Daily Note- Sing when you’re winning?


United States: Initial Claims, Durable Goods and New Home Sales surprise to the upside

China interbank cash crunch – banker urges better liquidity management

China looking to keep jobless rate below 4.6% in 2014

China’s foreign minister says Japan PM Abe’s shrine visit has pushed Japan in an “extremely dangerous” direction


Morning from a stormy Dublin! How did you get on over Christmas? Any monumental family rows or was it all sweetness and light?

Today, I am going to focus on China before I take the dog for a long stroll because (a) she hasn’t been out for days and (b) I want to ensure the outbreak of peace in the house between the teenager and the rest of the family endures.

Speaking of China and Christmas in the same breath reminds me of the first time I was in China just before Christmas a few years ago.  I was making a documentary on the global financial crisis for ABC, the Australian national broadcaster.

I arrived in the port city of Ningbo where the local cadres had advised the local retailers to embrace this Christian festival called Christmas. Presumably this was an effort to get local punters out shopping and also to make foreigners feel welcome. (Ningbo is a huge port and so there were more foreigners around than in other cities.)

There were Christmas lights, snowmen and brightly coloured shop fronts all over the place.

In the largest shopping centre, the local chamber of commerce had decided to take this seriously and undertook to out-Christmas everyone else. In the massive steel and glass atrium entrance to the centre there was an enormous Christmas tree, bedecked with thousands of white lights and acres of tinsel. Around it was a perfect ice-skating rink with hundreds of local children wearing little red hats with Scandinavia effect bobbles.

The scene wouldn’t have been out of place at the Rockefeller centre except for one detail: perched at the very top of this tree, illuminated by a huge spotlight was neither a beautiful twinkling star nor an angel, but a statue of a bleeding Jesus nailed to the cross!

You have to love lost in translation at moments like this, I mean who wouldn’t confuse Christmas and Easter? And if you asked the average westerner to explain crucial dates in the Chinese calendar, you’d expect some howlers.

In the world of commerce, Ningbo is a phenomenal place because, as one of the biggest ports in China, it is the gateway to the world for Chinese goods. And to see how dominant China is in world trade check out this truly amazing graph.

It shows in red those countries for which China is the largest trading partner.   China is the second largest trading partner for the countries in orange. Countries in yellow are where China is the third or lower bilateral trading partner.  The map comes from those wonderful people at @Amazing Maps and I was alerted to it by the wonderful, incisive commentary of Marc Chandler.

Figure 1: The Great Call of China. 


China has also recently become New Zealand’s largest trading partner, overtaking Australia and the reason for that is China’s burgeoning demand for milk products. This has enormous implications for Irish milk powder producers such as Glanbia.

I will come back to China a bit later in the note, but just let that graphic sink in for a moment and let’s head over to the US for a tick.

United States: Initial Claims, Durable Goods and New Home Sales surprise to the upside

US Initial Claims

Both Durable Goods and New Home sales surprised to the upside on Tuesday, while Initial claims beat expectations yesterday as the recent run of positive data in the US continued.

Initial jobless claims were slightly better than expected at 338,000 compared to consensus estimate of 345,000. The number of first-time claims improved by 42,000 after two consecutive weeks of worrisome numbers.

The better data pushed the US 10 Year towards the key 3% level. Short term interest rate expectations moved as well because the market is getting more bullish on  when the Feds first rate hike is likely to be.

The chart below shows you which duration has moved the most.

Figure 2-Rates Rising

While it might seem outlandish when the Fed is still administering a stimulus of close to $1 trillion per annum in QE, the market is pricing in a 40% chance that the Federal Reserve will hike rates in Dec 2014. This reveals the extent to which once the market senses “peak stimulus”, it moves rapidly to the next big policy move. I continue to believe that in the reversal of QE, there will be a number of big economic/financial wobbles, all of which will keep the Fed biased towards gradually less stimulus moving towards neutral and steady as she goes, for quite some time.

This rapid move in interest rate expectations may become an investment opportunity in the New Year if it persists.

I have been asked a lot recently about the dangers to the US housing market of a rise in US bond yields. As we talked about in our launch note, my base case scenario is that unless the rise in yields is disorderly, the effect on the US housing market and the economy in general should be modest. In short, in my world-view, the rise in rates is the consequence of a stronger economy and rate moves are made legitimate by more robust performance. If performance slips back so too will rates.

Have a look below at a chart of the US housing market sentiment (as measured by the NAHB housing index) and the 30-year mortgage rate.

Figure 3

As you can see, the US housing market is doing just fine, despite yields. Like all data we need to keep an eye on it for any changes (at which point we will reassess), but for the moment US housing confidence is more than ok.

China interbank cash crunch – banker urges better liquidity management

Now let’s turn to the East, Wang Yongli,vice president at the Bank of China (one of China’s biggest lenders) said on Wednesday that Chinese banks must manage liquidity risks more professionally as funding costs climb.

We know from bitter experience in Europe that treasury management is so often the weakest link in any bank’s balance sheet and the bankers’ bias for lending normally supersedes concerns about funding till it’s too late.

He added – wisely -that Chinese banks lack sound liquidity management as they have been focusing on boosting market share and profits.

The credit crunch in China remains one of our biggest global macro concerns going into 2014. We posted a chart this day last week explaining just how the rise in the China 2 year bond yield has been a drag on China stocks.

See below a chart of the 7-day repo rate. While levels have dropped since mid year, inter-bank rates are still at very elevated levels and are far beyond what a developed financial markets system should be.

Figure 4

China looking to keep jobless rate below 4.6% in 2014

Yin Weimin, Minister for Human Resources and Social Security, was quoted by the official Xinhua news agency as telling a conference that the urban jobless rate is expected to be around 4.1%.

Official data earlier put the rate at 4.04% at the end of Q3. Yin also said it hopes to add 10 million jobs in 2014 after adding an estimated 13 million jobs in 2013.

Unemployment in China is continually played down for fear of social unrest and the constant fear of not being able to employ the millions of peasants leaving the land looking for work. Have a look at the note on China from last week entitled “Too many farmers”.

China’s foreign minister says Japan PM Abe’s shrine visit has pushed Japan in an “extremely dangerous” direction

Never underestimate the anti-Japanese sentiment in China. This is regularly stoked up to distract from internal problems. The tap of anti-Japanese vitriol is turned on and off by the government when conditions demand.

According to the Chinese foreign minister,  Japan must ” bear full responsibility for the serious political consequences” of Abe’s action.

Mr Abe visited the Yasukuni shrine, which honours Japan’s war dead yesterday. He is the first serving Japanese PM to visit since 2006. This will only heighten the tension in the region where China, Japan and South Korea are embroiled in a number of disputes over territory in the East China Sea and Japanese war crimes against the civilian population of China and Korea still, understandably, strike a raw chord. The US embassy has also expressed its regret at Abe’s visit.

But Mr Abe is no fool. He knows what he is doing and maybe he is simply marking everyone’s card that Japan is its own country, with its own interests, culture and history and can in no way be regarded as an American client in Asia. During territorial disputes, such a move, although provocative, is understandable.

Maybe we should leave the last word on Chinese relations with Japan this morning to Peng Liyuan the very successful Chinese folk singer and possibly more importantly, the wife of the Chinese President Xi Jinping. This is a singer who sang for the troops in Beijing just after the Tiananmen Square massacre. Here she is singing anti-Japanese folk songs, which apparently are never a bad commercial move!



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