mexico - bloomberg l.p. · pdf file... brazil’s central bank probably will keep its key...
TRANSCRIPT
Wednesday
June 8, 2016
www.bloombergbriefs.com
April JOLTS Report; Brazil Rate DecisionBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS
WHAT TO WATCH: The Labor Department will report on for April U.S. job openingsat 10 a.m. The consensus of economists surveyed by Bloomberg forecasts a decline to 5.675 million openings in the month from 5.757 million in March — the second-highest total on record. MBA for the week ended June 3 are reported at mortgage applications7 a.m. Applications fell 4.1 percent the week before.
ECONOMICS: Brazil’s central bank probably will keep its key interest rate at a nine-year high of 14.25 percent for a seventh straight meeting, 6 p.m.
GOVERNMENT: Prime Minister and Finance Minister Justin Trudeau Bill Morneauare keynote speakers at the Economist’s Canada Summit, which begins at 8:30 a.m.
COMPANIES: Alphabet Inc. holds its annual meeting at Google headquarters in Mountain View, California at 12 p.m. The live webcast will be available .here
MARKETS: Asian stocks reversed earlier losses and South Korea’s won extended gains as Chinese trade figures added to signs the world’s second-biggest economy is on the mend. European equities declined, while crude oil held above $50 a barrel.
(All times local for New York.)
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QUOTE OF THE DAY
"Maybe the drag has passed, but where is the growth going to come from? The result of that is this sideways trading market with very limited risk tolerance on the part of the broad investment community."
— Gina Martin Adams, an equity strategist at
Wells Fargo Securities, on the in U.S. advance
stocks, in a Bloomberg TV interview
COMMENTARY IN THIS ISSUE
Investors who argue the Mexican is pesoundervalued could be right, but they may have to wait a while longer to be vindicated: Felipe Hernandez.
BlackRock portfolio manager Gerardo Rodriguez discusses the Fed's impact on
markets and the dynamics of emergingthe Chinese and Indian economies:
and Michael McKee Tom Keene.
2.4%The amount by which world gross domestic product will this year, growaccording to the latest estimate from the
in its semiannual Global World BankEconomic Prospects . That's down reportfrom 2.9 percent as forecast in January.
EQUITIES DATA MONITOR
MEXICO FELIPE HERNANDEZ, BLOOMBERG INTELLIGENCE ECONOMIST
JOLTS Details May Shed Light on April Jobs Deceleration
The JOLTS data are often overlooked by market participants because they trail the official jobs report by a month. However, there are important economic signals to be gathered from the underlying details. The March JOLTS indicated a surge in job openings, sending a compelling signal that the pace of hiring should accelerate this year. But payroll growth fell sharply in May, and were significantly revised down in April. JOLTS data for April should help better understand the reasons for the deceleration in job gains in the previous jobs report. This could give analysts some clues about the reasons behind an even sharper deceleration in May.
— Carl Riccadonna, Bloomberg Intelligence Economist
Source: Bloomberg
June 8, 2016 Bloomberg Brief Economics 2
MEXICO FELIPE HERNANDEZ, BLOOMBERG INTELLIGENCE ECONOMIST
Peso’s Performance Lags Behind Its FundamentalsInvestors who are disappointed with
the Mexican peso’s depreciation and argue the currency is undervalued could be right, but they may have to wait a while longer to be vindicated.
A popular view holds that Mexico’s fundamentals have improved since President Enrique Pena Nieto took office in December 2012 and are better than in most emerging markets. Three arguments are commonly used to support this assessment.
First, Mexico is one of the few countries to have made progress on structural reforms, and changes in energy, telecommunication, financials and education approved in 2013 should help attract new investment, raise productivity and boost long-term growth.
Second, because of Mexico’s trade orientation and structure, the country is in a unique position to benefit from the relative strength of the U.S. economy and is less vulnerable to China’s slowdown and lower commodity prices.
