No change at the FED

The Australian trimmed mean gauge of core prices rose by +0.7%, in Q3, Q/Q, slightly higher than the +0.6% expected, or 2.6% Y/Y, higher than the +2.2% expected. Analysts expect the RBA to cut rates in November, though the slightly higher inflation data has reduced expectations somewhat. There will, however, be a rate cut this year. The A$ improved on the news, but I continue to believe that it will decline in coming months and I remain short;

The HSBC Chinese flash PMI index came in at 49.1 in October, better than the 47.9 in September. New orders, export orders and the output components improved. Better demand from the US and Christmas orders were the reasons attributed for the rise. Prices seem to have bottomed and, indeed, are rising, suggesting that PPI and CPI will rise;

Reuters report that 1/4 of Japanese companies are rethinking their investment plans in China and may well shift future production elsewhere. Japanese and Chinese officials met secretly to discuss the spat over the South Chinese Islands, the ownership of which is contested by both countries.

Reports circulate that the EZ will give Greece a further 2 years (until 2016) to meet their budget deficit targets – to reduce the deficit to 3.0% of GDP. The privatisation schedule has been delayed, with the government intending to raise E8.8bn by the end of 2015. In addition, it looks as if the Troika and Greece have reached agreement on labour reforms. Greek debt to GDP rose to 150.5% at the end of Q2, up from 136.9% at the end of Q1. Its going to be interesting to see the reaction of MP’s in the Bundestag to the proposed 2 year extension. The official German position is that they are waiting for the Troika’s report, but it looks as if a deal has been done;

The Italian Consumer Confidence Index came in at 86.4 in October, in line with expectations, and marginally higher than the 86.2 in September;

The Spanish PM, Mr Rajoy is taking about easing the country’s budget deficit targets. Well, they are not going to make them anyway. However, he did not discuss whether Spain would request aid from the EFSF/ESM.

It looks as if Andalusia is going to request more aid from central authorities;

The important German IFO confidence index fell to 100.0 in October (101.6 expected), from 101.4 in September and the lowest for 2 1/2 years. The decline was the 6th consecutive drop and the lowest reading since February 2010. The current conditions component declined to 107.3, from 110.3 in September, whilst expectations component was unchanged at 93.2. The Bundesbank reported that 3rd Q German GDP would surprise to the upside, though the 4th Q would be weak. The IFO institute suggested that domestic consumption was still holding up and that the crisis had not hurt consumers. They added that the German economy will stagnate in Q4. Finally, the IFO institute stated that there was no reason for the ECB to cut interest rates – well a number would disagree with that view.

The German finance ministry expects a balanced budget in 2013;

Mr Draghi defended his proposals to buy short term debt of countries that request aid to a number of German politicians. He argued that the reason was to fix a broken transmission mechanism. He also warned that deflationary forces were a greater concern than inflation in certain countries in the EZ- interesting. By all accounts, Mr Draghi made a persuasive case, though the normal opponents will not change their mind;

The French PM has warned that unemployment rose in France in September – no great surprise and unfortunately is expected to increase further;

EZ composite (manufacturing and services) PMI declined by more than expected in October. The composite index came in at 45.8, the lowest for 3 years, from 46.1 in September and below the forecast of 46.5. The EZ services PMI rose marginally to 46.2, from 46.1, though the manufacturing PMI declined to 45.3, from 46.1 and lower than expectations of 46.5.

German services PMI declined to 49.3, from 49.7;

German manufacturing PMI declined to 45.7 from 47.4 and well below expectations of 48.0;

German composite PMI came in at 49.2, lower than the 48.1 reported in September;

French services PMI came in at 46.2, from 45.0 previously and expectations of 45.0;

French manufacturing PMI came in at 43.5, as opposed to 42.7 previously and 44.0 expected;

French composite PMI rose to 44.8 in October, from 43.2 in September;

The Governor of the BoE has warned that its policy actions (QE) was reaching its limits in terms of effectiveness and that the UK economy was performing somewhat worse than expected. However, analysts expect the BoE to increase its QE programme, from the current level of £375bn;

President Obama’s chances of winning the US Presidential election have declined materially to just over 56%, according to Intrade.This looks as if it is going to be a really tight race;

US new home sales for September rose by 5.7% to 389k on an annual basis, slightly better than the forecast of 385k and 368k previously and the highest rate for 2 years. Y/Y, new home sales have risen by +27.1% and the median price of a new home is up by +11.7%, with the average price up +14.5%. Apart from sales in the mid west (which were down -37.3% – looks like an anomaly), purchases of new homes rose by double digit percentages. New home supply declined to just 4.5 months, from 4.7 months in August, the lowest since October 2005. The US residential property market continues to improve, fuelled by low mortgage rates;

US manufacturing PMI came in at 51.3, slightly lower than the 51.5 expected and 51.1 previously;

The FED reports that economic activity has continued to expand at a moderate pace in recent months. It will continue with operation twist until the year end and reiterated that rates will be kept on hold until mid 2015. No other changes and the announcement contained no real surprises;


Asian markets closed mainly lower, though European markets closed mainly higher. US markets are flat. December Brent is down to US$107.89 and gold at US$1704, with copper also lower – bearish. The Euro is weaker against the US$ at US$1.2963, though the A$ stronger given the higher inflation data, with the Yen flat.

If, as looks to be the case, Greece is given a further 2 years to meet its budget targets, why not Spain and Portugal and…. The targets will have to be revised as they will, in any event, be missed. The market is awaiting Spain to request a bail out, though Rajoy continues to dither – will he wait for the Catalonian elections – based on his inaction, he may well try, unless markets dictate otherwise – not positive for markets.

US markets will await the outcome of the Presidential elections. Earnings, especially revenues are weaker and forward looking statements are cautious, so no real help from there.

I continue to believe that events in China and Europe will drive markets.

I remain cautious.

Kiron Sarkar

24th October 2012

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