Translated by Alexander Vasiliev
Russian version
Good afternoon. The main political event of last week was of course the mid-term elections in the United States. As was expected, Republicans enjoyed a crushing victory in the House of Representatives, which was totally re-elected - but in the Senate, were only 37 out of 100 seats were contested, Democrats managed to fend and save their majority, though a much thinner now. Governors’ elections also brought victory to Republicans - with one caveat: they lost in California – where by the way lives every eighth American. In general, elections brought up an explosive mixture of politicians of both parties - that promises a merry life to the Obama administration within the next two years. New Speaker of the lower chamber will be John Beyner, a 60-year-old sunburnt spry man of the Democratic Party - in the elections’ hot pursuit TV speech, he almost cried on the excess of feeling: well, he will have to keep his emotions while in the high office.
There were also a lot of “dangerous” news: Qantas A380 (with 459 people on board) has blown up the engine, with the wreckage crashing onto the Indonesian city - but the crew managed to safely land in Singapore in the end; the Yemeni terrorists send death parcels around the world; the same is done by the Greek leftists - they sent letters to Merkel and Berlusconi, mockingly putting Greek Ministries of Economy and Finance as the senders. However, Don Silvio has no time to be afraid of terrorists - 74-year-old ladies’ man was caught on the 18-year old Moroccan thief, whom he ordered the police to release earlier. Berlusconi parried all the allegations with a frivolous phrase that it is “better to love beautiful women, than to be gay” – and at this point the European sodomites became excited; their Moscow colleagues have been recently assaulting their opponents, so the Italian political bison should be wary – in the today’s world, tolerant to all the abominations, this public will eat up anyone and would not choke.
Rise of raw materials and food
Monetary markets. Last Wednesday saw the “crucial” meeting of the US Fed. Rates remained as they were, assessment of the situation nearly has not changed - but the Fed said resentfully, that it is upset with the too slow recovery of the economy: unemployment is not falling, and inflation is low – one should push the throttle! To do so, long-term treasuries for $600 billion will be bought before mid-2011: the average gives us $75 billion a month - but the speed and volume of transactions will be updated according the incoming data. As always, the lone dissenter Thomas Hoenig voted “against” - reasonably assuming that the disadvantages of emissions exceed its advantages. The reaction followed immediately: Koreans want to introduce severe restrictions on capital inflows from abroad; Brazilians promise to “take retaliatory measures”; Chinese are warning; and even the former head of the Fed Paul Volcker acknowledges the possibility of inflationary surge – with which the Fed will have to do something. Ben Bernanke had to face people quickly and make excuses - saying, do not be afraid: last time we poured $1.7 trillion and inflation did not happen - while here the sum is three times smaller. Hmm, monetarists’ “arguments”...
Experts’ reaction was mixed: on the one hand, the Fed has signalled that it can continue the emission pleasure indefinitely - but on the other hand, already in 2011 it will be harder to do, for at January 1, the number of hawks in the office will become noticeably larger. Markets did not rejoice too – in any way long bonds’ yields fell. We think, not the least reason of concern for the Fed is the budget: in the acute phase of crisis, the government has borrowed huge sums through short bonds - and now, lowering the long-term rates, the Fed allows administration to refinance for longer terms. At the same time, some consumers may also be able to refinance at lower rates - but the cost of this “pain” is the costs’ inflation, which will only worsen the situation for households and corporations. In general, the situation is ambiguous – but certainly bad in the long term: the fact is that all of this monetary easing can work only through more and more borrowing – and since the loans are granted at interest, the real burden of debt (including services) will grow; but where should it grow, if it is already so transcendental?
Other central banks were also active last week. Reserve Bank of Australia unexpectedly raised its base interest rate by 0.25% to 4.75% per annum - referring to the fact that rapid Chinese demand generated inflation and asset bubbles, as well as high levels of employment and capacities’ utilization: the Australian economy is small, so even modest spikes in external demand cause dramatic response. Reserve Bank of India raised the repo rate by 0.25% and limited the amount of mortgage loan to 80% of the cost of house - attempting to cool the market; that does not help much - inflation in the country reached 9.8% y/y and continues to grow, which is extremely dangerous for the country where three quarters of the population lives on $2 a day or less. Other central banks - the Bank of England, ECB, Bank of Japan and the Bank of Indonesia - left the rates unchanged, limiting themselves to vague comments about what the happening monetary madness. It is understandable - sane people do not attempt emission race, but everyone understands that at least some action should be taken in response to the Fed’s banditry. German Finance Minister Schäuble said that the policy of the Fed is the phenomenon of the same order as that of China’s currency manipulation; in his opinion, emission is useless to deal with the problems of the United States - who actually seems to be extremely helpless in the face of economic crisis.
