Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

NEW$ & VIEW$ (10 APRIL 2014)

CHINA’S CHINESE
China Posts Weak Trade Data An unexpected drop in both China’s exports and imports in March threw more doubt around the country’s growth prospects, though the real picture may not be as bleak as the numbers suggest.

A 6.6% drop in exports compared with last March confounded economists, many of whom had expected growth of more than 4%. Imports also fell 11.3% in March.

The data are difficult to interpret, economists warned, with a strong base of comparison last year making the numbers look especially weak.

Analysts suspect that China’s reported exports were exaggerated in early 2013 by a practice known as overinvoicing, by which companies use fake export invoices to dodge China’s capital controls and get money into the country, often for investment. (…)

Stripping out goods sold to Hong Kong and Taiwan, exports to other nations grew about 7%, said Julian Evans-Pritchard, a China analyst at Capital Economics. (…)

Even without such distortions, trade statistics can fluctuate widely from month to month. China’s trade statistics in the first quarter are often skewed by the Lunar New Year holidays, which this year fell in late January and early February. (…)

But the latest data still came in well below expectations, adding to the signs that China’s economy has been struggling since the end of last year. (…)

It is now all but certain that China’s growth in the first quarter was slower than in the final quarter of last year, Ms. Ma added.

China’s Metal Imports Defy Slowdown

Iron ore imports rose 15% from a year earlier to 74 million metric tons, according to customs data. Copper shipments rose 31.4% on year to 420,000 tons. Overall, imports into China fell 11.3% on year in March, signaling weakness in manufacturing as economic growth moderates.

Volumes of iron ore and copper imports were off record highs in January. But growth in import demand has remained robust, despite signs China’s economic growth is likely to slow this year from a 7.7% expansion in 2013. (…)

Analysts say steelmakers are bracing for a period of lower output as the government pushes environmental and industry-consolidation policies, but are continuing to stock up on cheap, high-quality foreign ore—particularly the cleaner-burning pellets that meet Beijing’s tougher new environmental standards for steelmaking.

Imports in March also were likely underpinned by deals in which Chinese investors were locked into buying metals like copper to back bank loans.

Copper imports have for years been widely used as collateral in China’s shadow banking system, as a means of circumventing official curbs on conventional lending. Analysts say copper financing declined last month as falling copper prices prompted a reassessment of collateral balance sheets. However, some pre-committed shipments may have continued to come through, they say. (…)

The data comes in the wake of a report from the International Monetary Fund which said China’s demand for commodities is far from peaking. The fund, in its latest global economic report, said China’s demand in the years ahead is likely to switch from iron ore and copper toward higher-value commodities like zinc.

There was a sharp rise in China’s soybean imports during March. They rose 20% on-year to 4.6 million tons, and were up 34% in the first quarter. A comprehensive breakdown of import volumes of most other commodities won’t be released by the Chinese authorities until later in April.

China, which imports more than half the oil it uses, imported 2% more crude oil in March than a year earlier, bringing in an average of 5.56 million barrels a day during the month.

Chinese to me! This next piece is clearer:

LVMH Hit by China Slowdown LVMH said first-quarter sales rose 4% as the group, a bellwether for the luxury-goods industry, struggles to adapt to a slowdown in China.

Excluding currency fluctuations and acquisitions, such as the purchase of cashmere maker Loro Piana, sales would have grown 6%. Currency fluctuations shaved 5% off the quarter’s growth, LVMH said. (…)

Sales at LVMH’s wines and spirits division, which includes champagne and cognac, fell 8% in the quarter. The company explained the drop by retailers destocking (…).

From the horse’s mouth (hey!, it’s the year of the horse):

China rules out stimulus despite trade woes

(…) “The upturn of the Chinese economy is not yet on a solid footing. Downward pressure still exists and difficulties in some fields must not be underestimated,” Mr Li said. But “there are conditions in place for the Chinese economy to achieve sustained sound growth”, he added. “We have the capabilities and confidence to keep the economy functioning within the proper range.” (…)

Mr Li said the government’s target of “about” 7.5 per cent GDP growth this year was flexible, and Beijing would not act to pump up growth as long as “there is fairly sufficient employment and no major fluctuations”. (…)

“We will not resort to short-term stimulus policies just because of temporary economic fluctuations and we will pay more attention to sound development in the medium to long run,” Mr Li said on Thursday. (…)

Plainly, they will wait for more data, just like the Fed. CEBM Research has some clues from its regular surveys:

According to our survey, export activity in March exceeded respondents’ expectations and most respondents expect export demand to gain momentum in April.

