Weidmann Calls on Troika to Produce an “Unblemished & Honest” Assessment on Greece! (Good Luck with that)

An interest rate cut by the Australian Central Bank, the RBA, is unlikely in December. The RBA has a annual inflation target of between 2.0% to 3.0%. However, the RBA revised its inflation forecasts higher for next year, up to +2.75%. In addition, the incoming Chinese leadership will, most likely in the New Year, introduce measures to support their economy – positive for Australia. I remain short the A$ (small position) against the US$, and will not increase it, as yet. The RBA is cautious, but at some stage, I believe that their economy will face a downturn – investment forecasts for the mining sector have been reduced to 8.0% of GDP from 9.0% previously. I will wait before increasing my A$ short though. In addition, the governments plans to balance the budget seems optimistic and, indeed, ill considered, given the global economic uncertainties. Australian press reports that the Russian Central Bank has been buying the A$ for the last 6 months, which would also explain its surprising resilience – likely;

Japanese 3rd Q GDP declined by -3.5% on an annualised basis (-0.9% Q/Q), slightly worse than the -3.4% expected and as compared with the +0.3% Y/Y rise in the 2nd Q. Consumer spending (down -0.6%) declined as did capex (-3.2% down) and exports (down -5.0%). It was the worst decline since the earthquake hit Japan in Q1 2011. Analysts expect that the Japanese economy will decline by -0.4% Q/Q, in the 4th Q, which would mean that Japan will have suffered the 3rd recession since 2008. The news will increase the pressure for the BoJ, in particular, to increase its monetary stimulus. The BoJ next meets on 19/20th December. The Japanese Parliament is to debate the budget financing bill next week, passage of which is necessary as it is to cover some 40% of spending for the fiscal year ending March next year;

The Chinese trade surplus widened to US$31.99bn, up from US$27.67bn in September and above forecasts of US$27.0bn. It was the largest trade surplus in almost 4 years. Exports rose by +11.6% Y/Y, higher than the +9.9% rise in September and the +10.0% expected. Imports however rose by just +2.4% Y/Y, unchanged from September and lower than the +4.0% expected – quite probably due to lower imports of base metals, due to the longer than usual holiday in October. Whilst exports to Japan rose by +1.0% Y/Y, imports from Japan slumped by -10.1% Y/Y, reflecting the dispute over the islands in the South China seas. Exports to Europe declined by -8.0% Y/Y, unsurprisingly, though were up +9.1% to the US. What would China do without the US?. Having said that, Chinese PPI declined by -2.8%. Whilst slightly less than the decline in September, the data confirms that profit margins are being squeezed – not a good sign, but no surprise given the huge over capacity in the system. Whilst the change of leadership will ensure some kind of stability next year, I continue to expect that the Chinese economy will face significant headwinds in the medium to longer term. Analysts expectations of 7.0%+ GDP growth rates for the remainder of this decade are way, way to optimistic – I will be staggered if they hit 5.0%, on average.

October new loans came in at Yuan 505.2bn, much lower than the expected Yuan 590bn and Yuan 623.2bn in September. The data seems to contradict the recent positive numbers from China.

Chinese October M2 money supply rose by +14.1% Y/Y, lower than the +14.5% expected and +14.8% in September.

The market continues to view Chinese data with a great deal of scepticism, especially given the current Congress. Increasingly, analysts will trawl through data from Chinese impacted countries/regions such as Australia, and Taiwan, though also Hong Kong, in assessing the Chinese economy. Its the same old issue – when in trouble, EM’s relax investment rules – the problem is at these times, investors are reluctant to invest and these kind of measures are largely ignored;

Chinese authorities will increase access by foreigners to its stock and bond markets. The government is to nearly quadruple the amount of Yuan held offshore that it allows to re-enter the country’s markets to Yuan 200bn (currently Yuan 70bn). The cap on individual institutions is proposed to be raised to US$5bn, from US$1bn previously.

