My Diary 552 --- Yen Carry Trade, US and China Macro Data

Market Thoughts --- Yen Carry Trade, US and China Macro Data

Oversea Market Review

Global stock prices firmed 0.2% O/N with +1.3% in US and +0.8% in EMs, but -0.3% in EU and -1.1% in Japan. Elsewhere, 2yr UST ticked up 1bp to 0.85% while 10yr down 2bp to 2.76%—down 10bp and 16bp, respectively, this week. Accordingly, US 30 yr conforming FRM rates have fallen 20bp to 4.96%, according to Bankrate. 1MWTI oil ebbed $0.16 to $49.25/bbl. In contrast, industrial metals continued to rise. Nickel jumped >5% and copper gained 3%. USD closed at EUR1.323 (+0.2%) and YEN99.4 (+0.4%). Gold was flat around 890/oz.

US Economy

Sitting back and looking at the overnight US macro data, I got some thoughts here:

The data proves how difficult it is to call a bottom or trade a bounce.

Ø         +VES: Headline CPI at -0.4% should ease the fear of significant inflation ahead;

Ø         Green shoots data were the NY Empire FED bounce (-14.65 from -38.23), just as the NAHB housing index (14 from 10 )and FED Beige Book suggested a less glum outlook;

Ø          -VES: the massive industry capacity available showing historical lows CapU at 67%;

Ø         n TIC data concerns me that the US ability to fund its way out of the recession

Cross asset market wise, US stocks rallied marginally, bonds moved into slightly positive and gold and oil were flat. USD managed to move higher vs EUR and JPY.

Ø         Global FX wise, JPY carry trade is back and I think this weaker YEN may be the only way to combat the 38% y/y drop in IP or the massive mismatch of deflation and debt.

Ø         This matches my talk with RCM and Pyramis friends, whom they saw continues fund flows to China funds from overseas, in particular Japan.

But overall, there remains plenty of doubt in the market as those data proves inconclusive. I feel the market atmosphere is yellow for caution. It is understandable as we need time to shift from a free fall economy to a bumpy bottom.

China Economy

The Chinese data, already leaked, is key to watch as many see China as the driver of the green shoots.

China macro   Cons     Last          ACTUAL

1Q GDP         6.2%    6.8% (4Q08)   6.1%

March CPI     -1.3%    -1.6% Feb     -1.2%

March PPI     -5.8%    -4.5% Feb     -8.9%

IP                 6.8%      3.8% Feb     +8.3%

Retail sales   14.6%     15.2% Feb    +14.7%

FAI               26.4%     26.5% Feb    +28.6%

My own estimate on GDP components and weighting is

Retail    14.7%   0.2        3%

FAI        28.6%   0.4        11%

Export   -20%     0.4        -8%

Ø         The 6.1% growth makes sense as, if one remembers that during the Asia Financial Crisis, real growth would have slowed below 6.0% but it always reported as slightly stronger --- Confidence issue!

Ø         Key is this economy remains heavy weighted by FAI and Export. That is a problem.

Ø         My question is on the mismatch of corporate CAPEX plan for most companies in 2009 vs. the huge amount of bank loans growth in 2009?

n         Today it is reported that CBRC to refine administration over use of loans to promote the principle of “payment to the beneficiary in order to prevent misappropriation.

n         But I think the fact that additional credit flows into stock market is quite apparent. The regulators should have been aware of the problem but again this helps boost the CONFIDENCE, so they might let it go at current stage as CPI and PPI is not responding to the liquidity boom.

n         Recently I also find some NEGATIVE comments from Beijing on property price. It seems to me a clear sign that Government is more than happy to see money flowing to stock market rather than property market.

n         Question is when PBOC and most banks will tighten credit? I guess Year end 2009, if China indeed bottom out at 1H09.

In addition, earning wise, I won’t put too much credit on 1Q09 data as it is not audited and many management I have met so far are hesitated to give a clear guidance, like CCCC or China retailers. In the US, Peabody also held off from offering its full year outlook due to economic crisis, coal pricing and shipping delays. What makes more sense is 1H09 result, which is subject to audit and which I am cautious of.

My preliminary thought is, "Sell in May" in China Markets may be delayed to "June or July" when the markets see more creditable liquidity tightening warnings and somehow WTE 1Q09 results.

April 16, 2009