Kiron Sarkar
November 30, 2011
Hi there,
Australian retail sales rose by +0.2% in October MoM (+0.4% in September MoM), weaker than the expected increase of +0.4%. Building permits declined by a whopping -10.7% in October, MoM, though less than the -14.2% MoM in September - though most analysts expected a small rise. This data suggests that the RBA will reduce interest rates. A slowing China (likely) will have material adverse impact on Australia;
Chinese official PMI fell to 49.0 in November, from 50.4 in October, weaker than expected, but the market was expecting poor numbers, following the RRR cut by 50bps (effective 5th December) to 21% yesterday (expect a number more) - which implied some bad news was coming. The move will free up some US$63bn in new lending capacity for Chinese banks. The new orders component declined to 47.8, from 50.5 (not good news), whilst the output component slipped to 50.9, from 52.3. Exports declined to 45.6, from 48.6 - the only good news was that input prices declined to 44.4, from 46.2.
The HSBC/Markit PMI number came in at 47.7 - its inevitably weaker than official numbers, but this may (partially) be explained by the smaller sample and generally the fact that the HSBC survey does not include the mega SOE's. The PMI data was the weakest since February 2009. With a fast declining Europe (China's main trading partner), PMI data will be weaker in coming months. Easing "official" inflation should and will enable China to continue with monetary easing, though I'm far from certain that it will be enough. Domestic consumption is not expanding as fast as the authorities believed it would, and the pressure will be to rein in fixed asset expenditure and and any potential rise in property prices (which continue to decline for the 3rd month in November), which increased financing could bring about - though unlikely. Generally, expect much weaker GDP numbers. It seems that the Government may spend on social infrastructure next year - clearly needed;
Indian markets rallied today, as investors anticipated interest rate cuts by the RBI. The RBI has been quite hawkish for some time, given the stubbornly high inflation, though cuts are, indeed, likely;
Yet more signs of movement by Euro Zone countries to get the ECB to get involved - this time from Finland. The Finnish Finance Minister stated "if there is nothing else left on the table and we're still in crisis, I'm ready to think about strengthening the role of the ECB.
Finland is part of the German group, which includes Austria and Holland - however, recently, the Finns have been moving away from the hard line (though softening) German stance. He also suggested an enhanced role for the IMF. His view was supported by the Swedish Finance Minister - voted the best Finance Minister in Europe by the FT;
Yesterdays FED lead move to reduce US$ swap lines rates by 50bps to
OIS+ 0.5% effective 5th Dec. The facility has been extended to 1st
February 2013. Existing swap facilities were unattractive as only US$2.4bn was drawn as of last week, reports the FT. The move should reduce the pressure on European banks selling US$ assets and remitting funds back home - impact on Euro - negative?. To improve the attractiveness of its US$ loans, the ECB cut the margin on collateral it receives from banks who require financing, to 12%, from 20% previously. There is a "stigma" attached to banks using these lines - ie why cant they not get financing from other sources, though the current rate is attractive and should be utilised.
The FED is likely to reduce the discount rate from the current 0.75%, as yesterdays move enables European banks to borrow at a lower rate;
Some (November) European manufacturing PMI data out today; Spain 43.8 from 43.9 in October - slightly better than the 43.5 forecast.
Ireland 48.5 from 50.1 in October - contraction territory; UK 47.6 from 47.8 in October - better than the 47 forecast - new orders declined for the 5th month in a row;
Nothing new in Draghi's speech to the European Parliament today. Essentially Downside risks have increased - well what a surprise; Temporary measures (bond buying) is only limited - oh yeah; Continuing difficulties for banks - no kidding - actually a number have serious problems; The ECB is aware of Banks having maturity mismatches and stresses on funding - here comes the ECB 2/3 year facilities; Impact of financially strained countries have not yet had an impact on financial markets - it's going to get worse; Credible signal needed to provide assurance to markets - Governments must get moving.
The ECB is aware that there is little eligible collateral left for banks (even though it is accepting, in effect, toilet paper) to be able to access ECB funding.
Other (cryptic) comments suggest that the ECB is finding it difficult to impact short term markets - losing control - sounds like it !!!!.
However, its the ECB's fault. The key sentance was "Dysfunctional government bond markets in several Euro countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends on the conditions of the bond markets in various countries". (source FT) In addition, Draghi sent out the clearest hint possible, namely that if the Euro Zone countries got their act together,( especially by agreeing a common, verifiable fiscal policy, including verification), the ECB would act - bond buying/QE, lending to the IMF, to on lend to Euro zone countries etc, etc;
Better Spanish and French bond auctions today. They sold the maximum amounts (Spain and near max France) and yields have declined - a sign that the bond markets believe that the Euro Zone is heading towards a solution - hopefully ASAP. Italian yields also declined, though German yields at flat at present. One conspiracy theory though. European banks are short of collateral to use to obtain funds from the ECB - what better than to buy high yielding Spanish bonds to use as collateral !!!!!
Mervyn King, Governor of the BoE pulled no punches today. He stated that the Euro Zone crisis could negatively impact financial stability in the UK. In addition, he suggested that the Euro Zone crisis represented a systemic and, in certain cases, a solvency issue - not just a liquidity issue. Tough words, but very much needed to get these guys to move;
Whilst Europe is in trouble, with the situation getting worse, US data continues to improve - better Chicago FED, housing, Beige book, ADP employment data etc. In addition, there is yet more, admittedly anecdotal evidence, that the US housing Market is beginning to stabilise - in certain parts of the country actually improve. ISM data is likely to indicate a further increase;
The Brazilian Central Bank cut the Selic interest rate by 50bps to 11% yesterday, the 3rd 50 bps cut since August - expect further cuts and a weaker Real as a result. Brazil's economy is slowing fast - the recent forecast is for GDP to rise by +3.1% this year, from +7.5% last year. However, inflation remains just above the target of 4.5% +/- 2 percentage points - it was +6.6% in mid November, down from 7.0% recently;
US markets closed at their highs yesterday. The Euro rallied followed, in particular, by the FED move. Euro Zone bond yields (ex Germany) are declining. Asian markets closed sharply higher, in spite of the Chinese PMI data.
European markets are trading flat to slightly higher and US futures indicate a modestly higher open.
Most of yesterday's rally looked as if reflected the Chinese cut in RRR's and the FED's reduction in rates for swaps. As a result, better news/ some solution in the Euro Zone could well take markets higher - though most of a possible deal has been well leaked by now.
Coincidence that the Chinese RRR move coincided with the FED's?
Interesting to speculate, but no evidence of coordination. Mervyn King, in his capacity as Chairman of Central Banks, apparently initiated discussions which lead to the FED and other CB's move yesterday.
Best
Kiron
|