Kiron Sarkar Weekly report 26th April 2014

Whilst the Chinese authorities have announced a modest stimulus programme, it appears that they are relying on the central bank to stimulate their economy. The PBoC is easing monetary policy to counter the decline of the economy. Interest rates are declining. Furthermore, the PBoC is allowing the Yuan to depreciate. It has weakened the reference rate it sets against the US$ for some months.

With the exception of France and, to an extent Italy, eurozone (EZ) economic data has improved generally. The peripheral countries of Spain and Portugal are recovering, with yields on government debt declining to record lows. Spanish Q1 GDP came in +0.4% Q/Q, above the +0.3% expected. However, disinflationary trends persist in the region, not helped by the strong Euro. Mr Draghi has again tried to talk the Euro lower, stating that a stronger Euro and/or persistently low inflation would result in the ECB acting to increase monetary accommodation, including the commencement of a broad-based asset purchase programme. Next weeks preliminary CPI data will be watched particularly carefully. However, the Euro strength may well dissipate if, as I expect, US data continues to improve at a faster pace than that in the EZ.

The crisis in the Ukraine is not improving, despite the agreement reached between the US, EU and Russia. Indeed, the situation on the ground is getting worse. Russia has been threatened with further sanctions, though Germany and Italy are reluctant. The risks remain high, though will affect Europe more so than the US. Germany is particularly vulnerable. Russia will fare the worst, though politics outweighs economic considerations as far as Mr Putin is concerned. This crisis is not going to resolved quickly and will weigh on markets.

S&P cut Russia’s sovereign debt rating to BBB- with a negative outlook, citing the possibility of large capital outflows and a further deterioration of their economy. Indeed, capital outflows have been large (US$50.6bn in Q1 this year, as compared with US$63bn for the whole of 2013) and there are clear indications that it is continuing. The downgrade means that Russia’s rating is just 1 notch above junk. The Russian economy contracted in Q1 and is likely to do so this Q, which would mean that Russia faces a technical recession. The imposition of further sanctions will clearly negatively impact the Russian economy even further. The central bank raised its key interest rate to 7.5% from 7.0% previously, to try and curb both the Rouble’s decline and inflationary pressures.

With the exception of housing, US economic data has generally come in better than expected, a trend which I expect will continue. Furthermore, Mrs Yellen recent speech suggests that the FED will remain dovish for longer than previously expected. However the crisis in the Ukraine is having an impact and, in addition, investors remain concerned about the valuations of a number of Nasdaq listed stocks. The yield on the 10 year bond declined to 2.66%. The risks to the US are more likely to come from potential events outside of the country.

The index of leading indicators, which assesses the outlook for the next 3 to 6 months, rose by +0.8%, above the rise of +0.5% in February and the increase of +0.7% expected. The improvement in the labour market is positively impacting consumer sentiment.

Sales of existing homes fell by -0.2% in March to an annualised pace of 4.59mn units, though slightly better than the annualised rate of 4.56mn expected. The median prices of homes rose by +7.9% Y/Y.

New home sales plunged by -14.5% in March to an annualised rate of 384k, much lower than the forecast for a rise to an annualised 450k. Housing data has been on the weaker side, with concerns over affordability and weak household income.

Both mortgage refinancing and new lending have declined materially in Q1 this year. Lending was down 58% Y/Y and 23% lower than in Q4 2013.

Weekly jobless claims rose to 329k, above the 315k expected and the prior weeks 305k. The Easter holidays may well have had an impact.

US durable goods orders rose by +2.6% in March, above the +2.1% increase in February and the forecast for a rise of +2.0%. The increase was the largest since November. Orders, excluding defense and aircraft, a better indicator, rose by +2.2%. Once again, better US data.

Germany continues to outperform. April manufacturing PMI came in at 54.2, above the 53.8 expected and 53.7 in March. The services PMI came in stronger as well, at 55.0, above the 53.0 in March.
France disappointed however, with manufacturing PMI coming in at 50.9, below the 52.1 in March and the forecast of 51.9. The services PMI also disappointed, falling to 50.3, from 51.5 in March. New business and employment declined.
The EZ April manufacturing PMI came in at 53.3, somewhat better than expectations of 53.0 and 53.0 previously.
The EZ April services PMI increased to 53.1, from 52.2 in March.
The EZ April composite index (manufacturing and services) came in at 54.0 (a 35 month high), above the 53.1 in March and better than the 53.0 forecast which, according to Markit, the producers of the index, suggests the EZ Q2 GDP will come in at +0.5%. However, input prices declined to a 10 month low, indicating that disinflationary pressures continue in the EZ.

The German IFO index rose to 111.2 from 110.7 in March. The forecast was for a decline to 110.4. Importantly, the expectations component rose to 107.3, up from 106.40 previously.

The UK’s Confederation of British Industry reports that manufacturing confidence rose to the highest in more than 40 years. There was increased optimism on employment and new orders, with investment intentions increasing to the highest since 1997.

UK retail sales rose by +0.1% M/M, in March (+4.2% Y/Y), much better than the decline of -0.4% expected. Wages are rising, with inflation trending lower, improving  disposable income. Sterling appreciated on the news.

Japan’s trade deficit rose to Yen1.45 tr in March, higher than the Yen1.08tr expected. Exports rose by a mere +1.08% (+6.5% expected), whilst imports surged by +18.1%. Exports in volume terms decreased by -2.5% Y/Y in March. Imports rose as a result of a rise in domestic spending ahead of the sales tax increase. The trade deficit for the fiscal year ending March came in at Yen 13.75tr, the 3rd annual deficit. A restart of some of Japan’s nuclear electricity generating plants (likely) will reduce energy imports and, as a result, the trade balance, though the numbers do not suggest that Japan has benefited from the weaker Yen. The BoJ is expected to increase its monetary policy programme in June/July.

Inflation, excluding fresh food, rose by +1.3% Y/Y in March, in line with expectations. It should increase materially in April, following the sales tax hike. Tokyo core consumer prices rose by +2.7% Y/Y in April, the largest rise since 1992, though below the rise of +2.8% expected.

Chinese new home price increases are declining across the country. Prices across the country rose by +7.7% Y/Y (+0.2% M/M) in March, an 8 month low and down from +8.7% in February. Mortgage availability has been restricted which has added to the slowdown in prices. Property construction activity has plunged and developers are offering discounts on prices. Analysts believe that the government will be forced to ease restrictions on lending. The property sector remains a material problem for China.

The preliminary April HSBC PMI index came in at 48.3 (48.0 in March), in line with estimates, though still in contraction territory for the 4th consecutive month. New export orders were weak, with employment contracting.

Australian core inflation rate rose by +0.5% in Q1 2014 (+2.6% Y/Y), below the rise of 0.7% expected. CPI rose by +0.6% Q/Q (+2.9% Y/Y), also below forecasts of +0.8%. The lower than expected inflation data, together with the weaker Chinese PMI data, resulted in the A$ weakening.

Kiron Sarkar
26th April 2014

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