UK to call referendum on continued membership of the EU – in 2017

Australian inflation is heading lower, increasing the scope for the RBA to cut interest rates. The trimmed mean gauge of core prices rose by +0.6% in Q4 2012 Q/Q, lower than the +0.7% forecast. CPI rose by just +0.2% Q/Q, last Q, half the rise expected and just 2.2% for 2012, as opposed to +2.4% forecast. The A$ declined on the news, but recovered and is currently trading at US$1.0555;

I remain bewildered by yesterday’s BoJ’s announcement. As I read it, the BoJ will increase its asset purchase programme not by the headline rate of Yen 13 Tr, but by a net Yen 10 Tr in 2014, according to the FT, well below the previous estimates for monetary easing. In addition, statements by the Finance Minister suggest fiscal tightening next and in future years. Completely perplexing. The Japanese Yen continues to strengthen and the Nikkei closed -2.1% lower today;

Chinese authorities are rushing to address their pollution problem. Bloomberg reports that the acting mayor of Beijing is to replace old cars and coal-burning heaters. In addition, the city will push government departments to switch to clean-energy vehicles. The Chinese authorities also intend to reduce coal consumption by 1.4mn tonnes, close polluting plants and reduce emissions. Great, but a great deal more will be necessary, with the cost negatively impacting Chinese GDP for years to come;

Unexpectedly, PM, Mr Netanyahu’s support dwindled following the recent general election, with voter turnout high. His party, together with its partner, Beitenu, won 31 seats in aggregate, down from 42 previously and lower than the 37 predicted. The results were marginally in favour of right wing parties (61 to 59). The outcome could force Mr Netanyahu to include the more centrist Yesh Atid party, which gained 19 seats, much more than was expected. However, the political situation in Israel is likely to remain difficult, if not unstable, given the number of parties (with differing views) necessary to form a stable coalition;

The EZ economy is expected to contract by -0.3% this year, though the President of the ECB, Mr Draghi, is becoming increasingly optimistic. He stressed the need to agree measures to establish the single European bank supervisor;

The Bank of Spain reported that Spanish Q4 GDP shrank by -0.6% Q/Q (-0.3% in Q3 Q/Q) with domestic demand continuing to contract. GDP is expected to have contracted by -1.3% last year. It is the 6th consecutive quarterly contraction, with little to suggest that anything will change in the immediate future. Indeed, even the finance minister does not believe that Spain will achieve positive GDP until Q4 2013. Furthermore, Spain will not meet its budget targets for last year and this – the only question is by how much. Markets remain complacent over Spain, mainly due the ECB’s OMT programme – I remain far less sanguine. In my opinion, Spain remains a very major threat to the EZ, as does France;

The UK PM Mr Cameron has promised to call a referendum by 2017 to decide whether the UK remains in the EU, if reelected. It will be a simple yes/no vote. However, unfortunately, I do not believe that the UK will exit the EU. Interestingly, my well informed friends, particularly from the UK, tell me that Germany is getting keener that the UK remains in the EU. With relations between Germany and France deteriorating and given Mrs Merkel’s agenda, the UK remains its only credible partner – Austria, Holland and Finland are far too small. Expect Mrs Merkel to make positive comments, though other EZ countries, France in particular, will remain hostile to offering any concessions. Furthermore, Germany is not as enamoured with Brussles/EU bureaucracy as many think – the UK’s help to restucture Brussles would be helpful. The US has urged the UK not to hold a referendum and is concerned if the UK exits;

The UK’s December jobless claims declined by -12k, better than forecasts for a flat reading and the lowest since June 2011. The claimant count rate was unchanged at 4.8%, though the better ILO data reports that claims fell by -37k in the 3 months to November, with an unemployment rate of 7.7%, slightly below forecasts of 7.8%. One of the major reasons I believe that the UK economy is doing better than official numbers is that unemployment has declined or, at worse, stabilised. Employment related taxes are also stable to better;

US sales of existing homes declined by -1.0% in December, to an annual rate of 4.94mn, as opposed to the increase to 5.1mn expected. However, annualised sales were the 2nd highest since November 2009. Supply of homes is shrinking – the number of existing homes on the market declined to 1.82 mn, the lowest since 2001 – another very bullish sign. The median price of a home rose by +6.3% in 2012, the highest rate of increase since 2005. The tightness of supply of homes suggests that prices will increase. November’s sales rate was revised lower to 4.99mn homes.

Real estate brokers report that 4.95mn homes were sold last year, up +9.2% from 4.26mn in 2011 and the most since 2007. Whilst far below the peak of housing sales of 7.05mn in 2005, home sales continue to rise, which bodes well for the US economy. Cheap mortgages, combined with an easing of lending standards, should result in a (material?) increase in home purchases this year;

The US House of Representatives is to vote on suspending the US$16.4bn US debt ceiling until 19th May, at which time the debt ceiling would rise to accommodate US borrowings over that period. The Senate may not accept the attached conditionality though. Automatic spending cuts kick in on 1st March, with a proposal that the House and the Senate must adopt a budget for the next fiscal year by 15th April. Bloomberg reports that global investors view the US government finances as the greatest threat to the world economy. Around half those surveyed stated that they were withholding investing in the US until this issue is resolved


Asian markets (ex Japan which closed -2.1% lower) improved, with European markets mixed. US futures suggest a higher open. US earnings season generally has been positive to date.

The Euro is trading higher at US$1.3331, with the Yen stronger at Yen 88.53

Spot gold is trading around US$1694, with March Brent at 112.54.

The gathering at Davos should produce some interesting insights this week. A number of flash EZ PMI’s are due tomorrow, which will focus the markets attention.

Kiron Sarkar

23rd January 2013

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