Third, the official commitment to free trade and responsible fiscal and monetary policy has prevented large imbalances and consolidated credible institutions and the economic framework.
Even so, the peso has depreciated in both nominal and real terms and underperformed its emerging-market peers. The currency has the eighth-worst spot return and fourth-worst total return in the group since Nieto’s inauguration in December 2012. This year, the peso has fallen more than 7 percent against the dollar and has posted the second-lowest spot return after the Argentinian peso and the worst total return in emerging markets.
Mexico’s peso has depreciated in real terms too. The trade-weighted real effective exchange rate calculated by the central bank fell almost 5 percent in 1Q and has depreciated more than 22 percent since December 2012. The currency is now at the weakest since 1996 in the aftermath of the Tequila Crisis.
Despite the peso’s poor performance, many investors still believe Mexico has good fundamentals and view exchange-rate depreciation as transitory. This view seems consistent with statements by
Read this analysis with an additional chart on the Bloomberg terminal . here
central bank Governor Agustin Carstens earlier this year that the peso is currently undervalued.
The terms of trade index calculated by the central bank has been steadily falling since 2013 and current levels are the lowest in almost five decades of official figures. Low terms of trade are mainly explained by falling export prices and have been only partially offset by import prices, which have also declined. Lower oil prices help explain tumbling export prices and terms of trade, but are not the only reason, as oil accounts for less than 10 percent of total export revenues. Falling or stagnant prices of goods in the U.S., according to inflation figures, also contribute to lower export prices and terms of trade and can have a considerable impact, as exports to the U.S. excluding oil account for almost 80 percent of total export revenues.
Low terms of trade support a weak exchange rate, but based on historic data the peso has depreciated by more than what would be consistent with their current level. The result implies the currency is overshooting and is in line with the idea that the peso is undervalued. A simple regression using monthly data from the last 10 years show a strong relation between changes in terms of trade and changes in the nominal and trade weighted real exchange rate.
According to the results, the peso would be undervalued by 5-10 percent.
A similar conclusion is reached when looking at the ratio between the terms of trade index and the trade weighted real effective exchange rate index. Assuming the exchange rate adjusts to changes in terms of trade, the ratio should be relatively stable, but instead it has sharply increased in the last two years and stands now at its highest level since 1996 and more than two standard deviations above its average. The result implies a weaker trade weighted real effective exchange rate relative to export and import prices and indicates a potentially undervalued currency.
Although terms of trade is an important variable affecting the exchange rate, it is not the only one. The apparent overshooting of the currency relative to terms of trade can be explained and supported by other variables not included in this analysis that need to be considered to provide a more robust conclusion.
Risk appetite and conditions in global financial markets are among the factors that also play an important role in determining the exchange rate and deserve additional consideration, particularly in countries with free-floating currencies and open capital accounts like Mexico.
WAGES
Emerging-Market Currency Total Return, Dec. 2012-May 2016
June 8, 2016 Bloomberg Brief Economics 3
WAGESSmaller Share of Workers Remain Stuck in Pay FreezeALEX TANZI, BLOOMBERG NEWS
Employers appear to be slowly opening their purse strings. The share of American workers that remain stuck in a pay freeze fell to 13.7 percent in April, down from over 17 percent in 2012 and the lowest in seven years, according to Atlanta Federal Reserve Bank data.
Worker pay was about the only bright spot in a Labor Department report released Friday that showed average hourly earnings increased 2.5 percent over the 12 months ended in May, an encouraging sign that more workers may finally be getting a raise.
