Material downgrade of German 2013 GDP by Bundesbank

The Australian October trade deficit widened to A$2.09bn, from A$1.42bn in September, though better than the A$2.2bn expected. Exports were roughly unchanged,  whilst imports rose by +3.0%. Terms of trade has declined by around 15%, from the peak, though is still historically high.

PM Gillard stated that the governments policy to post a budget surplus next year will depend on the Australian economy growing at trend rates – sounds as if she is backing off her previous commitment.

The A$ is marginally higher – currently US$1.0488 – will look to increase short just above the US$1.05 level;


The Indian government won the politically significant vote to allow majority ownership of multi-brand retailing by foreign investors, in the Upper House of Parliament, by 123 votes to 109 against. The Lower House had passed the non-binding vote. The passage of the bill is a good start for the government’s plans to press for structural reforms. Other reform measures in respect of the banking and insurance sectors are planned;


Bloomberg reports that the majority of ECB members were in favour of a rate cut or would not oppose one at yesterday’s ECB meeting. Apparently, the Germans, (Messers Weidman and Asmussen and the French representative Mr Coeure) were opposed. Mr Coeure arguing for the ECB to remain on hold is a surprise. Informed sources allege that the decision not to cut rates was due to the perceived negative impact of a rate cut, which followed the major downgrade of projections.

The ECB cut its 2012 EZ GDP forecast to -0.5% and 2013 to a decline of -0.3%, from a previous forecast of growth of +0.5%. Mr Draghi also hinted at setting a negative deposit rate – not at all sure that will be helpful, as the Japanese experience suggests that you lose control of monetary policy. However, a negative deposit rate is a major sell signal for a currency.

Inflation, the ECB’s primary objective, is now forecast to decline to just +1.6% next year and +1.4% in 2014, well below its target of at or just below 2.0%.

The ECB will cut interest rates by 25bps in Q1, though these material downgrades suggest it may even happen as early as January 2013;


Yet more political intrigue in Italy. The general secretary of Mr Berlusconi’s political party, the People of Liberty Party (PDL), called for an orderly end of Mr Monti’s government. They have withdrawn support, though have not voted against the current administration. The withdrawal of support could result in early elections in Italy. The PDL is losing support – recent polls suggest that just 17% of voters support the party. The winner, at present, is the centre-left party, the Democratic Party (PD), lead by Mr Bersani, who will, if he forms a government, take over from Mr Monti as PM – recent polls suggest that the PD have support from about 38% of voters – likely more, as support for a party lead by a comedian (who is anti austerity) is likely to fizzle out in a general election. The PD has announced that it will no longer work with the PDL, though pledged their continued support to the Mr Monti administration for the present.

S&P warns that it would cut Italy’s credit rating if the economy remains in recession in H2 2013, which it believes is a distinct possibility;


The Bundesbank reduced its 2012 German GDP forecast to +0.7% for this year, down from a previous estimate of +1.0% and savagely lower to just +0.4%, from +1.6% next year. Furthermore, the Bundesbank warned that that the German economy would contract this Q and stagnate in Q1 2013. Inflation is expected to decline to +1.5% next year from +2.1% this year, marginally lower than the +1.6% forecast previously. Unemployment is expected to rise to 7.2%. The materially lower forecasts confirm that Germany is not immune from the downturn in the EZ and internationally and could well help to push the ECB to cut interest rates early (January?) next year – may even get Mrs Merkel/Germany to rethink their “austerity only” policy, given the general elections in September next year;


UK manufacturing output declined by -1.3% in October M/M, the most in 4 months and is yet another bleak set of materially worse economic data from Europe today. The forecast was for a decline of just -0.2%. Total industrial output declined by -0.8%, the 3rd consecutive decline.

The data suggests that the UK economy will contract in Q4;


US NFP rose by +146k, much higher than the +85k expected and a revised +138k (+171k previously) in October.. The BLS reported that Hurricane Sandy did not make a difference, which seems counter intuitive. The unemployment rate declined to 7.7% (lower than the 7.9% forecast), the lowest since December 2008, though in reality due to the decline in the participation rate to 63.6%, from 63.8%, as the labour force shrank. Average earnings were better at US$23.63, up from US$23.59 in October. The average work week was unchanged at 34.4 hours. An early Thanksgiving helped, as retailers hired more temporary staff. Having said that, I continue to believe that the US will surprise to the upside. The FED, however, is likely to continue with QE.

More politicking in Washington, though I continue to believe that a deal will be done on the fiscal cliff;


University of Michigan consumer sentiment index declined materially to 74.5 in December, from 82.7 in November and much lower than the 82.0 expected. The consumer expectations component declined to a 1 year low of 64.6, from 77.6, with the current conditions component declining to 89.9, from 90.7 in the previous month.




Asian markets (ex Hong Kong, Japan and India) closed mainly higher with China +1.6% higher. European markets closed flat, with the exception of Italy which was -0.9% lower given the political drama, with Spain down -0.8%. US markets are currently flat (S&P) to lower by -0.6% (Nasdaq).


The Euro continues to decline and is currently trading at US$1.2938, with the Yen at Yen 82.33. I must admit, I had expected the Euro to weaken even further – it has recovered from briefly trading below US$1.29.


10 year German bunds fell to 1.31%, on flight to safety concerns, whilst equivalent Italian and Spanish yields have risen materially in recent days.


Spot gold is hovering around US$1700, with January Brent at US$106.84, sharply lower from the US$110 level in previous days – still too high.


Continue to short the Euro against the US$ and buy US/UK equities – financials, miners, London based builders and property companies and US/UK focused building material stocks.


I was waiting for the announcement of the Greek bond buy back programme before sending out this newsletter, though no news at present.


Have a great weekend


Kiron Sarkar


7th December



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