Australian November retail sales declined by 0.1% M/M, as compared with a +0.3% gain expected, the 1st decline in 4 months. Consumers are pessimistic about the economy, jobs and house prices, reports Moody’s.
Job vacancies declined by -6.9% in the 3 months to November 2012.
A further interest rate cut (25bps) by the RBA is likely, down from the 3.0% level at present;
A number of reports (Reuters, most recently) suggest that the BoJ will agree to announce an inflation target of 2.0% at its next meeting on 21/22nd January, though will not set a date by which this target is to be achieved. In addition, there is talk of setting an unemployment threshold, a la FED. Reuters adds that the BoJ will increase the size of its asset purchase programme from the Yen 101tr current limit, by Yen 10tr?. A member of the BoJ board, Mr Shirai, stated that he was open to the idea of eliminating the interest-rate floor on deposits held at the BoJ by commercial banks. The Yen has stabilised over the last few days, but I remain short (at my maximum levels) against the US$ mainly.
Fitch warned that they would downgrade Japan unless the authorities addressed the debt issue. Well, as that’s not going to happen – indeed, debt will rise, as a result of a massive fiscal stimulus programme, I guess that a downgrade is baked in.
Some Japanese industrialists warn against a much weaker Yen citing higher import costs, in particular energy, which will worsen the trade/current account deficit. All true, but its too late gentlemen;
Chinese money market rates continue to decline and are at 3 week lows at present. Analysts are bullish as to China’s economic performance this year. A mass of Chinese economic data will be released this week and next;
Interesting developments in respect of a fightback by journalists in respect of censorship. Beijing journalists have refused to republish an article which criticised journalists in Guangdong, who were up in arms following moves by management to limit editorial independence. The journalists in Guangdong have won some concessions. It is going to be difficult for China to continue to impose its strict censorship rules, given the access to information from such a multitude of sources. Wrongdoings by Chinese officials, are going to be highlighted more and more (Source FT);
The Indian central bank, the RBI next meets on 29th January, with a 25bps rate cut expected, the 1st cut since last April. The 10 year bond yield continues to decline and is currently trading around 7.90%, the lowest since December 2010. The Rupee however, I believe will suffer, especially against the US$ – its currently trading at Rupee 55 against the US$. A credit downgrade is likely this year. Indeed, Fitch retained its negative outlook due to concerns about India’s fiscal position;
To ensure that the Euro/Swissy peg remains, the Swiss National Bank has been buying an enormous amount of Euro’s, in particular. Its current holdings of currencies, gold and bonds has soared to US$541bn, which is close to Switzerland’s GDP !!!!;
Another “great” line from the former Italian PM, Mr Berlusconi. He is appealing his divorce settlement and has called certain Milan divorce judges “feminist communists”. Good luck with your appeal Mr B.
Mr Berlusconi has formed an alliance with the Northern League, though has promised that he will not seek to become PM, if the coalition gains power in the forthcoming elections. Personally, I don’t believe that the coalition will be successful, though it will take away votes from Mr Monti. As usual, Italian politics is getting messier and messier and…..;
German press reports state that the opposition parties will not support a bailout for Cyprus. Cypriot banks are totally bust and there are continued allegations of money laundering by Cypriot banks, on behalf of Russians. If a bailout is not agreed, it will be Euro negative.
The German business lobby forecasts German GDP growth at +1.0%, rather than the +0.4% predicted by the Bundesbank;
German industrial production increased by +0.2% in November, much weaker than the +1.0% expected, though above the revised decline of -2.0% in October;
Rumours floated around yesterday that France would be downgraded. The report was officially denied by French authorities. Well, maybe not this time, but I remain of the view that France will be downgraded this year – the only question is whether it will be by 1 or more notches?;
ECB day tomorrow, though I do not believe that Draghi will cut rates. However, I do believe that the ECB will reduce rates by 25 bps in due course and, in particular, as inflation declines below 2.0%, which I believe will be the case within the next 3 or so months;
The UK November visible trade deficit increased to Sterling 9.16bn, slightly higher than the Sterling 9.0bn expected, though lower than the revised Sterling 9.49 bn in October. Exports to the EU declined by -3.7% in the 3 months to November Y/Y, though rose by +6.8% to the rest of the world. Including income from services, the UK overall trade deficit declined marginally to Sterling 3.7bn in November, from Sterling 3.5bn in October;
Ireland takes over the rotating Presidency of the EU for the next 6 months. Expect the Irish government to push for a deal in respect of the bank bailout related debt that the country took on. There is a reasonable chance that Ireland will exit its bailout programme this year;
US imports of liquid fuels, including crude oil and petroleum products, are set to decline to their lowest levels for 25 years next year – to just 6mn bpd, according to the US Energy Information Administration the lowest since 1987. At the peak in 2004/7, US imports were nearly double that amount. Last year, the US produced 6.43mn bpd of crude oil, which should rise to 8mn bpd next year. Consumption has declined by some 2mn bpd to 18.7mn bpd last year and is expected to rise only modestly in coming years. The improvement in the US trade deficit will be significant, as US domestic production increases further in coming years. US industry will also benefit from cheaper energy. (Source FT);
Outlook
Asian markets closed mainly higher. Japan having been -1.0% lower initially closed +0.7% higher. Markets responded positively to the Alcoa results, which were released after US markets closed. European markets are trading higher, with US futures suggesting a better market, as well.
The Euro is selling off and remains below US$1.31 – currently US$1.3058, with the Yen weaker against the US$ – currently Yen 87.54. The Euro may well recover somewhat if, as I expect, the ECB remains on hold tomorrow.
Gold is higher at US$1660, with February Brent at US$112.
US 4th Q 2012 earnings season is upon us. Alcoa kicked off, as usual, with a beat and a robust forecast, based on expected increased aluminium demand (+11.0%) from China and aerospace (+10%) this year. As usual, forward guidance statements will be the most important this earnings season.
Chinese economic data, to be released later this week, are likely to move markets. It looks as if the US debate will focus on the spending cuts ie the sequester, rather than on Republicans trying to block the increase in the debt ceiling. At present, the sequester looks like coming into effect.
Kiron Sarkar
9th January 2013