DATA & EVENTS
Proportion of Workers Seeing No Wage Growth at 7-Year Low
June 8, 2016 Bloomberg Brief Economics 4
DATA & EVENTS
TIME COUNTRY EVENT SURVEY PRIOR
7:00 U.S. MBA Mortgage Applications — -4.10%
7:00 Brazil FGV CPI IPC-S 0.62% 0.64%
8:00 Chile CPI YoY 4.30% 4.20%
8:00 Brazil IBGE Inflation IPCA MoM 0.75% 0.61%
8:00 Chile CPI MoM 0.30% 0.30%
8:00 Brazil IBGE Inflation IPCA YoY 9.30% 9.28%
8:00 Chile CPI Ex Food and Energy MoM 0.20% 0.30%
8:15 Canada Housing Starts 189.0k 191.5k
8:30 Canada Building Permits MoM 1.50% -7.00%
10:00 U.S. JOLTS Job Openings 5675 5757
11:30 Brazil Commodity Price Index MoM 0.50% -3.09%
11:30 Brazil Commodity Price Index YoY 8.28% 8.56%
21:30 China CPI YoY 2.20% 2.30%
21:30 China PPI YoY -3.20% -3.40%Source: Bloomberg. Surveys updated at 5: 55 a.m. New York time.
CALENDAR
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
OVERNIGHT
The European Central Bank entered a new phase in its efforts to stimulate the flagging euro region’s economy, plunging into the corporate bond market today for the first time. Purchases included bonds issued by , Anheuser-Busch InBev NVthe world’s biggest brewer; Telefonica
, Spain’s biggest telecommunications SAcompany; , Europe’s Siemens AGbiggest engineering company;
Italy’s Assicurazioni Generali SpA,biggest insurer; French automaker
and utility , Renault SA Engie SAaccording to people familiar with the matter, who aren’t authorized to speak about it and asked not to be identified.
U.K. industrial production posted its biggest monthly gain in almost four years in April as manufacturing surged. Output rose 2 percent from March, when it gained 0.3 percent, figures from the Office for National Statistics published today show. Economists in a Bloomberg survey had predicted no change. Factories increased production by 2.3 percent in April, which was also the biggest gain since July 2012.
fell its French business confidencelowest level in more than a year in May as strikes hampered refinery output and limited petrochemical supplies. A gauge of sentiment among manufacturing executives dropped to 97 in May, its lowest since March 2015 and down from 99 in April, the Bank of France said today. The central bank cut its second-quarter growth forecast to 0.2 percent from 0.3 percent.
Japan’s economy grew slightly more than the government initially reported for the first quarter, helped by a fractional revision in private consumption and business investment that dropped less than first thought. Gross domestic product expanded by an annualized 1.9 percent in the three months ended March 31, more than a preliminary reading of 1.7 percent, according to revised data from the Cabinet Office.
Europe
Asia
‘Earnings-Driven Bull Market’ Seen Coming for U.S. Stocks
U.S. stocks are set up for an “earnings-driven bull market” as corporate profits rebound, according to Richard Bernstein, chief executive and chief investment officer of Richard Bernstein Advisors LLC. In a posted on his website Tuesday, Bernstein cited data reportabout the S&P 500’s performance after low points for earnings since 1938. The index averaged a 13.1 percent gain in the next 12 months, and rose all but three times in 18 occurrences.
— David Wilson, Bloomberg News
June 8, 2016 Bloomberg Brief Economics 5
MARKET INDICATORS
June 8, 2016 Bloomberg Brief Economics 6
MARKET INDICATORS
TREASURIES ALEXADNRA SCAGGS, BLOOMBERG NEWS
Source: Bloomberg. Updated 6 a.m. New York time.
June 8, 2016 Bloomberg Brief Economics 7
TREASURIES ALEXADNRA SCAGGS, BLOOMBERG NEWS
U.S. Sells $24 Billion of Three-Year DebtThe U.S. sold $24 billion of three-year
notes at the highest yield since March.The three-year debt sold for less than
the price indicated by pre-auction trading. What’s more, investors entered the smallest amount of bids directly with the Treasury since 2009, indicating “tepid” demand, according to Stone & McCarthy Research Associates. That’s a sign investors may see higher risk of a rate increase than market prices indicate. The probability of a rate boost at the Fed’s meeting next week has cratered since a weaker-than-forecast June 3 labor report sparked the biggest rally in two-year notes since September.
