Tags: real | cost | borrowing | consumers

The Real Cost of Borrowing for Consumers Remains Very Low

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Monday, 29 October 2018 08:00 AM Current | Bio | Archive

The Bureau of Economic Analysis (BEA) provides us today with the personal income and outlays data for September.

Personal income is running at around 4.7 percent year-on-year (y/y) while the wages component is running at 4.5 percent year-over-year growth.

For investors, this is far more relevant than the average hourly earnings number as a signal of the health of the U.S. consumer and the labor market generally.

It also means that the real cost of borrowing for consumers remains very low and arguably has fallen since 2016. The real cost for borrowing for the consumer is the interest rate less personal income growth, and personal income growth has risen nearly 3 percent in the past couple of years.

Expectations are personal income as well as consumer spending to rise a solid 0.4 percent month-on-month. Please take note that the report will unbundle September's contribution from last week's third-quarter GDP report.

The consensus for the overall PCE price index, which is the personal consumption expenditure price index, is for a 0.1 percent gain year-on-year rate to 2.0 percent. The PCE price index measures a basket of goods and services that is updated annually in contrast to the CPI, which measures a fixed basket.

WTO and U.S. Claims of Chinese Intellectual Property Theft

Today, the World Trade Organization (WTO) is to consider U.S. claims of Chinese intellectual property theft. This might matter if markets thought that the U.S. would abide by any WTO decision or if the decision was thought to be coming any time soon. Otherwise, this is just background noise.

Brazil's Right-Wing Bolsonaro Wins Presidency

Brazil has elected the right-wing candidate as its new President.

This was what markets were expecting and so the immediate financial impact is limited.

“Next Funds Ibovespa Linked ETF (1325.T)” which is an ETF that is focused on Brazilian stocks jumped more than 11 percent early in Tokyo today.

Bolsonaro will be the first president with a background in the armed forces since the end of Brazil’s 1964-1985 military dictatorship, which he has publicly praised. He has tapped retired generals to serve as his vice president and run key ministries.

Bolsonaro is an outspoken admirer of President Trump. He also pledged to realign Brazil with more advanced economies rather than regional allies, overhauling diplomatic priorities after nearly a decade and a half of leftist rule.

Trump called Bolsonaro to wish him good luck soon after his electoral victory, auguring closer political ties between the two largest nations in the Americas.

Remember that in 2005, the then leftist Brazilian President Lula rejected U.S. President George W. Bush’s free-trade proposal at the Summit of the Americas in Mar del Plata.

To many, Bolsonaro is the best hope to revive an ailing Brazilian economy and streamline an inefficient state.

Bolsonaro has said he would cut corporate and individual taxes to kick-start the economy and push structural reforms such as capping pension spending and simplifying taxes.

The key question will be Bolsonaro’s ability to unify a deeply divided nation and to forge a majority in congress to pass austerity measures.

If Bolsonaro’s plan succeeds, he could catalyze businesses in Brazil’s $2.1 trillion economy, the second-largest in the Americas behind the U.S.

We’ll see what comes out.

Germany’s Coalition Government Faces Problems

Regional elections in the State of Hesse saw both of the government’s coalition partners, the CDU (Merkel’s Christian Democratic Union) and the SPD (The Social Democrats), loose support, with the junior partner, the SPD losing a third of its votes compared to the last Hesse elections.

The election results laid the instability bare that is plaguing German Chancellor Angela Merkel’s fourth term in office.

Of itself, the result does not change, for now at least, German federal politics, but the question is whether this encourages the SPD to distance itself from Chancellor Merkel on the policies of the CDU in an attempt to rebuild their own support. The SPD secretary general described the result as a signal that the “Grand coalition” could not, quote, “go on like this.”

All this is important for investors because the strength of Chancellor Merkel has some bearing on the process of reform within the European Union (EU), which is absolutely needed.

President Macron of France has seen a collapse in support but does not have the same electoral challenges that Chancellor Merkel of Germany has.

To that extent, the balance of power in the European Union may tilt further towards Paris, France, although whether President Macron can lead a reform agenda without Chancellor Merkel’s assistance is a debatable point.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
It also means that the real cost of borrowing for consumers remains very low and arguably has fallen since 2016. The real cost for borrowing for the consumer is the interest rate less personal income growth, and personal income growth has risen nearly 3 percent in the past couple of years.
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2018-00-29
Monday, 29 October 2018 08:00 AM
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