Unlike most commentators, we never pay a great deal of attention to GDP, arguing
that by the time the numerous input errors have been amalgamated into one
"national" statistic, the accuracy of that number is unlikely to allow anything
useful to be concluded.

Having said that, we do like to monitor the Nominal GDP chart from quarter to
quarter to keep an eye on the shape of the economy's trajectory (at least as
measured by the BEA). We stick to nominal GDP simply because we live (and more
pertinently, invest) in a nominal world. Obviously inflation affects this
number, but since this itself is never measured with any reliability there
seems no point in using the "real" data (two errors don't make a right), rather
than simply noting what the BEA believes inflation to be.

The attached chart therefore shows total Nominal GDP together with a 4 quarter
RoC (the GDP Price index is also included for reference). This serves as a
reminder that we have been in a fairly smooth period of nominal growth of
around 4% for a number of quarters. We do not find this growth rate
particularly encouraging, but at the same time we note that the current economic
conditions have been robust enough to allow some key metrics such as retail
sales and corporate profitability to grow far faster (it should be noted both
of these are rooted in actual reported activity rather than statistical
estimation). If this quarter's report suggests that matters are unchanged
(which is probably the fairest reading) then we will take plenty of solace in
the notion that we can continue to enjoy both of these trends.

We are also reminded that the last cycle (where nominal growth was also limited
by modest price inflation) also underwent a plateau before accelerating in the
second half of 2003 (see chart). It would come as little surprise if something
similar unfolded later in 2012, particularly since the key housing industry is
finally showing some signs of life. - D-GDP_CUR$_Index.gif -

At least part of the mystery behind soaring Brazilian consumer confidence can
be solved by looking at a very robust set of loan data for March. Clearly
lending activity bounced back strongly after February's Carnival holiday, which
makes the March report somewhat less reliable as a guide for future activity
than it otherwise would be.

Total Private Sector loans grew by 1.40% in March. This takes the 12 month RoC
slightly higher at 14.08%, but the trailing 3 month RoC is a much slower 1.32%,
which is only 5.38% on an annualized basis. Since Q1 typically sees slower loan
growth than other periods it remains to be seen how much of the slowdown in
credit issuance is seasonal and how much reflects an actual change in
underlying activity. We would assume a little of both and that annual credit
growth will fall back to around 10% in the coming months.

Housing credit continues to be the stand-out area for growth, growing 2.94% for
March and 43% for the year. Personal credit on the other hand only grew by
0.49%, the second lowest reading since November 2008 (February 2012 was the
lowest). This may suggest that the recent surge in Personal Loan defaults has
caused some tightening in lending standards (it should be noted that
outstanding Personal loans are still around 300% of the size of Housing Loans).

There was some relief in the Default rate for Personal Loans in March, which
fell from 7.6% to 7.4%. However, the Delinquent Loan percentage (loans 15-90
days late) rose by 0.2% to 6.80% cancelling out this improvement. Overall loans
15+ days late were static at 14.20%, an uncomfortably high level. We still
expect Delinquency and Default levels to rise going forwards. -
D-BZLNPTOT_Index.gif - D-BRCDDEFT_Index.gif -

Brazil's Consumer Confidence index surprisingly soared to a new all time high
of 128.70 in April. Some of this leap can be attributed to exaggerated
seasonal adjustments, since the raw NSA data only rose to 125.70, which is below
the all time high of 126.20 recorded in November 2010. Even so, the data
suggests that Brazilian consumers feel pretty good about their situation and
prospects at the current time.

Unfortunately this robust confidence reading is unlikely to be justified by
future events. As a general rule consumer confidence is a useful contrary
indicator once it reaches extreme levels and this is particularly true when the
extreme reading is somewhat at odds with the general direction of economic data
as could be argued at present. As can be seen on the attached chart the local
IBOV index tends to both peak and trough with consumer confidence (the same is
true of the BRL) and April's surge raises the risks that the strong rally from
last summer's low is not merely consolidating its gains at present, but has
instead started a corrective move lower of some magnitude. -
barxilconsumerconfidence.gif

China's FX reserves slipped by just over $4bln last month, the 4th negative
reading since September 2011 although reserves still grew by $123.8 bln (3.9%)
over the course of the first quarter. Over a longer term reserves accumulation
has deteriorated with the trailing 12 month RoC down to 8.5%, the lowest pace
of growth since 2001. Clearly China still has ample reserves, but the slowing of
their accumulation does suggest that the importing of liquidity has slowed to
an appreciable degree in recent quarters since as recently as June 2011
reserves were growing at an annual pace of 30.3%. This underlines the degree to
which external factors are acting in concert with the PBOC's own restrictive
reserve requirement to restrict local Chinese liquidity. We are yet to see any
definitive evidence that this has started to translate into sharply lower
levels of economic activity, but the dangers are growing that this will prove
to be the case later in 2012. - M-CNGFOREX_Index.gif -

Brazil appears to be conforming to a monetary cycle whereby the initial
monetary easing is well received by the market, encouraging further steps to be
taken by the central bank. Later on in the cycle the market becomes much less
receptive to monetary easing, with fears growing that easing may either
represent a loss of control by the central bank or be seen as evidence that
local economic conditions are deteriorating (these are not mutually exclusive
concerns).

As can be seen on the attached chart, the first 4 cuts in the benchmark SELIC
rate were matched by a strong rally in both the local IBOV index (black) and
the Brazilian Real (shown on an inverted scale in green). March's surprising 75
bp drop to 9.75% was then greeted with sideways trading while April's further
cut to 9.00% never even created a short-term "feel good bounce". Instead the
market has slipped to 61,000, which is the lowest level since January 17th.
Meanwhile the BRL has been further undermined by this rapid easing and has
slipped to 1.89, down 1.21% for the year. This means that for a USD investor in
the IBOV, returns would have slipped to 6.06% for 2012 and that any investment
made after January 9th would is now under-water, despite the fact that the
SELIC is 200 bp below its level at the start of the year. -
brazilselicbrlibov.gif

The Eurozone sovereign market is very much back at the center of attention,
with political pressures in both France and the Netherlands adding to the
stresses loading up in Spain. Nevertheless, as the attached charts demonstrate,
the situation of today remains quite different from that of late 2011.

