Since I am on a short vacation for the rest of the week, I will only issue a
brief comment regarding today's developments. In the US we have an excellent
Chicago PMI report (see attached chart), with a headline number of 64 (black
line) and an Employment reading of 64.2 (pink line). This is very much in
keeping with the recent strong trend of US data, particularly employment data.

In Europe we have seen an aggressive take up of the LTRO in its 2nd round with
a large number of smaller banks taking part for the first time. We will comment
on this in more detail on our return but our assumption is that much of the
current take up is "opportunistic" and that several healthy institutions are
availing themselves of the very generous terms on offer. This ties in with our
idea that the healthier portions of the Euro-zone economy may now start to pick
up considerable steam.

In emerging markets we saw yet another poor trade balance from Turkey (-$7 bln
versus -$6.4 bln consensus) and some troubling news out of China's real estate
market, where it has become clear that the national government is willing to
put considerable pressure on municipal governments to keep restrictions in
place on local real estate markets (see attached story). This is in line with
our view that monetary tightness in China (and other major emerging markets) is
the main macro danger facing markets in 2012.

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

China Property Curbs Showdown Simmers After Wuhu Retreat (3)
2012-02-29 08:23:05.807 GMT


(Updates with closing share prices in 27th paragraph.)

By Bloomberg News
Feb. 29 (Bloomberg) -- China’s local municipalities will
press on with efforts to ease property curbs that have slowed
the land sales they rely on for revenue, even after two cities
retreated in the face of opposition from the central government.
Wuhu and Foshan, smaller cities that get at least 30
percent of their revenue from selling sites, abandoned attempts
to lift some restrictions that have hurt prices and sales.
Premier Wen Jiabao has reiterated the government won’t waver
from its measures to keep housing affordable.
“The local governments are testing the water, but the
central government is saying we are not ready yet,” said Andy
Rothman, CLSA Asia-Pacific Markets’ Shanghai-based China
macroeconomic strategist, who expects officials in Beijing to
start allowing their local counterparts to relax housing
enforcements in the second quarter.
That is already happening. The southern city of Zhongshan,
the hometown of Sun Yat-sen, the founder of modern China,
increased a price cap on residential home sales in January, and
the western city of Chongqing last month raised the minimum
threshold where a property holding tax kicks in.
Tensions between the two levels of authority will be on
show next week as officials gather in Beijing for the annual
National People’s Congress starting March 5. Land sales fell 13
percent last year from 2010 to 1.9 trillion yuan ($302 billion),
according to a SouFun Holdings Ltd. survey of 130 cities,
threatening funding for roads, highways and rail lines.

More Complaints

“Smaller cities rely much more on the property industry
than big cities, from land sales to deed tax,” said Liu Li-Gang,
a Hong Kong-based economist at Australia & New Zealand Banking
Group Ltd. “We are probably going to hear a lot of complaints
from small-city government officials during the NPC about how
much their revenue and economy have suffered.”
China has more than 1,000 county-level governments and
hundreds of city and municipal councils that get revenue from
local taxes, land sales and central-government transfers because
rules bar most of them from selling bonds. Land sales make up 30
percent of local government revenue and in some cities account
for more than half, according to a June 2011 report by Zurich-
based UBS AG.
Policies related to the property sector -- including
whether purchase restrictions in second- and third-tier cities
should be relaxed, preferential policies for first-time buyers,
and plans to extend the property tax experiment to more cities -
- “will surely be debated” at the NPC, according to economists
at Bank of America Corp.’s Merrill Lynch unit.

Fine-Tuning

“We believe the central government will not ease its major
property tightening measures,” the economists led by Lu Ting
wrote in the report. “However, the government could step up its
fine-tuning on several fronts.”
Changes may include further lowering mortgage rates and
down-payment ratios for first-home buyers and encouraging
developers to build smaller homes by providing favorable
policies on loans and land, the economists said.
The NPC is legally the highest governmental body in China.
While the legislature, with about 3,000 members, is often
derided as a rubberstamp parliament, its members are some of
China’s most powerful politicians and executives, wielding power
in their home provinces and weighing in on proposals such as
whether to impose a nationwide property tax.
Wu Yajun, China’s richest woman and chairman of Beijing-
based Longfor Properties Co., is a member of the NPC.

Shrinking Revenue

China’s home prices grew 6 percent in 2010 after surging 25
percent the previous year when the government started imposing
curbs, according to the National Bureau of Statistics. Home
sales rose 10 percent in 2011, the slowest pace in three years.
The government moved to stamp out speculation with measures
including raising down-payment and mortgage-rate requirements,
imposing property taxes for the first time in Shanghai and
Chongqing, and home purchase restrictions in about 40 cities.
The result has been shrinking local government revenue.
Land sales in Wuhu, a mid-size industrial city in the east and
home to China’s sixth-largest automaker, fell 51 percent last
year to 4.64 billion yuan from 2010, while they slumped 60
percent to 5.3 billion yuan in the northeastern industrial city
of Dalian, according to SouFun, the nation’s biggest real estate
website.
Local governments spearheaded a construction boom under a 4
trillion yuan stimulus program started in November 2008 after
global credit markets seized in the wake of the collapse of
Lehman Brothers Holding Inc. in September that year.

Backing Down

Property became the pillar industry in most second- and
third-tier cities than in Beijing and Shanghai, which have more
diversified industries and are considered more affluent,
according to Mizuho Securities Asia Ltd.
“Desperate diseases require desperate remedies,” said
Shen Jian-guang, a Hong Kong-based economist at Mizuho
Securities. “Had the government not introduce the nationwide
property tightening, it would be hard to control the risks of
asset bubbles. But today smaller cities are feeling the bigger
impact from the policies.”
First-tier cities include wealthier Shanghai, Beijing, and
Guangzhou and Shenzhen in southern China, according to the
statistics bureau. The second tier includes provincial capitals
and the third includes smaller cities.
Wuhu in Anhui province had planned to waive a deed tax and
subsidize some purchases, becoming the first Chinese city this
year to signal its intention to ease property measures. The
decision was halted three days after the Feb. 9 announcement, in
a move reminiscent of Foshan, in the south, which in October
shelved plans to ease limits on home purchases one day after its
announcement.

‘A Blind Eye’

China’s home prices in January recorded their worst
performance in at least a year, with none of the 70 cities
monitored by the government posting month-on-month gains. China
stopped releasing national average property prices in favor of
individual cities in January 2011.
The eastern city of Wenzhou posted the biggest drop, with
home prices declining 7.6 percent in January from the same
period last year, according to the statistics bureau. A credit
squeeze on smaller businesses in the city prompted a visit and
pledge of financial aid from Wen in October.
There are signs the central government may be allowing some
modest forms of property curbs relaxation. It “turned a blind
eye” in the case of Zhongshan and Chongqing’s “policy fine-
tuning,” according to CIMB-GK Securities Research Pte.

