Brazil's budget balance for August showed a total deficit (including interest payments) of -22.3 bln BRL which is the largest ever deficit for any August. The trailing 12 month ma has fallen to -$12.07 bln BRL which is also a record in nominal terms. As a percentage of GDP the deficit over the last 12 months is -3.12%, the largest since August 2010. We would not yet class Brazil's fiscal position as acute, but it remains in a deteriorating trend with a local economy that is at risk of further contraction.

The BOE UK Mortgage Approval report showed 62.2K mortgages approved in August, which is the highest number since February 2008 and represents something of a breakout from the 60K ceiling which has capped lending since 2009 (see chart). This takes the 12 month ma of approvals up to 55.7K, the highest reading since September 2008, underlining the fact that the August report is no fluke. Of course activity still remains far below normal (100K per month were approved in 2001) let alone peak activity of 124K in 2004, but the odds of an acceleration in mortgage lending over the coming months looks to be quite high, with the 75-80K range looking to be a reasonable target.

This morning saw the publication of two unrelated but equally interesting pieces of Spanish economic data. Spanish Housing Permits for July were 6525, representing a -1.2% drop from their level a year ago. This is the smallest annual decline since September 2011 and it is notable that the pace of draw-down has been ameliorating for a number of months (see chart). In part of course this is because there is always a limit as to how low activity can fall. Current Permit issuance compares to a level of around 45K a decade ago (in a normal market) and over 75K in 2006, meaning that over 90% of peak activity has been wiped out. Given this remarkable destruction of activity it is likely that we will now move back into positive growth, in part because a number of half completed projects are likely to be re-started. It is reasonable to expect construction to start to become a positive contributor to local economic activity going forwards, although clearly at a much diminished level compared to the last economic cycle.

One area of the economy which has had an out-sized contribution has been exports which have the dual effect of boosting local corporate earnings and also aiding local liquidity through the current account. The publication of the July Current Account data underlines this fact with the surplus of €1.6 bln marking a record for any July since the series started in 1990. The 12 month ma of the surplus increased to €0.391 bln which is also a record and represents an annual funding swing of around €54 bln from early 2011 and over €115 bln from late 2008, showing that the swing in the current account is a much more powerful force than is generally recognized.

The PBOC issued the August update to its balance sheet data last night which showed an increase of total assets of 222.9 bln CNY (0.73%) to 30.893 trln CNY. This takes the YoY increase up to 8.02% which is the fastest pace since January 2012. We note that FX holdings continue to grow at a slower pace increasing by 0.39% in August and 6.62% YoY, underlining a diminished role for the trade surplus as a provider of local liquidity (a factor that is generally underestimated when looking at China).

This means that over the last year local central bank liquidity has increased by around the same pace as local economic activity for the first time in 18 months, however, it needs to be considered that credit growth over this period has grown at a much faster pace with bank loans alone growing by 14.14% to 69.5 trln CNY at the end of August. This takes the ratio of the PBOC to total bank loans down to 0.446, the lowest level since January 2005 (see chart). If one looks at the broader measure of "Social Financing" this was just over 5% of the total PBOC balance sheet in August alone, matching the 12 month ma (see chart). In other words over the last 12 months new Social Financing has been the equivalent of 60% of the PBOC's balance sheet meaning that credit growth is outstripping liquidity growth to an alarming degree.

An additional concern is the fact that outside of real estate very little acceleration is visible in the Chinese economy. Last night also saw the publication of the local Business Cycle Index (jointly produced by Goldman Sachs and the NBS) which remained unchanged at 84.0 for the third consecutive month. Given that 83.3 marks the boundary between "Stable" and "Cold" conditions this is a convenient place for the signal to halt, but also one which underlines that massive credit issuance is generating less local activity than would be considered normal in a healthy economy.

The August New Home Sales report goes some way to addressing the strange draw-down in the July data (which was maintained through the revision process which further trimmed sales to 390K). The Census Bureau estimate of August sales rebounded to 421K, almost exactly matching expectations and representing a solid 12.6% increase over the activity level of a year ago. This keeps the 12 month ma in its rising trend, with the indicator reaching 419K, its highest reading since 2009, and a solid increase from its position last year at 347K. In other words estimated activity is slightly lower than was projected in the springtime but still in a clear improving up-trend.

Even so activity remains well below its 40 year average of 690K, a sign of how depressed activity remains. Interestingly the trailing 120 month ma has now fallen to 681K, meaning that average activity over the last 10 years (which includes both the great housing boom and bust) is now slightly lower than over the prior 40 years, in other words we have now more than made up for the "over-consumption" of housing that took place between 2003 and 2008.

New Home inventory continues to climb from its very depressed level which we see as helpful for future sales given how tight certain regional markets have become. Overall inventory rose 7K to 176K, its highest level since April 2011. The inventory of Completed homes remains very low at 37K (a rise of 2K for the month) but homes "Under Construction" rose 2K to 103K, the highest level since May 2010 while homes "Not Started" rose by 3K to 36K, the highest leel since June 2009.

Italian consumer confidence continued its recent improvement in June with the headline index reaching 101.1, its highest level in two years. It is interesting to note that this improvement in confidence is visible across the sub indexes with confidence in the "National Situation" rising to 99.7 from 97.7 last month and 71.0 in September 2012, while confidence in the "Personal Situation" rose to 102.6 from 98.9 in August and 92.3 a year ago.

Looking at the various sub-indexes our attention was drawn to the "Durable Goods Spending" reading of -79, a substantial rise from last month's -90 and the September 2012 reading of -103. This would seem to indicate a marked change in Italian demand for large ticket items such as cars and household furniture which would very much come as a surprise to the consensus view if it turns into accelerated sales. Of course this remains a big "if" but stranger things have happened over the years.

