On hold for Mr Benanke

Yet another sign of fixed asset (stimulus) spending in China. Following the decision to hold capex as a result of a rail accident, the Chinese government is to increase capex on rail infrastructure to Yuan 448.3bn, from Yuan 411.3bn, a 9.0% increase. As 1st half spending was limited, the 2nd half should see spending of some Yuan300bn.
Whilst capex spending is positive, the FT reports that Chinese steel prices hit a record low since the futures contract was launched in 2009;

The official Chinese news channel, Xinhua, stated that the “foundation for China’s economic recovery is not solid as yet”. The paper emphasized the need to boost investment based growth measures, though to cut waste. More capex coming, boys and girls;

Indian wholesale price index declined marginally to 7.25%, in June, lower than the 7.55% in May. However, with the significant decline in oil, the modest decline in inflation in June, suggests that inflation will remain stubbornly high, curbing the RBA’s flexibility to reduce interest rates, which is much needed. Rises in food prices will not help either. India continues to face significant problems and with an incompetent, corrupt and dithering government, I cant really see much respite;

A revolt by members of her party and her coalition could result in Mrs Merkel not getting a “Chancellors majority” ie a majority in Parliament with her supporters only, in respect of the legislation relating to the Spanish bank bail out to be debated in the Bundestag this Thursday. The legislation will pass as members of the SPD and the Greens will vote in favour and, in any event, requires just a simple majority, but the mini revolt will be an embarrassment for her. Mr Rajoy’s views that the bail out funds will be condition light is, well lets just say absurd. There is no doubt that Mrs Merkel will be forced to act tougher in her dealings with the PIIGS. In addition, there is the Constitutional Court decision coming up. However, the former federal President and former head of the Constitutional Court, Mr Roman Herzog stated “the government is justified in taking very high risks in difficult circumstances”. In addition he stated that he could not see a substantial difference in respect of a possible transfer of national sovereignty under the ESM, from what had been given following the passage of the EFSF legislation. Definitely positive for the government (Source FT);

It looks as the ECB is (finally) changing its mind and will allow for senior bank bondholders to participate in “burden sharing”, which was due to come in by 2018. Mr Draghi proposes that the timetable be brought forward. About time. In addition, Mr Asmussen, the German representative on the ECB. strongly supported a plan to remove some Irish debt off the country’s balance sheet recently. This change of mind could well impact bondholders in Spanish banks – unfortunately too late for Ireland, there is only E160mn of senior debt remaining;

The German investor confidence July reading came in at -19.6, below June’s -16.9, but in line with the -20.0 forecast;

One of Mr Dimon’s former colleagues contradicted his testimony to the UK Parliaments Treasury Committee. In addition, the chief banking regulator Mr Andrew Bailey told the committee “I don’t think what Mr Diamond said (to the Committee) in any way reflects the severity of the issue”. Mr Bailey alleged that Barclay’s “gamed” regulators. Today, further individuals, including the Governor of the BOE, heaped on more problems for Mr Diamond, who is certain to be recalled and will face an even tougher grilling;

UK June CPI came in at -0.4% MoM or +2.4% YoY, well blow the forecast of -0.1% and +2.8% expected. CPI is at the lowest since November 2009. Possibly some stabilisation , but the trend is for lower CPI, particularly in developed markets. EM’s will be hit by higher food prices, which are a larger % of their inflation basket;

US retail sales declined by -0.5% in June, as opposed to the growth of +0.2% expected. Retail sales have decline for 3 consecutive months, the worst performance since 2008. The savings rate increased to +3.9% in May, from +3.4% in February. The negative retail sales numbers will force economists to reduce their 2nd Q GDP forecasts. However, it will be another reason for the FED to intervene though, as is the case in the UK, I’m not sure whether buying more US government debt ie QE3 will be of much help. The FED is likely to try other measures;

The IMF has cut its 2012 forecast for global growth marginally, from +3.6% to +3.5% and to +3.9% from +4.1% in 2013. However, it warned that even these forecasts assume (a) enough policy action in the EZ to ease financial conditions and (b) some effective easing in the EZ. Downside risks are highlighted. Its forecast for the UK was sharply lower at +0.2% for the current year, as opposed to +0.8% previously. The IMF added “Emerging markets are facing extraordinary uncertainty about external conditions impinging on their economic performance”;

Mr Bernanke is to start his 2 day testimony, with the Senate banking committee today. Investors want some hint of QE. I cant help feeling that this will not be the venue for such an announcement and/or hints of such policy by the FED. Likely to disappoint markets. Indeed the statement does not contain any statement re QE, but signals all the underlying reasons to introduce QE;

US June CPI came in at +1.7% YoY (unchanged from May), slightly higher than the +1.6% YoY expected. Interesting, I would have expected a lower number;

Basically, on hold for Uncle Ben

Kiron Sarkar

17th July 2012

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