Mild Easing Allowed

“Local government officials are trying to read the mind of
the central authority,” said Johnson Hu, a Hong Kong-based
property analyst at CIMB-GK. “It seems cautious, mild easing
moves are allowed, while drastic relaxations are likely to be
called off.”
Major Chinese cities also are attempting some form of
easing. Shanghai on Feb. 22 reiterated its property curbs remain
in place after a newspaper affiliated with the state-run Xinhua
news agency reported the city will tweak its definition of
locals to allow a broader pool of people to buy second homes.
Shanghai stated yesterday that the definition of locals
excludes residence permit holders. That would leave out 671,000
in the city of 20 million who were issued residence permits as
of March 2009, China Business News reported.
The measure tracking property stocks on the benchmark
Shanghai Composite Index fell 3 percent at the close, the most
in three months. China Vanke Co., the biggest listed developer
on mainland exchanges, declined 2.8 percent to 8.28 yuan in
Shenzhen trading, while its biggest rival Poly Real Estate Group
Co. slid 3.3 percent to 11.1 yuan in Shanghai.

No Major Policies

“It’s very unlikely for the housing ministry to make any
major policy moves ahead of the NPC, while local governments
just can’t wait,” said Peter Bai, a Beijing-based property
analyst at China International Capital Corp., the country’s
biggest investment bank. The jostling between local and central
governments will last for at least half a year, he added.
China’s central bank cut the amount of cash that banks must
set aside as reserves for the second time in three months on Feb.
18. It also pledged on Feb. 8 to ensure that “loan demand from
first-home families” is met, echoing a housing ministry comment
in December that it will prioritize loans for first-home buyers.
“The central government wants to retain control of this
easing process; they don’t want each city going off and
operating on its own level,” said CLSA’s Rothman. “They need
to be convinced that they have enough evidence that policies
have worked before they start relaxing them.”

For Related News and Information:
Stories on China’s real estate market: TNI CHINA REL <GO>
Most-read China economy stories:
TNI CHECO MOSTREAD BN <GO>
Top China news: TOP CHINA <GO>
Top real estate stories: TOPR <GO>

--Bonnie Cao. Editors: Andreea Papuc, Linus Chua

To contact Bloomberg News staff for this story:
Bonnie Cao in Shanghai at +86-21-6104-3035 or
[email protected]

To contact the editor responsible for this story:
Andreea Papuc at +852-2977-6641 or
[email protected]
- chicagopmi.gif

Brazil's Private Sector loan report for January very much supports our notion
that credit conditions have deteriorate markedly over the last year. Overall
loan growth halted in February with total Private Sector credit shrinking by
4.13 bln BRL (-0.36%), the first monthly drop since July 2009. Most of this was
caused by a drop in Commercial Loans, which shrank by 3.86 bln BRL (-1.85%) and
Industrial Loans, which fell 5.99 bln BRL (-1.43%). Housing Loans grew by 5.34
bln BRL (2.66%), which is significantly slower than the recent pace of growth,
and the same was true of Personal Loans, which grew by 4.66 bln BRL (0.74%). If
this report is confirmed by the next couple of month's releases, it would
suggest that credit growth is coming under genuine pressure.

Much more troubling is the delinquency data, an issue that we have followed
closely for a number of months. January's report showed Personal Loans in
default (90+ days late) reach 7.60%, the highest reading since December 2010.
This is 1.90% above the January 2011 level of 5.70% and the largest 12
month jump since July 2002. As we have written before, Personal Loan default is
not meant to soar during a period of low unemployment and accelerating credit
issuance. The fact that it is doing so is a clear warning that underwriting
standards in Brazil have slipped and that consumers are becoming overstretched.
The default rate remains on track to push above the 8.00% level by the middle
of this year, an outcome that would come as a shock to most observers,
including the local banks who have mostly argued that the spike in defaults was
a temporary issue. - D-BZLNPTOT_Index.gif - D-BRCDDEFT_Index.gif -

The Conference Board Consumer Confidence Index rose to 70.8 in February, well
above January's reading of 61.5 and expectations of 63. At the current level
the index is just below the February 2011 reading of 72, which pretty much
marked the end of rapid progress for the US equity market for several months,
although the SPX did not finally peak until May 2nd. This demonstrated once
more the usefulness of using consumer confidence as a measure of INVESTOR
sentiment rather than retail consumption (which it really is of little help in
predicting).

One year later we find both the market and confidence back to where they
started, but it should be remembered that the fundamental underpinning of both
has improved significantly over the past 12 months. For equities we have 4 more
quarters of robust earnings growth under our belts, meaning that valuations are
considerably lower, while for confidence itself economic activity has by and
large recovered nicely in the key portions of the economy that consumers tend
to obsess about. Nowhere is this more true than employment. Initial Claims for
instance were running at around 400K per week in February 2011 and have fallen
to 350K today. There is finally some sign that consumers are starting to accept
the reality of an improving employment situation and we note that the "Jobs
Hard To Get" sub index has fallen to 38.70, the lowest level since November
2008. As the attached chart shows this tends to be very "sticky" data during
the early stages of a recovery but once it starts to decline it tends to trend
powerfully lower for several quarters. This strikes us as an important
development that should coincide with a greater willingness of consumers to
break out of their extremely risk averse allocations to local financial assets
over the coming months. - confidence.gif - conferencejobs.gif

We have spent the last few weeks watching investment flows return with abandon
to the emerging market complex. Although this has had a predictable effect on
the price of locally traded bonds and equities and has added considerable
liquidity to public markets, this is not quite the same as reliquifying the
entire financial system which in many cases remains under pressure.

A good example of this is India, where $7 bln of foreign investment has entered
equity markets alone for the first 2 months of the year, an annual pace of $42
bln that would blow past the 2010 record of $29 bln. The local SENSEX index has
reacted strongly and is up 14.73% for 2012. On top of this, bond flows have also
been rampant, allowing yields to fall and the Indian Rupee (INR) to recover a
portion of its steep 2011 losses.

