Premier Wen Reduces Chinese 2012 GDP forecast to 7.5%

Australia’s services sector posted a sharp decline in February. The index was down to 46.7, from 51.9 in January, the weakest since March last year. All sub components of the index (excluding wages) were particularly weak, including sales (47.5, down from 49.4), new orders (45.6, sharply down from 54.1), selling prices (44.2, from 46.9), employment (47.5, from 51.2), though wages were only marginally lower (57.7, from 57.8). Australia’s increasing dependence on China, in particular, must be considered a real concern;

Premier Wen announced that the target for GDP growth for the current year would be +7.5%, lower than the +8.0% target in place since 2005, though in line with forecasts. The inflation target remains at 4.0%. Reflecting weaker European and US markets, total trade is expected to grow by 10% this year, as opposed to +22.5% the previous year. Mr Wen emphasized to the National People’s Congress the need for China to develop a more sustainable economic model, involving higher income for the Chinese population with less emphasis of the previous (unsustainable) growth drivers, namely exports and investment and a focus on domestic consumption. He reiterated the need for a “proactive” fiscal policy, combined with “prudent” monetary policy. The budget deficit is forecast at US$125 bn for the current year, approximately 1.5% of GDP. The MoF reported that the 2011 deficit would actually be much less than forecast – roughly 1.1% of GDP. Whilst expected, the lower 2012 GDP forecast resulted in a modest sell off in Asian markets. Chinese GDP forecasts are normally lower than the actual outcome. Essentially no great surprises;

Is China trying to slow down the Yuan’s appreciation. The PBoC, according to the Chinese News Agency, is considering introducing a wider trading band. I remain of the view that far from being undervalued, the Yuan is probably overvalued;

Exit polls suggest that India’s Congress Party has come in 4th in the State elections in Uttar Pradesh. The result is important in that it reinforces voter discontent with India’s Congress Party and with Rahul Gandhi (son of Sonia Gandhi), its prospective leader. The loss is a particular blow for Mr Gandhi as he campaigned vociferously in UP. Question marks relating to his future will come thick and fast.The beleaguered Indian PM, Mr Manmohan Singh (really a figurehead) will also come under pressure;

India’s ban on cotton exports (effective immediately) has resulted in futures rising by some 4.0% in US markets. The ban, to appease Indian manufactures, who are losing competitiveness to manufacturers in Bangladesh and Pakistan, will reduce prices in India, but will hurt India’s reputation. However, a number of workers are employed in the sector in India;

Initial indications suggest that President Ahmadinejad is losing to supporters of the Iranian Supreme leader Ayotollah Ali Khamenei. Reports suggest that the result could help in negotiations, but if anyone understands what’s going on in Iran, please let me know;

International observers report that last weekends Presidential elections in Russia were “unfair” and “skewed” in favour of Mr Putin. The OSCE reports “There was no real competition and abuse of government resources ensured that the ultimate winner of the election was never in doubt”. Good grief, shock horror – I think not. Basically business as usual in Russia. Opposition leaders have forecast more protests (Source FT);.

EZ January retail sales rose by +0.3% MoM, flat YoY – better than forecasts of -0.1% MoM and -1.6% YoY. France performed much better (+2.0%), though the Germans were far more cautious – sales declined;

EZ composite PMI index declined to 49.3 in February, from 50.4 in January and below the flash estimate of 49.7;

EZ final services PMI was revised downwards to 48.8 in February, down from a flash number of 49.4, mainly due to worse Italian, though, in particular, Spanish data. Germany and France witnessed moderate expansion, though lower than January;

Italian February services PMI came in at 44.1, down from 44.8 in January and below forecasts of 45.2;

Spanish February services PMI was even worse – it came in at 41.9, as opposed to a forecast of 45.9 and well below January’s 46.1. This is the 8th consecutive month of contraction and the lowest reading since last November. The Spanish economy continues to contract at a rapid rate;

UK February services PMI came in at 53.8, lower than the forecast of 55 and down from 56.0 in January. Bad news, as services is the major (around 75%) part of UK GDP. However Markit (the producers of the index) reports that the UK services sector shows signs of “robust” growth and that a technical recession will be avoided – the UK economy contracted in the last Q of 2011;

A number of Spanish regions (Catalonia and Andalusia, for example) are balking at the deficit targets (1.5%) proposed by the Central Government, reports Spanish newspapers. Going to tough to impose discipline. Last year the semi autonomous regions posted deficits well ahead of forecasts;

Banks deposited a record E821bn at the ECB over the weekend, up from the E779bn on Thursday. The 2 LTRO’s injected just above E1tr into European banks, for comparison purposes. Very early days, but banks are clearly still cautious;

US economic data continues to surprise to the upside. The ISM February non manufacturing index came in at 57.3, higher than the 56 forecast and better than January’s 56.8. Factory orders were down -1.0%, but better than the forecast decline of -1.5%;


With China slowing down and redirecting emphasis away from fixed asset investment, I remain bearish on the miners and the A$. As you know, I’m short the mining sector (Rio, AAL, Vale and BHP), together with the A$ (against the US$) and South Africa.

Too early to tell what happens next in Iran – presumably there will be some respite from the threat of military action until the intentions of the new leadership are known. Should mean a lower oil price, though oil does move in mysterious ways – indeed, Brent rose above US$124, but is currently marginally below.

Well the market has finally recognised the difference between Italy and Spain. Italian 10 year yields declined below their Spanish equivalents – has taken a very, very long time. Unfortunately, I sold my Italian bonds far too early. Silly me.

Interestingly, the FT reports that Japanese investors (the legendary Mrs Watanabe) have continued to withdraw funds from investment trusts (Toshin’s), which invest in foreign assets, including currencies, since last September and reinvested domestically. Net outflows have amounted to US$10.4bn. Investors have been fearful of a collapse of the EZ and regulatory issues relating to the Toshin’s are believed to be the reason. However, the Yen, recently has been declining. If the authorities press the inflation button, as they report they will, surely Japanese investors will seek higher (real) yielding foreign assets. Hmmmm. Japanese investors have recently begun to invest in funds with just hold foreign currencies. Could be really dodgy.

All eyes on the proposed Greek PSI deal this week. Lots of conflicting reports, so difficult to assess the situation.The Greeks need 75% of bondholders to agree, to avoid utilising CAC’s.

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