Weaker Chinese, Japanese and EZ economic data

The IMF suggests that Australia cut interest rates and delay a return to a budget surplus. In addition, they report that inflation is within target and forecast GDP growth of +3.25% this year, similar to last year. They add that the A$ is “stronger than would be consistent” with just the structural shift that is re-orientating the economy toward mining. I remain bearish on the A$. (Source Bloomberg);

Japanese exports declined by -5.8% in August Y/Y, better than forecasts for a -7.5% decline, a 3rd consecutive monthly decline. Weakness in demand from China, together with the EZ was the main reason. Imports declined by -5.4% (lower oil prices), resulting in a trade deficit of US$9.6bn, slightly better than forecasts, though the worst since March 2011. Seasonally adjusted, Japan has recorded trade deficits for the past 18 months, since the Tsunami stuck the country. Exports to the US rose by 10.3%, though down 9.9% to China, the 3rd consecutive monthly decline. Shipments to Western Europe declined by -28% Y/Y, due to a large decline in exports to Germany (-18%) and the UK (-42%). The sharp decline to the UK looks like a one off;

Taiwan’s export orders fell for the 6th consecutive month in August. Exports orders to even the US declined by -4.2%, worse than the -2.7% fall expected. Taiwan’s export data is a leading indicator of the state of the global economy, by the way. CPI rose to +3.4% last month, a 4 year high and is likely to rise further, which is bad news as the Central Bank will, as a result, be restrained from cutting interest rates, which it kept on hold today;

Chinese September flash manufacturing PMI came in at 47.8, slightly higher than 47.6 in August and the 11th monthly contraction and near a 9 month low, reports HSBC. The “official” data is to released on 1st October and is normally better than the HSBC data. The continued decline will impact employment, which will be a major concern for the Chinese authorities. The weakness in the economic data suggests that Premier Wen’s target of GDP growth of +7.5% this year is, shall I say, “optimistic” – I would not be surprised if it came in below 7.0%. The Shanghai Composite index slumped by over 2.0% today, to the lowest since February 2009. Cant see much respite in coming days either. Interestingly, the Yuan rose to just below 6.30 against the US$ today and is up +1.4% since its July low – possibly US QE3, US Presidential election campaign and/or ECB proposed bond buying programme related. However, the forward market (1 year ahead) has not moved, suggesting that the current “strength” is temporary;

Mexico is challenging China as a manufacturing base, reports the FT. I had reported that businesses are relocating manufacturing operations from China to other parts of the world. The FT reports that Mexico is benefiting. Makes sense given the neighbouring US market. During the 1st half of the year, Mexico accounted for 14.2% of manufactured imports into the US, as opposed to 11.0% in 2005. Chinese imports, on the other hand, declined from 29.3% at the end of 2009, to just 26.4% at present. Worryingly for China, the rate of decline is increasing recently. (Source FT);

Indian markets declined today following the announcement by the Trinamool party that they would withdraw from the coalition, the United Progressive Alliance (“UPA”). However, amateur theatrics is a staple ploy utilised by Indian politicians, so don’t believe everything you read. In addition, the Indian Parliament does not reconvene till December. The real issue is that the lunatic Ms Banerjee, head of the Trinamool Party, wants to extricate large sums of money from Delhi, as her State, West Bengal, where she is Chief Minister, is bust. Ms Banerjee opposed the recent appointment of the Indian President, though fell in line at the last moment. A strike in India was called for today, in protest at the reform package which is to, inter alia, increase diesel prices (actually through reducing subsidies) and allowing foreign multi brand retailers;

Russia is kicking out USAID, alleging that the agency is trying to influence domestic elections. Russia states that civic groups do not need funding. The Russian Foreign Ministry stated that they were expelling USAID because the agency was “not promoting bilateral humanitarian cooperation”, though rather were trying to “influence the political process through the distribution of grants” to selective groups. The Agency’s funding in Russia was a mere US$50mn. The move continues the tougher line that Russia/Mr Putin is taking on political opponents and those who are highlighting the increasing corruption in the country;

The EU has wimped out of a trade dispute with China. Premier Wen of China is visiting. Mr Karel De Gucht, the EU Trade Commissioner, has told his officials that he needs stronger evidence to proceed against China, having previously stated that he had “very solid evidence” !!!!. During a recent trip to China, Mrs Merkel suggested that the EU should back off on trade issues in respect of China. All pure coincidence, of course !!!!!!!;

Spain sold E4.8bn of bonds today, above the E3.5bn to E4.bn targeted. The 10 year yield declined from 6.47% last month to 5.666%, with a bid to cover ratio of 2.8 times, higher than the 2.4 in August. The yield was well below the record of 7.62% just before Mr Draghi’s “do whatever it takes” to preserve the Euro speech in July. The better auction results is due to expectations that Spain will request aid shortly. In addition, S&P has stated that they would not remove Spain’s investment grade rating, which has given the Spanish PM more time. Mr Rajoy is facing regional elections in about 1 months time and, ideally, does not want to seek aid ahead of that. Reports that Spain will use the balance of E40bn (from the E100bn allocated to Spanish banks) not used to recap its banks, reported by Spanish newspapers, is absurd however – the EZ will never go for it. Interestingly, the head of BBVA suggests that the stress tests will reveal that Spanish banks need E70bn to E80bn – still far too low in my opinion. Finally, Mr Rajoy had a tough meeting with the head of the Catalonia region today. Mr Rajoy stated that Mr Mas, the head of the Catalonia region, has proposed a number of unconstitutional statements – well I suppose threatening to break away from Spain can be deemed to be unconstitutional;

EZ September flash PMI’s confirms the increasing weakness of the EZ economy and suggests that 3rd Q GDP will contract more so than the 2nd Q.

