In what can only be described as a remarkably candid assessment, China’s Ministry of Industry and Information Technology overnight claimed that both domestic and external conditions were still ‘grim’ and that the economy was likely to endure further downward pressure. Companies in China are confronting growing operational difficulties, including much higher prices for energy and substantially higher wages. Interestingly, there has been little response in Asia overnight to this report, with equities becalmed ahead of tonight’s FOMC decision and Friday’s BoJ meeting. In foreign exchange markets, even the Aussie ignored the warning, which is unusual because it is invariably extremely sensitive to changes in China’s economic outlook. Instead, it appears that more attention was paid to Premier Wen Jiabao’s promise to stimulate the economy through additional policy measures if required. More stimulus from Beijing cannot be far away because it is clear that the economy needs it to achieve the growth targets set by policy-makers.
Euro climbs the wall of worry. Despite widening economic and financial pessimism within the eurozone, the single currency continues to ignore the prognostications of the doomsayers. Yesterday it managed to climb the wall of worry to above the 1.32 level, aided by speculation that demand for the EFSF’s latest 7yr bond was actually very decent. Bond spreads between Europe’s fiscal miscreants and Bunds narrowed considerably, for no very good reason that we could pinpoint. For instance, the SP/GER 10yr spread fell by almost 20bp on the day. Risk appetite more generally was slightly improved, which in turn weighed on the dollar. Cable climbed to a new nine-month high in spite of public sector borrowing figures that were a little worse than expected. The Aussie recovered to1.03, ignoring mounting speculation that the RBA might just go for a more aggressive 50bp rate cut when it meets next week.
A missing link in the US recovery. Notwithstanding the justifiable optimism regarding the US recovery these days, one critical missing ingredient remains, namely house prices. According to the latest data from Case-Shiller, US home prices fell another 0.76% in February, representing a YoY decline of 3.5% and a cumulative drop of almost 7% over the past two years. Compared with three years ago, residential property prices have plunged by around 15% in Tampa, Seattle, Chicago and Portland, by 26% in Las Vegas and 22% in Atlanta. These recent price drops over the winter come despite a noticeable increase in sales. Since the peak seven years ago, real house prices in the US have collapsed by 43%! Looking ahead, it does not appear too optimistic either given the wave of foreclosures expected over coming quarters now that the robo-settlement fiasco has been resolved. At the risk of stating the obvious, a sustainable recovery in the US is rendered much more problematic by this continual decline in house prices. Near zero interest rates, respectable employment growth and increased mortgage availability are not making much visible difference so far. Moreover, the percentage of borrowers with negative equity continues to grow. Unfortunately, it is still far too early to announce that the coast is clear for the US economy.
Dutch courage needed. So long seen as one of Germany’s staunchest allies in the fight for fiscal responsibility, the Netherlands is now really struggling to deliver the austerity demanded by Europe’s new fiscal compact. Monday’s resignation by Prime Minister Mark Rutte complicates the budget process still further. It turns out that, in his new caretaker role, Rutte and his Finance Minister Jan Kees de Jager will now present a package of measures designed to reduce the budget deficit to under 3% (from 4.7% last year), although obtaining parliamentary approval for this will now be even more challenging. With the Dutch economy in recession, it is no surprise that these enormous political obstacles have appeared. Consumers in Holland have their hands firmly glued to the inside of their pockets in response to falling take-home pay – real household disposable income dropped in 2011 for the fourth year running. Unemployment has jumped over the past year, to 6.1% last month from 5.3% a year earlier. House prices continue to decline, down another 5% in the year to March. Dutch businesses are hesitant, with new orders down sharply last month, especially domestically-based orders. Against this highly-charged backdrop, achieving a political consensus on budget cuts has been understandably problematic. Dutch politicians will need to show the courage and fortitude they have demanded of their European brethren to avoid incurring the wrath of the fiscal overlords in Brussels.