Nevertheless in the banking system liquidity continues to remain very tight.
This can be seen on the attached chart, which shows the total amount of REPO
loans outstanding from the RBI to the local banking system. As can be seen, this
has now reached a record level of 1,806 bln INR (approximately $36.5 bln), all
being paid for at a REPO yield of 7.5% (up from 3.25% over the last 2 years).
This suggests that current RBI policy is placing considerable strains on the
local banking system, a risk that is ignored by those piling into Indian risk
assets at the current time. - D-RSPORRPO_Index.gif -

US Pending Home Sales came in slightly better than expected, growing 2% versus
1% consensus. Last month's data was also revised up from a -3.5% drop to a
-1.9% drop, combining for a boost of +2.5% over the two month period. As the
attached chart shows, this takes the monthly index up to 97 (2001 sales = 100),
the best level since April 2010 when the tax credit was still in effect.

Given the significant volatility of this data we have always used a trailing 6
month ma (red line on chart) which has risen to 93. If one excludes the
tax-credit distortions, this is the highest reading since September 2007 and
underlines the extent to which volume in the existing home market (which
dominates total home sales) has recovered to a point that it is no longer
problematic. Given the increase in pending sales over the last 60 days the
likelihood is that actual sales of existing homes will continue to be
reasonably good in the next couple of months. - D-USPHTOTL_Index.gif -

One of the problems with top-down research is that indicators that are useful
at one point in cycle may prove less so later on, and that the different
nuances in each cycle inevitably mean that new sources of insight must be
uncovered in order to shed light on the perennial statistics used each month.

The Citigroup Economic Surprise Index (CESIUSD) has understandably become a
widely followed metric in recent months. We ourselves made great use of it
during the summer of 2010, and to a lesser extent in the middle of 2011. In
both cases we argued that a deterioration in economic data was more likely
caused by seasonal disruptions in the data rather than actual underlying
economic conditions. This argument now seems to be widely accepted by
mainstream macro-research, as is the notion that data has its own cyclicality
and that official data has favored fall and winter activity and depressed
reports in the spring and summer.

It is therefore interesting to note that the CESIUSD has recently made a turn
from its very high recent readings. More importantly, so has its trailing 10 week
ma (our own modified indicator that helps avoid false-signals). It therefore seems
fairly likely that the index will start a multi-week decline that should take
it into negative territory some time in the middle of the 2nd quarter.

However, it should be noted that this only means that economic data may be no
better or slightly worse than consensus. Consensus itself has moved markedly
from its levels of one or two years ago. Consider for example expectations for
February data that will be released over the next 2 weeks. Initial Claims are
now expected to come in at 355K compared to expectations 405K or a year ago,
New Car Sales at 14.00mm compared to expectations of 12.60mm in February 2011
and 10.40mm in 2010 and so on. Merely meeting February expectations across the
board would result in a sharp decline in the index as the prior positive
surprises from November drop out of the index calculation, but this would still
keep economic data itself in very decent shape.

In other words, a modest slackening of data in the middle of a long period of
growth is very different from the stutters that cause panic at the start of the
recovery, or the collapse of data going into a sharp slowdown. Back in the
2003-2007 cycle we saw three separate mid-cycle drawdowns by the CESIUSD none
of which caused significant disruption to the SPX index. In the spring and
summer of 2004, data disappointed to the extent that by August, the CESIUSD had
fallen by -118 points over the prior 150 days but the SPX only lost around 60
points (just over 5% at the time). In late 2005 and mid 2006 there are two
further drawdowns by the CESIUSD that were actually met by gains in the SPX
index. Eventually this "data-blindness" becomes the sort of unhealthy myopia
that creates major tops (think emerging markets today) but we seem far from
this danger point in the current US cycle. We therefore believe that although
US data may decline versus expectations, the state of the US economy is not a
major source of risk to global markets today. We would look outside of the US
to economic risk, to precisely the areas that have been so heavily favored by
the great rush back into risk-assets in 2012. - W-CESIUSD_Index.gif -
cesisusdspx.gif

January New Home Sales data was supportive of the notion that a significant
improvement in spring data may be forthcoming, since although sales remained
sluggish during the winter months, there is enough anecdotal evidence out there
regarding better traffic (both qualitatively and quantitatively) to suggest
that better days lie ahead. Census Bureau estimates of January sales came in
at 321K, just above consensus estimates of 315K. Perhaps more importantly
December's weak report was revised up to 324K from 307K (readers may recall we
pointed out that the initial report was liable to be revised given the
volatility of this series). This still keeps the data pinned in its
"hibernation-zone" and overall sales are yet to break through the trailing 36
month ma that we have been using as a recovery signal for most housing data.
Inventory continues to drop, reaching a new all time low of 151K.

Perhaps unsurprisingly, there is increasing regional disparity (prior to the
housing collapse observers always argued that the US was too large and diverse
to be treated as a "national" market). The strongest region appears to be the
South, which is also the largest in terms of sales. This makes some sense since
it also led the national decline in activity that started almost 7 years ago.
South New Home sales reached 188K, the highest since the brief homebuilder tax
credit was in effect and just above the trailing 36 month ma at 180.9K. A push
above 220K sales in the months ahead would represent conclusive evidence that
the South region is back in expansion mode.

We have also included a chart demonstrating the extreme affordability of new
homes. The average price of a new home sold in January was $261K, equivalent to
the price charged in January 2004. However, if one adjusts for CPI this takes
the "real price" back to where it was in December 1999, prior to the housing
boom. Most interestingly, the cost of debt service using the 30 year fixed
mortgage rate for a theoretical 100% LTV mortgage (we know this is impossible
to obtain but it allows historical comparison) for the average new home price
is now $10,333, The only times this cost has been lower was in late 1993 and
September 1980 (when interest rates were much higher). Of course personal
income levels are far higher today than 19 or 32 years ago. Sheer affordability
does not guarantee a recovery in new home sales will occur, but it certainly
allows for one to do so, particularly given the remarkably low levels of
activity that have been in place for over 3 years. - D-NHSLTOT_Index.gif -
D-NHSLSO_Index.gif - M-.NEWCOST_Index.gif -

Following a sharp slowdown in Chinese money supply growth in January, we are
interested to see whether other closely related regional economies are feeling
the effects. Taiwan's January data came out this morning and although it showed
M1B (New Currency and Deposit Money) growing by 1.56% in January, this is
actually a fairly weak performance for the start of the year (data is not
seasonally adjusted). This takes the trailing 12 month RoC down to 2.77%, the
slowest growth since January 2009.