We note that this improvement in consumer confidence coincides with the FTSEMIB index breaking through the 18,000 barrier for the first time since it collapsed in the summer of 2011. This is no coincidence given the strong symbiotic relationship that confidence and local equity performance share and the strength of the rebound in confidence increases the odds that the recent breakout by the FTSEMIB will gather strength in the weeks ahead.

A reminder that not all of the recent EM currency woes can be laid at the feet of the FRB came in the shape of Brazil's August Current Account and FDI report. This showed the Current Account deficit reaching -$5.505 bln, wider than expectations of -$5.031 bln and over double August's 2012's reading of -$2.551.

FDI reached $3.775 bln, just beating expectations of $3.500 bln but somewhat lower than the August 2012 level of $5.035 bln. This means that over the last 12 months the Current Account deficit has surpassed FDI flows by a record -$19.56 bln (see chart) surpassing the deterioration seen in the aftermath of the 2008/9 crisis.

The headline Conference Board Consumer Confidence Index showed a slight drop to 79.7 from 81.8 last month (revised up from 81.5) but it should be noted that this was caused by slippage in the "Expectations" index, which fell from 89 to 84. Consumer's prognostications are not as useful an indicator as their "real time" opinions and we note that the Present Situation index actually rose to 70.90 to 73.20. This index has been in a clear rising trend for a number of quarters and the trailing 12 month ma reached 63.9 in September, the highest reading since January 2009.

This is significant since as we have pointed out before there has been a good historical relationship between the Present Situation index and FOMC monetary policy, a relationship which has broken down in the current cycle. Previously long trending moves in the Present Situation index were matched by either clear policy tightening (as confidence rose) or loosening (as it fell) measures by the FOMC. We illustrate this on the attached chart using the FDTR although we recognize that under the current regime an alternative source of tightening may eventually be applied.

Last week's decision to keep QE3 in full effect therefore marks a continued divergence between the view of consumers about the current situation, which is increasingly robust, and the FOMC's which remains extremely (and to our eyes inappropriately) cautious. We think it unlikely that the mass of consumers is deluded about improving current conditions, and the index has not yet got close to the sort of over-optimism which would suggest that it has become a contrary indicator.

Regarding consumer's view of employment opportunities we note that the Jobs Hard to Get index continues to moderate, falling to 32.7 in September, its lowest reading since September 2008. This remains an elevated reading but again is clearly trending lower, having been as high as 40.70 a year ago at the time that QE3 was originally authorized. The Jobs Plentiful sub index rose to 11.50, its second highest reading in 5 years. Again a clear trend of improvement has been established in this index suggesting that the polled consumers are seeing clear evidence of improvement in employment opportunities, but not yet labor markets which could be said to be functioning normally.

We sometimes are asked why we bother paying attention to Swiss monetary data and the answer is that although we would admit that the sums in question are substantially less than in either the US or Europe the full conversion of the SNB (historically one of the most prudent central banks) to the Bernanke Doctrine is perhaps one of the more surprising aspects of the last five years.

Indeed five years after its two major banks were imperiled by the Lehman failure (leading to an immediate injection of liquidity by the SNB) and almost two years after the peak of the Eurocrisis (which led to a massive intervention in defense of the CHF/EUR 1.20 cross rate) the SNB is yet to start the process of mopping up the vast increase in its monetary base despite a local unemployment rate of 3.2% and a real estate market that is showing signs of unhealthy frothiness.

What is interesting to note is that in recent months the SNB has ceased to expand the monetary base, leading to a slowing of M1 expansion which has grown by 6.98% YoY. However, broad money aggregates continue to expand much faster, with M2 growing by 10.81% and M3 by 10.44%. This suggests that credit usage is starting to expand more rapidly than liquidity itself, a sign that the local economy is starting to gather steam against the backdrop of an extremely loose monetary policy.

It would be surprising if the SNB were not concerned about these developments and the recent strengthening of sentiment towards Europe may cause some debate as to the necessity of the current policy mix. Although the market's attention has been drawn to the FRB in recent months it may be that the first significant tightening move in the developed world this cycle may take place elsewhere.

Attached is a red-lined version of the September FOMC statement (courtesy of Bloomberg ©) which allows for easy comparison with the prior text.

In one of the more closely watched meetings in recent years the FOMC chose to tiptoe away from its threat to taper We note that an unusually large number of linguistic changes were made in the statement that accompanied this (in)decision, particularly given the fact that policy actually remained unchanged and this gives a sense of the tortuous arguments that will have gripped the committee over the prior two days.

Of the more interesting changes we note the insertion of language regarding "tightening financial conditions observed in recent months" as a reason to hold off tapering. Other than the rise in interest rates we really are puzzled as to what the FOMC is looking at. The Bloomberg Financial Conditions Index (which the FOMC itself has admitted to following to gauge financial conditions) remains at +1.35 (standard deviations above normal) and is actually slightly higher than it was in mid-May before the surge higher in interest rates (see chart). Financial conditions (at least as measured by this index) are therefore at a very healthy level and this is therefore the flimsiest of excuses for postponing the moderation of bond purchases and gives a sense of how desperate the committee was to build an argument that supports inaction.

The other major changes to the text deal with further attempts to add clarity to forward guidance, including the statement that "Asset purchases are not on a pre-set course", an unhelpfully vague statement that perhaps the Chairman will address in his press conference.

