New month with old concerns

• Market moving on old stories
• Australia has new PM Gillard but the aussie is not celebrating
• No surprise with RBA or BoJ decisions
• Sterling watching gilt market for directional clues
• UK retail sales survey suggests modest August growth

The main stories in the early part of the week appear to be old ones that have been dusted off, slightly refreshed and sent out once again. The euro’s weakness overnight is owing to reports that the EU bank stress tests did not reveal all of the government debt they are holding (Wall Street Journal). This follows on from reports yesterday that German banks may require more capital. Furthermore, the BIS report of yesterday reminded us that the private sector deleveraging has a long way to go, with implications for both growth and currencies. The main thing is to determine what is old news, what is speculation and what is a change of circumstances, although the trouble is that markets can move on all three, to varying degrees)

Commentary

• Euro weakness in Asia session. The main standout overnight is the weakness of the euro, having moved from 1.2875 to near 1.2800 at the start of the European session. The Wall Street Journal is reporting that European banks have more government debt on their books than was reported in the EU bank stress tests back in July. This follows on from reports yesterday that German banks could need a further ₨ 11,500 (EUR 105)bn fresh capital if higher capital requirements are brought in on the back of BIS proposals. In our view, all old news polished up to look fresh.

• Australia has a (coalition) government. After over two weeks of negotiations, Australia has a new government, with current PM Gillard having secured enough support from independents to keep her labour party in power. The aussie was modestly weaker on the news, moving back towards the 0.91 level vs. the USD into the European open. The key concern going forward is with policy and also the extent to which independents and minorities are going to hold back decision making. Time will tell, but for now the aussie is softer.

• Eyes on the gilt market for sterling. There are around ₨ 1,200 (GBP 9)bn of coupon payments to be made this week in the UK bond market. This was one of the reasons attributed to sterling’s weak performance at the start of the week, the main issue being the extent to which overseas investors re-invest proceeds back into the market. Gilts are trading fairly tight to Bunds at present, the 10yr yield over Germany around 70bp not that far from the narrowest levels for the year to date. It could be that investors are viewing gilts as a little rich right now and are looking to scale back, especially ahead of the October spending round when there is some risk that the government will struggle to credibly deliver the spending decision announce in June. Note that Monday was the fifth consecutive day of sterling weakness vs. the euro, a pattern not seen since the early part of July, with the 0.84 level on EUR/GBP within the market’s sight.

• RBA and BoJ decisions in line. There were never any big risks with either one, especially the BoJ’s after their emergency meeting last week. Australia’s decision to keep key rates at 4.5% did see AUD/USD weaken modestly.

• UK retail sales slightly firmer. The rise in the British Retail Consortium’s like-for-like measure of retail sales is nothing to get too excited about, with the YoY reading rising from 0.5% in July to 1.0% in August. All in all, whilst strong conclusions are difficult, the data does fit the picture of a more subdued third quarter.

• UK car registrations fall further. The 17.5% YoY print in August was not that much of a surprise, given the ending of buyer incentives earlier in the year. Registrations were running 30% down YoY in the early part of the credit crises, so whilst August’s reading was a further fall, the pace of decline is slowing. Low and often negative real-wage growth, alongside tighter financing conditions, looks set to continue to act as a brake on the market for the remainder of the year and most likely into 2010 as well.

• Bad and good news from the BIS. The Bank for International Settlements quarterly report is always a fairly good overview of financial markets’ developments, if not predicting them, then at least putting them into context. Their point on the necessary household deleveraging has been made often before, but more than three years after the start of the credit crunch, it can sometimes be pushed to the back of the picture as investors scrabble to find signs of economic recovery. For example, in the post-war period, US household debt as a proportion of GDP has averaged just over 50% but, apart from a modest fall in 1965-75, has been on a fairly relentless rising trend. There are various ways of measuring it but, from a peak of 98% of GDP in early 2009, it’s falling to around 94% (Q1 2010). The average prevailing over the last cycle was 87% and, given that was a credit boom, it would make sense that the natural level is lower than that (even though knowing what this should be is rather difficult to determine). So, the bad news is that there is a lot more debt to be paid off. The good news is that the BIS says that this is not necessarily bad for growth. Indeed, they say that growth does rebound quickly in a lot of their examples, whilst debt ratios are still falling. In terms of currencies, those economies that can deleverage and rebalance away from consumption more towards investment and net exports should do better, but not all currencies can win that game (of those that need to play it, principally the US and UK), so those pushing the reform path harder should win out in the long-term.

Looking Ahead

• Tuesday: JPN: BOJ Meeting (expect no change in overnight target rate, currently 0.1%); UK: BRC Retail Sales Monitor, August; GER: Factory Orders, July (expect 0.6% MoM and 20.8% YoY, previous 3.2% and 24.6%).

• Wednesday: JPN: M3 Money Supply, August (expect 2.6%, previous 2.7%); Machine Orders, July (expect 2.0% MoM, previous 1.6%); Current Account, July (expect ₨1,576 (JPY1.534)trln, previous ₨1,076 (JPY1.047)trln); Trade Balance, July (expect ₨889 (JPY865)bn, previous ₨790 (JPY769)bn); GER: Trade Balance, July (expect ₨1,424 (€13.0)bn, previous ₨1,544 (€14.1)bn); Industrial Production, July (expect 1.0% MoM, previous -0.6%); FR: Trade Balance, July (expect -₨460 (€4.2)bn, previous -₨427 (€3.9)bn); BOF Business Sentiment index, August (expect 101, previous 101); UK: Industrial Production, July (expect 0.4% MoM, previous -0.5%); NIESR GDP estimate, Q3; CAN: BOC meeting (expect rates to remain unchanged); Building Permits, July (expect -6.0% MoM, previous 6.5%); IVEY PMI, August (expect 55.5, previous 54.0); US: MBA Mortgage Applications; Fed Beige Book; Consumer Credit, July (expect -₨465 ($5.4)bn, previous -₨112 ($1.3)bn)

• Thursday: JPN: BSI Large All Industry (previous 4.0); Households Consumer Confidence, August (expect 43.6, previous 43.3); FR: Non-farm Payrolls, Q2 f (expect 0.2% QoQ); GER: CPI, August final (expect 0.0% MoM and 1.0% YoY); EC: September Monthly Report; UK: Trade Balance, July (expect -₨435 (£3.3)bn, previous -₨429 (£3.26)bn), MPC Meeting (expect no change in rates or asset purchases); CAN: Housing Starts, August (expect 184.5K, previous 189.2K); International Merchandise Trade Balance, July (expect –CAD1.0bn, previous –CAD1.1bn); US: Trade Balance, July (expect -₨4,130 ($48.0)bn, previous -₨4,294 ($49.9)bn); Initial Claims (expect 470K, previous 472K).

• Friday: JPN: GDP, Q2 f (expect +0.4% QoQ, previous estimate 0.1%); GDP Deflator, Q2 final (expect -1.8%); FR: Industrial Production, July (expect 0.7% MoM and 5.0% YoY, previous -1.7% and 5.7%); IT: Industrial Production, July (expect 0.3% MoM, previous 0.6%); GDP, Q2 f (expect 0.4% QoQ and 1.1% YoY); UK: PPI Input Prices, August (expect 0.2% MoM and 9.0% YoY, previous -1.0% and 10.8%); PPI Output Prices, August (expect 0.1% MoM and 4.8% YoY, previous 0.1% and 5.0%); CAN: Net Change in Employment, August (expect +17.8K, previous -9.3K); Unemployment Rate, August (expect 8.0%, previous 8.0%).

Source: Bloomberg
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