January's data calendar got off to an extremely strong start with this
morning's Chicago PMI report. The overall index came in at 68.8 which is the
highest reading since July 1988 (note this was in the middle of the 1988/89
FDTR tightening cycle) and this was matched by similarly strong data in the sub
indexes. New Orders (red) came in at 75.7, which is the highest reading since
December 1983 (in the middle of the 1983/4 FDTR tightening cycle). This is
obviously very important as it suggests that the pipeline of order flow
continues to accelerate over 18 mon this into the recovery. Production (blue)
hit 73.7, the highest reading since 2004 and Employment (pink) hit 64.1 which
is the best reading since May 1984. The only major metric to show deceleration
was Inventories (olive) which fell to 54.5, suggesting only a moderate pace of
inventory-rebuild. If data of this quality is matched by tomorrow's national
ISM report then this would represent powerful evidence of an acceleration in
economic activity.

One thing we would note though is the relatively muted response by the equity
market. Good macro-data is clearly much less surprising than it was a few weeks
ago. This is not to deny its long term significance but it does confirm our
suspicion that this is becoming a trickier market environment. It also shows
how stubborn the FRB is being in its current stance that this is a
"disappointingly slow" economic recovery. The possibility of a change in stance
by the FRB later in 2011 remains one of the "macro-outliers" that very few have
considered in their outlook. - chicagopmijan2011.gif

Although Egypt's street protests are understandably garnering the bulk of
the world's attention it should not be forgotten that Thailand has also
been badly disrupted in recent days. Indeed Thailand's SET index suffered
a 4.26% fall last Monday a couple of days before the Egypt's CASE index
started to collapse on Wednesday. As can be seen on the attached chart the
SET found support at the 950 level on Tuesday and managed to bounce as
high as 987.85 on Thursday. Last night saw a return of selling pressure
with the index falling to close at 964.10. Negative momentum as measured
by MACD has now reached the greatest reading since the 2008 collapse
confirming that this is the most serious test of the 2 year recovery rally
that has been encountered. A break of support at 950 must therefore be
considered fairly likely and this would point the index down to at least
the 200 day ma (903.83). The importance of this level holding is shown by
the fact that below it obvious support only comes in at 809 (38.2%
retracement of 2009-10 rally) and 732 (50% retracement). Thailand
therefore remains one of the more obviously problematic of emerging
markets. - D-SET_Index.gif -

Official estimates for US Personal Consumption for December were somewhat
higher than expected, coming in at 0.7% versus 0.5% consensus. A portion
of this improvement was a result of a -0.1% revision to November's data
but this still represents a strong report that should lay to rest the
misguided fears that the US consumer is "running out of gas". December's
data shows Personal Spending to be 3.4% higher than the prior cycle peak
recorded in June 2008 and 7.4% higher than the December 2008 low of $9.856
Bln. The current pace of improvement is approximately 4% YoY, which should
be sustainable going forwards, particularly is employment starts to
improve.

As welcome as this data is, it is probably priced in to current market
expectations. We are about to close the books on 2010 from a macro
perspective (although some of the more tardy official numbers will
continue to be released into mid-February) and January's data will now
start to drive market performance. In this regard it should be noted that
the "expectations bar" has been substantially raised over the last 6 weeks
and the winter unusually harsh. The odds of some disappointment from the
macro calendar are therefore higher than they have been for several months
even though our view about an acceleration of the recovery remain intact. -
M-PCE_CUR_Index.gif -

We currently view overheating within the emerging market complex as the
greatest macro peril facing the global economy and one of the countries that we
are monitoring most closely is Turkey, which already has a high inflation rate
and a central bank which has been curiously reticent to raise local interest
rates (although they have just started to implement some macro-prudential
capital curbs).

December's trade data gives some insight into the state of affairs with a
massive (and record) deficit of -$8.68 bln being reported, compared to an
estimated $8.2bln, As the attached chart shows this deficit is being driven by
ballooning imports which are grew by 36.8% in 2010 compared to an increase in
exports by 18.1%. This would seem to be an unsustainable state of affairs, and
it is therefore likely that the central bank will be forced to radically
tighten monetary policy or otherwise risk losing total control of local
consumption and inflation.

Neither scenario strikes us as helping the local currency (TRY) maintain
its current valuation against other currencies. In this regard we would
note that the TRY has been notably weaker than other emerging market
currencies over the last decade and never truly recovered from its
implosion in 2001 (see chart). The TRY was also one of the most volatile
currencies during the brief but brutal emerging market sell-off in the
spring of 2006. This is clearly of significant concern for foreign
investors in both Turkey's equity and fixed income market and we would
expect to start to see some evidence of capital outflow in the weeks
ahead. Turkey therefore strikes us as an excellent market to avoid at the
current time. - D-TUTBEX_Index.gif -

The US Pending Home Sales Index rose to 93.7 in December which offers some
encouragement that the overall US housing market is starting to experience an
"organic" recovery without the artificial stimulus from tax credits. As the
attached chart shows this is the best reading since June 2007 if one ignores
the large spike in sales that was generated by the tax credit scheme. This is
quite significant since it suggests that overall activity is starting to force
its way above the very depressed range that has been in place since the final
leg of the collapse took place in the middle of 2007. So far it appears that
the existing home market is recovering quicker than the new home market and
that multi-family sales lead single family homes, but we would expect a rising
tide of sales to "lift all ships" later on in 2011. - pendingsalesdec2010.gif

Egypt's CASE Index fell a further 10.5% this morning and is now down 20.9% YTD
and at its lowest level since July 2009. Although this collapse is clearly
being caused by country specific issues it does act as a reminder that many
emerging markets do not have the same liquidity as developed markets,
particularly during liquidations. It is also worth considering that most
general emerging market corrections (1997 being a prime example) have started
at the margins with one or two individual markets behaving very badly for
country-specific reasons. We would therefore not dismiss Egypt's collapse as
irrelevant, particularly if the current riots are seen to lead to political
gains. - casejan262011.gif

The weekly initial claims data has been unusually volatile in recent weeks with
a combination of very large seasonal adjustments and unusually poor weather
conditions combining to create a great deal of short term confusion. This
week's estimation of claims moved back up to 454K, a 12% increase from last
week's 403K (part of this is being blamed on snow depressing last week's data
temporarily), while the NSA print fell 12.3% to 482K. The 4 week ma (attached)
rose 3.8% back up to 428K, which may in the end prove to be close to the level
reached at the current time once the noise from the data dies down. -
initialclaimsjan262011.gif

Attached is a chart of the day published last night regarding the possibility
that the Bank of Israel would impose restrictions on foreign investments in the
local "Makam" government securities. Based on our views regarding the growing
impetus towards "macro prudential" monetary policies we concurred with
Bloomberg that it was fairly likely that restrictions would be imposed. This
morning the Bank of Israel acted to cancel the tax exemption on foreign
investors' profits stating that:

"We have witnessed a significant increase in the inflow of
foreign currency which is targeted completely toward the
creation of short-term financial profit on the gap between the
interest rate in Israel and abroad.... There is an appreciation of
the currency which could hurt the long-term competitive ability
of the economy."

+------------------------------------------------------------------------------+

Israel Plays ‘Whack-a-Mole’ as Shekel Appreciates: Chart of Day
2011-01-26 22:01:00.2 GMT


By Alisa Odenheimer and Ilan Kolet
Jan. 27 (Bloomberg) -- Israeli policy makers may take
further steps to stem capital inflows as foreign investments in
short-term government bonds surge and the shekel hovers near a
two-year high.
The CHART OF THE DAY shows the rise in foreign holdings of
Makam bills, or short-term bonds, which climbed to about 28
percent at the end of last year, from 1.5 percent at the start
of 2009. The currency has strengthened about 6 percent against
the U.S. dollar in the past six months, according to data
compiled by Bloomberg.
Near-zero interest rates in the U.S. and Europe have
spurred increased inflows into Israel and other countries where
rates are higher, driving gains in currencies and undermining
exports.
“It is a little like the old ‘whack-a-mole’ video game
with the Bank of Israel implementing new controls against a
particular marketplace only to see excess capital pop up
elsewhere,” said Michael Shaoul, chief executive officer of
Oscar Gruss & Son Inc.
The Bank of Israel has been buying foreign currency in an
effort to moderate the effect and last week announced rules
aimed at stemming the flow of cash into the country, including a
reporting requirement for non-residents who trade Makams and
other short-term government bonds.
“To the extent that the bank has explicitly stated that it
would prefer to see a lower exchange rate, and a surge in Makam
holdings runs counter to this aim it is certainly possible that
a Brazil-style tax on foreign bondholders will be considered,”
Shaoul said.

For Related News and Information:
Chart of the Day story menu: CHART <GO>
Charts home page: GRAPH <GO>
Israel Money Markets: BTMM IS <GO>
Israel Economic statistics: ECST IS <GO>
Top currency stories: TOP FX <GO>
Currency forecasts: FXFC <GO>

--Editors: Andrew J. Barden, Louis Meixler.

