Interview concentrates on the impact of Hurricane Sandy on the US equity market and economy. Needless to say we are as clueless as everyone else. For those of our readers in the storm's path we hope you manage to avoid any significant damage and look forwards to resuming coverage of the US market when it reopens on Wednesday.

http://www.bloomberg.com/video/hurricane-sandy-won-t-derail-stocks-shaoul-says-1SYnIBeERBydCrEH7chVaw.html

Brazil's September loan data confirms that the "nationalization" of the country's credit granting continues to accelerate. Total credit outstanding was increased by 1.13% to 2237 bln BRL. Private Sector banks increased loans outstanding by a mere 0.39% while State owned banks increased loans by 2.00%. Over the last 12 months State banks have increased loans outstanding by a rapid 23.6% while the Private banks have been much more restrictive at 8.57% (overall credit grew by 15.8%). This has taken the ration of Private:State bank credit outstanding down to 1.16, a new low for the post 2002 Brazilian economy. Clearly the State sector is extending credit far more aggressively into a late cycle economy, and this means they are taking substantially more credit risk than the mere numbers suggest as late cycle loans are far more likely to lead to credit losses.

Even more interesting was the data for Personal loans which actually shrank in the month by -0.06%. Although the drop itself is tiny it is the first shrinkage of Personal credit since November 2008 and only the second negative month since July 2003. Annual Personal credit growth has now fallen to 11.9%, the lowest rate since October 2003 and can be expected to fall further from here.

It is not hard to understand why this may be taking place. The sharp spike in the delinquency rate for Personal loans (this remained at 7.9% in September) has clearly led to a restriction of credit granting in recent months while government pressure for lower lending charges has led to marginal borrowers becoming less attractive. We have also possibly reached the point at which demand for credit has started to ebb as consumers become tapped out. Whatever the cause the sharp deceleration of Personal credit granting suggests that retail activity may come under more pressure going forwards than most observers anticipate.

As most of our readers will know we are not great fans of GDP data, which combines far too many statistical guesses and adjustments to give much help in making investment decisions. On the other hand we recognize it represents an "accepted truth" about the state of an economy and therefore GDP data has to be considered as one of the inputs into overall sentiment.

In this regard the uptick to US GDP in Q3 is a useful fillip, with the headline number reaching 2.00% above consensus (1.8%) and Q2's tepid 1.3% rate of growth. The data also supports our belief that no deterioration of activity took place over the summer months. We generally prefer to look at Nominal GDP since this correlates more with actual corporate earnings (which are themselves nominal). This rose by 1.22% in Q3, which represents a 5% annual growth rate. The trailing 4 quarter growth rate is 4% (see chart) and as can be seen after the sharp rebound of 2009/10 the annual growth of Nominal GDP has stalled in a range between 3.8% and 4.5%.

This compares with growth of around 6.5% to 7.00% from 2004 to 2006 and a more volatile 4.5% to 6.5% range in the 1992-2000 cycle (prior cycles had much higher Nominal GDP but this was a reflection of higher inflation rather than activity). It would therefore appear that the "New Normal" argument for a prolonged period of substandard growth had some merit (at least in terms of economic statistics rather than equity market performance). However, this cycle has yet to be completed and placed into the history books. One significant difference between the last 2 years and other recoveries has been the complete absence of help from the domestic housing market.

As can be seen on the attached chart a strong rebound in New Home sales typically takes place at the same time as the sharp "V" shaped rebound in GDP. The period of 2010-2 has seen only a modest rebound in activity (as measured in units) which still remains far below normal levels. The strength of recent sales suggests that this is about to change, potentially unleashing a significant additional source of domestic growth.

It is readily understood that current GDP data leaves only a fine margin of deterioration before the words "double dip" would come into play, but the amount of improvement required to describe the US as being in a "strong recovery" is roughly the same. With the US Treasury market priced as if the former outcome was a certainty the potential for an interesting market going forwards is there for all to see.

This morning's Initial Claims report came in at 368K, suggesting that the seasonal confusion of the last two weeks has been replaced by more reliable data. The four week ma has risen modestly to 368K but remains -8.1% below its level in the same week last year. In theory persistent drop in claims this should have led to better payroll data. To some extent this is true of the BLS Household survey and the Unemployment rate (particularly after last month's sharp decline), but thus far the more widely followed Establishment survey has failed to reflect any improvement in job hiring.

Next week will see the publication of the September report, which given the strength of other US economic data has the potential to make or break the US market, at least on a short term basis.

The release of the UK's Q3 GDP data has brought to a close one of the sillier episodes in the annals of macro-data. Three consecutive quarters of negative growth had led to the announcement that the UK was back in "recession", which based on the widely held concept that two quarters of negative growth constitute a recession, came into effect when the Q1 GDP report came in at -0.3%.

This caused much hand wringing at the time and several pious editorials were penned criticizing the austerity policies of the UK government. As we and some others pointed out the draw-down of GDP was within the margin of error of official data and there was no anecdotal evidence of sustained deterioration coming from corporate data. This morning's large bounce in GDP to 1% QoQ (the strongest quarter since Q3 2007) suggests that the mathematical recession may have been a statistical mirage. We very much doubt that even with the Olympics help the UK economy grew this fast over the last three months, but we suspect that the economy probably never shrank in Q1 and Q2 either. Ironically the YoY calculation now shows that GDP is unchanged, which is probably a good enough guess for most purposes.

None of this would matter if the data was not taken so seriously. History will no doubt record that a double-dip recession took place in 2012 and capital has been deployed based on this illusion. Aided by safe-haven flows the UK 10 year gilt saw its yield fall to 1.44% in early August, since which time the yield has risen 40 bp to 1.94%. A break above 2.00% would suggest that the market is starting to take a more realistic view of the state of the UK economy.

Link to statement:
http://www.federalreserve.gov/newsevents/press/monetary/20121024a.htm

After last month's major revamp of FRB policy it is hardly surprising that the October meeting resulted in very little change to the accompanying statement. Perhaps most interestingly no change was made to the language concerning employment which remained: "Growth in employment has been slow, and the unemployment rate remains elevated". This may technically be correct but the sharp drop in the official unemployment rate probably deserved some verbal recognition given that the FOMC was willing to acknowledge the improvement in household spending noting that this "has advanced a bit more quickly", while balancing this with a comment that "growth in business fixed investment has slowed".

