Worse than expected Japanese, German, French and Italian Q4 2013 GDP

Japanese Q4 2012 GDP unexpectedly declined by -0.1% Q/Q, or -0.4% on an annualised basis, as opposed to +0.4%, on an annualised basis, expected.  Q3 2012 GDP was also revised lower to -3.8% on an annualised basis, as opposed to the initial estimate of -3.5%. It was the 3rd successive quarterly contraction. Net exports contributed -0.2% to the contraction, whilst business investment declined by -2.6% Q/Q, the 4th consecutive quarterly contraction. The worse than expected numbers does however enable Japan to justify (at the upcoming G20 meeting) the need for additional fiscal and monetary measures to stimulate the economy and increase inflation, which should weaken the Yen further;

The BoJ kept its asset purchase programme unchanged at Yen76 trn, as expected. In addition, the BoJ refrained from committing to hold interest rates at zero until the inflation target was reached.  This was inspite of the BoJ acknowledging that inflation would decline in coming months due to Y/Y declines in energy prices.  The BoJ did, however, suggest that the Japanese economy was starting to improve. However, this is all non news, as 3 new members (including the governor) will be appointed to the BoJ board on 19th March, which will result in a radical change in BoJ’s policy in the future. There are reports out of Japan that the PM and the Finance Minister disagree on the choice of the next BoJ governor;


Indian wholesale price inflation declined to 6.62% Y/Y, in January, well below the 7.18% in December and the 6.98% expected. The decline will increase the pressure on the RBI to cut interest rates further, as being demanded by the government. OK, better numbers, but the recent increase in oil prices will feed through in coming months. I continue to believe that Inflation in India will rise from current levels. CPI, for example, rose to 10.79% last month. The Indian Rupee declined marginally on the news. The focus will now be on the upcoming budget;

Italian Q4 GDP declined by -0.9% Q/Q (-2.7% Y/Y), worse than the -0.6% expected and the -0.2% in Q3;

French Q4 GDP declined by -0.3% Q/Q, worse than the -0.2% expected. GDP was flat for 2012, as opposed to growth of +1.7% in 2011.

Insee, the French national statistics office, reported that French manufacturing output declined by -2.3% in Q4 Q/Q, following a +0.9% rise in Q3.

It looks as if President Hollande will finally come clean and confirm that France will not meet either its budget deficit target of 3.0% this year or its ludicrous 2013 GDP growth estimate of +0.8%.  The French Finance Minister, who has been reiterating that France will meet its deficit target ad nauseum, reversed his position yesterday. The EU has forecast that French GDP will come in at +0.4% and that the budget deficit will be 3.5% of GDP – unfortunately, I expect both these forecasts to be revised lower on 22nd February when the EU releases updated forecasts. Indeed, there is a risk that French 2013 GDP will be negative;

German Q4 GDP contracted by -0.6% Q/Q, as opposed to the gain of +0.2% in the previous Q and worse than the -0.5% decline expected. However, Q4 was likely the worst and recent data (IFO index, together with exports, for example) points to a decent pick up in the German economy this Q. Q4 was worse than expected due to weaker exports, slower capex and reduced construction activity. GDP rose by +0.7% in 2012, much lower than the +3.0% growth in 2011. GDP is expected to be unchanged this Q, but I believe that it will come in better than the unchanged forecast. The German economy minister confirmed that the weakness in Q4 GDP was temporary;

Overall EZ Q4 GDP declined by -0.6% Q/Q, worse than the -0.4% expected and the -0.1% in Q3. The poor data (the worst since Q1 2009) has whacked the Euro, which is currently trading at US$1.3330 – phew, finally making money on my short Euro/US$ trade. However, even though I’m biased (as I’m short Euro/US$), I have to ask the question, why is the Euro not even lower?. At present, the Euro is around -0.9% lower against the US$;

The ECB monthly inflation report states:

  • the stronger Euro suggests that EZ inflation will undershoot the target;
  • economic recovery in the EZ is expected later this year;
  • upside inflation risks arise from increases in oil prices, administered prices and indirect taxes, whilst the weaker economy and stronger Euro will counteract such risks. Furthermore, the upside risk factors are demand negative, something the ECB has finally understood, I believe;
  • risks to the inflation outlook remain broadly balanced.

I continue to believe that if the Euro increases above current levels, the ECB will cut rates. I appreciate that a number of analysts disagree, but, in my humble opinion, Mr Draghi (OK, in a somewhat Delphic manner) alluded to exactly that at the last press conference. Furthermore, I repeat, Mr Draghi has moved on forecasts, as opposed to that (—-) Mr Trichet who waited for actual data.

Amazing comments by an ECB board member, Mr Constantico – he suggests that negative interest rates in the EZ are a possibility. Once again, the ECB is trying to talk down the Euro –  if that fails, well a 25 bps cut is getting close to inevitable in my view;

Interestingly, S&P warn that Spain, Italy, Portugal and France could be downgraded this year – pretty close to a certainty me thinks;

US initial jobless claims fell to 341k, better than the 360k expected and 366k the previous week. Continuing claims came in at 3.114mn, as opposed to 3.205mn and 3.224mn previously. At least the US delivers better numbers. Should strengthen the US$ against the crosses;


Asian markets (ex India) closed mainly higher. However, the weaker than expected EZ GDP data has impacted on European markets, which are between -0.6% to -0.9% lower -indeed off it earlier lows. That actually not bad given the poor GDP data. US futures suggest a weaker open, though once again its not material.

The Euro, well its around 0.8% lower at US$1.33341. The Yen is strengthening !!!!!, currently Yen 93.40.

Spot gold is trading at US$1642, with April Brent at US$117.62.

I remain cautious, as I believe that risk/reward is not in my favour.


Kiron Sarkar


14th February 2013

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