Wow! Bundesbank “accepts” higher inflation

Australia’s unemployment rate declined to a one year low of 4.9% in April, from 5.2% in March and as opposed to a rise to 5.3% forecast. However, the data reveals that the decline was caused by an increase in part time employment (+26k), with full time unemployment down (-10.5k). The A$ rose on the news. The RBA is expected to keep interest rates on hold at it’s next meeting on 5th June, though I suspect a cut of 25bps is likely;

Japan posted a current account surplus of US$20bn for the second month in March (slightly higher than forecast), as investment income more than compensated for rising energy imports due to the closure of Japan’s nuclear reactors. However, the surplus was -8.6% lower YoY and -52.6% for the year ended 31st March on an YoY basis. However, traditionally the current account improves in February/March as Japanese remit funds back home and coming months could well post deficits;

The Chinese trade surplus rose to US$18.42bn in April (US$5.25bn in March), almost double that forecast by the Chinese commerce minister only last week. Exports rose by +4.9% YoY (+8.5% expected), as compared with +8.9% in March. However, imports rose by just +0.3% (+10.9% expected), as compared with March’s +5.3% rise. Lower commodity prices impacted imports, though I suspect that the Chinese are also reducing their imports of commodities, in particular base metals. The numbers suggest that China continues to slow, in reaction to a weaker global economy. The evidence for a global slowdown is pretty clear, following the announcement of weaker export from Korea and Taiwan recently – down by -6.4% and -4.7% respectively;
The RBI, India’s Central Bank has cut the amount that companies can hold in foreign currencies to 50%, from 100% previously. The Rupee gained on the news. However, in my view such measures smack of desperation and are short lived. I continue to believe that the Rupee will decline (materially?) as funding the widening current account surplus becomes an ever increasing problem. Investors have been reducing their holdings of Indian securities, which will have a material impact on Indian markets given it’s dependency on foreign fund inflows – indeed, the market having risen by +1.2% initially on the news, closed -0.3% lower at the close. I remain short India;

Greek unemployment rose to 21.7% in February, from 21.3% in January, whilst industrial output fell -8.5% YoY in March, from -8.3% in February;

There are some reports circulating that a coalition may be formed in Greece;

In spite of repeated statements that Spain would not put government money into it’s banking sector, the Spanish government took a 45% stake in Bankia, it’s (3rd largest) beleaguered and insolvent bank, by converting E4.47bn of state funds into equity. OK great, but Bankia and for that matter, the entire Spanish banking sector, will need significant amounts of additional capital. All you have to do is look at the Irish precedent. This is no fix, though the IBEX has reacted positively this morning. It is estimated that Spanish banks have some E180bn of problematical property based loans !!!!. At the end of the day (in my opinion this year), Spain will need financial support from the EZ;

Italian March industrial output was up +0.5% MoM, better than the expected decline of -0.3%;

French March industrial output was -0.9% lower MoM, lower than the forecast of a decline of just -0.5%;

According to the FT, the Bundesbank has, in effect, signalled that it would accept higher inflation in Germany. Hallelujah, they have finally come to their senses. In any event, it was inevitable, as I have been banging on for some time. The FT reports that the Bundesbank argued that German inflation would have to rise above the EZ average in evidence submitted to the German Parliament. The move follows comments by Schaeuble, who has backed the need for higher wage increases in Germany. The statements could (will) help the ECB to ease monetary policy. Need to check this carefully, but I’m amazed that the markets have not reacted. In my humble opinion, this is a massive U turn and excellent news – whilst inevitable, the news should be should be positive for markets;

As expected, the UK’s BoE left interest rates unchanged at 0.5% and, in addition, did not increase QE. Sterling has strengthened on the news – hovering around 80c against the Euro – should strengthen further;

UK March factory output rose by a faster than expected +0.9% MoM, (-1.1% in February). The data continues to be better than that reported by the the UK’s statistics agency, the ONS;

US jobless claims declined to 367k in the week to 5th May, in line with forecasts, though slightly higher than last weeks revised 365k. The less volatile moving average declined to 379k, from 384k;

The US March trade deficit widened to US$51.8bn in March, from US$45.4bn in February. Will negatively impact 1st Q 2012 US GDP;


Need to research the veracity of the FT report about the Bundesbank’s willingness to “accept” higher inflation, but, if true, seems pretty positive to me. Higher inflation in Germany, is a prerequisite for some kind of fix for the EZ, though clearly numerous other issues need to be sorted out. However, I may well have to reconsider my current positioning.

European markets are higher at present, though the Euro is flat. US markets have opened 0.6% higher.

Kiron Sarkar

10th May 2012

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