Record Japanese trade deficit
Kiron Sarkar
January 20, 2013

The Japanese PM, Mr Abe is urging companies to raise wages. However Reuters reports that 85% of Japanese companies do not intend to raise wages and some are even looking to cut wages. If that turns out to be the case (which looks likely), and Mr Abe succeeds to raise inflation to 2.0% (highly unlikely, in the near future, admittedly), Japanese workers will face higher prices with flat to lower wages - hows that going to stimulate the domestic economy, pray tell me?. Furthermore, the Japanese population is declining sharply - how does GDP increase with a declining population. I remind you of Mr Kyle Bass’s comment. Investors in Japan are “picking up dimes ahead of a bulldozer” - a sentiment I very much agree with;

Whilst the Yen is near 3 year lows, the Nikkei is as 4 ½ year highs, following todays 0.84% rise. The focus is on the next BoJ governor - far too many conflicting reports to make sense of the likely candidate. However, Mr Kuroda seems the best qualified, given his experience and his international standing. I can't see the merits of appointing Mr Muto and/or Mr Iwata, given the likely Japanese policies and the need, as the PM states, for a candidate who is recognised internationally - though Japan is Japan. The Japanese PM, Mr Abe, has finally backed off his idea of buying foreign currency bonds to weaken the US$, at least publicly. He is due to visit President Obama and will announce the prospective BoJ governor on his return to Japan.

Inward FDI into China declined by -7.3% in January to US$9.27bn, the 8th consecutive monthly decline. Non-financial outward investment, however, increased by +12.1% to US$4.91bn. Inward FDI declined by -3.7% last year. I continue to believe that this trend will continue. Manufacturing is becoming more expensive in China, due to sharp increases in labour costs and, in addition, a number of foreign businesses are highly concerned about lack of safeguards over intellectual property rights and, in addition, the “fragile” nature of joint venture agreements with local partners. However, China is seeking to invest more overseas, especially in the resource sector, though they have also invested in infrastructure and property, in particular. This trend will, in due course, impact China’s current a/c;

The Chinese Securities Journal confirms that the authorities are seeking to reduce lending to the residential property sector and, in addition, raise taxes on the purchase of 2nd and subsequent homes. However, the Shanghai composite closed up +0.6%. This kind of news has popped up over the last few months, but little seems to materialise. However, if inflation starts to rise, as I suspect it will (materially?), these kind of threats should become a reality. The news is not positive for the mining sector - I increased my short positions;

Bloomberg reports that the Indian government intends to borrow around a record INR6 trn next fiscal year ending 31st March 2014. The Minister of Finance is deeply worried that S&P and Fitch will cut India’s credit rating to junk. There is no question that he is trying valiantly, but its an uphill task.

A general strike has been called in Greece today, the 1st this year. This highlights a problem which I continue to believe may well plague the EZ this year. As the weather improves, civil disorder in the region, in response to the continuing austerity measures, is likely to rise. Greece faces the 6th year of recession, with unemployment over 26%, similar to Spanish levels. Youth (16 to 24) unemployment in Greece is above 60%, the highest in the EU, with a number of young people emigrating;

Italian December industrial orders were down -1.8% M/M (-15.3% Y/Y), much worse than the slightly higher revised -0.6% M/M in November and expectations of a decline of -6.7% Y/Y. Wow. These are truly dreadful numbers. A strong Euro is certainly not going to help. Mr Berlusconi is certain to draw attention to these numbers, in particular to attack Mr Monti;

Spain, apparently, is to impose yield limits (no more than 100 bps over the sovereign rate) on borrowings by its 17 semi-autonomous regions. As a number of the regions are facing yields around 300 bps to 400 bps above the sovereign yield, how will this work?

Mr Rajoy reported that Spain’s 2012 budget deficit would not exceed 7.0% - Hmmmm, Spanish data - I’ll wait to see what the EU has to say;

German January producer prices rose by +0.8% M/M, much higher than the +0.3% expected and +0.3% in December - higher oil price effect?

However, German January CPI came in at -0.5% M/M (+1.7% Y/Y), in line with expectations;

French CPI came in at +1.2% Y/Y in January, lower than the +1.4% expected and +1.3% previously.

Yet more indications that France will not meet its 3.0% budget deficit target this year. The French Budget Minister stated that meeting the budget target of 3.0% would be “extraordinarily difficult”;

UK BoE minutes reveals that 2 more BoE members (including the governor, Mr King) wanted to increase the QE programme by Sterling 25bn to Sterling 400bn. This has come as a surprise to markets, which had expected no more than 1 member to call for additional QE. That makes 3 in total who wanted the increase the QE programme to Sterling 400bn; however their proposal was outvoted by the other 6 members on the Monetary Policy Committee (MPC). Members voted unanimously to keep interest rates on hold at 0.5%, though an interest rate cut was discussed. However, the MPC stated that they should consider other measures, in particular, more targeted policies to stimulate demand, including increasing credit. Sterling collapsed even further on the news. There is no doubt that the BoE is successfully engineering a decline in Sterling.