EZ September composite PMI came in at 45.9, lower than 46.3 in August and 46.6 forecast.

EZ September services PMI came in at 46.0, lower than the 47.5 expected and 47.2 in August.

EZ September manufacturing PMI came in at 46.0, better than the 45.5 forecast and 45.1 in August.

Overall, French manufacturing PMI slumped to 42.2, well below 46.4 forecast and 46.0 in August and the 7th consecutive monthly decline. French services PMI came in at 46.1, lower than 49.4 forecast and 49.2 in August, a 4 month low. German manufacturing PMI however, rose to 47.3, better than 45.3 forecast and 44.7 in August, the highest rating since March this year. German services PMI came in at 50.6, better than 48.5 expected and 48.3 in August.

The biggest concern in the above data is France. The French composite index slumped to 44.1 in September, its lowest for nearly 3 1/2 years, from 48.0 in August. The data suggests that French 3d Q GDP could decline by -0.5% in the current Q – a definite whoops. French business orders collapsed to a 3 1/2 year low, as well, with layoffs rising to a 34 month high. Services sector expectations slumped into negative territory in September for the 1st time since February 2009. As you know, I believe that France will prove to be the major problem country in the EZ, even more so than Spain and Italy;

UK August retail sales declined by -0.2% M/M, though better than the -0.3% forecast and lower than the rise of +0.3% in July. The numbers were negatively affected by the Olympics, which should result in a rebound in September.

The UK September CBI trends reports that total (manufacturing) orders came in at -8, though up from the -21 in August and better than the -15 forecast. September output expectations rose to +7, from flat in August.

Recent UK data has generally been better than forecasts;

Irish 2nd Q GDP (seasonally adjusted) came in lower than expected at flat, as opposed to +0.7% expected and -0.7% in the 1st Q. Y/Y GDP was down -1.1%. However, the 2nd Q current account Q/Q came in at +E3.235bn, much better than the -E1.045bn in the 1st Q. The EU forecast that Irish debt to GDP will peak at 119% in 2013. The Irish benchmark 2020 bond yielded just below 5.0% this morning, the 1st time since Ireland’s bail out in November 2010;
Sales of US existing homes rose to a 2 year high in August and above forecasts. Sales increased by +7.8% to an annual rate of 4.82mn homes (as compared with 3.39 mn rate at the low in July 2010), the highest since May 2010 and above forecasts of an annual rate of 4.56mn homes. Realtors suggest that a 5.0mn to 5.5mn annual rate of existing home sales is deemed normal. Prices have increased by +11.0% Y/Y. Distressed sales accounted for 22% of total sales, the lowest since October 2008. Corelogic report that 22.3% of homeowners were still underwater, though that’s down from 23.7%, 3 months earlier. However, 1.3 mn homeowners moved out of negative equity in the 6 months to June 2012. With the FED buying MBS, mortgage rates should decline even further, improving disposable income, once refinanced and in addition, home affordability. Tighter lending standards are a major constraint, but the better sales data is yet another piece of evidence that the US housing market has not only stabilised but is improving. A better housing market is critical for an improvement in the US economy;

US initial jobless claims came in at 382k, higher than the 375k expected and the upwardly revised 385k the previous week. Continuing claims came in at 3.272mn, from 3.30mn previously;

US September manufacturing PMI came in at 51.5, as opposed to 51.5 expected and 51.5 in August. The output component came in at 51.2 versus 51.9 in August. New orders were higher at 52.5, versus 51.9 in August, with employment better at 52.7 as opposed to 52.4 in August. (Source Markit);

The September Philly FED came in at -1.9, much better than the -4.5 expected and the -7.1 in August. However, it was the 5th consecutive monthly decline. The reading was better than the recent Empire State data;


Asian markets closed sharply lower, following the Chinese PMI data and weaker Japanese exports. European markets are also weaker. US markets, not surprisingly, have opened lower, but no major sell off – the S&P is down around -0.7%, as is the NASDAQ. . The Euro continues to weaken – currently US$1.2946, as does the A$, currently US$1.0377. November Brent is trading at US$108.94, with gold at US$1757. Yields of US, German and UK bonds are declining (ex the 2 year German Schatz), given weaker markets.

The Shanghai Composite index is down 40% since August 2009, whereas the US S&P is up 45%. I thought I’d mention that for the Chinese bulls – still many out there.

I keep getting brokers reports urging investment in the miners. I must say, that seems to be the craziest suggestion I have received recently, given the negative impact of China on the sector due to its continued slowdown, oversupply, reducing capex programme and lower prices, especially for Iron ore and coking coal. Sure the miners are cheap, but for good reason. I remain bearish on the sector and certain commodity currencies, such as the A$ and the Rand, in particular.

I must say that markets have been disappointing this week, though I will remain net long. The FED/ECB announcements remain, in my humble view, positive.

I leave you with this. Greece has closed down tax offices to reduce tax administration spending !!!!!. Well, I suppose if no one pays taxes…….

Kiron Sarkar

20th September 2012

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