In its article titled “Riding the Wave - An East Asian Miracle for the 21st Century”, the World Bank upgraded Thailand to a “progressive prosperity” country, having “eliminated income poverty while substantially increasing the share of middle-class households.” The article also goes on to highlight that “A wave of prosperity has spread across East Asia. Today, three of five people can be considered economically secure in that they face a very low risk of falling into poverty. A solid middle class has emerged in most countries.” Meanwhile, Thailand's economy has expanded at its fastest pace since the first quarter of 2013, with Q3’17 GDP at 4.3% yoy, up from 3.7% yoy; a pick-up in exports and tourism supported growth.
In a report published by the UK’s Labour Party, consultants GFC Economics recommended that parts of the Bank of England be relocated out of London to other major cities in the UK. The plan to establish the BoE in Birmingham, with offices in Belfast, Glasgow and Cardiff could mean that the second oldest central bank and the City of London would for the first time since 1734 not be the hub of finance in the UK.
Most will know we have been advocates for US Treasury curve flattening for an extended period of time and of course the UST curve is very important as it is the benchmark off which all US dollar credit spreads are measured. Since the end of June this year, so a little over five months, the 2- to 10-year benchmark spread has tightened 36 bps and now sits at just 56 bps, while the spread between the 5- and 30-year has tightened 31 bps to just 63 bps, a dramatic flattening of the yield curve. Now we all know the story, the market is clearly not on the same page as the Federal Reserve when it comes to inflation expectations, and with the Fed tightening path; we do expect a further 25bp on the funds rate next week, which is positive for longer-dated bonds as it further reduces the risks of inflation.
100 years ago on the 6th December 1917 Finland declared independence from Russia. Throughout this year they have been celebrating this heritage and their culture: which includes everything from summer-houses to baby-boxes, from some of the most stable politics in the world to the best education system in Europe. Finland is Aa1/AA+ rated according to Moody’s and Standard and Poor’s. It is rated 4 Star according to our Net Foreign Asset Model, meaning that it has accumulated neither significant Net Foreign Assets nor Liabilities. But from an investor’s view the country offers little value to celebrate over: with a negative sovereign yield curve up to 7 years and with yields less than 1.2% in the 30 year space.
On the 21st April this year the National Grid announced that for the first time ever no coal had been burnt to produce electricity for an entire 24 hour period in the UK. However, as renewable energy and large nuclear power stations make up more of the UK’s energy needs, the UK government and scientists are exploring a new avenue to produce electricity, the small "modular" nuclear reactor, or SMRs.
The major problem for South Australia is that it has less access to fossil-fuels such as gas and coal, so relies on renewable energy; at 41% one of the highest in the world. Which is all well and good, until the wind stops and the sun goes down, then power has to be imported from ‘peaker’ stations, that can power up to meet demand in the twilight hours. The new battery, which is connected to a wind farm, can power up to 30,000 homes, will stabilise supplies and help stop the blackouts that have blighted the region for many years.
However, although the battery is three times more powerful than the world’s next largest battery, Musk and Tesla will not hold that honour for long. Hyundai Electric & Energy Systems in South Korea is currently building a massive 150-megawatt lithium-ion unit in Ulsan, near the country’s southeast coast. According to Hyundai, the battery will go live in the first quarter of 2018.
Over the last few years billions has been poured into battery research and development, and today we have everything from your humble vacuum cleaner to trucks travelling 500 miles all powered by batteries. This has driven prices lower, with prices for batteries approximately 50% of what they were 3 years ago. And this is just the start. This year, according to Bloomberg, lithium-ion battery projects announced in 2017 were four times that for all of last year, at 1,650 megawatts per hour.
So … although Musk did indeed put his money where his mouth was, the odds were well and truly stacked in his favour!!
The National Association for Business Economics conducted a survey during the period 6th to the 15th November regarding the impact that the Republican-backed tax-cuts will have on the economy. The results are a little surprising; the majority see growth boosted by between 0.2% and 0.39% in 2018 with around a fifth looking for higher gains and a fifth seeing absolutely no benefit to growth. Of course, the survey was done almost a month ago and since then the package of tax cuts has changed somewhat in order to get lawmakers approval.
Earlier this week, José Antonio Meade resigned from his position as Mexico’s Finance Minister and announced his intention to run for the nomination as the PRI (Institutional Revolutionary Party) candidate for the 2018 Presidential Elections. The PRI party nominated candidate is due to be announced in February 2018. Interestingly, Meade is not a PRI party member but his reputation as an extremely capable candidate (having served in roles in Finance, Energy, Foreign Affairs and Development) and one who is honest and has integrity is a positive.
The President Trump nominated board of governors at the Federal Reserve continues to take shape with a further nomination last night of Marvin Goodfriend a professor at Carnegie Mellon University and a widely respected economist. He will join, if approved by the Senate, Jerome Powell who takes over the chair when Janet Yellen leaves office in February and Randal Quarles the vice chair of supervision. That will still leave two vacancies on the Board of seven governors and a third becomes available with Yellen's departure.
Extract from Bob Gay’s piece ‘Regime Change: Inflation’
The longstanding inverse relationship between inflation and economic slack seems to have weakened dramatically.
The Demise of the Phillips Curve. Almost 60 years ago, an economist named A.W. Phillips published an empirical study that showed periods of low unemployment were associated with rising inflation. The finding was intuitively plausible and meshed nicely with economists’ belief in how competitive markets should work – namely, prices rose when resources including workers were in short supply. By the 1970s, however, that inverse correlation was coming unglued as unemployment ratcheted higher and so did inflation.
