The RBA has kept its benchmark interest rate on hold at 3.25%. Most analysts had expected a 25 bps cut. The RBA continues to remain concerned about inflation. Its debatable whether they cut next month, but I continue to believe that they will, if not in December, in early in 2013. The A$ rose on the news – currently US$1.0437 (a 1 month+ high) and may rise a bit further – personally above US$1.5025 looks like a great level to short, though I’m even tempted around these levels – the currency is way too overvalued, given the state of the global economy and China, in particular. However, the RBA reports that “data from China suggest growth there has stabilised. About 25% of Australian exports go to China (5.0% of Australian GDP) and 60% of those exports are iron ore. The Australian government is trying to balance its budget, which looks unlikely – A$ negative clearly (Source Bloomberg);

A BoJ official states that the Central Banks unlimited lending policy will weaken the Yen, as the currency is used to play the carry trade. Personally, I believe that the Yen will weaken much further, but the main move may well have to wait for the outcome of impending political events (passage of the budget/financing bill and general elections) and following the appointment of a new BoJ governor, in April next year;

The Japanese coincident composite index declined by -2.3 points in September to 91.2, the 6th consecutive monthly decline. The data, which is based on over 10 key indicators, suggests that the Japanese economy is facing a contraction – cant see a respite either;

The 4 big Chinese banks have issued Yuan 220bn of loans in October, up from Yuan 166bn in September – total lending in September was Yuan 623bn. The data suggests that total October lending will be materially higher than current forecasts (below Yuan 600bn) – data to be released next week.The PBoC is also providing a massive amount of liquidity. All of these actions were necessary to stabilise an alarming decline of the Chinese economy. The real issue is what do the new leaders do?. Personally, I believe that they will have to stimulate the economy or face serious social strife. However, the big issue is whether these measures will provide more than a temporary reprieve. Personally, I believe that China’s future is not in its hands – it is dependent on a better economy in the US and unfortunately for them, Europe. However, in the short term, I believe that China will rebound. Finally, now the outcome of the US Presidential elections is nearly settled and especially if President Obama wins, don’t expect the recent rise of the Yuan to continue – indeed, it is likely to weaken;

A 48 hour public sector strike is starting in Greece to day, in protest against the further E13.5bn of austerity measures. The strikers will be joined by bank staff, lawyers, dentists, telecoms workers, engineers, air-traffic controllers, etc, etc…….. Basically, try and find anyone who’s working in Greece. The current Greek coalition is looking decidedly wobbly. They control 176 out of the 300 seat Parliament, though the Democratic Left have stated that they will abstain from voting on the austerity bill tomorrow, due to their disagreement over labour reforms – they will vote in favour of the Budget this coming weekend. In addition, some members of the PASOK party are likely to rebel against the proposed austerity measures tomorrow. Analysts believe that the austerity measures will be passed by just 3 or so votes. Here we go again. We then have the Budget bill (over the weekend), the Troika report, the EZ finance ministers meeting and, sorry, the most important issue – what will the German’s do?. Some kind of fudge is expected, with Greece getting some funds to keep this ludicrous game going on, though it ain’t going to solve the problem. However, Mrs Merkel will face the threat of a rebellion from a number of MP’s within her coalition – will she do a deal with the opposition – not going to be the shoe in that most expect, unless she does a deal with the SPD;

Interesting comments by the Spanish PM today. Whilst he adds that Spain has met the bulk of its 2012 financing requirements, he acknowledges that seeking a bail out would reduce financing costs (the man is a rocket scientist !!!!), though, apparently, he needs to know by how much (sorry no rocket scientist, but rather the school dummy). He adds that if financing costs rise (which they have), Spain would request a bail out. However, if these kind of comments continue, it suggests to me that he is warming up the Spanish population to an impending request for a bail out from the ESM – though most likely after the elections in Catalonia later this month.

The EU today announced far more pessimistic GDP forecasts for Spain, than that reported by Spanish authorities – though still too optimistic in my humble view. The EU expects GDP to decline by -1.6% this year and by -1.5% next, with growth of +0.5% in 2014. The Spanish expect GDP to decline by -1.5% this year and by just -0.5% next, rising by +1.2% in 2014. Clearly Spanish debt to GDP forecasts are well lets just say, optimistic, or as I normally put it, cloud cuckoo land stuff;

An IMF report highlights France’s problems, warning that the country could fall behind Italy and even Spain if it does not reform its economy and, in particular, improve competitiveness. They are calling for fundamental structural reforms, rather than tax hikes. They added that tax increases are undermining France as a place “to work and invest” and which leads to a significant loss of competitiveness. The IMF have reduced their forecast for 2013 GDP growth to +0.4% (personally, I believe that a recession is more likely), well below the estimate (closer to 0.8% to 1.0%) by the French authorities. Yesterday, Mr Loius Gallois called for the implementation of “shock therapy”, by cutting E30bn in payroll taxes, E20bn from French employers and E10bn from employees, to be offset by higher VAT and other consumption taxes. The IMF has proposed cuts in spending and warned against further tax increases. Whilst the IMF and Mr Gallois propose sensible recommendations, they are going to be ignored. Furthermore, French Unions, an extremely powerful force, are opposed to a number of the measures necessary to transform France. I regret to say that France is going to suffer further (material) economic decline. In addition, Mr Hollande’s ratings are declining – no great surprise. I just cant see him taking the tough decisions necessary, until its far too late.

