Japanese exports rose by +5.9% in March YoY, above forecasts of a rise
of just +0.2%. The trade deficit came in at US$1bn, far less than the
US$2.7bn forecast, though on a seasonally adjusted trade basis, the
trade deficit widened to US$7.6bn. The trade deficit amounted to
Y4.41tr in the year to March 2012, from a surplus of Y5.3tr, mainly
due to higher energy imports, following the closure of all (except for
1) nuclear reactors following the Fukushima incident. Overall, the
value of Japanese exports declined to Y65.3tr in the year to March
2012, down by some 25% from the 2006/7 peak.
The Japanese Central Bank Governor stated that Japan was fully
committed to maintaining its zero interest rate policy and to continue
to buy financial assets, until the goal of achieving a 1.0% inflation
rate is “deemed achievable”. The Yen slipped on the comments by the
central bank governor;

The PBoC has pledged to continue to provide adequate liquidity,
including using RRR’s, the State controlled Xinhua reported. Bank
lending has increased and RRR’s were cut in February for the 2nd time
in 3 months;

India is building up its military, in particular its air force and
navy to counter a perceived threat from China. Today, India launched a
long range (5,000km) missile capable of carrying a nuclear warhead,
which could target Chinese cities, including Beijing. Defence spending
is set to rise by +13% this fiscal year, to US$38bn, though far less
than China’s estimated US$110bn for 2012;

The RBI policy statement, which accompanied the rate cut of 50bps last
Tuesday, states effectively that there will be no further rate cuts
unless the Indian Government sorts out the fiscal mess, which is
highly unlikely, especially as there are key regional elections this
year and a general election in 2014. India’s consumer price index rose
to 9.47% in the year to March, up from 8.83% in February, which
reconfirms that inflation remains a serious problem;

Spain’s E2.541bn of 2 and 10 year bond auctions delivered neutral to
negative results. The market had expected the auctions to be better
supported, given demand as the market was short and the overall size
was low. The 10 year bond rose by 2bps post the results.
They sold E1.12bn of the 2014 bonds at a yield of 3.463%, slightly
lower than the 3.495% previously and at a bid to cover ratio of 3.29,
from 2.0 times before;
The 10 year bonds were auctioned at a yield of 5.743%, up from 5.403%
previously and a bid to cover ratio of 2.42 times from 2.2 times
Spain has managed to raise approximately 50% of its requirements for
the current year.
In spite of denials, Spanish authorities are trying to get the
EFSF/ESM to recap their banks, though is being opposed by the Germans
(Mr Weidmann, the head of the Bundesbank). The ECB may well have to
buy Spanish bonds, though the market will be wary as the issue of
seniority (following the precedent in Greece) will temper enthusiasm.
I continue to believe that Spanish banks will need EFSF/ESM support at
the very least, though a bail out (if funds are available) looks more
and more likely;

Just to clarify, Italy’s revised forecasts are still within the limits
imposed by the recent EZ fiscal compact. Italy was just trying to do
better. However, the forecasts they announced yesterday look
optimistic – Italy’s economy likely shrank in the 1st Q of 2012, for
the 3rd consecutive Q. Debt to GDP, based on the revised forecasts is
expected to increase to 123.4% at the year end, declining to 121.5%
next year. Italy’s February industrial orders seasonally adjusted came
in at -2.5% MoM (much weaker than the -1.1% expected) or -13.2% YoY.
The EU is to issue its revised estimates of budget deficits next week.
Monti has certainly introduced some reforms, though he has had to
water down important structural changes in respect of labour issues.
Further changes are going to prove difficult and his honeymoon period
has ended. Having said that Italy is still in a far, far better fiscal
position than Spain, irrespective of its headline higher debt to GDP;

Fitch is to hold a ratings committee meeting in June to decide whether
to downgrade Holland. On the negative side, household debt is the EZ’s
highest at approx 250%, as compared with 150% in the UK, 124% in Spain
and 90% in Germany, according to Eurostat 2010 data. Debt to GDP is
expected to rise to 76% in 2015. The Dutch pushed up home prices,
given cheap and readily accessible financing, though home prices are
now declining materially. There are some 221k unsold homes and prices
have declined by 11.0% from the peak in August 2008. Some 500k people
are in negative equity at present and home prices are expected to
decline a further 5.0% this year, according to the Dutch real estate
federation – likely by more. Wages are declining and unemployment is
increasing. The big issue is whether the Dutch will cut their budget
deficit to 3.0% of GDP. The right wing Freedom Party opposes strict
austerity measures put forward by the PM, Mr Mark Rutte. A resolution
is needed this week and, at present, there is deadlock (Source The

Mr Hollande proposes to raise the minimum French wage. France is
increasingly uncompetitive – this will be bad news. The most recent
poll suggests that Hollande will win both rounds – in the1st round, he
leads by 29% to Sarkozy’s 24%. His 2nd round lead has risen to 16
points, from 14 points previously. Monsieur “Bling Bling” looks in
deep trouble
French bond auctions went reasonably well today;

Germany’s Economic Institutes forecast of 2012 GDP came in at +0.9%,
with the 2013 forecast at +2.0%. Unemployment is expected to decline
to 2.8mn this year and consumer prices to rise to +2.3%. The budget
deficit is expected to decline to -0.65% of GDP and to near flat
(-0.2%) in 2013. Domestic demand is expected to remain the key driver
of growth;

As expected, Brazil reduced interest rates by 75bps to 9.0% and,
surprisingly, suggested that rates may fall further in response to the
fragile global economy. They added that the risks of missing its 4.5%
inflation target are limited and that the global outlook remains
disinflationary. The accompanying statement was very dovish,
suggesting further cuts – most observers had expected that the
anticipated 75bps cut would be the last for the year. The lowest
interest rate in 15 years has been 8.75%. Personally, I believe that
the Central Banks inflation expectations are optimistic;

The IMF has managed to raise US$320bn in new funds to increase the
size of its bail out funds – its target is US$400bn – US$500bn, though
Lagarde has been reducing expectations recently. Poland and
Switzerland have been the most recent contributors. The US and Canada
will not contribute;


Asian markets were mixed. European markets (ex Spain) are higher.
Brent is creeping up – currently US$118.24. Gold is higher at US$1644.
The Euro remains around US$1.3115.

Spain’s problems have not gone away. Expect further turmoil in coming
weeks/months. China looks as if it will ease further, which is

US housing data will be interesting, as will weekly jobless claims.

Kiron Sarkar

19th April 2012

Category: Think Tank

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