In terms of the meaning of today's decision we note that although the bond market has enjoyed a relief rally, particularly in the belly of the curve, no significant technical support has been crossed by the main treasury yields. The equity market by contrast has broken out into blue sky territory in the SPX and RTY indexes while the NDX is at a 13 year high. We continue to believe that a surging equity market recording all time highs imposes an intolerable opportunity cost on bond holders, and that we are likely to see a further wave of capital re-allocation towards the end of the quarter. The FOMC's attempt to placate the bond market by extending QE is therefore likely to be a self-defeating policy and we would use the current rally in bonds to further lighten positions.

Although at first glance the August Housing Start and Permit report is a headline miss it is actually a strong set of data once one strips out the influence of the volatile multi-family data. Total Starts were estimated at 891K, below consensus of 917K and the July level of 883K (revised down from 896K). However Single Family Starts rose to 628K from 587K in July, a 16.6% YoY gain while the Multi-Family data fell sharply to 263K from 296K.

Permit data was equally affected by a weak Multi-Family report (which we ascribe no importance to given its typical monthly volatility) with Total Permits falling to 918K, below consensus of 950K and July's 954K (revised up from 943K). However Single Family Permits (always the most important metric in this report) rose strongly to 627K from 609K, and are now at their highest level since May 2008 after gaining 20% in the last year, while Multi-Family Permits fell sharply to 291K from 345K.

The less followed but also much less volatile "Housing Under Construction" report showed total units under construction rising to 654K from 640K, the highest reading since April 2009. Single Family Homes Under Construction rose to 321K, the highest level since April 2009 while Multi-Family homes rose to 333K, the best reading since May 2009 (see chart). There is no logic for the discrepancy between the Multi-Family reports, but looking at the historical volatility of the measures we would simply discard the "noise" generated in the Housing Start and Permit reports.

The bottom line is that the US Housing Construction cycle continues to move forwards in what we assume will be a fairly long and powerful period of expansion given the long period of time in which this activity has remained well below its historic norm. There is no evidence that higher interest rate and mortgage costs have affected activity over the last 3 months and although we would allow for the fact that this is a fairly short period of time we believe that the recovery will be sustained in the months ahead.

China's real estate market still shows no sign of deterioration, which is perhaps unsurprising given the strong August credit data that was released earlier this month.

Monthly price changes in New Affordable Homes saw 66 (62 in July) markets with rising prices, 2 (4 in July) markets with falling prices and 2 unchanged (4 in July). In the Existing Home market, which has looked a little softer in recent months 58 cities saw rising prices (57 in July), 5 saw falling prices (-7 in July) and 7 were unchanged (6 in July).

In other words there has yet to be any obvious effect from credit tightening on the housing market. One possible explanation may be that the locus of constraint has been more on the corporate sector in recent months, where bond issuance has come under significant pressure and the cost of bank loans has risen for smaller companies. Although over the longer term this would impact housing demand through wages and employment it would take a long time for this to become apparent.

The more important question is what the reaction of the authorities will be to the resumption of the trend towards higher real estate prices, and we await the publication of the September credit report with great interest.

It has been a very long time since anyone has had anything positive to say about the Greek economy and we were therefore interested to see the July Current Account report produce a record monthly surplus of €2.73 bln. This is almost double the prior record and has been driven by a surge in Service exports, which we assume represents a bumper tourist season driven by bargain hunters abroad. As a result the trailing 12 month ma has moved up to almost break-even at -€23.4 mln.

While we would not pretend that a healthy Current Account surplus solve Greece's myriad of other problems it will at least help provide additional local liquidity. It also is suggestive of strong earnings for the crucial tourist sector (which given its high proportion of cash transactions is not always captured by official data). Greece remains in dire economic straights but perhaps there are some signs that even here an improvement in conditions in a portion of the economy is underway.

Despite last months poor Census Bureau New Home Sales data for July (which at the time we suggested was an erroneous report) the September NAHB Homebuilder Sentiment Index (black bar on chart) came in at 58 this morning, matching expectations and the revised August report (down from 59).

This suggests that a comfortable majority of survey participants continue to see a broad improvement in market conditions some two months after the rapid climb in mortgage rates took place, underlining the resilience of the recovery in demand for new homes. The Present Sales (red) index remained at 62 in September, a strong reading that indicates robust activity, and although th Future Sales index (blue) fell to 65 from 68 this an understandable pullback from last month's frothy reading. Traffic (green) remains relatively subdues at 47, again indicating that "window shopping" has been much less prevalent in this recovery than during the great housing boom of 2002-5.

Overall this is a very solid set of data and although it in no way guarantees that the Census Bureau report for August Sales will be equally strong we would remind readers that the NAHB report has a much better historical correlation with actual activity reported by the public builders in their earnings. We therefore consider the strength of the NAHB data over the last two months to be significant evidence that the poor performance of homebuilding equities since May (which has recently shown signs of reversal) substantially over-estimated the sensitivity of new home demand to mortgage rates.

August sales data for Tokyo condominium apartments suggests that a strong increase in activity levels is starting to take place with the August total of 4145 representing a 54% YoY increase from 2012 and the strongest August sales since 2005 (see seasonal chart). This has taken the trailing 12 month ma up to 4322, its highest level since June 2008 and up from 3950 in August 2012. Of course with the key seeling months coming at the end of the year (December dominates the calendar, with November the second strongest month) it is too early to gauge the sustainable increase of demand but we would describe the current report as very encouraging.

