Japanese Tankan survey suggests material weakness

The RBA needs to cut interest rates further as current policy is limiting economic growth, suggests the OECD. They forecast that the Australian economy will grow by +3.0% next year, down from +3.7% this year. The A$ continues to defy gravity and is currently trading at US$1.0536, slightly off its high of the day. I continue to believe its excessively overvalued, though the A$, I must admit, is the 1 currency I have got wrong this year. The RBA is expected to cut interest rates by at least 50 bps, though probably 100 bps next year;

The Japanese Tankan survey reveals that the large manufacturers are the most pessimistic in almost 3 years. The economy is in recession and is expected to shrink by -0.4% Q/Q this Q. The Tankan index declined to -12 in December, from -3 in September, worse than the reading of -10 expected. Tensions with China over disputed territory in the South China seas is not helping. The general elections will be held this weekend (16th December) and the coalition headed up by the LDP is expected to be the outright winner. The LDP coalition may need the support of the the Upper House, which has its elections in July 2013. The BoJ will announce its decision on the 20th December – they are expected to ease further. The Yen continues to weaken and is currently trading around Yen 83.44. I remain short the Yen;

HSBC December preliminary PMI for China came in at 50.9, in line with estimates of 50.8 and a final reading of 50.5 for November. The reading was a 14 month high and the 5th straight monthly gain. Electricity consumption, a key economic indicator, rose by +7.6% in November Y/Y, the largest increase since February. Chinese markets rose by +4.3% today on expectations that the economy is recovering, mainly due to domestic considerations. The local property market, in particular, has been picking up, with both demand and prices rising – a material factor for the Chinese economy. In the short term, I remain bullish on Chinese markets and added an ETF to my Chinese related investments, together with being long the mining sector. In the medium to longer term, China faces major economic problems – of that I have very little doubt. However, with the new regime in place, I continue to believe that Chinese markets will outperform in the short term;

Indian November inflation (wholesale price index) came in lower than expected at +7.24%, lower than the forecast of +7.60%. However, the Central Bank, the RBI is expected to remain on hold next week, though cut rates in the new year. The Indian government approved a land acquisition bill yesterday, yet another sign that they are pushing ahead with their recently announced reform agenda. The government has also set up an infrastructure panel to speed up approvals of infrastructure projects;

It looks as if Spanish PM, Mr (ditherer) Rajoy believes that Spain will not need ECB/EZ assistance for the present. The ECB’s OMT programme has been of material assistance, without the ECB having to act. However, I continue to believe that Spain will need support next year – it cannot keep borrowing at current levels. It is true that Germany would prefer that Spain not request a bail out ahead of its general elections in September next year;

The EZ December composite index rose to 47.3 (remains in contraction territory), though higher than the 46.9 forecast and 46.5 in November. The services sector gained the most – it was up to 47.8, from 46.7. Manufacturing remained in the dumps, with the gauge virtually flat at 46.3, from 46.2 in November. French PMI data was roughly in line with expectations, though German services PMI came in higher than forecasts at 52.1, higher than the 50.0 expected and 49.7 in November;

EZ November inflation declined to +2.2% Y/Y, in line with the initial estimate and down from +2.5% in October. Core CPI came in at +1.4% Y/Y, slightly lower than the +1.5% expected and +1.5% in October. Inflation should decline further and I expect the ECB to cut interest rates by 25 bps early in Q1 next year;

EZ employment declined by -0.2% in Q3, Q/Q. Y/Y, employment declined by -0.7%;

In a dig against Mrs Merkel, President Hollande stated today that France would not be bound by reluctant EU members. Well great, but France’s options are limited and I’m being polite. There was clear friction between Mrs Merkel and Hollande at the EU summit;

S&P revised the UK’s credit outlook to negative, down from stable previously, though reaffirmed the AAA rating. There is a very high chance that the UK will be downgraded next year;

US November CPI came in at -0.3% M/M, better than the -0.2% expected and +0.1% in October. Y/Y, CPI came in at +1.8% in November, lower than the +1.9% expected and +2.2% in October. Core CPI came in at +1.9% Y/Y, slightly lower than the +2.0% expected;

US December manufacturing PMI came in at 54.2 (the highest since April), much better than the 51.8 expected and 52.4 in November, the highest since April. The output, new orders and employment sub-components all came in higher than expected and the highest since April;


Asian markets closed mixed, with Shanghai the star performer – it was up +4.3% and has further to go in my humble view. The European markets are higher, with US markets flat.

The Euro is well above US$1.31 – currently US$1.3138 (had to cover my short), with the Yen weak – currently Yen 83.49. A resounding win by Abe’s LDP party is expected this weekend, which should be further Yen negative.

Spot gold is trading lower at US$1696 – cant see the interest with inflation lower, January Brent is trading at US$107.56.

With the FED on QE4 and the ECB with its OMT programme at the ready and likely to reduce interest rates in Q1 next year, combined with declining inflation and a more positive China, I continue to be positive/bullish. Yes, there is the fiscal cliff, but analysts (including myself) expect a resolution. I continue to add to my holdings on weakness.

Have a great weekend.

Kiron Sarkar

14th December 2012

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