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Swiss Franc Gains After Positive GDP & Manufacturing PMI Reports

The Swiss franc logged gains versus a basket of currencies today, getting help from positive domestic macroeconomic reports. Economists do not expect tomorrow’s data to be good, though. Switzerland’s Federal Statistical Office reported that gross…

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The Swiss franc logged gains versus a basket of currencies today, getting help from positive domestic macroeconomic reports. Economists do not expect tomorrow’s data to be good, though.

Switzerland’s Federal Statistical Office reported that gross domestic product grew by 7.2% in the third quarter of 2020 after falling 7.3% in the previous three months (revised positively from an 8.2% drop). Over the first half of the year, the economy contracted by 8.6%. The Swiss economy experienced its first recession since the height of the global economic crisis in 2009. Looking deeper into the components that have contributed to the third quarter’s growth, the report said:

Domestic demand and parts of the service sector recovered significantly, while international developments had an adverse impact on exports.

According to data from Procure, the manufacturing Purchasing Managers’ Index rose from 52.3 in October to 55.2 in November. That was a total surprise to analysts, who had predicted a drop to 51.5. The report explained the positive result:

Even though autumn saw Switzerland being hit by a bigger-than-expected second wave of the virus, the manufacturing PMI has consistently been inside growth territory since August. There are probably two reasons for the sector’s improved performance versus its showing during the first wave. Firstly, unlike in spring supply chains are now running smoothly. Secondly, north Asia in particular – i.e. China, but also Japan and South Korea – have got the pandemic under control. Swiss industry not only benefits directly from demand out of Asia, but also indirectly, for example as a supplier to the German automotive industry.

Tomorrow, the Federal Statistical Office will release a report on inflation in November. Analysts predicted ahead of the release that the Consumer Price Index will show a drop of 0.1% after demonstrating no change in October.

USD/CHF sank from 0.9086 to 0.9008 as of 15:57 GMT today. CHF/JPY jumped from 114.80 to 115.93. At the same time, EUR/CHF rose from 1.0837 to 1.0840.


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Economics

Retail And Food Sales: If It’s Not Inflation, And It’s Not, Then What Is It?

OK, so we went through the ways and reasons consumer price increases are not inflation, cannot be inflation, are nowhere near actual inflation, and what…

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OK, so we went through the ways and reasons consumer price increases are not inflation, cannot be inflation, are nowhere near actual inflation, and what all that really means. The rate they’ve gone up hasn’t been due to an overactive Federal Reserve, so it has to be something else. This is why, though the bulge has been painful, it’s already beginning to normalize. Without a persistent monetary component (in reality, not what’s in the media) the economy will adjust eventually.

It already has. Several times, and that’s part of the problem.



If not money, and it’s not, then what is behind the camel humps? No surprise, Uncle Sam’s ill-timed drops along with reasonable rigidities in the supply chain.

An Economist might call this an accordion effect. One recently did:

The closures and reopenings of different industries, coupled with the surges and lags in consumer purchasing during the pandemic, have caused an “accordion effect,” says Shelby Swain Myers, an economist for American Farm Bureau Federation, with lots of industries playing catch-up even as they see higher consumer demand.

Not just surges and lags, but structural changes that have been forced onto the supply chain from them. With the Census Bureau reporting US retail sales today, no better time than now and no better place than food sales to illustrate the non-economics responsible for the current “inflation” problem.

When governments panicked in early 2020, they shut down without thinking any farther than “two weeks to slow the spread.” This is, after all, any government’s modus operandi; unintended consequences is what they do.

The food supply chain had for decades been increasingly adapted to meeting the needs of two very different methods of distributing food products; X amount of capacity was dedicated to the at-home grocery model, while Y had been set up for the growing penchant for eating out (among the increasingly fewer able to afford it). Essentially, two separate supply chains which don’t easily mix; if at all.

Not only that, food distributors can’t simply switch from one to the other. And even if they could, the costs of doing so, and the anticipated payback when undertaking this, were and are massive considerations. McKinsey calculated these trade-offs in the middle of last year, sobering hurdles for an already stretched situation back then:

Moreover, many food-service producers have already invested in equipment and facilities to produce and package food in large multi-serving formats for complex prepared-, processed-, frozen-, canned-, and packaged-food value chains. It would be highly inefficient to reconfigure those investments to single service sizes.