According to the results of our most recent grassroots survey, domestic economic activity slowed across the board in March. Moreover, the March PMI employment index reading reached a three-year low. Based on these indicators as well as downbeat monthly data during 1Q14, we expect the 1Q14 GDP growth figure to fall to 7.3%.

In a recent report issued after a regular meeting of the PBoC, the central bank stated that the economy was in a “reasonable range”, whereas in 4Q13 the central bank commented that the economy was “stable”. This adjustment in wording likely reflects the deterioration in economic activity observed in 1Q14.

Recently, the government unveiled several measures it intends to use to support growth. These measures fall under three basic categories: 1) acceleration of project investment; 2) preferential tax policy; and 3) approval of reforms in pilot program cities. The announcement of these measures signal that another round of stabilization policies has officially begun.

Meanwhile, the Party has to deal with this internal fight:

China bank regulators caught in turf war PBoC and CBRC at odds as financial system comes under strain

The China Banking Regulatory Commission and the People’s Bank of China, the central bank, have always been rivals, but now rising tensions are obstructing reforms and efforts to tackle risks in the financial sector, according to officials from both agencies. (…)

“One of the biggest roadblocks to financial reforms in China now is the fact the PBoC doesn’t think the banking regulator is capable of handling the risks associated with that reform,” said one person familiar with the matter. (…)

Meanwhile, CBRC officials feel they are being unfairly blamed for not managing risks that were created by the PBoC and which they have warned about for years. (…)

Another CBRC complaint has been the PBoC’s aggressive promotion of “financial innovation”, which some officials at the banking regulator say is more accurately described as “interest rate arbitrage” or “regulatory arbitrage”.

They argue that having forced the banks to carry the burden of the stimulus the PBoC then encouraged the creation of the vast shadow banking sector that it now blames the CBRC for not regulating properly.

FED’S CHINESE
Fed Shows Growing Worry About Low Inflation Federal Reserve officials are growing concerned the U.S. inflation rate won’t budge from low levels, the latest sign of angst among central bankers about weakness in the global economy.

(…) Fed officials believe the U.S. economy was soft in the early months of the year in part because of the weather, and they are now expecting a pickup. But if that doesn’t happen, they could wait longer to start raising interest rates. Many central-bank officials and market participants don’t expect rate increases until well into 2015.

“In light of their concerns about the possible persistence of low inflation, members agreed that inflation developments should be monitored carefully,” the Fed minutes said. (…)

In the U.S. and Europe, signposts of soft consumer demand also are evident. In Switzerland, executives at Swatch Group AG told The Wall Street Journal earlier this month that consumers were switching to lower-cost timepieces. In the U.S., companies such as Procter & Gamble Co. and Georgia Pacific Corp., among others, have been blitzing consumers with deals and coupons to lift sales.

Carnival Corp. is filling cabins on its cruise ships by reducing ticket prices—a situation the Miami-based company hopes is temporary. “As the economy improves and as demand is there, we should be able to get the pricing back without any problem,” Chief Financial Officer David Bernstein told analysts last month.

Are they monitoring rents?

Brooklyn Apartment Rents Jump to a Record as Leases Surge

imageThe median monthly rent was $2,900, up 13 percent from a year earlier and the highest since appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate began tracking the market in January 2008. (…)

Across the East River in Manhattan, the median monthly apartment rent was $3,200 in March, up 0.2 percent from a year earlier, according to Miller Samuel and Douglas Elliman. It was the first month without a year-over-year decline since August.

It’s not only Brooklyn and San Francisco. Nationally, CPI-Rent is up 2.8% YoY and has increased at a 3% annualized rate in the past 4 months. And CalculatedRisk reveals that apartment vacancies are near a cyclical low:

image

Anyway, they sure are concerned by communications:

Fed Officials Worried About Misleading on Rates

Federal Reserve officials were concerned at their latest policy meeting they might unintentionally signal they had grown more eager to raise interest rates—a worry that was well-founded.

Some officials fretted their individual projections for short-term interest rates could be misleading, according to minutes from the Fed’s March 18-19 session, which were released Wednesday after the usual three-week lag.