As can be seen on the attached chart there is a well established relationship
between M1B growth and the performance of the local equity market (TWSE index).
This relationship is not perfect, and the relatively light monetary growth of
2006 and 2007 still saw strong equity participation (helped by the mainland
Chinese market powering to its all time high). However, generally speaking,
sharp decelerations of monetary growth, particularly when they fall into
negative territory, have led periods of very poor market performance. The TWSE
index had a poor 2011 losing over 21% (in line with the entire EM complex), and
has since recovered approximately half of these losses before stalling at clear
resistance around the 8,000 level. Should monetary growth continue to stall we
would expect to see further losses recorded in the months ahead. -
M-TWMSM1B.gif -

We cannot but help feel that there is a sense of change in China, which would
make sense given the upcoming succession of a new leader later this year. Last
week we highlighted a change to the way Chinese data is to be collected,
cutting the reliance on regional bureaucrats and seeking to obtain data inputs
directly from businesses (we believe this change may substantially increase the
volatility of Chinese economic data reports going forwards).

This morning we noticed the attached change in rules designed to curb nepotism
amongst civil servants, which again involves curbing the concentration of power
in this privileged portion of the Chinese society (no doubt to distribute it
equally unevenly elsewhere). In many senses the attempts to curb excess in the
Chinese property market (aided in many cases by the actions of civil servants)
comes from the same impetus to mould a new social order. We are unsure as to
the effect of these changes, or how strictly they will be enforced, but
together they increase the chances that China will throw off some surprises in
the months ahead.

US Initial Jobless Claims were estimated to be 351K this week, just below
consensus estimates of 355K. Last week's very strong data was revised up by 3K
to 351K. This takes the 4 week ma of Claims down to 359K, the lowest reading
since March 21st 2008. As can be seen on the attached chart, Claims have now
fallen into the "comfort zone" around 350K, which we have been using as a target
for the last few months. We still have about another 6 weeks of favorable
seasonality to go for this data and we would hope that further progress can be
made over this period, but to our eyes at least, the employment recovery seems
real enough already. - D-INJCJC4_Index.gif -

We came away from a week in Brazil more convinced than ever that their economy
has become increasingly lopsided and financially (increasingly this means
credit) driven. Further confirmation of this was supplied this morning with the
publication of the monthly Current Account and FDI data. The former fell to a
record -$7.086 bln in January, which was close to consensus estimates. This
represents -2.17% of GDP, which although manageable for the time-being, still
represents a significant deterioration from the comfortable current account
surplus that was in place between 2003 and 2008. The trailing 12 months total
deficit has now reached -$54.1 bln, a new record but one that should be
breached in the coming months given the recent trend of data.

This move into a permanent current account deficit is masked by the equally
powerful positive change in FDI inflows. FDI net inflows were $5.43 bln for January 
and have totaled a massive $69.14 bln over the prior 12 months. To put this in
perspective total FDI flows in December 2008 were only $45 bln. FDI flows for
the last 12 months were therefore $15 bln greater than the Current Account
deficit, which essentially explains how the BRL has managed to hold onto its
current loft valuation. This data of course underlines the fragility behind the
current state of affairs.

Turning around a current account that has now allowed increased domestic
consumption patterns to become embedded in imports and increasing industrial
uncompetitiveness in exports is a notoriously difficult procedure. FDI flows on
the other hand, particularly those directed to liquid financial markets, can
turn on a dime. One of the clear dangers facing the Brazilian economy is that
FDI decreases rapidly while the CA remains in substantial deficit, which could
be expected to put substantial pressure on the BRL and local financial assets.
- D-BZCACURR_Index.gif - D-BZCA12MO_Index.gif

US Existing Home Sales data continues to show an market bouncing along the
bottom in terms of activity, while outstanding inventory lessens appreciably.
Overall headline sales were 4.57mm, just below expectations of 4.66mm homes
(but well within error tolerance limits). December sales were revised downwards
from 4.61mm to 4.38mm units. Single Family home sales were 4.05mm units (up
from 3.90mm units in December, almost exactly the same as their level 12 months
ago. The trailing 6 month ma is 3.87mm homes, equivalent to the rate of sales
seen in mid-1997, which was a boring but healthy time for home sales.

As we have argued before, we do not need to see a substantial upswing in
existing sales volume in order to eat through outstanding inventory. Indeed
although sales have not changed since last January, overall inventory has fallen
by approximately 500K from 2.54mm to 2.04mm homes. Note that there is a fair
degree of seasonality in this data as listings typically are pulled for the
quieter winter months, and so the inventory data should now rise for the next 3
or 4 months, but stay well below the equivalent 2010 and 2011 levels for each
month.

Condo inventory shows an even sharper drop of 32% over the last 12 months, with
January inventory reaching 253K, the lowest level since July 2004. Again we
would expect a sharp rise in the coming months, but this does not hide the fact
that condo inventories are approaching historically normal levels. -
D-EHSLSL_Index.gif - M-ECSLHAFS_Index.gif -

The reason why central banks typically keep tight monetary conditions in place
for too long is that they have genuine reason to fear that inflationary impulses
will break out in their economy. We have always tried to look beyond the
traditional CPI measures when judging inflationary pressures since CPI is very
much dependent on the precise basket of goods and services that are included,
while every cycle tends to build its greatest pressures in distinct portions of
an economy, which will differ each time around. One of the things we do like to
watch is the price of luxury goods and services and any dramatic change in
collectible markets such as art or custom cars, all of which tend to exhibit
strange performance when there is "too much money" flowing into "too few hands".

Attached we have two interesting examples of this type of activity. From
Singapore we have the cost of purchasing a Category E license that allows an
individual to drive a car of any capacity on that island's crowded streets. As
the attached chart shows, this has now reached S$78,000 (about $62K), while the
trailing 12 month ma is now a record S$67,250. The cost of this license has
now risen 24 fold from the very depressed level of January 2009.

From Hong Kong's South Morning Post, we have an article suggesting that
purchasing uncut commemorative bank notes from the Bank of China will rise at
least tenfold. We can hardly think of a purer definition of inflation than
bidding up the value of legal tender to such a degree in the hope that it will
rise further in price at a later date.