To contact the reporter on this story:
Alisa Odenheimer in Jerusalem at +972-2-640-1102 or
[email protected]

To contact the editor responsible for this story:
Andrew J. Barden at +971-4-364-1034 or [email protected]
- codjan262011.tif

The weekly ICI Long Term Mutual Fund flows for the period ending January 19th
shows the second succesive positive flows for US Domestic equity funds (see
link)

http://www.ici.org/research/stats/flows/flows_01_26_11

December New Home Sale data came in considerably higher than expected
reaching 329K vs. consensus estimates of 300K. Although we would welcome
any good news for this sector of the economy we would caution that a
portion of the upside comes from the seasonal adjustment process.
December's NSA sales were 22K compared to 20K in November (see attached) which
is still the 2nd lowest monthly sales on record since the data started in 1963.
The boost in reported annual sales is therefore largely a reflection of
seasonality breaking down at these remarkably low levels of activity (as
we had predicted several months ago). Even so inventory continues to
shrink reaching 190K, the lowest reading since January 1968, underlining
the fact that home starts are insufficient to meet even the current
pathetic level of sales activity.

The really interesting data points will come in a couple of months as the
2011 spring selling season starts to unfold. Consensus calls for a
moderate increase in sales and construction which would keep the new home
market detached from all other forms of retail activity (including
existing home sales). Our point is that the longer this goes on the less
likely it is to continue (which is the opposite of how consensus builds
over the course of the cycle) and that the new home market can only either
be a non-factor or a help for overall economic activity from this point on
in the cycle. - D-NHSLNFS.gif - D-HSMNTOT_Index.gif -

Brazil's December loan statistics show little evidence of any slowdown in
activity following several months of monetary tightening. Total loans grew
1,51% to 1703 Bln BRL. Although this is marginally slower than the rate of
increase in the last 4 months it still leaves the 12 month RoC at over
20%. Housing (red) continues to rise at the fastest rate, increasing 3.92%
in December and over 50% during 2011. Although the total amount of housing
credit outstanding is relatively small at 138 Bln BRL (or about 8% of
total credit) the current pace of increase must raise questions about the
quality of underwriting standards (we note that the local central bank does not
share our concerns with Chairman Tombini pointing out housing loans are rising
from a "small base" and stating that no macro-prudential measures are planned
for this marketplace). Industrial loans outstanding have grown
by 18.5% over 2010, a marked acceleration from 2009's pace of 2.80%, but
still far less than the boom years of 2007 (30%) and 2008 (38.6%). On the
other hand corporate bond issuance has been a far greater factor in recent
months than it was 3 years ago and sine this issuance is simply another form of
credit creation, the loan data under-reports the total build up of
industrial indebtedness in 2010.

The December loan data is a useful reminder that tighter monetary conditions
generally have an effect on liquid financial markets far quicker than upon
actual economic activity. Despite a sluggish local equity market the economic
boom has hardly skipped a beat in 2010 and therefore today's data suggests that
further interest rate increases and MPMP initiatives can be expected in the
weeks ahead. Our concern would be that financial markets start to deteriorate
further (we would be just as concerned about the local bond market as the
equity market from this point on) and that only later in 2011 would the first
signs of slowing activity and rising delinquency start to become apparent. -
D-BZLNTOT_Index.gif -

We tend to do our best to avoid paying attention the snowy love-fest that takes
place each year at Davos, but one thing we have noticed over the years is that
this meeting tends to concentrate on "last year's" problems and opportunities.
The idea that a sharp spike in "C level" BRIC attendees is a positive for those
markets should therefore be resisted. Rather it is another symptom of some
cyclical hubris taking hold in that part of the global marketplace.

China Lifts Second-Home Down Payment Minimum to 60% (Update1)

China once more tightened lending conditions for its residential real estate
market. Note that while restricting lending capital the authorities are also
seeking to accelerate the supply of new land for building (we have seen a
similar combination elsewhere). Our view is that in the end this combination of
policy will prove all too successful but that speculative markets can prove
surprisingly resilient for as long as price continue to rise. In the meantime
SHIBOR continues to rise rapidly, reaching 5.44% this morning, a rise of 19 bp
overnight.

 

The improvement in tone that we noted in the weekly ABC confidence survey
earlier in January was also evident in today's Conference Board report. This
rose to 60.60 which is the best reading since May 2010 but still falls short of
representing a breakout from the range established after the collapse of 2008.
The Present Sentiment index on the other hand did manage to eke out a new 2
year high of 31 and this is suggestive that overall confidence may finally be
ready to move back up to more normal levels. A similar position has been reaced
in the employment sub-indexes with the "Jobs Hard to Get" reading falling to
43.40, the lowest reading since January 2009. Note that both these readings
have been very slow to respond to a significant change in circumstances (at
least as measured by official macroeconomic and corporate data) and so can be
expected to move quite rapidly once they finally break out of their
"depression" ranges.

Although better consumer confidence may seem like good news reality is somewhat
more complex. As we explained in our note on the ADP poll, a repair of consumer
confidence is a better indicator of retail investor sentiment than actual
retail purchases of goods and services (which repaired far earlier in the
cycle). It should be remembered that the May 2010 surge in confidence coincided
with the start of a difficult few months for the US equity market and it would
be typical if a sudden improvement in confidence was combined with a somewhat
more difficult market environment. - confidenceandclaims.gif

This week has seen another flurry of monetary tightening moves in emerging
markets with Israel and Hungary raising base rates and Peru introducing a
cap on FX forwards held by local corporations in line with the MPMP
orthodoxy. Meanwhile we continue to focus on India and China as being the
two largest emerging markets with clear signs of tightness in short term
money markets. In both countries the 3 month interbank rate has continued
to rise with SHIBOR hitting a new high of 5.25% yesterday. Although some
have pointed to the need to access cash ahead of the long lunar new year
celebrations there is little historical precedence for this sort of surge
and we note that very similar soothing noises were made at the end of
December. Thus far local asset prices have held support in the face of
tighter money but the SHASHR index closed last night right on key support
at 2800 and given the fact that SHIBOR stories are finally popping up in
the financial media we would expect to see the local equity market become
increasingly sensitive to this rate going forwards.

Meanwhile in India the NSE 3 month rate has experience a more grinding
march higher, but still managed to reach a new 2 year high of 9.27% this
morning compared to 9.00% at the start of January and 7.76% 3 months ago.
The Indian authorities did act (as expected) this morning to raise the local
base rate to 6.50% but this keeps the spread between these 2 measures at a very
high 2.77%. We would use 3.00% as the level that would indicate a significant
level of duress was building in Indian money markets. The local SENSEX
index continues to hang onto key support at the 200 day ma but both gold
and silver have acted increasingly poorly in recent sessions as we had
expected. - D-SHIF3M_Index.gif - D-NSERO3M_Index.gif -

Investors' concerns regarding emerging market monetary policy are starting
to crystalize and this can be seen by the relatively poor recent
performance of emerging market banks versus the overall complex. Attached
is a chart that shows the MSCI EM Bank Index (black) together with the
overall MSCI EM Index (red). As can be seen the EM bank index has
performed significantly worse since the "QE2 peak" was established at the
start of November and unlike the overall EM index has come nowhere near to
challenging this level in recent weeks (at the time of writing the index
is approximately 9% lower than its November high).

We would not yet characterize this sub-index as weak but would start to get
significantly more concerned were it to fall below 400 in the coming sessions.
This would be an important leading indicator of weakness across the entire
complex, since the EM Bank index has historically had a very high degree
of correlation with the overall index (largely because of the size of the
EM financial sector relative to total capitalization). In fact since 2001
the 120 day correlation has never dropped below 80% and rarely below 85%
(see attached) and a breakdown by emerging market banks would therefore be
highly likely to be followed by an across the board pullback for emerging
markets. - D-MXEF0BK_Index.gif - embankcorrelation.gif

Turkey Rate Cut Spurs Bank Bear Market on Bond Losses (Update2)

We have held a negative view on Turkey for several months. Their decision to
cut rates yesterday was extremely unorthodox and has not been well received by
the marketplace.

 

The December Existing Home Sales data came in significantly higher than
estimates at 5.28mm (4.87 consensus) with single family home sales rising
to 4.64mm, the best reading since May 2010. If one excludes the period of
tax-credit stimulus this is the best reading since since August 2007 and
this is probably a more accurate measure of where the current housing
cycle is at the current time. This is also equivalent to the pace of sales
recorded around the start of 2001, right at the start of the FRB rate cut
cycle that was to take the FDTR down from 6.5% to 1.00% over 30 months and
spark the housing boom in the process. It is important to note that
seasonal factors do not appear to have been behind the improvement in the
data. NSA single month sales for December came in at 354K which (excluding
the stimulus driven December 2009 report) is the best December data since
2006. Of course this report still needs to be confirmed in the months
ahead and the 6 month ma still lags at 3.938mm. Following the sharp
increase in multi-family building permits (see yesterday's note) we have
also started to track condo-sales as a percentage of total sales and as
can be seen this percentage has recovered to the levels seen near the peak
of the housing boom, suggesting that sales in this segment of housing are
particularly strong.

Should sales stabilize at the December rate (or even improve beyond it)
the large inventory of existing homes can be expected to start to shrink
fairly sharply. The total inventory fell in December to 3.020mm (a drop of
180K homes), equivalent to 7.8 months of sales. With the pace of new
foreclosures and delinquencies finally moderating we would hope to see
more progress made on this front in 2011. - D-EHSLSL_Index.gif -

The pace of monetary policy tightening continues to increase with Brazil
raising its SELIC rate by 50bp to 11.25%. Although this increase was
expected the tone of the accompanying statement (see attached chart)
leaves little doubt that other measures are going to be introduced in the
weeks ahead and that interest rates are only one of many policy tools
being implemented.

