Although we never take GDP terribly seriously as a measure of activity we do recognize its influence over sentiment for both investors and regulators of an economy. It was therefore interesting to see Brazil's Q3 report estimate GDP growth to be a meager 0.6%, well below expectations of 1.2%, while the Q2 data was taken down to 0.2% from 0.4%. This takes the rolling 4 quarter change of GDP down to 0.9%, the lowest level since Q4 2009 and poses something of a challenge to the local central bank and administration, both of whom had promised that by the second half of 2012 Brazil's economy would be back on track. Interestingly it would appear to be the service portion of the economy which under-performed in recent months, which is something of a shift from the prior data. This may suggest that economic weakness has started to spread in Brazil's economy, dampening the positive impact of some of the fiscal stimulus (primarily the reduction of automobile taxation) that helped boost manufacturing activity over the summer.

Meanwhile we note that the local budget deficit has started to widen as government spending increases beyond the pace of tax receipts. This deterioration would have been substantially more pronounced if it were not for the sharp decrease in local interest rates, which has substantially reduced the cost of servicing public borrowing. Debt Service now costs under 5% of GDP for the first time since 1998 (during a period when Brazil's borrowing were heavily restricted by investor demand). Although we expect local interest rates to continue to fall further we do expect the deficit to widen, since tax receipts can be expect to stall or even deteriorate later in the current slowdown.

It has been many months since we have issued a comment on Japanese economic data. We have not been alone in directing attention elsewhere and had good reason to do so. However, we did note earlier in the summer that the BOJ had finally switched policy to an accommodative stance and several months into this process there are some signs that local economic activity is perking up. Although most of today's headlines concentrated on good factory output data, we are much more interested in this morning's Housing Start data which showed a marked pickup in activity for October.

Total starts were estimated to be 978K (annualized), far above expectations for 852K and the strongest monthly report since December 2008. This strength is visible in the NSA data too, where October's 81.48K starts (monthly) was the strongest report since October 2008. Of course this strength still needs to be maintained for several months in order for a reliable trend to be established, but after 5 years of suppressed activity the latent demand for additional construction should be considerable.

The US Pending Home Sales report for October was a very strong report with the index rising 5.2% to 104.8 (2001 = 100). Excluding the tax credit boosted period of 2009/10 this is the strongest data since March 2007, which was just at the point that sub-prime credit availability started to collapse.

Since this is very volatile data we prefer to rely on the trailing 12 month ma for guidance of trend, and this remains strongly positive reaching 99.0 in October, its best level since October 2007 (ex tax credits). Even if we were to witness a little "give back" in a subsequent monthly report the data supports our notion that US housing is on a strong recovery path.

Brazil's October Loan data continues to show a marked disparity in credit granting between Private Sector and State controlled banks. Although overall loans outstanding grew by 31 bln BRL (1.38%) to 2269 bln BRL almost all of this increase was from the State sector, which grew loans by 26 bln BRL (2.55%) for the month taking the YoY growth rate to 28.14%. Private Sector bank credit however was almost static, growing by 4 bln BRL (0.38%), taking the annual growth rate down to 8%, the lowest rate since January 2009 at the height of the crisis. We see this disparity as another troubling sign of the interventionist policies of the current administration. We assume that Private Sector banks are profit seeking institutions that have good reasons for slowing credit growth at this point in the cycle, while State run institutions combine profit with political goals in setting lending targets. This runs the clear risk of significantly reducing credit underwriting standards at State banks, which is a typical result from political attempts to boost credit availability late in a cycle. The costs of today's loans are likely to be born by the Brazilian tax payer later in the cycle.

As far as the key Personal credit sector is concerned we note that although October saw a monthly gain of 0.98% to 686 bln BRL October tends to be a strong month for credit growth, and the annual growth rate actually fell to 10.3%, the lowest rate since October 2003 at the start of Brazil's current credit cycle. Total Personal Delinquencies stalled at 7.90%, and we would not expect them to move much higher until unemployment starts to build later in this cycle (something we would expect to see over the next quarter or so).

We never fail to marvel at the ability of official statistics to diverge from actual corporate data, or the herd instinct of market participants to follow the former over the latter despite the fact that most centrally produced statistics have a much more tenuous link with actual economic activity than corporate data.

The Census Bureau report on New Home sales is a good example of this phenomenon, being a report generated by a limited sampling of new home communities which is then further distorted by seasonal adjustments. Over the course of a cycle none of this matters very much but on a monthly or even quarterly basis the divergence from reality can be considerable. Looking at actual new home sales reported by public homebuilders tends to be a better source of information, even if in most cases this is only released on a quarterly basis and may be subject to internal corporate issues.

Nevertheless we are unsurprised to see a poor initial market response to a disappointing October sales report, with total sales estimated at 368K, well below expectations of 390K. September's sales data was also revised lower by 20K to 369K. Although this still means that New Home sales data has risen 17.2% YoY this keeps the data from breaking out above the key 400K level that would really suggest that the logjam has been broken. Of course sales reported by public homebuilders, the public comments of management and the breakout of the NAHB Sentiment index suggest a substantially better state of the New Home sales market, and permit data suggests that builders have started to build at a significantly faster pace in recent months. Given the reticence to build houses "on spec" we have to believe that this is a response to actual sales that will eventually be reflected in the Census Bureau data, either through a subsequent revision or a strong monthly report in one of the coming months.

Meanwhile we attach a chart which compares the data for Existing Home sales (reported by the NAR) with the Census Bureau's New Home data. The former is in the midst of a steady recovery while the latter remains pinned at a 50 year low. We very much doubt that this divergence is sustainable in the longer term, ands of course assume that this is resolved by New Home sales data moving substantially higher in the coming quarters.

The economic data coming out of Ireland has been consistently positive since the summer and October retail sales continued this trend with an increase of 3.1% from the level of sales in October 2011. This takes the seasonally adjusted index up to 89.90 (2005=100), which is towards the high point of the range that has been established since the collapse of activity in 2010. Should sales continue to improve and force the index above 91 in the coming months we would have firm evidence that the Irish consumer has finally turned the corner.

The overall reading for the Conference Board Consumer Confidence Index nudged higher to 73.7, in line with expectations (73) and just enough for a new 4 year high. The 12 month ma of the index has risen to 67, up from 58 in November 2011, a reasonable reflection of the progress that has been made over this period of time. Confidenced however does remain considerably below normal for an economy in the 4th year of recovery, but this really suggests that we have several more quarters of growth ahead of us before the excessive bravado of consumers signals the end of another cycle. This is particularly true of a willingness to take domestic financial risk, there has been some signs of life in the local housing market from retail investors in 2012, but equity market participation (at least as measured by mutual fund flow data) remains extremely reluctant.

Meanwhile we continue to track the employment sub-indexes and were pleased to see the "Jobs Plentiful" index reach 11.2, its highest reading since September 2008. The "Jobs Hard to Get" index fell to 38.80, its lowest level since February 2012. This should give some comfort that the generally more positive tone for employment data (allowing for the effects of superstorm Sandy) may continue into the coming months.

It is generally believed that the PBOC started to enact domestic stimulus at some time in the first half of 2012 and yet a close look at the balance sheet of this institution suggests that the heavy lifting continues to be left to domestic credit creation rather than the provision of new liquidity by the central bank.