Most strikingly the current market turbulence within fixed income is very much
restricted to long term sovereign yields. Although both Spanish (red) and
Italian (black) 10 year yields have started to push back towards crisis
territory, and the French/German spread is now back at 140 bp, there is far
less funding stress in evidence. The 3 month €/USD swap (grey) has actually
fallen to 47.5 bp in recent days, and while this is a little above normal it is
nowhere close to its 2011 peak of 157 bp. Similarly the Bloomberg European
Financial Conditions Index is just below the key -2 level, again unhealthy but
far better than the -5 readings of 3 months ago. This shows the effect of the
massive injection of Eurozone liquidity in the 2nd half of 2011, allowing
markets outside of long term sovereign credit to remain reasonably well bid at
the current time.

Even within the Spanish sovereign curve we can see that the short end is in far
better condition that it was last November. We have attached a chart which
compares today's curve to that of November 25th 2011 (the day the 10 year yield
peaked). As can be seen within the LTRO window Spanish yields are still between
450 bp to 250 bp below their 2011 peaks, compared to the 10 year yield which is
only 62 bp lower. This shows the power of the LTRO facility at creating
something of a safe haven for issuers of shorter term credits. We would not
call the Spanish curve ideal, or even healthy, but for that time being it is
probably manageable and at least allows issuance of shorter term treasury bills
and notes at affordable yields. - eurocrisis.gif - spaincurve.gif

Those who believe that the implementation of an austerity plan in countries
such as Spain will inevitably lead to a "depression" in that country should
consider the case of the UK, where a tightening of the fiscal belt does not
seem to have obviously impeded a slow but steady repair to the private sector
economy.

March UK retail sales (ex fuel) demonstrated this by increasing 1.46% from
February, reaching a new all time high of 104.2 (2008 = 100). Although some
extra boost probably came from warmer weather we note that the trailing 12
month ma has also managed to make a new all time high at 102.40. Although the
annual growth of sales at 2.86% remains sluggish when compared to the much
faster growth seen at the start of the 2002-7 cycle it is still comfortably in
positive territory.

Interestingly the recovery from the very tough 1989/90 recession (which was
also very much driven by a collapse in the national housing market) saw retail
sales peak in May 1990 before dropping quite sharply over the next 2 years (the
drawdown was substantially sharper than that of 2008/9 - see chart). It took 43
months to create a new high in December 1993 compared to 46 months this time
around. The annual growth of sales in November 1993 was also 2.8%, making the
two retail cycles essentially similar in nature. Following 1993 UK retail sales
were to enjoy a steady period of growth for a number of years and we would not
be surprised to witness a similar outcome this time around. -
M-UKRVALLR_Index.gif -

Interview concentrates on the state of the Chinese property market and its
implications for the wider economy.

http://www.chinamoneypodcast.com/2012/04/19/michael-shaoul-we-are-shorting-chine
se-h-shares-chinas-property-slide-is-just-beginning/

US Existing Home sales slipped from 4.60mm to 4.48mm on an annual seasonally
adjusted basis, but this small decline is well within the error tolerance of
this series and yet again a reflection of tougher seasonal adjustments. We
would therefore describe this as an "in line" report. Non-seasonally adjusted
sales rose by 25.8% to 361K in March, and is 4% higher than its level of 12
months ago. This means that existing home sales are broadly unchanged and
remain at the equivalent level to the late 1990's housing market. Although
unexciting, this is quite strong enough to steadily absorb the large inventory
of existing homes over a period of quarters without causing further slippage in
prices.

Looking at the single family home market we can see that headline sales slipped
slightly to 3.97mm units on an annual SA basis, but this still keeps sales
above the 36 month ma, which is our rough indication of a recovering market.
Total inventory remains just above 2mm units, indicating that sales are keeping
pace with the increase in listings that typically occurs in early spring-time.
NSA sales rose sharply to 317K units, as would be expected at this time of
year, and are 5.32% above their level of March 2011.

Meanwhile the condo market continues to exhibit a significant tightening of
inventory, with the move into March showing a much smaller spike in
availability than would typically take place (inventory data is NSA). This has
caused the trailing 12 month ma to fall to 360K units, the lowest level since
December 2005. - M-EHSLSLNS_Index.gif - D-EHSLSL_Index.gif -
M-ECSLHAFS_Index.gif -

As we had expected, the seasonal adjustment swing that takes place in April has
caused some deterioration in employment metrics. This week's Initial Claims
were estimated at 386K, while last week's were revised 8K higher to 388K. This
has raised the 4 week ma of claims up to 374K, and we would anticipate a
further rise as the March data drops out of the picture.

However, although this rise will be interpreted as a worsening of conditions,
it should be understood that we are witnessing a statistical mirage. The
underlying employment situation in February and March was probably not as
strong as the data presented, while April's deterioration is equally
fallacious. As we have explained many times before, cycles do not suddenly
accelerate and decelerate in the manner that data portrays (although there will
always be random fluctuations in any short period). Above all, in employment
statistics "the trend is your friend" and the attached chart shows this trend
to be in a powerful multi-quarter decline, which may be forced to pause for a
few weeks by the statistical quirks of the BLS survey methodology, but is highly
unlikely to reverse. - W-INJCJC4_Index.gif -

The recent populist decision to seize control of YPF has had a predictable
effect on the local equity market with the MERVAL index falling to 2357 at last
night's close, the lowest closing level since October 10th down -4.26% YTD and
-29.25% over the last 52 weeks.

At first glance the Argentine Peso (ARS, red line on chart) has held up
somewhat better, with the official spot rate barely budging up from 4.39 to
4.40 over the course of the last week. However, it should be understood that
this is a heavily constrained market following the draconian FX restrictions
introduced in late 2011. The 3 month forward market (blue line) shows a
substantially greater increase, moving up from 4.59 to 4.64 and indicating some
unease in the local banking system. However, the truly dramatic response has
been shown by the more widely accessible practice of converting local shares of
Tenaris (TS AR) into its highly liquid and fungible ADR (TS).

