KutcherJobsHead-Scratching Data Provoke Head-Scratching Reactions

“America’s recent economic data have not exactly been the easiest to interpret.”  Just to refresh your memory (wine tasting this weekend?): 0.1% GDP growth and 288,000 new jobs in the same week.  The Economist doesn’t seem to take the 0.1% number too seriously (weather weather weather), and argues that The Taper is further complicating the issue: “at faster rates of employment growth the Fed begins to worry about inflation pressures (or is perceived to worry about such pressures).  The expected pace of policy tightening and inflation expectations adjust accordingly, and the economy appears to slow back to a ‘safe’ rate of labour-market recovery.”  Furthermore, they argue that wage growth is a more critical indicator than headline unemployment and jobs growth, and “the question then becomes how willing the Fed is to tolerate wage growth that is rising toward ‘normal’ levels (of about 4%, compared with the 2% growth of the past few years).”  Meanwhile, the market reaction to the big jobs report last Friday involved a lot of head scratching: “It seems like the bond market is telling you one thing and the stock market is telling you something else, so which do you believe?”…”It’s almost a schizophrenic reaction from the markets here.”  While the strong economic data did produce some predictable behavior (growth-sensitive stocks rose), bonds and gold also rallied.  Utilities stocks fell ~2%, however, which are sometimes traded as a proxy to bonds.  Merrill Lynch is attributing “some of the muted reaction in rates to a tepid stock market reaction and short positioning in rates.  Other factors such as lower supply dynamics in agencies and the reserve growth in China may be helping longer term yields.  Unfortunately, we have no concrete evidence of the factors driving the bid.”  The tepid stock market reaction seems to suggest that it will take more than good job creation to boost stocks much higher: “It will take some catalyst, a genuine acceleration in economic activity or a sign that corporate America can expand profit margins from already record-high levels.”

World’s Biggest Economy Is A Hoax Work In Progress

“Smaller Chinese banks have ramped up their shadow lending activity (alt), adding to the financial risks that threaten to trip up the world’s second-biggest economy (first-biggest?).”  The Financial Times reports 10 unlisted banks whose “exposure to shadow credit assets soared last year.  For the 10 banks, which operate in large cities from Shijiazhuang in the north to Fuzhou in the south, investments in trust plans and holdings of other non-standard credit products climbed to 23.3 per cent of their total assets last year, up from 14.3 per cent in 2012…For Bank of Zhengzhou, almost two-thirds of its non-standard credit went to local governments, property developers, construction companies and miners — all of which struggle to obtain normal loans because regulators have classified them as risky borrowers.”  Meanwhile, “six months into China’s grand economic makeover, Beijing is playing it safe, choosing gradual progress on many fronts over game-changing, riskier reforms such as removing all controls over bank interest rates.”  The gradual progress so far has included “simplified business registration,” “removal of distortions in pricing of resources such as gas, and services like rail transport and healthcare,” “special economic zones,” etc.  Further reforms are expected, however, and include “stripping big state firms of an implicit government guarantee,” “reforms to China’s residence registration system and land property rights,” “revamp of how revenues, spending and responsibilities are split between Beijing and local governments,” etc.  Meanwhile, Nomura says that “China’s great real-estate bust has begun” thanks to “a combination of a huge oversupply of housing and a shortage of developer financing…producing a housing market downturn that could drive China’s GDP to less than 6% this year.”  Here’s something to cheer us up: “A narrower gap between China-HK trade balances suggests that the amount of hot money entering the mainland via over-invoicing exports has been efficiently cracked down during the past few months.”  Meanwhile, local governments in the Pearl River Delta (“the manufacturing workshop of the world — in south China”), “are allowing manufacturers to pay lower pension contributions than required (alt) as they worry about companies leaving, particularly as factories face double-digit wage rises each year.”  Here’s the dilemma: “while they want to keep factories, they also want to avoid the kind of strikes that raise concerns in the eyes of potential investors.”  

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