Japanese PMI fell to 46.9 in October, an 18 month low, down from 48.0 in September. The reading suggests that manufacturing production will contract by -3.0% at a quarterly rate. The index of new export orders did rise to 46.7, from 46.3 in September, though its the 5th consecutive monthly reading below 50.0. Manufacturers cut employment in October for the 1st time in 6 months and at the fastest rate since mid 2009;
Panasonic not only reported a loss (US$9.6bn) for the 2nd consecutive year (only slightly less than last year), as opposed to its earlier forecast that it would return to profits. The loss confirms the major problems facing Japanese consumer electronics companies, in particular. In addition, the company cancelled its dividend. Total losses at Panasonic over the last 5 tears have amounted to Yen2tr. Sony and Sharp faced large losses last year and may well be forced to downgrade their forecasts when they report earnings this Thursday. (Source FT);
Receivables are rising materially in China. Accounts receivable in the 3rd Q have risen by 60% during the past year, well above revenue growth. Oops. Chinese banks, however, report record profits. Hmmm. (Source FT);
Korean September IP rose by +0.7% Y/Y, below the forecast of +1.0%, though better than the +0.3% in August. September CPI came in at +2.0% Y/Y, higher than the +1.8% expected and +1.2% in August. The BoK meets on 11th November, though is not expected to cut rates below the current 2.75%;
The Greeks have submitted their 2013 budget to Parliament. They forecast a decline of -4.5% of GDP in 2013, though generate a primary surplus of -0.4%. Debt to GDP will increase to 189.1%, with the budget deficit set to reach -5.2%, higher than the previous forecast of -4.2%. Spending is set to decline by -E9.2bn. The budget will have to be approved by 11th November, ahead of the EZ finance ministers meeting on the 12th;
Italian unemployment rose to +10.8% in September, in line with forecasts, though below August’s +10.6%.
Italian September PPI declined by -0.1% M/M, below expectations for a rise of +0.1% and +0.8% previously;
German September retail sales rose by +1.5% M/M (well above the the forecast rise of +0.3%), a 11 month high, or -3.1% Y/Y;
Mrs Merkel wants to give Greece, inter alia, 2 more years to meet their budget deficit targets, though opposition from members of her coalition is rising – Mrs Merkel needs approval from the Bundestag. The EZ is also considering reducing interest rates on current loans, extending their maturities, debt buy backs and a T bill issue. A haircut on official sector loans is politically impossible at this stage. There is a concern amongst her coalition that she will, once again, have to seek the support of the SPD, the main opposition party, though the SPD has indicated that they would want certain “political concessions” in return for their support. It is expected that 25 members of her coalition will either abstain and/or vote against the Greek bail out amendment. In addition, Mrs Merkel wants to try and get all EZ countries seeking a bail out to be submitted to the Bundestag at one time – however, that seems highly unlikely. It looks as if Spain will wait till next year, according to Spanish newspaper reports, as will Cyprus. (source FT);
French September consumer spending rose by +0.1% M/M (slightly below forecasts of +0.2%), or -0.3% Y/Y, though much better than the -0.8% M/M in August.
September producer prices rose by +0.3% M/M (+0.1% forecast), though below the +1.3% M/M in August or +2.9% Y/Y (+2.4% forecast), or +2.9% Y/Y;
The EZ unemployment rose to +11.6% in September, higher than the +11.5% expected and +11.5% in August. The total number of unemployed in the EZ rose by 146k to 18.49mn, a record high.
The EZ October CPI came in at +2.5% Y/Y, in line with expectations and lower than the +2.7% in September – inflation should continue to fall in coming months, to below 2.0% in 2013, which could allow Draghi to go for unsterilised QE;
UK consumer confidence fell to a 6 month low in October. The GfK sentiment index declined to -30, from -28 in September. Future expectations component fell by -5 points to -13, also the lowest in 6 months. Consumer expectations of the UK economy over the next year also fell – they were down by -2 points to -29. The numbers are inconsistent with the increase in employment, higher retail sales and better GDP numbers (OK some of which was related to the Olympics);
US Case-Schiller 20 city August prices were up +0.49%, in line with the +0.50% expected and +0.44% previously. Y/Y home prices rose by +2.0% Y/Y, slightly higher than +1.9% expected and +1.2% previously;
Hurricane Sandy has had a devastating impact on the US East coast. It will take week’s to fully restore services, in particular, the NYC subway. However, whilst negative in the short term, the rebuilding will add to US GDP in due course;
Intrade has increased President Obama’s chances of winning the Presidential elections – the odds are now 64% in his favour;
Outlook
Asian markets closed mainly higher, with European markets up as well, though the FTSE is flat. US markets are flat, though the Nasdaq is some -0.5% lower – I would have thought that there would have been a month end bounce today. The Euro is trading at US$1.2988, with Gold at US$1719 and Brent at US$109.37.
Investors have not focused on the decline (indeed losses) of a number of major Japanese companies. Cash is hemorrhaging. In addition, the yield curve is rising – not a great sign. Whilst the Yen strengthened against the US$, following the less than expected easing by the BoJ, the economic situation deteriorates day by day. How long before Japan’s current account surplus turns – not long, in my humble view. I continue to believe that the Yen faces significant headwinds and will be increasing my short over coming weeks, most likely to my maximum limit.
Whilst Mrs Merkel is expected to get her proposals to extend the deficit cutting measures in Greece by 2 years, it will be tight. The Euro could well face some downside, as investors increase their concerns.
Ex the outcome of the US Presidential elections, I continue to believe that events in Europe, in particular, will drive global markets in coming weeks.
Kiron Sarkar
31st October 2012