But the European crisis is also deepening. Ireland continues to cut budget spending – this generates a decline in production and, as a result, in state’s revenues, so the sequestration has to be permanently strengthened. The market is already almost gave this country the verdict - and now every day its treasuries’ yields set new records: for the 10-year securities it reached 8% per annum, exceeding the rate for similar German bonds more than threefold; the price of insurance for 5-year loans using credit default swaps has reached 6% per year. Irishmen are not alone - the Portuguese papers have rushed in the same direction, and then the Greeks reconsidered their recent achievements. Parliament of Portugal has managed to adopt a draft budget for the next year - for the sake of that, opposition has cynically agreed to abstain from voting. But, on the whole, European periphery is rather dead than alive - and the fact that it is not very evident in the EU in general, is only due to a small size of the aforesaid three countries: their population is only 25 million people and combined GDP covers only 6% of the output of the entire European Union.
Currency markets. Another round of monetary pumping in the US has caused a new wave of dollar decline throughout the FOREX: euro soared up to 1.43, while pound - to 1.63; yen came to 80.25, and Swiss franc came back to 0.95; Canadian dollar approached parity with the American - and the Australian has confidently exceeded it, further stimulated by the local central bank’s monetary tightening against the Fed’s easing. Most likely, further movement of currencies will go in sync with the reaction of monetary and commodity markets on the Fed’s policy - and by the end of the week there were small corrections, though not for all the rates.
Source: SmartTrade
Stock markets. Fresh cash infusions leaped the world’s major stock exchanges to new local highs - so, for example, Dow Jones surpassed 11,400 points. Reports are now increasingly come from outside the US - though America does not sleep too. BP went into profit in the third quarter - but much of it has been eaten up by costs to cover damage from an accident on the oil platform in the Gulf of Mexico; the market took the numbers of the oil giant generally cold. Consumer sector does not shine - even in the exotic segments: for example, beer monster Anheuser-Busch InBev showed a decrease in profits (by 7.2%) and revenues (by 4.5%) - despite the growth of demand in China, Russia and Brazil; the business is going worse in Europe and the USA. Similar picture is true for Unilever (the manufacturer of Knorr soups, Lipton tea, deodorants Axe and Rexona, soap Dove, Cif cleaning products and many other products) – the producer’s main increase occurred in developing markets; however, even here the slowdown was registered now, so prices have to be reduced (on average by 1.2%) and poor sales growth is to be put up with (3.6% versus 5.7% for Nestle and 6.9% for Danone) - however, profits rose by 19% thanks to an aggressive campaign to reduce costs at the company’s factories in Europe. Competitor in the USA, Kraft Foods, who has recently acquiesced the British Cadbury, has seen its profits falling by 8% - but revenues have grown substantially.
Source: SmartTrade
Net profits of the American pharmaceutical group Pfizer fell by 3.3 times; revenues and forecasts for the year have not lasted up to expectations strongly - the market reacted gloomy on those numbers. Things are food for Adidas: profits increased by a quarter, revenues - by 20%; prospects for the year, in general, are also seen in more vivid colours than previously. Nissan’s performance has pleased: profits rose more than fourfold, while revenues increased by 21.4% - to blame the Chinese demand and a partial restoration of the US one; but chief executive Toshiyuki Shiga is unhappy, complaining about the too expensive yen, undermining efforts to strengthen the positive trend. Similar problem is with Toyota: after last year’s losses company has entered into profits - but prospects are shaky because of weak demand and expensive yen undermining the exports. Mobile phones manufacturer Alcatel-Lucent also returned to profits - and its head Ben Fervaayen complained about the Chinese rare-earth machinations, of which we wrote about a couple of weeks ago. Over one billion euro (8% more than last year) was earned by Deutsche Telekom - however, revenues decreased by 4%. Among the financial sector companies only AIG reported - but here the things are apparently hopeless: in the third quarter it has received $2.4 billion of losses. In general, the report season is yet calm - not too happy, but not particularly upsetting.
Commodity markets. News of the American emission provoked strong enthusiasm for commodity markets: oil is back to the highs just below $90 a barrel; industrial metals (aluminium, copper, platinum) surpassed the peaks of spring - only nickel has not managed that, while palladium literally whizzed upwards. Gold showed a new maximum slightly below $1400 per ounce, and silver rocketed to $27. New peaks were set by forage (soybean meal, etc.) and the irresistible cotton; of food products, the same was also made by corn, soybeans, vegetable oil, sugar, coffee and orange juice; rice and oats came back to the previous highs. As we can see, the threat of costs’ inflation is not an empty phrase.
Source: SmartTrade
Innovations are everywhere
Asia and Oceania. In Australia there was some recovery in business activity in October according to PMI indicators - manufacturing sector, however, could not get into the zone of expansion, but the service sector managed to do that for the first time since April, albeit very slightly. The corresponding figures of China have grown up again - and the manufacturing index, according to HSBC, showed its annual maximum. Australia’s trade surplus narrowed in September versus August by almost a half. The monetary base in Japan in October continued to accelerate its annual growth - it has reached 6.4%. House prices in Australia in the third quarter rose by 0.1% - far weaker than in the previous quarter (+2.0%); building permits in September have tumbled by 6.6% after declining for 4.8% in August – the figure declined by 11.6% in a year. In Japan basic salary showed the first annual growth for 25 months in September - albeit only by 0.1%; however, the fall of overtime hours and reduced rate of allowances for overtime work does not bode much happiness for the Japanese workers. And this, in its turn, hardly allows one to count on a rapid growth in private demand – another confirmation of what has been the fall of car sales by 26.7% y/y in October. In Australia retail sales rose by 0.3% m/m in September (as they did in August) – coming short of +0.5% forecast; we must remember that we are talking about a nominal value here - which does not account for inflation.
