Greek parliament passes the austerity bill
Kiron Sarkar
November 8, 2012

Japanese September machinery orders fell by -4.3% M/M (-7.8% Y/Y), much more than the -2.1% M/M expected. 3rd Q GDP data will be released next week, which is likely to show that the Japanese economy shrank by -3.4% (Bloomberg forecast), the largest decline since the earthquake. The Japanese current account surplus came in at Yen 503.6bn in September, the lowest since 1985, though was negative (Yen142bn) on a seasonally adjusted basis. I believe that next year, there is a high risk that Japan will face a (material?) current account deficit, which will result in a material weakness of the Yen. However, in the short term, a resolution of political disagreement on financing the budget for the fiscal year ending March next year is likely to be resolved this month (expected to be passed by the lower house on 15th November, according to Japanese news reports), which should be Yen positive;

The head of the Chinese statistical office stated today that Chinese economic data to be released tomorrow (retail sales, industrial output, fixed asset investment and October inflation) will make people "more confident" about 4th Q GDP. No further details were provided. The 18th Chinese Congress starts today, which will choose the new leadership, so good news is a certainty. However, is is credible?. In an opening speech, the outgoing President Mr Hu reiterated that China must retain its one-party rule and, in addition, ensure that the State retains dominance of the economy. He added that China must double per-capita income by 2020 and called for more local-level democracy, an improvement in social services and financial reforms, together with fighting corruption. Hmmmmm. Analysts remain convinced that Chinese GDP will rise by 7.0%+ over the next few years. I will be amazed if it hits 5.0%;

The Greek PM, as expected, managed to pass the E13.5bn of further austerity measures through Parliament. However, implementation will be the issue - basically no chance. Next comes the budget bill which is also expected to pass over the coming weekend. EZ finance ministers meet on the 12th November to discuss whether a further trance of aid should be paid. They will have the Troika's report, which will be fudged to be supportive of the need to provide further funds for Greece - interesting to see what the IMF have to say - they are pressing for haircuts on loans made to Greece by the EZ - not going to happen though. Subsequently, Mrs Merkel will need the approval of her Parliament - no shoe in, given opposition from a number of members within her coalition. However, it is expected that she will push it through and that Greece will get the next tranche of aid - some E31.5bn in late November, together with better terms on the existing bail out funds. The silly game continues. This whole house of cards will collapse, most likely in the 1st half of next year and, unfortunately for Mrs Merkel, ahead of her general election in September 2013, which is her major consideration. Greek unemployment came in at 25.4% in August, up from 24.8 in July. The under 25 unemployment rate rose to 58% !!!!;

Spain raised E4.763bn today, as opposed to E4.5bn expected. The bond issue was successful and has resulted in Spain meeting its financing requirements for the current year, which means that the Spanish PM will dither for longer - probably into next year. However, 10 year bond yields are up 15 bps, up to 5.85% as Mr Draghi interestingly voiced some reservations about the OMT programme and suggested that there was no hurry to launch the programme. Mr Draghi putting pressure on Spain to ask for a bail out do you think? - absolutely and a sensible strategy by Mr Draghi;

Credit Suisse reports that Spain will not agree to any loss sharing on assets transferred to its bad bank. They also believe that the bad bank will be stuffed with all the large and problematic "assets", including unfinished properties and undeveloped land. With an equity base of just 8.0%, this structure looks like a real dog. No doubt Spanish banks will be forced to subscribe, but cant see any other investors playing. (Source FT);

German September seasonally adjusted trade surplus came in at +E16.9bn, above the +E15.5bn expected and +E16.3bn in August. However, exports declined by -2.5% M/M (the most in 9 months), worse than the -1.5% expected and the revised +2.3% in August. Imports declined by more than expected as well, suggesting a weakening domestic economy.The German September current account surplus came in at +E16.3bn, higher than the +E10.8bn expected and an upwardly revised +E12.5bn in August. However, Mr Draghi stated today that the EZ crisis is beginning to affect Germany. He reported that "Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are starting to affect the German economy". To confirm that, German construction PMI declined markedly to 44.6 in October, from 48.6 in September. Construction, combined with domestic consumption has supported the German economy to date. With unemployment rising, lower exports, weaker construction and signs that domestic consumption is slowing, Germany is slowing - never did understand why they though they were immune. The slowdown in Germany may (will?), in due course, force Germany to change its policy of pressing for severe austerity measures - finally;

The ECB kept its interest rates on hold, once again as expected. At the press conference Draghi was pretty dovish. He confirmed that inflation would come in below 2.0% next year, as the EZ economy was weakening. The ECB will be issuing revised forecasts next month. He did state that the mistake on the issue of Spanish collateral was serious and was being taken seriously. There was no specific news on the OMT or on the possibility of a Spanish bail out;.

The BoE kept interest rates (0.5%) and its QE programme (£375bn) on hold. I must say, I had expected that the BoE would increase its QE programme by £25bn to £400bn. However, I have no doubt that the BoE will increase the programme in coming months. The decisions were expected. The news will be positive for Sterling, in particular against the Euro;

Irish October CPI came in at -0.1% M/M or +1.2% Y/Y, as opposed to +1.6% Y/Y in September - its slowest rate since November 2010. The Irish finance minister reported that he would increase his GDP growth forecast above the current +0.7% forecast for next year. In addition, he added that Ireland would not default on its debts, even if debt to GDP rises to 120%. The number of mortgages in Ireland rose by 23.5% in Q3 Q/Q, an increase of +10.4% Y/Y. The increase was the 1st annual increase since Q3 2006. First time buyers accounted for 52% of the mortgages. However, this rise is coming off a very low base. At its peak, the aggregate value of mortgages were just under E40bn, as opposed to just E2.3bn in the last 4 Q's. However, its another sign that the Irish economy is stabilising and, in my opinion, picking up marginally;

US home prices rose by +7.6% Y/Y in the 3rd Q, the largest Y/Y increase since 2006, according to the National Association of Realtors. More cities saw gains - some 120 of the 149 cities tracked by the NAR;

Interestingly, the House speaker Mr Boehner stated yesterday that Republicans may accept tax increases as part of a programme to resolve the fiscal cliff, pledging to find "common ground" and the need to "find a way to work together". "We are willing to accept new revenue (increases), under the right circumstances", though he added that his party would not accept higher tax rates. Given the materiality of the fiscal cliff, if unresolved, I continue to believe that an agreement will be reached;

US weekly jobless claims came in at 355k, less than the 365k expected and 363k previously. Continuing claims came in at 3.127mn, lower than 3.257mn expected and 3.262k previously. US September trade deficit came in at US$41.5bn, slightly higher than the US$45.0bn expected and US$43.8bn in August;

Outlook

Asian markets closed lower today, following the largest decline of the Dow this year, yesterday. All 10 groups of the S&P 500 index declined. Uncertainty over the impending fiscal cliff, particularly given potential disagreement between the Democratic controlled Senate and the Republican majority in the House weighed on investors, together with negative data/comments from the EZ. US markets have opened modestly higher.

European markets have picked up, with US futures suggesting a flat opening. The Euro is trading around US$1.2728, down from earlier highs following Mr Draghi's comments on Germany and the possible delay in implementing the OMT programme. Gold is trading at US$1717, with December Brent at US$107.56.

I remain cautious, indeed negative, on equity markets - cant see the upside at present.

Kiron Sarkar