Chinese exports growth slumps

RBA raises Australian 2012 GDP forecast to +3.5%, from +3.0% in May. In addition, the Central Bank reduced its CPI forecast to +2.25%, lower than the +2.5% in May. However, they added that the strong A$ was a risk to growth, putting pressure on the currency;

Japanese Diet approves sales tax, which is set to double to 10% by 2015, though initially to 8% in 2014. The passage of the sales tax was supposed to lead to the PM setting a date for a general election, but Mr Noda appears to be resisting;

Chinese export growth slumped to +1.0% in July, a 6 month low and down from the +11.3% rise in June. Exports to the EZ were down a massive -16.2% Y/Y. Imports rose by +4.7%, lower than June’s rise of +6.3%. The trade surplus declined to US$25.1bn, from US$31.7bn in June. Analysts have reduced 2012 growth targets to close to the Chinese forecasts of +7.5%. The PBoC is likely to depreciate Yuan, given the weaker outlook for exports – it is around -1.0% lower against the US$ YTD – going to be politically difficult given the impending US Presidential elections.

Total loans in July amounted to Yuan 540.1bn, much lower than the estimate of Yuan 700bn and the slowest since September 2011. Further monetary easing, combined with fiscal stimulus is inevitable;

56% of German’s want government to “do everything” to save Euro, with 76% saying a Euro break up bad for Germany. In addition, 64% of German’s believe that the Euro will survive, though 84% of them suggested that the crisis would worsen and 56% worry that the economy would deteriorate next year. 70% believed that Merkel was doing a good job. (Source Bloomberg, reporting on an ARD TV poll);

German economy minister expects weaker H2. He added that “the further outlook for the German economy remains subdued and subject to significant risks”. The domestic economy, which has held up to date is likely to weaken ie Germany is not immune. Counter intuitively, the weakening German economy is likely to spur German politicians to try and deal with the crisis in the EZ. However, the impact will weigh on the Euro. In addition, EZ GDP forecasts will need to be lowered – BoA has reduced 2013 EZ GDP to -0.7%, from flat previously;

France’s constitutional Council rules that no change in constitution required to sign fiscal compact. The ruling should enable France to implement the pact in September. It’s now over to the German Constitutional Court;

French June manufacturing and industrial production weak
Manufacturing production -2.6% Y/Y, vs exp -2.1% (prev rev -4.6%)
Industrial production -2.3% Y/Y vs exp -1.8% (prev rev -3.7%);

Less weak UK construction data points to better 2nd Q GDP. Construction output declined by -3.9% in Q2, as opposed to the -5.2% initially reported. The data should result in UK Q2 GDP to be revised to a decline of -0.5% or indeed better, rather than the initial estimate of -0.7%. In addition, construction activity has been on hold in London due to the Olympics, which suggests that activity will rise in Q4 and, as a result, a material rebound in UK GDP towards the end of the year. Sterling should benefit.
July PPI rose by +1.3% M/M, or -2.4% Y/Y, well below forecasts of -1.5% Y/Y;

NAR reports US home prices rose +7.3% in Q2 and in 110 out of 147 markets in the US, which was the strongest annual increase since 2006. Corelogic report that prices nationwide rose by +2.5% in June Y/Y, the 4th consecutive increase. Freddie Mac reported gains of +4.8% from March to June, the largest increase in 8 years. (Source Bloomberg). However, some analysts suggest that prices will flat line/decline marginally this Q. In addition, the Chief economist at the Mortgage Bankers Association expressed some concern that the delinquency rate had risen in the 2nd Q – albeit marginally, but against the trend;

US import prices unexpectedly declined by -0.6% in July, for the 4th straight month and below forecasts for a rise of +0.2% and a decline of -2.4% in June. Ex oil, prices declined by -0.4%. Prices of imports from China, Mexico and the EU declined, with import prices from Japan flat. The data helps to support the idea of another bout of QE by the FED, given declining inflation. Export prices rose by +0.5%, mainly due to a +6.4% rise in farm prices;

IEA marginally reduces 2013 oil consumption forecast to 90.5 mb/d. Consumption in 2012 is expected to average 89.6bn;


Asian markets reacted negatively to the Chinese export data and European markets are also lower. The Euro continues to weaken, currently US$1.2273, as does Brent (US$111.90), with Gold at US$1610. Bond yields of the “stronger” countries decline, though rise for the peripheral EZ countries, in particular

The market remains negative on China and deeply suspicious of Europe – both mistakes in my view. More on that over the weekend.

Personally, I believe that both China and Europe will outperform in coming months – Europe on the basis that the German Constitutional Court does not throw a spanner in the works, though I’m watching the impending general elections in Holland.

I remain bullish.

Kiron Sarkar

10th August 2012

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