross domestic product) growth rate in China is unnecessary, inadvisable and – given the return on incremental capital today in China – unlikely to be achieved,” it said, forecasting GDP would grow at a compound annual rate of “just under” 5 percent through 2020.

“We see growth coming largely from services and from the `peace dividend` from a combination of lower investment, rising utilization on existing infrastructure and lower energy and commodity prices,” it said. “It is not clear to us why allowing GDP growth to drop 100bps annually in coming years while household income and consumption growth accelerate would be anything but positive.”

Bernstein is also skeptical of claims that China risks a financial crisis from any repeatedly cited fears of a collapsing property market, extravagant state-owned enterprises, wasteful investment or sudden financial liberalization.

“The current leadership continues to confound expectations by doing pretty much the right thing,” Bernstein said, adding it believes there is little urgency to complete financial liberalization, noting that in many economies, it actually heralds a crisis.

“The fact that most Chinese debt is borrowed by Chinese SOEs from Chinese SOEs is one of the strengths of the system,” it said.

To be sure, many analysts still see China`s economy as rife with risks.

It`s “worse than scary,” Richard Jerram, chief economist at Bank of Singapore, told CNBC on Monday, referring to a speech by China President Xi Jinping at the Asia Pacific Economic Cooperation CEO Summit in Beijing Sunday.

“There are indeed risks, but it`s not so scary,” Xi said.

But Jerram is unconvinced.

“The IMF (International Monetary Fund) rule of thumb is if your credit-to-GDP ratio goes up 40 percentage points in three years, the probability is you`ve got a bad debt crisis. China`s is up 75 percent in five years, so it`s faster and it`s longer and it`s a very high probability they`ve got a massive amount of bad debts buried in the system,” Jerram said.

With credit still growing faster than GDP, it`s likely difficult to find productive investments, Jerram said.

“Probably they`re just writing new bad debts even as they`re trying to work through the old bad loans.”

-By CNBC.Com`s Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Copyright 2011 cnbc.com

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India data builds case for rate cut before Christmas

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Rapidly cooling inflation is building the case for the Reserve Bank of India (RBI) to cut interest rates as soon as its next monetary policy meeting on December 2, say economists.

Consumer prices rose a slower-than-expected 5.5 percent on year in October, following a 6.5 percent increase in the previous month, led by a fall in local food prices. This was the slowest pace since the index was launched in January 2012.

Inflation is now well below the central bank`s target of 8 percent for January 2015 and even dropped below the 6 percent target for January 2016.

The data indicates “interest rate cuts are likely to come onto the agenda sooner than most currently seem to expect, perhaps even as early as the RBI`s next meeting in December,” Shilan Shah, India economist at research firm Capital Economics wrote in a note.

Consensus expectations are for the first rate cut to come in the second quarter of next year, according to Capital Economics.

India`s benchmark repo rate has been unchanged since January, when the central bank increased it by a quarter percent point to 8 percent.

Shah is not alone in his rate outlook.

“The data is in line with our view that the RBI will cut rates in December,” Dariusz Kowalczyk, senior economist and strategist, Asia ex. Japan, Crédit Agricole said in a note published after the inflation figures were released.

Not so fast

However, not all economists were convinced the recent let up in price pressures would be enough to make the central bank budge.

“The recent moderation in CPI inflation and our expectation of continued disinflation in 2015 does not change our view on monetary policy,” said Sonal Varma, chief India economist at Nomura.

“In our view, the RBI is focused on ensuring that inflation remains low even as the growth cycle starts to pick up in 2015-16. This requires continued vigilance from the RBI given elevated inflation expectations in India,” she said. “It also requires not overreacting to any short-term undershooting on inflation for cyclical reasons.”

Tushar Poddar, managing director, Global Macro Research at Goldman Sachs, has a similar stance, noting that while easing inflation increases the probability that the “RBI may start giving a larger weight to growth concerns rather than a single-minded focus on inflation”, December is too soon for a rate cut.

“Given the helpful base effects in the October and November readings, still elevated inflation expectations, as well as uncertainty regarding the sustainability of weak commodity prices, we expect the RBI to remain on hold in the December meeting,” he said.

Copyright 2011 cnbc.com

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