Further confirmation of the dominance of MPMP over international central
banking came from Israel this morning which introduced a 10% reserve
requirement for foreign exchange derivative transactions undertaken by
non-residents. One of our criticisms of MPMP is that it has a disturbingly
moralistic overtone to it, seeking to discourage "bad" speculation while
allowing "good" investment. This really is something of a time-warp back
to the failed policies of the post-war period in Europe, and the 1960's
and 1970's in particular. Just as it takes about 30-40 years for
financial markets to forget the lessons of a major crash the same appears
to be true of regulatory policy. - W-BZSTSETA_Index.gif -

Writing last week we explained that the second week of January is the most
volatile report in the calendar year and therefore we were inclined to
ignore the surge up to 445K (revised down to 441K this week) provided that
future reports quickly snapped back to prior levels. This is precisely
what happened this week with the January 15th report falling back to 404K,
somewhat better than 420K consensus. This takes the 4 week ma back down to
411.8K. Continuing Claims also continue to fall with the current report of
3861 being the lowest reading since October 2008. Viewed overall this
report is in line with our own expectation of a fairly significant
improvement in employment metrics during the first half of 2011. -
D-INJCJC4_Index.gif -

We appear to have reached the point in the emerging market cycle at which
(due to concerns about further monetary tightening) "good news" from the
economy is stating to become "bad news" for financial markets. China's
December reports were a good example of this phenomenon since they failed
to show any weakening of Industrial Production (up 13.5% YoY), Retail
Sales (18.4%) or investment in Urban Fixed Assets (24.5%). The response of
financial markets was swift with the 3 month Interbank rate pushing on to
a new cycle high of 4.68% (readers should remember that this rate was
expected to moderate sharply in January following an "artificial" spike
ahead of the new year holiday). The local equity market also reacted
poorly with the SHASHR index falling 2.92% to close almost exactly on key
support at 2800. We will continue to watch both measures closely in the
days ahead. - D-CNRSACMY_Index.gif - D-SHIF3M_Index.gif -

The December Housing start and permit data proved to be somewhat more
interesting than we would have expected, at least for the multi-family
portion of the data. Headline housing starts fell to 529K, slightly below
consensus expectations of 550K while Permit data (which we prefer) rise
strongly to 635K, well above the consensus estimate of 554K. Interestingly
the entire overshoot is attributable to the multi-family sector. Single
family permits remained flat at 440K and although they are somewhat off
their cycle lows are yet to show any sustained move higher. This is
understandable given the fact that new home sales themselves remain
moribund and even though inventories are very tight we would still expect
sales to lead new starts and permits.

Multi-family permits on the other hand rose very sharply to 195K which is the
strongest month since November 2008 and almost double the rate seen at the
cycle low in July 2009 (101K).

This is very interesting. We had already noted that a number of stalled
multi-family projects have restarted work in recent months and that
construction funding (albeit at elevated rates) has finally become available in
a number of markets (New York City being a prime example). The improvement in
the data is still too recent to be fully trusted but it represents what may
prove to be a very important turning point for the US construction industry. -
D-NHSPA1_Index.gif - D-NHSPAM_Index.gif -

December saw a surprising surge in Japan's condo sales which reached 7388
for the month, a 40% increase from 2009 levels. Since the December sales
report is by far the largest of the Japanese calendar this is a
particularly important monthly report which suggests a fairly rapid repair
has taken place in recent months. At 7388 sales are still about 10% below
their December 2007 level and approximately 30% below the peak readings
seen in 2001, 2002 and 2004 which leaves plenty of room for improvement.
Nevertheless this is one of the first hard pieces of data to come out of
Japan that suggests that its consumer sector is experiencing a meaningful
recovery. - M-JNC_TOTL_Index.gif -

Tuesday's credit card delinquency reports continued to show a rapid
healing process is underway in credit card delinquency. Loans overdue 30
days + fell to 3.91% (black line on chart) which is the smallest
percentage since October 2007. In fact delinquency levels only dropped to
this level in the spring of 2005 last cycle so one could actually argue
that those consumers who have not already defaulted are actually now showing
less signs of duress than during the last recovery. This makes sense since new
card delinquency is typically far more correlated with the pace of
job-losses than the underlying level of unemployment. To illustrate the
last point we have overlaid the weekly initial jobless claims (divided by
100 to rescale them) on top of the delinquency rate.

As can be seen there has been a very close relationship between these 2
metrics historically and this actually became closer during the 2008-10
period. With claims now hopefully about to fall below 400K per week some
time in Q1 we would expect to see further improvement in delinquency going
forwards. This suggests far less pressure on consumers to "deleverage"
than most people suppose and that any reduction in consumer credit
outstanding is much more related to the repair of consumer disposable
incomes (primarily from a drop in the cost of mortgages and rents) than
any down-shift in consumption patterns. It would also suggest that
extending consumer credit remains an excellent business for the banks to
pursue, with profit margins quite wide enough to absorb a delinquency rate
now falling below historical norms. - D-DELQUS30_Index.gif -

Record Auto Lending Targeted as Bad Loans Rise: Brazil Credit

Another textbook piece of MPMP. Although this may seem like a novel and
sensible policy Terms Controls (the limiting of credit terms for consumer
goods, particularly automobiles) were actually a key portion of UK demand
management from the end of the second world war right up until 1980 when they
were abolished in Margaret Thatcher's earliest move towards financial
deregulation. After several decades of misuse they were abandoned as
inefficient and arbitrary but neither of these shortcomings seem to matter when
"prudence" is evoked.

 

The NAHB Homebuilder Sentiment Index remained unchanged at 16 and there was no
meaningful change in any of the sub-indexes either. This ties in with the
recent reports of public homebuilders which showed a surprising ability to be
profitable in very adverse circumstances but no clear evidence that the
macro-environment had changed for the better. This also implies that the
December New Home start and sales data will be in line with the recent dismal
data from this portion of the economy.

However, this throws very little light over what may occur in the crucial
spring selling season that starts approximately 60 days from today. Our view
remains that the homebuilding sector is acceptable even at curent activity
levels but would get very interesting should any hint of a recovery break out
later on this cycle. - nahbjan2011.gif

The January University of Michigan Consumer Sentiment report was down a couple
of points to 72.7 in January and therefore missed the consensus estimate of
75.5, but this really should be treated as "more of the same" from an indicator
that has resolutely failed to track any improvement in consumer sentiment over
the last 18 months. As we noted last week, the only gauge to hint at a change
in tone is the weekly ABC poll and even this is yet to give a definitive signal
that it has broken out. We would expect this to change sometime in the first
half of 2011, particularly if either employment or housing data make further
upwards progress. We would also expect the rise in sentiment to be fairly rapid
when it finally occurs since it would represent something of an emotional
capitulation to the reality of significantly better conditions. This is not the
same as saying that an improvement in sentiment will meaningfully change
consumer activity since these really are far less connected than most people
realize. - unimichiganjan11.gif

Official Census Bureau Manufacturer Inventory data came in somewhat short
of consensus at 0.2% (0.7% consensus) with October's data revised 0.1%
higher. Manufacturer sales were significant stronger, growing 1.2% over
the month and this led to another reduction in the Inventory/Sales ratio
to 1.255. As with so much official data the key is to consider it over a
reasonable period of time and to try and gauge where we are in a cycle
rather than obsess about the individual "data-shots" that inevitably
fluctuate either side of consensus along the way. In the case of the
Inventory cycle it is hard to think of a more positive framework going
forwards.

Including today's report the level of inventories has rise by over 7% sine
November 2009 but is still below the level seen in February 2009 and
approximately 8% below the level recorded at the August 2008 peak (it
should be noted that the inventory/sales ratio was at a reasonable 1.31 at
that time). This leads plenty of room for a continued inventory rebuild of
similar magnitude over the next few quarters. This situation is further
strengthened by the fact that the sales data continues to outpace the
inventory build, growing 8.5% over the last 12 months. Sales are now just
below their level in September 2008 and are 6.4% below their June 2008
peak. With today's retail sales number reaching a new all time high the
odds are favorable that manufacturing sales will follow suit in 2011,
which of course would require a further build in inventories given the
current tightness of supply chains.

