President Hu Jintao of China: Economic Growth Is Facing Notable Downward Pressure

“Economic growth is facing notable downward pressure”, reports President Hu of China. He added that China’s economy faced “a lack of balance, coordination and sustainability”, promising to promote “inclusive growth”. Whist China tried to wean itself off fixed asset investment, a lot of which produced little, if any, economic benefit, it looks as if the Chinese authorities will revert back to their previous programmes to stimulate a flagging economy, through some Yuan 1 tr of spending;

Chinese industrial production rose by +8.9% YY in August (+9.0% expected), the least in 3 years and fixed asset expenditure rose by +20.2% in August YTD. Imports declined by -2.6% in August Y/Y, much lower than the forecast of a rise of +3.5%, whilst exports rose by +2.7% (lower than the +2.9% forecast), resulting in a trade surplus of US$26.7bn. Exports to the EU declined by -12.7% Y/Y (-14.6% ex UK) and down -6.7% to Japan, though up by +3.0% to the US. Exports have risen by +7.1% in August YTD (well below the target of +10% for the current year), whilst imports rose by +5.1%. Inflation (CPI) came in at +2.0% in August Y/Y in line with expectations, whilst producer prices declined by -3.5%, the 6th consecutive monthly decline and weaker than the -3.2% forecast. Chinese August retail sales increased by +14.1% YTD, in line with expectations.The weaker data suggests that China will have to increase its stimulus programme even further and, in addition, provide rebates to exporters. Without further stimulus, China’s GDP target of +7.5% this year looks difficult to achieve;

The Troika (who are demanding E13.5bn of budget cuts) rejected alleged E2.0bn of spending cuts and revenue measures which the Greek government had proposed to meet its budget target over the next 2 years. In addition, the Greek government has failed to agree on deficit cutting measures. The Troika’s report is due on 8th October:

Much criticism in Germany on Draghi’s decision to buy, in theory, unlimited short term debt (up to 3 years) of peripheral EZ countries, subject to pre-established conditions and ongoing verification. The press, both on the left and the right, in effect, believe that the ECB has strayed into fiscal policy and the financing of sovereign states. Mr Weidmann, the head of the Bundesbank, was the only member of the 23 member ECB to vote against Draghi’s proposal, though it must be said that his German colleague, Mr Asmussen supported Mr Draghi. Mr Weidmann threatened to resign, but was persuaded otherwise by Mrs Merkel – Mr Weidmann was Mrs Merkel’s adviser. As you know, I have long believed that the policy adopted by German politicians of not explaining the situation to their people, is highly dangerous, particularly as their policy is to push for political union in Europe. I believe that German politicians are finally beginning to understand that or, possibly, because they are being forced into it. Mr Schaeuble has accused the German press of misrepresenting the ECB’s position. Mrs Merkel continues to support publicly both Mr Draghi and Mr Weidmann – yeah right !!!. These kind of issues cannot be slipped through by EZ politicians, as has been the case to date. Its high time that German politicians came clean with their public;

Excellent comments by George Soros who urges Germany to either leave the Euro or to lead the EZ, in an interview with the FT. Mr Soros argues that the current German policy will lead to a division between the creditor and debtor nations with the EZ, leading to its fragmentation. He suggests that the EZ should introduce growth policies to enable the region to grow by +5.0% in nominal terms and, in addition, accept a higher rate of inflation. The cot (to Germany) of leaving the EZ will be (much?) higher for Germany. In addition, Mr Soros proposes, in effect, an Euro bond, which clearly will be necessary in due course. Politically, Germany is not there, mainly due to the lack of their politicians to promote the case;

Italian final Q2 GDP came in at -0.8% Q/Q (-2.6% Y/Y), worse than the -0.7% expected and the decline of -0.7% in the 1st Q;

Mr Bernauld Arnaud, France’s richest man and CEO of LVMH is seeking to become a Belgian citizen, ahead of President Hollande’s decision to increase the tax rate (to 75% on those earning E1mn) on the countries wealthiest citizens. Whilst Mr Arnauld has denied that his decision is motivated by taxation, a number of wealthy French have and are likely to follow. France, remains in my view, a real problem country in the EZ, in particular given its size and its economic problems, which I would argue, will be made worse by President Hollande’s policies. France faces a E33bn budget shortfall next year to keep its budget deficit at 3.0% of GDP. Mr Hollande has stated that only E10bn of that would come from lower spending, with the balance from revenue increases presumably. Comments suggests that the French authorities may backtrack from the proposed tax increases;

French July Industrial production rose by +0.2% M/M, as opposed to a decline of -0.5% expected and a flat reading in June,

French July Manufacturing production rose by +0.9% M/M, much better than the -0.5% expected and +0.1% in June;

EZ investor confidence whilst negative, improved in September to -23.2, from -30.3 in August and -30.5 expected;

The latest polls from Holland suggest the centre right and centre left parties are gaining momentum and could form a coalition, most probably with another party, at least. The previous Euro Sceptic rhetoric will diminish, if the polls are correct, which appears likely;

The Citigroup US Economic Surprise index rose to a near 5 month high of 15, rising above zero for the first time since April, in spite of the weaker than expected NFP data on Friday;

A proposal for homeowners to refi mortgages is gaining support in the US. The proposal, if passed, will enable homeowners to refi mortgages with any lender under an existing government programme (and thereby obtain better terms) and eliminate certain fees that are currently charged by Fannie and Freddie. The Mortgage Bankers Association and naturally the Association of Realtors endorse the bill. Whether it will pass the Republican controlled House is debatable though and the FHFA has not signalled its approval either. Nearly 520k borrowers have refinanced under the Home Affordable Refinance Programme (HARP) to July, more than double that last year. An improvement in the US housing market remains the key for the US economy (Source WSJ). Hard to think that anything gets done ahead of the Presidential election;

The weaker than expected August NFP data (just 96k jobs created as opposed to 130k forecast and 141k in July) increases the chance of QE3 in September, especially as Bernanke had focused on jobs at Jackson Hole. The unemployment rate declined to 8.1% from 8.3%, though only because the participation rate declined to around the lowest in 3 decades. Virtually all aspects of August’s NFP report were weak – downward revisions for the previous 2 months, flat wages and incomes, a large decline in factory labour hours worked and a very modest rise in hours worked. The very disappointing data could well result in the FED extending the low interest rate guidance to 2015 and, off course, QE3, quite possibly in potentially open ended;

Gencore has raised its offer for the remaining shares in Xstrata it does not own and, in addition, has announced that it is final. Analysts expect that the higher offer will be accepted by Xstrata shareholders, though the Xstrata shares are lower than the implied bid. The Qataris have not announced their decision;

Outlook

Asian markets we remixed, though, in the main, higher. European markets are flat.  US futures suggest a modestly lower open. The Euro is off its recent high, currently trading around US$1.2775. October Brent, well its up to US$114.55, with gold at US$1729, in anticipation of QE3 in the US and Mr Draghi bond buying proposal.

The big announcement is the German Constitutional Court (“GCC”) decision on the 12th September (further attempts to delay the decision in view of Draghi’s statement last week have been lodged with the court) and the FED later. Interestingly, 53% of German’s hope that the Court will block the ESM. Personally, I think the risks of a conditional (potentially negative?) decision by the GCC is a distinct possibility.

I remain particularly cautious and have reverted to my excessively cashed up position.

Source:

by Kiron

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