The projections chart, which uses dots to indicate where each of the members of the Fed’s policy committee thinks interest rates will be in the next few years, showed some officials expecting higher rates in 2015 and 2016 than they predicted in December.

Noting the upward shift, some Fed officials at the meeting expressed concern “that this component of the [projections] could be misconstrued as indicating a move by the Committee to a less accommodative reaction function,” the minutes revealed.

I.e. the sum of the committee’s individual views was not the view of the committee.

Investors and analysts initially viewed the Fed’s March session as marking a turn toward more “hawkish” or restrictive policy despite contrary assurances in the central bank’s policy statement and from Fed Chairwoman Janet Yellen at a March 19 news conference following the meeting.

The minutes underscore that Fed officials had not become more impatient to raise rates, a message Ms. Yellen and other members of the Fed’s policy committee have reinforced in public remarks since the meeting.

But why did Yellen say what she said on March 19? Anyway, we now know that the sum of the parts is not at all representative of the official view.

Traders on Wednesday cheered the minutes’ positive tone. Stocks, which already had been moving higher Wednesday, extended their gains after the documents were released at midafternoon. The Dow Jones Industrial Average, which had been up 76 points earlier in the day, finished with a gain of 181.04 points, or 1.1%, to 16437.18.

The minutes also gave a lift to bond prices, which in turn pushed yields down slightly. In late-afternoon trading, the yield on the benchmark 10-year note was 2.688%, down from 2.721% before the release, according to Tradeweb. (…)

BloombergBriefs believes that what looked like a loose cannon was in fact a straight shooter:

We continued to learn about Yellen in these minutes. They reveal that her performance at the post-FOMC press conference was as transparent and plainspoken
as her opening Congressional statement in February. When she was forceful — pushing back on the short-term unemployment debate, dismissing the
interpretation of staff projections as policy guidance — it was based on confidence that the committee stood behind her. Her tentativeness with the now-infamous definition of “considerable time” as about six months, appears to have been a genuine gaffe, without support in the minutes.

More than ever, Yellen looks like a straight shooter. If she and the FOMC still need to refine their first-round communications, they can at least take comfort in the cumulative effect of the minutes and recent Fed speeches: Treasury yields have nearly retraced their rise since the FOMC meeting.

From the minutes:

A few participants, however, highlighted factors other than weather that had likely contributed to the slowdown during the first quarter, including slower growth in net exports following its unusually large positive contribution to growth in the fourth quarter of 2013. Moreover, it was noted that some of the pickup in economic growth that had appeared to have been indicated by the data available at the January meeting had been reversed by subsequent data revisions. For many participants, the outlook for economic activity over coming quarters had changed little, on balance, since the time of the December meeting.

Only “a few” think that it was not only the weather. And even though revised data pointed to slower growth than originally reported, “many participants” remain upbeat.

Yesterday’s wholesale sales report showed sales down 2.8% annualized between December and February. Even if the weather was indeed a factor, retailers are stuck with winter inventories that have increased at a 6.1% annualized rate during the same period. And they moved Easter in Q2 this year.

MORE ON SLOW EMPLOYMENT GROWTH

Only about 476,000 new U.S. businesses started up each month in 2013, down 7% from 2012 and 12% from 2011, according to a study by the Ewing Marion Kauffman Foundation, a Kansas City, Mo., advocacy group for entrepreneurship. The Kauffman study counts new incorporated and unincorporated businesses, including those with and without employees, based on data from the U.S. Census Bureau and the Labor Department.

In January, another study found that U.S. business creation among people who start companies because they can’t find satisfying jobs held stable at 21% from 2011 to 2013 and was down from nearly 30% in 2010. That study, based on a survey of 200,000 entrepreneurs world-wide, including about 5,700 in the U.S., was conducted by researchers in 70 countries and sponsored by Babson College in Wellesley, Mass. (WSJ)

OPEC Says Its Oil Output Tumbled in March OPEC’s oil output tumbled to its lowest level this year in March, the cartel of some of the world’s biggest oil producers said

Production by the Organization of the Petroleum Exporting Countries—which supplies more than a third of the oil consumed globally each day—fell by over half a million barrels a day last month to 29.6 million barrels a day, the group said in its monthly oil market report.

A steep drop in Iraq’s oil output of nearly 300,000 barrels a day led the decline, though there was also a substantial downturn in Angola, Libya and Saudi Arabia last month.

