Minutes released by Australia’s central bank, the RBA, report that “softening labour market conditions”, combined with “confirmation that the peak in the resource sector investment was near” and that “the short-term outlook for non-resource investment remains subdued”, allowed the RBA to cut interest rates earlier this month to 3.0%, the lowest since October 2009 and, indeed, 1960. The RBA forecast that wage pressures would ease and that employment prospects had weakened. In addition, the RBA stated that China was stabilising, with the US improving. The majority of economists expect the RBA to remain on hold at the next meeting scheduled for 5th February. The A$ weakened marginally following the release of the minutes and is currently trading at US$1.0537. However, I remain bemused as to the A$’s strength;
The next PM of Japan, Mr Abe, has increased pressure on the BoJ to ease monetary policy at the next meeting on the 20th December. He suggested that the BoJ should consider the election results and his pledges (to increase inflation to 2.0% and embark on a programme of fiscal stimulus) when announcing their decision this Thursday. Once appointed PM on the 26th December, Mr Abe wants the BoJ and the government to issue a joint statement which sets a 2.0% inflation target. The governor of the BoJ, who retires in April, was non committal following Mr Abe’s remarks. Mr Abe will try and replace him with a governor who is more supportive of his policies (which the current governor is not), though whilst Mr Abe’s LDP coalition has a super majority in the Lower House, he will still require the consent of the Upper House, which he does not control, for such an appointment. Mr Abe is planning a supplementary budget, which will involve a major increase in fixed asset expenditure.
The Yen fell to its lowest levels since April 2011. The decision at the forthcoming BoJ meeting will be important – the market expects the BoJ to increase its asset-purchase programme by between Yen5tr to Yen10tr.
I remain short the Yen, which I expect to weaken further;
Chinese November new home prices rose in 53 (35 in October) out of 70 cities tracked by the authorities, the most in 1 1/2 years. Prices in 10 (17 in October) cities declined. The Minister of Land and Resources claimed that China would maintain its property curbs, though it is known that certain provinces have been relaxing such measures. Rising property prices play a material role in the Chinese economy.
I remain bullish on Chinese markets and believe that it has further to go. For full disclosure purposes, I’m long a Chinese ETF and long the mining sector;
There are reports that China will set a GDP growth target of +7.5% next year, the same as this year, with inflation at +3.5% (+4.0% this year). The Chinese annual central economic work conference, which discusses these matters, has just ended. Money supply and bank lending targets have not been set apparently. Essentially, it looks as if Chinese authorities are prepared to accept lower growth, though of higher “quality and efficiency”. The government, if it follows normal practice, will disclose its GDP/inflation etc projections in March, at the legislatures annual meeting;
FDI into China declined by -5.4% Y/Y in November to US$8.29bn, worse than the -3.1% expected and -0.2% in October. FDI amounted to US$100bn YTD to November, down -3.6%. FDI has declined in each of the last 6 months and 12 out of the last 13 months. In 2013, FDI should continue to come under pressure, particularly from Japan, given the political problems between the 2 countries. Non financial investment overseas rose by +25% YTD to November to US$62.5bn and I would expect the rate of overseas investment by China to increase further;
As expected, the Indian Central Bank kept its key benchmark interest rate on hold at 8.0% for the 5th consecutive month. The cash reserve ratio was also unchanged at 4.25%. The government is eager for the Central Bank to cut rates, though inflation remains a problem. Whilst CPI rose in November (though wholesale price inflation declined to +7.24% Y/Y, the lowest in 10 months), the RBI highlighted that core inflation was declining. Furthermore, inflation is expected to decline in Q1 next year. The RBI stated that “In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth” – suggests to little old me that interest rate cuts are coming. Indian bond yields are at a 7 week low, another indication that the RBI will cut interest rates shortly, quite possibly in January;
Spanish October bad loans increased to 11.23%, from 10.70% in September. I’m afraid the pain is not over yet.
The EU advises that in the short term Spain (together with Cyprus) have the greatest fiscal risks of countries in the EZ. They suggested that Spanish pension cost growth should be decreased. Spain will miss its budget targets this year – the only question is by how much – expect a large miss;
UK November CPI rose by +0.2% M/M (+0.5% M/M in October), or +2.7% Y/Y, in line with expectations, though still the highest since May.
UK November output prices declined unexpectedly by -0.2% M/M, or +2.2% Y/Y, weaker than the +2.5% expected and the revised +2.6% in October.
Input prices increased by just +0.1% in November M/M;
President Obama has proposed that taxes be raised for those earning over US$400k or more, whilst Republicans suggested that the threshold should be US$1mn – looks like a deal around US$500k. Increases in social security payments would be contained. There is no news on payroll taxes. Furthermore, Mr Obama conceded that he was not looking for a permanent increase in the US debt limit, though would agree to a 2 year authority. It looks as if agreement on a deal is nearing, which is what most analysts, including myself, expect. US markets closed higher yesterday in response, with the S&P up +1.2%;
Bloomberg reports that half of all US States have returned to peak tax-collection levels since the start of the recession, according to the National Conference of State Legislatures. Taxes are expected to meet or exceed forecasts in 28 States. A pretty good bullish indicator I would have thought;
Outlook
Asian markets closed higher on prospects of a deal on the US fiscal cliff issue. European markets are higher in response as well, with US futures suggesting a higher open.
Spot gold is trading at US$1798, marginally higher, with February Brent also higher at US$108.17.
The Euro is marginally against the US$, currently trading at US$1.3184. The Yen is marginally weaker against the US$, currently Yen 83.85 – awaiting the BoJ meeting on the 20th December. I will remain short the Yen. I have learnt to be patient in respect of the A$, currently trading at US$1.0530.
I remain bullish overall and, in particular, continue to like the US/UK financial sectors, mining, US/UK focused building materials, UK (London based) builders and property companies, tech, German industrial sector and China. Essentially, a higher beta play. Defensives look less interesting.
A deal on the US fiscal cliff looks as if its coming.
Kiron Sarkar
18th December 2012