A rush to take this exit route has seen the implied exchange rate (black line)
soar from 5.41 to 5.69, a 23% premium to the official cross. This could be
interpreted as the effective discount that Argentinian policies have placed on
the value of funds held locally compared to in a more democratic and dependable
financial system such as the US. As the chart shows, this implied rate is very
volatile, but as recently as December 2010 it was lower than the official cross
and on the eve of the Argentine election was only approximately 2% higher.
Clearly Argentina is once more at risk of a destabilizing financial episode,
and we doubt that last week's action will be the last objectionable move made
by an increasingly brazen regime. - arsrates.gif

As had recently been anticipated by most observers, the Central Bank of Brazil
cut the reference SELIC rate by 75 bp to 9.00%. This verifies our assumption
made last summer that Brazil has commenced a wave of monetary easing that will
significantly exceed expectations of observers and the central bank itself.
Although this rate cut was anticipated in recent days, the idea a year ago that
the SELIC could fall to 9% by April 2012 would have been seen as fanciful.

As the attached chart of the Interbank deposit curve shows, the market still
prices in the adjustment as a short term phenomenon and believes that interest
rates will not fall much further (the overnight rate is predicted to bottom at
8.67% in April 2013 before rising to over 9.50% a year later). This is very
much in line with a "soft landing" scenario, which unfortunately is not what we
believe lies in store for this economy.

Instead we would reference the attached chart that shows the performance of
Brazil's currency (BRL) and equity market during the period that the SELIC has
been slashed from 12.50% to 9%. Although the equity market recovered from the
depths of its summer decline, it has been unable to challenge its 2011 high.
Meanwhile the currency has started to look quite weak over this period, falling
sharply in value despite massive fixed income flows being directed towards it.
Indeed Wednesday's fall by the BRL (in anticipation of the SELIC cut) wiped out
the remaining YTD gains for the currency against the USD, leaving investors
entirely reliant on coupons for their returns. This currency weakness has thus
far been fairly welcome to the monetary authorities but should the BRL's
weakness start to undermine foreign flows of capital we would be concerned that
this would start to significantly tighten domestic liquidity at precisely the
time that the central bank is attempting to ease.

We continue to believe that both Brazil's currency and local financial markets
offer considerably more risk than most observers believe, and see the response
of the central bank as being insufficient to remove our concerns. By the end of
this down-cycle we expect to see the SELIC at a record low yield (8.75% is the
current all time low) by a comfortable margin, much as the FDTR was slashed to
a then remarkable 3.00% back in 1992 from a starting point of 9.75% in 1989.
Using this as a rough guide a SELIC closer to 5% than 10% seems to us to be a
distinct possibility. - selicibocbrl.gif

The official apartment price data for China's 70 largest cities is starting to
show a marked deterioration in house price inflation (HPI) that has spread
across the majority of the surveyed cities. Using the YoY data (which obviously
lags the more volatile monthly data) we can see that only 28 cities now have
seen prices increase over the last 12 months (down from 67 in March 2011) while
46 have seen prices fall (up from 12 a year ago). This creates a negative
spread of 18 more cities seeing prices fall than rise.

For the existing housing market the data is slightly worse. Here only 20 cities
have recorded price rises (down from 63 in March 2011) and 49 have seen prices
fall (up from 5), for a negative spread of 29. This suggests that the marked
decline in the volume of transactions is now causing some slippage in the
clearing price for housing, which means that China's real estate market is
roughly where the US market was in early 2007. Given that the monthly data only
showed 8 cities with rising prices (for new apartments) we would expect to see
the negative spread continue to widen in the months ahead.

It should be remembered that home prices are always a LAGGING indicator in a
housing cycle. And although in most cities the cumulative falls in price are
still very modest, they are starting to mount in cities such as Wenzhou (down
-9% YoY), Hangzhou (-5.9%), Jinhua (-4.6%) and Ningbo (-3%). To put this in
perspective a city such as Tampa, Florida in the US saw YoY home prices fall by
-5% in April 2007, almost -9% by July 2007 and YoY losses peaked at -23% in
January 2009. The total cumulative decline in Tampa's house prices is around
45%. - D-.CHREPINC_Index.gif - D-.CHEPINC_Index.gif -

With all eyes back on Spain and the vast majority of headlines and data
painting the gloomiest of pictures the one chink of light is the robust
performance of Spanish exports. These have risen by 4.9% over the last year and
February's total of almost €18 bln took the trailing 12 month ma up to the same
level, which is also a record. With imports lagging somewhat this has led to a
fairly dramatic adjustment of Spain's trade balance.

At the height of the last boom this had widened to over -€8.5 bln, a figure
which has been more than halved to -€3.76 bln in just under 4 years. Since much
of this narrowing has been caused by improving exports we would describe this
as a benign rebalancing. Clearly Spain's problems are such that it cannot
simply "export its way out of trouble" but this improvement does hint at some
resilience in the portions of the local economy not attached to housing and
finance. We continue to believe that the odds of Spain working its way out of
the current mess are somewhat higher than consensus. - M-SPTBEUEX_Index.gif -
D-SPTBEUBL_Index.gif -

One day after the RBI's surprise 50 bp rate cut there are already signs that
this palliative move will have limited effect. The reaction of the local equity
market has been muted at best, with the SENSEX rallying off key support at
17,000 but then running smack into resistance at the 50 day ma and 17,500. This
keeps the index one bad session away from retesting support and given the
number of times this has been revisited since late February the odds are in
favor of a breakdown sooner or later.

One of the factors bothering local investors is the state of the Indian Rupee
(INR), which is now back up to 51.38, its highest cross rate since January 17th.
The currency is the clear loser from the change in policy, since it narrows the
yield gap between the INR and other currencies. We still expect the INR to move
back up and retest the record spot rate of 54.17 recorded last December.