The implications of this are that the current pace of industrial growth is
quite sustainable and we will be interested to hear if this is reflected
in the statements of corporate management during the upcoming earnings
season where we would expect to see a far better tone in terms of future
guidance regarding demand for manufacturing products than in prior
quarters. - M-MTIB_Index.gif -

The Chinese monetary authorities have started 2011 as they ended 2010 by
raising the reserve requirement for banks by another 50 bp effective
January 20th. This takes the large bank deposit rate to 19% and is
apparently in response to a very rapid ramp up in new lending by local
banks at the start of January. Although it would seem that the authorities
have had no dampening effect on local conditions the money market tells
another story. The local Shanghai 3 month inter-bank rate has risen
steadily over the last 12 months from under 2% to a peak of 4.62% right
ahead of the New Year holiday. Although this peak was partly reflective of
seasonal pressures the rate has only fallen back to 4.14% in the first
couple of weeks of January and this still keeps the 3 month yield above
the local 10 year bond rate (3.85%) which meets our definition of
adversely tight monetary conditions. The response of this rate to the new
reserve requirement will therefore be very interesting and probably
represents a better guide to the change in conditions than the bank
lending numbers over the short term. - W-CHRRDEP_Index.gif -

US Advance Retail Sales came in slightly below consensus growing by 0.6%
versus a consensus of 0.8%. Retail sales less autos came in at 0.5% (0.7%
consensus) and November's strong data was trimmed from 1.2% to 1.0% (note
this means auto sales were increased by 0.2%). Although we would expect
some negative headlines from the consensus shortfall this month's data is
in line with the recent strong improvement in retail sales data and the
trailing 12 month RoC of 7.56%. Of far more importance is the fact that
December's gain takes this data series ABOVE its 2007 peak, a fact that
very few observers of the "headline" monthly change level will be aware.

It is therefore somewhat perplexing to see the debate around the timing of the
consumer recovery when to a great extent (ex housing and domestic
equities) the US consumer is already operating at record nominal
levels.The speed of recovery in this nominal data-set is particularly
impressive given the low CPI environment since it is therefore much more
reliant on a geater volume of goods being purchased than their run up in
price. - M-RSTATOTL_Index.gif -

We continue to watch the Indian money rate marketplace as one of the
leading edges of the tightening monetary policy cycle in emerging markets.
The 3 month interbank rate rose to a new 2 year high last night at 9.13%,
a full 95bp higher than the current local 10 year bond yield. This rapid
rise in inter-bank rates to the point of inversion is indicative of
rapidly diminishing rates of liquidity and it therefore comes as little
surprise that the local SENSEX index has begun to act poorly despite the
significant inflows from foreign investors in recent months. Following
last night's decline to 18860 the index has erased over 40% of its entire
2010 gains in the first 2 weeks of January and is now targeting support at
its 200 day ma. This represents a marked under-performance versus the rest
of the emerging market complex and we are seeing comments from a number of
prominent international investors indicating that they are starting to redeploy
funds away from this marketplace. This of course will only serve to further
tighten domestic liquidity.

Apart from representing a threat to the current level of the SENSEX the
other marketplace that would need to be watched is that for gold and
silver. India has become the largest marketplace for gold (according to
the World Gold Council) and it may be no coincidence that tighter Indian
money and lower SENSEX have coincided with a poor performance by gold and
silver (following our note yesterday silver breached its 50 day ma this
morning). We attach an interesting story that was published on Mineweb
this morning that does suggest that local retail demand for gold in India
has started to diminish quite rapidly at what is traditionally the most
important season for purchases. If true this would be quite troubling and
leave the metals increasingly dependent on US and European ETF type flows
to maintain current prices.

http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=118469&sn=Detail&pid=1
10649 - D-SENSEX_Index.gif -

In the current "Weekly Speculator" we spent some time musing on the possibility
that a "Reallocation Trade" may be developing that would prove to be a
prevailing force for asset performance over the next couple of years in the
same way that the "Reflation Trade" proved to be dominant from 2003-2007. The
attached article is certainly supportive of this view.

For the first time in many weeks silver is starting to look under some
pressure with the metal currently testing important support at the 50 day
ma. As the attached short term chart shows the 21 day ma acted as trend
support during the powerful August to January rally but is now fully
violated and transforming itself into resistance. MACD shows the extent to
which upside momentum has dissipated in recent weeks and we would note
that the January 3rd 31 year high was never confirmed by this indicator.

As readers will be aware we are always very alert for sudden weakness in
popular trades a couple of weeks into a new quarter since this often
indicates that new allocations acted to push the price beyond a
sustainable level. In the case of silver if the 50 day fails to hold
support would come in at $27 and then $25, but we would be concerned that
given the speed with which silver made its ascent relying on support would
be quite perilous. The only sort of parabolic charts we trust are the ones
which keep going up and silver, for the time being is not doing so. -
D-SILV_Comdty.gif -

At first glance this week's surge in Initial Claims back up to 445K is
unsettling but it should be understood that this particular week is an
outlier in the annual cycle of weekly reports. As can be seen on the
attached chart of Non-Seasonally Adjusted Claims, data for the 2nd January
weekly report is always much higher than for any other week in the year due to
holiday-related employment trends. This weeks NSA claims surged to 770.4K,
which would be disastrous in any other week of the year, but has to be
treated with caution unless it is confirmed by other readings going
forwards. One of the benefits of using the 4 week ma of claims is that it
dampens the effects of the volatility of this data and the increase up to
416K does little to change the strong downward momentum of the last few
months. It may prove that the late December and early January reports slightly
overstated the improvement in claims but the breakdown below the key 450K level
looks real enough to be relied upon as a major turning point in this data
cycle. We would still expect to see a sustained improvement in employment
metrics over the course of the next few months.

Further confirmation of this improvement was also supplied by this week's
Continuing Claims report (note this report lags the Initial Claims by 1
week) which fell sharply to 3879K. As the attached long term chart shows
the pace of improvement of Continuing Claims is broadly in line with prior
deep employment cycles. - D-INJCJC4_Index.gif - D-INJCJCNS_Index.gif -
W-INJCSP_Index.gif -

This story supports our notion that investors are splitting EM into a "good"
and "bad" camp (a trend that has been clearly visible in recent relative
performance). The only surprise is that Brazil has been detached from China in
their allocations. We note that the IBOV has had a strong last 30 days and it
may be that other large EM investors are making a similar distinction. Of
course the borders between these two camps are porous. It is our belief
investors will be paying increasing attention to inflationary data and the
reaction of local central banks across the entire emerging market complex over
the course of 2011, with the number of "problem spots" growing as the year
progresses.

Another deal for a trophy property in NY City at a price far above what would
have seemed possible 18 months ago. It should be noted that the 2011 sales
price is 76% of the peak price paid in 2007 right at the top of the CRE cycle.
Since most senior mortgages that were issued and packaged into CMBS securities
during the CRE boom were under-written at an LTV of no more than 70% we would
appear to have reached the stage in the recovery where for at least the class
"A" NY office market this debt can be considered to be "money good".

Our comment on the ABC Consumer Confidence index was used in the attached
Bloomberg "Chart of the Day" although it should be noted that the chart itself
is different (see attached). The author is correct to point out the tendency of
consumer confidence to follow investor sentiment, which itself follows market
performance. The only thing that we would add is that consumer sentiment has
taken unusually long to repair itself after the surge in investor sentiment at
the end of 2010, and this perhaps explains why US equity flows (at least into
mutual funds) have remained so poor right through 2010. This weeks ABC poll and
the strong start to 2011 suggest that both may be finally changing.

+------------------------------------------------------------------------------+

U.S. Consumer Confidence Takes Cue From Investors: Chart of Day
2011-01-12 16:46:32.223 GMT


By David Wilson
Jan. 12 (Bloomberg) -- Growing confidence among U.S.
individual investors may be starting to rub off on households,
if a surge in the ABC News Consumer Comfort Index is any guide.
The weekly indicator of consumers’ views on the economy,
personal finance and spending climbed five percentage points to
its highest level since April 2008, when it tumbled following
the Bear Stearns Cos. collapse. The increase was the biggest in
a single week since March.
The CHART OF THE DAY compares this gauge with the
percentage of bullish respondents in a weekly survey by the
American Association of Individual Investors. The association
tracks stock-market sentiment, and the chart displays a 10-week
moving average of its results.
Last week’s moving average of 51.7 was the highest since
January 2005, as the chart illustrates. The weekly figures have
exceeded 50 for five weeks in a row, showing that most investors
expected stocks to rise in the next six months. The Standard &
Poor’s 500 Index jumped 88 percent from March 2009 through
yesterday.
Against that backdrop, the increasing consumer confidence
signaled by the ABC News survey “may prove to be a significant
improvement,” Michael Shaoul, chief executive officer of Oscar
Gruss & Son Inc., wrote today in an e-mail.
Langer Research Associates produces the Consumer Comfort
Index, which stood at minus 40 this week and has been negative
since March 2007. The results are based on a four-week rolling
average of surveys of 1,000 adults and have a three-percentage-
point margin of error.

(To save a copy of the chart, click here.)

For Related News and Information:
Conference Board confidence index: CONCCONF <Index> GP M <GO>
University of Michigan confidence: CONSSENT <Index> GP M <GO>
AAII survey percentages: ALLX AAII <GO>
Economy top stories: TOP ECO <GO>
Stock-market top stories: TOP STK <GO>
Charts, graphs home page: GRAPH <GO>

--Editor: Charles W. Stevens, Laurence Arnold.

To contact the reporter on this story:
David Wilson in New York at +1-212-617-2248 or
[email protected]

To contact the editor responsible for this story:
James Greiff at +1-212-617-5801 or [email protected]
- codjan122011.gif

The December 31st 2010 Short Interest report made for interesting reading since
it showed a fairly sharp 5.45% reduction in overall NYSE short interest to 1085
Bln shares (4.56% of the total float). However, since this covered the year end
period when positions are often trimmed and came at the end of one of the best
December's on record a drop of this magnitude is hardly surprising. What is
more interesting is the distribution of short positions across sectors.

