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Kiron Sarkar
April 19, 2012
Japanese exports rose by +5.9% in March YoY, above forecasts of a rise
of just +0.2%. The trade deficit came in at US$1bn, far less than the
US$2.7bn forecast, though on a seasonally adjusted trade basis, the
trade deficit widened to US$7.6bn. The trade deficit amounted to Y4.41tr
in the year to March 2012, from a surplus of Y5.3tr, mainly due to
higher energy imports, following the closure of all (except for
1) nuclear reactors following the Fukushima incident. Overall, the value
of Japanese exports declined to Y65.3tr in the year to March 2012, down
by some 25% from the 2006/7 peak.
The Japanese Central Bank Governor stated that Japan was fully committed
to maintaining its zero interest rate policy and to continue to buy
financial assets, until the goal of achieving a 1.0% inflation rate is
"deemed achievable". The Yen slipped on the comments by the central bank
governor;
The PBoC has pledged to continue to provide adequate liquidity,
including using RRR's, the State controlled Xinhua reported. Bank
lending has increased and RRR's were cut in February for the 2nd time in
3 months;
India is building up its military, in particular its air force and navy
to counter a perceived threat from China. Today, India launched a long
range (5,000km) missile capable of carrying a nuclear warhead, which
could target Chinese cities, including Beijing. Defence spending is set
to rise by +13% this fiscal year, to US$38bn, though far less than
China's estimated US$110bn for 2012;
The RBI policy statement, which accompanied the rate cut of 50bps last
Tuesday, states effectively that there will be no further rate cuts
unless the Indian Government sorts out the fiscal mess, which is highly
unlikely, especially as there are key regional elections this year and a
general election in 2014. India's consumer price index rose to 9.47% in
the year to March, up from 8.83% in February, which reconfirms that
inflation remains a serious problem;
Spain's E2.541bn of 2 and 10 year bond auctions delivered neutral to
negative results. The market had expected the auctions to be better
supported, given demand as the market was short and the overall size
was low. The 10 year bond rose by 2bps post the results.
They sold E1.12bn of the 2014 bonds at a yield of 3.463%, slightly lower
than the 3.495% previously and at a bid to cover ratio of 3.29, from 2.0
times before; The 10 year bonds were auctioned at a yield of 5.743%, up
from 5.403% previously and a bid to cover ratio of 2.42 times from 2.2
times previously.
Spain has managed to raise approximately 50% of its requirements for the
current year.
In spite of denials, Spanish authorities are trying to get the EFSF/ESM
to recap their banks, though is being opposed by the Germans (Mr
Weidmann, the head of the Bundesbank). The ECB may well have to buy
Spanish bonds, though the market will be wary as the issue of seniority
(following the precedent in Greece) will temper enthusiasm.
I continue to believe that Spanish banks will need EFSF/ESM support at
the very least, though a bail out (if funds are available) looks more
and more likely;
Just to clarify, Italy's revised forecasts are still within the limits
imposed by the recent EZ fiscal compact. Italy was just trying to do
better. However, the forecasts they announced yesterday look optimistic
- Italy's economy likely shrank in the 1st Q of 2012, for the 3rd
consecutive Q. Debt to GDP, based on the revised forecasts is expected
to increase to 123.4% at the year end, declining to 121.5% next year.
Italy's February industrial orders seasonally adjusted came in at -2.5%
MoM (much weaker than the -1.1% expected) or -13.2% YoY.
The EU is to issue its revised estimates of budget deficits next week.
Monti has certainly introduced some reforms, though he has had to water
down important structural changes in respect of labour issues.
Further changes are going to prove difficult and his honeymoon period
has ended. Having said that Italy is still in a far, far better fiscal
position than Spain, irrespective of its headline higher debt to GDP;
Fitch is to hold a ratings committee meeting in June to decide whether
to downgrade Holland. On the negative side, household debt is the EZ's
highest at approx 250%, as compared with 150% in the UK, 124% in Spain
and 90% in Germany, according to Eurostat 2010 data. Debt to GDP is
expected to rise to 76% in 2015. The Dutch pushed up home prices, given
cheap and readily accessible financing, though home prices are now
declining materially. There are some 221k unsold homes and prices have
declined by 11.0% from the peak in August 2008. Some 500k people are in
negative equity at present and home prices are expected to decline a
further 5.0% this year, according to the Dutch real estate federation -
likely by more. Wages are declining and unemployment is increasing. The
big issue is whether the Dutch will cut their budget deficit to 3.0% of
GDP. The right wing Freedom Party opposes strict austerity measures put
forward by the PM, Mr Mark Rutte. A resolution is needed this week and,
at present, there is deadlock (Source The Telegraph);
Mr Hollande proposes to raise the minimum French wage. France is
increasingly uncompetitive - this will be bad news. The most recent poll
suggests that Hollande will win both rounds - in the1st round, he leads
by 29% to Sarkozy's 24%. His 2nd round lead has risen to 16 points, from
14 points previously. Monsieur "Bling Bling" looks in deep trouble
French bond auctions went reasonably well today;
Germany's Economic Institutes forecast of 2012 GDP came in at +0.9%,
with the 2013 forecast at +2.0%. Unemployment is expected to decline to
2.8mn this year and consumer prices to rise to +2.3%. The budget deficit
is expected to decline to -0.65% of GDP and to near flat
(-0.2%) in 2013. Domestic demand is expected to remain the key driver of
growth;
As expected, Brazil reduced interest rates by 75bps to 9.0% and,
surprisingly, suggested that rates may fall further in response to the
fragile global economy. They added that the risks of missing its 4.5%
inflation target are limited and that the global outlook remains
disinflationary. The accompanying statement was very dovish, suggesting
further cuts - most observers had expected that the anticipated 75bps
cut would be the last for the year. The lowest interest rate in 15 years
has been 8.75%. Personally, I believe that the Central Banks inflation
expectations are optimistic;
The IMF has managed to raise US$320bn in new funds to increase the size
of its bail out funds - its target is US$400bn - US$500bn, though
Lagarde has been reducing expectations recently. Poland and Switzerland
have been the most recent contributors. The US and Canada will not
contribute;
Outlook
Asian markets were mixed. European markets (ex Spain) are higher.
Brent is creeping up - currently US$118.24. Gold is higher at US$1644.
The Euro remains around US$1.3115.
Spain's problems have not gone away. Expect further turmoil in coming
weeks/months. China looks as if it will ease further, which is helpful.
US housing data will be interesting, as will weekly jobless claims.
Kiron
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