As to bank liquidity, this remains tight. The 3 month interbank rate has
continued to fall, reaching 9.67% this morning. This still keeps it about 30 bp
above the level it had reached last September just prior to the decision to
raise the REPO yield from 8.00 to 8.25%. Local bank use of the REPO facility
also increased back to 1.014.9 trln INR and while this is lower than the acute
readings of 30 days ago, mid April is typically a very light period for REPO
usage since the start of the new year generally releases substantial amounts of
"window dressing" capital back into the banking system. - D-RBICRR_Index.gif -
D-SENSEX_Index.gif

The pace of China FDI continued to decelerate in March with total FDI of $11.76
bln representing a drop of -6.1% from the level of a year ago. Cumulative FDI
for the first quarter was $29.48 bln, a drop of -2.8% from Q1 2011. Given the
volatility of this data it is too early to assume that FDI will actually fall
in 2012, but it does seem fair to assume that it will not grow at anything like
the pace of 2010 or early 2011. This data is not broken down in terms of
industry specific metrics but we would assume that FDI into real estate related
activities will be particularly prone to being cut back in the months ahead.
From our perspective the deceleration of FDI is another drag on Chinese
liquidity, and that given the sort of projects that FDI tends to be directed to
this constraint will be concentrated on the more relevant portions of the
economy to foreign investors. - D-CNDIINVY_Index.gif -

This morning's housing start and permit data is a somewhat contradictory
collection of data with weak housing starts and decent permit applications.
Looking under the surface almost all of the swing can be attributed to the
multi-family portion of the data and the fact that housing starts and permits
are estimated using different methodologies, neither of which can be relied
upon to deliver a single month's data with reasonable accuracy (the absurdities
of the Census Bureau never fail to amaze us).

In terms of the data itself Total Starts were estimated at 654K, well below
consensus of 705K and last month's 694K (revised lower from 698K), but the
entire shortfall came in Multi-Family starts which dropped to 192K from 231K.
Single Family Starts were flat at 462K, which given the seasonal adjustment
means that a normal pickup in activity took place. Contradicting the Starts
data, Total Permits (which we actually prefer as a metric) came in at 747K,
well above consensus of 710K and last month's reading of 715K (revised up from
717K). Multi-Family Permits soared to 285K from 236K, reaching the highest
level since August 2008, while Single Family Permits fell back slightly to 462K
from 479K last month.

Our overall take on the data is that multi-family construction continues to
accelerate, driven by very robust demand for rental housing. Single family
construction remains moribund and will lag any sustained pick-up in actual
sales. This still means that overall construction has started to become an
important positive force for the US economy, but it would be nice to see the
single home market join the party in a more convincing manner. -
M-NHSPATOT_Index.gif - D-NHSPSTOT_Index.gif - M-NHSPA1_Index.gif -

The RBI finally took note of the significant deceleration in Indian growth this
morning and announced a 50 bp cut in the REPO Cut-Off Yield to 8.00%. This is a
larger cut than was anticipated by most observers and underlines the sense that
the RBI had fallen some distance behind the curve of events in recent months.
Nevertheless, as the accompanying statement makes clear (see link
http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/IEPR1658PS0412.pdf) the RBI
remains quite constrained by fiscal, inflationary and currency pressures at the
current time. This makes further easing quite difficult to accomplish, leading
to a sense that the RBI has chosen to take on large step before placing itself
on hold.

This is typical of the mind-set of a central bank at the start of an easing
cycle, but it does not mean that they are in control of the script. Should
matters take the usual course India's economy will continue to decelerate while
local credit quality also starts to be a locus of concern (the RBI statement
commented on a recent worsening of credit metrics). This will lead to
significantly more easing than most observers expect in the months ahead, but
also significantly worse performance by local equity and corporate debt. In
India's case we would also add the currency, which is still only 5.5% above its
all time low against the USD.

One thing the statement made clear was the fact that the RBI was aware and
concerned at the deterioration of local liquidity conditions. This is something
we have been very vocal about in recent weeks. As the attached chart shows even
after today's announcement the 3 month interbank rate remains just under 10%,
which means that the true effect of the policy stance has been somewhat more
restrictive than its original intention. The RBI has also been required to
inject record amounts of liquidity into the banking system in recent weeks and
although the end of the fiscal year on March 31st has alleviated some of the
strains (Indian corporations horde cash at year end to dress up their published
balance sheets) current availability of liquidity is still well below normal or
healthy levels. - D-RBICRR_Index.gif -

We view the NAHB monthly survey as one of the more useful regular indicators we
follow and therefore it is disappointing to see the April index slip to 25 from
28 in March. However, the fact that we like the indicator does not mean that we
follow it slavishly since it is subject to seasonal adjustment and tends to be
quite volatile on a month to month basis. We suspect that a good portion of the
decline from March is due to a more demanding seasonal benchmark rather than an
actual deterioration in survey responses. One other thing we would note was a
sharp decline in the number of builder responses to 337, compared to an average
of 439 over the last 6 months, meaning approximately 25% of the normal
responses are missing from this month's survey. Assuming some of the missing
100 respondents failed to respond due to the pressures of greater business, then
it may be that this reading will be subject to substantial upward revision at a
later date.

Even so, April's report does not change the fact that the indicator has
decisively broken out of the its 3 year depression range and that the trailing
6 month ma has reached 24.33, the best reading since September 2007. This
survey therefore continues to indicate that a major turning point was reached
earlier this year, and we would hope to see this confirmed in the earnings of
the public homebuilders this quarter.

The major cause for the shortfall in the April data appears to be Foot Traffic,
which fell from 22 to 18. Future Sales slipped from 35 to 32, but this compares
to a level of 26 the last time Foot Traffic was at 18 in December. This
suggests that the quality of visitors has improved markedly in recent months
even if seasonally adjusted volume has fallen back (although as we mention
above, we are very suspicious of this month's readings given the unusually small
sample size of the survey). - nahbapril2012.gif

Since we were out of the office on Friday, we did not have a chance to comment
on the Chinese economic data that was released. Clearly the slower than
expected GDP data garnered the headlines, but we always have a hard time
interpreting this sort of "big picture" data, that often hides as much in the
details as it reveals in the headline number.

Of much more interest to us was the relatively straightforward message from the
real estate data that a meaningful slowdown has taken place in the pace of
transactional volume, which we always take to be the key sign of health in a
real estate market (much more so than price which really lags to a deceptive
degree).

The floor area of Total Residential Sales fell by 15.5% over the last 12
months, the second straight month of negative growth and one that is not
distorted by the timing of the lunar new year (as could be argued in the case
of February). Meanwhile construction continues to expand rapidly, with total
floor area growing by 22.2% over the same period. This produced a 37.7% spread
between these measures, which represents the speed at which construction growth
is unwarranted by sales, leading to a build-up of unsold inventory.

This lag between sales and construction is typical and is caused by the fact
that half built projects, or even new ones on land which has been expensively
purchased, will move forward for as long as the funding is available. It is
this lag which causes the significant delay between the initial slowdown in
sales and the full impact on the overall economy (this certainly happened in
the US where sales climaxed in mid-2005 while starts peaked in January 2006).
Should sales continue to slow we would expect to see a marked impact upon the
pace of construction in a quarter or two, and this is when the full impact
should start to become apparent in wider economic metrics.