US New Home data confirmed the expectations of a further recovery in activity with Total Sales estimated at 389K vs. 385K consensus while August Sales were revised modestly lower to 368K from 373K. This brings the annual pace of recovery up to 83K homes, or 27% and finally takes sales through the trailing 60 month ma for the first time since April 2006. This means that all key metrics connected to US Housing have breached their 60 month ma's suggesting that a full housing recovery is underway.

We continue to use the trailing 120 month ma (this period now contains about four good years and six poor ones) as a reminder of what normal activity levels would look like. Thus although the recent growth may look explosive it is really a reflection of how depressed activity had become rather than a warning that a natural ceiling is being approached.

Perhaps the largest constraint for sales going forwards is the very low level of inventory, which crept higher to 145K homes this month, a mere 4.5 months of total sales. Interestingly recent months have seen a pick up in the number of purchases of Unstarted New Homes. September saw 10K Unstarted Sales out of a total of 31K, up from 5K a year ago. As can be seen on the attached chart the ratio of Unstarted to Completed home sales has been rising steadily from a low of 1:4 in late 2008 to 0.9:1 today (the peak of the housing boom saw a ratio of 2.5:1). This pick up in the number of Unstarted homes suggests that builders will finally have to accelerate their construction activity going forwards.

It is starting to become clear that the Irish residential real estate market has finally bottomed with September marking the third consecutive month of price gains. The national home price index rose 0.9%, bringing the quarterly increase in prices to 1.5%. This is the first positive quarter since Q3 2007 and the largest quarterly gain since Q1 2007.

As can be seen on the attached chart Irish home prices are currently 65% of their 2005 level and 50% of peak 2007 values. This would seem to be a sufficient discount in price to have created enough relative value between owning and renting homes to start to allow foreclosed homes to clear at current prices. Although some fear that an acceleration in foreclosures would lead to a further drop in prices the lesson of the US housing market is that this is unlikely to occur, since private sector investment capital will be willing to purchase real estate that can be rented out at yields better than those available in the bond market.

In other words Ireland's property market is roughly where the US was 18-24 months ago. There are still many hurdles to be crossed with the added complication of the hasty nationalization of bank obligations during the financial crisis meaning that regulatory pressures remain intense, but the odds of a surprisingly swift recovery in the local real estate market have increased in recent months.

The transition from the promise of QE3 into its reality has proven to be quite troublesome for gold bulls. Gold spiked $1,921 in September 2011 at the height of the Eurocrisis and then pulled sharply lower as Euro-stress abated to close the year at $1,563. After a brief switchback rise in January and February gold then traded in a fairly narrow range for the next 6 months during which time we argued it was more likely to break down than break out (our argument was based on tight monetary conditions remaining in effect in India and China).

By early August noises from the FRB made it increasingly clear that a further round of asset purchases were likely to take place and this caused an increased appetite for investment in gold as a "monetary hedge". As can be seen global ETF holdings of gold increased by 2.07mm oz (2.7%) in August and 2.7 bln (3.47%) in September and were matched by an increase of the price of gold of $77 (4.81%) in August to close the month at $1,692 and $80 (4.73%) in September to close the month at $1,772. Thus far October has been a tougher month and although ETF holdings have risen by another 1.25mm oz (1.5%) the price of gold has slipped sharply to $1,705, erasing almost all of September's gains.

It strikes us as quite important for gold to find support somewhere close to the current price. Potential support levels include this mornings low at $1704 (an exact 61.8% retracement of the gains made since Chairman Bernanke's Jackson Hole speech was made), round number support at $1700 and $1690 (a 50% retracement of the August 1st - October 5th rally). Practically speaking we would treat the $20 range between $1690 and $1710 as a single support range. If gold holds above or within this range its supporters are justified in terming this a consolidation of an overbought market, but a break would really suggest that the whole basis for the QE3 rally should come into question.

The Swiss National Bank (SNB) is unique amongst Western central banks in that its massive balance sheet expansion has been undertaken to protect its currency from over-valuation rather than in response to a domestically driven liquidity issue.

This raises the odds in our opinion that an excess of local liquidity will be created leading to an inflation of local asset values. As ever we would look to the local RE market as an obvious destination for this capital and were not surprised to see the official measure of condominium prices reach a new record at the end of the 3rd quarter (see black line on chart). The official index of condo prices reached 448.4 (March 1970 = 100), and has risen by over 15% over the last 3 years and 6.3% over the last 4 quarters. Rental rates (red line on chart) have been rising at a slower pace, with annual growth of 2.8% and 3 year growth of 7.36%. This makes sense since the ultra-low interest rates created by the SNB favors home purchase (which involves borrowing funds) rather than rentals. As such the impact of this policy on CPI is very limited, allowing the SNB to keep an easy stance without paying an inflationary price, at least as narrowed by CPI, although the affordability of local housing is starting to become a sensitive issue.

However, the long term relationship between Swiss rental and condo markets suggests that this is unlikely to be a stable. The ratio of the local rental to condo price index (blue shaded line) has fallen to 0.968, the lowest level since March 1980. This suggests that renting has become a very favorable alternative to condo purchase. We would expect that this will be resolved by significantly faster rental cost growth rather than a sharp reduction in condo sales prices, which would imply rather more CPI pressure for the SNB to deal with going forwards. This is not good news for the local treasury market, where yields remain negative through 4 years and only reach 1.00% at the ultra-long 30 year level. We understand the "fiscal haven" that Switzerland currently offers, but its real estate market has always been somewhat "Anglo Saxon" in its tendency to boom and bust and over the long term this is likely to be reflected in both central banking policy and treasury yields.

The NAR report on US Existing Home Sales was in line with expectations with total sales of 4.75mm homes, made up of 4.21mm single family homes and 540K condos. Looking at the Single Family data first, this very much keeps the multi-quarter improvement of sales intact and the NAR claims that it is now a shortage of inventory (particularly in distressed properties) that is limiting sales rather than a lack of any demand.

Regarding inventory this has now fallen to 2.04mm, the lowest level since December 2011. However, inventory is very seasonal with minimal new listings being made in the winter months. Looking just at September listings 2.04mm is the lowest level since 2002, and we would therefore argue that existing home inventory has finally "normalized" on a national basis. Clearly the level of "shadow" inventory is much greater than a decade ago, but so is the amount of passive investment capital willing to bid for foreclosed properties that become available.

This tightness of demand is perhaps best seen in the change of reported average prices. We have attached a table which breaks down this data into price bands and regions. As can be seen high end homes in particular have experienced significant price appreciation over the last 12 months.

Condo inventory is also tight, with total inventory of 284K the lowest September reading since 2003. Sales were flat at 540K and are up 12.50% over the last year, again suggesting a stable market that has further upside ahead of it.