You can only keep a secret for so long in capital markets and some 5 months after the DAX index broke out to a new all time high (if one allows for the fact that it is a total return index) there has been a marked up-shift in the ZEW poll that tracks German investors view of the current economic situation. As we have argued before this poll has generally been an excellent cycle indicator with strongly positive readings marking market tops and sharp negative readings market bottoms (see chart). In between these turning points the index generally matches the direction of the market, and the reluctance of Germans to change their economic assessment in the face of a very strong local equity market has been one of the anomalies of the post Eurocrisis rally.

September's poll suggests that this curmudgeonly behavior is drawing to a close, with the poll rising to +30.6, the highest reading since June 2012 (when the DAX was at 6416 vs 8597 today), up sharply from August's +18.3 reading and July's +10.6. On the other hand we are still far away from the sort of problematic enthusiasm that matched the peaks of 2011 (+91.5 in May of that year), 2007 (+88.7 in June) although we are closing in on the comparatively low 2000 cycle peak (+45.8 in September). Given that the latter is 13 years ago, and society tends to move on considerably over that sort of period we would use the 2007 and 2011 readings as a guide to "exuberance". Based on these numbers we are still some distance away from danger, and it should be remembered that it generally takes a few months of ultra-high readings to complete a market top.

Where we are today is the more rational portion of a bull market, when investors recover enthusiasm for today and hope for the future based on a tangible improvement to the local economy. Eventually this will develop into something more problematic but right now German sentiment is tracking an encouraging trend higher that suggests more local participation in the equity rally.

The withdrawal of Larry Summers from consideration as Chairman of the FOMC has been greeted by a broad rally in US treasuries. Given that the chatter amongst the Hedge Fund community favored his nomination, and that he was assumed to favor a more rapid unwinding of QE than his main rivals for the post we are not surprised to see a sharp adjustment of interest rate assumptions take place this morning. We note that the belly of the curve has been the most affected, with the 5 year yield dropping almost 14 bp to 1.556%. This has taken the 2-5 year spread down to 118 bp, compared to over 125 bp on Friday, and 133 bp on September 5th. At the long end of the curve the 10-30 year spread has widened back to almost 100 bp, compared to 95 bp last week, and the difference between these two spreads (which we have used as a rough proxy for stress in the treasury market) has narrowed back to -17 bp compared to -44 bp on September 5th.

We would also stress how unimportant all of this is over the medium to longer term. We never saw any great difference between Summers and Yellen since neither candidate seemed to recognize the degree to which FOMC policy has fallen behind the trajectory of the US economy. We also believe we have reached the point at which FOMC accommodation has started to actually undermine the foundations of the bond market, as the risks of an inflationary impulse start to grow in stronger portions of the US economy. We have also reached the point at which bond returns simply cannot keep up with equities, and even today's rally in bonds seems likely to be a fraction of the gains for those enjoyed by the broad US equity market, which looks to be pushing further into blue sky territory.

Therefore while this morning's violent rally may bring some much needed respite to those heavily exposed to the bond market it is likely to blow over soon enough and be replaced by another grind towards higher yields and lower prices as investment capital continues to head for the exits. Clearly the risks of an imminent breakdown in the bond market have diminished for the time-being, but we would still expect substantial difficulties to be encountered in the weeks ahead making this rally an excellent selling opportunity for those who remain over-exposed to fixed income.

Italy continues to post trade and current account data that many emerging markets can only look upon with envy as its domestic travails have created an export impetus of impressive proportions. This is not only important at the level of corporate activity and earnings but has also become an important generator of liquidity for the Italian financial system, which for most of the last 13 years has experienced a substantial drain from its Current Account, but is currently experiencing a strong surplus.

July's Trade Balance was €5.95 bln, the third highest reading on record while the 12 month ma rose to €2.09 bln, the highest since February 1998. This large surplus was driven by Exports of €38.13 bln, a new all time high for any month (July is typically the strongest month for the year seasonally) and an increase of 3% YoY while Imports were essentially flat at €32.18 bln.

The Current Account balance reached a surplus of €5.92 bln, the second highest on record, taking the 12 month ma up to €0.53, its highest level since April 2000.

We always feel that the Census Bureau Advanced Retail Sales report makes much better news than data, since even the name is misleading with its release coming a couple of weeks after most chain stores and car manufacturers have reported actual sales figures that are generally more accurate that Census Bureau estimates. In addition the monthly fluctuations in the headline report attract far more attention than is justified by their statistical meaning, particularly since most people judge the data using the MoM figures which have a habit of being quite volatile.

August's report is no exception with the headline sales showing an increase of 0.2%, well below expectations of a 0.5% increase. However, the fact that the July report (itself the cause of angst at the time of release) was revised up to 0.4% from 0.2% and the June report up to 0.7% from 0.6% fully accounts for the "miss" in August's data.

Viewed over the longer term Advanced Retail Sales increased by 4.7%, matching the trailing 12 month ma of this metric. This suggests no evidence of consumer fatigue and if anything the current cycle has shown rather less monthly and quarterly volatility than we have seen in prior cycles, in part because sales are probably still being aided by the prolonged sub-normal pace of purchase of large ticket items that took place between 2008-2010.

Although emerging market currencies have recovered some of their sharp losses in recent days there is still considerable momentum behind the recent wave of monetary tightening. Indonesia's central bank surprised markets this morning by raising the base rate to 7.25%, taking it to the highest level since April 2009. This comes in response to a rise in the 10 year sovereign yield from under 5.50% in May to almost 9% in early September (see chart), meaning that sharply higher interest rates are now in effect across the yield curve. As with other emerging markets we doubt whether this tightening has yet had any effect on local economic activity, but the longer high interest rates remain in place the higher the likelihood that clear signs of stress will emerge.

