The governor of the BoJ, Mr Shirakawa emphasises the need to end deflation. Well great, but do something about it. However, he resigns in April next year and the policy is likely to have to wait for the new governor. Interestingly, the head of the opposition LDP party, Mr Abe reiterated his call for the BoJ to ease until inflation hit 3.0% – the current BOJ policy is for inflation to rise to 1.0%. In addition, Mr Abe stated that if he came into power he would consider revising legislation which guaranteed the BOJ’s independence and allow the government to dictate central bank policy !!!!. More importantly, Mr Abe has signalled that the LDP would not link the passage of the budget legislation from the timing of the next general elections;
Will inflation rise in China in coming months. Bloomberg reports that the 3 month Shibor rate has risen by around 25 bps in the past month, suggesting that further easing policies may not be possible. Chinese monetary policy remains effectively “linked” to US monetary policy (which will continue to ease) as the Yuan is still “managed”, with reference to the US$. A rise in inflation (due to higher food and energy prices) will be a significant problem for the new Chinese leadership;
The Greek Parliament is to debate the austerity measures today. Further aid is dependent on Greece passing the austerity measures, which is expected, though only by a very slim majority;
The EU has forecast that the Italian economy will decline by -2.3% this year and by -0.5% next, lower than forecasts by the Italians;
Spanish September non seasonally adjusted industrial output declined by a massive -11.7% M/M, as opposed to -2.5% in August. Y/Y, output declined by -7.0%, much lower than -3.0% expected and a revised -2.5% in August. The decline was the 13th consecutive monthly decline and the lowest since April 2012. However, the Spanish PM continues to dither;
Even German economic forecasts have been reduced. Germany’s “wise men”, a 5 man team of economic advisers, report that German GDP will grow by just +0.8% this year (in line with the EU’s forecast released today and as compared with their previous forecast of +1.7%) and next, with a low point (negative growth?) this Q. A weaker Germany may result in the country introducing more pro-growth policies, especially as Mrs Merkel faces a general election next September;
German September industrial production (seasonally adjusted) came in at -1.8% M/M, much worse than the -0.7% expected and -0.5% in August, which is yet another confirmation the recent weaker economic data, other than domestic consumption, which to date is holding up, though for how long;
The EU has forecast that the French economy will grow by +0.4% next year (half that forecast by the French) – personally, I expect the French economy to decline next year, especially if current policies are maintained. They added that whilst France should achieve its budget deficit target of -4.5% of GDP this year, it will be higher than the -3.0% next year (-3.5% expected). Personally, I believe that France will find it near impossible to meet even the -3.5% budget deficit forecast next year, based on current EZ policies. I continue to believe that France is the real big problem in the EZ, far more so than Italy (similar to Spain) – so long as the Italians deal with their political issues;
The EU forecasts that 2012 GDP will contract by -0.25% this year, with the EZ to decline by -0.4%. The EZ’s 2013 forecast has been slashed to just +0.1%, from +1.0% previously – still too optimistic, based on current policies. Inflation is expected to decline to +1.8% in 2013, in line with previous forecasts, with 2012 inflation at +2.5%, rather than +2.4% previously. They have raised the Spanish budget deficit to -8.0%, much higher than the -6.3% target. Basically, a much weaker EZ economy in 2013 – why is anyone surprised. Indeed, unless policies change, a much worse outcome is likely;
The European Court of Auditors reported, once again, the the EU made material errors in spending, amounting to 3.9% of its budget. The report will add to the pressure to limit the EU’s budget and will be good news for the Euro sceptics. The UK, in particular, wants a freeze (at worst) in the EU’s budget and the UK PM has little flexibility, given the recent Parliamentary vote (non binding) that he must obtain a cut in the EU budget, let alone a freeze. There is an increasing possibility that the UK will have a referendum as to its continued participation in the EU;
The UK PM meets Mrs Merkel today to try and agree on the EU budget ahead of the 22/23rd November meeting. The EU has proposed a rise of 6.0% in its 2014 to 2020 budget (they have suggested that EU countries cut back on their budgets, by the way), though Mr Cameron wants a freeze, at worst. The Germans have proposed that the EU budget is limited to 1.0% of the EU’s GDP;
President Obama has won (including the popular vote – by some 2mn, at present), with the Senate under Democratic control (up 2 seats) and the House controlled by the Republicans (down 5 seats). The vote in Florida is yet to be announced. The bookies were correct. The immediate issue is for the President to deal with the “fiscal cliff” and he has to concentrate on the US economy this time around. I believe that some compromise is likely, which will mitigate its effects. Fitch has warned that the US could lose its AAA rating, if the fiscal issues are not resolved;
Interestingly, California passed proposition 30, which involves an increase of taxes, both sales taxes and income tax on those who earn above US$250k, by between 1% to 3.0%, to raise US$6bn. The budgets of state schools will be maintained. Recently, a number of senior US businessmen have suggested that the budget deficit needs to be fixed through a combination of spending cuts and tax increases. Cant see any other way;
Outlook
Asian markets closed flat to higher, with European markets having opened higher are now much lower, given the string of bad European economic data. US futures suggest a much lower open as well, following the much weaker European economic data. The Euro having climbed to well above US$1.2850, is trading well below US$1.28 at present (US$1.2752), given the much gloomier economic data. However a positive vote by the Greek Parliament on the austerity measures tonight (likely) should result in a rebound of the Euro – I will watch carefully – after all they are the Greeks !!!!. Gold is up at US$1723, though Brent is off its highs at US$110.33.
The German’s plan of continuing to push austerity is unsustainable. As you know, I expect more pro growth policies, quite possibly as early as Q1 next year. The impact of fiscal multipliers is worsening the fiscal position of countries including Greece, Spain and Portugal and arguably France. This nonsense has to end. The clear downturn in Germany may well be the trigger for a change in policy.
We await the outcome of the Greek Parliament’s vote on the proposed austerity measures – the current view is that it will squeak through, though remember it is Greece. Tomorrows ECB meeting is unlikely to reveal much.
Kiron Sarkar
7th November 2012