The UK has finally caved to the EU’s disaggregated approach to Brexit negotiations: agreeing in principle to give around €55bn (as part of the eventual package deal) to compensate for retracting from future funding of the EU budget. The argument that such a stance was illogical (as they certainly wouldn’t enforce a leaving subsidised-member to continue receiving payments or impose a leaving-bonus) gained no traction after many precious months; neither did the previous €20bn and €40bn offers by Prime Minister Theresa May. Given that early talks of what the UK ‘owed’ were in the range of €60bn it seems that already in the first few items the UK as conceded much, and the EU precious little.
As regular readers are aware, we recently added a holding in State-owned Abu Dhabi Crude Oil Pipeline (ADCOP) 4.6% 2047s. Rated Aa2, this bond has performed well since issue, having gained roughly 2.54 points. It continues to offer attractive expected returns, which we calculate at ~17%, with the additional yield of 4.40%; the highly rated bond also offers over 5.7 notches of credit cushion, i.e the market is mispricing the issue as a Baa1/Baa2 credit. We also favour the Emirate's sovereign paper, having added the 4.125% 2047s at issue, and more recently the 3.125% 2027s; rotating out of Saudi Arabia sovereign positions. Both bonds offer in excess of 3 notches of credit uplift, with expected returns and yield of 16.1% and 7.2%, respectively.
It’s been 20 years since German sportswear giant Adidas manufactured sportshoes in its homeland, however that all changed earlier this year when Adidas opened its new ‘Speedfactory’; a 4,600-square-metre highly-automated plant in Ansbach, southern Germany, where it will start to manufacture shoes by robots. Indeed, by 1993 Adidas had closed all but one of its 10 shoe factories in Germany. With the new German factory, plus another one to be built in the US, Adidas hopes to be making and selling around 1mln pairs of sports shoes to developed markets customers within the next 5 years.
Extract from Bob Gay’s piece ‘Regime Change: Inflation’
One of the most striking yet unsung by-products of globalisation and technology has been the rise of monopolistic industries that has shifted bargaining power from workers to employers. Since the heyday of union power in the early 1970s, which coincided with the coming of age of the postwar baby boom generation, labor’s share has declined from highs around 58% to 53% today. The erosion in workers’ bargaining power has been even more noticeable since the onset of the Great Financial Crisis. Information and communications technology have enabled scale economies that were inconceivable just 25 years ago.
For the next 3 days we feature extracts from our macro-economist Bob Gay’s latest piece ‘Regime Change: Inflation’.
With the nomination of Jerome Powell for Chair of the Federal Reserve Board, we hear much speculation about whether a change in Board members will alter the course and conduct of US monetary policy. Strong Chairs, including Paul Volcker and Janet Yellen, have managed to guide policy in times of dramatic change in the economic landscape. Mr. Volcker reshaped America’s future by breaking the wage-price nexus of the 1970s. Ms. Yellen will be remembered as the architect of extricating the Fed from the extraordinary policies undertaken in the aftermath of the Global Financial Crisis.
Last week Moody’s upgraded India's long-term rating one notch to Baa2, stable. Rated BBB- by S&P and Fitch, this is the first time India has been upgraded in over a decade. Moody’s said, “The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term.
This week is a Thanksgiving holiday-shortened week in the US. Today we will see further Brexit discussions as EU foreign and European ministers meet; according to sources, PM May could look to get cabinet approval to double the ‘divorce settlement’, originally touted at EUR20bn. The new location for the European Banking Authority and European Medicines Agency will also be decided today. On Tuesday we will hear from Fed Chair Janet Yellen “In Conversation with Mervyn King” in New York, and the Chicago Fed National Activity Index could be of interest.
Russian Q3 GDP grew 1.8% yoy which was down from growth of 2.5% yoy in Q2 and slightly weaker than market expectations of 2%. Elvira Nabiullina, the Central Bank Chief, is reported as saying she expects growth to reach 1.8% for 2017 as a whole although the Central bank has been guiding to 1.7-2.2% range, and the Finance Ministry projection has been at the upper end of the range. Moody’s estimate 2017 GDP growth at 1.5%. But all projections represent a significant improvement from GDP growth of -0.2% in 2016.
According to two of Sweden’s top bank bosses, the Swedish housing boom that has lasted a generation is coming to an end as the ever increasing leverage finally begins to bite. In the past 10 years alone the housing market in Sweden has doubled, and as chief executive of Skandinaviska Enskilda Banken has warned ‘We see red flags’ adding ‘You cannot see household indebtedness continuing to increase. Sustainability is no longer there’. In September, house prices in the Scandinavian country fell by 1.5%, the first fall in years. Along with booming house prices there has been a coinciding rise in household debt, which is amongst the highest in Europe.
As is well publicised, OPEC continues to cut supply alongside Russia and other compliant partners, to bolster the price of crude; Brent has recently been trading comfortably above $60 per barrel, a two year high. Nowhere is this more noticeable than in the US. The largest oil refinery in the states is situated at Port Arthur Texas and is, in fact, owned by Saudi Arabia’s Aramco. During October the US imported an average of just 525,000 barrels per day of Saudi crude, the lowest level since May 1987 down from around 1.5 million barrels a day just ten years ago.