PM Mr Singh is proposing to attract further FDI to invest in much needed infrastructure projects in India. Quite clearly necessary. However, will be be able to get the necessary legislative changes through Parliament – the jury is still out. He then has to deal with bureaucratic delays and, as ever, corruption.

The PM reduced India’s GDP forecast for the current fiscal year to 6.0% yesterday

Indian industrial production declined by -0.4% in September Y/Y, much worse than the +2.8% expected and the +2.3% rise in August. The worse than expected data reflected a material (-12.2% Y/Y) decline in capex.

The trade deficit came in at US$20.96bn in October. Exports declined by -1.6% Y/Y, while imports (in particular oil) rose by +7.4%.

October inflation (CPI) rose to 9.75% Y/Y, slightly higher than the +9.73% in September, with the more important wholesale price index expected to come in at 7.9% in October. The Indian Central bank, the RBI stated that there is a “reasonable likelihood” of a cut in interest rates in Q1 next year, if inflation moderates

Another threat is a potential credit downgrade by credit agencies to junk – looks like a realistic threat;

The Greek Parliament passed its 2013 budget last night which was a requirement to obtain further bail out funding. The budget involves further cuts of E9.4bn next year. GDP is expected to decline by -4.5% next year, with the budget deficit at -5.2% of GDP. The Greeks aim to achieve a primary surplus of +0.4% next year. The EZ finance ministers meet this evening, though don’t expect a resolution of this crisis. Greece has a E5bn debt repayment on the 16th November and apparently needs to raise E1.5bn to meet the payment. Some kind of fudge is coming – the EZ does not want a technical default at this time. The ECB has given Greece permission to maintain a temporary E17bn ceiling for T-bills, though the ceiling is reduced to E12bn this month. Importantly, the The Troika’s report on Greece has yet to be released – the IMF objecting to the EU trying to fiddle the numbers, do you think?

Greece’s budget deficit declined to just E12.3bn for the 10 months to October 2012, with the primary deficit declining to just E1.2bn;

Mr Weidmann, the head of the Bundesbank, called for an “unblemished and honest” assessment from the Troika on Greece – well he can ask, but…….. The IMF will be the most forthcoming, but the EU, in particular……… He added that EZ politicians seem to have already decided to fund Greece. Yep, but obtaining agreement from their countries, for some in the EZ including Germany, is going to be interesting to watch. Interestingly, he did not support calls (from some German’s) for the larger countries, such as Germany, to have a greater voting powers at the ECB, preferring a narrower remit for the ECB. I must be turning soft – I agree with Mr Weidmann;

Germany’s CDU pushed through measures on Friday which will cut overall government spending by -3.1% and cut their 2013 budget deficit by 9.0%. The cuts enable Germany able to meet its (self-imposed) “debt brake” to achieve a structural budget deficit (before allowing for cyclical spending) of just E8.8bn next year (0.34% of GDP), 3 years ahead of their 2016 target to achieve a budget deficit of just 0.35%. Germany is slowing (as recognised by the German’s) and, as a result, so will tax revenues – quite probably by more than they forecast. The agreement will be viewed negatively by the rest of the EZ, who had hoped that Germany would spend more to help out the EZ. Overall spending will be lower in 2013 than it was in 2010, reports Mr Bathle, the CDU’s budget spokesman – only can happen in Germany. I expect that the announcement has been made to take some of the possible sting out of a prospective deal (on Greece?) in due course.

Mrs Merkel is traveling to Portugal today – expect protesters to be out in force;

The economic decline of France continues. The Bank of France forecasts that the economy will enter a recession this Q. GDP is expected to decline by -0.1%, the same decline as Q2. I’m surprised at that as I would have expected that the French economy will decline by more than -0.1% this Q. French industry, in particular its auto sector is being hit particularly hard – industrial production fell by -2.7% in September, the largest decline since January 2009 and much more than the -1.0% decline forecast. I remain of the view that French 2013 GDP forecasts (the IMF/EU is at +0.4%), are optimistic. The French continue with their ludicrous forecast of +0.8% GDP growth for next year – some other forecasts are even higher !!!!!, with growth this year between zero and +0.2%. I continue to believe that France will prove to be the biggest threat to the EZ and one which is going to be difficult (some would argue impossible) to resolve;

Euro shorts continue to increase, according to the weekly Commitments of Traders report. No great surprise and I expect the Euro to weaken even further;

The University of Michigan’s provisional November confidence index rose to 84.9, the highest since July 2007 and much better than the 82.9 expected and 82.6 in October. The expectations component increased to 80.8, the best reading since July 2007 once again and up from 79.0 in August. The current conditions component rose to 91.3, the highest since January 2008 and up from 88.1.