India reported better than expected Industrial Production data this morning with July seeing an annual gain of 2.6% compared to consensus expectations of a -0.9% decline, while the June data was revised slightly higher from -1.8% to -2.2%. This keeps the trailing 12 month ma at 1.2%, indicating sluggish growth remains in place.

However, it should be noted that this improvement was largely caused by a surge in the volatile Capital Goods sub-index, which rose 15.6% YoY, its highest reading since June 2011. As can be seen on the attached chart this metric tends to move around quite violently from month to month and the 12 month ma remains close to zero.

It should also be considered that the sharp increase in Indian interest rates only took place in mid-July, and therefore may not have started to have an effect on Industrial Production at the time the survey was completed. Our concern remains that tight local monetary policy in defence of the INR will place India's industrial sector under increasing pressure, particularly the portion sensitive to local demand (exports at least may gain from the weaker currency). Although July's report shows no such deterioration it is too early to take heart from the data.

Following economic statistics over holiday periods is always tricky, and this week's Initial Claims data was further distorted by the introduction of a new computer system in one large and one small state. The result was a significant outlier of -292K claims, far below expectations of 330K and the lowest reading since March 31st 2006. This took the trailing 4 week ma down to 321.3K, the lowest reading since October 2007 although clearly there is an element of distortion in this metric.

The degree of distortion is revealed by the NSA reading which was 228.4K, the lowest reading for any single week since September 2000. In other words this report is too good be true, which is not the same as saying that there is no improvement in the underlying data. We have argued for several months that Initial Claims data has demonstrated a clear trend of improvement that is not negated by the significant negative revisions to the Non Farm Payroll reports for July and August. Initial Claims have a much better track record of indicating employment trend in real time, and have generally been in line with the bond market's mood if one removes the temporary "noise" that coincides with the monthly BLS report.

Given the caveats linked to this week's release we doubt that it will have much immediate impact, and of course it is the last employment data that will be issued prior to next week's FOMC meeting. Nevertheless the clear message from Claims data since the start of the year has been that the employment situation is improving and it would appear that the bond market has been listening rather more closely that the FOMC.

Japan's official Business Confidence report for Q3 2103 shows a surge in business confidence to levels unseen since the data series starts in mid 2004. Large Firms of all types saw confidence rise to +12, the highest ever reading and up strongly from the Q2 report at 5.9. Medium Firms also recorded a record at +9.6, while the Small Firm segment improved to -8.7, the best reading since Q4 2006.

Manufacturing Firms led this move higher (as would be expected given their reliance on exports) with the Large Firm index reaching a record +15.2 (up from +5) and Medium Firms a record +11.7 (from +1.1), while Small Firms saw confidence rise modestly to - 12.7 (from -12.9). We view this as encouraging data that suggests that the improvement in local conditions has improved over the summer months.

The UK economy has comfortably surpassed the (admittedly low) expectations set for it this summer and the August Claimant Count (the equivalent of Continuing Claims data in the US) continued the trend of encouraging data this morning. Total Claimants fell by -32.6K, well above expectations of -21K while the July drop was revised from -29.2K to -36.3K, making this a strong report. Over the prior 12 months the Claimant Count has dropped by an average of -14.2K, the fastest pace seen since September 2000 while over the last 3 months the drop has averaged a punchy -32.8K. Total Claimants are now 1401.8K, the lowest since February 2009.

Of course part of this drop is caused by ineligibility rather than actual re-employment (a reason why many observers mistakenly downplay the value of following Claimant data), but historically this series (and Continuing Claims in the US) have been an accurate gauge of the underlying trend of the employment cycle and we believe that the improvement in the data is meaningful.

The UK Unemployment rate for July was also published this morning and fell to 7.7%, beating expectations of a flat 7.8% report. Here we are yet to see a conclusive shift in the data, with the current level matching the reports of September 2010, April 2011 and November 2011. A subsequent drop below this level would therefore be highly encouraging since again it would establish a change in the trend of Unemployment that would be much more meaningful than the actual drop itself (markets generally react to the direction of data and not the level).

India's trade report for August showed a narrowing of the Trade Balance to -$10.9 bln, compared to a level of -$12.3 bln in July and -$14.2 bln a year ago. Thus although this still represents a very wide deficit it is an improvement on some of the dire reports seen over the last two year. The 12 month ma of the deficit declined to -$16.1 bln, down from its record high -$16.8 bln in June. This report has been greeted by understandable relief, given the recent heightened concern over India's trade position.

Perhaps most encouragingly the improvement has come from greater exports, which grew by 13% YoY to $26.1 bln, a record for August. This would appear to be a response to the sharply lower INR, which has served to make Indian exports more competitive in recent months. Imports were essentially unchanged over the last 12 months. Gold imports fell sharply to $0.65 bln following the introduction of new restrictions, although we would caution that this may have led to a substantial increase in illicit smuggling activities which would have simply removed the effect from official trade data without actually resolving the underlying problem.

China's monetary and credit data for August 2013 suggests that the brief period of concerted tightening that took place between May and July may have come to an end, at least for the time being. Whether this is the result of a deliberate policy unwind, or simply a reflection of how hard it is to kill a credit bubble without resorting to draconian measures is unclear, but the ramifications are that the clock has for the time being stopped ticking on China's credit crunch.

Total Social (i.e. aggregate) Financing was 1570 bln CNY in August, well above expectations of 950 bln CNY and July's 808.8 bln CNY. This caused the trailing 12 month ma to tick slightly higher to 1518 bln CNY, reversing the recent sharp decline of this key metric. Perhaps more surprising is the fact that it was "shadow banking" activity that caused the surge. Total Bank Loans actually missed expectations (730 bln) at 711.3 bln, meaning they represented only 45% of total Social Financing, their lowest proportion since April.