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

U.S. Sept. Regional Existing Homes Price Distribution (Table)
2012-10-19 14:03:44.521 GMT


By Kristy Scheuble
Oct. 19 (Bloomberg) -- Following is a summary of U.S.
distribution of sales and regional price ranges of existing
home sales in Sept. from the National Association of Realtors.
*T
==============================================================================
------------------% change from 1-Year Ago------------------
$0-100K $100-250K $250-500K $500-750K $750-1M $1M+
==============================================================================
U.S. -12.5% 3.1% 15.9% 11.6% 2.2% 13.4%
------------------------------------------------------------------------------
Northeast -3.2% 2.3% 8.5% 3.6% -9.7% 16.5%
Midwest -3.0% 7.1% 22.9% 13.4% 26.4% 3.0%
South -3.1% 8.1% 21.6% 16.0% 11.5% 13.2%
West -47.1% -5.8% 14.9% 15.5% 2.5% 13.2%
------------------Distribution of Sales-----------------
U.S. 19.7% 44.7% 25.5% 6.5% 1.8% 1.8%
==============================================================================
*T
SOURCE: National Association of Realtors

For Related News and Information:
To chart sales of previously owned homes: ETSLTOTL <Index> GP <GO>.
For more data on existing home sales: ALLX ETSL <GO>
For more data on single family home sales: ALLX EHSL <GO>
For more data on Condos/Coops sales: ALLX ECSL <GO>
For today’s business and financial stories: TOP <GO>
For news on commercial and residential real estate: TOP REL<GO>
For stories about Federal Reserve actions: FEDU <GO>

--Editor: Alex Tanzi

To contact the reporter on this story:
Kristy Scheuble in Washington at +1-202-624-1993 or [email protected]

To contact the editor responsible for this story:
Marco Babic at +41 44-224-4112 or [email protected]

Recent weeks have seen a marked change in the state of the Italian treasury market with the 10 year yield falling as low as 4.70% this morning, its lowest yield since March. Perhaps more importantly recent auctions of debt have been well bid and the recovery of the secondary market has been brought about by private sector purchases rather than a new injection of ECB liquidity (although the ECB sponsored ECB was fundamental in creating this shift in attitude).

This moderation of panic should allow some more considered appreciation of the state of the Italian economy, which is generally in better shape than most observers realize (admittedly a very low bar to exceed). This morning's industrial sales data is a good example. There has been a clear deterioration in both Industrial Orders and Sales over the last 12 months but this reverse comes nowhere near the collapse of activity in 2008 when the annual drawdown in Sales peaked at -25%. By comparison August 2012 Industrial Sales were -4.4% below their 2011 level and the largest annual drawdown was June at just over -6%. August sales were equivalent to those experienced at the end of 2010 and the middle of 2006 (see chart).

Overall we would say that the pattern of Italy's Industrial data is more reminiscent of a mid-cycle reversal than the beginning of a new recessionary period. Should the Euro-fix remain in play and Italian yields continue to compress it will be interesting to see if this is joined by an improvement in industrial activity. Given the gloomy scenarios baked into consensus estimates it is not hard to imagine Italy's economic performance surprising to the upside in the months ahead.

China released its September fiscal data this morning which continues to show a steady deterioration of China's budget balance. September's total revenue was 825.80 Bln CNY and was exceeded comfortably by Expenditure of 1167 bln CNY . This took the monthly deficit down to -342 bln CNY, a new record for September (the data is not seasonally adjusted). The trailing 12 month ma of the deficit has now widened to 90.8 bln CNY from 23 bln CNY a year ago (see separate chart). Since the last months of the year are the most important for China's fiscal spending (the December deficit is always by far the largest monthly swing) we will have to wait until the end of the year to be sure of the pace of deterioration. Nevertheless recent months certainly suggest that China has become a debtor nation, at least on a cyclical basis. The current deficit is somewhat wider than it was in 2009 when the post Lehman fiscal stimulus was in full swing.

If we assume this year's deficit will total around 1.2 trln CNY this would equate to about 2.4% of GDP (which we guess will be about 50 trln CNY). This is not yet an alarming number but the speed of deterioration is significant. China's deficit has not received much attention at the current time and remains an issue waiting to be "discovered" by the analytical and investment community.

After last week's positive surprise of 339K Initial Claims (revised up to 342K today) the data shot back up to 388K this week. The unusually large adjustments made at the start of the quarter are behind this swing, together with some tardiness of the filing of Californian claims last week. It is to minimize the effect of such swings that we (and most others) use the 4 week ma of Claims, and this metric has remained virtually unchanged at 365.5K up from 364.8 last week.

This still means claims have fallen by 8.6% over the last 52 weeks and keeps open the possibility that the key 350K level will be breached sometime in Q1 2013. It should be noted that this persistent improvement has yet to be reflected in Non-Farm Payroll data, which still suggests a modest deterioration in employment trends has taken hold in 2012. In our experience the weekly Initial Claims data in the end proves correct, particularly when a persistent directional trend takes hold in one direction or another.

We have always been reasonably confident that Chinese data would achieve a soft landing, particularly in the politically sensitive period in which the leadership mantle will be handed off to a new generation. Premier Wen can happily retire safe in the knowledge that official history will recall he left China's economy in a modest slowdown with every chance of accelerating growth after a brief hiatus.

Of course this has little bearing on what may actually be occurring in reality, and it is hard to reconcile the modest improvement in Q3 data with the growing number of corporate statements from international companies doing business in China. While most corporate comments are still hope laden for an improvement in the near future, there is a general agreement that the last few months have seen increasing difficulties rather than a modest improvement.

As for the data itself, GDP growth of 7.4% matched expectations while Industrial PRoduction at 9.2% is a little better than expected. Retail sales were also slightly higher at 14.2% and Fixed Asset Investment remained torrid at 20.5%. Over the short to medium term this data will serve to satisfy many observers that China is a manageable problem, but we would pay far more attention to data points produced outside of the large official data sets and to the comments of corporate management with significant exposure to China.

Brazil's CAGED index is the equivalent of the US Non-Farm Payroll data and yet this monthly release is accompanied by non of the hoopla associated with the US data. It is however probably roughly as accurate (not very) and useful (reasonably over the longer term) indicator as its US counterpart.

