CHINESE ECONOMY: CREDIT IMPULSE
January 22, 2019
Prediction: China is again prioritizing growth over deleveraging, and will respond to the ongoing economic slowdown. The primary mechanism will be total social financing (TSF, or aggregate credit). As such, we expect a significant expansion of aggregate credit in Q1’19.
Validation: By the end of January 2019, China’s total social financing rose to a record CNY 4.64tn, up from CNY 1.59tn the previous month, even higher than market consensus had predicted, with the operations gaining traction shortly thereafter.
Indian Economy: Entering a Period of Fiscal and Monetary Easing
December 19, 2018
Prediction: Given government deficit data for the first 7 months of the year and the tepid rate of revenue collection, we anticipate a widening of India’s fiscal deficit as it enters a period of fiscal and monetary easing. We anticipate up to a 1% slippage in the fiscal deficit against GDP, which may be obfuscated by deferring payments to the Food Corporation of India.
Validation: In the central budget released on February 1, the fiscal deficit was indeed revised up to 3.4% of GDP from 3.3%. However, as we pointed out in a note on February 5, the true size of the deficit may be obscured by an inflation of expected tax revenue and deferred payments to the FCI, which had to borrow nearly INR 2tn to cover costs in FY19.
Indian Economy: Policy, Macros, Institutions and Politics
December 3, 2018
Prediction: Against the backdrop of sharply lower crude oil prices, soft Consumer Price Index (CPI) readings and slowing growth, India’s Monetary Policy Committee (MPC) statement on December 5 is likely to be a dovish pause. Moreover, BJP discussions suggests they may be more cautious in their expectations than market analysts, ahead of the state election results on December 11.
Validation: The MPC indeed pursued a rate pause in December, keeping the repo rate at 6.5%. Then, in a surprise election upset on December 11, the BJP lost all three main Hindi heartland state elections.
India’s Political Economy: Institutions and Elections
November 14, 2018
Prediction: On November 14th, we called that although there seemed to have been a rapprochement between RBI Governor Patel and the government, there remained some deep animosity, rehighlighting those issues in a note on December 3.
Validation: On December 10, 2018, Governor Patel resigned from the RBI, to be replaced later that week by Shaktikanta Das, whom we had included in our December 12 list of front-runners.
Federal Reserve: A Bigger Normal Balance Sheet
July 9, 2018
Prediction: As the US comes to terms with a bigger ‘normal’ size for its balance sheet, the timeline for the end of runoffs continues to accelerate. We expect the balance sheet to end up somewhere between $3tn and $3.5tn, about $1tn larger than the Fed’s most recent public estimate.
Validation: In February of 2019, after putting further rate hikes on hold, the Fed confirmed the mounting view that the balance sheet would remain larger than previously suggested in official statements.
Chinese Economy: Financial Stability After Governor Zhou
November 17, 2017
Prediction: Governor Zhou’s outgoing comments on the potential for a Chinese “Minsky moment” lead us to believe that his warnings about China’s high debt levels and potential sources of instability are not merely legacy-proofing, but a policy road map for further regulatory reform and deleveraging. We predict that they will accordingly put further rate hikes on pause to accommodate regulatory tightening.
Validation: The PBOC did indeed keep rate hikes on hold even as the US Fed continued to tighten, and deleveraging continued until it was reversed in light of economic softness in the second half of 2018.
Portugal: Improving Budget and Economic Prospects
April 19, 2017
Prediction: Portugal’s continued track record of beating expectations on deficit reduction paired with a cyclical upturn leads us to expect an inflection point in Portugal’s bond market. After having stabilized about 300bps over the German 10-year, up from 180bps, over the course of Q1, investor perception is likely to shift, especially when the ratings agencies begin upgrading Portuguese debt.
Validation: On April 17, the spread between Portuguese and German 10-year bills was 357bps. On April 24, it was 322bps. On June 5, it was 278bps. It continued to fall until its low of 107bps in April 2018, before stabilizing between 140 and 160.
Federal Reserve: The FOMC and Overshooting
November 8, 2016
Prediction: Comments from Fed Chair Yellen and Vice Chair Fischer indicate that, given uncertainty about the nature of the inflation dynamic, the FOMC will tolerate an overshoot of inflation, pointing to a serious policy review under way at the Fed, with a number of policymakers willing to test and revise their assessment of the full employment unemployment rate (NAIRU) as the actual unemployment rate declines.
Validation: At the press conference following March’s FOMC meeting, Chair Yellen was explicit in the Fed’s tolerance of an overshoot in inflation, reiterating the symmetrical nature of the inflation target, and raising rates again by 25bps.
Bank of Japan: IOER CUT?
