Ex the US, PMI weak globally

Hi there,

Japan’s Tankan survey was unchanged in March at -4, from a similar reading in February and worse than expectations of a reading of -1. The survey is particularly closely watched as it reflects the intentions of Japan’s major companies. The index also showed that the survey would be -3 in June. The Yen has weakened recently, but Japanese companies are not confident that the weakness will continue, suggesting that the BoJ could well continue to ease policy – more money printing. Large manufacturers forecast that the Ye/US$ rate would average Yen78.14 this fiscal year, well below the current rate of Yen 82.35. Personally, with a slowing China and generally a global economy (ex the US, though even the US is unlikely to remain immune) and rising oil prices, I don’t buy the whole Japanese recovery story, that a number of people are pushing. I am neutral at present – closed my Yen/US$ short. However, large domestically orientated companies are more positive about domestic consumption – the index rose to 5, from 4, the best reading since mid 2008. I will not be either a buyer nor a seller of the Japanese equity market at present, though my instinct suggests that the rally in the Japanese markets is coming to an end;

Chinese March PMI unexpectedly rose to 53.1 from 51.0 in February, according to the National Bureau of Economics (“NBE”) and higher than expectations of 50.8. New orders rose to 55.1, from 51 previously. Seasonal factors may well have flattered the official numbers. However, on a seasonally adjusted based, new export orders declined below 50 and inventories rose – not a good sign, especially for the future. By contrast to the official numbers, the HSBC/Market March PMI came in at 48.3, from 49.6 in February, the 5th month that the index is below 50. The official PMI data is more dependent on large SOE’s, whilst the HSBC/Markit index is mainly based on smaller/medium sized companies, dependent on exports. The Chinese NBE stated that “as the country’s overall demand is weak, China’s economic growth may keep slowing down in the future”. HSBC’s chief economist reports “Final PMI results confirm a further slowdown of growth momentum, weighed on by weakening new export orders”. Whichever number you chose to believe (interestingly the market is following the HSBC data), the bottom line is that China is slowing. The key issue arises as to whether the PBoC will cut interest rates, rather than relying on just reducing RRR’s. To date, the PBoC has refused to reduce interest rates, fearing (quite correctly, in my humble view) inflation. However, can this continue. China is in a pickle – any sensible policy action will have adverse consequences – their only choice is to select those policies that have the least worse impact;

India’s February trade deficit widened to US$15.2bn, from US$9.3bn YoY. Imports continue to rise significantly – they were up +20.6% to US$39.8bn, though exports increased by just +4.3bn, to US$24.6bn. Since the start of the fiscal year in April 2011, to February this year, India’s trade deficit widened to US$166.7bn, from US$115.2bn on a YoY basis. This rate of deterioration is unsustainable, especially as the current account deteriorates, and foreign investors are now selling Rupee denominated debt and, I expect, equities in due course ie the current account deficit is widening. Bond investors are generally first off the mark. The Rupee – well after a great start in 2012, it is beginning to look vulnerable, though high interest rates (though not in real terms) may provide some help;

The HSBC/Markit March PMI for India declined to 54.7, from 56.6 in February. Lower new orders, raw material shortages and problems caused by power outages (which remain a chronic problem in India) were the reasons for the decline. Output declined to 56.3, from 60.5 in February, new orders down to 58.1 from 62.8 though exports rose to 55.6 from 53.9 in February. The RBI meets shortly – whether they will cut or not is uncertain – inflation remains a problem. On balance, a modest cut by the RBI is likely;

Business associations of the US, UK, Canada, Japan and Hong Kong have written to the Indian PM, Mr Manmohan Singh to warn about “retroactive” tax policies contained in the recent budget’s Finance Bill. They report that international companies are reviewing their existing and, more importantly, prospective investments, in India. This is tough stuff. The row started over the Indian Supreme Court’s decision which ruled that Vodafone did not have to pay a tax bill of US$2.2bn on the acquisition of a mobile phone business and which the Indian Government has got quite upset about. India desperately needs foreign investment and capital and will have to play this carefully;

