Governor Stevens of the Australian Central Bank, the RBA, states that he has room to “adjust” interest rates to respond to a slowing global economy. In other words, rates will be reduced further. You could argue that the RBA has been behind the curve in cutting interest rates – certainly my view. Furthermore, the government is talking about balancing its budget, which seems pretty silly, gven the weaker economic conditions GDP – must have had too much testosterone. The A$ is flat to marginally lower today;

Inflation in China came in at +1.9% in September Y/Y, in line with estimates and below August’s 2.0%. Producer prices declined by -3.6% Y/Y, the seventh consecutive monthly decline and the most since 2009. However, consumer prices are expected to increase in coming months as food prices rise, causing additional problems for policy makers. The Xinhua news agency (the mouthpiece of the administration) reports that the country has a “relatively large room” to use monetary and fiscal policies as compared with other countries ie stimulus is coming boys and girls;

 

China’s growth of forex reserves is slowing – reserves rose marginally to US$3.29tr at the end of September, from US$3.24tr at the end of June. I would expect that China’s forex reserves have neared a peak and will start to decline (slowly) in a few Q’s time. The slowing growth of reserves will help reduce the pressure to appreciate the Yuan;

Chinese September M2 came in higher than expected at +14.8% and importantly has been on a steady increase throughout the year. New loans came in weaker than the Yuan 700bn expected at Yuan 623bn (Yuan 6.7tr YTD), though the target of Yuan 8.5tr for the current year looks achievable (Yuan 7.5tr last year);

September Chinese exports came in +9.9% Y/Y, while imports were +2.4% higher. However, the larger than expected increase in exports was due to shipments being made ahead of the week long holiday. Chinese manufacturers/exporters are still facing significant problems;

Inflation in India remains a problem, increasing to 7.81% in September (a 10 month high) and higher than forecasts of 7.70% and 7.55% in August. A rise in diesel prices, due to the reduction in subsidies, was the main reason for the increase. Cant see the RBI cutting rates at the next meeting on 30th October, though the RBI will continue to provide liquidity to the markets;

President Putin’s United Russia party won all 5 races for governors and 6 local legislative elections in a low voter turnout election. Well, what else would you expect. However, there does not seem to be the same allegations of widespread vote rigging this time around, though its early days;

Greek press reports suggest that the Troika and Greek officials remain in active talks over the E13.5bn of austerity cuts demanded by the Troika. Basically all talk, but little action. The Greeks want to conclude the deal ahead of the EU Heads of State Summit on the 18/19th October – extremely unlikely – probably in November. However, will the “deal” be implemented by the Greeks?. Reports suggest that the Troika has concluded that Greece needs 2 more years to complete its reforms, which will involve a further E30bn to be provided by its creditors. A 3rd bail out package – cloud cuckoo land, boys and girls. I continue to believe that Greece will default and will exit the Euro. Can’t see any alternative;

Portugal is set to announce its 2013 budget today. The country has been imposing austerity measures in earnest, though its budget targets (unlike Ireland) had to be revised higher – to 5.0% from 4.5% for this year, but it looks as if the country will not make the higher target. However, Portugal’s current account deficit should decline to 3.0% this year, from around 10% some 2 years ago. In addition, exports are rising by around 10% per annum, with unit labour costs falling by 3.75% this year. However, in spite of raising taxes, tax revenue is down -2.4% in the year to August. Its the effect of that negative fiscal multiplier, that the IMF has raised and which the EZ still has not figured out.

The country is slowly on the mend, but talk of further austerity (likely, though silly) is certain to create social tensions and civil disorder, unlike previously, when the country “accepted” the need for cuts. A national strike has been called for November 14th. GDP is expected to decline by -3.0% this year and by at least 1.0% (likely higher) next. Debt to GDP will rise to around 125%;

US retail sales rose by +1.1% in September, higher than the +0.8% expected, though lower than Augusts upwardly revised +1.2%. Ex autos retail sales rose by +1.1%, the highest since January and above the +0.7% forecast;

Manufacturing contracted in in New York region in October for the 3rd straight month. The Empire State manufacturing index came in at -6.16, worse than the -4.0 expected. The employment index came in at -1.08, as opposed to 4.26 in September. New orders declined by less at -8.98, as opposed to -14.03 previously. Prices paid were 17.20, as opposed to 19.15. The data is in line with other regions;

 

Outlook

Asian markets closed mainly higher, ex China. European markets are happier today – they are up some +0.5%+. Chinese 3rd Q GDP numbers are to be released on Thursday, which will be closely watched. US markets have opened some +0.2% higher.

The Euro, well it’s trading at US$1.2960. Gold is US$1743, with oil (November Brent) at US$114.61.

Huge number of comments on my weekends piece. Will respond next weekend.

Flying back to Ireland tonight, after a great trip to New York. Just want to thank all my friends for giving me such a great time over here.

Finally, the outlook looks gloomy, but I’m not at all ready to throw the towel in yet. Still believe there will be positive policy action in China, in coming months and, quite probably in the EZ, as well, though I always have to remind myself that they are the EZ, after all.
Still like European financials – I’m long, for full disclosure purposes.

Kiron Sarkar

15th October 2012

Category: Think Tank

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