As the infection rate of the coronavirus stabilises the market is increasingly focused on the economic impact of the disruption. Markets were initially buoyed this week by the prospect of further stimulus form China but the warning from Apple that both sales and production will suffer is a reminder that the impact extends far beyond China. One notable piece we feature this week is a recent Fed paper on the global spillovers of a China slowdown. It was written before the outbreak of the virus but the findings are still highly relevant.
On the US election we feature Paul Krugman on why Bernie Sanders’s self-proclaimed socialism is not really socialism but nevertheless leaves him exposed to Republican attacks. We also feature a detailed take from the MIT Technology Review on how US pollsters are adjusting their methodologies after failing to capture the extent of Trump support in 2016.
Away from the US we feature a new paper from the IMF which models for the first time a fiscal Taylor rule.
Finally, we feature an Exclusive from leading Turkey economist Haluk Burumcekci previewing tomorrow’s interest rate decision.
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As the infection rate of the coronavirus stabilises the market is increasingly focused on the economic impact of the disruption. Markets were initially buoyed this week by the prospect of further stimulus form China but the warning from Apple that both sales and production will suffer is a reminder that the impact extends far beyond China. One notable piece we feature this week is a recent Fed paper on the global spillovers of a China slowdown. It was written before the outbreak of the virus but the findings are still highly relevant.
On the US election we feature Paul Krugman on why Bernie Sanders’ self-proclaimed socialism is not really socialism but nevertheless leaves him exposed to Republican attacks. We also feature a detailed take from the MIT Technology Review on how US pollsters are adjusting their methodologies after failing to capture the extent of Trump support in 2016.
Away from the US we feature a new paper from the IMF which models for the first time a fiscal Taylor rule.
Finally, we feature an Exclusive from leading Turkey economist Haluk Burumcekci previewing tomorrow’s interest rate decision.
Enjoy!
Bilal
CBRT Credibility On The Line (3 min read) With the lira under pressure expectations are mixed on whether the Turkish central bank will opt for a sixth consecutive interest rate cut on Wednesday. We expect no change from the current 11.25%.
Inflation Continues to Edge Back Up
Turkey’s Central Bank (CBRT) is once again at a crossroads. After 1275bps in rate cuts since July last year the lira is under pressure and the focus on the true level of reserves has intensified. State banks have conducted regular foreign exchange sales in recent weeks, yet the lira has weakened 2% in the last month. Total open FX positions of the state banks reached US$4.8bn for the week ending February 7, its highest for a long time, with US$2.8bn additional positions opened, according to BRSA data.
(Haluk Burumcekci, 18th February 2020)
Negative real yields and the impact of Tesla’s eventual stock correction on national security
Treasury Market Flashes New Warning As Real Yields Go Negative (The Capital Spectator, 4 min read) From inverted (nominal) yield curves last year to sub-zero real yields in 2020, the US bond market is again signalling looming economic weakness. But the debate over the current power of these signals continues, especially for the less liquid TIPS market.
Why Bonds Are Still a Good Hedge (Blackrock, 2 min read) Despite UST yields below 1.6% bonds remains a good insurance against equity risk. The correlation remains negative and during any pronounced spike in volatility long duration bonds significantly outperform.
Central Bank Dovishness and Good Fundamentals Create Opportunity in Spread Sectors in 2020 (Advisor Perspectives, 3 min read) Both spread products and emerging markets should outperform government bonds this year with the Fed keeping rates firmly on hold and the global economy picking up pace.
How a Stock Bubble Could Unwind America’s National Security (Defense One, 8 min read) The eventual reversal of Tesla’s meteoric stock price rise will bring many other stocks crashing down with it and leaves the potential for higher interest rates (and government financing costs), a weaker dollar and stepped up deglobalisation.
Effective Fed funds under different liquidity conditions plus the leftward shift in inflation distribution
How Did the Fed Funds Market Change When Excess Reserves Were Abundant? (New York Fed, 15 page read) The switch to significant excess liquidity following the financial crisis and introduction of renumeration on excess reserves (IOER) changed both the main players in the fed funds systems and their motivation. But the effective fed funds rate remained within the target range and in line with other overnight funding rates.
Inflation at Risk (Federal Reserve, 65 page read) Fed researchers find that tight financial conditions create “substantial” risks of low inflation with rising credit spreads shifting the distribution of inflation to the left. This adds to earlier explanations of anchored inflation expectations and liquidity constraints as the drivers behind low and stable inflation.
Forward-Looking Monetary Policy and the Transmission of Conventional Monetary Policy Shocks (Federal Reserve, 30 page read) Incorporating Fed forecasts and the introduction of forward-looking policy provides more consistent results of the impact of monetary policy on output and prices than has been modelled before.
A new fiscal Taylor rule and big pharma’s transfer pricing
A Model-based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance (IMF, 36 page read) Assesses the fiscal stance, defined as the change in the structural primary balance, by using public debt, output gap and primary balance in the preceding period as the starting point. The model points to G7 primary balances below the recommended levels.
