Chinese data got released this morning, and it seems traders are still digesting it about an hour later. The CPI came in at 1.4%, (October YoY data was 1.6%, expectations were at 1.7% for November) and PPI was significantly lower at -2.7% vs. expectations of a 0.2% drop to -2.4%. Producer price index drops were led by industrial producers’ input prices, dropping 3.2% YoY or down 0.7% MoM, and about 2% on a year-through-November basis (PPI overall -1.8% in this measurement).
For producers, it does really seem like lowered raw material costs globally is having a significant effect and this might signal increased profitability down the line. There is definitely a positive factor to this data, meaning that firms should be able to pocket a difference as long as exports keep going up and internal demand and inflation is growing.
On the CPI side, the lower value probably will allow even further easing and loosening of the reins (on property and bank lending primarily) by the People’s Bank of China, so the initial positive reaction to this data is completely understandable. I do think that any effective policy needs to be seen being indicated by the PBOC directly before this information really gets legs.
The first batch of data out of Asia for the day has been out for a while, and I can finally get to it! This post will be updated throughout the day as more data comes along.
- 08:30 JST: The Reuters Tankan survey of manufacturers was a 13 vs. a previous month 8, so it is a slight improvement but the expectation is that this will turn down again later. Still a relatively good positive at the moment, and the future is changing fast in Japan. As they say, forecasting is difficult, especially about the future!
- 08:50 JST: The October manufacturing orders however were up 2.9% MoM (exp: -1.9%, pre: 4.6%), and 7.3% YoY (exp: -1.3%, pre: -3.3%). Great for manufacturing orders and things are probably going to be even better come November data!
- 08:50 JST: Capital flows for last week were strong! Foreigners bought a net 1124 billion yen of bonds, and 1055 billion of equity, versus 807 and 905 billion the prior week respectively. foreigners believe in the longer-term prospects for Japan, or simply love quantitative easing!
- 08:50 JST: Corporate goods prices decreased 0.8% MoM, and only increased 2.9% YoY, vs expectations that were 0.4% higher for both data points. Price pressures are downwards for Japanese companies, and this could probably be explained by the raw materials prices being lower than expected for the period, but it doesn’t indicate inflation anytime soon. It might indicate higher profits to the extent that the supply chains are small, but for longer supply chains this means decreased profits throughout.
- 13:30 JST: Japan industrial production and factory capacity ratios were both giving out really good data, up 2.7% and 3.6% respectively. The market reacted calmly to this but it is definitely a good sign that demand for Japanese production might be increasing, together with the manufacturing orders earlier this morning. Green shoots are showing!
- 13:30 CST: The Chinese data here (urban investment, industrial output and retail sales) came in largely within expectations but with a 0.3% downwards miss on industrial production and 0.1% ditto on retail sales. I am not surprised. This was pretty much to be expected given other data, but the misses were apparently worth nearly 100 points on the HSI in stimulus expectations, and 80 on the Nikkei 225 (which didn’t respond to industrial production data meaningfully). What does seem to be up is volatility though, the HSI started see-sawing in a wider range than it has previously in the day, so perhaps a lot of money is being moved around, which would be a positive for the prospects of cracking 24 000.
More updates throughout the day! So far neither the yen nor the Nikkei 225 seems to be too interested in this data and has kept relatively flat for the morning sessions.
I decided to go back over the charts I have provided previously on the Asian debt and capital structure situations, here looking at updating the charts with Singapore and Hong Kong in mind. I’m pretty happy that I didn’t include these two in the first pass-around, but at the moment they carry some interesting features so picking and choosing which charts to include has its benefits!
Let’s get to it with this chart of aggregate financing across Asia, now updated with Singapore and Hong Kong:
Capital structure in Asian economies. Note that Hong Kong and China has been adjusted to allow 2/3 of Hong Kong market capitalization to count for Chinese equity market capitalization, and 1/3 is counted as retained in Hong Kong.
