User Agreement

March 18, 2013

"This brings us within about a billion and a half towards what we need to [meet our funding needs to] the end of 2014. That puts us in a very strong position."

THE WEEK IN REVIEW...

Europe: Small attempts to address austerity’s pain, and a glint of good news amidst an otherwise gloomy backdrop.

• Employment: Spain proposed €3.5bn (US$4.5bn) of programs intended to help reduce unemployment among younger people, including tax breaks for companies hiring workers in their twenties and guarantees of employment contracts within four months of completing training. The country’s labor unions were reportedly unimpressed. Meanwhile, British Prime Minister Cameron publicized his government’s own apprenticeship programs in the face of growing public dismay at the state of the economy. 
• Economies: UK industrial production fell 1.2% in Jan 2013 from the previous month, with manufacturing falling by 1.5%, both worse than expected. The trade deficit fell hard, with imports falling 4.2% and exports dropping 3.5%. All this as financial markets rendered their own verdict on higher future inflation rates, with the 10-year “break-even rate” (a measure of inflation expectations)¹ reaching 3.35% on March 11, the highest since Sep 2008.
• Two cheers from the bond market: Ireland issued €5bn ($6.5bn) of 10-year bonds, the first 10-year issuance since Aug 2010, more than expected. The sale moved Ireland well forward in its plan to exit its European bailout program on schedule later this year. The offering was priced to yield 4.15%; that’s a sign of major progress. For comparison, Irish bonds of similar maturities were priced to yield over 14% at the height of the 2011 euro crisis. Spain saw progress as well, issuing €5.83bn (7.6bn) of 6- and 12‑month bills, more than its €5.5bn goal, also at lower yields than similar previous auctions.

US: A flood of economic data reflected both progress made, and the need for more before the recovery can fly on its own power.

• Retail sales up, but not upbeat:  Retail sales rose 1.1% in Feb from Jan, beating the consensus forecast.  But the devil’s in the details: much of that increase was due to the rising price of gasoline and increased auto sales, the latter aided by rock-bottom auto loan interest rates and long-deferred replacement of older cars by consumers. However, furniture stores, department stores and restaurants all saw declining sales – hardly a sign of buoyant consumer demand.
• Working: The weekly unemployment figures surprised to the upside, with that positive indications supported by the “quits” figures (the number of people who voluntarily quit jobs) in the Labor Department’s monthly JOLTS² report for Jan 2013.  In the most recent survey, quits for the construction industry nearly doubled, from 1.2% to nearly 2.2%. One interpretation: construction workers are more confident about finding the next job. The overall private sector quit rate rose to 1.9% from 1.8%, the highest since Oct 2008, limited by almost no quitting in either the manufacturing or government sectors.  On the downside, the drop in the unemployment rate to 7.7% in Feb (vs. Jan’s 7.9% ) was mostly due to workers leaving the workforce “for any reason”, including no longer looking for work – a sign of discouragement rather than optimism.

Asia: The region’s central bankers have their hands full balancing growth, inflation and leadership transitions.

• China: Zhou Xiaochuan, Governor of The People’s Bank of China (PBoC), was named to the Chinese People’s Political Consultative Conference, the top government advisory body – suggesting that his already record-breaking term as head of the central bank will be extended yet again, despite widespread expectations that he would retire. This decision could reflect a desire to keep a steady hand on the tiller while navigating the conflicting goals of growth, controlling inflation, maintaining control over credit and internationalizing the Chinese currency.
• Japan: Minor opposition political parties appear to be falling in line to support Prime Minister Shinzo Abe’s three nominees to the Bank of Japan (BoJ). Opposition party support is needed to get the Prime Minister’s slate through Japan’s upper house of parliament. If the three candidates are accepted, it’s viewed as more likely that the BoJ will take a more aggressively expansionary monetary policy as its path to getting Japan’s economy restarted.

SIGNS OF THE TIMES:

China’s Economic Data Show Weakest Start Since 2009 - Bloomberg

Greece Faces 150,000 Job-Cut Hurdle to Aid Payment: Euro Credit - Bloomberg

Merkel Rides Pro-Growth Bandwagon as EU Loosens Budget Shackles - Bloomberg

[US] Lawmakers Warn of ‘Grave’ Danger From Cuts, Vote for Them - Bloomberg

Workweek Tying Longest Since WWII Spurs Hiring at U.S. Factories - Bloomberg

 

Nothing ventured, nothing gained
Koketsu ni irazunba koji wo ezu - Unless you enter the tiger's cave, you will not catch its cub – Japanese proverb

MSCI Japan Index³ (JPY and US$ terms); Japanese yen (JPY) per US dollar (USD):  3/14/11 – 3/12/13

Source: Bloomberg. Past performance is no guarantee of future results. The graph above is for illustrative purposes only and is not reflective of an actual investment. Please note that an investor cannot invest directly in an index.