One sign that things are already starting to change is a sharp slowdown in new
funds being allocated to Chinese real estate. These have grown by 8.2% over the
last 12 months, the slowest pace of growth since February 2009, and clearly
growth of this pace in funding will not support construction growth of 20% plus
going forwards. The idea that the sort of fine tuning methods under rumored
discussion at the PBOC will turn this market around strikes us as fanciful, and
reminds us of the confidence in the incremental measures taken to ease monetary
conditions and specifically the mortgage market in the early stages of the US
housing crisis. We had little confidence in the efficacy of these moves then,
and have none in the power in the PBOC today to deflate a speculative housing
boom without suffering collateral damage to the wider economy. -
chinarefundsyoy.gif - chinarebuilsold.gif

It has been an unusually verbose day for members of the FOMC with a large
number of public speeches being made. If we step aside from the economic
forecasts made within them (which are now quite unimportant given that they
have been communicated ad nauseam in official statements) we were more
interested in what they reveal about the "process of policy". In this regard it
is worth reading the two speeches given by Charles Plosser (President of the
Philly Fed) and Narayana Kocherlakota (President of the Minneapolis Fed).

Plosser's speech concentrates on the need for transparency in FOMC
communication and details the careful steps taken since the Greenspan FOMC
side-swiped the markets back in 1994 with its totally unexpected rate hike
cycle. As we have commented before, the Bernanke FOMC has made something of a
fetish out of transparent communication (apart from when being asked to reveal
who the FRB lent money to back in 2008).

One reliable sign that a cycle has overstayed its healthy lifespan is when
government officials start to price in boom-time revenues as part of their long
term planning. We would remind readers of Bill Clinton's infamous press
conference in late 1999 when he proposed either paying down the entire Federal
Debt and/or fixing social security based off the soaring US budget surplus.
Similarly the UK's labor government massively increased public spending in the
final years of the 2002-7 cycle.

At a time that we are becoming increasingly bearish about the trend in energy
prices (more due to an acceleration of supply than a decrease in demand) we are
therefore intrigued by the publication of the attached story describing
Alberta's planned increase in spending. Long term residents of the state will
recall a massive spending spree in the late 1970's and early 1980's caused
severe strains as energy prices entered a 2 decade bear market. With high cost
oil sand production being key to Alberta's oil industry there is an awful lot
riding to the assumption that crude is stable at $108 a barrel.

The perils of relying on monthly volatile data was shown this morning in India
where the strong January Industrial Production report was revised sharply lower
from a YoY% change of 6.8% to a mere 1.1%. Even more bizarrely the major cause
of revision was a miscalculation of sugar production, which was originally
estimated at 13.4 million tonnes and was revised down to 5.8 million (see link
for details http://mospi.nic.in/Mospi_New/upload/Press_statement_12apr12.pdf ).

Including February's data we can see that India's IP is growing by 4.11% YoY,
well below the pace of recent years. Since the 12 month ma of the YoY% change
is also just over 4%, this would seem to be a reasonably reliable estimate of
the current pace of Indian Industrial Production. With the RBI currently
maintaining a reverse REPO rate of 8.50%, and the cost of capital for
industrial concerns being substantially higher than this amount, it is
important to understand that the cost of capital is currently substantially
higher than the average growth rate of production, which constitutes tight
monetary conditions under any reasonable definition.

Of course today's data was greeted warmly by the local market since most assume
that the RBI will now be closer to lowering interest rates. This may indeed be
the case, but as we noted earlier this morning, the early stages of monetary
loosening tend to be precisely the time that the really bad news starts to leak
out of an economy. - M-INPIINDU_Index.gif -

Following March's poor NFP report all employment statistics will be coming
under heightened scrutiny and it is therefore unfortunate that today's Initial
Claims report came in at 380K, well above expectations of 355K, while last
week's data was revised 10K higher to 367K. This probably reflects the end of
the favorable seasonal period in employment data that we anticipated would fall
roughly between Labor Day and Easter (although we did not expect this
time-frame to be accurate to the day), but it does not mean that clear
improvement in employment data over the last six months is a statistical mirage.

As can be seen, the 4 week ma of claims has now risen to 368K, but this still
represents an improvement of over 9% from the level of claims 52 weeks ago. It
may be that we experience a further worsening of the weekly data in April and
early May, based on the experience of last spring-time when claims rose 30K
over a 4 week period and then fell back fairly rapidly. We would hope that the
2012 experience is a little milder, since some of the seasonally sensitive
sectors such as construction are experiencing much better conditions, but this
will rely on the BLS's arcane sampling methods actually picking up on this
change in circumstance.

One useful measure to watch at this time is Continuing Claims. These fell
sharply to 3251K this week, the lowest reading since July 2008. Although most
of this is due to yet another seasonal adjustment (seasonally adjusted
Continuing Claims should really have fallen several weeks ago based on the NSA
data and are still probably overstated), the shape of the chart is encouraging
enough, as is the annual decline of -12.3%. Our view remains that employment in
the US is in the middle of a long a cumulatively powerful recovery, although we
recognize that the data may periodically clash with this view, particularly at
the current time of year. - W-INJCSP_Index.gif - W-INJCJC4_Index.gif -

It had been widely rumored in recent days that China's March monetary data
would show a surge in new lending and this proved to be the case with total new
loans reaching 1010 bln CNY, the highest level since January 2011. This is
perhaps a sign that the authorities are starting to respond to the alarming
collapse in the growth of narrow money supply (M1), which saw a YoY% change of
a mere 3.1% between January 2011 and January 2012. Even after March's lending
binge, M1 YoY% growth has only risen to 4.4%, and although the monthly gain of
2.85% is impressive, it is hardly higher than the 2.72% gain of March 2011
(narrow money typically rebounds in March due to the fact that the cash drain
from the lunar new year falls sometime in January or February) when New Loans
were only 679.4 bln CNY.

Broad money growth is somewhat healthier at 13.4%, but while in any other
country this would represent powerful monetary growth, in China, where M2 was
surging by almost 30% 3 years ago, a 13.4% growth rate is very much at the low
end for the prior decade. Furthermore the March boost of 3.27% is again hardly
more than the 2.99% gain of March 2011. Thus it would appear that China's loan
surge is a case of "running hard to stand still" rather than a genuine boost to
local liquidity and is therefore much less stimulative than it appears to be on
the surface.

