Much worse Japanese current account data

New Zealand kept interest rates on hold and, in addition, suggested that rates will remain at current levels through 2012;

Australian unemployment rose by 15.4k, well above the 5k expected.The unemployment rate rose to 5.2%. The A$ weakened initially, but has rebounded – currently US$1.0610;

Japan announced a record current account deficit of Y437bn (US$5.4bn), the largest since comparable records were prepared in 1985. The seasonally adjusted current account surplus declined sharply to Y116bn, from Y776bn in December. The closure of Japan’s nuclear reactors is having a material impact – only 2 are operating at present. The Yen weakened on the news – currently Y81.33 against the US$. The Bank of Japan has announced a policy of raising inflation to 1.0%, through asset purchases recently seems to be working in terms of weakening the Yen. Next weeks BoJ meeting should be particularly interesting. The weaker Yen is positive for Japanese equity markets – on a currency hedged basis;

Whilst the current account deficit data was much worse, 4th Q 2011GDP was revised much higher – to a decline of just -0.7% (-0.2% Q/Q) on an annualised basis, from the previous -2.3% reported;

As forecast, the Bank of Korea kept its 7 day repo rate on hold at 3.25% – the 9th consecutive month. GDP is forecast at +3.7% this year (+3.6% in 2011), with inflation at an optimistic +3.2%;

Bloomberg reports that China may announce much lower February inflation tomorrow (+3.4% YoY, as compared with +4.5% in January – Chinese New Year impacted), though a sharp drop in industrial output growth – down to +12.5%. They suggest that the Chinese authorities will ease monetary policy. A reduction in RRR’s is likely, but to date the PBoC have refrained from cutting interest rates. Inflation is certainly not under control and the current high oil price will impact, as it will in the rest of Asia. The Commerce Minister announced that Chinese exports rose by +7.0% in the 1st 2 months of the year;

The FT, quoting the International Institute for Strategic Studies, reports that Asian defence spending will exceed that of Europe’s this year for the 1st time ever. Expenditure rose by +3.15% in real terms in 2011. China (30%), Japan, India, South Korea and Australia accounted for more than 80% of expenditure in 2011. With a number of Asian countries increasing concerns about China, spending will increase much faster;

Bloomberg reports that approx 60% of debt holders have agreed to accept the Greek PSI proposals. With others coming in today (the deadline is this evening), it appears that the Greeks will get the requisite amount, though may well need to implement CAC’s;

The Spanish Budget Minister announced that Spain’s regions/towns etc owed some E35bn, though he acknowledges that it may not represent the total amount outstanding !!!!. The previous administration simply did not pay its bills to “maintain”
that it had “met” their budget deficit forecasts. The news re Spain gets worse and worse. I have to say that the current EU’s policy that Spain has to reduce this years budget deficit to previously agreed targets, given what the current administration has inherited from it’s predecessors, is nonsensical. However, not sticking to pre agreed targets immediately following a “fiscal compact” will clearly destroy the EZ’s already limited credibility. At the end of the day, Spain simply cannot meet its targets. Better to renegotiate a realistic and comprehensive plan with all EZ countries and then stick to them;

The BoE and the ECB are to announce their decisions today – no cange and/or material news is expected. It will be interesting to hear about the impact of the ECB’s 3 year LTRO and, in addition, the ECB’s inflation forecast;

Interesting article in the WSJ. They suggest that the FED may buy MBS’s/Treasuries, though sterilise the proceeds. If true, just confirms my suspicion that the FED is getting concerned about rising inflation, though the bond purchases should keep yields from rising. Sounds credible. In addition, the WSJ has been remarkably accurate in “predicting” future FED policy;

Bloomberg, quoting Deutsche Bank, reports that US payroll data has been revised higher in all but 2 months since July 2010. The upward revisions were particularly pronounced in the 2nd half of 2011 – revisions resulted in payrolls increasing by 235k. The BLS reported that worker output per hour slowed materially in February and that wages rose by +2.8%, double previous estimates. Labour expenses rose by +2.0%, higher than the +1.2% initially reported and by the most since 2008. 2011 productivity was revised lower – to +0.4%, from the +0.7% initial estimate – suggests greater hiring;

Nomura reports that the much maligned ADP payrolls data is strongly correlated to NFP in February each year – the average miss is just 25k since 2006, half other months. It’s all to do with BLS yearly revisions in January apparently. A survey of US executives also suggest that they will increase hiring – by +2.1% over the next year;

In a split vote (5 in favour, though 2 members dissented), the Brazilian Central Bank reduced interest rates by 75bps to 9.75% – a cut of 50bps was expected. Rates are expected to be reduced further – analysts expect further cuts of possibly as much as 125bps by May. January industrial production was particularly weak (down -2.1% MoM and -3.4% YoY, a decline of just -1.4% was expected) and the authorities are deeply concerned as to the strength of the Real. However, with low unemployment and high consumption, the Central Banks forecast of maintaining inflation around 4.5% is highly optimistic;

Outlook

Whilst I remain bearish, it looks as if the Greeks will get their PSI deal through, though will need to activate CAC’s. OK CDS’s will be triggered, but I believe Goldman’s are right in that it will not be a market negative. You could argue that if CDS’s are not triggered, markets (particularly bond markets) will react badly. A Greek deal should be Euro and markets positive – the Euro has risen to US$1.3170.

Secondly, in Europe, I continue to believe that the Germans will agree to increasing the size of the ESM/EFSF, irrespective of their current public position – another bullish event. A decision is expected towards the end of the month. In addition, expect support from a number of countries (China, Japan, Brazil?), through the IMF.

In addition, my clued up friends also tell me that there is quite a lot of money waiting for an opportunity to invest. However, there is clear evidence of a slowdown globally (ex the US) and with oil at these levels, inflation looks as if it will rise. As a result, I would not be surprised by a short term market pop, but I believe that any such rise will be relatively short lived.

One other bullish possibility – if the LTRO money (over E800bn), parked with the ECB starts to leak out, risk assets should react positively.

Having said all that, it seems like a number of possible bullish events, just in Europe. Hmmmm.

Spot Brent has risen to US$124.50 – just wont go down – bad news.Gold has crept up to near US$1690 and copper is up about +0.5%.

Asian markets closed higher and European futures suggest a modest rise – I would have thought it would be better.

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