In general the PBOC's balance sheet is an extraordinary creature. In USD terms it is almost $4.7 trln, significantly larger than either the ECB's ($3.9 trln) or the FRB's ($2.8 trln) despite a much smaller local economy. It is also largely composed of FX reserves which account for over 80% of total assets. This is a key distinction to its western counterparts, since it means that it is China's trade relations that set its domestic liquidity rather than the internal needs of its credit system.

In terms of recent activity the PBOC's balance sheet had been growing by between 12-15% YoY for most of the 2010/11 period while late 2011 and 2012 saw an abrupt slowing of growth. By August 2012 the balance sheet had ground to a halt (+1.17% YoY) and has subsequently moved a little higher. October showed a monthly gain of 0.93% which resulted in a 2.30% YoY increase. Interestingly the FX position of the PBOC shows no such improvement, and was flat in October for the month, taking its YoY growth to 1.00%. This means that if the PBOC is really trying to boost domestic liquidity via its balance sheet then it is really only left with 20% of its balance sheet to play with unless China's trade position was to radically improve, which obviously makes it much harder to boost liquidity.

The sluggish growth of the PBOC's balance sheet is a reminder that China has been much more reliant on domestic credit creation than liquidity provision in recent months, a marked change from the pre-crisis economy of 2002-2007. Attached is a chart which shows the ratio of the PBOC's balance sheet to the amount of CNY loans in the Chinese banking system. As can this ratio increased from a low of 0.36 in 2003 to a peak of 0.69 in November 2008, representing a massive over-provision of liquidity versus credit creation. Since 2008 the reverse has been true, with the ratio falling to 0.54 by December 2010, 0.51 in December 2011 and 0.47 in October 2012. As would be expected this ratio has a strong (if lagged) relationship with the performance of the local equity market, and helps partly explain the awful performance of the latter in recent months. It also acts a reminder that true stimulus at the PBOC's level has not even started, which the level of CNY credits approaches $10 trln, well above the US banking system equivalent of $7.3 trln which was reached in October 2008.

We have been tracking the quarterly China Entrepreneur Confidence Index and were interested to see how it would respond to the supposed improvement in conditions over the summer months. Since the start of 2012 this index has been revised to include future expectations (40% weighting) as well as current conditions (60% weighting) as is the result of a poll of 21,000 companies conducted by the National Bureau of Statistics. The poll has a range from 0 to 200 with anything above 100 registering expansion.

It is interesting to note that no improvement in trend with the overall index falling to 116.5 from 121.2 last quarter. This is the lowest reading since Q2 2009 and a drop of -4.7 points from Q2 2012. The main reason for the drop appears to be a collapse in Mining confidence, which fell from 110.3 to 92.9. This is the lowest reading on record, exceeding the collapse in Q4 2008. However, deterioration was shown across all 11 sub indexes a selection of which are shown on the attached chart. Real Estate (red) fell back into contraction at 98.1, Industry (blue) dropped from 121.5 to 115.1 the lowest since Q2 2009 and Construction (green) fell to 117.4 the lowest since Q1 2009. It is hard to tally this deterioration in confidence with the generally positive tone of official pronouncements. It should be noted that falling sentiment which has not yet reached an negative extreme tends to be positively correlated with local asset prices and economic performance, and while we would not put too much faith in a quarterly poll undertaken by the government it is hardly encouraging data.

It is one of our more cherished beliefs that the majority of interesting investment cycles commence against a backdrop of despair, in large part because the path to this emotional state involves the wholesale liquidation of economically sensitive assets such as equities. We therefore take perverse encouragement from Italy's Consumer Confidence poll for November, which showed confidence at an all time low of 84.8 (data commences in 1996).

As we have explained before, it is not that things look particularly rosy in Italy, but as far as the corporate economy is concerned they look far better than they did back in 2008. There is a growing disconnect between the crisis of government and the reform of fiscal policy on the one hand with that of actual corporate activity on the other. Indeed, even though the local economy has slipped back into recession, the last earnings period had a generally positive tone to it, and the local equity market has rallied strongly since the summer collapse moving back into positive territory for 2012 (the FTSEMIB index is up 3% YTD at the time of writing). To the extent that the drop in GDP is a reflection of tighter fiscal spending, rather than a wholesale collapse of consumer and industrial demand, the equity market should continue to make decent if volatile progress in the months ahead.

Interview concentrates on sovereign yields and Asian economic activity.

http://www.bloomberg.com/video/sovereign-debt-yields-to-rise-shaoul-says-oLo6hRjNRMKZr_HgDC6vaA.html

We continue with our coverage of Brazil with a look at the CAGED job index, which is Brazil's equivalent of the BLS non-farm Payroll (although it generates far less local interest). October's data is the latest in a long line of disappointing data, coming in at 66.99K, well below expectations of 92.10K, and 59K below the pace of job creation a year ago. Indeed this data is essentially the same as that reported in October 2008, as Brazil was entering a sharp slowdown in the aftermath of the Lehman collapse.

Although the volatility of the monthly report may exaggerate the shortfall in this month's report the 12 month ma really suggests that a marked slowdown in job creation has taken place. At 79K the average is 61K below the pace of 12 months ago. Interestingly Brazil's unemployment rate has not yet started to deteriorate and was estimated to be 5.3% in this month's report. The decline in the CAGED index over recent months really suggests that unemployment should start to move higher before too long, and also ties in with our own sense that Brazil's economy is under considerably more stress than the consensus view recognizes.

Brazil's monthly flow data shows a widening current account deficit that continues to be compensated by robust foreign investment flows. Although this situation is sustainable at current levels the fact that FDI tends to be much more volatile than a country's current account does mean that Brazil is rather more vulnerable to the effects of capital flight than it was a few years ago.

October's data shows a Current Account of -$5.43 bln, which was considerably wider than expectations of -$4.74 bln, and last October's CA deficit of -$3.16 bln. Over the last 12 months the deficit has totaled -2.27% of GDP. Fortunately FDI remains strong, with October producing $7.73 bln, well above expectations of $6.00 bln. This means that over the last 12 months FDI has exceeded the CA deficit by a total of $13.8 bln. It is interesting to note that even with this surplus of flows the BRL has weakened substantially over this period, which may suggest that the true balance of flows is somewhat less favorable than the official data. In any case the central point to understand is that Brazil not only benefits for continuous inflows of capital to its equity and debt markets, it actually requires them to remain in place.

Given the poor returns generated by equities in particular (the IBOV index is down almost -13% YTD for a USD investor) there are some concerns that at least equity flows could turn negative if the market were to falter again. Fixed income flows are likely to remain strong until either the local currency cracks or the overall EM bond trade comes unstuck. Both seem distinct possibilities at some point in 2013, at which point the Current Account deficit would be likely to become a focus of general concern.

Following comments by President Rousseff in the local media regarding the undesirable "over-valuation" of the BRL the currency has weakened further to 2.0924 this morning. This brings the key 2.10 level into play for the first time since May. Back then significant intervention by the central bank brought the currency back into line (although it did not recover its substantial losses suffered earlier in the year). Given the governments clear preference for a lower currency it is not clear that the same response could be expected by a central bank which is increasingly independent only in name.