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

Banknote set looks like great bet
2012-02-20 23:10:33.26 GMT


By Joyce Man
Feb. 21 (South China Morning Post) -- Uncut commemorative
bills from the Bank of China are expected to soar in value when
they are issued next month, with one dealer predicting that a
set of 30 the bank sells at HK$6,000 may rise at least tenfold.
The bank is issuing two million limited-edition HK$100
bills to celebrate its centenary, including 1.1 million single
notes, 100,000 sets of three uncut notes, and 20,000 sets of 30,
which are sold for HK$150, HK$600 and HK$6,000, respectively.
They are legal tender but not intended for general circulation.
The sale started last Monday. The singles, available at the
bank's 50 branches, sold out a day later. For the sets, buyers
had until yesterday to apply at a branch or online.
The bank will notify successful applicants between March 10
and 19.
Since the single notes went on sale, buyers, who could get
two per purchase, have been earning a pretty penny by reselling
them. Some reported getting up to HK$1,700 per pair at one point
last week.
Gold Field Coins and Stamp director Chan Wing-fai said his
company was buying the single notes at HK$1,300 each yesterday.
Hong Kong Numismatic Society president Ma Tak-wo said that
as of last night, one note was trading at about HK$1,400.
Some users on web shopping portal Taobao.com were selling
at 1,700 yuan (HK$2,084) last night.
Chan said that based on the HK$1,300 price per note, a set
of three could get at least HK$5,000 and a set of 30 at least
HK$60,000 when the bank released them, pointing out that these
came in shorter supply than the singles. However, he noted that
these sets were not yet on the market so it was impossible to
accurately predict their eventual value.
Ma said: "This is the most impressive trading of
commemorative notes in recent memory - more than when the Bank
of China issued the 2008 Olympics HK$20 notes and when Standard
Chartered issued the HK$150 note to commemorate its 150th
anniversary."
Chan said the notes were attractive and well-known, and
that mainlanders liked commemorative banknotes, sets of uncut
banknotes and Bank of China memorabilia.
Hundreds of people queued at the city's Bank of China
branches last week. Many had lined up overnight to get the
notes, and there were reports of queue-jumping. Customers also
complained when the bank decided to issue all remaining tickets
to buy the singles - which were supposed to be available until
yesterday - last Tuesday.

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-0- Feb/20/2012 23:10 GMT
- singaporelicensee.gif

The MBA Refinance Index dropped -4.76% to 4322 this week, but this still keeps
the index well above the key 4000 level, meaning that MBS duration hedging
remains a substantial source of demand for longer dated treasuries. If we
ignore the "mega-boom" of July 2002 - August 2003, prior refi-booms have
remained in place for 2 - 4 months after which the demand for refinancing is
exhausted and have been followed by sharp back ups in treasury rates. Since the
current boom only really got going at the start of January this would give us a
likely window of another 2 - 8 weeks for the current boom. Of course rates and
refinancing have a dialectical relationship; any independent move higher by
rates caused by a shift in investment flows out of treasuries would act to
raise the 30 year mortgage rate and choke off refinancing activity that much
sooner. In any case, the clock is ticking on the current boom and its favorable
influence on longer term yields. - D-MBAVREFI_Index.gif -

Interview discusses Greece and the PBOC's recent cut in reserve requirements.

http://www.bloomberg.com/video/86796504/

On Saturday the PBOC announced that the Reserve Requirement for major Chinese
banks would be cut from 21% to 20.50%, a move that had been widely anticipated
prior to the Chinese New Year. We would not read too much into the delay of a
few weeks, other than the ever-present desire of the PBOC to be seen to be
leading markets rather than the other way around. We would also stress that
this is a very moderate easing that still keeps the Reserve Requirement far
above the levels that were seen prior to the massive build up in local
liquidity in 2009/10.

As we wrote at length last week, local liquidity conditions in China seem to
have worsened appreciably in recent months and so a much more radical shift in
policy is probably justified. That this is unlikely to occur due to a
perceived need to cool the local housing market and a fear that local
inflationary tendencies remain largely untamed (the latter seems to be a more
reasonable argument). We therefore expect the PBOC to err on the side of
caution with any further loosening, until clear evidence of significant credit
problems start to emerge in the local real estate sector.

There is a widespread belief at the current time that the PBOC will acting to
prevent any meaningful slowdown taking place in what is an important transition
year for China's leadership. We do not doubt that this is their intention but
we have little confidence in their ability to fine-tune their way out of what
looks to be a classic late cycle dilemma. The odds of a disorderly squeeze on
local borrowers seem to be growing at the current time, and the incremental
nature of this recent announcement underlines the slow pace with which the PBOC
intends to loosen policy. - chinareserverequirement.gif

We are interested to note that China is starting to introduce a new system for
data collection (this story was originally reported on February 14th but we did
not have time to comment on it). Anything that improves on the current set of
data that never deviates from expectations would be welcome, at least in terms
of offering transparency. The only problem we could see is that the world has
got used to a reliable set of monthly reports from the Chinese economy, any
introduction of even normal month to month volatility would probably create an
out-sized reaction, while the consequences of a clear stream of deteriorating
data hardly bear thinking about.

Having just returned from a week in Brazil visiting local institutions, one
comment that was unanimous was the power of capital flows since the start of
the year. This has been confirmed by the various surveys of investor flows that
have come to our attention and it is clear that the "green light" from the
calming of the Euro-crisis has sent global investors scurrying into emerging
markets, which have responded by posting powerful gains over the last 6 weeks.
India's SENSEX index (red line on chart) has risen 18.34% YTD, while Brazil's
IBOV index is up 16.3% over the same period. In the case of India, which
published daily flow data for foreign investors, total YTD inflows have reached
$4,870 bln as of February 15th, an annual pace of approximately $40 bln, which
if sustained would blow past the 2010 record of $29.3 bln.

Interestingly some "EM proxy" markets have behaved much less positively since
the start of 2012. Consider Australia's AS51 index and Israel's TA-100 (MSCI no
longer considers Israel to be an Emerging Market), which are up 3.43% and 1.81%
respectively. Whatever their technical ranking, from a cycle perspective both
Israel and Australia are closely linked to "official" emerging markets (indeed
Australia has served as a China proxy for the last decade). This performance
gap is therefore a reasonable guide to the power of external flows on the
recent performance of the emerging market complex. It shows the extent to which
investors have focused on a narrow definition of what constitutes an emerging
market, or have simply poured money into funds and ETF's that follow a strict
index definition of this space. Indiscriminate flows such as this rarely
results in efficient capital allocation, but for as long as flows continue we
doubt that those committed to this path will feel any pangs of regret. It is
only once flows are completed that a more difficult environment may emerge. -
D-IBOV_Index.gif -

We had suggested that gold's 4th quarter weakness may have been partly driven
by weakness in Indian demand. This article certainly suggests that this was the
case. We note that although gold rebounded strongly at the start of the quarter
it remains well below its 2011 high and has stopped making further upward
progress. A fall below $1,700 would suggest that a test of key support at
$1,650 will follow and below that level gold would be considered to be weak
from a technical perspective.

An interesting article that helps in part to explain the sharp deterioration in
Chinese liquidity metrics in recent months. We would be concerned at the
quality of some of the assets being used to generate above average returns, and
in general competition for savings products that payout significantly greater
yields than regular deposit rates is not normally a good thing for a banking
system (whose margins are squeezed and liquidity drained) or in the end for the
customer base who end up taking far greater risks than they understand with
their savings.