The sharp pullback in Iraq’s oil production to 3.2 million barrels a day is a disappointing decline after the country’s oil output rose to its highest level in 35 years in February. (…) infrastructure constraints have slowed the development of several oil fields and led many analysts to question whether February’s surge in output was sustainable.

Elsewhere, Angola’s oil production fell by 150,000 barrels a day in March. Libya’s oil output declined by 118,000 barrels a day as blockades of key ports in the country’s east by rebels seeking greater autonomy continued to take their toll on the country’s oil sector.

OPEC kingpin Saudi Arabia also cut its production by 81,000 barrels a day to 9.7 million barrels a day last month. (…)

OPEC tweaked higher its forecast for non-OPEC supply growth this year to 1.37 million barrels a day, an addition of 60,000 barrels a day from its previous forecast. The cartel also lowered the amount of demand it expects for its oil this year by 100,000 barrels a day to 29.6 million barrels a day.

Big Car Makers in Race to Recall

Major car makers are accelerating recalls and ordering dealers to stop sales of vehicles with potentially dangerous defects amid an aggressive safety clampdown by auto regulators and others in the U.S., Japan and China.

The latest move: Toyota Motor Corp. TM -1.26% on Wednesday issued a massive recall of nearly 6.4 million vehicles world-wide. The action covers five separate problems and 27 different models including such globally popular cars as the Corolla, Yaris and Matrix compacts, and RAV4 and Highlander sport-utility vehicles.

All told, BMW AG, Fiat Chrysler Automobiles, Ford Motor Co., General Motors Co., Toyota and Volkswagen AG have recalled nearly 15 million vehicles since the start of the year. Industry experts say a landscape that once allowed auto makers to negotiate terms with regulators has been transformed because of the potential for huge fines and criminal prosecution now hanging over executives.

SENTIMENT WATCH
U.S. start-ups raise $9.99 billion, hit outsized valuations in first-quarter

Venture capital funding for U.S. start-ups hit its highest mark since 2001 during the first three months of the year and 11 companies were valued at $1 billion or more, underscoring the increasingly pricey environment for entrepreneurs, according to a report on Thursday from consultancy CB Insights.

Venture capitalists invested $9.99 billion across 880 deals in the first quarter of 2014. The dollar amount jumped by 44 percent compared with the same quarter in 2013, while the number of deals rose by 5 percent.

The large number of companies that won funding last quarter with billion dollar valuations is the same as for all of 2013. The year before, just eight companies were funded at valuations of $1 billion or more.

The technology companies that venture capitalists valued at over $1 billion last quarter include payments company Stripe, online home-furnishings company Wayfair and enterprise-data management company Cloudera.

About 10 percent of the deals, by volume, were late stage, meaning a fifth funding round or later, fitting with the tendency of many venture-backed companies to delay initial public offerings. (…)

Goldman Warns 67% Odds Of A 10% Market Decline In Next Year

While quick to explain how next year will be better (even though he keeps his year-end 1900 target for the S&P 500), Goldman’s chief US equity strategist David Kostin warns there is a good chance of a 10% drop sometime in the next 12 months. The recent 6% pullback (sparked by EM concerns) is only one-third of typical historical corrections and as Kostin notes, the market has gone way too long without a so-called correction (10% from peak to trough). It’s been 22 months (and 50% gains) since the last 10% drop and, based on Kostin’s quant work, there is a 67% probability that we’ll see that correction – which would take the S&P to around 1700.

But BloombergBriefs is reassuring:

The recent selloff in global equities hit only the “high-flying” stocks and doesn’t indicate a looming bear market, Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., said. A rotation from bonds to stocks is also unlikely, she said.

U.S. stocks will rally further as the doubling of the Standard & Poor’s 500 Index from its 2009 low has yet to stretch valuations, according to Holland & Co. “This is not a bear market,” chairman Michael Holland said. “The bull market still has some significant legs to it before this is over. We had valuations that were screamingly attractive five years ago. Fast forward to today, they are reasonably valued. These things normally don’t end until we get overvalued and we’re not there yet.” Holland

This is generally true, although equities have so far refused to cross the fair value line in this cycle. The bull may have some significant legs but who knows where they will take us.image

NEW$ & VIEW$ (9 APRIL 2014)

Wholesale inventories up, sales rebound

U.S. wholesale inventories rose at a slower pace in February than in the prior month, which could support views that restocking will not help the economy in the first quarter.

