US Q3 GDP better than expected

Japanese consumer prices fell for a 5th consecutive month in September – prices, ex fresh food, fell by -0.1% Y/Y, though by less than the estimate of -0.2%. The data will add pressure on the BoJ to expand its monetary easing policies next week. Reports suggest that the BoJ will downgrade the outlook of the Japanese economy at its meeting next week (30th October).

The Japanese government added a small stimulus programme today – some US$9.4bn. It cannot do any more,as the opposition is blocking its ability to raise funding;

The disgraced Mr Bo has been expelled from the Chinese National People’s Congress, removing his immunity from prosecution. The next step will be for the authorities to press charges – the FT reports that the government has a 98% conviction rate. Its only 2 weeks to the Congress, which may not be enough time to try Mr Bo ahead of it;

The New York Times reports that the extended family of Chinese Premier Mr Wen Jiabao has accumulated some US$2.7bn of assets. Chinese authorities blocked the New York Times Chinese-language web site in China and, intermittently, its English language version. Too late comrades – the news is out;

South Korea’s economy grew by +1.6% Y/Y (+0.2% M/M) in the 3rd Q, the slowest pace in 3 years and below the +1.7% expected. Exports slowed, capex declined and domestic consumption weakened.

Consumer confidence declined to a 9 month low. The South Korean economy is expected to grow by +2.4% this year and the government has forecast that GDP will rise by +3.0% next year – sounds optimistic;

South African finance minister Mr Pravin Gordhan promised to freeze spending, for the 1st time since 1998. However with unemployment rising to 25% and increased unrest amongst workers, combined with rising debt levels, yesterday’s budget failed to address the country’s problems. Both Moody’s and S&P have downgraded the country in the last month. The ANC promises radical reforms at its next meeting in December – Hmmmmm. The finance minister raised its budget deficit to 4.8% of GDP, from 4.6% for the year ending 31st March 2013 and forecast that the deficit would be 4.5% for the next fiscal year. Growth was cut to +2,.5% this fiscal year (+2.7% previously) and 3.0% (+3.7% previously). Further credit downgrades are likely – Fitch were negative on South Africa today. I remain short the Rand. (Source Bloomberg);

Germany is pushing its plan to offer Greece a 2 year extension to meet its target to bring down its budget deficit to 3.0%. Mr Assmussen of the ECB suggests that the EZ buys Greek bonds, which are trading at a discount, to reduce the overall level of debt, though such buy backs wont make enough of a difference. In addition, Greek politicians have yet to agree to implement the austerity measures, proposed by the Troika. The leader of the Democratic Left party, Mr Kouvelis wants changes to the labour measures proposed by the Troika. The Greek finance minister has publicly rejected any changes before the reforms are discussed in Parliament. The EZ are trying to finalise plans ahead of the EZ finance ministers meeting on the 13th November. The 2 year delay for Greece to meet the deficit targets will result in Greece requiring an addition E20bn through to 2016 – other estimates are higher, at E30bn. Finland and Holland will need to be persuaded to allow a 2 year extension, but will certainly not agree to providing more funding. All these grand plans will fail sooner rather than later. Greece will default and Mrs Merkel’s plan of trying to kick this particular can down the road (well at least until after her general election in September next year) will fail;

Italian business confidence unexpectedly declined in October to 87.6, from 88.3 in September and lower than the rise to 88.7 expected. Recent economic data has been positive and today’s data will be a disappointment. The economy is expected to decline by -2.4% this year. The IMF forecasts that Italian GDP will decline by -0.7% next year;

Spanish unemployment hit 25.02% in the 3rd Q, up from 24.6% in the 2nd Q and, unfortunately, with no signs of declining. Unemployment has tripled since 2007, according to Bloomberg. Cant see any upside and yet the Spanish PM, Mr Rajoy continues to dither – he will have to seek a bail out at some stage. Plans to set up a bad bank are in doubt – basically Spain remains a complete mess;

German consumer confidence rose to 6.3, from an (upwardly revised) 6.1, better than the forecast of 5.9;

Interesting developments in Finland. The FT reports that the Finns are thinking about exiting the Euro. I have to say that this sounds far fetched at the moment. However, they are considering setting up a parallel currency, something which has been considered by the Greeks;

S&P has downgraded BNP, citing increased economic risks in France. In addition, the ratings agency cut the outlook to negative of 10 other major French banks, including Soc Gen and Credit Agricole. How long before France is downgraded – a near certainty in 2013, in my view. S&P adds that though the French economy has been relatively stable, its resilience has been reduced as “the constraints of a relatively high public debt, reduced external competitiveness, and persistent high unemployment, are being aggravated in our view by the ongoing eurozone crisis, a more protracted recession across Europe and lower domestic growth prospects”. A definite whoops. (Source FT);

Intrade’s odds on President Obama remaining President has risen marginally to 61.5%;

9 more banks have been subpoenaed by the New York attorney-general in respect of the LIBOR scandal;

US 3rd Q GDP came in at +2.0% on an annual basis, higher than the +1.8% forecast and +1.3% in Q2. Better consumer spending, gains in residential construction and an increase in government spending helped, whilst declining exports and lower business investment were negatives. The rate of growth would have been better if were not for the drought in the Midwest.

Consumer spending rose by +2.0%, from +1.5% in Q2. Real disposable income came in at +0.8% Y/Y, the least since end 2011. The savings rate fell to 3.7%, from 4.0%.


Asian markets closed lower, with the Shanghai composite declining by the most in 5 weeks (-1.7% lower), due to earnings disappointments. European markets were mainly lower, but the better US GDP data resulted in a turnaround, with markets higher at present. US futures suggest a flat open. The Euro is flat, currently around US$1.2932 – improved following the release of the US GDP data – counter intuitive. Gold is trading at US$1715, with oil at US$108.72.

The IMF is questioning whether it is sensible for Portugal (lead by a Conservative government) to continue to impose additional austerity measures. They argue that the further spending cuts, combined with higher taxation are making the situation worse. Social unrest is increasing as is opposition to the measures. Expect this argument to spread across a number of countries in the EZ. It is clear that austerity by itself, without some kind of growth measures, is not going to survive as an economic policy for the EZ much longer (3 to 6 months, I would guess) which, when changed, will be positive for markets.

OK, better US GDP data, but its not enough in my view. Far too much uncertainty out there. I remain cautious in respect of the equity markets.

Have a great weekend.

Kiron Sarkar

26th October 2012

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