Japanese politicians urging the BoJ to act

Australian retail sales rose by just +0.2% in August M/M, lower than +0.4% expected, but better than the decline of -0.8% in July. Traders are pricing in an over 70% probability for a further rate cut by the RBA next month – seems optimistic to me;

Japanese politicians are pressing the BoJ far, far more recently. A new Governor of the BoJ will be appointed in coming months, as the current incumbent, Mr Shirakawa retires. The measures proposed by politicians (buying foreign bonds), if enacted, will weaken the Yen. Whilst its still a bit early, I do believe its worth watching to see whether, finally, the graveyard trade, ie shorting the Yen, makes sense. The newly appointed Japanese Economy Minister, Mr Maehara, is to attend tomorrow’s BoJ meeting, the 1st time a politician has attended a BoJ meeting for nearly a decade – confirms the increasing concern and strong desire for action by the ruling Japanese party, who will be facing an election shortly and are well behind in the polls;

The Indian government is to consider proposals to lift caps on foreign investment in the insurance and pensions industry. The Government is considering raising the maximum foreign equity holding in an insurance company to 49%, from 26% currently. In addition, they may allow foreigners to acquire a 26% holding in pension funds management. After a long period of policy gridlock, the PM seems to have taken his pep pills and is moving on. The proof, as usual, is in the eating – ie delivery is the important issue. However, this time around, I believe its worth giving the Indian government the benefit of doubt – policy paralysis will not get them reelected. Indian markets rose to a 1 year high today and the Rupee strengthened.

Indian services PMI rose to 55.8 in September, from 55.0 in August. The Indian Rupee has risen by over 6.0%, since the government announced reform measures in mid September;

The Russian Central Bank forecasts that Russia will face a current account deficit in 2015 – most likely earlier if the oil prices declines further. They have assumed that the oil price will be around US$104 in 2015. Russia’s state spending is rising fast and needs a higher than US$110 oil price shortly. (source FT);

Oil prices declined materially (over US$3) yesterday following a report that US production has risen (OK, just 11k bpd) to 6.52mn last week, though the most since 1996. Total demand fell -0.3% to 18.3mn bpd in the 4 weeks to 28th September, the lowest level since April. The US met 83% of its energy needs in the 1st 6 months of 2012, the highest since 1991. Is this the start of the much talked about US energy self sufficiency?. If it is, and there a strong argument in favour, it will be a game changer, not just in the US, but globally (Source CNBC);

The European Banking Authority (“EBA”) has stated that European banks will need to keep core Tier 1 capital at 9.0% of their risk weighted assets for an indefinite period of time. Banks will have to prove to the EBA that they will have to comply with the Basel 111 rules. Its going to be interesting to see what responsibilities the EBA retains, once the ECB takes over supervision of EZ banks, possibly just the systemically important, as the Germans wish;

Further disagreements between the Troika and the Greeks. The Greeks have forecast that the economy will decline by -4.0%, rather than the decline of -5.0% forecast by the Troika. Its the old game of countries fiddling forecasts ie forecasting more optimistic scenarios to reduce austerity measures. The same game is being played out in Spain (see below) and France. Interestingly, Draghi stated today that extending the maturity of Greek bonds held by the ECB would be the monetary financing of an EZ country and therefore illegal. The Greeks have been trying to get the ECB to do exactly that – nice try, but no cigar;

Portugal announced a series of tax hikes to try and stick to its bail out targets. The measures, which include spending cuts, amount to 3.0% of next years forecast GDP. Recently, there has been significant public opposition to further austerity measures (and the government had to back track on some measures), a major change from the past, when the Portuguese seemed to “accept” the austerity measures imposed upon them. A general strike has been called for 14th November. Portugal has managed to exchange E3.75bn of debt due next year for longer term debt. However, Portugal will need a further bail out;

France, Italy and Spain are to meet on the sidelines of the Mediterranean Summit in Malta this Friday. France is looking more like a Mediterranean country day by day, rather than a Northern European nation;

The Governor of the Bank of Spain states that the government must introduce additional measures to achieve its budget targets next year. To date, Spain has played the game of announcing optimistic forecasts to reduce austerity measures/increase taxes. He believed that the contraction in Spain could amount to -1.5%, much higher than the government forecasts. The Governor added that the 2012 budget deficit target was also at risk – at risk !!!, it certainly wont be met. The head of Catalonia voiced similar concerns and, in addition, stated that regional deficits should be increased to 1.5%, from 0.7% at present. Mr Schaeuble, the German finance minister, reported that Spain could ask for a bail out, though only when the forecasts were verified ie stop trying to fiddle the books;

The ECB has kept its interest rates on hold at 0.75%, as expected. At the press conference today, Mr Draghi stated that the ECB is ready to buy short term debt, once countries requested assistance from the ESM/EFSF. He added that conditions for countries to benefit from ECB bond purchases need not “be harsh” and urged governments to act. Inflation is expected to be above 2.0% this year, though decline below in 2013 – however, there were no 2nd round effects ie inflation is not a problem;

As expected, the Bank of England has kept rates on hold and the size of the Sterling 375bn asset purchase programme (QE) unchanged.

US ISM non manufacturing composite index for September came in at 55.1, as opposed to expectations of 53.4 and 53.7 previously, the fastest rate of growth since March. The index covers some 90% of the US economy. The employment component declined, though was still above 50 at 51.1, down from 53.8 in August. However, the business activity index rose by 4.3 points to 59.9. The new orders component came in at 57.7, from 53.7. Exports were weaker at 50.5, as compared with 52.0 previously;

Listened to the 1st of the US Presidential debates last night. It was clear that Governor Romney won the debate. A CNN poll reported that 67% of respondents believed that Governor Romney won the debate, as opposed to just 25% who favoured President Obama. President Obama, surprisingly, seemed hesitant and on the defensive. Should boost Governor Romney’s campaign, but he needs to do a lot more for him to have a chance;

US initial jobless claims increased by 4k to 367k in the week ended 29th September, lower than the 370k forecast. The 4 week average was unchanged at 375k.


Asian markets closed higher following better US data. European markets are modestly higher. US markets have opened modestly higher – some +0.3% higher.The Euro rose on Draghi’s comments – currently US$1.2990. Gold is trading at US$1786, with oil (November Brent) at US$109.55, higher than yesterdays close.

US NFP data tomorrow will be important.

Kiron Sarkar

4th October 2012

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