Kiron Sarkar
April 27, 2012
The BoJ has decided to increase the size of its asset purchase programme
by Yen10tr (US$124bn), the 2nd increase in 3 months, though reduced the
size of its credit lending programme by Y5tr. They left their key
interest rate at zero to 0.1%. The move suggests suggests that the BoJ
is more serious about it's inflation target (currently 1.0%). The
Central Bank also decided to buy up to 3 year debt, rather than 2 years
previously. Having said that the Governor's statements suggested that
the BoJ will pause to assess the effects of the programme. The Nikkei
rose by +1.0% on the news, but has backed off subsequently. Personally,
I believe that creating inflation in Japan is pretty dangerous stuff, as
interest rates will rise - not at all pleasant given the level of public
sector debt. The Yen, should weaken on the news, though it was widely
expected;
A Japanese output report shows that manufacturers forecast a MoM rise in
production of +1.0% in April and a massive -4.1% fall in May. The
decline in May is as a result of much weaker overseas demand. March
retail sales were -1.2% lower MoM, well below the forecast for a decline
of -0.5%. However, unemployment remained at 4.5% in March. CPI rose by
+0.5% YoY;
The FT reports that the outgoing Premier Wen (later this year) is trying
to introduce constitutional and political changes in China, following
the dismissal of Bo Xilai who, together with a number of colleagues, was
totally opposed to introducing further democracy into China. Mr Wen has
failed in the past, but has been emboldened by the recent exit of Mr Bo.
Reforms, including binding members of the Communist Party to be subject
to the law (yep, they are exempt at present !!!) will take time and
result in uncertainty - watch this carefully;
Corruption in India has no boundaries. The FT reports that by inflating
the number of government subsidised latrines available, politicians and
officials have pilfered at least US$1.7bn !!!!;
S&P has downgraded Spain's long term rating (the 4th largest EZ
economy) by 2 notches from A to BBB+ (3 notches above junk) and placed
the country on negative outlook - it's the 2nd downgrade YTD. The short
term rating was reduced to A-2, from A-1. The ratings agency expects the
Spanish economy to contract by -1.5% this year (the IMF is at -1.8%)and
-0.5% next, much worse than their previous forecasts of an increase in
GDP of +0.3% this year and +1.0% in 2013 . They added that the budget
deficit is likely to increase further this year (they believe that the
current target of -5.3% will not be met - they suggest -6.2% for the
current year and -4.8% in 201) and that the country would need further
fiscal support for its banking sector - no chance from Spain itself (it
does not have the necessary funds and, in addition, has the disastrous
Irish experience), it will have to come from EZ funds (EFSF/ESM).
Furthermore, they added that a further downgrade was possible if Spain's
debt to GDP exceeded 80% between now and 2014 - well they better do it
immediately, because it is over 80% at present. Spanish 10 year bond
yields rose above 6.0%, though are at 5.98% at present - personally, I
believe they will rise much further.
The news was not a major surprise, but a further downgrade (very
likely) has not been priced in;
The Spanish Economy Minister stated "Nobody has asked Spain to bail out
its banking sector". Yeah sure. Spain will have to bail out it's banks,
though does not have the necessary funds. Morgan Stanley estimates that
Spain will need between E50bn to E160bn to recapitalise their banks. In
these kind of cases, the situation always turns out worse than initial
estimates, so assume at least E160bn. However, Spain cannot afford even
E50bn. EFSF/ESM or funds from the IMF (though the IMF can only lend to
sovereigns), with assistance from the ECB, are the only options;
More bad news for Spain - 1st Q unemployment rose to 5.64mn (24.4% and
an 18 year high), up from 22.9% in the 4th Q 2011 and much worse than
the 23.8% forecast. Spain's official forecast of unemployment peaking at
25% looks a nonsense.
Further reports revealed that Spanish inflation rose to +2.0% in April,
from +1.8% in March YOY and that retail sales declined by -3.9% YoY;
French jobless claims rose by 16.6k in March to 2.88mn, the 11th
consecutive month of increases and approximately 10% of the workforce
- the highest in 12 years. Not good news for Sarkozy's Presidential
aspirations;
Consumer spending, a key component of the French economy, declined by
-2.9% in March MoM, much weaker than the -1.9% expected;
Presidential hopeful Mr Hollande stated that "It's not for Germany to
decide for the rest of Europe". If Mr Hollande wins (which looks
likely), it's going to get sticky in the EZ. However, with debt to GDP
expected to rise to 89% by the year end (IMF estimate), one has to
wonder what flexibility he really has. However, his dilemma is that he
has made an awful lot of (expensive) promises, which are going be
difficult to ignore;
German May consumer confidence declined to 5.6, from 5.9 in April.
Recent numbers suggest a weakening of the German consumer - bad news if
it continues, as German economic forecasts have been based on
strengthening consumption;
The Dutch PM has managed to agree a deal with opposition parties which
will result in Holland meeting its 3.0% budget deficit target next year,
through a combination of revenue increases (VAT rise to 21%, from 19% at
present) and a freeze on civil servant salaries;
The announcement that the UK is in a technical recession has been
largely ignored by the markets - indeed, Sterling has recovered from
it's initial decline and is now trading at higher levels. Revisions to
the data (generally are positive) could well reverse the initial
forecast. Importantly, the BoE is paying far less attention to GDP and
more to unemployment and data contained in business surveys. As a
result, the announcement of a technical recession is unlikely to impact
the BoE deliberations on the need for further QE;
US jobless claims declined by just 1k to 388k in the week ended 21st
April, worse than forecasts of 375k. The less volatile 4 week moving
average rose to 382k, the highest since 7th January, from the previous
week's 376k;
Whilst the jobless claims data was disappointing, US March pending home
sales (existing homes) rose by +4.1% to 101.4, the highest level since
April 2010 and well above the +1.0% expected. YoY, pending home sales
rose by +10.8%. Sales of existing homes represents over 90% of the
housing market last year and March's data is clearly good news.
The National Association of Realtors ("NAR") reports that the US housing
market "has clearly turned the corner". However, the banks have a large
inventory of foreclosed homes just waiting to hit the market;
Minutes of the recent Brazilian Central bank meeting suggests that it
could/would? continue to reduce interest rates (currently 9.0% and just
above the historic low of 8.75%) as the economy improves more slowly
than expected. The head of the Central Bank reported that the economy
remains fragile, which is easing inflationary pressures. The Central
Bank stated that they expected inflation to decline towards their target
of +4.5%, from 5.24% in March. Another 25/50bps rate cut is expected
next month. The Real has declined by some 10% against the US$, since
late February;
Outlook
Asian markets closed generally weaker following the Spanish downgrade,
having initially been positive following the increase in the BoJ's asset
purchase programme. European markets opened sharply lower, but have
rallied - amazingly, even Spain is higher.
The Euro has rebounded - currently E1.3222.
Spot Brent oil is trading at US$119.72.
Markets are amazingly resilient. Cant help feeling that's it's the lull
before the storm.
All eyes on US 1st Q GDP later today.
Kiron Sarkar
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