A number of European banks are utilising creative accounting schemes to “reduce” their asset base and thereby “improve” their capital ratios. The WSJ today, highlights a number of these schemes. These smoke and mirror tricks essentially result in banks failing to clean up their balance sheets and also limit lending to stronger borrowers – indeed, the banks may be lending to weaker borrowers, to avoid them defaulting !!!!. Complete madness. The European Banking Authority is a complete joke. National regulators may become tougher, but as yet not. With banks unable to access private sector capital, the ECB’s Asmussen’s idea of setting up a bank resolution fund is critical. At present, the EZ are pushing austerity, without any growth initiatives – complete madness, once again. However, to compound this with banks curbing lending is a totally insane policy;

The EZ’s March final PMI came in at 47.7, in line with expectations. However, French March PMI declined to 46.7, from 47.6 and a 33 month low and French March car registrations declined by a whopping -23.5% YoY. On the other hand, German March PMI rose to 48.4, up slightly from the flash estimate of 48.1. However, new orders, especially new export orders continued to decline. Italian March PMI came in at 47.9, from 47.8 in February – some signs of stabilisation. Spain, well the decline continues – March PMI declined to 43.5, from 45.0 in February;

Good news, the UK’s and Ireland’s March PMI came in at 52.1 (highest reading since last May) and 51.5 respectively, higher than the revised 50.7 and 49.7 respectively reported in February. The UK data also reveals that new orders picked up to 52.7, from 50.5 in February, the highest since March 2011 and PMI’s are up for the 4th consecutive month. The 1 worrying point is that input prices are rising materially – from 44.9 in January to 55.3 in February and 60.4 March. Output costs rose as well but by not as much as input prices, suggesting that corporate margins are contracting. Finally, whilst good news generally, manufacturing contributes just 10%, approximately, to UK GDP;

EZ February unemployment rose marginally to 10.8%, from 10.7% in January, in line with expectations and the worst number for 14 years – yep, that’s 14 YEARS;

Whilst the EU is incapable of sorting out the messes it has created, it is now proposing pan European regulation of Alternative Investments. The EC’s draft text of “supplementing rules” which strengthen the Alternative Investment Fund Managers Directive is causing particular consternation, especially as it diverges from advice provided by the European Securities and Market Authority. Who’s in charge you may well ask. The current draft proposals will drive up the cost of alternative investments, custodian banks may face increased liability, overall borrowing would be limited and fund managers in non EU jurisdictions would have more difficulty accessing EU based investors. The problem is that the EU and continental Europe, in the main (ex Holland and Sweden, I suspect) are not keen on the Alternative Investment industry. (Source FT);

Gavyn Davies of the FT has penned an extremely interesting report on Spain in today’s FT. You really should read the full report, though I summarise below:
The ESM/EFSF will only be sufficient for a medium sized Spanish crisis – IMF contribution not factored in;
Spain’s budget forecast of 5.3% for the current year is optimistic – more likely to come in at 6.0% – 6.5%;
Goldman’s estimate that the fiscal (negative) multiplier is about 1.5 times as Spain cannot either devalue or reduce interest rates unilaterally;
By the end of this year (all things remaining on course – which is highly unlikely), Spain’s primary deficit will amount by 3.0%. However, to maintain debt to GDP of 80%, Spain needs a 1.0% PRIMARY SURPLUS. To achieve that, Spain has to contract by a further 4.0%, in GDP terms this year, though given the 1.5% fiscal multiplier, that means it has to contract by 6.0% !!!!. As you will appreciate, the more the austerity measures, the greater the debt to GDP !!!! as the economy TANKS;
With unemployment at 23% and rising and home prices collapsing (impact on Spanish banks), this whole scenario is ready to blow.
Essentially, as I keep banging on AUSTERITY WITHOUT GROWTH DOES NOT WORK.
The current policy will indeed blow – a few more Euros from the IMF will not be enough.
I’m sorry to say that another EZ crisis is on the way, unless policy makers take the necessary action pretty soon.
Yes the ECB will reduce rates and there may (when?) be a bank resolution fund, but the balance between austerity and growth needs to be sorted out. The current policies are the policies of the lunatic asylum – actually a lunatic asylum will have come up with far more sensible proposals;