And if anyone had reconfigured or would because they felt this economic shift might be more permanent:

For food-service producers, the dilemma is around the two- to five-year payback period of new packaging lines. Reinvesting and rebalancing a food-service network for retail is not a straightforward decision. Companies making new investments would be facing a 40 percent or more decline in revenue. And any number of issues could extend the payback period or make investments unrecoverable. Forecasts are uncertain, for example, about the duration of pandemic-related demand shifts, the recovery of the food-service economy, and the timeline of returning to full employment.

So, for some the accordion of shuttered restaurants squeezed food distributors far more toward the grocery and take-home way of doing their food businesses. And it may have seemed like a great bet, or less disastrous, as “two weeks to slow the spread” morphed to other always-shifting government mandates which appeared to make these non-economics of the pandemic a permanent impress.

More grocery, less dining. Forever after.

In one famous example, Heinz Ketchup responded to what some called the Great Ketchup/Catsup? Shortage by rearranging eight, yes, eight production lines to spit out their tomato paste in individual servings rather than bottles. CEO Miguel Patricio told Time Magazine back in June (2021) there hadn’t actually been any shortage of product, just the wrong packaging for it:

It’s not that we don’t have ketchup. We have ketchup, but in different packages. The strain on demand started when people stopped going to restaurants and they were ordering takeout and home delivery. There would be a lot of packets in the takeout orders. So we have bottles; we don’t have enough pouches. There were pouches being sold on eBay.

But then…vaccines. Suddenly, after over a year of the above, by April 2021 the doors were flung back open, stir-crazy Americans flew back to their local pubs and establishments (see: below) and within months, according to retail sales, it was almost back to normal again. Meaning pre-COVID.



The accordion had expanded back out but how much of the food services supply chain had been converted to serve the eat-at-home way which many companies had understandably been led to believe was going to be a lasting transformation?

Do they undertake even more costly and wasted investments to go back? Maybe they resist, just shipping what they have even if not fully suited in the way it had been before all this began.

Does Heinz spend the money to reconfigure those same eight production lines so as to revert to producing their ketchup in bottles? Almost certainly, but equally certain they’re going to take their sweet time doing it; milking every last ounce of efficiency – limiting their losses, really – they can out of what may prove to have been a bad decision (again, you can’t really fault Mr. Patricio for being unable to predict pandemic politics).

Rancher Greg Newhall of Windy N Ranch in Washington likewise told NPR that he has the animals, beef, pork, lamb, chicken, goat, but distributors are caught in the accordion (Newhall didn’t use that term):

NEWHALL: People don’t understand how unstable and insecure the supply chain is. That isn’t to say that people are going to starve, but they may be eating alternate meats or peanut butter rather than ground beef.

GARCIA-NAVARRO: Newhall says he hasn’t had any issues raising his animals. It’s the processing and shipping that’s the bottleneck, as the industry’s biggest players pay top dollar to secure their own supply chains.

The usual credentialed Economist NPR asked for comment first tried to blame LABOR SHORTAGE!!! issues, including those the mainstream had associated with the pandemic (closed schools forcing parents to stay home, or workers somehow deathly afraid of working in close proximity with others) before then admitting:

CHRIS BARRETT: And there’s also the readjustment of the manufacturing process. As restaurants are quickly opening back up, the food manufacturers and processors have to retool to begin to supply again the bulk-packaged products that are being used by institutional food service providers.

With US retail sales continuing at an elevated rate, the pressures on the goods sector are going to remain intense.


Because, however, this is not inflation – there’s no monetary reasons behind the price gouge – the economy given enough time will adjust. And it has adjusted in some ways, very painful ways.

Painful in the sense beyond just hyped-up food prices and what we pay for gasoline lately, the services sector has instead born the brunt of this ongoing adjustment. Consumers have bought up goods (in retail sales) at the expense of what they aren’t buying in services (not in retail sales); better pricing for sparsely available goods stuck in supply chains, seeming never-ending recession for service providers.