The 1 year inflation expectation declined to +3.0%, from +3.1% previously and the 5 year came in at +2.8%, slightly higher than the +2.7% previously;

Inventories at US wholesalers rose by +1.1% in September M/M, higher than the +0.4% forecast, the most since December 2011 and higher than the +0.8% rise in August;

The combination of better US trade data, together with increased construction activity and higher inventories suggest that Q3 US GDP data will be revised higher, quite possibly much higher – at an annual pace at 3.0% or better – US$ positive;

US October import prices rose by +0.5% M/M, higher than the flat reading expected, though lower than the +1.1% in September;

President Obama has threatened to veto any measure which does not include a tax hike on the better off. The House speaker Mr Boehner states that he would not accept any tax hikes, preferring a cut in deductions. Whilst fraught, I continue to believe that some kind of deal will be done, though negotiations are going to go to the wire, and quite probably slightly over the end of the year deadline;

The IEA reports that the US will become the largest producer of oil in 2017, overtaking even Saudi Arabia and Russia and become self sufficient by 2030. In addition, US industry will have a competitive advantage over Asia and Europe, given increased energy production, yet another reason the US looks much better. The US trade deficit will also improve materially. The change is likely to have material geo-political issues. Some analysts question whether the increased production of shale oil in the US is credible, however;


Asian markets (ex China) declined, with European markets having opened weaker, somewhat higher at the moment, though look fragile. US futures are flat, with bond markets closed for the Veterans day holiday. Spot gold is marginally higher and is trading at US$1735, with December Brent at US$109.04

The Euro is weaker today (currently US$1.2724), though I continue to believe that the Euro will weaken further against the US$. The Greek “rescue” seems a way away and is no easy task for Germany, which needs to obtain the approval of the Bundestag, where a number of Mrs Merkel’s coalition remain sceptical. Having said that, the current view is that it will happen. Whilst an interest rate cut is unlikely in December even though revised forecasts are likely to confirm further weakness in the EZ, I believe that the ECB will cut interest rates next year, possibly in the 1st Q, though certainly in the 1st half of the year. Unsterilised QE is also a real possibility, especially if inflation declines below 2.0%, as I expect.

Fitch today reported that significant concerns over Spain remain – Moody’s has also warned previously. Fitch added, that Spain’s decision on seeking aid from the ESM will not affect the rating – suggests that a credit downgrade to junk is on its way. The 2012 Spanish budget deficit is expected to come in at 8.0% at least, as opposed to the target of 6.3%. The Spanish claim that GDP will decline by just -0.5% next year – the EU suggests a decline of -1.5%. However, the Spanish PM continues to dither.

Given the continuing problems in the EZ, US markets seem far better placed on the assumption that the fiscal cliff will be resolved – likely, at least in the main, in my view. However, negotiations could well extend to the wire, potentially just after. In addition, The US$ should improve on better Q3 GDP revisions.

The EZ continues to deteriorate – I remain particularly concerned about France, though I would avoid the EZ altogether. I remain bearish, in particular of Europe, though the US, in due course, offers upside.

A deal on the Japanese budget financing bill looks as if is coming – should be Yen positive. However, economic and corporate data from Japan is bleak and deteriorating. The Yen, in due course, looks like an interesting short. Interestingly Reuters suggests that the Japanese PM, Mr Noda, may call a snap general election next month – seems counter intuitive, given that support for Mr Noda and and his party are slumping in the polls.

Kiron Sarkar

12th November 2012

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