PBoC warns of inflation threat

There are some reports in the Japanese press which suggest that cabinet colleagues of the PM, Mr Abe, are not as wedded to the 2.0% inflation target as he is, fearing the negative impact on JGB’s and interest rates. Well boys, the penny seems finally to have dropped, if that’s the case. However, what do they do. I, for one, have not had enough saki to figure that one out. However, further reports such as this may mess up the short Yen trade – at least for a while;

The Chinese Central Bank, the PBoC has started to warn of the risks of higher inflation. With Western and now Japanese Central banks easing, commodity prices (in particular food and energy) are rising. EM’s are far more sensitive to increases in food and energy prices, given the composition of their inflation basket. Expect inflation to become a problem for EM’s, which will make life difficult, as they are virtually all trying to reduce interest rates and, in certain cases, depreciate their currencies. The Chinese clearly should allow the Yuan to revalue far faster to compensate, but they don’t. In those circumstances, its no point blaming other Central Banks;

The Indian authorities admitted that GDP for the year ending 31st March 2013 would rise by +5.0%, lower than previous estimates and forecasts of +5.5%. Consumer prices rose by +10.56% in December Y/Y. The finance minister has forecast that the budget deficit will come in at 5.6% this fiscal year. The reality is that the budget deficit will likely be higher, as will inflation, with the current a/c deficit widening. I have no doubt as to the sincerity of the new finance minister – its just that the current situation is going to take quite some time to resolve and with general elections to be held in 2014, possibly earlier, well…….;

Reuters report that Ayatollah Khamenei, Iran’s Supreme leader has rejected an offer by the US Vice President for direct talks. There were suggestions that Iran wanted direct talks with the US. As usual, complete nonsense coming out of Tehran;

Spanish yields have risen materially in less than 1 month (though the 10 year is down 4 bps today), as a result of the corruption scandals plaguing Mr Rajoy and his party. Yields on the 5 year bond auction today rose by 35 bps, from the last auction of similar maturity bonds. The bid to cover ratio, in particular on the medium and longer term bonds, declined as well. Investors fear that investigations in respect of the corruption scandals will reduce the government’s ability to press ahead with reforms and, in addition, may result in civil disorder – both, unfortunately likely events.

Spanish industrial output (adjusted for workdays) declined by -6.9% in December Y/Y, marginally better than the -7.0% in November, though worse than the -6.6% Y/Y expected. It was the 16th consecutive monthly decline, with no end in sight;

German December industrial production came in at +0.3% M/M, as opposed to +0.2% expected and +0.2% in November M/M. As usual, better German data;

The French trade deficit widened to E 5.35bn, as opposed to a revised E 4.29bn in November and higher than the E4.15bn expected. The deficit for 2012 came in at E 67bn. Just more and more bad data;

The ECB, as expected, kept interest rates on hold at 0.75%. The deposit rate was left unchanged at 0.0%. Draghi is just speaking. Markets expected a positive report. However, it very much sounds like dovish comments. Will report further tomorrow – got to listen;

What, better news from the UK – wow. UK factory output rose by +1.6% in December M/M, double the +0.8% expected. Total industrial production rose by +1.1%. The rise was due mainly to a rise in North sea oil and gas production, which is set to increase further in coming months.

The UK trade deficit declined to Sterling 8.9bn in December, better than the Sterling 9.3bn in November, in line with estimates. Exports rose by +3.0%, whilst imports increased by just +1.1%. The gain in exports was mainly due to demand from countries outside the EU (+11.7%), whilst exports to the EU declined by -4.8%.

As expected, the BoE kept both interest rates on hold at 0.5% and its asset purchase programme at Sterling 375bn.

Mr Carney, the next governor of the BoE, reiterated his view that flexible inflation rate targeting was the “most effective monetary policy framework implemented thus far”. Well that’s clear – open up the printing presses, create inflation and reduce the real value of existing debt – a policy which clearly is becoming fashionable across the world, with the exception of the EZ so far, as long as Germany influences policy. Mr Carney is also in favour of FED like speak in terms of establishing either timing commitments or specific targets re monetary policy;

There are some unsubstantiated reports that the Irish government has agreed a deal with the ECB on the promissory notes issued in respect of the bailout of the notorious Anglo Irish bank. The ECB refrained from commenting – ah ha, sounds like a deal is being/has been done – if so why did it take so long. The Irish government had to scramble to introduce legislation to liquidate Anglo Irish bank;

US initial jobless claims came in at 366k, slightly worse than the 360k expected and the revised 371k last week.

US non-farm productivity came in at -2.0%, worse than the -1.4% expected, though Q3 productivity was revised higher to +3.2%, from +2.9% previously.

Unit labour costs came in at +4.5%, much higher than the +3.0% expected;

The UN warns that whilst food prices have stabilised, prices could spike violently due to low stock levels, in particular of grains. The current forecast is for good yields this year internationally, but adverse weather condition, which seem to be getting more frequent, could be devastating;


Asian markets closed mainly lower. Chinese stocks declined for the 1st time in 9 days, as concerns were raised over potential curbs in respect of the property sector. These reports surface regularly, are then denied and then resurface. I just wish the Chinese authorities would make their mind up – no chance though. European markets are higher, with the exception of the FTSE. US futures suggest a flat open.

The Euro having drifted down to close to E1.35, has risen to US$1.3545, though is now around US$1.35, following Draghi’s initial comments. The Yen is weakening, currently at Yen 93.67 against the US$.

Spot gold is trading at US$1675, with March Brent at US$117.34. The markets don’t seem to care about the rising oil price – seems truly amazing to me.

I continue to reduce my equity positions. Just don’t believe that risk/reward is in my favour.

Kiron Sarkar

7th February 2013

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