A few weeks ago, I suggested that you but Italy and sell France – had a lot of comments telling me that I was wrong – I wonder what people think today !!!!;

The French have announced an E20bn programme (basically tax credits) over 3 years to assist French industry and exporters, financed by a E10bn cut in spending and E10bn of consumer tax increases. Its going to be interesting to see what the EU have to say about the proposed tax credits – cant see them giving the French the green light that easily;

The EZ October final services PMI came in at 46.0, slightly lower than the 46.2 expected and the lowest since July 2009. Both Germany (48.4, as opposed to 49.3 expected and well below September’s 49.7) and France (44.6, as opposed to 46.2 expected, though above September’s 43.2) were much lower. Interestingly, Italian services PMI came in at 46.0 in October, better than the 44.5 expected, though slightly below the 46.2 in September. In addition, Spanish October services PMI came in at 41.2, better than the 40.2 expected and 40.2 in September;

The EZ October final composite (services and manufacturing) PMI came in at 45.7, roughly in line with the 45.8 expected and September’s 45.8;

EZ September PPI came in at +0.2% M/M, in line with expectations and +0.9% previously. On an Y/Y basis, September PPI came in at +2.7%, slightly higher than the +2.6% expected and +2.7% previously. However, inflation is not the threat in the EZ – it will decline to below 2.0% in the 1st half/1st Q? of 2013;

German September factory orders collapsed by -3.3% M/M, much weaker than the -0.4% expected and -1.3% previously. The decline was the 2nd consecutive decline and the most in a year. Domestic orders declined by -1.8% M/M, though exports slumped by -4.5%, with a -9.6% collapse to other EZ countries. Y/Y orders declined by -4.7%, adjusted for work days. With business confidence the lowest in 2 1/2 years, combined with, inter alia, rising unemployment, the domestic economy is keeping Germany going, for now. That, I fear will change, which could well trigger a policy change in Germany, given that Mrs Merkel faces a general election in September next year. There is a high risk that the German economy could face negative growth this Q;

The French EU Commissioner Mr Michel Barnier reports that the EZ crisis is over the worst. Mr Barnier is the financial services commissioner for the EU. Now you know why I believe that the EU, and the EZ/France in particular, is a basket case;

UK September manufacturing output was up +0.1% M/M or -1.0% Y/Y, weaker than the forecasts of +0.3% and -0.9% respectively. Industrial output declined by -1.7%, though mainly due a -20.9% drop in oil and gas production, due to later than normal maintenance issues;

Intrade has raised the odds on an Obama win materially, to 73.4%. It was 67.5% when I wrote yesterday’s note and touched 55% a few weeks ago. The pollsters suggest a very tight race. As I reported yesterday, I will stick to the views of the bookies;

Outlook

Asian markets closed mainly lower today, though European markets are trading higher. US futures suggest a higher open. The Euro, well its up a bit (currently US$1.2800), for some unknown reason, in particular given the weaker PMI and German factory orders data. Gold is at US$1692, with Brent up at US$109.17 (expecting a continuation of accomodative US monetary policy?).

Following today’s US elections, the market tomorrow will focus on the Greece – the proposed passage of the austerity measures (likely, but by the slimmest of margins) and then to the ECB’s meeting on Thursday (no changes and/or major announcements expected) and finally back to Greece (Budget, together with the decision of the EZ finance ministers). The final decision will need the approval of the Bundestag and the vote is expected (according to my very clued up German friends) during the week of the 19th November.

Attended the Kilkenomics weekend economic conference in, not surprisingly, Kilkenny in Ireland, arranged by the great David McWilliams. Even got to present for some mysterious reason. If you ever want to turn up to an economics conference which is both informative and (as usual in Ireland, great fun) you really should turn up next year. David and his team have produced a truly excellent weekend event, which, dare I say it, beats the hell out of most economics conferences worldwide. Just recovering from a few too many glasses of the black stuff though.

Finally, I will have my web site up and running next week – sorry for the delay.

Kiron Sarkar

6th November 2012

Category: Think Tank

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