Here, we pretty immediately see that both Hong Kong and Singapore leapfrog Japan or Taiwan in terms of total aggregate financing, with Hong Kong achieving that (with debt alone almost eclipsing aggregate financing in Singapore), and Singapore easily achieving that when also considering equity market capitalization.
Perhaps most astonishing is the massive equity market capitalization in these economies, at nearly 400% (!) of GDP for Hong Kong and over 200% for Singapore. Sure, they are financial centres, but their overall economic sizes are equivalent to Malaysia and the Philippines. Now, how does this debt break down in terms of the nominal interest cost of the debt? (I have ignored mortgage payments here, modeling those is even more uncertain than any other place, as the growth to be considered is regional rather than domestic.)
Good GDP data came out of the US, but it seems as if it didn’t really bite fully until 3-4 hours later when a massive impulse sent markets globally at least 1% higher. The Nikkei futures saw a 1.27% rally in 75 minutes! Whoa! The yen also seems to be the major currency market shakeout since the yen crossed weaker than 109 to the dollar, providing some additional value to the Nikkei. Still, when quantitative easing starts to not be as important, good news can be good news for once, and it feels like it’s been forever that said rationality mirrored reality.
Before I start sounding like a street peddler trying to push the Nikkei on you, it might be time that I enlist the help of Bloomberg which last morning covered the analyst estimates of how much the Japan Government Pension Investment Fund will increase their equity weights to. As discussed in the article, it would have a great effect on the market, but it currently looks like the Nikkei is a bit too close to the range top of 16 400 points (500 – 600 points away) for the fund to go in at these levels unless better fundamental data is on the way. What’s the case for that?
Wow, the volatility these days, especially during the US opening hours!
The Nikkei 225 futures rallied almost 2% since their Tokyo close, fuelled by a yen drop of 1% largely off the back of good US employment data plus decent earnings from US corporates. Similarly, the euro took a tumble. The Hang Seng futures closed at about 0.5% up in the HK evening session, suggesting a pretty forceful move up tomorrow of around 0.7-0.8% at opening from global peers alone. Both the Nikkei 225 and S&P500 receded by roughly 0.5% from the top note in a rather quick 15-20 minutes of trading, but currencies have since stabilized near their corresponding time peak levels for both indices.
Perhaps of the most interesting developments today was that Japanese government notes for 3 months sold at a negative yield! Pay the government to hold your money for you!
Yes, I know I am a but behind on my academia postings, but looking into models has kept me up at night (models for the Asian economies, mind you). I thought sharing some of these findings with you might be more interesting, particularly as they deal with some of the most important data points available in finance.
Remember how I wanted to model cost of equity capital for Asian economies after the insight into their debt breakdowns allowed me to evaluate how much debt costs these economies? Well it turned out that this wasn’t particularly easy, to say the least. And no, I’m not one to give up particularly early, so after finding out that CAPM had to go out the window, I decided to try my hand at making a fledgling of a model of how much equity capital contributes to economic growth, and deduce the cost of equity capital from there.
Asian Debt Service Breakdowns
Here is some pretty bad, back-of-the-envelope calculations and estimations I did for the economies in Asia based on yesterday’s information from the Nikkei Asian Review. I don’t know if it gives a good or bad picture of the Asian financing market, but I will use it here as if it does at least provide some accuracy, with full disclosure of my assumptions and why I made them.
First, a few reflections strictly on yesterday’s data:
- Korea has a relatively advanced corporate bond market that could warrant further study for adoption in other East Asian countries, under assumption that corporate bonds can be shifted from bank loans or bonds.
- East Asian countries ex Japan are not too keen on government debt. South East Asian countries are more likely to get government debt in their debt mix.
- Countries with relatively strong bouts of growth behind them have higher consumer debt, generally going above 60% and sometimes approaching 100% of GDP.
Now, for the meat of the post: