Japanese exports declined by -5.8% in December Y/Y, the 7th consecutive monthly decline and much worse than the -4.2% decline expected, with the trade deficit coming in at Yen 641.5bn, the 6th consecutive monthly decline. Imports rose by +1.9%, mainly due to higher energy demands – LNG imports rose by +8.3% Y/Y. The 2012 trade deficit was Yen 6.93 Tr (US$79bn), the worst on record and the 2nd in 2 years. Exports to China, the US and Europe came in -15.8%, -0.8% and -11.1% down Y/Y, respectively. The Yen weakened on the poor data, though also on reports that N Korea is to test a nuclear weapon and is back above Yen 89 against the US$;

More Japanese talk to weaken the Yen – the deputy economy minister states that Yen 100 against the US$ will not be a problem, though Yen 110 to Yen 120 would raise import prices – and the Yen weakening to Yen 100 wont !!!. Furthermore, I had thought that talk on currencies were supposed to be the responsibility of the Minister of Finance – obviously, the chap did not receive the memo;

Flash January Chinese PMI came in at a 24 month high of 51.9, according to HSBC, better than the 51.7 expected and Decembers 51.5. The new exports component turned positive coming in at 50.1, as opposed to 49.2 in December. The output and the employment component rose to a 22 month and 20 month high, respectively. The data suggests that China will report that Q1 2013 GDP higher than the +7.9% Q4 2012 GDP growth rate, Q/Q. Most of the pickup is due to the improved domestic economy;

The South African Central Bank kept interest rates on hold at 5.0%. The accompanying statement reported that there was no discussion on a rate cut. The Central Bank warned about the weak Rand and rising wages could impact inflation – well, they will .They estimated that 2012 GDP grew by +2.5% and that inflation would average +5.8% this year, higher than the previous forecast of +5.5%. Interestingly, they reported that the outlook for the mining industry was “bleak”. I believe that South Africa will continue to face significant economic problems this year. For full disclosure purposes, I remain short the Rand, against the US$;

Spanish Q4 unemployment rose to a record 26.02%, up from 25.01% in Q3 and marginally higher than the 26.00% expected. Unfortunately, the numbers are likely to get even weaker – forecasts are that unemployment will rise above 27% this year. The Spanish authorities remain in denial – they have forecast that GDP will decline by just -0.5% this year. The IMF suggests that Spain will contract by -1.5% this year. Unfortunately, other analysts expect Spanish GDP to decline by as much as -2.5% in 2013, which I suspect is closer to the truth. The market remains far too complacent over Spain (and France – see below), in my humble view;

French flash January manufacturing PMI came in at 42.9 M/M, much lower than expectations of 45.1 and December’s reading of 44.6. A very big whoops – don’t know the French for it;

German flash January manufacturing PMI came in at 48.8 M/M, a 11 month high and much higher than both the 46.8 expected and December’s 46.0;

EZ flash January manufacturing PMI came in at 47.5 M/M up from 46.1 in December and higher than the 46.5 expected – a 10 month high. Clearly much better German data made the difference to the EZ number; French flash January services PMI came in at 43.6, much weaker than the 45.6 expected and December’s 44.6; German flash January services PMI came in at 55.3, well above Decembers 52.0 and a 19 month high; EZ flash January services PMI came in at 48.3 M/M, higher than the 48.0 expected and the 47.8 in December – a 10 month high – once again, Germany and, in addition, confirms that the domestic economy remains healthy;

Me thinks theres a pattern here, namely Germany good and France bad.

On a composite basis, EZ flash PMI came in at 48.2 M/M, higher than the 47.5 expected and the 47.2 in December. The Euro declined following the French news but rallied on the German data.

I continue to believe that German official GDP forecasts of just +0.4% for the current year are way too pessimistic – I expect that these forecasts will be revised to closer to 1.0% as the year progresses. Personally, I continue to believe that German GDP will exceed +1.0% this year;

Interestingly, reports circulated this morning suggesting that President Hollande will scrap the ludicrous 75% tax rate which he has imposed. A number of his colleagues will be upset, if it happens – there are denials from French sources;

The US House of representatives passed a bill (by 285 to 144 votes) to allow a short-term extension (till 18th May) of the government’s borrowing capability. A majority of Democrats voted against the bill. It is expected that the Senate will follow through and the White House Press Secretary stated that the President would accept it. However, we now get to the trickier element, which involves spending cuts. The Chairman of the House Budget Committee, Mr Ryan is to prepare a budget plan which will eliminate the US budget deficit in 10 years by cutting spending, without raising taxes. Hmmmm. The President has insisted on tax increases, together with spending cuts, which will eliminate the deficit in 30 years. The deal represented a retreat by Republican’s from their previous position that there would be no increase in the borrowing limit without comparable spending cuts. It looks as if the real political fight is to come and an automatic sequester on 1st March remains quite possible/likely?;

US initial jobless claims came in at 330k, much better than the 355k and 335k last week. Its the lowest reading since January 2008 and has strengthened the US$ further, especially against the Yen;

The IMF has reduced its global growth forecast marginally to +3.5%, from +3.6% last October, though higher than last years +3.2%. The forecast for 2014 has also been reduced marginally to +4.1%. The EZ is set to contract by -0.2%, rather than grow by +0.2%, though turn around in 2014 to 1.0%. They suggested that Spain would fare amongst the worst in the EZ, though also warned that German GDP would slow this year. They reduced US GDP growth marginally to 2.0% this year, though raised it to 3.0% next. The forecast for Japan remained unchanged at +1.2% for the current year, though reduced to just +0.7% in 2014, from +1.1% previously. Chinese growth is forecast at +8.2% this year, rising to +8.5% next;

Outlook

Asian stocks (ex Japan, which rose as the Yen weakened) were lower, with European stocks flat to marginally higher. US markets have opened higher.

Apple shares declined over 10% in after hours trading yesterday on lower than expected revenues, which impacted the tech sector and, to a lesser extent, markets.

The Euro, having traded weaker, has risen on the better German services and manufacturing PMI. Currently at US$1.3350.

The Yen is weakening materially on the much worse than expected trade deficit and the comments that Yen 100 against the US$ would be OK . Had to cover my long position, fast. Yet more strange comments by the Japanese Finance Minister about limiting borrowing next fiscal year, but the momentum is for a weaker Yen, at present – currently Yen 89.81, as opposed to well below Yen 89 very early in the morning. The Yen is up near 1.3% against the US$ and even more (near +1.5%) against the Euro. Analysts are all over the place in respect of their forecast for the Yen this year – ranging from 85 (indeed just below) to 105+. Interestingly Goldman’s are at 87 at the year end. Personally, I remain of the view that the Yen will weaken to (well?) above Yen 100 against the US$.
Mr Weidmann recently and Mrs Merkel today expressed varying degrees of concern as to the Japanese policy to weaken the Yen. Mrs Merkel stated that she was “not without concern” about the Yen. Going to be an interesting Davos.
The better US jobless claims data has strengthened the US$ further – I would not be surprised if the US$ breaks above Yen 90 today.

Spot gold is trading around US$1671, with March Brent at US$112.55.

Better European data, together with a weaker Yen and continuing flows into equities suggest that the market should hold up. The potential political issues in the US relating to the impending spending cut debate is clearly for a future date. However, I will wait as I still believe a sell off is possible in the next month or 2.

Kiron Sarkar

24th January 2013.

Category: Think Tank

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