In the case of the CAGED data a clear deterioration has been in place for several months, and was maintained by the September data this afternoon. Job creations were estimated to have been 150K in September, well below the 170K expected and 58.7K below the level of September 2011 (the data is not seasonally adjusted and September is typically one of the stronger months). As can be seen on the attached chart this brings the trailing 12 month ma down to 84.4K, which compares to a level of 145K a year ago and peak 12m average creation of 189K in September 2010. The danger from this point on is that a further deterioration will start to pull the data towards neutral or even negative territory. Excluding December (which is always negative for seasonal reasons) there has not been a negative months since November 2008.

Although through the summer months official housing data improved considerably it lagged the very significant improvements being reported by the public homebuilders (and our own anecdotal conversations with those connected to this industry). A blowout number from the Census Bureau's estimation of Starts and Permits was therefore a reasonable bet and it comes as little surprise that it should be delivered right at the time that seasonal adjustments start to favor official data. One of our stronger beliefs is that the housing market is likely to be much less seasonal than usual in the early phase of its recovery which could deliver some very powerful data in the autumn and winter months (and perhaps a little disappointment in the spring).

Regarding this morning's data total Starts were estimated at 872K, well above estimations of 770K. August data was nudged higher to 758K from the original estimation of 758K. This is the best level of starts since July 2008 but it is still far below peak activity of 2273K and average starts over the last 20 years of 1387K. Importantly both single and multi-family starts were strong. The latter category is volatile but has been in a clear recovery for several quarters. Single family starts were estimated at 603K, the highest level since August 2008.

PErmit data (which we prefer) was equally impressive. Total Permits were estimated at 894K, well above consensus estimates of 810K, the best data since July 2008. Single Family Permits were 545K, again the highest since July 2008. As can be seen on the attached chart this key metric has now finally broken well above its trailing 60 month ma. We have been using this average as a timing device for several years and the ability of the data to finally force its way through this level can be taken as the final piece of evidence that a new homebuilding cycle is underway. This will come as little surprise to the market, where the S15HOME index has risen 131.7% over the last 52 weeks, but we do not think that the ramifications of a powerful construction cycle have been built in to most economic models (including those of the FRB) at the current time.

October's NAHB Sentiment Index confirmed the recent sharp up-tick in new home data. The overall index ticked higher to 41, matching consensus expectations. Present Sales were unchanged at 42 and were Future Sales at 51. Interestingly Traffic rose quite strongly to 35 from 30, and is now at its highest level since April 2006. For obvious reasons this is an encouraging metric to see improve at this point in the recovery and suggests that better news out of the new home market is starting to generate a little bit of a "buzz" amongst prospective buyers.

For fairly obvious reasons investor sentiment and local equity market performance tend to be fairly well correlated. Higher equity prices tend to be a function not only of better economic conditions, but also a higher belief by the local population that they are better, since the latter tends to drive actual investment flows (the same is true on the way down). This is why peaks and troughs in sentiment typically coincide with market tops and bottoms.

Interestingly in Germany at the moment there is a fairly interesting divergence between sentiment and the local DAX market. The ZEW poll of investor appreciation of current economic activity dropped to 10 from 12.6. This is sharply lower than its 2012 peak of 44.1 which was recorded in May. On May 31st the DAX index closed at 6264.38 but had risen to 7216.15 by September 30th, a rise of over 15%. A divergence of this magnitude is fairly rare and over the last 20 years only really occurred in 1998/8 (at the time of the LTCM crisis, when sentiment collapsed before rebounding) and in 1994/5 (when sentiment ran well in excess of market performance before normalizing abruptly).

Our assumption is that the market has it right at the current time. Sentiment seems likely to be strongly affected by the lingering political fall-out from the Euro-crisis. German citizens are still largely unaware of the sizable monetary stimulus their local economy has received, but are all too aware of their country's role in supplying funds to rescue other nations from fiscal ineptitude. Equity markets on the other hand tend to be much more agnostic to political process and highly responsive to changes in local liquidity. We would expect the DAX index to continue to make progress and for local sentiment to improve sharply before the end of 2012.

It is only 3 months since the Census Bureau's estimation of Advanced Retail Sales sparked widespread fears of a consumer led recession by dropping on a quarterly basis by -1.37%. As we explained at the time this drop was most likely a statistical reversion caused by an over-estimation of sales in Q1 (when the data rose by 2.06%) and given that Q3 retail sales have grown by 3.07% (the strongest quarter since Q2 2005) this would appear to have been an accurate call.

September's data estimated total Advanced Retail Sales grew by 1.1%, above consensus estimates of 0.8%. August data was also revised higher to 1.2% from 0.9%. This takes the YoY growth rate back up to 5.4%, repairing most of the damage from the spring "slowdown". As can be seen on the attached chart the equity market did a much better job at interpreting the data than most economists. The RELX index did suffer a sharp pullback in the middle of the 2nd quarter but quickly found support and went on to record a new all time high in early October. The index is up 23.17% YTD and 181.70% since the start of the current bull market (compared to 111.16% for the overall SPX index). We continue to believe that the US consumer is the key driver of the current economic cycle.

On the surface China's Trade data would appear to show very robust export growth at 9.9% Yoy and a sluggish Import growth of only 2.4%. As ever with Chinese data the picture under the surface is a little less certain. Exports to Hong Kong (China's second biggest export market) supposedly soared by 31.7% YoY but clearly most of these goods would then have to be "re-exported" in order to count as genuine trade. With Hong Kong exports totaling almost $30 bln, or about 16% of total exports this is hardly a trivial issue, particularly since most other markets showed considerably slower growth than the 9.9% overall figure, bringing its reliability into question. In terms of Regional trade exports to the US grew 5.5%, EU exports shrank -10.7% while most emerging markets still showed decent import growth.

On the import side growth remains far below estimations of Chinese GDP. We would not expect these two figures to match on a month by month basis but the longer imports lag by a large degree the less likely it seems that China's growth data is accurate. Whatever the true underlying rate of growth China's import slowdown will be being felt by some of its major trade partners. We have attached a chart of imports from the 3 other BRICs to demonstrate this. As can be seen imports Brazil came to dominate these flows in the post-2008 boom (understandably given the massive construction program that took place) but has recently seen exports peak with September 2012 being -14.5% below September 2011. India never really participated in the 2009/10 frenzy but has still seen exports to China slump -31.5% over the last year. Russia has seen far less moderation of trade, with exports to China slipping -3.9%.

In our note on Friday we discussed how a narrow focus on CNY Chinese Loan data obscured considerable additions to local liquidity from other sources (particularly bond issuance and foreign currency credit). Given the strength of such supplementary sources in September it is not surprising that Chinese monetary aggregates finally showed some signs of reversing the abrupt slowdown that took effect just over a year ago.