Although the wish for a lower currency is made with local industry in mind, the government should bear in mind that Brazil's currency and local equity market have a long and close relationship (this is true of most emerging markets). Since a lower currency hurts foreign investors returns it typically leads to capital flight. In terms of the current cycle this would obviously extend to credit as well as equity markets. An additional issue would be the funding of USD denominated debt, the issuance of which has been substantial in recent years.

Our view is that the government will probably see the lower currency that it wishes for, and potentially a sharply lower BRL. Unfortunately this would probably be combined with another leg lower for the IBOV. We suspect that this combination will bring interest rate policy into play once more. We note that the current market only prices in a tiny chance of cuts in the SELIC in 2013 {NSN MDU9J10YHQ0X <go>} while there is a 50% chance of a rate hike by July 2013. This strikes us as a significant mispricing, but also a typical one for a country in the middle of a long protracted bear market.

The weekly MBA application report showed refinancing applications at 4565, meaning that the index has remained above the 4000 for the last 6 months. Indeed the 52 week ma of the index is now 4380, which is the highest level seen since the great refinancing boom of 2003/4. The length of time that the index has stayed at an elevated level suggests that a meaningful number of properties have been refinanced, taking advantage of the fact that the 30 year mortgage rate has fallen from 4.00% to 3.34% over the last 12 months and from 5% as recently as March 2011.

This is obviously good news for general consumer activity, with lower mortgage rates freeing up personal income for both savings and purchases. It also means further strains on MBS investors, who have seen available yields collapse and have been forced to hedge refinance activity in the overpriced US treasury market. Eventually the current pool of refinance-able homes will be depleted, which based on past experience should lead to a sudden back up of yields as duration hedging ceases to provide demand. The unusually low levels of yields and resulting sensitivity of bond prices makes this a more dangerous issue in terms of potential losses from a yield spike.

As for the Purchase mortgage market this remains much more subdued, although at least it seems clear that the constriction of mortgage credit has come to a halt. The Index has bounced in a range between 180 to 210 in recent months (52 week ma is 186) but there is some anecdotal evidence suggesting that credit is starting to free up for home purchases. Should this index start to push above 230 in the coming weeks this would be a significant change in the data for mortgage availability for home purchase.

Bloomberg TV Interview from last night. Interview talks about housing data and US retail sector. Weblink for non-Bloomberg users below.


http://www.bloomberg.com/video/shaoul-sees-best-holiday-retail-season-since-2007-Thu~MKqZTGe9eusjFSG1gg.html

China's FDI continues to post negative comparison's with that of a year ago with October's FDI dropping -0.2% YoY to $8.31 bln. This is the 11th month out of the last 12 in which FDI has fallen on a YoY basis and this is reflected in the trailing 12 month ma, which shows a -4.5% decline. On a cumulative annual basis FDI has fallen by -3.34% YTD in 2012. Given that November and December are both seasonally important months for FDI (particularly the latter) the next two months will be important indicators for how strong FDI comes in for 2012 as a whole. The pattern at present shows at best stagnation, at worst a marked decline, which is another reason that reliance on domestic credit provision is growing in the local economy in order to provide the growth in output that so many take for granted as the natural state of affairs for the Chinese economy.

We have not spent a great deal of time looking at the Netherlands over the years, but we were struck this morning by the truly dismal consumer confidence data which was released this morning. Overall confidence fell to -41 which is the lowest reading on record (the seasonally adjusted data was -37 which is close to a record low, but we cannot really understand why confidence should be seasonal and so we would concentrate on the raw index).

Outlier confidence readings tend to be good contrary indicators at their eventual extremes. What is interesting about the current readings is that they are occurring against a backdrop of poor rather than disastrous economic data, and at a time that the local equity market has been making steady progress since collapsing in the summer of 2011, and before that the collapse of 2008. This does heighten the likelihood that confidence will rebound in the months ahead, which generally would be accompanied by a rise in local financial assets, particularly equities. To an extent the very multi-national nature of the AEX itself may blunt the correlation, but it should be remembered that the local equity market collapsed on the basis of the Eurocrisis and so could be expected to benefit from any rise in risk appetite in the months ahead.

Following yesterday's strong NAHB Sentiment report we had expected to see decent Start and Permit data for October, and this was delivered this morning. Total Starts were estimated at 894K, the highest level since July 2008. Starts have increased by 41.9% over the last 12 months but remain well below the long term average of around 1.4mm units, suggesting several more quarters of growth lie ahead. Both Single Family and Multi-Family starts were strong in October, with the latter rebounding somewhat from September in line with its more erratic month to month behavior.

Single Family Permits (our favored metric) were also strong at 562K, again the strongest report since July 2008 and this metric is starting to peel away from its trailing 60 month ma (now 483K) in the manner that we had expected. Readers should note that the seasonal adjustments start to get very favorable for Start and Permit data over the next 3 months, meaning that some quite powerful data could be delivered between now and the key spring selling season. It remains to be seen how much of this improvement is already priced into the homebuilding sector, which has already enjoyed torrid gains in 2012. We suspect that current levels of activity are already in current prices but that a more sustained increase in activity would still come as a surprise to many observers.

The NAR US Existing Home Sales data was an encouraging set of data which shows that the dramatic change in housing affordability and the attractive rental yield available in many markets has generated a steady demand for existing homes. Overall sales for October were estimated at 4.79mm, above consensus expectations of 4.74mm, although September's data was nudged lower by 6K to 475K. This represents a gain of 47K homes (10.9%) from the level of activity in October 2011 but keeps sales still around 10% below the late 1990's pre-boom level of activity.

Single Family sales were 4.22mm units, up from 4.14mm in September and at the current rate of repair have a chance of reaching 4.50mm while the seasonal adjustments remain favorable in the winter months (we believe that financial buyers of existing homes are likely to be much less likely to drop off in winter months than actual home-owners). Overall inventory fell to 1.75mm houses, the lowest since January 2005. This represents 5.4 months of sales, the lowest since March 2006.

A similar picture emerges in the condo data. Here inventory dropped to 253K units, the lowest since January 2012. However, since condo data is very seasonal with listings always plunging in winter months, October's data really represents a break-down in inventories which are 26.9K below their 2011 level and represent 5.3 months of sales.

The NAHB Homebuilder Sentiment Index continues to force its way rapidly back to "normal" territory with the overall index reaching 46 in November, a further sharp rise from October's 41 and the highest reading since May 2006. Present Sales reached 49, Future Sales 53 and Traffic 35 (this compares to readings of 50, 55 and 33 back in May 2006). We suspect that some of this surge has been caused by seasonal adjustments, since we believe that the US New Home market is likely to be significantly less seasonal than normal during the early phase of the recovery. In recent months the NAHB data has been a fairly accurate guide to both housing start and New Home sales data, and given the power of this month's NAHB report this suggests that decent October data can be anticipated by both series.

Following the release of a record trade deficit of $20.9 last Monday we had been anticipating a policy response by the RBI. We were therefore interested to see the RBI post this morning a sternly worded missive banning bank finance of gold purchase for anything other than "genuine working capital requirements of jewellers (sic)"

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7695&Mode=0

Interview covers potential change to US taxation of dividends and capital gains and the impact to the US equity market and a discussion of risk and opportunity in Ireland, Italy, Brazil and China equity markets

http://video.ca.msn.com/watch/video/navigating-a-nervous-market-11-16-12-10-35-am/jvoe5lfu

One of the interesting aspects of the current correction is that it is the first to take place in several years during which overall financial conditions (primarily comprising volatility, credit and swap spreads) have remained fairly benign. This and the marked under-performance of US equities which are either dividend reliant or depositories of substantial capital gains makes it fairly clear that we are dealing with an understandable reaction to a likely adverse change in taxation of dividends and capital gains (see the current Weekly Speculator for a fuller discussion.

All other corrective moves since the financial crisis started in early 2007 have either been preceded or combined with a sharp deterioration in financial conditions. With the SPX falling almost 9% from its September peak and the NDX index over 13% it is interesting to note that the Bloomberg US Financial Conditions Index (BFCIUS Index) remains at a very benign +0.49, having dropped from an almost giddy +0.861. European Conditions (BFCIEU) have fallen back to -0.228 from +0.152, but given that this index was at -5 a year ago and -2 (the boundary of crisis conditions) as recently as July the modest deterioration is clearly an effect of the US equity correction rather than its cause.

The correction that started in late October has thus far been a largely domestic US affair, caused we believe by the realization that capital gain and dividends are about to see a substantial and adverse change in tax treatment.

Most non-US market, at least until recent sessions have been relatively well behaved, with the significant exceptions of China and Brazil, both of which have fully participated in the corrective move.

Given that these two markets are alone in following the US one really should assume that the cause of their declines is not US fiscal policy (or lack thereof) but issues specific to these two economies. In China's case the belief that monetary stimulus would take place is simply not backed up by recent data, although we recognize that the bond market has been wide open for business (Chinese corporate credit is now 122% of GDP compared to 52% in the US) overall monetary creation has been quite retarded. Similarly the uptick in official economic data has not been reflected in the earnings of either local Chinese companies of (more importantly) those of major multinational companies active in China, which brings the credibility of data into question. Meanwhile the local SHASHR index has ground its way lower and closed last night right on key support at 2100, taking the index back to the level reached in early 2009.

In Brazil's case the local market has been troubled both by the country's close economic links to China and also by the increasingly populist, anti-business stance taken by the Rousseff administration. The latter has weighed heavily on the financial and utility sectors in recent weeks, while the former has kept the large resource companies under pressure. This morning saw the IBOV index break key support at 56,00, placing the index back in the messy range between 52,000 and 56,000 which the index traced last summer. We would expect to see a full retest of the July low at 52,200 and for the BRL to continue to come under pressure, with the currency now within 1% of its 2012 low of 2.106.

One of the funny things about capital markets is that respond not so much to news itself but the difference between news and expectations. In Italy's case the latter could hardly be lower, with the country becoming something of a pariah state for global investors over the last 18 months as the sovereign credit crisis spread into the local equity market in the spring of 2011.

We do not deny that this crisis has had an economic effect, but we do argue that this effect has been much more limited than is generally recognized. Q3 GDP for instance showed a decline of -0.2% on a QoQ basis, somewhat better than expectations of a -0.5% decline. This took the annual drop to -2.4%, again better than expectations of a -2.9% decline, while the Q2 decline was trimmed from -2.6% to -2.4%.

Even allowing for the modest beat in the data this is clearly not a great place for a highly indebted economy to find itself, but it is equally clearly an awful lot better than the -6.9% drop in GDP in the year ending Q1 2009. This point seems to have been missed by the local equity market which actually fell below its 2009 record low (using the FTSEMIB index) during the summer, reaching 12,295 in late July. The index rebounded strongly in the run up to the "Euro-fix", reaching 16,694 in mid-September, a rally of 36%. Since that time the index has experienced a retracement back to the 15,000 level where support is supplied by a combination of round number, 200 day ma and a 38.2% Fibonacci retracement level.

Although we would never argue for a straightforward relationship between GDP and equity market performance (if nothing else the last 3 years should have made it clear that this is a foolhardy path to follow) the mismatch between the perception of Italy's economy and the pricing of its equity market on the one hand with the actual data on the other does argue for a re-balancing of sentiment and exposure back towards a more positive (or at least less negative standpoint). This process should be generally beneficial for local equity prices in the weeks ahead.

Given the disruption that superstorm Sandy to large portions of the North Eastern United States in it unsurprising that Initial Claims have risen strongly in its wake, with the data for W/E November 7th surging to 439K, the highest weekly total since April 2011. It will take several weeks for the storm's effect to pass through employment data, with the initial effect being negative as shut-down businesses lay off workers, and then turn positive as firms re-hire and reconstruction efforts hopefully leading to some incremental employment. This of course will play havoc with the long term trend to employment, although the regional nature of the distortion should allow a more nuanced analysis once the state-by-state data is released one week after the national Initial Claims report.

Following this week's print the 4 week ma has risen to 383K, the highest level since June 29th, and we would expect it to continue to rise as the pre-storm data falls out of the average.

Census Bureau estimates of Advance Retail Sales for October showed a drop of -0.3% on a MoM basis for both Total Sales (-0.2% consensus) and Sales ex-Autos and Gas (0.4% consensus), although part of this shortfall was generated by a further revision higher of September's strong data.

One obvious cause of the shortfall is the massive storm that crippled the north-eastern markets at the end of the month but it should also be understood that fluctuations of this degree are fairly common in the Census Bureau data (see monthly chart). It is interesting to note that the actual monthly sales reported by most public retail chains for October showed no meaningful impact from the storm and we suspect that any impact will actually be felt in November rather than October given the time it has taken to get power restored and people back to normal patterns of home-life. Even so we would expect any effect to be transitory and perhaps more about a shift in consumption patterns than a reduction in aggregate activity.

As the chart of Total Sales demonstrates retail sales have actually been a pocket of reliable strength in this choppy recovery, growing substantially faster than overall GDP. We would hope to see this trend continue through the key holiday season and into 2013.

China's fiscal balance moved back into surplus in October as would be expected given the typical seasonal patterns. Total revenue was estimated to be 1044 bln CNY and Expenses 861 bln CNY generating a surplus of 182 bln CNY, 71 bln above last year's October surplus. The main cause of this increase in surplus was a substantial slowing of Local Government expenditure which grew 0.9% YoY while Revenue grew 18.7%. Since Local Government accounts for around 80% of total expenditure this slowing of expenditure is significant, but given the volatility of monthly fiscal data we really need to wait and see if this is simply a matter of a change in the timing of recognition of expenditure (in which case November should see a large increase) or an actual change in fiscal activity which would very much contradict the stimulative posture that has publicly been presented.

In any case November and December are generally the two most important months of the year with the latter generating by far the largest deficit in the annual calendar. Over the last 12 months China's deficit has averaged -84 bln, which is still a comfortable level for the overall economy, but we really need to see the next two months data released before we can make any definitive comments about China's fiscal position.

With global markets caught between a consolidation and a correction it is worth monitoring the EM currency complex as a potential guide as to how things may play out. As our longer term readers will be aware since mid 2011 the EM currency complex has been a good early indicator that investor flows are pulling back from global exposure and EM currencies have generally lost significant ground against the USD since the start of 2011.

Attached is a chart of four of the most volatile major EM currencies, the ZAR (black), BRL (green), INR (orange) and TRY (pink). The latter was very much the dog of 2011 but Turkey has been a major beneficiary of foreign flows in 2012 (largely at the expense of Brazil). Thus far the TRY has remained well bid and would have to break above 1.825 from its current cross rate of 1.80 in order for this to change.

The other three currencies have been substantially weaker in recent sessions. India's INR rallied hard in the QE3 honeymoon but has since lost all these gains. At its closing price of 54.875 the INR is 2% away from the key 56 level. Brazil's BRL had surprised most observers by weakening in early 2012 (it was generally expected to be the strongest major EM currency in 2012). After rising as high as 2.10 the spot price had stabilized in a narrow band around the 2.03 level until the end of last week when it suddenly came under selling pressure. Its current price of 2.072 is within 2% of the key 2.10 level. The ZAR has consistently been the weakest EM currency and actually made its low for the year in early October as industrial unrest spooked observers. After hitting the 9.00 level (actually 8.995) on October 8th the spot rate pulled back to around 8.60 but has recently started to twitch higher back up to 8.76. The ZAR has a slightly wider margin of safety of 3% but given its greater vulnerability this is of little comfort.

When attempting to unravel China's economic cycle our advice has been to watch the local equity market rather than economic data since the former is product of actual market activity rather than a manufactured statistic.

Thus far the message from the market is that conditions remain difficult in China, with none of the sense of improvement or stable growth that has been reflected in the statistics. It is interesting to note that following the release of October's data (which was mostly unremarkable) the SHASHR market has once more lost ground, falling by 1.00% over the last two sessions after losing 2.27% last week and this has taken the index to within 2% of key support at 2100. We still believe that the bear market in local equities has the potential to wipe out the entire 2008/9 recovery which would mean the SHASHR falling below 1800 in the coming months.

Of course the SHASHR is a market dominated by local flows while the majority of foreign investors seeking exposure to China do this via the "H" share market listed in Hong Kong. As can be seen on the attached chart there is a close relationship between the HSCEI and SHASHR indexes which generally move in tandem with one another. It is interesting to note that the HSCEI enjoyed a much stronger bounce that the SHASHR in September, which is a reflection of the fact that foreign flows into the emerging market complex were accelerated by the run-up to QE3. Local Chinese investors were understandably much less influenced by this event, and the SHASHR index managed nothing better than a "Dead cat bounce". Should the SHASHR index now continue to decline and break key support this would leave the HSCEI index vulnerable to a fairly sharp reversal of its 12% September/October rally.

India's September Industrial Production data suggests that the local industrial economy remains in a period of slow to negative growth and it should be understood that the definition of "industrial" is very broad in India and covers the agricultural and computer service sectors as well as more traditional industrial activity. Official data estimated that IP shrank by -0.4% YoY in September, well below expectations for 2.8% growth while August's data was trimmed from 2.7% to 2.3%. This takes the trailing 12 month ma of IP growth down to a feeble 0.6%, which essentially means that activity has been static.

One reason for this is a reduction in Indian export activity, with October's data showing a drop in exports of -1.63% YoY, bringing the last 6 months activity -6.18% below the level of 2013 on a cumulative basis (India's fiscal year runs from April - March) and we commented earlier this morning of a substantial reduction of Chinese imports from India. Imports however continued to grow by 7.4% YoY in October, an increase that is attributable to a substantial rise in Oil imports. The net effect of this activity was to generate a record trade deficit of -$20.96 in October (see chart) and to pull the 12 month ma down to a record -$15.7 bln.

This is obviously a bad combination of data, and the fact that October's CPI remains high at 9.75% (in line with expectations) only underlines the fact that India's economy shows all the signs of a late 1970's boom turning to bust. This is far more obvious in the nation's currency than equity market. The latter has been buoyed by massive foreign flows while the currency has been undermined by the large trade deficit. Following the report the INR spot rate moved up to 54.87 and looks likely to move back up to test strong resistance at 56 in the coming weeks.

Although overall liquidity provision in China (called Social Funding by the PBOC) for October remained robust this is increasingly reliant on corporate bond issuance and FX loans rather than the staple CNY loans that propelled the countries 2009/10 boom.

Overall Social Funding was 1290 bln CNY, an increase of 499 bln (63%) from last October. but down 361 bln CNY from September's level. CNY loans on the other hand were quite modest at 505.2 bln, a drop of 81 bln (-13%) on a YoY basis. This shortfall was made up for by very robust corporate bond issuance at 299 bln CNY and FX loans of 129 bln. The massive bond issuance is a reflection of local Chinese investors preference for fixed income following the collapse of the local equity market (as well as continued inflows from foreign investors). Ironically this poor equity market performance is a direct result of tight PBOC monetary policy.

Meanwhile October's money supply data suggests that aggregate liquidity remains tight with M1 growing by 6.1% YoY, down from September's 7.30% rate. We view M1 as being the key metric for judging the effective overall liquidity provision of current PBOC policy and although things are not quite as tight as they were earlier in 2012 they are far from stimulative. M2 is growing by 14.10% and therefore remains below the growth rate of overall loans (15.90%), which again suggests that credit is growing faster than broad money. None of this suggests that PBOC actions have been significantly stimulative in recent months, contrary to consensus belief.

The picture that is emerging in China is of two-tier liquidity, with ample funds available for larger corporations that have access to the bond and FX loan markets and far tougher conditions for those relying on traditional bank credit. Meanwhile actual "liquidity at hand" (which is how we interpret M1) continues to grow far more slowly than either credit or actual economic activity. This mismatch does not appear to be sustainable over the longer term and so either the PBOC will have to start to expand its balance sheet once more (September's data showed it growing at only 1.6% YoY) or the risks of a credit crunch will start to grow considerably.

China's Trade data continues to split between Export data, where overall YoY growth remains robust at 11.6% and Imports which are far more sluggish at 2.4%. Within the Export category Hong Kong continues to dominate the data, with growth of 38.4% dwarfing all other major markets. Our concern is that it is hard to then tie in these exports to precise evidence of re-export from Hong Kong which muddies the waters somewhat. Chinese Exports ex-Hong Kong grew at a much ore modest 7.4% rate, roughly in line with overall GDP growth. As would be expected exports to Europe are shrinking while US exports grew by 9.0%.

Meanwhile the import data really suggests a domestic economy growing significantly less rapidly than official GDP. Although the relationship between imports and overall economic activity is far from straightforwards a gap of over 5% does raise legitimate questions about what exactly is happening.

We also continue to monitor trade between China and the other 3 BRICs (see chart). Here Russia is alone in seeing its exports to China remain growing at 1.9%, while Brazil exports to China fell by -17.4% and Indian exports to China fell by a hefty -36.8%. It would seem that regardless of its official growth rate China has ceased to be a source of stable demand for a number of countries exporters.