The bottom line:

• Japan’s stock market has been buoyant since the latter part of 2012, to the delight of the country’s domestic equity investors.
• The rally has been so strong that even the yen’s rapid decline against the dollar (and other major currencies) hasn’t been enough to negate the gains for investors outside of Japan  
• The question for investors both inside and outside Japan: is Japan’s equity market overly optimistic about the new government’s ability to end decades of stagnation?  Or does the market accurately reflect the possibility that a rejuvenated ruling party and new leadership at the country’s central bank will rekindle growth?

Background:

• Change could finally be in the air in Japan. The new government of Shinzo Abe is seeking to implement stimulative policies to reignite a lethargic economy weakened by two decades of deflation.  Of course, that remains to be seen, but Japan’s resurgent stock market may signal faith he will succeed where others have failed. Since his election in December, Japanese stocks, as measured by the MSCI Japan Index, are up 30.5% in local currency terms.
• The yen itself has depreciated by over 15% during the same period. That could reflect anticipation of a flood of new monetary stimulus or the expectation of policies to jump-start Japan’s once-dominant export-driven companies.
• But even with a weaker yen, the MSCI Japan index, denominated in US dollars, is up more than 13% since the December elections.
• The recent rally in Japanese stocks is even larger if measured from the 2012 stock index low, +50.6% in yen terms and +22.7% in USD terms. The yen has depreciated more than 26% since its recent high in early 2012.

The graph:

• The graph shows the MSCI Japan Index, denominated in both JPY and USD, re-indexed to 100 as of 3/14/11.
• The lower portion shows the spot value of the Japanese yen over the same two-year period.

Context & Perspective:

• The government of Shinzo Abe is seeking aggressive action from the central bank, which will be under new leadership this week, to combat deflation. Newly appointed Haruhiko Kuroda takes over March 19th and could seek to expand quantitative easing efforts that may even include the purchase of foreign bonds or open-ended buying of newly issued Japanese government bonds. The government has asked that the bank target 2% annual inflation.
• Prime Minister Abe would also like to see Japan become more competitive. In a recent speech before Parliament, Mr. Abe said, “The future of Japan’s economic growth depends on us having the willpower and the courage to sail without hesitation onto the rough seas of global competition.”⁴ Of course, becoming more competitive would likely mean some market-opening changes that could prove difficult to achieve politically even for the presently popular Abe, whose approval ratings are near 70%.

 

… THE WEEK AHEAD

 GLOBAL ECONOMIC CALENDAR: March 17 – March 23

	U.S.	Other Americas	Europe, UK, Africa, Mideast	Japan, Asia Ex Japan & Pac Rim
Sun 3/17				South Korea: producer prices
Mon 3/18	Homebuilder optimism	Canada: foreign securities purchases Chile: GDP5	Italy: trade balance Russia: producer prices, industrial production	Hong Kong: unemployment rate
Tues 3/19	Housing starts, building permits, weekly retail sales	Canada: manufacturing sales, wholesale sales Mexico: private spending	Germany: economic sentiment Italy: industrial production Russia: retail sales UK: consumer prices, producer prices, retail prices	India: interest rate decision New Zealand: current account
Wed 3/20	Mortgage applications, interest rate decision		Eurozone: consumer confidence Germany: producer prices Switzerland: economic expectations UK: average earnings, claimant change, unemployment rate South Africa: consumer prices, interest rate decision	New Zealand: GDP
Thu 3/21	Initial jobless claims, existing home sales, leading indicators, Philly Fed survey, home prices, Fed balance sheet, money supply	Canada: retail sales Mexico: retail sales Colombia: GDP	Germany: manufacturing sector survey, services sector survey France: manufacturing sector survey, services sector survey Switzerland: trade balance UK: retail sales, public sector borrowing, industrial trends orders	Hong Kong: consumer prices
Fri 3/22		Mexico: unemployment rate Argentina: economic activity indicator Chile: manufacturing production Colombia: industrial production, interest rate decision Uruguay: GDP	Germany: business expectations, Ifo business climate, business assessment France: business survey	India: bank loan growth
Sat 3/23

Sources: Bloomberg, Wall Street Journal, The New York Times, The Financial Times, EU Observer, The Guardian. Reuters, US Dep’t of Labor Bureau of Economic Analysis

1 The “break-even rate” is the difference, in percentage points, between the yield of inflation-indexed government bonds and non-indexed government bonds of similar maturities. This rate is regarded by some as the bond markets’ assessment of the expected inflation rate.

2 JOLTS, the Job Openings and Labor Turnover Survey, is issued monthly by the US Bureau of Labor Statistics.

3 The MSCI Japan Index is a free-float adjusted market capitalization weighted index designed to track the equity market performance of Japanese securities, in both Japanese yen (JPY) and US dollars (USD)

4 Quoted in The New York Times, March 6, 2013

5 Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

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