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Monday, October 19, 2009


Friday’s US data and Q3 earnings reports probably gave us a timely reminder of how fragile and patchy the economic rebound really is and markets tended to favour the “risk-off” trade heading into the weekend. While the industrial production and capacity utilization data looked solid on the headline, the current need to adjust numbers for the impact of the one-off cash-for-clunkers vehicle sales. In essence, the improvement of +0.7% was only +0.4% ex-vehicles, and still showed a 6.1% year-on-year decline. The preliminary University of Michigan confidence index was also significantly lower coming in at 69.4 versus 73.1 expected and 73.5 last. On the Q3 earnings front, Bank of America cast a cloud over earlier more-buoyant results when it revealed a larger-than-expected loss of rising consumer defaults.


China was hitting the headlines on Friday, and over the weekend, as the US Treasury highlighted that China’s piling up of foreign reserves threatened to slow the correction of global imbalances, though again fell short of branding the Chinese authorities as a currency manipulator. Similar thoughts seem to be surfacing again in Europe as well with the head of euro-zone finance ministers Jean-Claude Juncker announcing that he, ECB chief Trichet and EU Monetary Affairs Commissioner Almunia would travel to China before year-end to discuss the Yuan’s exchange rate. A similar visit went ahead in November 2007 where the EU plead for a faster appreciation of the Yuan, a plea that was rejected at the time by Premier Wen Jiabao.

Meanwhile on the China economic front, various officials have been more upbeat about the recovery. The chief economist at the National Bureau of Statistics said that China’s V-shaped recovery could extend into next year. An official from the National Development and Reform Commission also said that China would have no difficulty in reaching the 8% official target for the full year 2009, having already reached 7% in the first 9 months of the year.


The pound was pressured by articles in the Sunday Times and Telegraph with the former highlighting comments from MPC member Posen. Posen said he was in favour of increasing quantitative easing and was not so concerned about overshooting inflation in the current environment. The QE comments ran contrary to those from BOE’s Fisher and Bean last week, who favoured a “pause and wait-and-see” approach. Additional pressure was piled on by an article in the Telegraph, quoting the Confederation of British Industries who warned that Britain risk a sterling crisis if public finances are not brought under control by 2015-16.

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