Even after a year of powerful outperformance and excellent macro and corporate
data the Consumer Discretionary sector remained by far the most popular short
target at 7.19% of float. The second highest sector was energy at 4.88% which
is broadly in line with the overall average. Telecom Services had a notably
small short position (no doubt due to the high dividend of the stocks in this
sector) which may indicate an element of vulnerability early in 2011.

Drilling down on the Consumer Discretionary short position we see that the
largest concentration of shorts (as measured against total float) were in the
Homebuilding sector, at 11%. The short interest in this sector only fell by
1.59% in the December 31st report. Although it may be true that macro data has
remained very poor for new home sales and construction this is far less true of
corporate earnings in this sector, with a number of good reports in recent
weeks. The S&P Supercomposite Homebuilder Index (S15HOME) is up 9.39% since the
start of January and has actually outperformed the SPX index since the start of
September 2010. The current level of short interest therefore indicates a level
of stubbornness on the part of short sellers that has not been justified by
recent performance. Should there be any hint of an end to the current new home
slump in the winter and early spring reports the stage would be set for a
squeeze in this overcrowded short position. - shortinterestdec312010.gif -
homebuildingsi.gif

We are paying increasing attention to India at the current time and
although last night the local SENSEX index had its strongest day since late
November, rising 1.76% to 19,534 there was some poor macroeconomic data
reported. The Indian Industrial Production index for November fell by
4.56% from October which took the 12 month RoC down to a mere 2.7%.
Clearly this is well below the consensus view of India's industrial
performance and is one of the first metrics to suggest that the
significant tightening of monetary conditions may be having some effect on
actual economic activity. As ever we would caution from drawing too many
conclusions from a singly monthly print of volatile data, particularly
since December is historically the second strongest month for this data
set (over the last 10 years the index has risen an average of 8.5% from
November's level). It may well prove that today's data is an aberration
but there is also the possibility that it represents an important change
in the trend for this key emerging market economy. - M-INPIINDU_Index.gif -

We have become so used to static Consumer Confidence data in the face of better
economic conditions and robust asset markets that we were somewhat surprised to
see what may prove to be a significant improvement in the weekly ABC Consumer
Confidence report. This index is based on a four week rolling average of
responses from a 1000 person telephone poll and as the attached chart shows
this improved to -40 on the January 10th index showed an increase to -40, which
is the best reading since April 2008 when the index fell sharply in the
aftermath of the Bear Stearns collapse.

Should the poll continue to push higher this would represent something of a
(belated) mood-swing and may prove similar to the surge seen between September
1993 & February 1994 when the index rose from -37 to -20. It should be noted
that this improvement in sentiment came almost 2 years after the end of the
"official" recession period (much to the chagrin of George Bush snr) and
culminated with the FRB announcing a series of surprise rate hikes that were to
take the FDTR from 3% in 1994 to 6% one year later (the FRB is typically as
late as the average consumer in its appreciation of a change in economic
conditions). An abrupt improvement in consumer confidence therefore could be
seen to be something of a mixed blessing for asset markets should it presage a
change in the FRB's super-accommodative stance sooner than most assume at the
current time, but this is getting ahead of events. At present we would simply
start to monitor this weekly poll a little more carefully. -
abcconfidencejan10.gif

After several months of strongly positive reports the Census Bureau
estimation of Wholesale Inventories fell by -0.2% in November compared to
consensus expectations of a 1% rebuild. The October build was also trimmed
to 1.7% from the original reading of 1.9%. Since this data is not
particularly accurate on a month-by-month basis we would not assume that
any significant change in inventory management practice took place in
November but would instead use the 12 month RoC as a reasonably accurate
gauge as to the pace of the current inventory build, at approximately
8.4%. Since the 12 month RoC of sales is over 12% this implies that
production of wholesale goods grew by a little more than 20% over the
course of 2010. Importantly the pace of sales shows no sign of slowing (in
fact the Census Bureau estimates sales grew by 5% between September and
November, an annualized RoC of 21%) and the Inventory/Sales ratio remains
unusually low at 1.15 this supports our belief that the current pace of
industrial recovery is sustainable going forwards. - D-MWINTOT_Index.gif -

Argentina Buys More Pesos From Brazil as Bill Shortage Worsens

Argentina has a long history of monetary chaos and the signs are growing that
the current boom will end the same way as other cycles. Attached are two
stories, one from today which describes a shortage of high-denomination paper
bills and the second (originally published yesterday) which describes the
intention of the local Central Bank to accelerate monetary growth in an attempt
to keep down local interest rates. This is quite simply monetary heresy given
the clear inflationary pressures already present in this economy.

We have recently noticed a number of stories recommending Argentinian credit,
where the nominal yields appear attractive. Buenos Aires for instance is
currently paying a yield of 10% on its 5 year paper. Those who remember the ill
fated Patacon (a "local currency" minted by Buenos Aires to pay its workers in
the last Argentinian crisis in 2001/2) will understand that this risk premium
is well deserved.

 

Despite multiple policy tightenings over the last 12 months Chinese
monetary growth remains virtually unchanged. M2 grew by 2.19% in December,
taking its annual increase up to 19.7% and 3 month RoC is 4.22%, which
would annualize to just under 18%. New Loan activity fell to 480.7 bln CNY
which led to a small drop in the trailing 6 month ma to 550 bln CNY. Such
intransigence is actually typical of a battle between a central bank and a
booming economy. The incentive to lend money typically overwhelms the
early policy moves forcing greater and greater levels of restriction until
an abrupt slowdown in activity becomes apparent. China looks likely to
follow down this familiar path, unless the authorities decide to simply
throw in the towel and let the good times roll into an inflationary
spiral. Complicating matters is the speed with which China's Foreign
Exchange Reserves have been building in recent months. These surged
another $79.5 bln (2.87%) in December taking their annual growth to over
18% and a much faster pace of growth over the last quarter (43%
annualized). Clearly the authorities are finding it difficult to break the
linkage between a build-up of reserves and local monetary growth, which is
hardly surprising and unless they wish to undo the entire export-driven
basis of their economic model (which seems highly unlikely) reserves seem
set to continue to grow in the months ahead. - M-CNGFOREX_Index.gif -
D-CNMSM2_Index.gif -

We pointed out last week that Australia's PMI reading is just about the
only international Manufacturing diffusion index that has been signaling a
moderation of activity in recent months. Further confirmation of a slowdown in
the non-mining related portion of the economy came last night in the form of
the AIG Construction Performance Index, which is another diffusion index based
solely on construction. This came in at 43.8, the 7th consecutive sub-50
reading. Although readings for the overall index have remained in the mid 40's
(which typically indicates only a moderate slowdown of activity) we would be
concerned that the New Order sub-index made a new low of 37, the worst reading
since April 2009. Readings in the high 30's typically indicate a fairly sharp
rate of deterioration and for obvious reasons NEw ORders tend to lead other
sub-indexes in both directions. December's data should therefore be treated as
a warning that the Australian construction index is showing signs of coming
under duress at the current time. - D-AICIPCI.gif -

It is easy to forget that the 1st quarter of 2010 started with a very
difficult few weeks for emerging markets as investors became concerned
that Chinese monetary authorities were starting to tighten monetary
policy. It really took until the later Spring before emerging markets left
their concerns behind and this was largely aided by a number of prominent
EM central banks ceasing to tighten monetary policy based on the mistaken
notion that the US was about to experience a "double dip".

Looking at the start of 2011 there are some signs that history may be
about to "rhyme". This time it is the Indian market that seems to be
worthy of attention since as the attached chart demonstrates it has had a
very poor start to the year, with the benchmark SENSEX falling 6.25%
through this morning's close. This takes the index close to key support at
the 19,000 level, which held in the face of the late November and early
December declines. Furthermore it should be noted that it is Indian banks
that have been leading the market lower. The NIFTY Bank Index (CNXBANK),
an index of the countries 12 largest public banks (total market cap
approximately $80 bln) is now down 9.25% for the year. This is a
reasonable indication that it is monetary concerns that is leading the
market lower, which is hardly surprising given that the local 3 month
funding rate remains just over 9%, up from 5% last May and 7% last
September. Should the rate break higher than the December peak of 9.08% we
would have further evidence that India is experiencing something of a cash
crunch.

Given India's extreme popularity with foreign investors a further
pull-back in the SENSEX would probably put a dampener on the entire
complex. It would also concentrate investors' attention more clearly on
the growing wave of monetary tightening within emerging markets.

The other market that we would be very alert to is that for precious metals,
particularly gold. We have argued many times that one of the fairest ways to
value gold is to measure the "opportunity cost" of holding 1 oz in the local
currency. Attached is a chart of the cost of Gold in INR using the 3 month
Offered Rate (NSERO3M) to finance. As can be seen we have just surpassed the
October 2008 high of 5576 INR. Back then it was the NSERO3M of 13.2% that made
gold prohibitively expensive. This time it is a combination of a higher
funding rate and much higher metal price (the INR was approximately 5%
higher in October 2008).

