Revisions improve January NFP’s

In Australia, the manufacturing index declined -4.1 points to 40.2 in January, the lowest in 3 ½ years and the 11th consecutive monthly contraction. The new orders component declined by -6.3 points to 39.4, employment was -4.4 points lower at 40.1, with production down -2.1 points to 40.4. However, the wages component rose by +3.4 points to 60, whilst selling prices declined -3.0 points to 40. Not a healthy mix and not helped by the strong A$;

The Japanese unemployment rate rose to 4.2% in December, up from 4.1% in November. Household spending declined by -0.7% Y/Y, in December.

Mr Abe is close to selecting his candidates to replace the 3 retiring BoJ candidates, including the governor;

J P Morgan makes the following points on Japan

• A number of Japanese products are non competitive, especially when compared with their Korean counterparts – it is not an uncompetitive currency that’s necessarily the issue;

• The Yen 20 trn programme is, of course, large, but is unlikely to have a big multiplier effect which stimulates private sector investment and/or consumption;

• Japan’s trade deficit will worsen, given higher import costs due to the weaker Yen;

• The budget deficit is expected to reach 11.5% of GDP this year – probably higher, given the optimistic growth and revenue forecasts announced by the Japanese authorities;

• The Japanese authorities are likely to buy foreign bonds which will weaken the Yen even further (see below re Japanese buying EFSF/ESM bonds issued by the EZ), which, in turn, will increase the trade deficit, etc, etc;

• Japan has to finance its huge budget deficit. Foreigners own some 9.0% of theiroutstanding debt. Can’t see them buying at current yields and with a weakening currency. Indeed, they are likely sellers. Japan finances roughly 50% of its deficit through the sale of bonds. Yields are ludicrously low (just 0.75% for the 10 year) and account for approx 25% of the budget deficit, even at present. Higher Japanese yields blows this all up;

• Japanese financials are stuffed full of JGB’s – a weaker Yen and likely higher yields will not encourage them to buy JGB’s in the future. Who, pray tell me, will be the buyers of Japanese bonds – certainly not moi – I’m shorting. The infamous Mrs Watanabe looks like she is starting to invest abroad, by the way – no great surprise – the recent buying has been mainly from non Japanese investors;

• More and more short Yen positions are likely. As I keep banging on, once a currency starts sliding, the authorities have a difficult (impossible?) time trying to stop the slide; (Source FT)

No point going on – you get the picture. In any event, I have made these points before. Remember Mr Kyle Bass’s comment, when referring to the investors buying the Nikkei. I quote – people are “picking up dimes ahead of a bulldozer”. I very, very much agree with Mr Bass. The Yen weakened easily through Yen 92 against the US$ and even more against the Euro (currently around Yen 126);

South Korea is increasingly concerned about the devaluation of the Yen. The government has threatened to impose a financial tax, which has resulted in capital outflows. Currency wars in Asia, I very much think so. Recently, statements by Chinese authorities suggest that they are concerned about the stronger Yuan. Don’t expect the Korean Won and/or the Chinese Yuan to go much higher – the Yen, well I can’t see anything but further weakness;

Chinese official PMI data was 50.4 in January, well below the 51.0 expected and as compared with the 50.6 in December. Whilst the new orders component rose to 51.6, from 51.2, the export component declined to 48.5 from 50.0 previously. Output slowed to 51.3 (52.0 in December) and employment declined further to 47.8, from 49.0 in December. Essentially, a better domestic economy, though weaker export prospects, with employment declining. However, the numbers could well have been negatively impacted by the upcoming Chinese New Year holidays.

The HSBC PMI came in at 52.3 in January, higher than the 52 expected and the reading of 51.5 in December.

Interesting to see that the HSBC data is higher than the “official” data – does not happen often. The official PMI reflects the SOE’s, in particular, whilst the HSBC data, which is a smaller sample size, is based on medium sized private companies;

China’s Q4 current a/c surplus came in at US$65.8bn. The surplus for 2012 amounted to US$213.8bn, or 2.6% of GDP and has declined from +10.1% in 2007.

