Jamie Diamond day

Japanese machinery orders rose by +5.7% in April, much higher than the +1.6% expected;

Chinese press reports state that the Chinese economy will grow by less than 7.0% in the 2nd Q. Well, I suspect it will, which is why China has to ratchet up its stimulus programme, particularly given the major change in leadership later this year. Quite frankly its happening already – no big headlines, but its certainly happening – expect more imminently;

Greek deposit outflows are rising ahead of this Sundays general election – the precise amount is unknown, but one analyst suggested that some E700mn was withdrawn yesterday;

As is always the case Fitch, downgraded 18 Spanish banks, following last weeks downgrade of the sovereign. Spanish 10 year bonds have risen to 6.72%;

Italian short term yields soared in today’s 1 year auction to 3.972%, from 2.34% just 1 month ago. Bid to cover was 1.732 times. The 10 year is yielding 6.17%
There is more pressure on Monti at home – some of his reform measures are facing opposition and/or lack of political support by the main parties, who do not want to be associated with unpopular measures;

The French government is to revise its economic growth targets (downwards, off course), given the slow start this year. Monsieur Hollande has promised to keep the French budget deficit to 3.0% next year and to balance the budget over his term in office ie 2017. The original targets assume economic growth of +0.5% this year, rising to +1.7% next. Independent forecasts suggest that the budget deficit will be over 5.0% this year and 4.2% next, higher than the 4.5% and 3.0% proposed. A difference of 0.5% implies about E10bn of budget measures. (Source WSJ).

EZ factory output declined materially in April – it was down -0.8% MoM, the steepest decline in 4 months and much higher than the -0.1% decline in March. Germany reported the largest decline of output in 7 months, though Portugal was even worse – its output was the weakest since 2000. Continuing weakness (very likely) is going to result in 2nd Q GDP coming in with a negative number;

Germanys CDU Mr Kauder states that his party and the opposition will meet again on 21st June to try and reach agreement on the fiscal compact and to pass it prior to the summer break. He added that they were close to reaching an agreement wuith the opposition;

The WSJ reports that Germany has commited E113bn to the EZ debt crisis to date (or 4.4% of GDP) which would increase to E401bn, in the event the EFSF/ESM are called upon in full. In addition, the Bundesbank has Target 2 claims of E644bn in April. When aggregated, Germanys total exposure soars to E671bn, or 25% of GDP and rising. Pretty big numbers. Essentially, Germany is increasingly being sucked into this crisis;

Jamie Dimon, the CEO of JPM, is due to appear on Capitol Hill today to explain the losses incurred by the CIO. He is going to face tough questioning;

US May PPI was -1.0% MoM versus expectations of -0.6% and April’s -0.2%. On a YoY basis, it was up +0.7%, as opposed to +1.9% in April and expectations of +1.2%. Core CPI came in at +0.2% MoM, in line with expectations;
US May retail sales less autos was down -0.4% MoM, as opposed to and unchanged expected, the largest decline since May 2010. The decline reflected a significant drop in petrol prices. The numbers ex autos and gas were -0.1%, from a downwardly revised -0.1% in April, though worse than the increase of +0.4% expected;

Outlook

Asian markets rallied following a better performance by US markets yesterday which rose in anticipation of QE3. European markets are flat to marginally lower, though feel weak. Brent oil is around US$97.50, with gold at US$1609. The Euro has crept up to above US$1.2540. The yield on the 10 year German bund is rising – currently 1.52% (still far too low, in my humble view, in the medium/long term, in particular), with comparable US and UK yields at 1.69% and 1.77% respectively.

The ECB supported the idea of an EZ wide deposit guarantee scheme – well great but I don’t believe that the Germans are on board. In addition, the EU Parliament passed a vote which supported the introduction of Euro Bonds and, amongst other things, a debt redemption fund and a stimulus programme amounting to 1.0% of GDP. Well great, but no one pays attention to the European Parliament. In addition, enthusiasm for the debt redemption fund seems to be ebbing in Germany.

Pretty slow day at present. Cant see much action ahead of the Greek elections this coming weekend

Kiron Sarkar

13th June 2012