There are 3 potential ways for this price to moderate; relief can come from
lower short term rates, a higher local currency or lower spot prices for gold.
In the absence of one or a combination of these local Indian demand for gold is
likely to come under continued pressure, particularly the more speculative
portions of the market where leverage tied to short term rates is being
used to to fund purchases. - D-SENSEX_Index.gif - D-NSERO3M_Index.gif -
D-.GOLDIND.gif -

An interesting "Chart of the Day" from Bloomberg that echoes a point we made
earlier this week (although using a slightly different methodology to get
there). Interestingly the targets generated off the 1994 and 1994 sales are
broadly similar to our own which were based on an extrapolation of the last 12
and 3 months sales respectively. In any case sales in excess of 15mm for
December 2011 would seem to be far more likely than that priced into current
consensus (which crucially includes the inventory levels currently being
carried by auto-manufacturers).

+------------------------------------------------------------------------------+

Auto Sales May Return to Normal in U.S. This Year: Chart of Day
2011-01-07 17:00:34.250 GMT


By David Wilson
Jan. 7 (Bloomberg) -- U.S. auto sales may bounce back to
normal by year-end after the plunge that triggered bailouts of
General Motors Corp. and Chrysler LLC, according to James W.
Paulsen, Wells Capital Management’s chief investment strategist.
As the CHART OF THE DAY shows, the industry’s current sales
rebound is in line with recoveries after the 1981-1982 and 1990-
1991 recessions, according to data compiled by Bloomberg and the
Commerce Department. The earlier figures are extended by 12
months to show where sales might be by the end of 2011.
Since reaching bottom in February 2009, sales have been
“just as rapid and robust” as they were during the 1980s and
1990s rebounds, Paulsen wrote this week in a report. Car and
light-truck sales rose 34 percent from their low through last
month, when the annual rate stood at 12.5 million units.
Year-end sales may reach a rate of 15 million to 16 million
vehicles, assuming the latest rally keeps pace with the previous
recoveries, he estimated. The higher end of the range amounts to
a 28 percent increase from December’s pace.
The sales rate has to reach 14.3 million to surpass its
peak in August 2009, when a “cash for clunkers” program was in
effect. Under that effort, the U.S. government offered discounts
as high as $4,500 to car buyers to encourage trade-ins of older,
less fuel-efficient vehicles.
“Auto stocks may again have a good year” as sales climb,
Paulsen wrote. Car, truck and auto-parts makers in Standard &
Poor’s benchmark U.S. indexes rose 55 percent as a group last
year after more than doubling in 2009.
GM, reorganized as General Motors Co., rose 18 percent as
of yesterday from its initial public offering price in November.
Chrysler is now Chrysler Group LLC.

(To save a copy of the chart, click here.)

For Related News and Information:
North American International Auto Show: SHOW <GO>
U.S. auto industry top stories: TNI USTOP AUT <GO>
U.S. monthly auto sales: ALLX SAAR <GO>
Charts, graphs home page: GRAPH <GO>

--Editor: Charles W. Stevens, Laurence Arnold.

To contact the reporter on this story:
David Wilson in New York at +1-212-617-2248 or
[email protected]

To contact the editor responsible for this story:
James Greiff at +1-212-617-5801 or [email protected]
- codjan72010.gif

You never quite know what to expect from the monthly Non-Farm Payroll
report and despite a number of very encouraging labor metrics from other
sources the "senior survey" came in some distance short of expectations
(150K) at 103K. Some recompense came from the fact that November's very weak
data was revised higher by 32K to 71K and the Unemployment rate bumped lower to
9.4% as a result of a change to the estimated size of the work-force and
population (as we have written before this number is highly unreliable but
unfortunately influential).

Private Sector Payrolls followed the overall data coming in at 113K (178K
consensus) but being revised higher by 79K for November (boost of 29K).
Given the unreliability of this survey we would not draw any conclusions
from today's shortfall (nor would we if data had come in 50K higher than
expectations). Eventually the Non-Farm Payroll report will reflect a
significant improvement in employment (assuming that one is in fact
occurring) and in the meantime we would continue to follow the Initial
Claims data and anecdotal comments from corporate management to get a
sense of how things are progressing.

Even so, December's data takes the 12 month ma of Private Sector Payroll
Changes (our preferred metric) up to 112K which is equivalent to the state
of affairs in April 2004 and February 1992. This is still within the range
of a strong employment recovery and December's data is 196K better than
the December 2009 report. We would hope to see significantly stronger data
at some point in Q1 2011 and for the 12 month ma to continue its upwards
trajectory. - M-NFP_PCH_Index.gif -

An interesting article from today's NY Times describing the recent tightening
of the used car market. The main cause of higher prices is a shortage of "new
used" cars for sale, since total new car sales from late 2008 to late 2010 were
several million units below trend. Clearly higher used car prices represent a
positive boost for the new car market and one of our main arguments last fall
was that the lengthening of car ownership was likely to be a source of
significant additional demand later on in the cycle and the attached article
shows that this process is now underway.

Initial Jobless Claims bounced off last weeks very low reading but in
rising to only 409K (in line with consensus) they helped confirm the very
rapid improvement in this data over recent weeks. The 4 week ma of claims
(attached) fell to 410.8K, the lowest reading since July 25th 2008. We
remain in the highly volatile holiday season and non-seasonally adjusted
claims rose to 575K last week. Most observers will therefore wait until
mid-January before fully embracing the recent improvement in this data but
it should be remembered that it has been somewhat confirmed by much better
ADP and Challenger reports for December. In theory a drop of 20K. in the 4
week claim average over the course of a month (equivalent to approximately
90K less firings) should be enough to spark an improvement in tomorrow's
Non-Farm Payroll report; in practice we will just have to wait and see. -
D-INJCJC4_Index.gif -

The difficulty in controlling the booming Brazilian economy is becoming
increasingly apparent. Local Vehicle sales increased to a new record of
382K in December, a gain of over 30% from December 2009. Total sales for
2010 grew by just under 400K vehicles to a new record of 3,515K. Meanwhile
the local central bank remains more concerned about addressing foreign
capital flows than directing its attention to local consumption. This
morning saw the latest dose of MPMP with the introduction of a new 60%
reserve requirement for short USD positions above $3bln in size (see
attached article). As we noted a couple of days ago the Brazilian central
bank has become somewhat obsessed with the BRL/USD rate and has repeatedly
(and mistakenly) accused the US authorities of waging a "currency war". It
is particularly interesting that this rule appears to be USD specific. We
recognized that the BRL/USD cross dominates capital flows but the limiting
of the new requirement to one particular currency betrays a political edge
to the current policy.

+------------------------------------------------------------------------------+

Brazil Sets Reserve Requirement to Stem Real Rally (Update3)
2011-01-06 12:56:58.839 GMT


(Updates with Mendes comment in fourth paragraph, analyst
comment in sixth paragraph.)

By Andre Soliani and Matthew Bristow
Jan. 6 (Bloomberg) -- Brazil’s central bank set reserve
requirements on short dollar positions held by local banks in
its third attempt since October to stem a rally in the currency.
The real fell as much as 0.8 percent after the announcement.
The new rules have the potential to reduce short positions
in the dollar to $10 billion from $16.8 billion in December as
banks seek to avoid paying reserve requirements on currency
operations, Aldo Mendes, the central bank’s director of monetary
policy told reporters in Brasilia.
Starting April 4, Brazilian banks will need to deposit in
cash at the central bank 60 percent of their short positions in
U.S. dollars above $3 billion or their capital base, whichever
is smaller. The reserves will not earn interest, Mendes said.
“It’s bad for the economy when the system swings to one
extreme,” Mendes said.
Policy makers in Latin America are trying to stem currency
gains as fast economic growth and low interest rates in rich
nations attract capital inflows to the region. Finance Minister
Guido Mantega said this week that Brazil’s government is ready
to take new measures to prevent the dollar from “melting” and
stem the real’s 38 percent rally against the dollar since 2009.

No Lasting Effect

The measure could weaken the real in the short-term, though
is unlikely to have a lasting effect, said Andre Perfeito, chief
economist at Gradual Investimentos.
“This measure won’t be efficient, because the real’s
appreciation is based on fundamentals,” Perfeito said in a
telephone interview from Sao Paulo.
Since October, Brazil’s central bank has twice raised, to 6
percent, a tax foreigners must pay to buy fixed income and
derivative assets. President Dilma Rousseff, in her inaugural
address Jan. 1, pledged to protect the country “from the
indiscriminate flow of speculative capital.”
Brazil’s real fell as much as 0.8 percent after the
announcement before paring losses. The currency weakened for the
third straight day by 0.5 percent to 1.6821 per U.S. dollar at
7:52 a.m. New York time. Yields on the interest rate futures
contract due in January 2012 rose three basis points to 12.12
percent.

Latin America

Other emerging markets including Chile and Peru have
stepped up their battle against the weak dollar in recent days.
Chile this week said it will buy $12 billion in the
foreign-exchange market to weaken the peso, the region’s best-
performing currency over the past six month. Peru’s central bank
on Jan. 1 extended reserve requirements for banks to their
overseas units to stem inflows increasing volatility in the sol.
Mantega said Jan. 4 that the government has an “infinite”
number of tools at its disposal to affect the country’s exchange
rate and support exporters hurt by the currency gains.
Brazil’s trade surplus narrowed 20 percent last year from
2009 as a stronger currency and the fastest economic growth in
more than two decades fueled imports.
Perfeito said today’s move by the central bank shows that
Rousseff’s top concern is preventing the real from strengthening
further. The move raises the risk bank President Alexandre
Tombini won’t raise the benchmark Selic rate this month to
control inflation running at a 23-month high, he said.