The Commerce Department said on Wednesday wholesale inventories increased 0.5 percent after a revised 0.8 percent gain in January.

Inventories are a key component of gross domestic product changes. The component that goes into the calculation of GDP – wholesale stocks excluding autos – rose 0.5 percent in February. Farm inventories jumped 2.7 percent after falling 0.9 percent the prior month.

Businesses accumulated too much stock in the second half of last year and are placing fewer orders with manufacturers while they work through the pile of unsold goods.

That, together with severe weather, the expiration of long-term unemployment benefits and food stamps cuts, is expected to weigh down on first-quarter GDP growth.

In February, sales at wholesalers rebounded 0.7 percent. Sales had declined 1.8 percent in January.

OECD LEADING INDICATORS

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to weakening growth in major emerging economies, with the exception of China, where the CLI points to growth remaining around trend. CLIs point to growth below trend in Brazil and India, and to growth losing momentum in Russia.

For the OECD as a whole, and for the United States and Canada, CLIs point to growth remaining around trend. CLIs point to growth returning to trend in Japan1 and tentatively losing momentum while remaining above trend in the United Kingdom.

In the Euro Area as a whole, and in Italy, CLIs continue to indicate a positive change in momentum. In Germany, the CLI points to growth above trend, and for France the CLI points to stable growth momentum. image

image

IMF Trims Growth Forecast The International Monetary Fund has trimmed its outlook for global economic growth, as anemic output in Europe and Japan hobble the recovery and emerging markets struggle with rising borrowing costs.

The fund forecast the world economy will expand 3.6% this year. That marked a slight downgrade from its 3.7% estimate in January, but would be stronger than last year’s 3% expansion. It comes amid a darker outlook for key emerging markets such as Russia, Brazil and South Africa, despite healthier recoveries in the U.S., Germany and the U.K.

The IMF downgraded Russia’s growth forecast by 0.6 percentage point to 1.3%, as Moscow’s standoff with the West over Ukraine has cut investments and sent capital fleeing.

“Downside risks continue to dominate the global growth outlook,” the IMF said in its World Economic Outlook report. The forecast sets the stage for a gathering of the world’s finance ministers and central bankers here this week to discuss the global economy.

Despite lower expectations, IMF chief economist Olivier Blanchard said the recovery is strengthening and risks of the euro zone returning to recession are receding. He said U.S. growth of 2.8% this year should help perk up prospects for many emerging markets, where output is slowing.

Pointing up “There are no brakes on U.S. growth,” Mr. Blanchard said in an interview. “It’s an economy that is fundamentally robust.”

That situation is in contrast to the weak recoveries in Japan and many euro-zone nations. (…)

The IMF is pushing the European Central Bank and the Bank of Japan to be more aggressive in fighting persistently low inflation. Falling prices can cause debt levels to rise. That is a major problem for countries such as Portugal and Greece where authorities are still struggling to fix heavily indebted economies and convince investors they can pay their bills.

Some euro-area countries with particularly high unemployment rates are already experiencing deflation, the IMF noted. And inflation levels for the currency union as a whole are likely to undershoot the ECB’s target by “substantial margins,” the IMF said. That is a clear signal more resolute policy action is needed, it said. (…)

Although the IMF kept its growth forecast for China at 7.5% for the year, it also indicated the world’s second-largest economy could slow more than expected as authorities tackle the country’s borrowing problems. The IMF said China needs to do more to rein in credit growth to prevent a buildup of bad loans, even if it means lower growth than currently forecast.

TWO CHARTS, TWO VIEWS…

A chart is worth a thousand words…

…depends what impression one tries to convey. First chart from Haver Analytics, next from the horse’s mouth:

large image

nfib-optimism-index-201404

If Haver wanted to give the impression that things look pretty good, their choice of date range was optimal for all the charts in this particular post.

THE U.S. LABOR SUPPLY DEBATE

While economists debate, things are happening in the real world (THE U.S. LABOR MARKET: WHERE IS GODOT?)

  image  image

And this to help explain missing workers:

More Moms Staying Home, Reversing Decades long Decline After decades of decline, the share of mothers who stay home with their children has steadily risen over the last several years, a new report has found.

In 2012, 29% of all mothers with children under age 18 stayed at home, a figure that has steadily risen since 1999 when 23% of mothers were stay-at-home, the Pew Research Center reported Tuesday. The share of stay-at-home moms had been dropping since 1967, when about half of all moms stayed home.