According to the BEA’s last figures, overall services spending remains substantially lower than when the recession began last year. And it shows in services prices which had been temporarily boosted by Uncle Sam’s helicopter only to quickly, far more speedily and noticeably fall back in line with the prior, pre-existing disinflationary trend following a much smaller second camel hump.



Once the supply and other non-economic issues get sorted out, we would expect the same thing in goods, too. It is already shaping up this way, though bottlenecks and inefficiencies are sure to remain impediments and drags well into next year.

Those include other factors beyond food or domestic logistical nightmares. Port problems, foreign sourcing, etc. The accordion has played the entire global economy, and in one sense it has created the illusion of recovery and inflation out of a situation which in reality is nothing like either.

That’s the literal downside of transitory. We can see what the price bulge(s) had really been, and therefore what it never was.

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Economics

Milton Friedman and “Zero Cost” Expanded Government

President Joe Biden has declared that his proposed $3.5 (or is it $5.5?) trillion “Build Back Better” social agenda will have a “zero” cost—as…

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President Joe Biden has declared that his proposed $3.5 (or is it $5.5?) trillion “Build Back Better” social agenda will have a “zero” cost—as in $0.00! Why?  Because the added expenditures will be covered by increased revenues drawn from businesses and the “rich.”

The President and other progressive Democrats, who have parroted the Biden claim, should reflect on the wisdom of the late Milton Friedman, who had a knack for crystallizing stark economic truths.

During the early 1980s, when supply-side economics was the rage, Reagan Republicans promoted tax-rate cuts as a means of reviving the economy (because the cuts would increase people’s incentives to work, save, and invest), which Friedman believed distracted them from concern about what was happening to government outlays, which continued to rise throughout the decade.

Friedman framed the fiscal issues of the day differently, and with far greater clarity than anyone else. He admonished everyone (including President Reagan’s advisors), to “Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax. . . If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing.”

And make no mistake, government outlays have risen substantially, especially lately, increasing from $3.9 trillion in 2016 to $6.6 trillion in 2020 (including Covid outlays). Even without passage of the reconciliation bill, the White House estimates that federal outlays will continue their upward march through 2026.

Friedman understood that the real taxes on the economy ultimately come in the form of government outlays siphoning off resources for public purposes that would otherwise be used in the private sector. If the government chooses to build a bridge or road, the concrete and steel could have been used to produce houses and office buildings.

How the added government outlays are financed—through taxes, newly printed dollars and inflation, or debt—is of secondary importance, perhaps only marginally affecting people’s incentives. The costs of expanded government outlays will be incurred through the shift of resources from private-directed uses to public-directed uses.

By declaring that his “Build Back Better” agenda has no costs, President Biden must be confused—if he truly means what he has been saying. He may think that the dollars expended for an expanded array of welfare recipients will come only at the expense of the “rich.” Not so at all. Those transferred dollars will enable the recipients to buy goods they could not otherwise buy, which means they can pull resources away from the production of the variety of goods that ordinary Walmart (and Home Depot and Kroger) shoppers, many with far less-than-privileged means, would have bought.

 


Richard McKenzie is an economics professor (emeritus) in the Merage Business School at the University of California, Irvine. His latest book is The Selfish Brain: A Layman’s Guide to a New Way of Economic Thinking (2021).

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Economics

COP-Out? World’s Largest Polluter Won’t Attend Climate Summit, Kerry Pessimistic On Progress

COP-Out? World’s Largest Polluter Won’t Attend Climate Summit, Kerry Pessimistic On Progress

Update: As if to confirm the shitshow we expected…

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COP-Out? World's Largest Polluter Won't Attend Climate Summit, Kerry Pessimistic On Progress

Update: As if to confirm the shitshow we expected below, just two weeks before a crucial summit in Rome, Bloomberg reports that the world’s major economies are gridlocked in their efforts to agree concrete steps to tackle climate change.