According to September's release M1 grew by 7.3% on a YoY basis, its fastest pace since November 2011 while M2 increased by 14.80%. If this data is sustained in further releases it would suggest that the very tight monetary conditions have now been replaced by something a little more accommodating. Again there is nothing surprising by this, monetary conditions normally ease in the midst of a slowing economy in response to a change in central banking policy. For instance US M1 growth, which had crawled to a halt in early 2006, suddenly started growing more rapidly in Q2 2008 (see chart) as the FRB began to address the collapse of the housing market. The PBOC would appear to be following a similarly late and incremental path to monetary easing, but having turned the policy corner we would expect to see monetary growth pick up steam against a backdrop of deteriorating economic conditions.

The University of Michigan Consumer Confidence Index has finally broken above the 80 level reaching 83.1 in October, its highest reading since September 2007 (at the start of the FRB monetary easing cycle). We have commented many times before on the extremely long period of "recovery denial" shown by all consumer sentiment metrics and the lag between the end of the recessions (and start of the bull market in domestic equities) and the recovery in consumer confidence from its 2007/8 collapse has been much longer than prior recessions (see chart).

October's reading brings this period to a close and the last 12 months have seen a 22.20 rise in the index, its strongest annual advance since early 1993. Although we would still expect to see plenty of volatility in the numbers the trend should remain positive. In terms of what better sentiment means we would say that it is probably more important for investment allocations than actual retail activity (which has been healthy for many quarters), and could indicate that the long flight of retail capital from US equities is drawing to a close. We would also imagine that the stabilizing of the US housing market has played a large role in improving sentiment. Finally it would also appear that the recent improvement in employment data reflects an actual change in conditions rather than a statistical blip, resulting in a considerably more upbeat monthly poll.

Until recently China loan data was restricted to the publication of monthly CNY Loan issuance, and this metric still dominates analysis of Chinese lending conditions. Earlier this year the PBOC started to release "Total Social Funding" data, which represents a much wider set of funding criteria, namely:

CNY Loans
Foreign Currency Loans
Entrusted Loans
Trust Loans
Bankers Acceptance Bills
Corporate Bonds
Non-finance Enterprise Equity

While none of the new categories come close to CNY loans in aggregate they make a significant difference. Corporate Bond issuance for example has averaged over 240 bln CNY over the last 3 months (CNY Loans have averaged 622 bln over the same period). It therefore makes sense to include an analysis of total Social Funding rathaer than limit discussion to Loan data and today's note represents our first attempt to do so.

Looking at Loan data first, this showed 623 bln CNY of loans issued, somewhat below expectations of 700 bln and a drop from August issuance. However, this shortfall was made up for in other categories. Foreign currency loans rose strongly to 176.4 bln (from 74.3 bln in August) and the volatile Bankers Acceptance Bills went from -84.4 bln to 216 bln. Overall Total Social Funding rose considerably from 1240 bln CNY to 1,650 bln CNY which is the highest level since June.

We would not draw too many conclusions from this surge, since Social Funding data is much more volatile on a monthly basis than Loan data. However, we would say that other forms of liquidity were more than sufficient to make up for a 100 bln CNY shortfall in loans. Interestingly in recent months the proportion of Social Funding represented by Loans has fallen considerably, reaching 37.8% this month (see chart). This does seem to be something of a trend and appears to indicate a substitution of bank lending relationships by bond issuance much of which is financed by foreign and domestic investment flows, both of which have been enamored with fixed income. The category of Foreign Currency loans would also appear to have come from nowhere in recent months and represents another qualitative change to local liquidity.

Overall we would say that China's Social Funding shows that liquidity provision has been more generous than Loan data alone would indicate. This is important since it means that the deterioration of local economic and monetary conditions (particularly M1) has taken place despite the generous provision of Social Funding. It also suggests that the effect of simply lifting loan issuance by 100 to 200 bln CNY per months would be less than most observers imagine.

Bloomberg TV Interview with Pimm Fox. Interview concentrates on Technology sector and the interface between media content and technology. Weblink for non-terminal users below.

http://www.bloomberg.com/video/shaoul-sees-exciting-time-in-technology-industry-3hPXeqrjR0mv3~wnmpkeFg.html

We have spent a considerable amount of time reflecting on employment data in recent weeks and this morning's Initial Claims report supports our argument that there has been rather more improvement in recent months than most observers realize.

Total Claims were estimated to have fallen to 339K, well below consensus of 370K and the lowest data since February 2008. This takes the traling 4 week average of Claims down to 364K, the lowest reading since May 2008. It would appear that this large drop was caused by some seasonal factors (the normal quarter start jump in Claims failed to occur) and it may be that the data bounces higher again next week. However with employment data "the trend is your friend" and weekly Claims have been dropping by around 35K on a YoY basis for the last 18 months. This really should take the 4 week ma below the key 350K level by sometime in Q1 2013 which should be enough to force some of the more fair-minded commentators change their view about employment. Of course many now point to a "failure to hire" rather than a "wilingness to fire" as a cause of stubbornly high employment but based on the experience of prior cycles the improvement in Claims data should eventually be reflected in the recalcitrant BLS Establishment Survey that feeds into the all powerful Non-Farm Payroll report.

Forecasters were split roughly down the middle as to whether Brazil's SELIC would be cut to 7.25% or kept at 7.50%, and in the event the central bank's board was equally split voting 5-3 to cut the rate. This very much keeps the SELIC on track to fulfill expectations that a substantial new record will be set during this period of economic deterioration. Arguing in early 2011 that a 7.5% SELIC was feasible seemed like heresy (we based our assumptions on the FRB's slashing of the FDTR from 6.5% in 2000 to 1% in 2003). Having exceeded this target roughly on schedule we think that the current expectations for the SELIC to bottom around the current level and then start rising by the middle of 2013 is as likely to be correct as the mistaken assumption of October 2010, which forecast a SELIC of around 11.80% today, or October 2011, which forecast a SELIC of around 10.5% (see chart).

The current SELIC expectations are based on the idea that the economy will bottom in the near future and that recent fiscal and monetary easing will then start to generate substantial improvement in the coming months. Given the substantial issues facing Brazil this strikes us as overly optimistic, even if we understand why the dominant view that is held today. Although the SELIC rate may be held at 7.25% for a month or two we would expect by early 2013 that enough new problems have emerged to see the 7% level breached for the first time in the rates history.