Pew attributed the rise of stay-at-home mothers to a mix of demographic, economic and societal factors. The vast majority of married stay-at-home mothers, 85%, say they are doing so by choice in order to care for their families. That rate is much lower for single stay-at-home mothers, at 41%, and cohabitating mothers, at 64%.

The report also found a drop in women working because of the recession, a trend that has lingered as the economy recovers. Pew cited an increase in immigrant families, for whom it is more common to have a mother stay at home with her children, and an increase in the number of women who said they were disabled and unable to work. (…)

The share of stay-at-home mothers is now higher than it was during the recession in 2008, when it reached 26%. About 6% of moms say they are home because they can’t find a job, up from just 1% in 2000. (…)

Frigid Winter’s Effects Will Hit Produce Aisle

The unusually cold temperatures and heavy snowfall that enveloped much of the U.S. this past winter have taken a toll on farms—from New York to Kansas to California—that grow everything from grapes used to make wine to wheat for baking bread.

Auto BMW, Daimler Upbeat on Luxury Car Outlook German luxury auto makers were upbeat about the outlook for sales this year as BMW turned in record sales for the month of March.

(…)The German auto maker said sales at its BMW, Mini, and Roll-Royce brands rose nearly 9% to 487,024 vehicles. Sales were buoyed by BMW’s X-series sport-utility vehicles and the 3-Series sedan.

That compared with a 12% rise in Audi’s first-quarter sales and a 14% rise at Daimler’ Mercedes-Benz unit as Germany’s leading auto makers all turned in record sales for the period.(…)

At BMW, the strong performance of the BMW brand, helping the group notch up record monthly sales of 212,908 vehicles in March, offset a loss of momentum at the auto maker’s U.K.-band Mini unit as its lineup of new cars was delivered to dealers only at the end of the month, BMW said.

“This is the first time in the company’s history that over 200,000 vehicles were delivered to customers in a single month,” said Ian Robertson, BMW’ head of sales. “Despite continuing economic uncertainties, we are experiencing steady improvement in almost all regions,” Mr. Robertson said.

Daimler was also upbeat about its outlook for this year.

“We are beginning 2014 at the same pace with which we finished 2013,” Daimler Chief Executive Dieter Zetsche said at the company’s annual shareholder meeting.

Auto Volkswagen Reports Sales Boost

Global sales of VW brand cars grew 3.9% from a year earlier to 1.48 million cars in the quarter, rising 4.8% in March alone. Sales in Europe were up a robust 6.6%. Volkswagen noted that the sales situation in Europe has regained momentum so far this year, but hasn’t given any regional forecasts.

The increase helped offset weakness in the U.S. and in Russia, where sales declined 2.7% in the latest three-month period.

Volkswagen said demand from China also contributed to first-quarter growth, while sales in South America and India declined.

Sports-car maker Porsche said on Tuesday that world-wide deliveries in March rose 6%, to 15,377. Luxury car maker Audi on Monday said its global sales grew 15%, to 170,450.

March data for France showed new registrations there up 8.9%. Germany and Italy rose roughly 5.4% and 5%, respectively, over the same month a year earlier.

Renzi cuts Italy growth forecast to 0.8% New PM repeats pledge to push on with income tax cuts

Matteo Renzi has lowered Italy’s 2014 growth forecasts but says he intends to maintain his pledge to cut income taxes for low-paid workers by cutting public spending and by raising taxes on banks and through higher projected VAT revenues.

Presenting the government’s annual economic and financial review on Tuesday evening, Italy’s new prime minister cut this year’s projected growth to 0.8 per cent from the 1.1 per cent forecast late last year by the previous left-right coalition led by Enrico Letta.

(…) the deficit for this year was projected to reach 2.6 per cent of GDP, up from the previous forecast of 2.5 per cent but still below the 3 per cent limit set by Brussels. (…)

French PM pledges €11bn in extra tax cuts Valls prioritises growth over EU-enforced austerity

In a clear move to reinforce a pro-business policy shift adopted this year by President François Hollande, Mr Valls said he would remove over the next three years a production tax on companies worth €6bn and pledged to cut France’s main corporate tax rate from 2016.