Any doubt that homebuilder sentiment had decisively broken out last month was
removed by today's report which shows that US Homebuilder Sentiment has now
recovered to the levels of June/July 2007. This still keeps sentiment broadly
negative, but the direction of improvement in now unarguably present in the
headline and sub-indexes.

Overall sentiment hit 29 this month, the best data since June 2007, at which
time new home sales were at an annual pace of 793K homes compared to just over
300K today (they had fallen from 1.5mm 2 years earlier which accounts for why
sentiment was already negative in 2007). Present sales rose to 30, which
suggests that the early stages of the key spring selling season have been above
expectations, while Future sales (red) were very strong at 34 (the best reading
since July 2007). Interestingly Traffic (green) is somewhat lower at 22, but
this indicates that there is much less casual traffic, and that higher
percentage of those who visit a homebuilding site are converted into sales
(hardly a negative).

To an extent this welcome improvement in sentiment had already been priced into
homebuilding equities, which have rise over 50% (using the S15HOME index) since
their October 2011 low and now may need to pause a little. This strong recovery
still keeps the index in its 2008 - 2012 trading range, and if further
improvement in sentiment and actual sales is recorded in 2012 we do think
further gains will be registered. For the time-being we are just happy that a
vital metric has confirmed that the recent strong rise may be justified. -
nahbfeb2011.gif

We were interested to note another very sharp improvement in German Economic
Sentiment was reported by the February ZEW index this morning. Expectations of
Economic Growth were +5.4% the first move back into positive territory since
May 2011. This was 27 points above last month's reading of -21.6 and well above
expectations of a -11.8 reading. Indeed the 2 month surge off the very low
December reading is +59.2, the fastest 2 month move ever recorded in this
index, bettering the speed of recovery seen in 2009.

This underlines the degree to which German retail investors were captive to the
same "Eurobsession" as everyone else (though perhaps with better reason than
many non European institutional investors). What is remarkable is that an
unemployment rate at a multi-decade low could coexist with Economic Sentiment
at deep depression levels. The recent rebound is really only a normalization of
sentiment, which arguably is still below where it should be given the very
robust state of the German economy. As ever we see a surge off a very low
reading in sentiment as evidence that a firm bottom in the local equity market
has been put in place. We would not expect to see the DAX revisit its 2011 low
for quite some time and have for several weeks been taking a very positive
stance towards domestically focused German equities. The surge in the ZEW
suggests that this shift in emphasis was warranted. - zewfeb2012.gif

It is exactly 3 years ago since Chinese Monetary data shocked observers with
the ferocity of monetary growth that the PBOC was willing to unleash in the
face of gridlocked capital markets and industrial activity. The January 2012 is
the polar opposite of this report since even allowing for the significant
distortion of the Chinese New Year, it would appear that monetary conditions
have continued to slow considerably in recent weeks.

New loans granted in January totaled 738 bln CNY, compared to expectations of
1,000 bln. This is a drop of -304 bln (-29%) from the pace of activity seen in
January 2011. This sharp drop in lending has taken M2 growth down to 12.4% YoY,
the lowest pace of growth since 2001. Narrow money measures such as M1 show a
much sharper pace of contraction. M1 actually fell in January by 1,999 bln CNY
(-6.87%), which no doubt partly reflects strong spending ahead of New Year.
Nevertheless the 12 month RoC should adjust for this, and this shows a
remarkably slow pace of growth at 3.1%, the lowest pace since the data starts
in 1990. In nominal terms, M1 has only grown by 813 bln CNY over the last 12
months, equivalent to the change in mid 2000 when China's economy was a
fraction of the size it is today. There clearly has been something of a
liquidity squeeze in recent weeks, at least at the level of narrow money.

We would expect to see something of a rebound in these metrics in the February
report, which should have a more benign balance between seasonal spending and
lending, but even so we feel that Chinese monetary conditions are significantly
tighter than most people realize. The longer the PBOC delays significant
tightening the greater the danger of an abrupt down-shift in economic activity,
particularly in the private sector businesses that are most credit dependent
(such as real estate development). Indeed looking at recent data, we suspect
that the window of opportunity for timely easing has already passed. -
chinam1.gif

After suffering greatly in the crisis of 2008, the UK can be said to have had a
relatively good performance during the recent turmoil in Europe. This has kept
the Bank of England (BOE) largely out of the public eye (at least outside of
the UK) but it is worth noting that this institution has pursued a fairly
aggressive policy of quantitative easing over the last 3 Years.

This has been enacted via the BOE Asset Purchase Program, which has its target
size set periodically at the regular BOE meetings. This morning this was
increased to £350 bln, in line with expectations and this will take the size
of the facility up to around 23% of GDP, somewhat greater than the relative
size of the FRB's own purchases to GDP, which are approximately 20% at the
current time (including the CBLS which is not strictly an asset purchase).

We would imagine that this further monetary stimulus will be somewhat
beneficial for the local equity market (which performed significantly better
than most continental European markets in 2011), and we would expect the local
FTSE 100 index (UKX) to make a new recovery high in 2012. Where it may be less
helpful is the long term treasury market. This may seem counter-intuitive since
the Asset Purchase Program actually buys long term gilts, but the UK Treasury
market has been treated as a "safe haven" destination since last summer leading
to the same divergence between yield and equity market performance that we see
in the US today (see chart).

We do not think this divergence is sustainable over the longer term. Either the
UK equity market "has it wrong" or longer term interest rates are likely to
start rising. Just as in the US, our money would be on the latter and today's
confirmation generosity of the BOE only makes it more likely that this will be
resolved via the rising of long term rates. - W-GUKG10_Index.gif

US Initial Jobless Claims continued their recent trend of improvement this week
with the headline index falling to 358K, well below consensus of 370K. Last
week's data was revised 6K higher to 373K. There do not seem to be any unusual
factors in this report, following which the 4 week ma of claims has fallen to
366.25K, the lowest reading since April 26th 2008. As the attached chart shows
this data is now honing in on the "recovery range" that we have marked in a
band around the 350K level which has long been our target during the seasonally
favorable period that will expire around Easter.

Although much still needs to be done to normalize aggregate employment levels
(and we doubt that we will recover all the jobs lost during the crisis,
particularly in the financial sector) we have now reached the point that
improving employment starts to contribute meaningfully to overall economic
activity.