Tuesday’s note sale, the first of three Treasury offerings this week totaling $56 billion, comes after demand rose to the highest on record at a string of blockbuster auctions last month. Investorshave been snapping up U.S. securities amid worldwide demand for the safest fixed-income assets as more than $10 trillion of global debt offers negative yields, according to Fitch Ratings.
Read the full story on the Bloomberg terminal . here
The three-year notes auctioned Tuesday yielded 0.93 percent, compared with a 0.928 percent yield in when-issued trading immediately before the sale.
In addition to Tuesday’s auction, the U.S. will sell $20 billion in 10-year notes Wednesday and $12 billion in 30-year bonds June 9.
SURVEILLANCE WITH KEENE & MCKEE
Direct Bids at Three-Year Auction Lowest Since 2009
June 8, 2016 Bloomberg Brief Economics 8
Bloomberg Brief: Economics
SURVEILLANCE WITH KEENE & MCKEE
BlackRock emerging markets portfolio manager
speaks with Bloomberg's Gerardo Rodriguez
Michael McKee and Tom Keene about the Fed's
impact on emerging markets and the dynamics of
the Chinese and Indian economies.
Q: Janet Yellen is central banker to the EM world, right?A: Absolutely. What happens with the Fedis very relevant for the emerging markets complex. Overall, U.S. financial conditionsdetermine pretty much the dynamics of what happens to emerging economies. Now, over time, emerging economies have had some time to adjust and to accommodate say for the next phase of the cycle in U.S. monetary policy. What has been a bit of a headwind for emergingmarkets has been the strength of the dollar. It is very much through the currency channel by which the Fed monetary policy has been operating.
And a stronger dollar creates some challenges for emerging markets, in general, and for China, in particular. The peg that the Chinese have been managing against the dollar becomes unsustainable to the extent that the dollar continues to strengthen and that reduces the competitiveness position of China.
And the Fed themselves have been struggling in terms of calibrating their response because they know that if economic dynamics improve in the U.S. you want to normalize, but then there is this feedback channel through the
currency that comes back to them.
Q: The dollar hasn't particularly moved in two years now, so what do we pay attention to in China?A: It is a very difficult process that Chinese authorities are going through, which is liberalizing financial markets, opening up their capital account and making their currency more flexible. Over history, emerging economies have not done that very well. So every time a country goes from a pegged currency to a flexible one it has triggered a financial crisis. Actually countries have moved in general to flexible currency arrangements not by choice but basically markets have forced them to do that.
So that is why the Chinese experiment is very interesting. And China, as with everything else, is managing the process in a very different manner. And one could think that from a communication standpoint they haven't done a great job because we don't clearly understand what is the framework under which they're operating. But so far, they've been testing the waters to see how they can move to become more flexible. Q: Can India continue to get it right?
The case of India is a bit unique in the A:EM world right now. India has come a long way in terms of external adjustment since 2013. From an external standpoint, India has basically strengthened its position. Yes, the currency appreciated significantly, but over say the past 12
months where the EM complex continues to depreciate against the dollar, the Indian currency has remained somewhat stable.
And then on top you have some reform momentum going for the government which is basically making economic growth accelerate at the margin. There are not many examples out there in the EM world where you have a strong external position, accelerating growth, andalso some policy leeway for interest rates to come down. India has some medium-term challenges as well, but over the nine-to-12-month horizon, it's one of the most attractive investment opportunities.
Q: Is it that India has untapped potential, or is Prime Minister Modi doing something to change the dynamic there?A: Clearly, Prime Minister Modi has energized the government after a very long period in which not much was happening there. So he has been touring around the world. He has strengthened relationships around the world. He has come a long way. But aside from that, you have one of the best central bank governors in the Reserve Bank of India, not only sort of modernizing their framework and financial market, but also a very strong communicator that has brought to the table confidence that had not been in India. Strong confidence plus interesting growth dynamics at the margin again making one of the very interesting cases out there.
This interview has been edited and condensed.
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