Indian Central Bank cuts rates by more than expected

RBA minutes released today suggest that they will reduce interest
rates as a weaker economy will result in slower inflation. Indeed, the
BA lowered their assessment of growth in Australia. The 24th April
inflation report remains the key. It is likely that the RBA will cut
rates by 25bps at its next meeting, having kept rates on hold YTD;

Japanese authorities announced that they would contribute US$60bn to
the IMF to increase its funds for countries in difficulty. A number of
countries suggest that an agreement may not be possible this week. Mrs
Lagarde has scaled back the amount she was trying to raise to closer
to US$500bn, from US$600bn previously;

FDI into China declined for the 5th consecutive month in March – it
dropped by -6.1% YoY to US$11.76bn (-0.9% in March). FDI declined by
-2.8% in the 1st Q to US$29.48bn (+US$29.4bn in the same period in
2011). FDI into China rose by +9.7% YoY in 2011, amounting to US$123bn
in total. Outbound investment soared by +94.5% to US$16.55bn in the
1st Q 2012.
FDI from the EU collapsed by -31.2% in the 1st Q to US$1.4bn, though
rose by +10.1% to US$893mn from the US. (Source Bloomberg);

The Indian Central Bank, the RBI, unexpectedly lowered its benchmark
interest rate by 50bps today. The repo rate was lowered to 8.0%, from
8.5% previously. Most analysts had expected a cut of just 25bps. It
was the 1st cut since the RBI hiked rates 13 times between March 2019
and October 2011 to try and reduce inflation. The RBI kept its cash
reserve ratio at 4.75%, having cut the ratio by 75bps in March in
order to combat liquidity issues.The RBI forecast that GDP would be
around +7.3% for the year to March 2013, as compared with an expected
7.0% for the year just ended. In addition, the RBI expects inflation
around 6.5% – their target is between 4.0% – 4.5%. The RBI warned of
uncertainty around food and energy prices (India imports 75% – 80% of
its oil requirements) and risks of a higher fiscal (forecast at 5.1%
of GDP this fiscal year – likely to be much higher) and current
account deficit (a record US$19.6bn in the 1st Q and around 4.3% of
GDP – unsustainable). Essentially, cant really see any reason to buy
India, unless commodity (food and energy) prices decline;

Spain sold E2.09bn and E1.09bn of 12 and 18 month bills today,
slightly more than its target.
The 12 month bills yielded 2.623% (up from 1.418% in March) with the
bid to cover ratio of 2.9 times, from 2.14 previously.
The 18 month bills yielded 3.110% (up from 1.711% in March) with the
bid to cover ratio of 3.8 times, up from 2.93 times previously.
Yes a successful auction, though at much higher rates. The 10 year
auction on Thursday is key;

EU car sales declined to a 14 year low in March. Registrations in the
27 EU countries, together with Norway, Switzerland and Iceland fell by
-6.6% in March to 1.5bn, from 1.61mn last year. First Q sales declined
by -7.3% to 3.43mn. Sales in France and Italy declined by -23% and
-27% respectively. Automakers forecast that sales will decline by 5.0%
this year – likely to be more;

Mrs Merkel is back in election mode – this time in respect of North
Rhine-Westphalia (has approx 25% of Germany’s 82mn population), which
her party hopes to recapture following its loss in 2010. The election
is scheduled for May 13th. Given the election, expect the rhetoric to
be anti bail out/more austerity – basically the same old claptrap;

German ZEW (investor) April confidence numbers came in at 23.4, from
22.3 in March, a lot higher than the forecast of 19.0 The attached
commentary state that downside risks have decreased considerably.
About 1/3rd of respondents expect higher inflation due to ECB easing
policies and oil price increases. The current situation component rose
to 40.7, from 37.6;

EZ March revised HICP was up +2.7% YoY, (forecast +2.6%) and unchanged
from February and January. Higher energy costs were to blame. Core
inflation rose to +1.6%, from +1.5% in February;

UK inflation rose unexpectedly in March, for the first time in 6
months. Consumer prices rose by +3.5% YoY (+3.4% in February) and
slightly higher than the +3.4% expected. Core inflation rose to +2.5%
YoY, from +2.4% in February. RPI declined marginally , to +3.6% from
+3.7%. UK inflation remains sticky and the BoE’s forecast of inflation
down to +2.0% by the year end looks optimistic. This will impact
whether the BoE embarks on QE4 in coming months;

Outlook

Asian markets closed lower, ex India which benefited from the higher
than expected rate cut. European markets have strengthened during the
morning, given better ZEW data and the successful? (I think not)
Spanish bond auctions. However, yields on the 10 year bonds have
declined today.The Euro has also benefited, though off its high –
currently US$1.3150 – even better rate to short.

US futures indicate a higher open – approx +0.2%/0.3%. All eyes on the
US housing data today. The NAHB data was disappointing, which if it
follows through suggests weaker data today.

Spot Brent is up marginally – currently US$119.06.

Kiron Sarkar

17th April 2012

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