UK jobless claims declined by 12.5k in January to 1.54mn, better than the 5.5k decline expected and as compared with the revised 15.8k decline in December. This is the strange aspect of the UK economy - unemployment is declining, but the economy is apparently getting weaker !!!! The UK December unemployment rate rose marginally to 7.8% M/M, from 7.7% previously. 154k people were employed in Q4 2012 (the fastest rise since the summer), increasing the number employed to 29.73mn and +580k higher Y/Y at the end of December. However average earnings (ex bonuses) rose by just +1.3%, well below prevailing inflation (CPI is +2.7%) and the lowest for 2/12 years. In other words real incomes are declining, but.......;

Sequestration nears, though Congress is on holiday. Hmmmm. President Obama warned of the consequences of sequestration, which is due to come into effect on 1st March 2013. US 2013 GDP is expected to be reduced by over -0.5%, if sequestration takes place. Neither the Democrats nor the Republicans want to compromise. A proposal by Simpson-Bowles does not seem likely to gain much traction. Yet another political mess. The odds are that no agreement will be reached by the deadline, but I remain hopeful that some form of compromise will be reached (reluctantly and possibly in bits and pieces) - yep, I’m probably far too optimistic !!!;

US January producer price index rose by +1.4% Y/Y (+0.2% M/M), lower than the +1.5% (+0.3% M/M) expected and +1.3% in December. The Labour Department stated that ¾ rs of the January rise was due to increased food prices.

US January housing starts declined -8.5% to 890k on an annual basis, as opposed to +920k expected. December was revised higher to +973k, from the previously reported +954k in November. Building permits came in at an annual pace of +925k, higher than the +920k expected and the most since June 2008 and up from the +903K annual pace in December. Single family units rose, through multi family homes declined by -24%;

Brazilian retail sales rose by just +0.5% in December M/M, lower than the +0.8% expected. Inflation continues to be a problem - it came in at 6.15% Y/Y in January. The Brazilian authorities dearly want to cut interest rates, but is that possible?. Indeed, they should raise interest rates, given the current inflation rate. Even with the lower than expected retail sales increase in December, domestic consumption remains far too high in any event. Furthermore, real wages are rising faster than productivity, making Brazilian products even more uncompetitive. The government is faced with a real dilemma - its current policies are unsustainable. Unless changed, Brazil risks sinking further and into stagflation. (Source FT);

Whilst the G7/G20 say there is agreement that no country will try to depreciate their currency, (with the exception of Germany - Mrs Merkel stated today that the Euro between US$1.30 to US$1.40 was a normal historical range. However, Draghi at the ECB will be more important in respect of the relative value of the Euro and I believe he is leaning towards weakening the Euro, most probably by cutting interest rates), virtually every country is seeking a lower currency in reality. The New Zealand Central Bank stated that they would try and reduce the value of the NZ$ !!!;

Outlook

Asian markets continue to rise and are at 1 ½ year highs, with the Nikkei up +0.85%. European markets are marginally higher. US futures suggest a flat open.

The Euro having been as high as US$1.3434 earlier has declined - currently US$1.3391. I increased my Euro/US$ short - though given the Euro’s decline since this mornings highs in Europe, I certainly should have shorted much more.

US 2 year Treasuries are yielding 7bps more than their German counterparts, which should be US$ supportive. US 10 year Treasury yields are at 2.04%, as compared with 1.67% for the German equivalents.

The Yen is weakening again and is at Yen 93.71 to the US$. Analysts are waiting for the announcement of the next BoJ governor.

Sterling continues to be in the doghouse - there were rumours of a downgrade (by S&P) yesterday. Whatever, I continue to believe that the UK will be downgraded this year. In addition, the BoE’s minutes confirmed more QE was a possibility. Sterling is currently around E0.8747 against the Euro and US$1.5308, down over 0.75% against the US$ on the day, though was below US$1.53 earlier.

Quite a lot of forex volatility so far today.

No much interest in Gold - spot gold is trading below US$1600 at US$1593, a 6 month low, with April Brent lower at US$116.92 - still too high.

The Italian elections (and Cypriot) are taking place over this weekend - the Italian polls open on Sunday and close on Monday. The outcome of the Italian elections is likely to move markets. Pretty uncertain to guess the outcome in Italy - Bersani/Monti seem worried though.

The FED minutes, out later today, will be read most carefully.

I remain cautious to negative of the equity market, in the short term, in particular. Just too much exuberance around, in my humble view. I appreciate that US markets closed at 5 year highs yesterday, with global stocks at a 4 year high, but I believe that this is a reflection of liquidity flowing into the market, rather than a realistic assessment of the current situation. Time will tell.

In any event, I continue to take profits and have added to my shorts in the mining sector on the news that the Chinese are likely to introduce curbs on the residential property sector, though still remain around 24% net long equities - probably reduce that further to around 20% net long (quite possibly even lower), ahead of this weekend's Italian election.

Finally, you should definitely read the letter from Maurice Taylor, the Chairman and CEO of tyre maker Titan International. The French Industry Minister Mr Montebourg suggested that Titan take over a Goodyear factory in France. His response is interesting to say the least. I won't spoil your fun by spilling the beans.

Kiron Sarkar