This point is largely lost on those still bickering about the veracity of last
week's NFP report, which was as fallacious as it always is in terms of a single
data-point, but did confirm the growing body of data and anecdotal reports that
indicate that the employment cycle turned the corner several months ago. -
D-INJCJC4_Index.gif -

US Consumer Credit grew by $19.31 bln in December, much higher than the
consensus estimate of $7 bln and only just below the surprisingly strong
November report of $20.38 bln. This represents an increase of 0.78% for the
month and takes the annual increase for 2011 up to $89.96 bln or 3.74%, the
fastest increase since 2007.

Virtually all the growth came in the non-revolving portion of the data, which
grew by $89.19 bln or 5.55% in 2011 and by $16.50 bln or 0.98% in December
alone. This category is dominated by student debt and automobile loans and
while the former represents a largely unproductive use of capital (at least
from the perspective of short term economic growth), the latter is a very
important driver of economic recovery.

Revolving credit grew by $2.80 bln (0.35%) in December and by 0.77 bln (0.1%)
over the course of 2011. Although the annual growth rate is puny, it represents
a significant turn from the sharp draw-downs of 2010 (-7.54%) and 2009 (-9.61%)
and as the attached chart shows, this data was shrinking by -$85 bln on a YoY
basis in early 2010. We would now expect to see reasonable growth in revolving
credit going forwards and with outstanding credit back to where it was at the
end of 2004, there would seem to be plenty of scope for consumers to re-leverage
while staying well within their means. - revolvingcred.gif - totalcred.gif

We noted with some interest that the RBA elected to keep its Cash Target Rate
(RBATCTR) unchanged at 4.25% last night. This came as a surprise to the market
where almost all observers expected a rate cut to 4.00%. In their accompanying
statement the RBA pointed to a stabilizing of the European Sovereign credit
market stating that "Much remains to be done to put European sovereigns and
banks on a sound footing, but some progress has been made," showing the extent
to which global central banks have been sucked into the "eurobsession" mind-set.

From our perspective Australia's economy is going to be far more sensitive to
the state of the Chinese housing market than the yield at which the Italian
government can borrow funds in the private marketplace. While the latter may
have made significant improvement the former has seen a number of troubling
data-points in recent weeks. We would also note that although global financial
assets have experienced a strong rally since the time of the last RBATCTR cut
in October the local Australian equity market continues to lag its global
peers. The local benchmark AS51 index has risen by 13.5% since October 4th,
compared to a 26.5% rally in the MXEF index and a 20.5% rally by the SPX index,
and is still down -14.5% from its level at the end of 2010.

The risk going forwards is that other (mostly emerging market) central banks
follow the RBA's playbook and pause in their own easing cycles in response to
the global risk rally. This would very much be in tune with the historic bear
markets in which monetary policy continuously lags the deterioration in local
economic activity. - D-RBATCTR_Index.gif -

Although we have not yet had a chance to crunch any detailed numbers of this
bid, it would seem that Brazil's initial auction for major airports has resulted
in a clearing price that would be considered to be hefty by any reasonable
standards. For instance it would seem to be significantly higher than the price
paid by Ferrovial in 2006 for control of the British Airport Authority and
their control of London Heathrow and Gatwick airports, a deal which has proved
to be very expensive in recent years (note that this deal was also expected to
benefit from an influx of tourists for the 2012 Olympics).

We are also reminded of very high auction prices for 3G spectrum that were paid
in both US and UK at peak of the technology bubble. Although 3G usage was
eventually to become widespread, it was something of a dirty word around the
telecom industry for the majority of the next decade. Our initial reaction is
therefore that this transaction fits the general model of whereby the "long
term strategic need" overrides any sensible valuation of an asset based on
recent historic activity, which is one of the classic signs of a top in
valuations being put into place.

As we pointed out in several commentaries last year, Indonesia was an oasis of
calm in 2011 in what was a very difficult period for the emerging market
complex. The local JCI index up 3.2% in 2011 compared to a decline of -20.41%
by the overall MXEF index.

The main reason for this outperformance was that Indonesia's economy was
somewhat out of phase with the overall EM complex, and in particular monetary
tightening had been much less of a dampening factor in late 2010 and early
2011. However, this does not make Indonesia immune to the rigors of an economic
cycle and there are now some signs that the local sentiment is entering the
sort of territory that signals that a top in being put into place.

We note with interest that January Consumer Confidence in Indonesia rose to
119.2, the second highest reading after the record print of 120.4 in November
2004. The Present Situation index (which is perhaps more relevant for a turning
point in a cycle) rose from 105.4 to a record 110.9 (these were 101.8 back in
November 2004). As a generalization, when local consumers believe that they
"have never had it so good" they have invested accordingly in local financial
assets, which is why extreme readings of consumer confidence has proved to be a
good contrary indicator in multiple cycles. We would be far more cautious
towards Indonesia from this point on in the cycle. - M-JCI_Index.gif

We continue to marvel at the disparity between the quality of US Economic data
(which is now starting to move from early recovery to mid-cycle acceleration
for many key metrics) and the level of longer term US interest rates.

We of course understand the reasons for this. Firstly the FDTR appears to be on
perma-hold, although we would caution that what appears to be a "promise" of
inaction until late 2014 is in reality simply a reflection of the average view
of current voting members as to when the FDTR will be raised.

The concern of a Euro-sovereign crisis has led to massive repatriation of
capital back into the US treasury market, but again this is reversible. Some
money may be attracted back to European yields as stress levels abruptly
normalize, other funds will find their way into corporate credit and perhaps
even "riskier" assets such as equities. We also recognize that the creation of
almost $ 1 trln of "new money" by the ECB and FRB allows the aggregate value of
all global assets to rise (and therefore for yields to fall) but we judge the
"safe" portions of the global treasury complex to have been unwarranted
beneficiaries of this process.

Therefore the most obvious catalysts for a reversal in treasury are an
improvement in economic data and a moderation of Euro-stress. The latter is
clearly underway but perhaps is not yet conclusive enough for the sort of
risk-averse investors crowded into safe-haven treasuries to change their minds.
The Bloomberg European Financial Conditions index for instance has risen from
-5.35 at the height of the crisis to -2.941 today, its best reading since early
August. On the other hand at the current pace of repair this gauge could be
moving above -2.5 in a matter of days, approaching the lower end of normal
conditions.

US economic data on the other hand has rarely enjoyed a better string of upside
surprises. With the glaring exception of GDP (which really tells you all you
need to know about this overrated and over-used statistic) all major US
economic data has delivered a statistically significant upside surprise in
recent months. This can be seen in the chart of the Citigroup Economic Surprise
Index (CESIUSD), which has reached 83.70 after today's NFP and ISM Non
Manufacturing reports. The more reliable 10 week ma has reached an all time
high of 76.35 (data starts in 2003) and so however you account for it, this has
been a very strong period for US data.

