Much lower US December trade deficit

The Australian Central Bank, the RBA, has reduced its growth and inflation forecast to +2.3% and +3.0% respectively, as compared with the +2.5% and 3.25% predicted last November. The Central Bank cited a peak in mining investment, together with both fiscal consolidation and the high A$. The non-mining business investment is unlikely to rebound, they added. The reduced forecasts will result in the RBA reducing interest rates further, possibly by between 50 bps and 75 bps this year. The A$ continues to weaken, a trend that I expect will continue;

Japan reported a further current account deficit of US$2.8bn (nearly double estimates) for December, the 1st time it has had 2 consecutive monthly current account deficits since 1981. Whilst the weaker Yen should help some export sectors (autos), though not all (electronics), the benefits will not flow through for quite a few months. In addition, the weaker Yen will increase import costs. It is yet to be proven that the weaker Yen will be as supportive for Japan, as is currently thought;

Chinese January exports rose +25% Y/Y, higher than the +17.5% forecast and at the fastest rate since April 2011. Imports rose by +28.8% – higher import prices, which will increase inflation? – quite likely. The trade surplus rose to US$29.2bn (US$31.6bn in December), above the US$24.7bn forecast and US$27.1bn in January last year. However, January had more working days than the previous year and, in addition, Chinese companies have pushed out product ahead of next weeks New Year holidays – the year of the snake is coming. Adjusted for working days, Chinese exports rose by +12.4%, Y/Y, whilst imports rose by +3.4% (dont understand the steep decline in imports from the unadjusted for workdays numbers above), according to the Chinese authorities;

As expected, Chinese CPI came in at +2.0% Y/Y in January, in line with forecasts and lower than the +2.5% in December. PPI rose by +1.6% Y/Y, also as expected and lower than the +1.9% in December. The problem however is the rise of energy and other commodity prices, which will result in inflation rising (materially ?) in coming months. The PBoC has warned of rising inflation;

South Africa is going down the tubes, as is Brazil. Russia is facing difficulties, as is India. China, well admittedly its economy has picked up and should outperform the other BRIC’s, materially. OK, S Africa is not officially in the BRIC’s, but was represented at the BRIC’s conference in Delhi.   Importantly, Mr Jim O’Neill, the man who coined the word BRIC’s is leaving Goldman’s. He was also the man who suggested that the BRIC’s were “decoupled” !!!!!!. Personally, I think it time to move on from the BRIC’s – many other opportunities out there. These countries economies are totally “COUPLED” with developed economies. Follow the developed economies for the moment. When they turn for the better, thats the time to revisit the BRIC’s;

Here’s another reason why Greece is such a basket case. The head of the Greek Statistical Office, Mr Andreas Georgiou, together with 2 of his officials, have been charged for allegedly inflating the 2009 budget deficit data ie getting it right. EU authorities warn that they are watching with “deep concern”. (Source Bloomberg);

Cypriot elections are due this weekend. Unless a candidate gets over 50% in the1st round (likely), a second will be called. The EZ will, following the elections, need to deal with the request for a bailout of Cypriot banks and the State;

Germany’s 2012 trade surplus came in at E 188.1 bn, the highest in 5 years – in spite of the financial crisis – truly amazing;

I followed Mr Draghi’s press conference yesterday. Somewhat Delphic, at times, I set out my assessment/interpretation;

• He stated that the banks mandate was price stability and not the exchange rate (clearly a statement which was to be expected), BUT added that the ECB would review the impact of the stronger Euro on its price stability mandate. Please note that the ECB is to produce revised economic forecasts next month. No prizes for guessing that a lower inflation rate forecast will be forthcoming;

• There was a hint that interest rates may be cut (by 25 bps?)shortly. As you know, I believe that the ECB will, indeed, cut interest rates by 25 bps, possibly even this Q, but most likely next;

• He dismissed President Hollande’s call to weaken the Euro;

• He emphasized that the ECB will maintain its accommodative policy ie he does not want monetary policy to tighten, which has been the case, inter alia, with the stronger Euro. Yet another reason, I believe, a cut in interest rates is likely, especially if the Euro remains, or even more certainly, if it rises above current levels;

• Draghi talked about LTRO repayments and Eonia. Basically, he played down the recent LTRO repayments (the ECB announced that banks will repay a further E5bn on the 13th Feb), which have strengthened the Euro. Essentially, he does not want Eonia rates to rise. Increases in Eonia rates will clearly push the Euro higher;

• He admitted that “downside risks” remain, though added that the EZ economy economy would improve in H2;

• Finally, he advised that the ECB’s decision not to cut interest rates was “unanimous”, but added, “of course there were hints and discussions about how to influence financial conditions, but that is it”. Suggesting to little old me that he is saying – if you push the Euro higher, I will act and cut interest rates. You are warned.