Whilst PMI’s in China and the EZ disappointed, in the main, US March manufacturing ISM rose to 53.4, higher than the 53 expected and 52.4 in February. The ISM production index rose to 58.3, from 55.3. Interestingly, prices paid declined marginally to 61, from 61.5 (they had been rising), employment came in much higher at 56.1, as compared with 53.2, though new orders were marginally lower at 54.5, as opposed to the 54.9 expected and exports decreased to 54, from 59.5. If it were not for the US, where would we be;

Construction spending in the US declined unexpectedly in February – it was down -1.1%, as opposed to an increase of +0.6% expected, the largest drop in 7 months, and compared to a revised decline of -0.8% in January. Non adjusted construction spending rose by +7.4% YoY in February. The prospect of more foreclosed properties hitting the market may have curbed building. Home improvements rose by +1.2%. Private non residential projects declined by -1.6% and public construction also declined by -1.7% MoM. Overall, not good news, as the weather conditions were mild;

Outlook

Asian markets closed mixed, with China and South Korea higher and the rest mostly slightly lower. However, if you look at the details of Korea’s trade numbers (more on this tomorrow), its not that great a picture and, as a result, I believe Asian markets will continue to drift lower. Spot Brent is declining – currently around US$122.60 – needs to decline much further, but Oil has been pretty resilient to date.

The A$ initially rose on the official Chinese PMI data, but the HSBC/Markit data has carried more weight and the A$ is declining – some -0.4% against the US$ at US$1.0406. I remain short of the A$, against the US$.

Just one thought, will the weakness of the Yen continue – me thinks not.

The weaker European PMI numbers, as opposed to the better US ISM number is taking it’s toll on the Euro – currently down to 1.3320

Whilst the BoE and the ECB will not announce any policy changes this week, I am beginning to believe that the ECB will have to cut rates. The outcome of the spring IMF meeting may well increase the size of the EZ bail out funds, but that’s just another temporary band aid. A bank resolution fund/more money printing by the ECB/interest rate cuts by the ECB – yep, I suspect that all of these measures are likely to be needed in coming months.

The US ISM data has turned around European markets strongly (closed near the day’s high), even though Spain is roughly flat to lower and Italy is down – currently down nearly 0.4%. No surprise. Used the opportunity to increase short on Spain. Personally, I think markets will come under pressure in coming days. After all, US markets are not following the exuberance of the European markets. Also interestingly, European banks and insurers are weak today – I wonder why !!!!. Investors in that sector know.

Greece took quite (indeed far too long) a long time to default. The problems in Portugal and Spain will surface far faster. The problem is that EZ politicians/officials think that the ECB’s LTRO/ESM fund increase (which really it is not), will buy them time – they are, as usual, mistaken. Just 1 point which I believe proves this point. Mr Rojoy (why did he want to take on this mess) won a landslide victory in a general election just a few months ago, but failed to gain a majority in Andalusia. That suggests to me that the Spanish are not that enamoured with further austerity. Poll results in Italy suggest that Monti is perceived negatively by the Italian public. Finally, only 50% of Irish home owners have paid their recently announced annual tax. This kind of action is likely to increase. Ireland is the poster child of the EZ in terms of taking the pain – a number of my Irish friends tell me that they believe enough is enough. Hmmmmm.

Austerity without growth does not work. In addition, people will take more pain, but they have to see some light at the end of the tunnel. At present, it’s a black hole they are staring at. A number of people tell me that the EZ will bumble on – well, lets see. I want to check out the likely IMF contribution to the EZ bail out fund. At least, the EZ (finally) has a sensible ECB.

Best

Kiron

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