The Nikkei closed +2.8% higher today, following yesterday’s holiday. With the Yen declining materially, in particular against the US$, the Nikkei has been outperforming global markets over the last month and the trend looks set to continue, unless the BoJ does not play ball with Mr Abe’s suggestion that they target an inflation rate of 2.0% at the next meeting on 22nd January;

Average home prices in the 100 largest Chinese cities were up slightly in December Y/Y, the 7th monthly consecutive gain and the 1st Y/Y gain since March last year;

HSBC China December services PMI came in at 51.7 M/M, lower than the 52.1 in November. Whilst lower, new business and employment were positive, which bodes well for the future;

India’s current account deficit rose to US$22.31bn in the quarter ended 30th September, the largest deficit since independence in 1949. The current a/c deficit soared to -5.4% of GDP, up from -3.9% in the previous quarter. The Rupee, certainly looks vulnerable;

Indian December services PMI rose materially to 55.6, up from 52.1 in November, suggesting that the current account deficit for the quarter to 31st December will increase further;

Italian December services PMI was still in contractionary territory, coming in at 45.6 M/M, though higher than the 44.6 in November and better than the 45.0 expected;

The WSJ reports that the Spanish government has been forcing its Social Security Reserve Fund to buy government bonds. Apparently 95% of the funds assets have been invested in government bonds, up from just 55% in 2008. Furthermore, the Spanish government has been withdrawing cash to meet pension payments – E3bn and E4bn were withdrawn in September and November last year, respectively. The fund is apparently some E3bn in deficit – which given the Spanish authorities penchant for being “economical with the truth”, suggests that it will prove to be far more than that. Spain continues to be a basket case and Mr “ditherer” Rajoy will have to ask for a bail out shortly – Spain needs to raise around E207bn this year, up from E186 in 2012 – some hope unless they ask for help. The prospects for Spain remain bleak;

Spanish December services PMI came in at a contractionary 44.3 M/M, though up from 42.4 in November. However, it was the 18th consecutive month of contraction;

German November (seasonally adjusted) preliminary real retail sales were up +1.2% M/M (-0.9% Y/Y), much stronger than the Reuters forecast of a gain of +0.8% M/M or -1.6% Y/Y. Recent polls indicate that 78% of Germans are more confident of the future – bodes well for domestic consumption. German final services PMI was fractionally lower at 52.0 M/M in December, lower than the 52.1 previously;

French final December PMI fell to 45.2 M/M, lower than the flash reading of 46.0 and November’s 45.8. Final December composite PMI rose to a 4 month high of 44.6 (still in contraction territory though), lower than the flash reading of 45.0, though higher than the 44.3 in November;

EZ December final services PMI came in at 47.8 M/M (the highest in 5 months), unchanged from the flash reading, but higher than November’s 46.7;

EZ flash December CPI came in at +2.2% Y/Y, slightly higher than the +2.1% forecast. I do not believe that the ECB will cut interest rates imminently, but will do so in H1 this year and possibly even in late Q1;

UK December services PMI came in at a disappointing 48.9 M/M, much lower than the Reuters forecast of 50.5 and the 50.2 reported in November. It was the lowest reading since April 2009. Sterling declined following the report, currently trading at US$1.6042. The data will revive fears of a recession, given the importance of the services sector to the UK economy. However, I continue to believe that the UK is performing better than the data would suggest;

Irish unemployment came in at 14.6% in December, unchanged from November. December seasonally adjusted unemployment claims fell by 1.4k to 431k, though more importantly was the 6th consecutive monthly decline;

The FED minutes released yesterday really did throw the cat amongst the pigeons. Essentially, members of the Federal Open Market Committee are split as to whether to keep buying assets through 2013. At present, the FED is buying US$85bn of MBS’s and Treasuries per month. The minutes reveal that “several” FED members want “to slow down or to stop purchases well before the end of 2013”. One member opposed further QE altogether. 10 year Treasury yields rocketed, rising to 1.94% at present. Whilst treasuries yields may decline on difficult negotiations in respect of the upcoming negotiations in Congress in respect of spending cuts and the need to raise the US debt ceiling, I would not be surprised if 10 year US treasury yields rise to above +2.50% this year. However, the FED is on hold in terms of its interest rate policy, which confirms that monetary policy will remain accommodative;

US December NFP came in at +155k, marginally higher than the +152k expected and the upwardly revised +161k (+14k higher) in November. Private sector payrolls rose by +168k, higher than the +155k expected, as opposed to the upwardly revised +171k (up +21k) in November. The participation rate came in at 63.6%, unchanged from November. Average hourly earnings rose by +0.3% M/M (+2.1% Y/Y), higher than the +0.2% M/M and +1.7% Y/Y expected, possibly reflecting early payments to avoid expected tax increases starting in 2013. The average work week rose to 34.5 hours, marginally higher than the 34.4 expected and 34.4 in November. On balance a decent set of numbers;

Outlook

Asian markets closed mainly mixed, with the Nikkei up over +2.8%, with the Shanghai Composite up +0.2%, though Hong Kong is -0.3% lower. India was flat. Europe having opened lower is trading flat, with the FTSE higher, following the US NFP data. .

The US$ responded positively to a potential slowdown/cessation by the FED of QE in H2 this year. It strengthened materially against the Euro declining to near US$1.30, though the Euro picked up following the release of the December NFP data and is currently trading at US$1.3055. The Yen is at 87.70 against the US$. The December NFP data is more positive US$ news, though the Euro is strengthening against the US$ – currently US$1.3056. Will look to start building up a short in due course.

Gold is being crushed, with the precious metal trading at $1647. February Brent is also lower at US$111.24. Silver is even lower, losing over 4.0% today.

I’ve had a great run in the base metal miners and inspite of being positive on China, decided to sell out of my positions, given the rise of the US$, which I expect will continue. Will revisit in due course.

A steepening yield curve will, off course, be positive for financials. I will retain my holdings and, in due course, will increase.

Kiron Sarkar
4th January 2013

Category: Think Tank

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