To me its clear. If the Euro rises above current levels, the ECB will almost certainly cut interest rates. Its debateable as to what will happen if the Euro remains at present levels, though the risk is that the ECB will cut rates, especially if the inflation forecasts come in at 2.0% or below, which I believe will be the case. In addition, please note, that Draghi, unlike his predecessor, has acted on forecasts and not waited for actual data. I appreciate that other analysts disagree, but I really don’t see it any other way. For full disclosure purposes, I remain short the Euro against the US$;

Ireland did indeed “do a deal” with the ECB in respect of the thorny issue of E28bn of promissory notes issued following the bailout of the Anglo Irish Bank. It should be noted however, that Mr Draghi yesterday stated that he had “taken note” of the Irish actions and not that the ECB had agreed to the deal. Basically, the Irish government will swap the promissory notes for long term ( 25 and 40 year, with an average maturity of 34 years) debt, which will carry a coupon of 3.0%, rather than the 8.0% rate on the promissory notes. Apart from the savings on the lower interest rates, the scheme will reduce the amount of financing required by Ireland by E20bn over the next decade. As a result, the amount of further austerity measures necessary to reduce Ireland’s debt to GDP to 3.0% by 2015 will be cut by E1bn. Credit agencies reported that the “deal” was “credit positive” – a credit upgrade coming ? – likely
Ireland also passed the 9th review by the Troika (the ECB, EZ and the IMF) and an exit from the bailout programme is likely by the year end;

Discussions over the EU budget for the period 2014 to 2020 continues. The richer nations want a budget cut, whilst the poorer countries want an increase. However, it looks as if a deal around a budget of E960bn has been agreed – still way too high, but the only good news is that, for the 1st time, the EU budget will be cut – a success for the UK PM, Mr Cameron, who was helped by the Northern European countries including Sweden, Denmark, Holland, though, most importantly, by Germany. However, the 27 member states will provide just E908mn. The EU Parliament reports that they will block the deal;

UK recruitment companies suggest that demand for workers has increased, both full and part time. What’s more, salary levels are rising. As you know, I continue to believe that the UK is doing better than official data, though data has certainly not supported that view. In the last few days, for the 1st time, UK economic data has been positive. Time to stop being so bearish on Sterling, I believe;

US consumer credit rose for the 5th consecutive month. Borrowings rose by US$14.6bn in December, lower than the US$15.9bn in November, though higher than the US$14 bn expected. The increase was mainly in non-revolving credit (up US$18.2bn) suggesting purchases of bigger ticket items, such as autos. The consumer credit numbers do not include mortgages;

The US December trade deficit declined materially to -US$38.5bn, much lower than the -US$46.0 bn expected and the -US$48.7bn in November. Much lower oil imports seem to be the reason. In addition, the lower December trade deficit will result in an upward revision to Q4 2012 GDP, certainly to a positive number, as opposed to the 1st reading of -0.1%;


US markets closed well off their lows yesterday.  Asian markets closed mixed, with the Nikkei down -1.8%, in part due to dreadful results from Sony. However, the much better headline Chinese data (the Shanghai Composite closed higher) resulted in better Asian markets with European markets higher as well.

The Yen has been strengthening materially today. The finance minister, Mr Aso, stated that the Yen’s depreciation had been far too fast. In addition, he has been emphasising Japan’s proposed stimulus programme, rather than policies to depreciate the Yen. Well, come now Mr Aso. Lets bear in mind that the G20 meeting is coming up – basically, Japan does not want to face criticism.

The Euro held up relatively well in the morning, but is now declining – currently US$1.3372. The Yen well its strengthening materially – currently Yen 92.36 against the US$. Sterling is rising for a change – currently US$1.5803.

Spot gold is trading at US$1669, with March Brent over US$118 – currently US$118.25 – still no market concern – truly amazing.

Continue to reduce my equity holdings and will have closed the last of my Chinese related plays today. Chinese markets are closed for the whole of next week for the New Year holidays, welcoming the year of the snake. Apparently, the year of the snake suggests increased volatility. Well, I certainly agree with that.

Have a great weekend.

Kiron Sarkar

8th February 2013

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