IHS's estimate that total PC shipments will fall in 2012 (see attached) has the makings of a milestone for this industry. Our sense for many months has been that we had reached the point at which PC's start to transition into a legacy product just as main-frame computing, cathode ray TVs, print photography, VHS recorders and DVD players have done over the last 20 years. Based on the experience of these prior cycles we suspect that the transition will be somewhat swifter and far reaching than current consensus estimates.

This is a potent reminder that within the US over the last 4 years we have not simply been dealing with a recovery from the disaster of 2008 but have started an entirely new economic cycle. This cycle would seem to be increasingly driven by consumer behavior which has not only recovered quantitatively but has changed qualitatively to a significant degree (which helps explain the side dispersion of performance in retail stocks in recent months with clear winners and losers)

This is particularly true in terms of technology usage where a genuine innovation cycle (led by the introduction of Amazon's Kindle and Apple's I-Phone) commenced on the eve of the housing crisis but was largely obscured from view during the dark days of 2007 and 2008, and the V shaped recovery of 2009. The equity market is of course well aware of this shift and has acted accordingly. We used a chart showing Apple's "cannibalization" of its competitors' market caps and we have attached an updated copy in case anyone missed the original version. Today's IHS release suggests that further disruption of technology performance can be expected in the months ahead as the PC industry comes under increasing pressure to hold onto its current position at the heart of consumer and business techology usage.

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

IHS: PC SHIPMENTS SET TO FALL IN 2012 FOR FIRST TIME IN 11 YRS
2012-10-10 17:36:59.99 GMT


(The following is a reformatted version of a press release
issued by IHS iSuppli and received via electronic mail. The
release was confirmed by the sender.)

PC Shipments Set to Decline in 2012 for First Time in 11 Years

El Segundo, Calif. (Oct. 10, 2012)--After entering the year with
high hopes, the global PC market has seen its prospects dim,
with worldwide shipments set to decline in 2012 for the first
time in 11 years, according to the IHS iSuppli Compute Platforms
Service at information and analytics provider IHS (NYSE: IHS).

The total PC market in 2012 is expected to contract by 1.2
percent to 348.7 million units, down from 352.8 million in 2011,
as shown in the figure attached. Not since 2001--more than a
decade ago--has the worldwide PC industry suffered such a
decline.

“There was great hope through the first half that 2012 would
prove to be a rebound year for the PC market,” said Craig Stice,
senior principal analyst for computer systems at IHS. “Now three
quarters through the year, the usual boost from the back-to-
school season appears to be a bust, and both AMD and Intel’s
third-quarter outlooks appear to be flat to down. Optimism has
vanished and turned to doubt, and the industry is now training
its sights on 2013 to deliver the hoped-for rebound. All this is
setting the PC market up for its first annual decline since the
dot-com bust year of 2001.”

From hope to disappointment
The year started off with major hope for Intel’s ultrabooks at
the annual Consumer Electronic Show (CES) in Las Vegas. New and
innovative form factors like convertibles, combined with the
first appearance of Windows 8 demos on display, provided a fresh
wave of enthusiasm for the possibility of a revitalized PC
market. Even when first-quarter PC shipments came in, the less-
than-stellar results were thought to be a minor setback.
The high expectations continued midyear during the big PC event
at Computex in Taiwan, as Intel plugged its latest Ivy Bridge
processor. Shipments during the second quarter, however, once
again disappointed.
For now, important questions remain for the PC market and the
rest of the year:

- How much impact will Windows 8 really have toward
boosting the PC market in the fourth quarter?

- Will continuing global economic concerns neutralize
whatever hype or interest has been generated by ultrabooks?

- Will mobile computing gadgets such as tablets and
smartphones win over PCs during the crucial holiday selling
season, taking precious consumer dollars and keeping PC sales at
bay?

There are signs that a strong rebound could still occur in 2013.
While IHS has reduced its forecast for them, the new ultrabooks
and other ultrathin notebook computers remain viable products
with the potential to redraw the PC landscape, and the addition
of Windows 8 to the mix could prove potent and irresistible to
consumers. Whether a newly configured PC space could then stand
up to the powerful smartphone and tablet markets, however,
remains to be seen.

For more information, please contact:

Jonathan Cassell
Senior Manager, Editorial
[email protected]
Direct: + 1 408 654 1714
Mobile: +1 408 921 3754

Or

IHS Media Relations
[email protected]
+1 303 305 8021

About IHS (www.ihs.com)
IHS (NYSE: IHS) is the leading source of information and insight
in critical areas that shape today’s business landscape,
including energy and power; design and supply chain; defense,
risk and security; environmental, health and safety (EHS) and
sustainability; country and industry forecasting; and
commodities, pricing and cost. Businesses and governments around
the globe rely on the comprehensive content, expert independent
analysis and flexible delivery methods of IHS to make high-
impact decisions and develop strategies with speed and
confidence. IHS has been in business since 1959 and became a
publicly traded company on the New York Stock Exchange in 2005.
Headquartered in Englewood, Colorado, USA, IHS employs more than
6,000 people in more than 30 countries around the world.

IHS is a registered trademark of IHS Inc. All other company and
product names may be trademarks of their respective owners.
Copyright © 2012 IHS Inc. All rights reserved.

(bjh) NY



#<873920.660640.3.1.0.0.76>#
-0- Oct/10/2012 17:36 GMT

After a brutal 2011 the local Indian equity market has enjoyed a decent 2012, buoyed by very robust foreign investment flows which have reached $17.6 bln YTD, the second highest level for early October. 2010 flows reached $21.4 bln by this time of year in the enthusiastic run-up to QE2, helping the SENSEX index to create its final top in early November.

To a significant extent Indian investment flows have benefited from the fact that India is not China, Brazil or Russia. China and Brazil have had clear evidence of deterioration in their local economies discussed in the global media while Russia has its own issues with political and corporate governance and a close connection to the Eurozone. These factors have served to direct investment flows to other portions of the EM complex, with India in particular benefiting from "BRIC" focused investors. India has therefore benefited from a form of benign neglect, with most investors simply unaware of the massive long term structural issues (including a budget deficit greater than Italy, a large and widening trade deficit and persistently high inflation) facing the country and the degree of cyclical deterioration that has taken place in recent months.

We doubt this situation can be maintained for much longer and either the local economy will confound our expectations and accelerate out of its recent slump, or corporate earnings will start to reflect what we believe are significantly adverse local conditions.