Selic Impact

“Perhaps they won’t increase the Selic next meeting,
because they are trying so hard to control the exchange rate,”
Perfeito said. “That’s my worry right now.”
Traders are betting policy makers will raise the benchmark
rate by 50 basis points, to 11.25 percent, at their Jan. 18-19
policy meeting, according to Bloomberg estimates based on
interest rate futures contracts. Brazil’s real interest rates
accounting for inflation, the highest in the Group of 20
nations, are a magnet for speculative capital, Mantega has said.
Brazilian consumer prices, as measured by the IPCA-15
index, jumped 5.79 percent in the 12 months through mid-
December. That’s the highest inflation rate in nearly two years.
Mendes said today’s move had no connection with monetary
policy.
In 2009, Brazilian banks held $2.9 billion in long
positions in dollars, swinging to $16.8 billion in short
positions at the end of 2010, Mendes said.
The measures are “prudential” and could spur dollar
purchases that weaken the real and reduce the central bank’s
daily dollar purchases, he added.
Nelson Barbosa, the Finance Ministry’s executive secretary,
said today’s measures had been under consideration since 2008
and will reduce volatility in the foreign exchange market.



For Related News and Information:
News on Brazil’s central bank: TNI CEN BRAZIL <GO>
Top Latin America news: TOPL <GO>
News on BRIC countries: STNI BRICS <GO>
Stories on Brazil: NI BRAZIL <GO>
News on the Brazilian economy: TNI BRAZIL ECO <GO>
Surveys on Brazil’s Economy: ECO BZ <GO>
Central Bank Interest Rate Decisions: CPOM <GO>
Brazil Annual Consumer Prices: BZPIIPCY <Index> GP <GO>

--Editors: Harry Maurer, Joshua Goodman

To contact the reporter on this story:
Matthew Bristow in Brasilia at +55-61-3329-1609 or
[email protected];
Andre Soliani in Brasilia at +55-61-3329-1605 or
[email protected]

To contact the editor responsible for this story:
Joshua Goodman at +55-21-2125-2535 or
[email protected]
- M-BZVLTLVH_Index.gif

A very interesting transaction that is one of the largest restructurings we
have seen in homebuilding projects this cycle. Note that one of the drivers
behind this deal is the fact that new home inventory in the area is now very
tight. Clearly a deal of this size and complexity does not get done unless the
parties believe that there is an end market for the homes that will be
constructed and we would therefore see this transaction as one of the first
signs that confidence within this sector is finally starting to turn the corner.

Yet another upside surprise was delivered by this morning's ISM
Non-Manufacturing survey and even though we do not consider this data
series to be nearly as useful and the Manufacturing gauge it still
suggests that the economic recovery is both broadening and deepening. The
headline index came in at 57.1 (consensus 55.7) which is the best reading
since April 2007 (right at the start of the blow-up in the mortgage
financing industry). This takes the 6 month ma back up to 54.23 and erases
any lingering concerns from last summer's weaker than expected data. Even
more encouragingly both the Business Activity index and New Orders were
much stronger at 63.6 and 63.0, the best readings since August and May 2005
respectively. Perhaps the only disappointment came from a tepid Employment
reading of 50.5 but given the other employment metrics released in recent weeks
we would not pay too much attention to this marginal piece of data and in any
case the rapid improvement in activity implies better employment prospects
going forwards. - D-NAPMNMI_Index.gif -

The December ADP Payroll Change Index joins the chorus of metrics that
suggests that a significant positive shift in the US employment cycle took
place in the 4th quarter. December's 297K increase is the largest monthly
gain since the data starts in 2001 (we would assume that in part this is
"payback" for some surprisingly low prints earlier in the 4th quarter) and
takes the 6 month ma up to +96 (still below the 150-200 range that we would
consider indicative of strong payroll growth). This still does not guarantee
that Friday's official Non Farm Payroll data will also surprise on the upside
but it does increase the probability that things really are improving quite
rapidly in the real economy and that this will be reflected sooner or later in
the official employment data. - D-ADP_CHNG_Index.gif -

As we have argued before, the introduction of MPMP makes judging the
tightness of monetary policy far more difficult than normal. Looking at
China for instance the multiple hikes in reserve requirements would seem
to have had little effect on the pace of M2 growth or new loan issuance in 2010
but digging a little deeper there are signs of stress building in the system.

One is the sudden surge in SHIBOR (see attached) which started 2010 at
1.80%, reached 2.90% in late November and ended December at 4.62%. This is
a clear sign that short term funds became very tight in the run up to the
holiday period and it will be interesting to see the extent to which this
rate pulls back at the start of the year (readers should recall that
something very similar has occurred in India).

The attached Bloomberg article is also worth considering since it describes a
rapid increase in the use of commercial paper to fund Chinese corporations.
While over the longer term the development of a deep commercial paper market
would be a good thing for China we would have concerns that the current spike
is merely a sign that bank credit has become less available and is being
substituted by commercial paper that currently is perceived as attractive by
the marketplace, thus increasing the reliance of the industrial economy on
short term wholesale funding markets. As we spent most of 2007 and 2008
explaining, a mismatch between the time span of a loan and the use of the
capital is always a source of potential trouble and China's CP market
therefore joins th growing list of EM monetary metrics that should be
watched at the current time.

+------------------------------------------------------------------------------+

Commercial Paper Sales to Rise 20% as Loans Pared: China Credit
2011-01-04 23:14:45.320 GMT


By Bloomberg News
Jan. 5 (Bloomberg) -- China’s efforts to stem inflation by
curbing access to loans are driving companies to borrow record
amounts in commercial paper, even as interest costs more than
doubled in 2010.
Sales of the short-term notes may rise about 20 percent
this year following last year’s 45 percent increase to a record
678 billion yuan ($103 billion), according to forecasts from a
Bank of China Ltd. unit and Industrial Bank Co. The average
yield on one-month AAA commercial paper jumped 229 basis points
to 4.23 percent last year, according to Chinabond, the nation’s
biggest debt clearinghouse. The similar benchmark interbank
lending rate increased 437 basis points to 6.17 percent.
The market’s development may help China sustain economic
growth that’s averaged more than 10 percent in the past five
years, as the nation tries to curb the fastest inflation in 28
months. Central banks in the largest emerging markets are
tightening cash supplies to cool overheated property and stock
markets, with India’s one-month CP rate jumping 491 basis
points, or 4.91 percentage points, to 9.03 percent last year.
“The bigger issuance of commercial paper this year will
help ease the funding shortage in the real economy,” said Zhou
Yan, a bond analyst in Shanghai at Bank of Communications Ltd.,
the nation’s fifth-largest lender. “More companies will seek to
raise financings through the debt instrument as banks cut loans
this year.”

New Class

China added a new class of commercial paper last month with
maturities of up to 270 days, and approved the sale of 210
billion yuan of notes in 2011, according to the National
Association of Financial Market Institutional Investors, or
NAFMII. China Ministry of Railways, China National Petroleum
Corp. and China Petroleum & Chemical Corp. are slated to sell
the first notes, the market regulator said Dec. 22.
Commercial paper sales may increase about 20 percent to
around 820 billion yuan in 2011, according to Guo Caomin, a bond
analyst at Industrial Bank in Shanghai, the eighth-biggest
commercial paper underwriter last year. The increase will be
driven by sales in the new asset class, Guo said.
Sales may reach between 800 billion yuan and 1 trillion
yuan this year, said Chen Jianbo, a Beijing-based bond analyst
at BOC International, a unit of Bank of China, the No. 6
underwriter in 2010, according to data compiled by Bloomberg.
“New direct financing instruments typically grow faster
than traditional tools such as bank loans,” Guo said. “The
central bank’s raising of interest rates will curb demand for
loans.”

Bank Loans

Chinese new bank loans fell for two straight months to 564
billion yuan at the end of November from 596 billion yuan in
September, the latest government figures show. The country has
moved to curb risk-taking by banks after 2009’s record $1.4
trillion in new loans fanned concerns asset bubbles were forming
in the property market. Benchmark one-month interbank lending
rates in China rose 266 basis points in the fourth quarter of
2010.
The government failed to draw enough demand at a bill sale
on Dec. 24, as higher reserve requirement ratios left banks with
less cash. The Finance Ministry sold 16.76 billion yuan of 91-
day securities, falling short of the 20 billion yuan target,
according to a statement on Chinabond’s website.
The yield on China’s 2.68 percent government bond due in
November 2013 fell 1 basis point to 3.41 percent yesterday,
Chinabond prices show. The yield on India’s three-year bonds
rose 8 basis points to 7.9 percent. Similar maturity bonds yield
7.1 percent in Russia and 12.2 percent in Brazil.
The cost of protecting China’s government bonds from
default was little changed. The five-year credit-default swap
contracts were at 66.5 basis points yesterday, according to CMA
prices. The contracts pay the buyer face value in exchange for
the underlying securities or the cash equivalent should a
borrower fail to adhere to its debt agreements.