On the other hand Entrusted Loans rose strongly to 293 bln (compared to an average of 196 bln over the last 3 months). Bankers Acceptance Bills soared to 304.5 bln (having shrunk by an average of -184.6 over the last 3 months) and we suspect this represents a straightforward reversal of prior the cash drain. Perhaps most importantly Corporate Bond issuance recovered to 122.7 bln, after collapsing in June and July, although this still represents a decline of over 50% from the level of issuance seen in August 2012 (see chart). Of all the categories in Social Financing this one seems to be the most likely to remain subdued in the months ahead, with important implications for corporate activity.

As would be expected given the credit data China's monetary aggregates have stabilized, with M2 growing by 14.7% YoY (just above the pace of bank loan growth) while M1 remains somewhat lower at 9.90%. Again we would stress that this represents growth substantially in excess of the PBOC's balance sheet (although we do not yet have August's data), underlining the extent to which China has become dependent on credit rather than liquidity in recent quarters.

The Chinese authorities released both their activity and credit statistics for August this morning making for a busy morning's analysis. We are much more interested in the latter (which will be addressed in the next note) since we believe that money and credit help see forwards whereas activity metrics are more backwards looking, but we recognize that most market participants would place them in the opposite order. In any case the overall picture is that the Chinese authorities would appear to have taken a substantial step backwards from the tourniquet of late June, with credit and money flowing much more freely and overall activity stabilizing.

As we commented with China's trade data yesterday this should be enough to rebuild confidence for a period of time in the entire emerging market complex, but it may also add to pressure in international fixed income markets as another of the major global economic worries recedes for the time-being. We continue to believe that we are in the middle of a prolonged period of rising global interest rates.

Regarding China's activity metrics Industrial Production was reported as rising 10.4% YoY, above expectations of 9.9% and the strongest data since December 2011. On a YTD basis (a more reliable metric 8 months into the year) Industrial Production has increased by 9.5%, ahead of 9.4% expectations.

Retail Sales were estimated up 12.8% YoY, just below expectations of 12.9%, while Fixed Asset Investment grew by 20.3%, just ahead of expectations of 20.2%. Real Estate Sales YoY increased by 24.4% (by area sold), which is clearly a fast pace of growth but still the lowest seen since December 2012. Real Estate Completions grew 1.4% YoY (which is hard to reconcile with the Fixed Asset Investment data), suggesting a healthy balance between supply and demand.

Japan was in the headlines over the weekend thanks to Tokyo being awarded the Olympic games in 2020 (we should remember to go short Japan sometime between 2016 & 2017 based on the experience of Beijing, London and Rio) but our attention was drawn more to the publication of the monthly bank loan and deposit report as we continue to track the BOJ's monetary experiment.

There seems little doubt that the massive increase in the monetary base has started to affect bank deposits, since although total deposits fell by -¥2.1 trln (-0.35%) this is an unusually small decline for the holiday month of August and means that deposits have grown by 3.8% over the last 12 months to their current level of ¥589.7 trln. Furthermore the average growth rate over the last 12 months is 3.00%, which represents the steadiest growth in deposits since June 2000. In other words money is not only pooling at the level of the central bank's balance sheet but is also now starting to increase significantly in private sector cash positions.

Loan creation remains more anemic, with Total Bank credit increasing 2% YoY and 2.3% excluding trusts. August itself was a flat month, again reflecting the influence of the summer vacation. On the other hand at least a steady positive growth trend has taken hold at at their current level of ¥405.5 they are within 1% of exceeding the March 2009 high of ¥409.2, which we regard as something of a milestone (see chart).

This keeps the ratio of deposits/loans at a very high 1.454, almost twice the record low level of 0.759 recorded in February 1993. Based on the experience of the US we would expect this ratio to remain elevated since the deposit base is likely to continue growing, but we would also expect to see a steady increase in the pace of credit creation going forwards from the current steady but unexciting level.

One of the most helpful forces over the last few months has been a discernible change in the mood of investors towards Europe, which has acted as an important buttress against the worsening of sentiment towards emerging markets.

This morning's release of the monthly Sentix poll showed a move back into positive territory by the Aggregate index (which combines both professional and retail investors' views) for the first time since July 2011 and the reading of 6.5 was somewhat stronger than the -3.5 which had been anticipated.

We view this move back into positive territory as a helpful tailwind for Euro-zone risk assets, although as we always argue sentiment tends to move after markets, and September's strong reading is itself largely a product of the better than expected showing by European equity markets this summer. Nevertheless a clear trend of improvement is in place and sentiment remains a long way from the sort of problematic positive readings that mark a market top.

On the other hand this change in mood does not bode well for safe haven bond markets. As the attached chart shows there is a fairly strong relationship between the Sentix poll and the German bund yield, and the strong improvement in the former has not been fully reflected by the recent surge in German yields. The bund yield briefly exceeded 2% last week, before falling back in the aftermath of Friday's BLS payroll report. Given that the yield was over 3% in May 2011 we would expect to see a continued climb higher in the weeks ahead.

China's trade data for August showed a steady increase in both Import and Export activity, which were up 7.0% and 7.2% respectively YoY and a larger than expected trade balance of $28.52 bln, mostly caused by imports being somewhat smaller than would have been expected.