This indicates the degree to which the Chinese economy has become reliant on
continuous capital infusion since the great monetary boom of 2009. This is
particularly true of the local real estate industry, which has recently had to
contend with a mismatch between the pace of residential real estate construction,
which continued to increase by over 32% YoY (measured by floor area) through
February 2012 and the pace of sales, which dropped by 16% over the same period.
Even allowing for a monthly distortion caused by the new year, this -48% spread
between the growth of sales and construction can only be bridged by capital infusion,
and only then for a limited period of time.

Although the initial response to this data will be enthusiasm and relief, it is
at best a response to a substantial worsening of local economic conditions.
Again there is nothing new about a local central bank waking up and sensing
that conditions are too tight (the FRB certainly did so in January 2001 and
September 2007), but this tends to be around the time that the scale of the
damage starts to become clearly apparent to the wider public. -
D-CHRESORY_Index.gif - D-CNMS1YOY_Index.gif -

Even after the recent battering, this has been a very good start to 2012 for the
SPX index. It is therefore intriguing that the energy sector has thus far
failed to participate, with the S&P 500 Energy Index {S5ENRS index} currently
down -0.86% for the year, over 10% behind the SPX index. Moreover, the 12 month
return for this index is the worst of the 10 Level 1 groups, down -11.07%
versus a gain of 3.68% for the SPX. We have attached a long term chart of the
S5ENRS index that shows its price and relative performance against the SPX
index. As can be seen, 9 consecutive years of rapid relative gains (during
which time the sector performed over 3 times better than the overall market)
ended abruptly in July 2008 when crude oil peaked at $147 a barrel. Since that
time the sector's performance has been disappointing in both absolute and
relative terms and it is notable that the recent rally has not managed to
exceed the 2011 recover high.

It is therefore interesting that little negative commentary has been attached
to this group, nor are we aware of any concentrated divestment of capital from
it. Indeed in conversations with most clients, it is assumed that crude oil
remains stable around the $100 level and that the possibility of a disruption
of Persian Gulf oil supplies warrants continued participation in the group.

We are starting to wonder whether the market may be sending a message regarding
the future prospects for this sector. One clear issue that exists is the
collapse of natural gas prices in the US in response to a massive increase in
supply. At its current price a crude oil contract is now over 50 times more
expensive than a natural gas contract, a record high for a relationship that
has spent most of the last decade in the 5-15 range. Over time we doubt whether
this disparity in price can be maintained and even if natural gas were to
narrow some of this gap by increasing in price, it seems likely that crude oil
will have to complete the bulk of the work by falling lower.

Indeed we suspect that the price of crude oil is now substantially supported by
financial flows into commodity programs rather than actual physical supply and
demand. With further increases in global supply expected to come online in the
months ahead, we suspect this will become an increasingly difficult balancing
act to perform. We would not yet claim to have reached a definite conclusion,
but the amber alert sign is flashing for this sector. - W-S5ENRS_Index.gif -
W-CL1_Comdty.gif -

We had happily mothballed our Eurostress chart in late December and were hoping
not to refer to it again for a prolonged period of time. However, recent
turbulence in global markets has once more been blamed (at least partially) on
renewed weakness in certain Eurozone sovereign credits and so we will briefly
revisit the state of the market.

As can be seen, the Spanish 10 year yield (red, top chart) has recently risen from
just under 5.00% to 5.87%, while Italy's 10 year yield (black, top chart) has
reached 5.53%. A casual view would therefore suggest that much of the progress
made following the introduction of the LTRO has already been lost, but looking
deeper we can see that this is not correct. Consider for instance the shape of
the Spanish yield curve. Back on December 1st 2011, the market did not
distinguish between the risk of short or long term Spanish credit. 3 month
bills yielded 3.81% and 2 year notes 4.67%, while today these yields are 0.605%
and 3.25% respectively (see yield curve chart and table). This is important
since it allows Spain considerable flexibility in terms of setting the maturity
of new issuance while the market gets comfortable with the resolve of the
administration to tackle the budgetary issues.

The other major difference between the recent turbulence and that of 4 months
ago is the fact that at present stress remains very much isolated within
limited portions of sovereign credits. French yields for instance are unbudged,
and the wide spread to German bunds is more a reflection of the markets love
affair with Germany than anything else. Furthermore general financial stress
remains far more muted than it was in Q4 2011. The 3 month €/$ swap curve
(grey) is 55bp (still higher than normal but nowhere close to its 150bp record)
while the Bloomberg European Financial Conditions index is just on the wrong
side of the key -2 level.

The odds therefore remain that we are witnessing an aftershock of last years
crisis rather than the beginnings of a new one, although we will continue to
monitor this process over the coming sessions. - eurostressapril112012.gif -
spanishyieldcurve.gif - spanishyieldtable.gif

Interview focuses on our view for China, India and Brazil. BNN is Canada's
daily business Channel.

http://watch.bnn.ca/#clip654295

China's monthly trade report is so volatile, particularly in the aftermath of
the the lunar new year, that it is hard to make any firm conclusion from a
single report. That being said, there is some support in March's data for the
notion that the pace of growth in China's economy has started to decelerate
meaningfully in recent months, or at least that portion of the economy that
relies upon global trade. As can be seen on the attached chart, both imports
and exports rebounded very strongly from their February levels, in line with
typical seasonal variance. The rebound in exports was particularly strong,
allowing China's trade balance to swing back into the black after February's
very record -$31 bln deficit. Using the 12 month ma as a guide we can see that
it is too early to suggest that China's net trade position has taken a further
leg down in recent months, but it is increasingly clear that the rapid build up
of trade surplus halted in early 2009 and the monthly average suplus has
roughly halved in size since that time from $26 bln to $13 bln.