Presenting his policy programme to parliament, he also promised €5bn in cuts to employee social charges on the low paid and to taxes on poorer households by 2017, when Mr Hollande’s term ends. (…)

Living up to his reputation as a market-friendly reformer, Mr Valls condemned recent governments of both right and left for hoisting France’s tax burden to one of the highest in Europe.

“We have got to stop inventing new taxes that cause our citizens such anguish,” he said.

He said a heavy surtax on corporation tax for big companies, which has boosted the current rate above 35 per cent, would be removed in 2016. He said the government would plan to cut the standard rate, currently at 33 per cent, to 28 per cent by 2020. (…)

Korean Won Surges to 5-Year High

(…) “The Bank of Korea has finally allowed [the exchange rate] to break to fresh post-Lehman lows this morning,” Geoff Kendrick, head of Asian currencies and rates at Morgan Stanley noted, referring to the currency’s strength against the U.S. dollar.

Recently, adding to the positive sentiment, the central bank forecasts growth at 3.8% this year and 4% in 2015, up from 2.8% last year. The won is also showing resilience even as the Chinese yuan falls, while benefiting from a weakening U.S. dollar as Treasury yields dip. China is South Korea’s largest trading partner.

The Korean won’s gains “are a result of a solid fundamental under-footing for the economy, a return of portfolio inflow, lack of contagion from the recent squeeze” in the Chinese currency, Patrick Bennett, a macrostrategist at CIBC World Markets in Hong Kong wrote in a note on Wednesday.

In recent days and weeks, there have also been signs that stimulus from the U.S., Japan and European central banks will be kept up to keep growth humming, moves that may also help Asian currencies that are typically sensitive to U.S. dollar sentiment swings.

There is “an emerging view that accommodative global monetary policies are not going to be as swiftly unwound as had been feared,” said Mr. Bennett. (…)

Emerging-Market Currencies Continue to Rally

(…) Against a backdrop of falling U.S. Treasury yields, as expectations of early rate rises from the Federal Reserve recede, emerging-market currencies have performed strongly of late.

Interest rate rises from several emerging-market countries, including Turkey and South Africa, have provided further support, encouraging investors to enter so-called carry trades, whereby they borrow money in currencies where rates are low and seek higher-yielding investments elsewhere. (…)

China Is in No Hurry to Halt Yuan’s Fall

Interviews with a Chinese central-bank official, bankers and analysts suggest Beijing won’t move in the near term to stop the currency from weakening.

Big US banks forced to hold extra $68bn Regulators ratchet up limits with new 5% leverage ratio

A new “leverage ratio” will force the eight largest US banks to hold a minimum of 5 per cent equity to total assets to absorb losses in a crisis and proposes adopting a more stringent way of calculating the rule.

The leverage ratio is supposed to be a backstop to other capital rules that are “risk-weighted”. It does not allow banks to use their own models, which some critics have warned allows institutions to game the system.

It is tougher than a new international metric that requires banks to reach a 3 per cent minimum of equity to assets and potentially hinders the profitability of the eight banks affected – Bank of America, Bank of New York Mellon, Citigroup, Goldman, JPMorgan, Morgan Stanley, State Street and Wells Fargo – compared with their rivals in Europe.

Dan Tarullo, the Fed governor in charge of regulation, indicated that he wanted to go further. He signalled that the Fed might impose an additional risk-based capital charge on the biggest US banks, bringing it “to a higher level than the minimum agreed to internationally” to discourage short-term wholesale funding.

Investment banks such as Morgan Stanley and Goldman, which do not have the same deposit base as retail banks such as Wells Fargo, might have most to lose if Mr Tarullo succeeded in imposing an additional capital surcharge.

He has highlighted the problem of bank dependence on short-term wholesale funding on numerous occasions. But his comments were a new hint at the potential severity of the regulatory response. (…)

Banks have until January 1, 2018 to comply with the leverage ratio. (…)

SENTIMENT WATCH

The stock market’s recent drop might not have been so unsettling to investors but for one thing: The lack of a clear reason as to why it happened. (…)

Some perspective is needed, though. On the Richter scale of what the stock market has been through in recent years, the past week doesn’t register very highly. The Nasdaq’s historical volatility—a measure of how wide its swings have been over the past 30 trading days—shows that while it has been a bit shakier lately, it isn’t even close to as jittery as it was through the summer of 2011.