We are unsurprised by this data, since we view China as currently benefiting from an improvement of external demand from developed economies. We note that exports to the US, Europe grew by 6.1% and 2.5% while Japan fell by -2.2% (see chart). Exports to Hong Kong were estimated to have risen by a reasonable 6.4% but we still note that the impact of what were clearly bloated export reports last year has never been erased from the data, meaning that we suspect that the overall export and trade balance figure still significantly overstates the strength of China's trade position. Since the trade balance to Hong Kong alone is close to the entire trade balance this is not a trivial issue. We would therefore rely on the data more for a sense to "change" than an accurate snapshot of China's overall trade position.

Regarding imports we would argue that the impact of tighter local credit conditions is unlikely to be felt for a number of months longer, and hence we are not surprised to see demand remain stable. Overall we would expect this data to be well received by the market, anxious for some reassurance regarding emerging markets. However, China's problems are quite distinct from many of its peers and this weekend's data has much less direct relevance for a country such as India than most would suppose.

The timing of this year's Jewish New Year means that we will miss this week's release of Initial Claims data tomorrow and Friday's BLS Employment Report. The former has been a source of upside surprise over the majority of the summer although we note that some distortion from the Labor Day holiday will affect the data over the next couple of weeks. Friday's Non-Farm Payroll report is expected to estimate job gains of 180K in both Total and Private Sector payrolls, with the Unemployment Rate remaining unchanged at 7.40%. This would be close to the trailing 12 month ma of gains (192K for Private Sector) and a little above last month's report (161K). The improvement of Initial Claims data suggests that things may be running a little stronger than this but given the erratic nature of the report anything between about 160K and 200K would represent an "in line" report.

As far as the bond market is concerned the great risk now is that employment data confirms the very strong signal given by yesterday's ISM report. We have seen some clear signs of pressure building in the yield curve in recent days and although long dated yields have not broken out to new highs in recent sessions the shape of the curve has continued to meaningfully steepen in the overpopulated "belly" of the curve.

We have attached an updated chart of the entire yield curve sliced into sections, and as can be seen the 2-5 Year spread (green) now accounts for the largest portion of the curve at 127 bp, its widest level since May 2011 (the 2011 high point for this spread was 156.8 recorded on April 10th). At the same time the long end of the curve has continued to compress, with the 10-30 year spread (black) falling to 90.4, its lowest level since June 2010.

We have included a second chart which isolates these two spreads and compares their level historically. At the current time the 10-30 Year spread is -36 bp less than the 2-5 year spread, compared to a +75 bp reading at the start of May. In February 2011 a gap of -52 bp was recorded. However, it should be considered that significantly more capital has been invested in fixed income instruments today than was the case in early 2011.

From our perspective the steepening of the belly of the curve is perhaps a better indication of capital fleeing the bond market than simply following the long end of the curve. The latter remains an accurate indication of the cost of the credit but the former is more pertinent to the pressure that some of the more poorly positioned portfolios may be under at the current time.

Link to interview:

http://programme.rthk.hk/channel/radio/player_popup.php?pid=5126&eid=231243&d=2013-09-04&player=media&type=archive&channel=radio3

Ireland's large pool of unemployed workers continues to fall steadily with the August Live Register falling by -3.4K (-0.81%) to 415.3K. This is the 14th consecutive decline and the 19th out of the last 21 months, indicating the steady improvement that has taken place since the height of the Eurocrisis and the Live Register is now back to where it was in the summer of 2009.

Over the last 12 months the Register has fallen by a total of -20.2K, the largest annual drop since April 2001 (when the total was far lower at 139.4K) but over the last 3 months the total has been falling at an annualized rate of -40K, a pace only reached at the peak of the technology boom of 2000.

Of course we are dealing with a very different set of circumstances today. 13 years ago Ireland was lauded as the "Celtic Tiger" whereas today the country is still digging itself out from the rubble of the disastrous foray into speculative real estate. The Unemployment rate bottomed at 3.70% in January 2001, compared to a crisis peak of 15% seen in February 2012 (interestingly this was lower than the 1993 peak of 15.70% and the 1985 peak of 17.30%). August saw this measure drop to 13.40%, taking it back to its level of June 2010 and a drop of -1.2% over the last year. We would expect to see further rapid progress made with the key level of 12% being a legitimate target for the summer of 2014. Clearly Ireland remains a long way away from healthy or even normal employment metrics but the clear trend of improvement gives much hope for the future.

The ISM Manufacturing report for August is a good reminder that for all the attention of the FOMC's intentions it is increasingly hard for long term interest rates to remain at their current historically low levels given the clear signs of accelerating economic activity.

The overall ISM index rose in August to 55.7, somewhat higher than consensus expectations of 54. This represents a clear acceleration of activity, and follows a similarly strong report in July (55.4). Perhaps most encouragingly New Orders (red) rose to 63.2, the highest reading since April 2011. However, given that we are dealing with a diffusion index it should be understood that a 60+ reading of New Orders 4 years into an economic expansion signals an important acceleration that will take a number of metrics up into blue sky territory.

Production (blue) fell slightly to 62.4 from 65, but again still remains very strong at this level. Inventory levels (olive) remain under pressure at 47.5 and Employment modestly positive at 53.3.

The reaction of the bond market to this report is telling, with the 30 year yield rising to 3.82% and the 10 year to 2.89%. The latter is now only 4 bp away from generating a new two year high and unless this week's employment data comes in well under consensus we would expect to see a further leg higher in interest rates.

Brazil posted a positive trade balance of $1.226 bln in August, somewhat below the $1.5 bln which had been expected. This compares to an average August trade balance of $3.276 bln between 2003-2012, which gives a sense of the recent deterioration in Brazil's trade position. Over the last 12 months the average balance has been $0.207 bln, the smallest surplus since November 2001, suggesting that the sharp reduction in the BRL has yet to translate into stronger exports (we are not surprised as it can take several months of a lower currency to stimulate external demand for goods).

