Australian retail sales declined unexpectedly by -0.8% in July, as opposed to a rise of +1.2% in June, the 1st drop this year and well below the rise of +0.2% expected. The RBA meets tomorrow, though is not expected to cut rates (currently 3.5%) – however, it will soon, even if not tomorrow. There are fears of rising unemployment. In addition, capex in the mining sector is being cut back, given weaker demand from China. The RBA today released its August commodity price index, which came in at the lowest since April 2010. The A$ declined on the weaker retail sales data news (together with the worse than expected Chinese manufacturing PMI data – see below) and is trading at its lowest level in 5 weeks – currently US$1.0248 and weakening. (For full disclosure purposes, I’m short the A$ and Aussie banks);

Japanese capex rose by +6.6% Y/Y, lower than the +7.8% expected, though well above the decline of -8.2% the year before. Companies sales have declined for 4 consecutive Q’s – not good news. However, the Yen is strengthening, given Bernanke’s dovish comments last week. The weaker data suggests that the Japanese authorities will reduce their estimate for GDP for the period April to June, from +1.4% annually initially estimated. The BoJ meets on 18/19th September and is expected to increase its asset purchase programme ie QE;

Official Chinese August PMI (reflects the larger SOE’s) declined to 49.2, from 50.1 in July and lower than the forecast of 50. It was also the lowest reading in 9 months. Export orders were unchanged at 46.6, though the 3rd consecutive monthly contraction. New orders declined further to 48.7, from 50.9 in July. The employment sub index declined to 49.1, from 49.5 in July and the lowest since January.
HSBC’s August updated manufacturing PMI (smaller sample and medium sized non state and mainly export businesses, predominantly along the coast) came in worse than initially reported (47.8) and the official data at 47.6 M/M, lower than the 49.3 in July. Exports have collapsed at the sharpest rate since March 2009. Companies are firing workers at the sharpest rate in 41 months and the 6th in nearly the same number of months. In addition, work in progress in declining materially. Essentially the HSBC numbers suggest that a) domestic orders are declining faster than export orders, b) de-stocking is incomplete, indeed inventory levels are ikely rising and c) production has lost momentum. (Source FT). A definite whoops;

Chinese August non manufacturing PMI came in better at 56.3, as opposed to 55.6 in July – surprising.

Some common sense has finally prevailed in India, as a committee has recommended (likely to be implemented) that the authorities are to defer a proposal to crack down on tax avoidance for at least 3 years. The GAAR scheme, introduced by the former finance minister (now “promoted” to President !!!!) has been widely criticised by foreign investors. The Indian markets are dependent on foreign purchases. The change of heart may help to defer a credit downgrade, but the odds are that India will be downgrade sometime this year. The new Finance Minister, Mr Chidambaram is regarded favourably by the market;

The Spanish PM continues to live in cloud cuckoo land. He is reported to be considering a request for additional financial aid from the EZ on top of the E100bn for the Spanish financial sector, but does not believe that the EZ needs to impose any further conditions. In addition, he reiterated that Spain would wait to assess the conditions attached to the bail out programme, before requesting aid;

A Portuguese commission reports that the country’s budget deficit will come in between 6.7% to -7.1% in H1 2012, well above the rate required to meet its target – which it wont. A 2nd bail out is coming;

The ECB will circulate its bond buying plans to EZ Central Bankers tomorrow for consideration at the ECB meeting on the 6th September. Interesting, especially as the ECB had previously leaked that they would defer decisions on such matters until after the decision of the German Constitutional Court is known. I remain cautious and believe that the ECB will hold back from revealing much this Thursday. There is also the possibility that the ECB will cut rates at the forthcoming meeting – certain, even if not this Thursday, in spite of inflation being above the 2.0% target at present;

The German Finance Minister Mr Schaeube has, as expected, thrown cold water on the EU’s proposal that all EZ banks are supervised by the ECB. He prefers that the ECB supervises just the largest EZ banks and not (for domestic political reasons) the smaller German banks, who, quite frankly, need to be recapitalised. In addition, Mr Schaeuble questions whether the necessary regulation for banking union can be established by the year end. No great surprise, but not helpful at all. Mr Schaeuble also warned against expecting too much from the ECB – Hmmmmm;

