Growth Story and Basel Drive Markets

One of the most important developments over the past two weeks has been the easing of the summer’s anxiety about the pace global growth.

The important US economic reports include the August manufacturing ISM and the better than expected jobs data (and back month upward revisionsin private sector job creation). To this list, we can add the pre-weekend July wholesale inventory data. The consensus called for a 0.4% increase. Instead they rose 1.3% and the June series was revised to show a 0.3% rise rather than 0.1%. The fact that the inventory/sales ratio remains low (1.16 vs 1.27 a year ago) suggests the accumulation of inventories is intentional and points to a source of possible upward revision in Q3 GDP estimates.

Chinese data reported over the weekend also help ease concerns. The data helps strengthen views that slowdown in the Chinese economy was largely shallow. Here the market will focus on not only industrial production and retail sales, but also the fact that urban fixed asset investment increased at a faster rate for the first time in several months.

In addition, faster growth in new loans suggests Chinese officials are managing to walk a fine line between minimizing financial excesses and choking the economy. New loans increased by CNY545.2 bln, this represents the first month-over-month increase in four months If the government’s annual target is to be achieved, the pace must slow down below CNY500 a month. Recall that starting last month, new regulations forced trust companies to put loans linked to wealth management back on to balance sheets. There had some suspicions that banks were using trust companies to circumvent regulations. Contrary to pre-weekend speculation, the PBOC did not hike interest rates or use other administrative levels to tighten monetary conditions.

Another development is not so much what happened as what did not happen. The BOJ did not intervene. There had been stepped up talk at the end of last week that the BOJ could intervene as the markets were opening earlier today.

The idea was that 1) Japanese officials had stepped up their rhetoric,; 2) there were press reports claiming that Japanese officials were preparing officials in Europe and the US and negotiating no undermining comments; 3) it would be a way for the Prime Minister to steal some of this rival’s thunder ahead of the DPJ party leadership context tomorrow. Net-net the yen is flat against the dollar, but weaker on the crosses.

Perhaps the most important development in Japan is not really the fact that the BOJ did not intervene—after all Japanese officials have been very reluctant to do so, but that tensions with China have increased sharply. While Japan has reportedly released the crew, it has arrested the captain of the Chinese fishing boat caught in disputed waters. China has immediately postponed talks with Japan about a joint gas field in the East China Sea and summoned the Japanese ambassador around midnight.

The better global growth story and the extended implementation period envisaged for Basel III may help stabilize the intra-European bond spreads for the near-term. Also after a quiet August, bond maturities in the euro zone this week are estimated at nearly 40 bln euro and these funds may help ensure smooth bond auctions in the coming days.

However, the reliance of ECB facilities remains very high. Greece and Portugal figures are readily available. Greece banks reliance slipped ever so slightly for the first time this year in August to 95.9 bln euros from 96.2 bln in July and 49.7 bln at the start of the year. The August borrowing is more than a quarter of GDP. Portuguese banks borrowed a record 49.1 bln euros from the ECB in August, a 0.6% increase from July. This is more than a fifth of GDP. For its part, Ireland dramatically under-estimated the costs of its bank bailout. S&P warned that it cost 30% of GDP. These considerations may not influence the day-to-day vagaries of the capital markets, but they would seem to represent a weight on the euro sentiment.