It seems that markets take a view that US is already in recession. If this is the case it could mean that in the coming weeks we should see two conflicting forces to affect the markets. One would be a possible decline of the price of oil amid falling US demand. This is the view that OPEC is taking when resisting output expansion calls by US. But it seems unlikely that OPEC will cut output either, at least until more evidence of US recession is available. Falling oil price would support the dollar, but at the same time recession will indicate falling returns on US assets, which will be dollar negative.
List of interesting articles I read yesterday follows:
- Ken Rogoff on re-emerging power of trade unions , as a possible threat, a quote:
“Will the political resurgence of labor unions throw a wrench into the wheels of globalization? Or will their growing strength serve to make globalization more sustainable by fostering great equality and fairness? One way or the other, unions stand as a major wild card for the evolution of our economic system in 2008 and beyond.”
- EIU remains skeptical on Asia decoupling story: a quote:
“There is, however, a caveat. Although Asia is certainly in a better position to withstand a US slowdown than it was in 2001, it would be a mistake to assume that the region has fully decoupled from the US. Although the Asia 8 have diversified their export markets over the past two decades, the G3 (and the US in particular) remains important in terms of final demand for Asian exports. According to calculations from the ADB, 70% of trade within the Asia 8 (excluding Taiwan but including China) consists of intermediate goods used in manufacturing production processes. This is mostly a reflection of changes in Asia’s supply chains that have led to different production stages being parcelled out between different countries. In particular, China’s export juggernaut now imports components from the rest of Asia and assembles them, before shipping them off to their final destination–which is usually still in the G3. As a result, in 2005 around 61% of Asian exports were still consumed in G3 countries.
The argument that China can provide a back-up source of demand if the US falters is especially fragile. Soaring Asian exports to China do mean that China is now the largest Asian recipient of imports from the region (excluding Japan). However, most of this is the component trade. According to the ADB’s calculations, China still only accounts for just 6.4% of total Asian final demand. This is under one-half of the contribution from Japan, and less than one-quarter of the contribution from the US. This clearly suggests that China’s booming economy would be unlikely to prove much of a back-up if the US economy were to falter significantly.
Indeed, by some measures, Asia’s dependence on exports has actually increased since 2001, arguably making it more exposed to a slowdown in foreign demand. The exports/GDP ratio (measured in US dollars) increased for most Asia 8 economies between 2001 and 2006 (Indonesia and the Philippines being the two exceptions). The combined exports/GDP ratio for all eight economies increased from 57% in 2001 to 66% in 2006. Since the region as a whole is more export-exposed than in 2001, and with a large proportion of these exports still going to the US and other G3 economies, it could be argued that the Asia 8 are even more vulnerable than in 2001 to a slowdown in their main end-markets.”
- Mortgage Bankers Association on US situation. A quote:
“Below are our projections for the rest of this year and next:
- We expect housing starts and home sales to continue to trend down and reach bottom around the second half of 2008
- Total existing home sales for 2008 will decline by about 13 percent from 2007 to 4.94 million units. Sales will pick up by about four percent in 2009
- New home sales will decline by about 15 percent in 2008 from 2007 to 666,000 units. We expect sales to increase about seven percent in 2009.
- Median home prices for new and existing homes are expected to decline this year, with median prices falling about two percent. Prices should increase by between one and two percent in 2009
- Residential purchase mortgage originations will decline about 18 percent in 2008 to $955 billion from a projected $1.16 trillion in 2007. Given a recovery in sales and prices in 2009, purchase originations should be up by five percent to one trillion in 2009.
- The yield on 10-year Treasuries — the benchmark for fixed rate mortgage yields — are projected to decline in the current quarter as the Federal Reserve is expected to continue with its easing. However, we do not expect a large pickup in refi activity as we would normally do for several reasons. First, lending standards have been tightened significantly. Second, the spread between the 10-year Treasury yield and conforming mortgage rates as well as the spread between conforming mortgage rates and jumbo rates has widened. Third, home prices have declined in many areas. These factors have combined to discourage some refi activity, especially in areas with relatively high share of jumbo loans and falling home prices. Thus we project that refinance originations will decline about 14 percent to $1.01 trillion in 2008 from a projected $1.17 trillion in 2007. Refi activity will decline by another 13 percent to $883 billion in 2009 from 2008
Total mortgage production will be down 16 percent to $1.96 trillion this year from a projected $2.34 trillion in 2007. This would mark the first time since 2000 that total mortgage originations fall below $2 trillion.
It is not common for one country central banker to comment on what would be the right rate moves in another country. ECB Bini-Smaghi however tells markets that the Fed room to cut may be limited as it could lead to dollar depreciation. This goes against market expectations that Fed will ease aggressively this month.
Anvid Panagariya offers comments at Vox on what India must do to modernize . He shares an observation that India exports are either capital or skilled-labor intensive, which is a puzzle, as low income country usually specializes in low-skill labor intensive exports. A quote:
“The most important factor that still holds back large firms from entering these products is a set of draconian labour laws in India. Under these laws, it is virtually impossible for a firm with 100 or more employees to fire the workers even in the face of bankruptcy. It is equally difficult for the firms to reassign the workers from one task to another. These provisions impose very low worker productivity or a high real cost of labour. Large-scale capital-intensive sectors such as automobiles, where labour costs are a tiny proportion of the total costs, can profitably operate in such an environment. But the same is not true of large-scale labour-intensive sectors labour. Few foreign manufacturers are willing to enter India outside of a small subset of capital- and skilled-labour intensive sectors.
Two additional factors have held back the labour-intensive manufacturing in India: costly power and poor transport infrastructure. Not only do firms pay a much higher price for power in India than elsewhere in the world, they also face much greater uncertainty of supply. Likewise, despite considerable improvement, the transportation network in India remains unreliable and inefficient. The time taken to clear the goods entering and existing the ports and to move the goods between ports and manufacturing sites, which is so critical for assembly and processing activities, is much higher and more variable in India than in the competing countries such as China.”