One sign that things are moving towards the latter scenario is the stagnation of local car and motorcycle sales. Car sales has been expected to grow by up to 10% in 2012/3, a forecast that has now been cut to 1%. The very strong sales of early 2012 have given way to several months of sub-par sales with both August and September seeing sales fall below their 2011 levels. September sales were 157.5K, a drop of 5.4% from their 2011 level. This is significantly better than the state of the local motorcycle market, which still dominates Indian total vehicle sales by volume. September sales were 906K units, the lowest monthly sales since January 2011 and a decline of 17.6% from 2011 activity. It therefore would seem that economic weakness is starting to build at the lower income levels of the Indian economy, but once established the deteriorating trend is unlikely to remain focussed on one portion of domestic demand.

As we mentioned in our note on Economic Surprise indexes, Consumer Credit data is too volatile on a month by month basis to be used as a "real time" indicator. This did not stop the shortfall of July's data being pounced upon as evidence of a summer slowdown. August's report should more than address those concerns with Total Credit growth of $18.12 bln (0.67%), well above expectations of $7.25 bln, while July's data was revised up from -3.27 bln to -2.45 bln.

Non-Revolving credit again dominated the growth representing $13.90 bln of the increase. Although this is widely associated with Student Debt the category also includes automobile loans which we suspect have become a much more important factor in recent months. Revolving Credit (almost entirely related to consumer expenditure) rose by a more modest $4.2 bln after falling for the last two months. Over the last 12 months the total outstanding has remained roughly flat, increasing by $7.7 bln (0.8%).

Given that retail sales have remained buoyant over this period this really means that US consumers with jobs are not having to resort to credit usage to support their purchases. They are no longer "de-leveraging", a process that ended in late 2011, nor are they refraining from shopping. Moreover, should US consumers need to start borrowing again later this cycle they almost certainly have the wherewithal to do so with revolving credit still approximately 15% below its peak level of 2008 and interest rates associated with this debt far lower.

One of the most marked aspects of the last three years has been the seasonality
of US economic data and it is starting to become clear that 2012 will follow
the pattern of 2010 and 2011 with weak spring and summer data giving way to a
better than expected collection of data over fall and winter.

This can be seen on the two attached charts of the Citigroup Economic Surprise
Index (CESIUSD Index ) and the newer Bloomberg Economic Surprise Index
(ECSURPUS Index). We have used the former since the summer of 2010 to argue
that the cyclicality of data creates the appearance of economic acceleration
and deceleration many times over the course of a singe cycle, with good periods
following bad and vice versa. We therefore noted the turn in this index in
mid-July from its low of -65.30 and of the more reliable 50 day ma in early
August from its low of -54.5. Less than 3 months later the index is over 100
points higher at 43.50, while the trailing 50 day ma has reached -3.13 and the
experience of the last 2 years suggests that data will continue to surprise to
the upside for the next 2 to 4 months.

The Bloomberg Economic Surprise Index has rather less pedigree, but makes up
for this with greater transparency (terminal users can hit {ECSU <go>} for
details). This index is still in negative territory at -0.12 (it ranges from +1
to -1) but has started to move back towards neutral having bottomed on July
31st at -0.422. The difference in the timing of the two indexes moving into
positive territory is a reflection of different weightings being given to
different data. Turns in data are always patchy, the Bloomberg survey appears
to use many more data points, which probably has caused it to pay too much
attention to very unreliable data like monthly changes in Durable Goods and
Consumer Credit. However the Bloomberg index still tends to trend just as
clearly as the CESIUSD and can be expected to push into positive territory
later this quarter and peak somewhere between 0.4 and 0.6.

Our assumption is that a steady stream of positive data surprises will be
supportive for the local equity market (which having largely ignored the data
slowdown may have already priced some improvement into its current level) but
quite problematic for longer term treasury yields. 3.00% looks like a key level
for the 30 year treasury to stay below and a break above this level could
signal that we are at the start of a significant unwind of the collapse in
treasury yields that took place earliest this year.

There is no doubt as to which statistic will be driving the headlines in the
general and financial media this weekend and that is the sharp drop in the
estimated unemployment rate to 7.8%, its lowest level since the Obama
administration took charge in January 2009 (this is a statement of fact and not
a suggestion that government policy has had much to do with the recent drop).

We will discuss the ramifications of this drop later in this note but first we
will deal with the headline NFP report. This showed Total Payrolls growing by a
modest 114K, almost matching expectations of 115K. On the other hand sizable
upward revisions were made to the August data (up 46K to 142K) and the July
data (up 40K to 181K) which really removes the whole notion of a summer
slowdown in employment trends (justifying our lonely skepticism at the time).
Private Sector Payrolls were a little more disappointing, growing by 104K
compared to 130K estimates and with small negative revisions. We have a hard
time believing the BLS's data but we will have to see some significant pick up
in the survey in the next few months to keep the trailing 12 month ma from
falling below the 150K level from its current level of 154.7K (see chart).

Meanwhile the really shocking data came from the Household Survey where a
massive 873K jobs were estimated to have been added. This is the greatest
increase since January 2003. Of course the Household survey (which is used for
the Unemployment report) is even more erratic than the Establishment Survey
(which drives Non Farm Payroll) and had shown substantial job losses over the
last 2 months totaling -314K. We do note however that the trailing 12 month ma
of the Household Survey has now reached 238.9K suggesting a much more
meaningful pickup in employment is taking place than in the Establishment
Survey.

Rather like the relationship between ADP and NFP, over time the differences
between the Household and Establishment surveys tend to even out and over the
last 30 years the Household Survey has averaged 119K versus 120K for the
Establishment Survey. The greater pace of improvement in the Household Survey
again increases the odds that the Establishment data will eventually follow
suit.

Of more importance is the effect of Household Survey job gains on the estimated
Unemployment rate. The sudden drop to 7.8% has the potential to be a game
changer for the perception of this employment cycle and means that over the
last 12 months Unemployment has fallen by -1.20% the quickest drop since
February 1995. As the attached chart shows Unemployment data tends to trend
powerfully once it starts to move and would seem to have a shot of targeting
7.0% or lower over the next few quarters. This would put it well ahead of the
FOMC's schedule and as we argued in the Weekly Speculator the "open ended"
nature of QE3 should not be interpreted as meaning "never ending". 

Although the Euro-fix may have served to greatly moderate financial stress in
the sovereign credit market and allowed the EUR to recover a good portion of
its losses against the USD, the SNB is still having to add to its EUR purchases
in order to keep the EUR/CHF cross above 1.20, albeit at a significantly
reduced rate.