And yet despite all this, the 10 year yield remains inert below 2.00% while the
30 year yield is at the top of its recent range at 3.15%. As we state above, we
well understand how we got here but that is very different from saying that we
expect this dichotomy to remain in place. Should the 30 year yield move up
beyond 3.20%, the market would be delivering a clear warning that an unwind is
underway, although it would take a sustained break above 3.50% to settle this
matter conclusively. At current paltry yields, the reward of sticking around to
find out how this particular episode plays out do not seem to balance the risk
to capital of a sharp move higher in yields. - W-CESIUSD_Index.gif -
D-BFCIEU_Index.gif - cesiusd10year.gif

Other data series had already supplied outlier positive data-points for
employment (the ADP Report did so in December 2011 and a single Initial Claims
report at 350K in January), but until this morning the more widely watched
Non-Farm Payroll report had not really managed to do so. The January report
therefore should be something of a game changer that may finally break the back
of "recovery denial".

Our first impression is that it is a strong report across the board, although
as ever we would caution that this data is always more rooted in statistical
myth than reality. Overall Non-Farm Employment is estimated to have grown by
243K, much higher than 140K consensus. Private Sector gains came in at 257K
compared to 160K consensus (December's data was notched slightly higher in both
reports). This takes the 12 month ma of Private Sector gains (thick blue line
on chart) up to 174K, approximately where it was in mid 2005.

Of course the big difference between 2012 and 2005 is the much higher level of
unemployment, but even here good news was supplied by a drop to 8.3% when data
was expected to be unchanged. As we have argued before, the Unemployment
calculation seems to be particularly inclined to trend, and that once the
downward move is in place it is likely to extend lower and faster than current
consensus expects.

Attention will now shift to capital markets, particularly the long end of the
US yield curve, which seems to be even more mispriced following the publication
of this report. - D-USURTOT_Index.gif - nfpprivatejan2012.gif

The majority of attention on major central banks has understandably been
focused on the actions of the ECB and FRB in recent months but it should not be
forgotten that the BOJ has been quietly increasing its own monetary base since
the devastating earthquake and tsunami hit last March. As the attached chart
shows, the initial surge of liquidity provision in March and April which
increased the monetary base by ¥20.89 trln (almost exactly 20%) to ¥121.89 trln
was partially removed in the next 2 months as the monetary base fell back to
¥113.48 trln in June. Last autumn's Euro-crisis (and the massive appreciation
of the JPY that resulted from this) appears to have brought upon a change of
heart and over the last 3 months the monetary base has increased by ¥3.33 trln
to ¥118.97. This still represents a fairly modest pace of change compared to
the remarkable expansion by the ECB but it does raise the possibility that
monetary policy in Japan has quietly shifted towards an expansion of the
monetary base that goes beyond the emergency provision of liquidity in the
midst of a massive natural disaster. - japanmoneybasejan12.gif

The weekly Initial Jobless Claims report came in at 367K, marking the second
time in recent weeks that the data has come in below the 375K level. The 4 week
ma remains almost unchanged at 375.8, but this includes the very high 402K
print from 4 weeks ago. Unless next week's report is much higher than
anticipated, the 4 week ma will move below 375K for the first time since the
middle of 2008, underlining the recent improvement in employment metrics.
Attention now turns to tomorrow's NFP report which should be able to meet
consensus estimates for moderate gains with little problem if it follows the
trend of Initial Claims data. Unfortunately the world of official statistics is
never that easy, so we will have to wait for the report and deal with its
impact tomorrow morning. - D-INJCJC4_Index.gif -

With much attention being focused on the potential easing of reserve
requirements by the PBOC (these were rumored to be implemented prior to the
Chinese New Year but are yet to be enacted) it is interesting to note that
another government body took steps this morning to actually tighten funding for
the local property market. Attached is a brief story from China Daily which
states that the National Development and Reform Commission (NDRC) has issued an
order that will greatly restrict the availability of mortgage credit for
non-Chinese purchasers of real estate. This certainly suggests that Chinese
authorities still wish to dampen the speculative portions of the local real
estate market, even if they may choose to loosen overall reserves for local
banks. Since demand for local real estate would already seem to be falling
quite sharply this strikes us as a classic example of mistaken policy
tightening after a boom has run its course.

We remain convinced that the current belief in the infallibility of Chinese
authorities economic management will appear as misguided as the belief in the
wisdom of Japan's MITI 20 years ago, or of the Greenspan Fed in early 2000.

US Car Sales got off to a significantly stronger start than was expected, with
total seasonally adjusted sales equivalent to a pace of 14.13mm cars (note this
data was released late afternoon yesterday). This blew past expectations of
13.50mm units and almost matched the "cash for clunkers" surge to 14.16mm units
in August 2009. If one ignores this artificial spike, January saw the strongest
sales since May 2008 and very much suggests that the strong trend of recovery
in vehicle sales remains in place.

At the current rate of improvement, US sales can be expected to push through the
15mm level sometime between the middle of 2012 and early 2013, although one
should note that sales can fluctuate quite violently over short periods of
time. We would, however, be open to the possibility a more significant surge up
to 16mm units which would still only represent activity getting back to the low
end of the pre-crisis normal range. - M-SAARTOTL_Index.gif -

The January ISM report came out pretty much where we would have wanted to see
it. The overall headline index rose to 54.1, just below consensus expectations
of 54.5, but any disappointment in this number was more than made up for by a
very strong New Order (red line) print of 57.6, up from 54.8 last month and the
strongest reading since April 2011. This therefore suggests that any temporary
reluctance to order manufactured goods caused by the Euro crisis have well and
truly passed and there may actually now be some additional activity caused by
pent up demand and a better than anticipated level of sales in the US New Car
market at the turn of the year.

The rest of the data was reasonably robust. Production (blue) fell to 55.7 from
58.9, but this generally follows New Orders and so can be expected to rebound.
Inventories (olive) rose to 49.5 but are still signalling no build up 30 months
into this recovery. Employment was almost unchanged at 54.3, suggesting a
moderate pace of employment growth. All in all, a solid report. - ismjan2012.gif

After December's month's massive upside surprise the January 2012 ADP Payroll
Report is a more subdued release. New private sector jobs were estimated at
170K, just below consensus of 182K while the December blow-out was revised down
to 292K from the original reading of 325K. All of this keeps the trailing 12
month ma at approximately 158K, a pace of job growth close to that seen in the
second half of 2004. We now await Friday's non-farm payroll report where
consensus calls for 145K Total gains and 165K Private Sector gains. - adppayroll.gif