Germany’s IFO confidence index declines yet again

Japan to downgrade economic growth. Mr Furukawa, the Japanese economic and fiscal policy minister, is likely to downgrade Japanese growth when he submits his report to the cabinet tomorrow, the 1st time in 10 months, mainly due to lower production and exports, particularly to China, other emerging countries in S E Asia and Europe;

Samsung shares plunged by -7.5%, following the US$1bn fine imposed by US courts for infringing Apple patents. Samsung may have to change the design of their products and, indeed, withdraw some devices from the market. The ruling will impact Android products;

Korea’s credit rating has been raised to Aa3 by Moody’s, from A1 and in line with China and Japan;

Yet more downgrades for Chinese GDP growth. Deutsche has cut its estimate for 2012 GDP growth to just 7.7%, while HSBC has cut its forecast to 8.0%. A report, written by 2 economists at the Dallas FED and published in Barry Riholtz’s Big Picture, question’s whether reported Chinese GDP growth is accurate. We all know that it is not. Indeed, a future leader Mr Li stated that the GDP numbers were “man made”. Chinese policy, at present, is bizarre to say the least and markets are at 3 year lows.

Whilst I continue to believe that the Chinese authorities will be forced to ramp up stimulus and ease monetarily, particularly if unemployment rises, which it will, its getting late in the day. The UK’s Telegraph newspaper reports that China has announced some US$800bn of stimulus projects so far, though there are question marks as to how these projects are to be funded. Premier Wen (vocally active these days, but with very little result) reports that China will take measures to stabilise exports (how?) and to “proactively” increase imports. Other reports suggest that inventory level are rising rapidly in China, as factories continue to churn out product to maintain employment, even though there are fewer buyers. Censors have, apparently, stopped publishing details of inventory levels and, in some cases, sales;

The Shanghai Composite index declined by -1.75% today and is at the lows of February 2009. Profits of the major Chinese industrial companies fell by -5.4% Y/Y in July, as compared with a decline of -1.7% in June;

FDI into India almost doubled in the fiscal year to 31st March 2012, reaching over US$36bn. The majority of the funds went to the South and the West, as has been the case for over a decade. Indeed, over 75% went to Maharashtra and its capital Mumbai, Delhi and Bangalore (Karnataka). (Source FT);

Spanish mortgage capital loaned declined by -20.4% in June Y/Y, though less than the -32.4% in May. Spain’s 2011 GDP was revised down to +0.4%, from +0.7%;

Unnamed officials state that the ECB will not unveil details of their, inter alia, bond buying programme etc, until after the decision by the German Constitutional Court is known. Well, sensible, though the delay just adds to concerns that the Court may issue a conditional approval (or worse), which could impact the ESM (the EZ’s permanent bail out fund), for example by limiting the ESM to leverage itself over and above the current size of E500bn. As a result, the next ECB meeting on the 6th September will be a non event, though it will be interesting to watch how Draghi answers questions at the press conference (Source Bloomberg);

Mr Schaeuble repeated last Friday that Germany would need a referendum, ahead of any further transfer of sovereignty.  With the delay by the ECB, as set out above, these type of comments will raise uncertainty, though clearly are a responsible course of action;

Germany generated a 1st half budget surplus – will it last. German generated a budget surplus of E8.3bn in the 1st half of the year (-0.5% deficit for 2011), with revenues from income tax rising by +6.3% – in spite of GDP growth of just +0.5% and +0.3% in the 1st and 2nd Q’s of the year respectively. However, GDP is expected to contract in the current Q, reflecting a sharp decline in exports. The important IFO index has declined for 4 months in a row. Whilst domestic consumption has proved resilient to date, there are some signs (which I expect to worsen) that consumer spending will stall/decline in the 2nd half of the year. Unemployment should also rise, though the government has measures in place to curb a sharp increase. Furthermore, the Bundesbank has warned that state and municipal budget deficits remain high;

Germany’s August IFO business climate index declined for the 4th consecutive month and came in at 102.3 M/M, the lowest reading since March 2010 and lower than the 102.7 expected and 103.3 in July. The current conditions component was 111.2, as opposed to 111.5 in July, though better than the 110.8 expected, though the more important expectations component fell to 94.2, the lowest since June 2009, from 95.5 in July and lower than the 95 expected;

The French government has reduced 2013 growth targets to between +0.5% to +1.2%, from +1.2% previously – personally reaching 0.5% is going to be challenging, if  current policies are maintained. France’s 2013 budget (which requires a reduction in spending and/or revenue increases of, in aggregate, around E35bn), was based on a growth target of +1.2%;

US durable goods orders, ex defence and aircraft, were -3.4% lower in July, the sharpest drop in 8 months. However total orders were up +4.2%, mainly due to an increase of civilian aircraft by +54%, as opposed to a revised -1.6% in June and higher than the +2.5% forecast;

US July existing home sales rose by +2.3% from an 8 month low, to an annual rate of 4.47mn homes, though marginally lower than the rise to 4.51mn forecast. The number of homes on the market rose by +1.3% to 24mn homes, a 6.4 month inventory. The NAR reports that it consider a 6 month supply normal. Sales to first time buyers accounted for 34% of all sales (32% in July 2011, and compared with 40% in normal conditions), while all cash sales were 27% (29% in June 2012). Distressed sales accounted for 24% of the total, less than the 29% in July 2011. (Source Bloomberg);


The MSCI Asia Pacific index closed – 0.35% and Europe (ex the UK, which has a public holiday today) is drifting lower. Early days, but US futures suggest a marginally higher open. The Euro is trading at US$1.2525, with Brent (October) higher at US$114.70.

Still believe that being cautious/cashed up and waiting (in particular for the ruling by the German Constitutional Court, though also for comments by Bernanke/Draghi at Jackson Hole) remains the right policy.

Kiron Sarkar

27th August 2012

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