January 27, 2016
Prediction: Given the material risk to the inflation outlook and disappointing wage developments paired with a rising yen, we expect the BoJ to take action to ease policy. The question is whether they will pursue an IOER rate cut, and whether they will dip into negative rates. The BoJ has not been considering an IOER cut, nor is it comfortable with such a cut, but we believe Kuroda will not hesitate if he deems it necessary. While we do not think they are prepared to go negative this week, we put a cut to zero at better-than-50% odds.
Validation: The BoJ implemented an IOER cut with negative rates for the first time ever on Friday, January 29.
Indian Economy: Update on Fiscal and Monetary Context
January 17, 2019
Prediction: Under pressure to provide monetary and regulatory relief, the newly-minted Governor Das is likely to lean on the dovish side at the next MPC meeting. On February 5th, we further raised the possibility of a rate cut as opposed to the consensus of a pause.
Validation: At the MPC meeting on February 7, four of six governors voted to cut rates, and all supported a shift in stance from “calibrated tightening” to “neutral”.
Euro Area Economy: Shifting Fiscal Policy Priorities
December 19, 2018
Prediction: EU fiscal policy will turn clearly expansionary in 2019 for the first time since 2010, with several countries having amended their budgets to include further spending to prop up domestic spending as Europe waits to see whether the global economy will continue to slow. We expect the area-wide cyclically-adjusted deficit to widen by 0.5% of GDP, and for the ECB and European Commission to project as much.
Validation: Quoting “cuts to direct taxes and social security contributions, as well as higher government expenditure in some countries” and a “weaker macroeconomic outlook”, the ECB admits “The euro area deficit outlook has deteriorated significantly compared with the December 2018 projections.”
Federal Reserve: Word and Deeds Around the Neutral Rate
October 10, 2018
Prediction: Given benign inflation, we expect that the end of the current rate cycle is more likely to settle at less than the 3% median neutral projection currently on the books, with anything over that 3% target looking quite unlikely, despite the FOMC policy projections.
Validation: The Fed’s pause in December of 2018 and subsequent dovish remarks indicating a likely end to the rate cycle have left the Fed funds rate at 2.25-2.5%.
Italian Economy: The Battle of the Budget
August 9, 2018
Prediction: Despite market uncertainty about the fiscal plan of Italy’s new cross-ideology populist government (reflected in widening bond spreads) we expect 5SM and the League not to rock the boat too much. While they will probably blow out the previous government’s goal of reducing the budget deficit to 0.8% of GDP, we do not expect a serious existential clash with the EU, such that they will keep the budget deficit under 3% of GDP.
Validation: Italy’s 2019 budget proposal put the projected deficit at 2.4% of GDP, which the government eventually reigned in to 2.04% of GDP after the EU threatened sanctions and markets protested in the form of higher yields.
US Politics: Implications of the Pennsylvania Election
March 14, 2018
Prediction: The apparent upset victory (unofficial as of this writing) of Democrat Conor Lamb in a special election for a US House district in Western Pennsylvania, a district Trump carried easily in 2016, signals hope for Democrats seeking to retake the House and worry for Republicans. We put Democratic chances of retaking the house at moderately better than 50%.
Validation: The Democrats took back the House of Representatives in the 2018 election, winning 40 seats — 17 more than necessary to win a majority in the House.
Abenomics and Abe: Snap Elections
August 30, 2017
Prediction: Abe’s political woes are making us anxious about the future of Abenomics, as without the titular leader, there is no guarantee of policy continuity. In the midst of political calendar upheaval, we expect that Abe may call snap elections as early as this fall, to take place on October 22, in order to recharge his political capital and continue on through 2021.
Validation: Snap elections were called on , and the Nikkei, which had been hovering just under 20,000 for most of the summer, rose to around 23,500 by year end in the wake of Abe’s announcement and optimism about the continuation of Abenomics.
US Congress: Bill to Overhaul Obamacare Faces High Hurdles
March 8, 2017
Prediction: The complexity of the Affordable Care Act is likely to provide substantial obstacles to the Trump administration’s attempts at revamping the ACA, and any such bill is likely to be delayed. Moreover, this will further delay any movement on any tax bill Trump seeks.
Validation: The Trump administration and GOP failed to make headway on changes to the ACA, with the issue ultimately becoming a thorn in the side of both. Further, the actual tax bill, despite promises of an announcement as early as February, was not introduced until November of 2017.
US Politics: An Examination of Trump’s Trade Policy Proposals
March 17, 2016
Prediction: With his calls to impose hefty tariffs on imports from China, Mexico and Japan, Republican front-runner Donald Trump is proposing to effectively scrap the decades‐old trend in the US toward supporting a more open global trading system. We believe Trump’s threats to pursue retaliatory measures against key US trade partners need to be taken seriously should he win the election, even if he backs down from some of his more blatantly protectionist proposals.
Validation: The Trump administration has pursued aggressive renegotiations on NAFTA/USMCA, hundreds of billions of dollars in tariffs levied against China and on steel and aluminum broadly, and challenged US preference for liberal trade policy at the structural level.