An interesting article that highlights the sudden absence of demand for Asset Backed paper issued by Brazil's second tier banks. Again we see an echo back to the last US credit cycle when asset backed commercial paper was placed into what were known as SIVs. A number of these collapsed in late 2006 and early 2007 leading investors to flee other vehicles. New issuance then ground to a halt with a dramatic impact on the amount of commercial paper outstanding as existing obligations matured from the summer of 2007 onwards (see chart).

This collapse in liquidity as a significant contributor to the disastrous events of 2008, since the financial sector had become used to the commercial paper market providing liquidity on demand. In Brazil's case this seems to be true much more of the second tier banks than the major players, and this tallies with our view that the country faces at worst a "secondary banking crisis", rather like the events in the UK in 1974/5 or in the US at the time of the Savings and Loans debacle. Although both these episodes were much less devastating that the events of 2008 both at the time were considered to be extremely serious and both led to substantial panic in local debt and equity markets.

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

Disappearing Asset-Backed Money Signals Overhaul: Brazil Credit
2012-11-08 12:57:26.301 GMT


(For more credit market news, click on TOP CM.)

By Blake Schmidt and Gabrielle Coppola
Nov. 8 (Bloomberg) -- An interruption in payments to asset-
backed funds issued by Banco BVA SA is putting pressure on
authorities to overhaul regulation and reverse a record plunge
in offerings that’s cutting mid-sized banks off from one their
most important sources of financing.
The decline in cash flows to the four funds issued by BVA
in September was a sign the money earmarked to investors may
have been intercepted by the bank as it struggled with a cash
shortage, according to Standard & Poor’s. The mid-sized lender
was seized by Brazil’s central bank last month, becoming the
seventh bank taken over or bailed out by regulators since 2010.
Four years after the U.S. asset-backed market was frozen
following the failure of Lehman Brothers Holdings Inc., issuance
of asset-backed funds in Brazil has plunged 72 percent this year
as investors shun the securities that let banks in charge of
passing payments to investors dip into cash flows. Issuance of
FIDCs, as the funds are known, may rebound once new regulations
alleviate that risk, Western Asset Management said.
“The FIDC instrument wasn’t segregated enough, but with
this new regulation, you’re eliminating that problem,” Jean-
Pierre Cote Gil, a fixed-income manager at Western Asset, which
oversees $491 million of structured credit, said in an interview
at his office in Sao Paulo. “You’re going to have more people
looking at this market.”
Yields on dollar bonds sold by Brazilian midsize lender
Banco Bonsucesso SA have risen 13 basis points in the last 10
months to 13.73 percent, while average yields on emerging-market
financial debt have declined 169 basis points to 4.49 percent,
according to JPMorgan Chase & Co. indexes.

Regulatory Revamp

Brazil’s securities regulator, known as CVM, proposed rules
for structuring and managing FIDCs on Sept. 6 to ban sellers
from passing payments through their own accounts, give
custodians more oversight to reduce fraud risks and eliminate
conflicts of interests between sellers, custodians and managers.
Public comments on the rules are being assessed and there
is no set date for when the final changes will be published,
according to a CVM official in Rio de Janeiro who asked not to
be identified in accordance with internal policy.
Asset-backed funds, which bundle consumer or corporate
loans and other receivables, were created in 2001 and used by
smaller banks to raise money at lower rates than was available
in the domestic market. A lack of local, long-term funding has
pushed lenders to rely on FIDCs, the sale of loan portfolios and
the international bond market for financing.

Issuance Plunge

Issuance of asset-backed receivables funds plunged to 3.8
billion reais ($1.9 billion) this year through October, from
13.6 billion reais in the same period last year. Issuance in
Brazil is headed for its biggest annual drop since 2009,
according to data compiled by Brazil’s capital markets
association. Asset-backed sales in the U.S. jumped 82 percent to
$206 billion in 2012 from about $112.9 billion at the same time
last year, data compiled by Bloomberg show.
BVA, a Rio de Janeiro-based lender that specializes in
loans to mid-size companies, was seized by the central bank on
Oct. 19 after regulators uncovered violations of industry
standards and deteriorating finances. Brazil’s privately owned
deposit-insurance fund said Oct. 20 it will pay 1 billion reais
to some of BVA’s local bondholders
BVA used FIDC flows to make other payments as depositors
withdrew money from the bank, newspaper Valor Economico reported
Oct. 29, citing unidentified officials at the bank. BVA declined
to comment through its press office in Sao Paulo. The central
bank’s press office in Brasilia declined to comment.

Credit Quality

BVA paid a 9.125 percent interest rate on three-year
international bonds sold in 2011. The bonds were being bid at
five cents on the dollar yesterday, according to prices compiled
by Bloomberg. The Brazilian unit of Madrid-based Banco Santander
SA, Brazil’s sixth-largest lender by assets, paid 4.25 percent
on five-year bonds issued in January 2011. The bonds currently
yield 3.04 percent.
Holders of BVA’s FIDC Multisetorial BVA Master, Master II
and Master III funds voted last week not to liquidate the funds,
according to regulatory filings. Holders of BVA’s FIDC
Multisetorial Italia were set to meet yesterday, though assembly
minutes have yet to be made public.
Default rates on Master II and III rose to 11.6 percent and
12.6 percent on Oct. 5, from 2.8 percent and 6.7 percent on June
30, according to a regulatory filing. Multisetorial Italia’s
default rate rose to 3.5 percent, from 0.3 percent in the same
period.

‘Lower Return’

Austin Ratings, a Brazilian credit rating company, cut its
ratings on the Master II and III funds by five levels to brBBB+
and Italia by four levels to brA- on Oct. 11, citing the rising
default rates.
“We observed an increase in defaults and a comingling risk
that could eventually lead to the bank retaining flows that it
shouldn’t,” Luis Miguel Santacreu, an analyst at Austin, said
by phone from Sao Paulo. Santacreu also cited concern over a
lack of information as BVA stopped reporting earnings after
2011.
S&P analysts Hebbertt Soares and Leandro de Albuquerque
placed the four BVA FIDCs, which have total assets of 838
billion reais, on review for downgrade on Oct. 19, citing
operational difficulties the funds face from the central bank
intervention and the possibility of a change in management.
Interruptions in payment flows and increases in default
rates will be “temporary,” according to S&P, which assigns the
Master I FIDC a brAAA rating, the highest on the local scale.
S&P has brAA ratings for Master II, III and Italia.

Default Swaps

Banks oppose the new rules being considered by regulators
because they will increase costs, which will end up reducing
returns on the securities, according to Andrew Storfer, a former
president of Brazil’s association of financial executives, known
as Anefac.
“At the end of the day it will be the investor who pays
for this, he’s going to have a lower return,” Storfer said in a
telephone interview from Sao Paulo.
The extra yield investors demand to own Brazilian
government dollar bonds instead of U.S. Treasuries fell three
basis points, or 0.03 percentage point, to 141 basis points at
10:08 a.m. in Sao Paulo, according to JPMorgan Chase & Co.

Default Swaps

The cost of protecting Brazilian bonds against default for
five years was little changed at 100 basis points, according to
prices compiled by Bloomberg. Credit-default swaps pay the buyer
face value in exchange for the underlying securities or the cash
equivalent if a borrower fails to adhere to its debt agreements.
The real was little changed at 2.0351 per dollar. Rates on
interest-rate futures contracts due in January 2014 were
unchanged at 7.33 percent.
Investors in BVA’s FIDCs will probably wait to see results
of the central bank intervention before making further decisions
on whether to push for liquidating the funds, Santacreu said.
“The central bank in its intervention could directly
recover the flows from debtors and give them to investors
without passing them through the bank,” he said. “It’s the
central bank’s obligation to identify which money is going to
the bank and see to it that it goes instead to the funds.”