However, capital outflows amounted to US$ 117.3bn for 2012, as opposed to a surplus of US$221.1 bn for 2011. Outflows amounted to US$51.7 in Q3, slowing to US$31.8bn in Q4. With the improvement in the economy, capital is expected to flow back into China this Q;

It looks as if the Spanish bank, Santander, has been caught up in the Monte dei Paschi scandal. Santander bought an Italian regional bank, Antoveneta for E6.6bn, following the breakup of ABN Amro, only to flip it to Monte dei Paschi for E9bn a few days later, at an extraordinarily high price (some 20 times earnings). There are allegations of bribes being paid. There were more than a few raised eyebrows at the time of the transaction and Italian prosecutors are now investigating. Looks like yet more trouble for Spain, combined with political uncertainty in both Italy and Spain – and yet the Euro continues to rise – currently well over US$1.36, with no sign of slowing down. Looks as if it will rise through US$1.37;

Whilst on Santander, NPL’s in respect of its Latin American operations are rising – indeed NPL’s have risen in Brazil, Mexico and Chile;

Well its not just Italian and Spanish banks – the UK bank, Barclays is being investigated, following allegations that they provided financing for Qatari investors to buy shares in the bank, at the height of the financial crisis in 2008. The equity investment by the Qataris avoided Barclays from having to be bailed out by the UK government. In addition, the bank paid massive fees for the equity investment by the Qataris. Once again, this story looks as if it has legs;

Spanish and Italian PMI came in at 46.1 and 47.8, better than the 44.6 and 46.7 in December respectively, though still in contraction territory – highest since mid 2011 though. On the other hand, Irish January PMI came in at 50.3, below 51.4 in December. German final January manufacturing PMI rose to 49.8, from a revised 46.0 in December and above the flash reading of 48.8. Does not look like flat German Q1 GDP to me. Output and orders were above 50.0. The Euro popped up on the German data. As usual, Greece was the laggard, with PMI coming in at 41.7, the 41st consecutive monthly contraction, though marginally higher than December’s 41.4. Final French PMI came in at 42.9, in line with the flash estimate, though much lower than December’s 44.6;

Bloomberg reports that Japan bought 10.3% (approx E400mn) of the bonds issued by the ESM last month. In addition, Japan has bought E7bn of bonds issued by the EFSF by 31st December 2012, representing 6.7% of the bonds issued. Its difficult for the EZ to criticize Japan for weakening your currency if it buys your bonds, which you need to sell !!!. Whatever, the news is Euro supportive.

However, one Euro negative news item – the ECB announced that banks would repay just E3.48bn of the 2nd 3 year LTRO on the 6th February – hmmmm, sounds as if European banks have not improved quite as much as the market expected following the much higher level of repayment in respect of the 1st ECB LTRO. Furthermore, I will not be surprised with a reasonably sized take up of the 3 month ECB financing;

EZ December unemployment declined to 11.7% M/M, lower than the 11.9% expected and the revised 11.7% in November – seasonal effects?;

EZ January estimated CPI came in at +2.0%, lower than the expected +2.2% and +2.2% in December. The +2.0% numer is important as its the target rate for the ECB. On the assumption that EZ inflation continues to decline, which I expect, and as a result of the much stronger Euro, I believe that the ECB will cut interest rates, not next week most likely, but pretty soon;

UK January manufacturing PMI declined to 50.8, from a revised 51.2 and below the 51.0 forecast;

US January NFP’s came in at +157k, slightly below the +160k expected. However, December’s data was revised higher to 196k, from 155k previously, with November increased to 247k from 161k previously. In addition, an additional 422k jobs were created in the year to 31st March 2012. The unemployment rate ticked higher to 7.9%, from 7.8%, though the participation rate remained at 63.9%. Private sector jobs increased by +166k, in line with the 165k expected, through December was revised higher to 202k from 168k expected. The average workweek was unchanged at 34.4 hours. Average earnings rose by 4 cents to US$23.78 an hour. The U6 unemployment rate (including discouraged workers) held at 14.4%. All in all, a decent set of numbers, in particular as a result of the revisions;


Asian markets closed mainly higher – the Chinese market was higher on denials by government sources that the property tax trials would include Beijing. European markets are trading higher. US futures suggest a positive open.

The S&P rose by +4.2% in January, the best since October 2011.

The Euro continues to rise – currently US$1.3643, though off this morning’s high of US$1.3675. The Yen has declined below 92 against the US$ for the 1st time since 2010, following the weaker Japanese employment and household spending data, though for some reason has rebounded following the NFP data and is currently just below 92 to the US$.

Spot gold is trading at US$1672, with March Brent at US$116.29 – wow.

Kiron Sarkar

1st February 2013

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