Preparatory talks between G-20 officials this week failed to end in an agreement to reduce coal subsidies and curb methane emissions. There wasn’t even a consensus on striving toward net-zero emissions and limiting global warming to 1.5 degrees from pre-industrial levels, according to three people familiar with the matter.

China and India, two of the world’s biggest emitters and largest coal users, have failed to submit updated climate pledges.

One person described the negotiating round as a disaster.

Are they all suddenly realizing at once - amid the glorious FUBAR situation occurring in global energy markets - that their goals are a) infeasible, b) a giant waste of time and money without China's firm commitmentm and c) will create social unrest and lead to them losing their political power.

*  *  *

The imminent COP26 Climate Summit - heralded with the mighty goal of 2050 net-zero emissions - looks like being a giant nothing-burger (vegan of course).

According to the study co-authored by a former Obama admin climate policy official, energy modelers and emissions experts (just go with it), China is now responsible for 27% of total global emissions - more than the combined total produced by the United States (11%), India (6.6%) and the 27 EU member nations together (6.4%).

In fact, as we have noted previously, China's emissions exceed those of the United States and the rest of the developed world combined...

In 2019, China’s emissions not only eclipsed that of the US—the world’s second-largest emitter at 11% of the global total—but also, for the first time, surpassed the emissions of all developed countries combined (Figure 2). When added together, GHG emissions from all members of the Organization for Economic Cooperation and Development (OECD), as well as all 27 EU member states, reached 14,057 MMt CO2e in 2019, about 36 MMt CO2e short of China’s total. -Rhodium Group

So it makes you wonder just what can be achieved given that Chinese officials have informed G-20 envoys that Xi does not currently plan to attend a summit in Italy later this month in person, and diplomats have said that means he’s unlikely to go to COP26 either.

Which is quite a change from his previous "commitment":

"We must be committed to multilateralism," Xi has said in the recent past.

"China looks forward to working with the international community, including the United States, to jointly advance global environmental governance."

With China in the middle of a serious energy crisis that sees it ramping up its coal production to meet energy demand (sending Thermal Coal prices to the moon), we suspect Xi is missing the Glasgow trip to focus on putting "China first"...

Finally, we note that even Bloomberg is admitting that in an interview with AP, US Climate Envoy John Kerry has already downplayed hopes of success, saying nations could fall short of a new agreement on more aggressive action on global warming. Specifically, he warned that two weeks of talks could end with countries still short of the emissions targets set by those pushing for more action on climate change.

“We will hopefully be moving very close to that,” he was quoted as saying.

“Though there will be a gap and … we’ve got to be honest about the gap, and we have to use the gap as further motivation to continue to accelerate as fast as we can.”

Greta is going to be so mad at you!!

Lauri Myllyvirta (lead analyst at @CREACleanAir) explains why in the following Twitter thread...

If your theory of how we're going to limit global warming to 1.5 degrees was that Xi is going to fly to Glasgow, strike a deal with OECD countries where everyone commits to 1.5-degree compatible emissions pathways, and flies home, I have bad news for you.

Continued growth in China's CO2 emissions until late in the decade is absolutely not acceptable, and that needs to be made clear to Chinese negotiators. But China was never going to "cave" and commit to an earlier peaking date in Glasgow than pledged by Xi.

It will take a lot more pressure and coaxing and leverage than offering a photo-op in Glasgow to change the mind of Chinese decision-makers. And however much leverage you bring to bear, that's going to be one factor at most alongside domestic considerations.

Also anyone decrying China not going substantially further needs to ask "were we prepared to go much further as a part of a deal" and/or "does our own current commitment rank much higher on the scale of fair and equitable effort than China's".

I want the whole climate problem to be sorted at least as much as the next guy, but it's going to be a long slog.

In the past year and a bit, we've had China, South Korea, Japan, EU, UK, US commit to carbon neutrality. That's not enough but it's progress. Consolidate that, get holdout countries to pledge something comparable, make clear that's not yet enough, call it a year.

We look forward to hearing from Larry Fink and the rest of the China apologists to explain just how committed to ESG etc China is after this.

Tyler Durden Fri, 10/15/2021 - 16:50
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