Perhaps the most interesting facet of March's data is its hint that the pace of
both export and import build-up may be slowing. As can be seen, March 2012
exports were 8.87% greater than March 2011, while imports increased by 5.42%. If
this trend were to be continued into the middle of the year, it would suggest
that something meaningful may be occurring within the Chinese economy. Again at
the very least, the explosion of activity in 2009 and 2010 has subsided into
something more orderly, but the more troubling possibility is that we are
witnessing the early stages of drift into a flattening or slippage of aggregate
trade activity. - D-CNFRBAL$_Index.gif - D-CNFREXP$_Index.gif -

China's March CPI report will come as a blow to those who have pinned their
hopes on some meaningful loosening of monetary policy by the PBOC early in
2012. Annual CPI was estimated to be 3.6%, above consensus expectations of 3.4%
and a rise of 0.4% from the February report. This still keeps the recent trend
of lower inflation intact, with CPI falling 1.8% since March 2012, but it does
also keep the index at a heightened level. Furthermore both Food Inflation at
7.5% and Consumer Goods at 4.4% are well above the overall index, with both
being key readings for an administration increasingly focused on the threat
social unrest and need to create an appearance of economic fairness. We would
not call the current level of CPI a problem in itself, but it would be an
uncomfortable level to start a new wave of inflationary pressures. At the very
least this report should trim any urge for the PBOC to take the sorts of
measures that its real estate sector and other debt driven portions of the
Chinese economy require at the current time.

About the only good thing about March's non-farm payroll report was the Friday
on which it was issued. Total Payroll was estimated to have grown by 120K compared
to 205K consensus, while Private Sector Payroll grew by 121K versus 215K. The
small positive revisions to prior report did not make up for the shortfall in
the number, but with many global equity markets, including the US, closed on
Friday we have yet to see the market's verdict.

From our perspective nothing has changed following this report. Non Farm
Payroll data is far too erratic to pay any great attention to a single beat or
miss, and although at first glance an 85K miss may seem like a big one it is
well within the error tolerance for this data. As we always argue, NFP data can
only be usefully interpreted via a reasonably long term moving average. We
favor 12 months although those of a less patient disposition could use 6 (we
would go no shorter though). Using this metric, March's report caused Private
Sector gains to slip to an average of 174K over the last 12 months, which keeps
them where they were in Q2 2005 (see chart). Total Payroll gains are slightly
lower at 158.5K, which is equivalent to the gains seen in Q3 2004. Our
assumption is that future reports will be at or above these averages and we
would also not be surprised to see March's weak report revised higher in the April
and/or May reports.

The one spot of good news in the report was Manufacturing Payroll which gained
37K (see chart). Again, using a 12 month ma we can see that this was no fluke.
Total Manufacturing Payroll has gained an average of 19.8K jobs over the last
12 months, the fastest pace of growth for this section of the economy since
mid-1997. Clearly only a fraction of Manufacturing jobs lost in the last
recession have been re-gained, but this does not negate the fact that the
recovery in this portion of the economy is stronger than anything seen for the
last 15 years and shows no sign of letting up.

Brazil's March Vehicle sales were 300,574 units, a modest decline of 1.82% from
the March 2011 level. Since this time March was free of the Carnival holiday
this actually represents a slightly worse performance than one might have
expected (February took the full effect of the holiday causing sales to dip 9%
YoY). At the very least we would argue that Brazil vehicle sales have stalled
after 9 years of powerful growth, interrupted only briefly in 2008/9. The
danger is that a stalled market now starts to slip into reverse and we will be
watching future releases quite closely. - M-BZVLTLVH_Index.gif -

Since the April Non-Farm Payroll report will be issued on Good Friday (when the
US equity market is closed) this month we will not be commenting on the release
until Monday but even if this erratic data proves to be worse than the 205K
consensus estimate there is sufficient evidence from other metrics to suggest
that March was a good month for US employment.

The 4 week ma of Initial Claims for instance have forced their way down from
close to 380K at the start of the quarter to 361.8K at the end of March. This
week's reading of 357K was the lowest since April 18th 2008, although it should
be noted that last week's 359K was revised higher to 363K. With the move into
April the seasonal adjustment process will now start to get a little tougher,
however we would be surprised to see the sort of "data-shock" that was
delivered back in 2011, when Initial Claims rose around 35K between their Q1
low and Q2 peak. This time there is much more evidence of growth within the
sort of cyclical industries that typically accelerate at this time of year,
particularly in the area of construction. Although we may see a hiatus in the
improvement of Claims data, this should be enough to keep claims in the
350-370K range during the seasonally difficult Q2 period. - W-INJCJC4_Index.gif
-

One of the stranger stats that we like to keep an eye on is the cost of
purchasing a license to own a car in the congested island of Singapore. These
licenses are auctioned twice a month and include various categories based on
engine size and type of vehicle. The attached chart is for Category E, which is
unrestricted and therefore covers larger, luxury vehicles and can be used as a
very rough indicator of "bubble tendencies" in that economy. As can be seen, the
clearing price reached a new all time high of 84,590 SGD (approximately
$67,000) which is a new all time record and an increase of 28,600 SGD from the
level of a year ago. The trailing 12 month ma has risen to 71,400 SGD, a new
all time high, and looks likely to set a series of new records in the coming
weeks.

The ADP Payroll report came in just above expectations at 209K, while the
January report was revised up from 216K to 230K. This keeps the string of
recent encouraging employment reports in place and means that almost exactly 2
million jobs were added to the ADP survey over the last 12 months, a rate
equivalent to that of November 2004.

In terms of the total level of employment, this has now reached 110.25 mln,
almost exactly the same level as February 2009, and means that approximately
40% of the 8mm jobs lost in the 2008/9 decline have now been recovered. Put
another way, the same number of people are employed today in the US private
sector (according to this survey) as were in December 2004. This all suggests
that we can expect to see several more quarters of employment growth going
forwards and we do not think it is unreasonable to expect this metric to
continue to post readings in the 200 - 275K range on average in the months
ahead (although we would allow for individual months to fluctuate out of this
band).

After being widely assumed to be "one letter from Iceland" a few months ago,
Ireland has made good progress in stabilizing its economy and rehabilitating
its sovereign credit. Not that things can be considered "normal" with a 10 year
yield at 6.60%, some 365 bp higher than French yields and 480 bp higher than
Germany's remarkably low borrowing rate of 1.79%, but when one considers that
back in July the yield was over 15%, progress has certainly been made.

