Sarkar’s Week in Preview

US GDP was revised higher to an annualised rate of +4.1% (from +3.6% previously) in Q3, with consumer spending, a key driver of the economy increasing by +2.0% on an annualised basis, higher than the +1.4% previously estimated. Analysts have increased their annualised growth forecasts for the 2nd half of the year to around 3.0%, well above the +1.8% rate in the 1st half. The improvement in US GDP supports the FED’s decision to reduce its asset purchase programme. Estimates for Q4 GDP have been revised higher to around +2.5%, though is likely to come in better. Personal incomes rose by +0.2% in November, following a decline of -0.1% in October. Spending rose by +0.5%, mainly due to higher auto sales and increased expenditure on utilities due to the cold weather. Durable goods orders were up +3.5% in November. Excluding transportation, which tends to be volatile, orders rose by +1.2%. Jobless claims were also better than expected. Generally, US economic data is coming in better than expected.

Japan announced its budget for their fiscal year starting 1st April 2014. The budget which amounts to approximately Yen 96bn, is a record and the finance minister announced that they will need to issue Yen 41.25tr of bonds to finance the spending, around 43% of the total. In addition, the finance minister states that Japan could increase spending even further to stimulate growth !!!!. Inflation is rising. Prices, excluding fresh food, increased by +1.2% Y/Y, higher than the rise of +1.1% expected, mainly due to the weaker Yen. CPI was even higher, coming in at +1.5%, the highest since late 2008. However industrial output rose by a lower than expected +0.1% in November M/M, though retail sales were higher than forecast. To date, Japanese businesses have not raised wages. The annual wage round, which occurs shortly, should indicate whether businesses do indeed raise wages. Prime Minister Abe is urging businesses to increase wages. One of the largest business federations have urged their members to raise wages, though the expected increases (around 0.5%) will be much lower than prevailing inflation, with CPI predicted to increase to 3.0%. The real decline in earnings will clearly impact domestic consumption, reducing growth. I remain deeply sceptical of Abenomics and the Bank of Japan’s policy. Japanese bond yields have been rising, with the 10 year at 0.74%, though have much further to rise in my view. Japanese investors are beginning to buy foreign bonds.

The Chinese Central Bank, the PBoC announced that it had injected further funds into the financial system to avoid a liquidity crunch. The measures seem to have worked with short term rates declining by over 250 bps over 7 days, the most since 2011. The Yuan rose to its highest level in 20 years, trading around 6.07 to the US$. Chinese local government debt has risen to Yuan 17.9tr (US$ 3.0tr), as at June, according to the National Audit Office. The Office promised to keep a close watch on spending by local governments.

Overview
US data has come in better than expected. As a result, bond markets have declined, with the 10 year Treasury yield rising to around 3.0%. Yields look as they will rise to 3.25%+. The higher US yields could well impact emerging markets. US markets continue to set record highs, though on light volume due to the holidays. The better data also helped Japanese markets which have risen by over 50% in local currency terms this year. The DAX in Europe is also trading at record levels. Markets look as if they will continue to rise into the New Year.

The Yen continues to decline to 5 year lows against both the US$ and the Euro. The weakness of the Yen is causing concern for countries in the region, in particular exporting countries such as China, South Korea and Taiwan. With the current policies in place, I believe that the Yen will decline further. Sterling has been strong, following a string of better economic data, approaching US$1.65. The Euro remains resilient, though has backed off its recent highs of over US$1.38. I must admit, I have been surprised by the resilience of the Euro, though continue to believe that it will decline against the US$ next year.

May I just take this opportunity of wishing you a very happy New Year.

Kiron Sarkar
30th December 2013