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Kiron Sarkar
September 18, 2011
Hi there,
Japanese machinery orders (a good indicator of capex some 3 to 6 months ahead) rose by +11.0% MoM in August on demand for electrical products (up +29.5% MoM), well above the forecast of an increase of
+3.9% and well above July's decline of -8.2%.
Bank loans rose for the 1st time in 2 years in September - they were up +0.1%. Post Tsunami construction was the reason cited;
The Indonesian Central Bank unexpectedly cut interest rates by 25bps to 6.5% yesterday. The Philippines announced a US$1.7bn stimulus programme. Inflation is no longer the concern for the majority of EM economies - faltering growth is;
Chinese authorities are being forced to bail out banks, insolvent regions (Wenzhou) and their railway system. Oops. The previous 30%+ annual loan growth rate is coming back to haunt the authorities. The recent monetary tightening is resulting in significant falls in property prices in major cities, though other Tier 2 etc cities are now being affected. For example, sales of residential property in "Golden Week", the most active week for property sales was down by 75% in Shanghai. Someone better tell the Chinese that it is difficult to organise a "soft landing". In addition, there has been aggressive selling of Chinese credit today, reports Jefferies. The reason - no great surprise - false accounting, fraud etc, etc. Expect these problems to intensify significantly. The authorities are buying Chinese banks to prop them up. Wait till they will be forced to recapitalise them - yet again;
The US Senate passed a bill last night (63-35 in favour) which would let US companies seek duties to compensate for undervalued currencies.
However, the House Speaker Mr Boehner is resisting pressure for a vote in the House. China criticised the passage of the bill, which most commentators expect to fail to be be approved. In addition, if passed, its real impact will take years to take effect reports Bloomberg. No one wants a trade war, but personally I believe that the Chinese will be the biggest losers;
Indian industrial output rose by +4.1%, less than the expected +4.7%.
However, the RBI is expected to raise rates further -to 8.5% at the next meeting on October 25th, particularly with inflation very near double digits;
The Slovak Government failed to pass the necessary legislation to approve the amendments to the EFSF. However, a further vote this week is expected to pass the legislation. Slovakia is the last of the 17 Euro Zone countries to vote on the legislation - the other 16 have approved the changes. Markets are unconcerned as to the failure to pass the legislation yesterday;
The Euro Zone is full of news of taking measures to recapitalise banks, sort out Greece (expect much larger haircuts - currently 50% - 60% being talked about - it should be well over 70%). The Troika is to report shortly - basically that Greece has missed all its targets.
The impending EU summit on the 23rd October will be crucial. Mr Barosso is to present proposals to the EU Parliament today;
Euro Zone industrial production rose by +1.2% MoM or +5.3% YoY, much higher than the forecasts of +0.7% and +2.2% respectively.
The German Finance Ministry is downgrading GDP growth - expect little growth in the 3rd Q, but a slight pick up in the 4th.
French EU harmonised September CPI was flat MoM and +2.4% YoY, well below forecasts of +0.3% and +2.6% respectively;
Italian and Spanish banks were downgraded today - equity markets don't seems to care.
Further signs of a weakening UK economy today as unemployment rose by 178k to a 15 month high in the 3 months to August. The unemployment rate rose to +8.1%, from +7.9% in the 3 months to July. The number of people unemployed increased to 2.57mn, the most since 1994. Expect more QE (from the current £275bn) by the BoE early next year. Mr Posen a member of the MPC stated that the BoE could do more if necessary.
Sterling, surprisingly, did not move on the news - indeed, its strengthening. The BoE reported that the UK economy slowed "quite sharply through the 3rd Q and will continue to slow in the 4th Q".
They added that whilst inflation will spike to +5.0% shortly (September), it will decline rapidly next year - to below its 2.0% target in the medium term - quite possibly even next year, providing ample reason for more QE - expect at least another £100bn, before the BoE finishes;
The US Senate, as expected, blocked the US$447bn Obama jobs plan. Only
50 Senators voted in favour, as opposed to the 60 votes needed. 49 Senators were opposed. Yet more deadlock in the US;
The EIA has cut 2012 oil demand by 210k bpd, for the 2nd consecutive month - now 90.5mn bpd. With Libya coming back - though production is expected to be around 500k bpd only next year, rather than the 1.2mn+ bpd, Brent, in particular, may well come off and reduce its pricing differential with WTI. A lower 2012 oil price certainly looks possible, which will be good news for the global economy;
Summary
Markets are acting as if everything is great. A much stronger Euro and a weaker US$ is certainly helping equity markets. EM's are going for growth policies, rather than taking measures to curb inflation.
Everything depends, crucially on the Euro Zone in the next few weeks, leading up to the G20 meeting in early November. The big issue is how a number of Euro Zone countries (France, Spain, Belgium recapitalise their banks). Germany is insisting that individual countries provide the necessary capital themselves - France, fearing a credit downgrade
- its inevitable, in any event - is resisting - it wants the EFSF to be used. However, well over E200bn will be necessary to complete the exercise. That's not available. The ECB is refusing to leverage up the EFSF. Something has to give. Personally, I believe it will be the ECB, especially following the departure of Trichet, Stark etc. In the interim there are going to be a lot of scares, but Euro Zone politicians (crucially German's in particular) have finally got it.
Personally, I believe that the Euro Zone solutions will not be enough when announced later this month/early next, which will create a wobble in the markets. This will force them to rethink. Expect major policy decisions in the next few months.
The current Euro/£ strength seems overdone, though Gold/Oil is responding accordingly.
Equity markets remain dependent on the situation in Europe - however, continued political deadlock etc in the US is being ignored - dangerous. US economic data has been better than expected and reduced longer term interest rates is resulting in record low mortgage rates with a massive amount of mortgage refi's, increasing disposable income
- clearly positive. The US housing market remains the key to the US economy.
US season is beginning - Alcoa's results were disappointing. Europe is to blame apparently - expect many more such issues.
At the end of the day, I believe that even Europe will have to push the inflation button - there is no alternative. The ECB/Germany remain the key obstacles, but QE by the ECB, personally I think its coming.
In any event, ECB will will be lowered by 50bps at least, probably starting this year, which will be welcomed by the peripheral Euro Zone countries, in particular, given their higher personal borrowing levels.
Whilst Europe is on every one's radar, events in China are deteriorating rapidly. The attempts by the authorities to organise a "soft landing", through monetary tightening are not going well. Will be bad news for the miners/A$. Look like great shorts pretty soon.
Watch this one very carefully indeed.
Best
Kiron
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