Japan Politics and BoJ: Rewriting the BoJ Act
September 27, 2012
Prediction: Even before ex-PM Abe won the LDP presidential elections, we warned about the capacity for Japan to rewrite the BoJ Act. That risk has only risen, with propositions to align BoJ and MoF coordination more closel and allow the BoJ to purchase foreign bonds for easing purposes gaining traction. The result could be a more active BoJ that sets policy and moves markets, instead of merely reacting to the Fed.
Validation: In the years running up to the fall of 2012, the Nikkei had been stuck around 9,000-10,000, with the dollar-yen exchange around 80. This tectonic policy shift shift to activist policy resulted in a jump to 16,290, representing a fundamental inflection point in Japan’s markets that persisted for years. Prior to this inflection point, dollar-yen was around 80, rising to
Fed Rate Hike Cycle – Why it may be complete
January 11, 2019
Prediction: In the wake of the Fed’s sudden pause in its rate hike schedule in response to market volatility in December, we predict that the threshold for a resumption of hikes is quite high, and that having signaled patience, the Fed may be done raising rates in this cycle.
Validation: As of December, the Fed’s dot plot had shown a median of two hikes for 2019 and one additional hike for 2020. As of April 2019, both hikes have disappeared from 2019, with one remaining in 2020, with market pricing indicating no further hikes.
US-China Trade: The Huawei Incident
December 6, 2018
Prediction: In the wake of the arrest of Huawei CFO Wanzhou Meng by Canadian authorities, we wagered that the effect on the US-China trade talks would be relatively benign, as Beijing seeks to compartmentalize the issue from the larger trade conflict. However, in the long term, it does indeed signal residual tension that is likely to persist regardless of any deal that might be made in the short run.
Validation: Despite tension over Canada’s decision to extradite Ms Meng to the US and the US urging Europe to seek other avenues for developing 5G networks, trade talks continued apace, with the 90-day truce during which the arrest occurred being extended to accommodate negotiations.
Indian Economy: Perspective on Macro Landscape, Part II
October 2, 2018
Prediction: On October 2, we pointed out that the RBI’s relationship with the MoF had become quite strained. We followed this with a note on October 23rd indicating that the MoF might be eyeing the RBI’s balance sheet as a source of fiscal policy funding.
Validation: In a speech on October 26, Deputy Governor Viral Acharya brought the tension between the RBI and MoF out into the open, specifically citing the question of excess capital on the RBI’s books.
Chinese Economy: Beidaihe Conference
August 8, 2018
Prediction: As Chinese Communist Party members and elders gather in open secret for their annual “summer meeting”, we anticipate some points of discussion — namely, the announcement of a fall date for the 4th Plenum of the CCP’s Central Committee; and a reassessment of the US-China trade conflict.
Validation: The 4th Plenary Session was indeed scheduled for October 20-23 and we seem to have observed a shift in China’s approach to trade talks with the US, as we witnessed a ramping up of tension before its denouement in late 2018/early 2019.
US-CHINA TRADE: COMING CONFLICT
December 20, 2017
Prediction: The designation of China as a “rival power” in the new US National Security Strategy indicate that the Trump administration is taking a tougher tack on China going forward. We expect tensions and tariffs to flare up in early 2018 after the conclusion of trade investigations.
Validation: President Trump imposed the first tariffs of the US-China trade war in February 2018, beginning with 30% tariffs on solar panels, with China responding in March after the steel and aluminum tariffs.
ECB: Case for Tapering Continues to Build Up
August 23, 2017
Prediction: Despite continued low inflation data, surprise upside for growth in Europe seems robust, and we expect it to continue for the rest of the year. Accordingly, the ECB is confident that it can meet its inflation target in the long term, and we expect the ECB to announce policy guidance about the end of its Asset Purchase Program later this year, and to officially end the program by year-end, though they will do so with caution.
Validation: The ECB changed its guidance to reflect the end of the expansion of the APP by the end of the year at their September meeting, and made the end of QE official at their December meeting.
US Congress: Big Infrastructure Spending?
November 14, 2016
Prediction: In the wake of the 2016 election, we expect that despite heavy speculation around infrastructure as an avenue for fiscal stimulus as monetary policy accommodation winds down, President-Elect Trump is likely to focus on trade, immigration, and tax issues. If we do see any infrastructure spending, it will have to wait, or be very small.
Validation: As of the 2018 midterms, there was no infrastructure bill or discussion thereof.
Bank of Japan: The 3-tier Negative Rates
February 8, 2016
Prediction: The Bank of Japan’s tiered negative rate system seems to have come under fire by some analysts who claim the tiering preclude the measure’s efficacy. However, their metrics of success are clearly different from the BoJ’s — since rates are the mechanism for this policy, the BoJ is using the yield curve, not on lost interest income on excess reserves.
Validation: