Very disappointing NFP data

The Australian Central Bank, the RBA, has reduced its growth and inflation forecasts for the country. The mining sector has been performing to date, though the rest of the economy is facing continued pressure. However, with a slowdown in China expected, the mining sector will be negatively impacted impacted. The country unexpectedly announced a trade deficit for 2 consecutive months. The housing sector remains overvalued and home prices continue to decline. Retail spending is flattening and is expected to remain soft this year. The Central Bank has cut 2012 GDP growth to 3.0%, down from 3.5% in February – expect further cuts in GDP forecasts. Inflation is expected to rise by 2.25% this year, lower than the 2.75% previously forecast. The A$ is weakening and I would expect it to decline (much?) further – likely below parity against the US$;

Chinese stocks rose to a 7 week high today. Speculation that the PBoC will ease monetary policy continues. In my humble view, the Chinese markets are likely to hold up this year, not because of underlying economic performance of the country/businesses, but because there is to be a major change in the leadership in China this year, as 7 of the 9 members of the State Council (the guys that run China) change and the authorities want a smooth transition. Recently, a number of (State Controlled) funds have been buying the market and Chinese authorities are encouraging continued investment. However, from 2013 onwards…..;

HSBC’s China services PMI rose to 54.1, from 53.3. However, Hong Kong’s PMI was 50.3, down from 52;

A friend of mine points out that another of the major reasons for the high savings rate in China is due to the low interest rates paid on deposits at Chinese banks, due to the policy by authorities to subsidise SOE’s with low interest rates at the expense of savers. He is, off course, completely right;

Fitch advises that Indian banks require some US$50bn in additional capital to meet Basel rules. I must say, the more I look at India, the even more bearish I become. The chances of some kind of funding crisis this year increases, with the Rupee looking particularly fragile – which suggests interest rates will have to rise to attract funding. Inflation is likely to rise materially and the budget, trade and current account deficits look unsupportable. With the domestic political situation looking increasingly problematical and fractious coalition politics, the Government seems incapable of implementing the necessary actions. The markets were -1.9% lower today;

Spanish April services PMI came in at 42.1, from 46.3 in March, well below expectations of 45.1 and the 10th consecutive decline.
Italian April services PMI fell to 42.3, down from 44.3 in March and below the 44.0 expected;

EZ final manufacturing PMI collapsed to 46.7 in April, from 49.1 in March and lower than the preliminary reading of 47.4.
EZ final services PMI was also lower than the preliminary estimate at 46.9, from the flash reading of 47.9 and 49.2 in March.
EZ April final composite PMI came in at 46.7, down from the flash estimate of 47.4 and the March reading of 49.1.
Importantly, the April final composite PMI numbers were weaker for France, Germany, Spain and Italy.
However, EZ March retail sales were up +0.3%, from -0.1% in February or -0.2% YoY, slightly stronger than the unchanged expected;

Hollande’s lead over Sarkozy has declined to 6 points according to the most recent polls;

US April NFP came in with a gain of +115k jobs (the lowest for 6 months), much weaker than expectations of a gain of +160k and lower than the whisper number of a gain of +125k. Weather related issues may have impacted, with stronger hiring in earlier months now impacting the numbers. However, March was revised higher to +154k, from +120k. The unemployment rate declined to +8.1%, a 3 year low from +8.2% expected. Private sector job gains amounted to +130k, lower than the +165k expected. The average work week was unchanged at 34.5 hours. The participation rate fell to 63.6%, the lowest since December 1981, from 63.8% last month, with the underemployment rate holding at 14.5%;

Brazilian authorities have succeeded in cutting the country’s interest rates by lowering the guaranteed return on a popular savings account. The move will enable the Central Bank to reduce its benchmark rate again, possibly to 8.5%, less than the 8.75% 15 year low. The reforms result in the rate on interest on the savings accounts being reduced to 70% of the Selic rate. The change requires the approval of Congress;


Asian markets closed mainly lower, though Japan and China were higher, in particular a near 1.0% gain in China. The worst performer was India. European markets are lower, ex Spain for some reason. Brent is weaker again – currently trading at US$114.46, some 1.3% lower.

US futures indicate a lower market, though only about -0.4%, which surprises me given the weak NFP. There will be more talk of QE.

Next main issue will be the weekends elections in France – Hollande remains the clear favourite.

I remain bearish, indeed increasingly so.

Kiron Sarkar

4th May 2012

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