Market/Economic Analysis: Colombia

From the latest Minutes of the Colombia Central Bank on May 31:

The latest information on the performance of the economy in the first quarter of 2013 suggests that this slowed down in comparison to what had been seen at the end of last year as was predicted in earlier reports.  The indicators for that period are influenced by the lower number of working days in February and March.

In the first quarter of the year, household consumption grew at rates that were slightly lower than the ones registered in the fourth quarter of 2012.  According to the figures from the Retail Monthly Sample (MMCM in Spanish) published by DANE in March, the annual growth of sales was 0.9% in the first quarter (less than the 3.3% for the last quarter of 2012).  This performance could be explained by an annual drop in the sales of vehicles (-11.4%).  In contrast, sales of other goods grew 4.0% in the first three months of the year.  

.....

With regards to the supply indicators, the news shows mixed performance.  Production of coffee continues to expand at favorable rates.  Energy related mining showed positive growth in petroleum production while coal production was affected by labor problems and environmental penalties.  The industrial sector registered significant deterioration during the quarter.  In March, the index of industrial production excluding threshing shrank 11.5% in annual terms.  Based on this rate, industrial production showed an annual contraction of 6.0% in the first quarter.  

So households are still spending, albeit at slower rates.  The real problem is in industrial production.  This exact same situation is playing out in the US.

As a result, the central bank has been cutting rates for stimulate growth:

Colombia sure likes to keep the markets on their toes.

On Friday, the country cut its benchmark interest rate for the fifth consecutive month. While previous cuts came in at 25bps increments, the central bank took out the axe this time around and chop rates by 50bps to 3.25 per cent – the lowest in Latin America.

So, let's take a look at the Colombia ETF's daily chart:

 Since the beginning of February, the market has been moving lower.  But remember that this move lower has been very disciplined.  There has not been a massive volume spike indicating a selling climax.  Instead we see a nice pattern of lower lows, followed by consolidation, followed by another disciplined move lower.  Prices are below the 200 day EMA are are using the 10 and 20 day EMAs as technical resistance.  While the CMF is indicating some volume moving into the market, momentum is negative.

The weekly chart shows that the current price level is around the 38.2% Fib level for the 4Q11-1Q13 price move. While we do see a slight uptick in volume over the last few months, it does not indicate a selling climax.

Could Economic Blogging Get Any More Boring?

Stop me if you're read this before.  The EU is in a recession, the US is in slow-growth mode and China is rebalancing its economy.  The sluggishness in developed economies is slowing the growth of emerging economies.  Well - you have read that before.  In fact, that's all anyone has been writing for the last year to year and a half.

Consider this paragraph from the latest policy announcement by the Bank of Korea:

Based on currently available information, the Committee considers the moderate economic recovery in the US to have continued but economic activities in the euro area to have remained sluggish, while emerging market countries such as China have shown slightly lower economic growth than initially anticipated. The Committee expects the global economy to sustain its modest recovery going
forward, but judges that the uncertainties related for instance to the possibility of an earlier-than-expected tapering off of US quantitative easing policy and to the implementations of fiscal consolidation in major countries remain as downside risks to growth 

Compare that statement to the release of December 2012

Based on currently available information, the Committee considers the moderate economic recovery in the US to have continued, but the sluggishness of economic activities in the euro area to have persisted. Economic indicators in emerging market countries have shown signs of gradual improvement. The Committee expects the global economy to exhibit a modest recovery going forward but judges the downside risks to growth to be large, owing chiefly to the euro area fiscal crisis and to the fiscal consolidation issue in the US.

And here's the September 2012 announcement:

Based on currently available information, the Committee considers the economic recovery in the US to have weakened somewhat and the sluggishness of economic activities in the euro area to have deepened. Growth has continued to slow in emerging market countries as well, due mostly to the impact of the economic slumps in advanced countries. The Committee expects the pace of global economic recovery to be very modest going forward and judges the
downside risks to growth to be large, owing chiefly to the spillover of the euro area fiscal crisis to the real economy and to the possibility of the so-called fiscal cliff materializing in the US.

Not much difference, is there?

And don't get me started on how often the Fed has used the word "moderate" in the Beige Book.  

I read a ton of central bank announcements.  They all contain a general outline of the then current economic environment.  For the last year and a half, they could all just say, "that thing we wrote last month?  Ditto."

I just wanted to mention from a writing about the economy perspective, it's just really boring right now. 

More Bad News for Australia

I'm bearish on Australia.  The latest auto sales news does not increase my confidence:

• Trend estimates: The May 2013 trend estimate (93 439) has decreased by 0.6% when compared with April 2013.
• Seasonally adjusted estimates: The May 2013 seasonally adjusted estimate (93 209) has increased by 27 units when compared with April 2013.

Moreover, the trend has been declining for six months.

Click the link to see the accompanying chart; it's not a pretty sight.

Rational Expectations Theory Debunked in a Minute

Barry had this up on his blog over the weekend.  It is one of the best economic lectures I have ever seen.  Blyth is brilliant, funny and deeply irreverent.