For Related News and Information:
Top Stories: TOP <GO>
Top Latin American News: TOPL <GO>
Most-Read News on Brazil: MNI BRAZIL <GO>
Bloomberg News in Portuguese: NH PBN <GO>

--With assistance from Sarah Mulholland in New York and
Francisco Marcelino in Sao Paulo. Editors: Brendan Walsh, Robert
Jameson

To contact the reporters on this story:
Blake Schmidt in Sao Paulo at +55-11-3017-4809 or
[email protected];
Gabrielle Coppola in Sao Paulo at +55-11-3017-4909 or
[email protected]

To contact the editor responsible for this story:
David Papadopoulos at +1-212-617-5105 or
[email protected]
Michael Tsang at +1-212-617-3277 or
[email protected]

We were interested to see that the SNB reserves fell by 5 bln CHF in October to 424 bln CHF. This is the first monthly drop since February and is another sign that the Eurocrisis has abated, since the EUR was able to keep above the 1.20 cross rate without the SNB constantly selling of CHF for EUR. Of course the EUR was unable to make much forward progress but it never looked in danger of testing 1.20 with the exception of one difficult session in the evening of October 10th.

Even so total reserves have risen by 179 bln CHF over the last 12 months and we see little chance of these being unwound meaningfully over the short to medium term, with the result that Switzerland will still be subject to a substantial over-provision of local liquidity. However, it may be that the need for continuous intervention in the currency market has passed, although we would still expect to see occasional forays in the weeks ahead.

We will be publishing our thoughts about the impact of the US election on asset markets in our Weekly Speculator tomorrow morning (for those who can't wait that long we do not think a great deal has changed) but in the meantime we would like to update our periodic watch of global interest in the "Fiscal Cliff".

As would be expected with the election out of the way and the calendar rushing towards the December 31st deadline for the expiration of the 2001 tax cuts an obsessive amount of attention has suddenly been focused on the Fiscal Cliff. We had predicted as much back in the summer and now will start to track the levels of news stories and searches being conducted on this issue. For the former we use Bloomberg's NT function (see attached) and the latter Google Trends http://www.google.com/trends/explore#q=fiscal%20cliff&date=today%2012-m&cmpt=q

Unsurprisingly both have registered a new record of interest in the term, which seems likely to be repeated ad nauseam before the issue is settled one way or another. Our expectation remains for some sort of a fiscal compromise to be crafted closer to the deadline data, albeit one which will contain obvious flaws, fudges and inequality. In the meantime (and perhaps post-compromise) the Fiscal Cliff will now become the primary reason used to avoid participating in the current bull market, and for a period of time it certainly has the potential to generate some unpleasant price movement, playing much the same role that the Eurocrisis did in 2011 and the first half of 2012.

Mexico's economic cycle continues to shadow that of the US with a very robust recovery of consumer activity propelling the economy forwards. Importantly there would still seem to be room for further improvement in many key areas with local car sales remaining about 10% below the prior cycle peak.

October sales were 83K, a rise of 7.4K from October 2011. This matched the trailing 12 month ma which has been rising steadily for several quarters without suggesting any local over-heating. Total production increased to a new all time high of 282K, a gain of 41K over the last year. This increase has been enabled by very robust export performance as a number of key markets (most clearly the US) have continued to improve. We continue to believe that Mexico's economy is much better positioned than most other Latin American countries and although this viewpoint is no longer controversial (we have argued it since 2010) it is still supported by the current data.

Car sales in Brazil have benefited considerably in recent months from a sharp reduction in local tariffs. October sales we 341,644K, just over 61K above the October 2011 level. We would caution that sales a year ago were particularly weak and the trailing 12 month ma suggests that sales are only modestly above last years level.

It remains to be seen what effect the introduction of tax breaks will have had on the seasonality of sales. December is traditionally the strongest month for car sales but we would assume that the massive surge in August 2012 sales will have absorbed much of the activity that would otherwise have occurred in December. For the moment the policy has helped stabilize demand in a key area of the economy, although there are some signs that this has been at the cost of demand for other consumer goods.

Although we have noted a sea-change in recent opinion regarding Brazil our view on Brazil remains that it is in the midst of a difficult economic period and that this will be reflected in a poorly performing equity market as well as growing problems with personal and corporate credit. We fully expected sentiment to improve following the summer sell-off since this fits our simple model of a three phase bear market stretching over 30-36 months.

The NAHB is mostly known for its monthly sentiment poll which has proved to be an accurate indicator of the current housing cycle (indeed it has been significantly more useful in real time than most official housing statistics). In addition to this monthly poll the NAHB also publishes a couple of other metrics that are worth noting at the current time.

On a quarterly basis a Home Remodeling Index {AMI NATC Index} is published. The Q3 2012 index was released last week and showed a level of 52 (50 being neutral), the highest reading since September 2005 (see chart). Thus for the first time in 7 years home remodeling is showing signs of increase. The NAHB noted that

"All three indicators of current market conditions improved: maintenance and repairs rose to 56 (from 50), minor additions and alterations to 51 (from 47) and major additions and alterations to 49 (from 42). Current market conditions improved or held steady in all four regions in the third quarter of 2012. Current remodeling activity was particularly strong in owner-occupied housing; the sub-components of the current conditions index for owner-occupied housing were all well over 50, ranging between 55 and 60".

This morning then saw the publication of the monthly "Improving Markets" index which tracks the number of improving markets in the nation. This hit a new high of 125 in November, up 22 from October (see chart). As can be seen on the attached link the improving markets are spread pretty widely across the nation, but there is still plenty of scope for further progress.

http://www.nahb.org/fileUpload_details.aspx?contentID=175144

We view this data as further anecdotal evidence that the housing and home improvement cycles both made decisive turns in 2012, and that both can be expected to be significant contributors to economic activity going forwards.

We have commented several times to clients that India has more in common with Italy than the fact that both countries names start with an "I" and contain five letters. Perhaps most clearly it has has decades of experience with large budget deficits that are often the result of unruly coalition partners insisting on special interest handouts.

As with Italy pre Euro, the local currency has typically been the means of adjustment, with the INR falling in value from 8 to 54 against the USD since 1980. None of this mattered much when global investors ignored India but this is hardly the case today, with equity flows reaching over $18 bln in 2012 (the second highest for early November) and total fixed income investments estimated to be above $32.75 bln, double their level of 2 years ago (see chart).

The deficit for year ending March 31st 2013 was supposed to be reduced to 5.1% from 5.8%. It never seemed likely that this target would be met and we note that it has been raised to 5.3% this morning. The response of the currency market was immediate, with the INR spot rate rising to 54.61 this morning its highest level since mid September. With the RBI fretting publicly about the state of public finances a higher deficit target also makes significant monetary loosening less likely to occur.

