Spain in recession once again

Australian new home sales declined by -9.4%, to a record low in March MoM. The RBA is set to cut interest rates tomorrow;

Japan is set to increase it’s spending on defence and, in addition, may effectively change its policy in respect of it’s military – to allow foreign intervention for the 1st time since World War 11. Essentially it is planning to expand it’s role in regional security. At US$60bn, the Japanese defence budget was the 6th largest in 2011, globally. The moves, applauded by the US, are in response to China’s territorial demands in the South China seas. Recently, Australia has allowed the stationing of US troops in Darwin, Singapore has enabled more US ships to use their facilities, Vietnam has increased it’s links with the US, the Philippines are seeking to increase US military involvement, India is increasing it’s naval and air forces etc, etc. All of these moves is to counter a threat from China. Basically, China’s aggressive policy is backfiring;

South Korean industrial production rose at +0.3%, a slower pace in March, after rising +14.4% in February and well below the +2.2% forecast. Production declined by -3.1% in March MoM. Leading economic indicators rose by +0.4% in March MoM, as compared with +1.0% in February. Sales of consumer goods declined -2.7%, in March MoM. Exports are declining and domestic consumption remains weak. With the global economy (ex the US) slowing, I cant see much improvement in coming months;

China is planning to cut tariffs on certain products, including commodities, technology in key strategic emerging industries that cannot be produced locally and energy products and to “appropriately enlarge” the import of consumer goods to reduce trade conflicts. Hmmmm. Will wait and see, but presumably will help to reduce inflation. The statement, as it was made by the State Council is important however. “Local administrators and government departments must adjust their focus on encouraging exports and limiting imports and place equal emphasis on both”. Time will tell basically;

Singapore’s unemployment rate rose to 2.1% in the 3 months to March, up marginally from the 2.0% in the previous Q, a 3 year low and above the 2.0% forecast. Once again, reflecting the impact of a slowing global economy;

Whilst monetary policy is too tight for most in the EZ, it is too lose for Germany. Recently, German public sector workers obtained a 6.3% pay increase over 2 years and the large IG Metall union is demanding a rise of 6.5% – the employers have offered an increase of 3.0% over 14 months. The ECB is under pressure to maintain and/or even ease monetary policy, though rising inflation in Germany may deter it from doing so. ECB policy makers acknowledge that interest rates are too low for Germany. Indeed, residential home prices are rising in reaction to the easier monetary policy, something which has not occurred for a very long time. A single monetary policy across the EZ clearly does not work, but with a single currency…… The ultimate solution will have to be for Germany to accept higher inflation and increased consumption, resulting in a reduction in their current account surplus, but German policy makers (the Bundesbank) are/ will not play ball. Personally, I believe that the ECB will establish monetary policy for the majority in the EZ, rather than for just Germany – it has no other option;

A few weeks ago, I wrote a note stating that Portugal would need a second bail out prior to September this year. The reason is because a Portuguese bond is due to mature in September 2013. Under the 1 year rule of the IMF (namely that recipient countries must be capable to accessing finance 1 year hence), the IMF will be unable to continue to lend unless there is another bail out, as Portugal will not be able to redeem the September 2013 bond otherwise, as it will not be able to access capital markets. A 2nd bail out will be provided to Portugal – the German’s have already acknowledged that and the Portuguese have been good boys. It would be sensible to restructure Portuguese debt at the same time, so as to remove at least 1 EZ country from the “critical ward”. The Troika, in respect of Greece, suggested that debt to GDP of around 120% is acceptable, which off course is complete nonsense. A haircut exceeding 40%+ will be required in respect of Portuguese debt;

Spain is discussing the establishment of a bad bank. However, the authorities do not want to provide any State Finance, to avoid getting into the same problems as Ireland did. Some kind of private sector partnership is proposed and/or finance provided by the Spanish financial sector. All these proposals are unworkable. Ultimately Spain will need a bail out for its banks from the EZ, most likely the EFSF/ESM and the IMF. The level of losses is far, far higher than currently estimated and the new capital requirements significant – Morgan Stanley have suggested between E50bn to E160bn. I believe far more will be required, as is always the case in these situations. For example, valuations suggest that Spanish residential properties have declined by around 25%, though in Ireland (with a lesser problem) they are down around/over 50%. S&P is taking negative rating actions on 16 Spanish banks (it actually cut the rating of 11 banks), following the 2 notch country downgrade (with a negative outlook) last week;

Spanish 1st Q GDP came in at -0.3% lower QoQ, or -0.4% YoY (-0.3% QoQ in the 4th Q 2011), slightly better than the -0.4% QoQ and -0.6% YoY expected, though resulting in technical recession in Spain. Current years forecasts suggest that Spanish GDP will decline by between -1.7% to -1.9% – most likely by more, unless the EZ takes action;

Mr Sarkozy is gaining some ground against his opponent Mr Hollande. A recent polls suggest that Hollande is leading by 53% to 47%, though most polls suggest that Hollande is leading by around 8 points. Mr Hollande continues to rail against German influence/dominance of the EU/EZ. Going to get interesting.
Hollande is calling for the ECB to lend directly to EZ states. Mon Dieu !!!;

EU Finance Ministers meet on Wednesday to try and agree on rules relating to bank capital. It is uncertain as to whether an agreement will be reached. The EU wants a standard set of rules, whilst countries such as the UK and Sweden want the ability for their regulators to impose higher capital requirements than the minimum EU standards. The UK’s banking industry is far larger than other EU countries and, in addition it is concentrated. There is also the whole issue of setting a standard definition for calculating risk weighted assets, which at present is being defined differently by banks in the EU;

German March real, seasonally adjusted retail sales were up +0.8% MoM or +2.3% YoY, lower than the +1.0% MoM expected. In February, retail sales declined by -0.9% MoM ;

EZ April inflation is estimated at +2.6% YoY, slightly higher than the +2.5% expected, though lower than the +2.7% in March. The ECB is unlikely to reduce interest rates this month (3rd May), but I believe they will in coming months. Core inflation increased to +1.6% in March, from +1.5% in February. One part of the EZ solution requires higher inflation (and a lower current account surplus) in Germany, plain and simple;

Local elections in the UK this week will result in the Conservative party losing a number of local authorities. The past few weeks have been difficult, with problems relating to the budget, allegations of a far to close relationship with Rupert Murdoch (the PM, Mr David Cameron did admit that he did discuss Murdoch’s bid for BSkyB), news that the UK had entered into a double dip technical recession and a potential strike by fuel tank drivers. In Europe generally, the lefter leaning parties and the ultra right wing are in the ascendancy;


Asian stocks are rising today (ex China and Japan which are closed for the Golden week holidays).

Spot Brent is around US$119.20, with the Euro off a bit at US$1.3222 and Gold trading at US$1657.

Portuguese 10 year yields at 10.49% by the way, flat today and well below the 15+% when I first started talking about them – I’m really kicking myself.

European markets opened higher, but are retreating at present. US futures suggest a weaker open.

French elections next weekend. In addition Greek elections – does anybody care?



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