The lecture is a little over 50 minutes and worth every minute of your time.

Here's his explanation of the the "confidence fairy" which is from the video starting at about 45 minutes.

This is the confidence fairy thing,

Imagine the economy is falling around your ears; you don’t know if you’re going to have a job tomorrow, your partner is already unemployed, you really don’t know about the future, but you really worry about the debt, you just lie awake all night worrying about the debt as people do,

So the government credibly signals that it’s going to massively cut government expenditures and what you do using your rational expectations that are built into your head – well you know the true structural form of the equation governing the economy and the value of the co-efficients therein – big assumption, but put that to one side – you calculate your lifetime budget and lifetime expenditures in relation to the fact that twenty years from now that because of these state spending cuts now you’ll pay less taxes then.  Thereby you can retrodect how much extra money you’ve got now and everybody goes to Ikea and buys a couch and that cures the recession. 

I am not making this shit up.

Market/Economic Analysis: US

First, let's review last week's economic news:

The Good:

First, import prices declined: Prices for U.S. imports declined 0.6 percent in May, the U.S. Bureau of Labor Statistics reported today, after a 0.7 percent drop the previous month. Falling fuel and nonfuel prices contributed to the decreases in both months. U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March.  What's interesting here is that non-fuel imports have also been dropping.

Retail sales increased .6%: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $421.1 billion, an increase of 0.6 percent (±0.5%) from the
previous month, and 4.3 percent (±0.7%) above May 2012. Total sales for the March through May 2013 period were up 3.7 percent (±0.5%)
from the same period a year ago. The March to April 2013 percent change was unrevised from 0.1 percent (±0.3%)*. 

This is by far the best news of the week.  With manufacturing slowing consumers will have to provide more economic activity to keep the economy moving forward.  This report indicates they're more than up to the task.  Equally impressive was the .3% increase ex-autos. 


Neutral

Producer prices are right on the edge of being a concern for a one-month print. The Producer Price Index for finished goods rose 0.5 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods fell 0.7 percent in April and 0.6 percent in March. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.1 percent in May, and the crude goods index advanced 2.2 percent. On an unadjusted basis, prices for finished goods moved up 1.7 percent for the 12 months ended May 2013. 

Regarding PPI, most of the increases are due to large movements of single products that make up an index.  For example, fuel prices account for 60% of the increase in finished goods while a 41.6% increase in egg prices is responsible for over 60% of the increase in finished consumer foods.  Also note that 2/3 of the increased in the finished core prices are attributable to a .4% increase in light trucks and autos.  It's entirely likely that the prices related to eggs and autos are one-off events.  Energy is a bit more volatile, but there isn't much demand pull or price push pressure right now. 

There is no way anyone can say that inflation is an issue or even a potential issue in the current environment.  However, bigger moves in a single month's print of an inflation statistics is something to keep your eye on going forward.

Industrial Production was unchanged: Industrial production was unchanged in May after having decreased 0.4 percent in April. In May, manufacturing production rose 0.1 percent after falling in each of the previous two months, and the output at mines increased 0.7 percent. The gains in manufacturing and mining were offset by a decrease of 1.8 percent in the output of utilities. At 98.7 percent of its 2007 average, total industrial production in May was 1.6 percent above its year-earlier level. The rate of capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent, a rate 0.2 percentage point below its level of a year earlier and 2.6 percentage points below its long-run (1972–2012) average.  

The good news is the print wasn't negative.  The bad news it the print was just barely good.  And the .1% overall increase in manufacturing -- especially on the heels of two straight contractions -- is pretty concerning.  It does appear that external events like the global slowdown and the sequester are starting to take a bigger bite out of manufacturing.

The Bad 

US Export prices dropped: U.S. export prices fell 0.5 percent in May following declines of 0.7 percent in April and 0.5 percent in March.  Lack of pricing pressure indicates that exporters may be under profit margin pressure over the next 3-6 months.

Let's turn to the charts.

hart

The daily chart (top chart) shows that prices are using the trend line connecting the early January and mid-April lows as technical support.  The high from early April in the 159-160 and 50 area is providing support as tell.  The technicals are bearish: the shorter EMAs are entangled with prices, while the MACD and CMF is declining.

The top chart is the 60 minute prices chart and shows that prices are consolidating in a triangle pattern.

The big story in the bond market -- and all markets at large -- is when will the Fed start to taper off its bond buying program.  Last week, there was an emerging concensus it would be soon -- leading to the sell-off in the bond markets.  However, traders started to change their minds about that assessment, leading the bell of the treasury curve to rally above resistance.  As it stands right now, the IEIs still have support at 122 and the IEFs at 105.

The dollar has broken support at the 38.2% Fib level with the new price target of ~21.5.  Any rally will hit resistance at the 10, 20 and 200 day EMAs as well as the 38.2% Fib level.

Market outlook for the week: slightly negative.  The dollar's drop indicates that traders are short-term bearish on the US, which is confirmed by Treasuries inability to make a sustained move below support.