September's addition to reserves were 8.5 bln CHF, a 2.2% increase for the
month. This is significantly lower than the massive sums expended from May to
July when an average of almost 57 bln CHF of intervention took place, but 3
years ago (prior to the massive inflation of reserves) intervention on this
scale would have increased total reserves by over 10% in a single month. At
least the SNB finally has something to show for its troubles, with the EUR/CHF
cross peeling off the 1.20 level and rising to 1.216 on September 14th before
closing the month at 1.208. This may suggest that this prolonged period of
massive intervention is drawing to a close, but this would simply mean that
reserves would now stop growing powerfully and would still leave the SNB with a
the task of mopping up the massive amount of excess liquidity that has been
created in recent months.

The experience of the "Cash for Clunkers" policy in the US (and also that of
the Housing Tax credit) is that fiscal handouts can shift the timing of
consumption demand but has little effect on total demand measured over a longer
period of time with substantial post-policy hangovers wiping out the surge of
demand while the government's generosity is in effect.

Something similar would seem to be taking place in Brazil where a reduction in
local excise duty saw car sales surge in the summer months, reaching an all
time high of 420K vehicles in August. September has seen this activity plunge
back down to 288K, some 23.5K vehicles (7.55%) less than the sales of a year
ago. We would expect the next few months to continue to display muted sales, as
August would seem to have exhausted whatever latent demand for car sales had
built up in prior months. - brazilautosales.gif

Even by the low standards of employment data, the Challenger Job Cuts and Hire
data is an erratic series that should only be used to supply some background
color to an overall picture of that may be taking place. Nevertheless the very
surprising September data is still worth considering in the run up to the
monthly "Non-Farm Nonsense" of tomorrow morning.

The Monthly Job Cuts survey showed 33816 cuts announced, slightly above
August's 32,239, but down a hefty -70.80% from the level of September 2011.
Indeed this is the lowest September reading since the series starts in 1999
(the data is not seasonally adjusted so this is significant). This supports our
notion that the emotional stability of those currently employed is
substantially higher than would normally be the case with an 8.2% unemployment
rate. It may still be hard to find employment but it is getting less easy to
lose it.

On the hiring side of the ledger, the Challenger data shows a very surprising
surge to 425K job announcements, more than double the prior high for monthly
hires. This was dominated by retail hires of 413K, which are likely to be short
term seasonal jobs for the holiday season. Although this cannot be taken as
evidence that employment conditions have substantially improved, an upside blip
of this magnitude should not be wholly ignored, and at the very least suggests
that the US retail sector is starting to gear up for a somewhat busier last 3
months of the year than had been anticipated.

The ISM Non-Manufacturing Index is a significantly less useful measure than the
Manufacturing version but September's strong reading of 55.1 is still welcome
confirmation that little went wrong in the US economy over the summer months.
This reading was somewhat higher than estimations of 53.4 and is the strongest
reading since March 2012, just prior to the seasonal adjustment headwinds. Of
particular encouragement was a strong bounce in Business Activity to 59.9
(highest since February) and New Orders to 57.7 (best data since March).
Overall US PMI data is currently the strongest for any major global economy,
underlining that the domestic US economy now offers global leadership for the
first time in over a decade.

The ADP Payroll report is in the statistical doghouse after August's +201K
report was followed by a BLS Non Farm Payroll estimation of only 103K jobs
created. As we explained at the time, all the disappointment a month ago really
missed the point about the data. We have a collection of vaguely accurate
(certainly no better than that) employment reports, which over a period of
months tend to correlate with each other reasonably well. Therefore a steady
improvement in ADP and Initial Claims data (which is what has taken place in
recent months) meaningfully increases the odds that BLS data will follow suit
sooner or later.

Regarding the September report, ADP estimates that 162K jobs were added, rather
more than the 140K estimate. August's very strong report was trimmed from 201K
to 189K and the trailing 12 month ma rose to 183.4K, the highest level since
April 2005. It is the steady rise of this metric that is the strongest clue
that employment conditions have improved in recent months.

Attention now shifts to the BLS report. We consider it something of a scandal
that the FOMC has tied monetary policy and local interest rate expectations so
closely to this data without describing its innate inaccuracy (on the other
hand the nation's politicians have treated the unemployment rate as gospel for
decades). Last week saw a preliminary revision to the 12 months of data ending
in March 2012 of 386K for Total Payrolls (+32K) and 453K for Private Sector
Payroll gains (+37.7K per month), a story which generated scarcely a ripple in
the financial media. Again we would argue that a large upward revision to past
data makes it more likely that the BLS's "guesstimation" process will generate
some positive surprises in the coming months, although we'll make no promises
about Friday's data.

Ireland's Live Register of Unemployed Persons fell by-0.4K in September; a small
decline but nonetheless the 3rd consecutive drop and the 7th out of the last 12
readings. Over the last year unemployment has fallen by 8.5K, a dent of around
2% in the total still sitting on the register. This is clearly a modest
improvement in what remains a very significant problem (the unemployment rate
is estimated to be 14.7%) and we would not deny that Ireland still faces very
significant hurdles to rebuilding its economy.

However, employment tends to lag economic cycles and be a very inertial
statistic that does tend to follow through for long periods of time once its
direction has been changed. The change in direction is therefore quite
significant and there is some reason to hope that the pace of job creation will
now start to accelerate. The very sharp drop in risk premia attached to Ireland
can only help this process along (we have used the 5 year CDS as a proxy) since
it both reduces local financing costs and helps rebuild local confidence. We
will therefore continue to watch this data quite closely in the months ahead.

US Automobile sales continue to power their way back towards a pre-crisis level
of activity with total sales in September reaching 14.88mm, the highest level
of sales since March 2008. This was somewhat higher than consensus estimates of
14.50mm of sales, demonstrating that consumer activity continues to surprise
most observers to the upside, with sales growing 13.58% over their September
2011 level. This data takes the trailing 12 month ma to 14.03mm, the highest
level since October 2008.

The strength of local automobile sales together with the long awaited recovery
in new home sales has been a key force in counteracting the effect of lower
international demand for US industrial products. We were therefore unsurprised
to see the ISM Manufacturing survey push back into positive territory earlier
this week, and for this rebound to be underpinned by a recovery of new orders.
We continue to see the robust nature of consumer demand for housing,
automobiles and general retail sales to represent robust underpinning for the
current US growth cycle. Although aggregate economic data remains anemic, the
pace of improvement in these key sectors remains far above that of overall
economic activity, as has been reflected by the generally buoyant equity prices
in consumer related sectors seen in recent months.