Only 26% of Germans believe that Greece should either remain in the EZ and get more assistance, with 54% suggesting that Greece should leave the EZ, reports the FT. However, the difference in the EZ countries is wide – 77% of Italians believe that the Greece will repay their loans, as do 57% of Spaniards. The poll must have been taken after Italians/Spanish respondents had had a very long and boozy lunch !!!. The French polling data is particularly interesting. Only 25% of French believe that EZ countries should do more to keep Greece in the EZ, though only 32% believe that they should be kicked out. The bottom line is that Greece will never repay its loans from the EZ;

The German government has reconfirmed their confidence in the head of the Bundesbank, Mr Weidman
n and, in addition, of their confidence that the German Constitutional Court (“GCC”) will enable the President to sign off on the ESM. I certainly hope they are right. Personally, I remain exceedingly cautious in respect of the impending decision by the GCC, in particular;

Set out below are the August manufacturing PMI’s (M/M) for a number of EZ countries:
Spain          44.0, better than the 42.6 expected and July’s 42.3;
Italy            43.6, worse than the 44.8 expected and July’s 44.3, a 10 month low;
Greece        42.1, better than July’s 41.9
Ireland         50.9, weaker than July’s 53.9
France        46.0, slightly worse than the 46.2 expected, though better than July’s 43.4;
Germany     44.7, worse than the 45.1 expected, though better than July’s 43.0;
Euro Zone    45.1, slightly worse than the 45.3 expected, though better than July’s 44.0.
In particular, new export orders have slumped by the steepest since January 2009

UK August manufacturing PMI came in much stronger at 49.5, as opposed to 46.1 expected and July’s 45.2. However, it still marks the 4th consecutive month of contraction. Capital Economics suggests that the reading implies that UK 3rd Q GDP will decline by -0.3%, reports Bloomberg. An UK cabinet reshuffle is expected, though the current administration seems to have lost its way. The head of the Liberal Party and the deputy PM is facing a move to oust him. However, the UK PM has reiterated his pans to stick to the governments expenditure cutting plans, though in reality these mean a lower rate of spending, rather than actual cuts at the moment;

Templeton holds some E6.1bn of Irish government debt as at the end of June. Well, Ireland certainly has stabilised and is showing signs of recovery, but that is one very large position in an illiquid market and with a number of issues in the EZ yet to be resolved. (Source FT)
Irish July industrial production rose by +1.0% M/M, up from the -0.3% in June;

Outlook

I had thought that the Chinese authorities would introduce stimulus measures by now, together with additional monetary easing to combat the economic downturn, in particular, given the impending change in leadership later this year/early next. However, to date, the government has not introduced anything like the measures (US$586bn or 14% of GDP) enacted in 2008/9. With unemployment rising and the Chinese authorities concern to maintain social stability, I think its only a matter of time before China acts, though I will wait for any announcement before acting. Some of my well informed friends advise me that the Chinese authorities may prefer coordinated global central bank action, though another suggests that they will hold off for a while yet. The Shanghai index declined for the fourth consecutive month in August (the longest period of time it has declined since August 2004) and is at its lowest level since February 2009 – it has declined approximately 16% since May, though closed +0.6% higher today (not convincingly) on hopes of a policy response.

Asian markets (ex the Nikkei) closed mainly higher, with European markets also up. US markets are closed for Labour day. The Euro is trading at US$1.2570, off its recent highs. Brent (October) is trading higher at US$114.46, with gold down to US$1688, though well off its highs post Bernanke Jackson Hole comments. I remain of the view that inflation is likely to decline in the 1st instance (clearly bad for gold), though the solution for the debt crisis will involve higher inflation in due course – good for gold.

I’m sounding like a record stuck on the same track, but I remain exceedingly cashed up and particularly cautious. I really don’t expect much from the ECB this week and believe that current expectations are unrealistic.

Kiron Sarkar

3rd September