We have been following the Swiss real estate market for several quarters and we note that the Q3 reading for the UBS Swiss Real Estate Bubble Index moved into "risk" territory at 1.02. This is the first time the index has been above 1 since 1991. However, back then the index was transitioning from boom to bust, the last time the index broke above 1 from the downside was Q3 1987.

In more normal times the SNB would be reacting to the froth in the market by draining liquidity and boosting rates. Of course at present the opposite path is being followed as the "currency first" policy has led to an explosion of the central bank's balance sheet as the maintenance of the s₣/€ 1.20 level requires constant intervention. Meanwhile the safe haven flight capital has pushed short to medium term yields into negative territory and the 10 year yield to below 0.50%. Under these circumstances it seems likely that further rapid appreciation of swiss real estate will take place in the months ahead.

We do not expect any response by the SNB to this data. However, as we noted a few weeks ago the rental market has recently started to respond to higher prices. The major cities of Switzerland have large rental populations (rather like New York) and we believe that a significant hike in local rents would place intolerable pressure on the SNB and would meaningfully raise local CPI.

Looking at the immediate response to this morning's payroll data we noticed that gold broke below the $1,700 level and tested the remaining technical support in this area at the $1,692 level (a 38.2% retracement of the May - September rally).

It is an interesting time for gold to breakdown, since it comes at the start of the month, a time in which portfolio flows tend to benefit the metal. It also comes after a natural disaster which should have appealed to some of the "survivalist" instincts of some of gold's supporters. As the attached chart shows flows into gold related ETP's have remained positive, and reached a new high of 83.33 mm oz yesterday (see chart). All of this makes gold's poor price action more notable than the relatively small movement in price itself. Gold retains the benefit of the doubt so long as current support remains in place but should this give way then a fairly rapid move back down the wide trading range can be anticipated.

We have stated a number of times that an upside Non-Farm Payroll report was long overdue and we are therefore somewhat relieved to see it materialize in the October report, which looks to be a very robust set of data.

Total Payroll gains were estimated to be 171K well above estimates of 125K. Perhaps more importantly the September data was revised 34K higher to 148K while the August data was boosted by 50K to 192K. It should be remembered that the ORIGINAL August report was for 92K jobs, which sparked off significant fears of a deterioration in employment growth. We pointed out at the time that this clashed with other employment data and all anecdotal evidence, but we had little company in this viewpoint despite the fact that exactly the same thing took place last summer.

A similar picture can be seen in the Private Sector report. Here total gains were 184K vs. Expectations of 123K. September was revised higher to 128K from 104K. August was revised higher from 97K to 134K (and an original print of 103K). The net result of all of this is that the 12 month ma stays rooted to 160K, justifying our insistence that the only way to use this data is as a slow moving cyclical signal.

As for the Household survey this continues to paint a rosier view of Employment. Total gains were 410K but due to other changes in the model the unemployment rate rose modestly to 7.9% (which was expected). The one thing we would note is that the slope of the 12 month ma of the Household survey suggests significant improvement in employment has taken place. This tallies with the Initial Claims data (which is persistently 8-10% below its 2011 readings) and anecdotal evidence (such as yesterday's consumer confidence report). We are hopeful that this trend will continue, and that as a result the Official Unemployment rate will fall faster than anticipated over the fall and winter months, before seasonal adjustments once more come into play next spring.

The Conference Board measure of Consumer Confidence came in at 72.2 (1985 = 100) this morning, narrowly missing consensus estimates of 73 but still registering the best data since February 2008. This is in line with other measures of confidence which show a significant increase over the late summer months. Perhaps most interestingly the employment sub-category of this survey shows a distinct improvement. The percentage of respondents stating that "Jobs are Plentiful" rose to 10.30, the highest reading since September 2008, while the number saying they are "hard to get" fell to 39.40, the lowest since April 2012 (see chart). This represents a fairly dismal picture but one which is finally showing some signs of a sustained improvement.

The ISM Manufacturing report for October has delivered a healthy start to this months data cycle with the overall index nudging higher to 51.7 from 51.5 last month, just above expectations of 51.0. In itself this is a modest achievement but the story from the sub-indexes is a little more encouraging.

New Orders (red) rose to 54.2, the best reading since May and far enough from the neutral zone to suggest that a meaningful pick-up in orders has taken place since the summer stall. Production (blue) has improved to 52.4 and should follow New Orders higher in the coming months. Inventory (olive) reversed its modest build and has now returned to neutral at 50 while Employment (pink) stayed positive at 52.1. Interestingly the poorest data in the report remains linked to external trade with both Exports at 48 and Imports at 47.5 remaining in negative territory. This really highlights the extend to which it is the domestic US economy which is doing all the "heavy lifting" at the current time. We expect this divergence to continue to be felt in the coming months.

The quarterly FRB Lending Officer survey (which was released yesterday) continues to show a stead trend towards looser lending standards as banks step back into mortgage, consumer and commercial lending activities.

The attached chart shows responses for the survey going back to 1997. Respondents reporting a tightening of standards across the board are in black, some tightening (red), unchanged (orange), some loosening (light blue), loosening of all standards (dark blue). Perhaps unsurprisingly the last of these has only even appeared twice, in August 2004 and 2005.

The picture at present is of most banks on hold, with 59 out of 66 respondents reporting unchanged standards. Note this is not the same as a lack of new origination since the survey showed robust demand for new credit in most key segments of lending, and provided additional borrowers were qualified this would have resulted in greater credit.

6 respondents reported some loosening, unchanged from the August report, but again this is a cumulative process meaning that overall credit standards continue to loosen. This may seem like a low number but even in the reckless credit boom of the last decade there were never more than 13 respondents reporting a loosening of standards.

1 respondent reported some tightening which is more likely to be a reflection of specific institutional issues than any change in trend. No bank reported a total loosening or tightening of standards. Overall we would say that the report is encouraging since it suggests a modest acceleration of demand for new credit and an increasing willingness for banks to lend.

This suggests that credit creation is becoming an increasingly supportive force for the current economic cycle. Although the overall strength of the credit rebound in activity lags that of the early 1990's (following the S&L crisis) or the housing boom of the last decade this also means that a more meaningful contribution can be expected in the coming quarters.

For those of us who like to use long term economic statistics to follow a cycle's trend there is nothing more depressing than a wholesale change in methodology to a standard series, since it can take several quarters of monitoring to determine if the new methodology is better or worse than the original.

This month's ADP report is the first made under a new joint venture with Moody's (no comment) which takes a larger sample set and explicitly attempts to align the series closer to the official BLS report. For those who want to use the ADP report to bet on the BLS report one day early this may seem like a good idea. For those of us that used the ADP report as an independent alternative to the monthly BLS report (on the basis that two wrongs sometimes help make a right) this is a much less welcome development. ADP have removed all the original data and replaced it with the new methodology and we have attached a table of the revisions from the original series which makes it clear that we are effectively dealing with an entirely new survey.

Given the aim of matching the BLS data the methodology appears to be successful with large downgrades to some of the strong recent reports. The training 12 month ma now reads 149.7K, which shows a modest deterioration over the summer rather than a small improvement. October's report came in at 158K, somewhat better than expectations of 131K. Whether this means a better BLS report (consensus is for 124K Private Sector gains) remains to be seen.