Calls for growth measures in Europe

South Korean 1st Q 20212 GDP rose by +0.9% QoQ (+0.3% previous Q) or
+2.8% YoY, in line with estimates, though at the slowest pace in 2 1/2
years. Last year GDP grew by +3.6%, down from +6.3% in 2010.
Government spending has spurred activity YTD – the Government has
front loaded spending to 60% in the 1st half of the year. However, the
Korean Central Bank Governor warns of downside risks and, in
particular, a decline of exports to China and Europe – though higher
to the US. Exports rose by +4.5% in the 1st Q YoY, but this rate of
growth is far weaker than the +10.5% in the same period in 2011 and
+16.0% in 2010. Household spending remains weak, given high levels of
debt. The Central Bank is unlikely to raise interest rates for quite
some time;

Cheaper rates for 1st time home buyers, increased bank lending,
reductions in RRR’s and Government infrastructure spending, confirms
that Chinese authorities want to ensure that their economy does not
suffer from a hard landing and, indeed, meets its target growth rates
this year. In particular, the change in leadership this year will
ensure that the authorities do whatever they have to to ensure that
the economy keeps ticking over. However, can the economy continue to
grow by 7/8% next year and beyond – I doubt it;

Mr Putin seems to be reneging on pledges he made during his
Presidential campaign to make the political process more democratic.
For example, he had promised to restore direct elections for the
appointments of Governors. In reality he is appointing Governors
before the law comes into effect. Mr Putin also has the right to
select those who can run for Governor. More public protests are
expected as a result. (Source Bloomberg);

The EZ economic sentiment fell to 92.8 in April, weaker than the 94.2
forecast. The business climate index fell to -0.52, weaker than the
-0.30 forecast;

Italian business confidence fell to 89.5 in April, from a revised 91.1
in March and weaker than the 92.1 forecast – suggests a sharper
decline in GDP than currently expected;


Mario Draghi is calling for a “growth compact”, in addition to fiscal
austerity and hinted that the current economic downturn in the EZ
could be prolonged. He rejected views that the current emergency
measures should be curtailed – “An exit strategy is premature given
the current economic situation”. His comments have been used by
Hollande, who is claiming that his views are being supported. In
addition, Mr Hollande stated that he would not ratify the fiscal
compact as currently drafted. However, Mr Draghi is proposing more
competition, liberalisation, structural reforms and privatisation –
not quite Mr Hollande’s prescription and certainly not additional
government spending, leading to increased budget deficits. In
addition, Mr Draghi added that the LTROs had helped lending in the 1st
Q, though it would appear to be only at the margin and, in addition,
it has bought time for EZ countries to act and put their finances in
order – some hope. It is likely that EZ leaders will respond, though
the means to achieve growth are very different in Germany (structural
reforms involving reducing labour costs, increased competitiveness,
raising the retirement age, etc) than in France (easier ECB monetary
policy, more government spending etc). For example Mrs Merkel stated
“We need growth in the form of sustainable initiatives, not simply
economic stimulus programs that just increase government debt”, whilst
Hollande is into increasing wages, infrastructure spending etc, etc.

French 10 year spreads are widening against their German equivalent –
currently 132bps, up some 7bps since the morning;

In spite of German objections, the EU is drafting proposals which will
allow European banks to access funds from the EFSF/ESM. Personally, I
believe that such a move is inevitable. A number of European banks are
insolvent and cannot raise the capital they need from the markets;

Whilst austerity prevails in the EZ, the EU is proposing to increase
its budget by +6.8%. Hmmm. These guys really must be smoking
“aromatic” cigarettes;

LCH Clearnet is raising margin requirements on Spanish and French
bonds. The increase in margins on French bonds was unexpected and is
likely to result in more pressure on French banks;

UK Nationwide consumer confidence rose 9 points in March to 53, the
highest reading in 9 months. The long run average is 76 though and
sentiment is expected to decline in coming months;

The number of UK mortgage approvals declined to 31.9k in March, down
from 32.8k in February, though the amount lent rose to £904mn (highest
since March 2011), up from £659mn in February. Purchases to benefit
from lower stamp duty, which has ended, suggests that lending will
decline in coming months;

Mr Bernanke suggested that further stimulus was unlikely unless the US
economy deteriorated, particularly as inflation is near the 2.0%
target. However, he added that the FED would ease further, if economic
conditions worsened. Unemployment is not declining as quickly as
desired and the FED reiterated that interest rates would be held at
“exceptionally low levels” through 2014. However, this time around
only 4 (down from 6 previously) FED officials believed that rates
would remain at current levels through 2014. The FOMC stated that
growth was likely to remain moderate, though did increase its estimate
of 2012 GDP growth to +2.4% to +2.9%, up from January’s estimate of
+2.2% to +2.7%. The FED also lowered the unemployment forecast to 7.8%
to 8.0% this year, from January’s 8.2% to 8.5%.The Richmond FED’s
Jeffrey Lacker dissented for the 3rd consecutive time, repeating that
he believed that interest rates should be raised in 2013;

US durable goods orders declined by -4.2% in March, the most since
January 2009 and much higher than -1.7% expected. Shipments for non
military capital equipment, ex aircraft, rose by +2.6%  from +1.4% in
February, though orders declined by -0.8% (+2.8% previous month),
suggesting possible weakness in coming months;


The main Asian markets closed flat to higher. European markets have
continued to decline through the morning. European bank results
(Deutsche and Santander) were disappointing, though Barclay’s came in
better than expected.

The Euro opened higher, but is weakening at present.

Spot Brent is trading higher at US$119.34.

European markets are looking particularly skittish – awaiting US data
in respect of home sales and jobless claims. In particular, I’m amazed
that French markets have held up as much as they have.

Kiron Sarkar

26th April 2012

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