Tax Games: Big Pharma Versus Big Tech (CFR, 6 min read) In contrast to profit shifting by US tech firms that lower US exports, pharma profit shifting raises US imports. The US trade deficit on pharma is now bigger than the surplus on aircraft and comes from Ireland, Singapore and Switzerland, all of which have favourable tax treatment for multinationals.
How to add unemployment into business cycle dating and why subprime auto delinquencies are at all-time highs
Reading the Tea Leaves of the U.S. Business Cycle—Part Two (Liberty Street Economics, 6 min read) Using a “threshold rule” for the unemployment rate provides a good fit with the dates of NBER-defined business cycles. With limited revisions to the unemployment data it also provides a stable and timely gauge of the cycle.
The Accuracy of Long-term Growth Forecasts by Economics Researchers (VoxEU, 4 min read) Real and nominal GDP growth forecasts for Japan show an upward bias over the past 10 year even when excluding the 2008-09 crisis. Government forecasts have a larger upward bias than those made in the private sector.
Subprime Auto Loans Explode, “Serious Delinquencies” Spike to Record. But There’s No Jobs Crisis, These Are the Good Times (Wolf Street, 4 min read) Nearly one quarter of all subprime auto loans are more than 90 days overdue, yet delinquencies on prime auto loans are at historic lows. The divergence reflects aggressive subprime lending and investor demand for high yielding auto loan ABS.
US pollsters try to correct for 2016 errors and history repeats itself in the UK’s Treasury power grab
Bernie Sanders Isn’t a Socialist (New York Times, 2 min read) Paul Krugman describes Bernie Sanders as more European social democrat rather than true socialist. Sanders’ chosen misnomer will, however, make him an easy target for Republicans.
Pollsters Got it Wrong in the 2016 Election. Now They Want Another Shot (MIT Technology Review, 12 min read) Large numbers of undecided voters, shy Trump supporters, poor sampling and correlated errors were among the factors behind the 2016 polling miss. Errors have since been corrected but pollsters still cannot account for the impact election forecast have on individual’s likelihood of voting.
As Rishi Sunak Cecomes UK Chancellor, a History of Battles Between No 10 and 11 Downing Street (The Conversation, 4 min read) Boris Johnson’s efforts to control the UK Treasury have been tried by various prime ministers before him and have never proved successful. Given the manifold risks facing the UK economy it is unlikely to work this time either.
Linking large datasets and how to predict high yield returns
The Promise of Automated Historical Data Linkage (VoxEU, 6 min read) Using automated techniques to link historical data is no worse than using “hand links” providing a practical solution to linking multiple large datasets.
A Simple Introduction to Neural Networks (Less Wrong, 24 min read) A introductory guide to machine learning focusing on neutral networks. Designed as a stand-alone although the earlier nine chapters are also available.
Are High-Yield Returns Predictable? Key Metric Suggests Yes (Advisor Perspectives, 1 min read) High yield corporate bonds exhibit predictable returns over time with the starting yield the key driver, even during the financial crisis.
US less affected than others in a China slowdown and the permanent hit to China’s political system
The Economic Consequences of the Coronavirus (Project Syndicate, 4 min read) Information sharing could be a more effective and less damaging way to contain the spread of the coronavirus rather than large-scale quarantines. Monetary and fiscal stimulus can also help to limit the hit to the economy.
Global Spillovers of a China Hard Landing (Federal Reserve, 42 page read) EM commodity exporters are most affected by a China slowdown with the estimated hit to growth three-quarters of that to China. This drops to a half for other EMs and one-third for advanced economies ex US. With low direct financial linkages, a less open economy and more space for accommodative monetary policy the impact on the US economy is more contained.
Is Political Change Coming to China? (Project Syndicate, 5 min read) Regime collapse, leadership change or an internal power shift are three possible scenarios from the Communist party’s mishandling of the coronavirus. Retaining the status quo seems unlikely with the perception that censorship costs lives.
How bioenergy can play a role in the fight against climate change plus positive correlation between ESG and fixed income returns
Landing a Blow Against Climate Change (Project Syndicate, 4 min read) Earlier efforts to accelerate the use of bioenergy stalled as land conversion created concerns over food security, land degradation and carbon capture from the bioenergy process. With better planning land can, however, play a vital role in the fight against climate change.
ESG Metrics Continue to Emerge as Key Criteria for Power Sector Investment (S&P Global, 2 min read) The power sector’s need for accurate and consistent ESG data extends to the construction materials and installation process used to ensure any contamination and geological impact are fully accounted for.
ESG Integration Outperforms Since 2014 in Europe; Amundi Study Finds (Investment Europe, 3 min read) European IG fixed income portfolios incorporating ESG have outperformed for the past five years with an annual excess credit return of 37bps. Integrating ESG with USD portfolios did not perform as well but the study nevertheless found a positive correlation between ESG and returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)