Yuan Weakens

China’s currency weakened 0.29 percent to 6.6088 per dollar
yesterday, the biggest decline in two weeks, according to the
China Foreign Exchange Trade System. Twelve-month non-
deliverable forwards were little changed at 6.4400, reflecting
bets the currency will gain 2.6 percent in a year.
The seven-day repurchase rate, which measures lending costs
between banks, more than doubled in the last two weeks of 2010,
reaching a high of 6.24 percent on Dec. 31, according to daily
fixings published at 11 a.m. by the National Interbank Funding
Center. The rate slid 200 basis points to 4.3 percent yesterday
following a public holiday on Jan. 3.
The one-year interest-rate swap, the fixed cost to receive
floating payments, has dropped 22 basis points from a two-year
high touched in November. The rate was unchanged at 3.13 percent
yesterday.

Stimulus Curbs

The commercial paper market helps improve the effectiveness
of China’s monetary policy and promotes liberalization of
interest rates, NAFMII said last month. People’s Bank of China
Governor Zhou Xiaochuan said at a financial forum in Beijing on
Dec. 17 the nation will make “noticeable progress” over the
next five years in interest-rate liberalization. The lenders
with the best ability to price risk should be given more freedom
to set rates according to market conditions, ahead of those
still bearing heavy “historic burdens,” Zhou said.
“Because of the volatility of companies’ daily funding
requirements, through the issuance of super and short-term
commercial paper they can respond flexibly to unexpected
demands,” NAFMII said.
Policy makers twice raised interest rates last year and
increased the proportion of deposits that lenders must set aside
as reserves six times. Consumer prices rose 5.1 percent in
November from a year earlier, driven by food costs, according to
a statistics bureau report Dec. 11.
Yields on the 2.56 percent commercial paper due in August
2011 from the Ministry of Railways, the biggest issuer of
commercial paper in 2010, moved last week between a high of 4.13
percent and a low of 2.52 percent after policy makers raised
interest rates on Christmas Day. They were last quoted at 3.65
percent, according to Chinabond prices.

For Related News and Information:
China Commercial Paper Sales: LEAG332 <GO>
New bond issue monitor: NIM <GO>
Reports on China and inflation: TNI CHINA INF BN <GO>
China Economic Statistics: ECST CH <GO>
China Economic Coverage: NI CHECO <GO>
China Economic Snapshot: ESNP CH <GO>
Yuan Forecasts: FXFC CNY <GO>

--Shelley Smith, Dingmin Zhang. With assistance from Judy Chen
in Shanghai. Editors: Hugh Chow, Tom Kohn

To contact Bloomberg News staff on this story:
Shelley Smith in Hong Kong at +852-2977-6623 or
[email protected]
Dingmin Zhang in Beijing at +86-10-6649-7576 or
[email protected]

To contact the editor responsible for this story:
Will McSheehy at +65-6212-1140 or
[email protected]
- D-SHIF3M_Index.gif

The December Challenger Job Cut Index fell sharply to 32,004, supporting
the recent improvement in the Initial claims data. This is the lowest
monthly print since June 2000 and has only been bettered on 3 occasions
since this data series started in 1999. The 6 month ma (red) has now
fallen to 38,716, which itself has only been bettered at the height of the
technology boom in the spring of 2000. As ever we caution that this data
gives no insight into the December payroll release but it does suggest
that the overall employment picture is starting to heal fairly rapidly in
line with our expectations. - D-CHALTOTL_Index.gif -

December was another excellent month for US car sales with total vehicle
sales being reported at 12.53mm (seasonally adjusted annualized basis), a
rise of 2.2% from November and well above consensus estimates of 12.30mm
units. This marks the 4th consecutive month of growth and takes the sales
up tot heir best level since the brief "cash for clunkers" spurt in the
summer of 2009. Ignoring this episode sales are now just below where they
were in September 2008 which matches the performance of the SPX index in
recent weeks and means that the gains in sales recorded have been in line
with the prediction we made at the start of the 4th quarter.

Looking forwards we would still expect to see sales repair quicker than
consensus. At the very least we would use the trailing 12 month RoC as a
guide (blue dashed line on chart) which would take sales up to
approximately 14.1mm units by the end of 2011. A more aggressive forecast
would argue that the 3 month RoC offers a better guide since the entire
pace of consuer activity has started to accelerate since the summer and
there is a great deal of deferred demand present in today's new car
market. This would imply an increase in sales of approximately 30% over
2011 to around 16.25mm units. This might seem a very aggressive claim to
make but it would only put sales back where they were during the
unexceptional (for new car market) decade between 1998 and 2008. This does
not strike us as unattainable in the current environment, but even if it
proves too ambitious sales seem likely to comfortably surpass the
consensus estimate and require a significant increase in productive
activity by auto-makers in the coming months. - M-SAARTOTL_Index.gif -

A link to the FOMC minutes for its December 2010 is attached. As usual they
contain a great deal of backward looking discussion of economic data (most of
which we dealt with at the time it was released) and precious little insight as
to the future. We would, however, highlight the following paragraph which
occurs roughly three-quarters of the way through the text:

"A few mentioned the possibility that growth could pick up more rapidly than
expected, particularly in light of the very accommodative stance of monetary
policy currently in place. It was noted that such an acceleration would likely
be accompanied by significantly more rapid growth in bank lending and in the
monetary aggregates, suggesting that such indicators might prove to be useful
sources of information."

We find the above interesting since it not only hints at some dissent over the
largely dismal (if improving) prognosis for the US economy but, more
importantly, gives a hint as to the data which may prove influential in
changing opinion towards a more realistic appreciation of current economic
conditions. Clearly the Thursday night releases on M1 & M2 and Friday night
releases on Bank lending metrics are well worth following going forwards.

The turn of the year has done nothing to stem the tide of MPMP rhetoric if
today's gaudy comments from Brazil's Finance Minister Mantega are anything to
go by. Lost in the reportage is that fact that the USD has not in fact "melted"
in recent months, but actually gained against most currencies in 2010 and only
fell about 4.5% against the BRL. The problem remains rampant inflows into
Brazil's credit markets rather than a deliberate attempt to debase the USD.
Given the strength of language used today we would expect to see additional
barriers to foreign capital implemented in the fairly near future.

The Census Bureau Factory Orders data for November confirmed what we already
knew, namely that the industrial sector continues to recover rapidly. Total
Orders were estimated at 423.8 Bln, an increase of 0.75% (consensus was a -0.1%
drop) and the best reading since September 2008. It is now apparent that the
very poor data reported in this series last spring (May and June 2010 had a
combined drawdown of 2.44%) was (as we argued at the time) a figment of the
Census Bureau's imagination. Orders are now growing at an annual pace of 8.7%
and with this data series still $60 bln (12.4%) below its December 2007 all
time high there is reason to expect a continued expansion at the current pace
through the course of 2011. - factoryordersnov10.gif

The global PMI reports for December have generally been excellent with G7
nations reporting readings in the low 60's and high 50's and Asian markets
somewhere in the low 50's.This allowed the JPM Global PMI index (black) to
rise to 55, the 18th consecutive month of positive 50+ readings.

The one outlier in the monthly reports was Australia, which reported a
reading of 46.3 (green), its lowest since December 2009. This is the 4th
consecutive sub-50 reading for this survey and this suggests that an
important shift in conditions is taking place within the Australian
economy. Clearly the material sector remains white hot, but both the local
real estate market and industrial sectors are showing distinct signs of
cooling in the face of sharply higher interest rates (red) and a soaring
AUD (blue). This all shows the complication of fitting a single monetary
policy into a complex economy with multiple drivers. There is no doubt
that the RBA would like to engineer a "soft landing" for the local real
estate market (it is a pity that they never occur) and this seems to be
the main driver of local monetary policy. Complicating this is the soaring
commodity markets that is both pulling speculative capital into Australia
and overheating the mining sector. The industrial sector would appear to
be the loser in this battle, with higher interest rates increasing
financing costs and a higher currency making exports uncompetitive. The
result is the only persistently negative PMI survey at a time of global
industrial growth that has rarely been bettered over the last 30 years
which is a clear warning sign that the Industrial portion of the economy
is starting to come under some duress. - D-AIGPMI_Index.gif -

December saw yet another strong report from the ISM Manufacturing Survey
suggesting that growth accelerated through the end of 2010. The overall reading
rose to 57.0 (in line with consensus) which is an excellent reading given that
we are now 17 months into the recovery of this data. Importantly both New
Orders (red) and Production (blue) both rose to 60.9 and 60.7 respectively
while the rapid back-up in Inventories (green) moderated to 51.8. This
indicates that the bulk of the increase in activity is coming from a genuine
increase in end demand rather than inventory rebuild, underlining the
durability of the current recovery.

One area that remains tight is Customer Inventories (separate chart) these fell
to 40.0 suggesting that bottlenecks remain in supply chains close to the retail
end of the equation. Again this represents a potential source of additional
demand later into 2011. Finally the Employment index fell slightly but remained
positive at 55.7 for the 13th consecutive month.

One thing we would note is the manner in which consensus has moved up to meet
the level of industrial activity. 3 months ago data of this quality would have
been greeted as a significant upside surprise whereas today it is more of a
justification for the rapid re-valuation of industrial equities over the course
of the 4th quarter than a cause for another surge upwards. -
ismcustomerdec10.gif - ismdec2010.gif