Back then, the selling was driven by widespread fears that a weakening U.S. economy could tip back into recession. In contrast, this month’s selloff has come amid economic data that would normally be highly supportive for stocks. (…)

Thumbs up On one hand, this is reassuring: Investors are taking a breather after a breakneck dash. Thumbs down But it is also troubling. Usually there is some event that can be pointed to—a bad economic report, a big earnings miss, a fight in Washington—that explains why stocks have fallen. Share prices crumbling just because prices have reached a point that investors can no longer stomach them can signal real trouble. When the dot-com bubble began losing air in March 2000, for example, there was no compelling cause.

The market is nowhere near the heights of ridiculousness it reached back then, both in terms of average valuation multiples and initial public offerings. But like the relative valuations used to justify many popular stocks today, using such an extreme situation as your touchstone for investing isn’t advisable.

Perhaps it is because good news has become bad news since Yellen’s 6 month slip. Did you notice that 5Y rates have gone from 1.45% to 1.7% in the last 3 weeks, touching 1.8% en route.

Lance Roberts had this in his April 8 post (No One Will Ring The Bell At The Top), first quoting Seth Klarman

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.”

It is in that statement that we find the unfortunate truth. Individuals are once again told that this time will be different. Anyone who dares speak against the clergy of bullishness is immediately chastised for heresy. Yet, in the end, no one will ring the bell at the top and ask everyone to please exit the building in an orderly fashion.

Ben Hunt adds:

Bottom line: “don’t fight the Fed” is a reflection of the institutional power of the Fed and the Narrative of Central Bank Omnipotence. It cuts both ways. You don’t want to be short anything when the Fed is easing, and it’s hard to be long anything when the Fed is tightening. The crowd is picking up on a shift in the easing/tightening Narrative and is beginning to act on that by selling, just as they acted on prior market-positive shifts in the easing/tightening Narrative by buying. Different monarchs; same monarchy. What’s to come? More of the same, I suspect. Good real world news is bad market news, and vice versa, for as far as the eye can see. Why? Because the crowd is not going to fight the Fed.

Just kidding Meanwhile, back at the ranch, there are more serious matters:

HOLY COW!
Scientists seek climate-friendly cow Burping bovines exceed methane emissions from landfill

A White House climate initiative has boosted a quixotic search for the “cow of the future”, a next-generation creature whose greenhouse gas emissions would be cut by anti-methane pills, burp scanners and gas backpacks.

Carbon dioxide from fossil fuels is the primary man-made gas warming the planet, but methane is far more potent and the US’s biggest source of it is its 88m cattle, which produce more than landfill sites, natural gas leaks or hydraulic fracturing.

The Obama administration’s launch last month of a plan to curb methane emissions has given fresh relevance to climate-friendly technologies for cattle that range from dietary supplements and DNA gut tests to strap-on gas tanks. (…)

“Ninety-seven per cent of all the methane gas is released by the front end through burps, not from the back end,” he said.

Based on his research priorities, the dairy cow of the future will be the unstressed inhabitant of spacious accommodation, munching on anti-methane gourmet grains that are processed by an efficient, best-in-species digestive system.

“We want it to be more productive, we want it to be healthier, we want it to be a problem-free cow,” said Mr Tricarico. (…)

C-Lock, a South Dakota company, sells a feeding station that gives animals dietary supplements such as basil to cut methane production and measures the content of their breath by pulling it towards trace gas sensors with a vacuum.

Patrick Zimmerman, C-Lock’s founder, says prices start at $45,000 but stresses the economic benefits of improved efficiency. “Of the energy the animals eat, 3 to 15 per cent is lost as methane and that’s a waste,” he says.

At Argentina’s National Institute of Agricultural Technology, scientists have created backpacks that collect gas via tubes plugged into cows’ stomachs. A typical animal emits 250-300 litres of methane a day and researchers say this could be used to power a car or a refrigerator for a day, but Jorge Antonio Hilbert of the institute says the tanks’ use on a large scale is “totally improbable”.

Jonathan Gelbard of the Natural Resources Defense Council, an environmental group, says: “Anyone who can come up with a cost-effective way to harness that methane is going to make a lot of money.”

Ilmi Granoff of the Overseas Development Institute said an alternative to controlling cattle emissions would be to cut the number of cows.

“Forget coal, Forget cars. The fastest way to address climate change would be to dramatically reduce the amount of meat people eat,” he said. “But that involves cultural preferences and they are difficult to touch.”

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