Meanwhile the July Industrial Production report showed a -2.0% reduction from June, a steeper draw-down than the -1.3% that had been expected. This meant that the YoY increase was trimmed to 2.0%, missing the 2.60% consensus estimate. Although we would not characterize this as statistically meaningful a miss in this widely watched metric will do little to improve the mood of local or foreign investors.

Indonesia continues to report a sharp deterioration in its trade position with the July Trade Balance falling to a deficit of -$2.309 bln, a record for this 5 year old data series. This compares with a deficit of -$0.263 bln in July 2012 and the deterioration of the last 12 months is shown by the 12 month ma which has fallen to a record -$0.630 bln (see chart). Although a deficit of this level seems trivial compared to that of Turkey or India, Indonesia has been drawn into the same locus of concern in recent months, with the IDR suffering substantial liquidation pressure and following the release of the trade report the IDR fell to a new 4 year low of 1145.

As we have mentioned before the attempt by the central bank to defend the currency by raising interest rates risks placing considerable strains on the local economy. Given that the greatest risk facing Indonesia over the short top medium term is capital flight by current investors it is not hard to imagine an unfortunate feedback loop between a lower currency, tight monetary policy, lower corporate profitability, deteriorating asset markets, capital flight, a lower currency and so on. The fact that this scenario is playing out in multiple venues simultaneously increases the odds that investors will start to move as a herd, in an echo of the sharp withdrawal of capital from the Eurozone two summers ago.

Returning to the subject of Japan we note that the Ministry of Finance released its estimates of Q2 total corporate profits over the weekend. This report showed profits totaling ¥15.68 trln, up 18% YoY and the highest Q2 total since 2007. The rolling 4 quarter average increased to ¥13.36 trln, the highest reading since September 2008.

Attached is a chart which compares Japanese corporate profits to the NKY index, with a ratio of these two measures on the lower chart. As can be seen at the market's 1989 peak profits totaled ¥10.27 trln while the NKY reached almost 40,000, generating a ratio of 0.264. In June 2010 profits of ¥13.27 trln were matched with a NKY close at 9382, generating the highest ratio of 1.415, or extreme value. A year ago the ratio stood at 1.404, and while the strong rally in the NKY over the last 12 months has brought it back down to 1.146 we would argue that this still represents an attractive valuation given the clear trend towards increasing profitability in the corporate sector.

Monitory conditions in Japan are the mirror image of China with a very powerful surge in central bank assets being used in an attempt to reinvigorate a moribund credit system. Although the same could be said of a number of developed economies at the current time the situation in Japan is somewhat different since their domestic financial system is not currently overburdened by non-performing credits from the last economic cycle. Thus we would argue that whereas in a country such as the US much of the new money created under QE1 and QE2 was used to replace that destroyed in prior years (we would argue that by the time QE3 came around this process was complete) in Japan's case the surge in the monetary base has already started to create a pool of "excess" liquidity within its financial system.

The extent to which this liquidity is now used for genuinely productive purposes (in which we would include investing in risk assets such as equities) remains open to debate. We remain hopeful while others are skeptical, with the still reasonable valuations creating a reasonable risk/reward ratio.

What is not in question is the willingness of the BOJ to complete this monetary experiment, with August's report showing a further increase in the monetary base of ¥4.82 trln (2.86%), a 12 month increase of ¥51.49 trln or 42%. This represents the fastest rate of increase since late 1973, when the BOJ was responding to the oil shock in the wake of the Yom Kippur war.

We note that Japan's equity, bond and currency markets have marked time since May, following their extremely rapid adjustments in prior 6 months. This pause is reasonable and strikes us as a healthy consolidation for the equity market, which we would expect to resume its upward progress sometime towards the end of 2014. Unlike the earlier advance we would not expect to see any substantial change to the value of the JPY, which we believe will be range-bound between roughly 95 and 105. We could however start to see a more concerted move higher by Japanese interest rates, in sympathy with the rest of the developed world's bonds. Again this would strike us as healthy, and not the beginning of the dreaded "death spiral" that some called for at the start of the BOJ's policy shift.

The PBOC released data for its July balance sheet over the weekend allowing us to update our monitoring of domestic Chinese liquidity. The data showed the balance sheet shrank slightly by -4.39 bln CNY (-0.01%) falling to a total of 30.669 trln CNY. However, since July 2012 saw a significantly larger draw-down of 149 bln CNY this means that the YoY change actually increased to 7.77%, its fastest rate of increase since January 2012.

Of course this remains well below the pace of growth for other monetary and credit aggregates, with both M2 and bank credit growing at approximately twice the rate of the PBOC's balance sheet over the last 12 months. As a result the ratio of the PBOC's balance sheet to outstanding bank credit (excluding shadow banking) fell in July to 0.4459, the lowest level since January 2005 (see chart). Of course given the much more substantial role played by shadow banking in recent years compared to 2005 we would describe conditions today as significantly tighter than they were eight and a half years ago.

The diminished level of liquidity creation by the PBOC strikes us as a more important factor in setting Chinese monetary conditions than most observers realize. As the FRB found in late 2008 there comes a time that a static balance sheet fails to keep up with compounding credit growth, particularly when the latter starts to lead to accelerating non performing loans. With shadow banking and corporate bond issuance both running at much diminished levels since May the role of bank credit has become substantially more important in recent months. The sluggish pace of growth for the PBOC's balance sheet would appear to raise the stakes further over the coming months that a deliberate attempt to exert control over credit creations leads to some unpleasant consequences in the months ahead.