10th April 2012

The BOJ kept it’s key interest rate between zero and 0.1% today. In addition, it left its asset purchase and credit lending programme unchanged. The BoJ may well have to relent next month and increase its asset purchase programme. The Yen strengthened on today’s news;

Rumours circulate that Premier Wen of China will announce stimulus measures tomorrow – the markets rose on the rumour. Chinese 1st Q’s GDP data will be out this Friday. Possible cuts in RRR’s and/or a reduction in interest rates are cited as possible actions that the Chinese authorities could take;

With exports rising by +8.9% (more than the +7.0% expected) in March and imports up just +5.3% (+9.0% expected), China unexpectedly reported a trade surplus of +US$5.4bn, rather than the deficit of -US$3.15bn expected. YTD, the trade surplus amounts to US$670mn. The rise of exports is positive, though slowing imports suggest a weaker domestic economy. Exports to Europe declined by -1.8% YoY, though they rose by +12.8% to the US. Chinese inflation rose to +3.6% YoY in March, higher than the +3.2% in February – food and energy prices were the reason for higher inflation;

It looks as if Portuguese banks are ever more dependent on the ECB – they borrowed E56.3bn in March, higher than the E47.6bn in February and the previous peak of E49.1bn in August 2010;

German January and February exports rose by +2.1% compared with the 4th Q 2011 average, whilst imports rose by +1.7%. In February, exports rose by +1.6% MoM (E119.3bn and well above the decline of -1.2% expected), whilst imports rose by +3.9% (E77.4bn). The adjusted February trade surplus came in at E13.6bn (in line with estimates of E13.4bn) and slightly lower than the upwardly revised January’s E15.1bn. A German Trade association forecasts that Germany’s 2012 trade surplus will be roughly in line with last years surplus of 2011. Exports to Europe are set to decline, but Asia will take up the slack, they report. In nominal terms, exports are expected to rise by 6.0% this year, with imports increasing by 7.0%;

Whilst German bond yields drop to a record low, Spanish bond yields continue to rise – the 10 year was above 5.90% this morning and seems set to rise further;

The EZ Sentix Index fell to -14.7 in April, from -8.2 in March and much weaker than the forecast of -8.1;

The Bank of France reports that economic activity is likely to stagnate in the near term. They estimated that 1st Q GDP would be flat, confirming the same view reported by the National Statistics Office, Insee. Sentiment amongst factory executives was unchanged at 95 in March. Factory PMI slumped to a 3 year low of 46.7 with output (45.6) and new orders (43.4) declining sharply. The services PMI rose marginally – it was up +0.1 to 50.1 in March. Manufacturing production fell by -1.2% in February, the 3rd monthly decline;

US small business confidence index fell to 92.5 in March, from 94.3 in February, the 1st decline in 6 months;

Outlook

The totally unexpected US March NFP data – employment rose by just 120k is certainly having a negative impact on equity markets. In addition, concerns about China, combined with problems in the EZ (Spain), is also adding to the woes. Asian markets closed mainly lower today and European markets are weaker.

Whilst the markets have welcomed Mario Monti’s accession to power in Italy, there are increasing reports that the implementation of the proposed structural reform programme (particularly labour reforms) is facing serious opposition and that he is being forced to compramise far too much. Italian bond yields are rising. Italian and Spanish markets are amongst the worst performers today, though the French CAC is also weak.

The US earnings season is upon us, with Alcoa today. Businesses and analysts have reduced forecasts significantly (less than a 1.0% increase Q/Q), which should make the targets achievable. The outlook comments will be read carefully.

The Euro is off its lows – currently US$1.3121, with Gold slightly higher at US$1646, though Brent some 0.5%+ lower at US$121.67.

Kiron Sarkar

Category: Think Tank

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