Weaker Chinese, EU and US data

Chinese official PMI fell to 50.2 in June, from 50.4 in May, according to the Chinese statistics bureau, better than the 49.9 forecast. The new export orders component declined into contraction territory of 47.5 in June, lower than May’s 50.4 and the overall new orders component was also below the 50.0 neutral reading, coming in at 49.2, from 49.8 in May. The imports component also declined to 46.5 in June from 48.1.

The HSBC PMI number came in at 48.2 in June, from 48.4 in May – HSBC’s numbers are consistently lower than the official Chinese data.

The data confirms that China is slowing and that most analysts will have to reduce their forecasts of GDP growth lower than the 8.0% average forecast. – some have Credit Suisse, JPM for example. Personally, I believe that unless China embarks on a larger stimulus programme (which I believe they will, though through a series of measures, rather than 1 headline grabbing announcement), achieving 7.0% GDP growth this year is going to be a problem ie a hard landing in Chinese terms;

Its early days, but there is some evidence that Chinese property prices are stabilising. Chinese new home prices rose (OK by just +0.1%) for the 1st time in 10 months in June. The recent interest rate cut, lower mortgage rates for 1st time buyers and a policy of encouraging home purchases by a number of provinces is having an impact, though few expect property prices to increase significantly;

EZ June final manufacturing PMI came in at 45.1, unchanged from May’s reading, though above expectations of 44.8.

German June manufacturing PMI came in at 45.0, lower than May’s 45.2, but slightly higher than the flash estimate of 44.7. It was however, the lowest reading in 3 years. Importantly overseas orders declined at the 2nd fastest rate since May 2009, with a marked slowdown especially in respect of China.

Italian manufacturing PMI was 44.6 in June, slightly lower than the 44.8 in May, though slightly better than the 44.5 expected.

French June manufacturing PMI came in at 42.2, higher than May’s 44.7, but slightly lower than the 45.3 expected.

Spanish June manufacturing PMI came in at a ghastly 41.1, lower than May’s 42.0 and below the 41.5 expected – indeed, the weakest since May 2009
Greek June manufacturing PMI came in at 43.1 – new orders and output collapsed;

EZ May unemployment rose to 11.1% in May, up from 11.0% in April, but in line with forecasts. However, the unemployment rate is the highest on record, with under 25 unemployment in Spain and Greece above 50%;

Importantly Mrs Merkel did not achieve the 50% majority for the passage of the fiscal compact and the ESM legislation from her own coalition – she had to rely on getting the 2/3rds majority necessary, with support from the SPD and the Greens. This is important as she may feel more constrained in the future (see below);

The Germans want to link EZ aid to banks tied to the passage of a financial tax – oops, suggests that EZ countries will vote in favour, if the Germans maintain this position, which is very likely;

The French (independent) state auditor, the Cour des Comptes has admitted that 2012/13 will be difficult years for the country. They have downgraded GDP growth to just +0.4% in 2012 and (a still optimistic) +1.0% in 2013. They added that some E6bn to E10bn of savings will be necessary this year, with a whopping E33bn of cuts in 2013, to achieve the 4.5% and 3.0% budget deficit target in 2012 and 2013. A +1.0% 2013 GDP growth with a further E33bn in cuts !!!! – well good luck Mesdames and Monsieurs. Mr Hollande has promised to increase taxation on the rich. At present French government spending represents 56% of GDP, one of the highest in Europe – oohh la la;

The UK’s LIBOR scandal has claimed its 1st victim. The Chairman of Barclay’s resigned – how much longer before the CEO has to as well. The LIBOR rate setting scandal will ensure that further regulation will be imposed on European banks. The scandal includes most of the largest international, including US, banks;

UK manufacturing PMI came in 48.6 in June, as opposed to 45.9 in May and better than the 46.5 expected;

US ISM manufacturing in June came in at 49.7, much weaker than May’s 53.5 and below expectations of 52.0. Not good news.
However, US June construction spending came in at +0.9% MoM as opposed to +0.2% expected and the previous (upwardly revised) +0.6%


Rather disappointingly, Mrs Merkel did not get enough support from her coalition to cross the 50% threshold – she had to rely on the SPD and the Greens to achieve the 2/3rds majority to pass the legislation in respect of the fiscal compact and the establishment of the ESM. Reports that she had done “a 180 degree U turn” did not help and (misguided) euphoria in Rome, Paris and Madrid impacted as well. The reality is that Germany gave away little and has succeeded in pressed its demand for more fiscal disciple and for banking, fiscal and ultimately political union. In addition, a great deal needs to be negotiated by the year end, especially in the case of a single banking regulator – expect a significant degree of dissenting views. However, the perception that Germany lost out, rather than the reality, has won the day and has resulted in less than enthusiastic support from her colleagues, which suggests that Merkel will have to “go aggressive” again.

In addition, the Dutch and the Finns reaffirmed today, that bond buying by the ESM, would be on a case by case basis and with conditions – Mr Monti please note. Germany confirmed that view. I will remind you that the ESM requires unanimous approval if it is to buy peripheral debt. A number in Germany are unaware as to what exactly Germany has signed up to – no great surprise, as a number of key issues are to be negotiated. The German Constitutional Court is to opine shortly, which could throw a spanner in the works – Mrs Merkel is certainly nervous. The German Justice minister reports that the German Constitutional Court will validate the passage of the fiscal compact and the ESM – I certainly hope so as, if not ……..

The ECB should cut interest rates by at least 25 bps this Thursday and reduce the 25bps deposit rate to zero this week, which, assuming I’m right, will help markets. The weaker EZ manufacturing data should help. After that, we will have to suffer months of agony, as announcement after announcement hits the screens, which, together with various leaks result in (material?) market volatility. Its going to be tough, but for the moment, I remain a happy bunny.

I continue to believe that China will be forced to reflate its economy, as well.

I will remain long equities (particularly UK and European and less so/negative US) and short German and French 10 year bonds, especially ahead of the ECB and, for that matter, the BoE meetings – further QE (£50bn) expected. The Euro, well, its coming off (currently below US$1.26) and I continue to remain negative on the single currency.

Attended a charity (sports and music related) breakfast courtesy of Ms Carole Stone who, for your info, knows everyone whose important in the UK and me, for some reason. The London Mayor spoke – Mr Boris Johnson – he’s very amusing. However, the real point is that with the Olympics coming, London should see a surge of foreign investors, many of them will be buying property, as they exit numerous countries facing problems. In particular a number of French have decided to cross the channel recently.

Kiron Sarkar

2nd July 2012

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