At the level of the economy things remain depressed but there are now some
signs that a bottom is in place and some improvement may finally be taking
hold. Attached is a chart of Ireland's Live Register, which totals the
country's unemployment claimants. As can be seen this soared from approximately
150K in 2007 to a peak of 448K in August 2011, with over 190K jobs lost between
mid 2008 and 2009. Recent months have seen something of an improvement and the
March 2012 reading fell to 434K, the lowest total in two years. This means
that over the last 12 months 8K people have been removed from the register
which is the largest drop since July 2005.

Clearly 8K is still a minuscule drop, and at this pace it would still take
about 35 years to return Ireland's employment to its pre-crisis level, but
fortunately this is not how employment cycles generally work. What we have seen
time and again is that employment is a heavily trending statistic, but that
once it makes a sustained turn in direction it generally picks up momentum and
starts to move rapidly either lower (as in this case) or higher (as in 2007-9). In
Ireland's case we would hope that a drop to the 1991/2 peak of 300K is a
realistic target for Unemployment over the next 24 months, which would go a
long way in improving the entire feel of the economy.

The FOMC minutes for the January 24th/25th meeting are a fairly unexceptional set
of comments (See link
http://www.federalreserve.gov/monetarypolicy/fomcminutes20120125.htm)

Once more we see a grudging acceptance that the US economy is improving
together with some relief about the state of Europe and financial markets:

"Participants agreed that the information received since the Committee met in
December suggested that the economy had been expanding moderately,
notwithstanding some slowing in growth abroad. In general, labor market
indicators pointed to some further improvement in labor market conditions, but
progress was gradual and the unemployment rate remained elevated... With
respect to the economic outlook, participants generally anticipated that
economic growth over coming quarters would be modest and, consequently,
expected that the unemployment rate would decline only gradually."

Perhaps the most interesting comments were those discussing the effect of
releasing the FOMC members' expectation for changes to the FDTR:

"A couple of participants expressed concern that some press reports had
misinterpreted the Committee's use of a date in its forward guidance as a
commitment about its future policy decisions.... Some members underscored the
conditional nature of the Committee's forward guidance and noted that it would
be subject to revision in response to significant changes in the economic
outlook."

We discussed this misconception at length a few weeks ago, but it still remains
embedded in the market's understanding of FOMC policy.

Absent from the discussion was any enthusiasm for a new round of quantitative
easing. Quite why this would have been expected following the release of the
FOMC statement and numerous speeches by FOMC members in the intervening 6 weeks
is a mystery to us, but judging by the knee-jerk reaction of the market at
least some participants expected (or hoped) that some monetary crumbs of
comfort would be offered.

In particular we note the very poor immediate response of gold to the release
of minutes, and at the time of writing the metal is down 2.10% on the day.
Gold's supporters include many who believe the metal to be the obvious way to
hedge monetary loosening (we have argued many times that golds relationship to
money is rather more complicated) and it would seem that the absence of FOMC
language regarding QE3 has come as a disappointment to some. The key level to
watch over the short term is now $1,628, which marks the March 22nd low. A
failure to hold this level would set up a test of more important support at
$1,600, below which the December 2011 low of $1,522 would be beckoning. 

Census Bureau estimates of US Factory New Orders showed a rise of 1.3% in
February, a little under expectations of 1.5%, but well within the error
tolerance for this series. This takes total orders up to a new recovery high of
$468 bln, still about 3.5% below the all time high of $485 bln recorded in June
2008. Orders have grown by over 9% over the last 12 months which means that we
should expect to see a new all time high reached sometime in the early summer.
We would stress that despite some monthly wobbles, a very
strong trend towards higher Factory orders remains in place.

Looking at the sub index data we note that Consumer Goods, which account for
over 40% of the total, are within $1 bln (0.5%) of their July 2008 high and can
be expected to exceed this level sometime in the next few months. As can be
seen, this area has been at the forefront of the recovery since it commenced in
early 2009. The same cannot be said of Construction Materials, which not
surprisingly collapsed by about 30% in 2008/9 to $34 bln and made little
progress over the next 18 months. As can be seen on the attached chart the last
5 months have seen a concerted surge in Construction related orders, allowing
the data to recover back to $39.6 bln, a gain of 8.7% since September 2011.
This demonstrates the sort of broadening of the recovery that has been
anticipated by the strong performance of US domestically sensitive equities in
recent weeks.

Brazil's February Industrial Production data came in somewhat better than
expected with the seasonally adjusted index rising 1.3% versus 0.6%
expectations and January's very poor data revised up from -2.1% to -1.5% while
the NSA data rose 2.22% for the month, taking the 12 month decline down to
-3.9%.

Although the headlines will inevitably follow the one month positive surprise,
February's data in no way negates the deterioration that preceded it. Both the
SA and NSA charts show that a distinct deceleration took place in 2011, and suggest
that Industrial Production started to shrink at the end of the year. Given the
volatility of Industrial Production on a monthly basis some strong data can
still be expected even in a declining trend, and we therefore do not see any
reason to change our views based on February's data.

Mexican Total Remittances are a useful secondary source of information
regarding the health of the manufacturing and construction related portions of
the US economy, since much of the money sent home is generated in these
industries (together with other less cyclical service type industries). As can
be seen on the attached chart February remittances were $1,788 mln, somewhat
above expectations of $1,756 mln and an increase of over 8.5% from February
2011. Nor is February a freak result, since the trailing 12 month ma has moved
steadily higher since bottoming 2 years ago and has recovered to reach $1,914
mln (still about 10% below the level reached at the peak of the 2003/7
cycle).Should this be the start of a new construction cycle we would expect
this to be reflected by an acceleration in remittances going forwards. -
M-MXRETOT$_Index.gif -

Last Friday we showed how India's Current Account balance had deteriorated in
the 4th quarter and although foreign investment flows into equities and bonds
have been much more positive so far in 2012, the trade portion of the equation
continues to deteriorate.

February's USD trade balance widened to -$15,163 bln in February (which is
normally a fairly kind month for trade data). This is -$5.8 bln wider than
February 2011 and takes the 12 month trailing ma (which is probably the fairest
measure to use) down to -$12.53 bln, a new record. The surge in the cost of oil
imports is one of the major factors behind this deterioration, and these
increased by $3.5 bln (39%) over the last 12 months. However, non-oil imports
rose by $3.2 bln (13%) over the same period while total exports rose by only
4.28%. This suggests that although a high price for oil is worsening India's
problems it is not the sole cause of them.