The Australian Central Bank, the RBA, reduced its overnight cash rate by 25bps to 3.5%, as expected. The Governor of the RBA stated “The board (of the RBA) judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accomodative stance of monetary policy”. The A$ improved marginally following the news, as markets had expected an even larger rate cut. A further rate cut is July is likely;

 

Yesterday, Chinese markets closed 64.89 points lower. For the superstitious Chinese, the decline reminded them of the Tiananmen Square massacre 23 years ago on  June 4th 89. The reaction – well authorities blocked all references on the internet. The key issue is that it just confirms the paranoia of the Chinese authorities;

 

The HSBC Chinese services PMI rose to a 19 month high in May of 54.7, from 54.1 in April. Interestingly, the official services PMI number indicated a decline in services PMI in May;

 

EZ May services PMI were as follows:

Italy came in at 42.8, up from 42.3 in April and better than the forecast of 41.8;

France (final) came in at 45.1, slightly lower than the initial estimate of 45.2;

German (final) came in at 51.8, lower than the initial 52.2;

Overall, the EZ May final services PMI came in at 46.7, slightly better than the flash reading of 46.5.

The EZ composite PMI came in at 46.0, also slightly better than the flash reading of 45.9, but the lowest since June 2009.

 

EZ April retail sales were down -1.0% MoM, or -2.5% yoY, much weaker than the forecast of -0.1% and -1.1% respectively. Spain was down -2.4% MoM. May’s data should be even worse;

 

For the 1st time, Spain (the Budget Minister) has called for direct EZ aid into its insolvent banks – he states that at current borrowing costs, the market is not open for Spain. However the Spanish authorities (the PM) still does not want EZ oversight. Will a recap of Spanish banks be enough. I very much doubt it. The PM will have to cave in. The head of Santander suggests that Spanish banks need just E40bn – most analysts are higher, with UBS as high as E100bn. Spain is to test bond markets this week, with an auction of longer term bonds;

 

German April manufacturing orders were -1.9% lower MoM, much weaker than the -1.0% expected. However, March’s data was revised higher to +3.2% MoM, up from +2.2% previously. The German economy Minister states that the reason for the decline was the strong data in March. However, I expect the data to show (significant?) weakness in coming months. An analysis of the data reveals a sharp drop (-4.7% MoM) of non EZ manufacturing orders and of foreign orders generally (-3.6% MoM), though domestic orders have held up (+0.4%) marginally;

 

Both Mrs Merkel and her Finance Minister, Mr Schaeuble, support the concept of bringing systemically important EZ banks under EZ supervision., rather than leaving them to regulation/supervision by individual countries. However, both Mrs Merkel and Mr Schaeuble reiterated that Germany would not support the creation of Euro Bonds, prior to “real fiscal union”. Mr Schaeuble also suggested that the German inspired “debt redemption fund” was “a medium term project”. However, the opposition parties in Germany want to discuss precisely this idea, in exchange for passing the fiscal compact through the German lower house.

 

Some analysts suggest that the ECB will cut interest rates tomorrow. The ECB will release revised economic data, including growth and, more importantly, inflation data, which should suggest a (much?) reduced inflation outlook. Personally, whilst I believe that the ECB will cut rates, I believe they will hold off until they can assess the outcome of the French and Greek elections and the results of the EU heads of State meeting at the end of the month, in particular. The ECB is anxious for EZ governments to act, rather than relying on them;

 

US May ISM (non manufacturing) came in at 53.7, higher than the 53.5 expected and above the 53.5 in April. Whilst the employment component was lower at 50.8 (the lowest since December), as opposed to 54.2 (supporting recent employment data), prices paid was sharply lower at 49.8, versus 53.6 and new orders were also higher at 55.5, as opposed to 53.5 previously. Overall, respondents suggested that activity had picked up. In addition, inflation is likely to weaken materially in coming months – lower oil price impact.;

 

The G7 finance ministers and central bankers are discussing Europe this morning. Cant see a great deal coming out of that chat. Indeed, comments from the Japanese, following the tele conference confirmed precisely that. US sources suggested that fiscal union in Europe ie Euro Bonds was discussed – yeah, I’m sure, but the German participants were deaf, he should have added;

 

Bloomberg reports that oil tanker rates have fallen to the lowest since 1997. Not going to be good for the Greek ship owners, the largest part of the Greek economy, with tourism next – which has also gone down the plug hole given the civil unrest;

 

Outlook

 

Gloomy EZ data, though the US non manufacturing data has improved sentiment. Bernanke’s comments are going to be listened to carefully – I would expect him to be dovish. Expect a lot of hot air in respect of Spain/Spanish banks, but ultimately Spanish banks will need funds from the ESM and will have to accept oversight.

 

The better US ISM report has improved US market sentiment. Oil is well off its lows and currently just over US$99 (July Brent).

 

UK markets will reopen tomorrow, following the 4 day holiday to celebrate the Queens Diamond Jubilee, a spectactular event and much more interesting than watching markets at present.

 

Kiron Sarkar

 

5th June 2012

Category: Think Tank

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