Europe. According to the preliminary assessment of the central bank, the GDP of Spain in the third quarter remained at the level of the previous quarter, while annual growth made 0.2% - the main bulk of data for the European GDPs will be released next week. Manufacturing sector in Europe, as could be expected looking at the dynamics of euro, is beginning to sink rapidly. Production of cars in Germany went into the minus on annual dynamics in October; industrial production in Spain in September was 1.4% weaker than a year ago - although back in August, there was an increase of 1.6%. Machinery orders in Germany in September were 28% higher than last year - but it is much less than 45% in August and 48% in July: unfortunately, the monthly dynamics has not been given - but it seems that it is bad. This was confirmed by a report on orders in the manufacturing sector - in September they have fallen by 4.0% versus August, though they were expected to grow by about 1%; in the third quarter orders are still in positive territory against the previous quarter - but only by 1.7% against +7.5% in April-June, and + 6.6% in January-March; external orders collapsed by 6.6% - the factor of drastic rise in the price of euro begins to do its job. However, the October business activity indicators (PMI) in the main eurozone countries, including Germany, showed some recovery after subsiding in September – let’s see how it will affect production and orders. Improvement in the PMI has also nhappened in Britain – for the first time since May; while the construction sector, which was the major factor for GDP growth in the second and third quarters, fell to 8-month low in October.
Inflation takes the offensive again – which is logical given the rapid growth of raw materials. In the eurozone in September producers’ prices grew by 0.3% m/m, bringing the annual increase up to 4.2%. In Britain, the monthly growth of the same index versus October was 0.6% (a peak since April) and annual - 4.0%; incoming prices (raw materials) soared by 2.1% m/m (maximum since March) and by 8.0% y/y - hence, output prices will continue to grow. According to the British Retail Consortium, retail prices in October rose by 2.2% y/y - the biggest growth since January; the food has been particularly active rallying by 4.1% - which has not happened since June 2009. British house prices have been contradictory in October: according to Hometrack, there was a fall of 0.9% against August (the worst figure since January 2009), but according to HBOS, there has been an increase of 1.8% - though the latter source has reported the crash by 3.7% in the previous month, after which the roll-back looks logical. Consumer confidence in Ireland fell to a 17-month low in October; the mood of the Spaniards has also been deteriorating – which is not surprising, since the rise of unemployment (which is already above 20%) in their country has not just resumed, but even accelerated. Quickly glooming are the employment prospects in Britain - according to KPMG/REC, the index of permanent vacancies in October fell to 14-month low. Decrease in the registration of new cars is present everywhere: in Italy it accounted for 28.8% y/y, in Britain - 22.2%, Germany - 20.0%, in France (where the remains of stimulus plan for the industry are alive) - by 14.9%. Retail sales in the eurozone in September fell by 0.2% m/m – Germany was especially upsetting, registering the collapse of 2.3%; in France there was the second consecutive month of decline. To be continued - good figures of the previous months were due to the fact that the Europeans have cut their savings rates hoping for the future growth of income; the latter, however, did not happen (real incomes are standing still for 2 years now) - and it is not the fact that the tight-fisted people of old Europe will agree to continue consuming their reserves.
America. In the United States in the third quarter productivity has increased, while the cost of labour fell - business does not want to hire staff, preferring to load the available maximally. Industrial orders in September rose by 2.1% - an enviable contrast to Germany, which is explained by cheap dollar and expensive euro. Business activity in Canada in October has unexpectedly sagged sharply, although remained in the area of expansion; similar US indicators, by contrast, improved slightly versus September. In Canada, building permits jumped by 15.3% m/m in September more than recouping the August drop of 9.2%. The number of jobs in Canada grew by 3 thousand in October, and the unemployment rate fell from 8.0% to 7.9%. The similar US report gave an increase of 151 thousand in general, and 159 thousand for the private sector; figures of the past two months were also revised upwards; unemployment rate remained at around 9.6% - but the growth of wages and length of the workweek is positive. However, indicators of long-term unemployment went back to growth - the average job search time has reached 33.9 weeks, very close to the historical peak of June (35.2). Report of ADP on private sector employment is more modest (+43 thousand jobs), but also not bad. We must not forget, however, that, because of population growth, simply maintain the level of employment requires 100-150 thousand new jobs created each month - that is, the United States have only went to a zero level. Primary applications for unemployment benefits again jumped by 20 thousand and the total number of recipients in mid-October reached 10.2 million.
Source: US Bureau of Labour Statistics
Private demand in the United States is generally weak, but snaps sometimes. In October, car sales have exceeded forecasts and, seasonally adjusted, for the first half year exceeded 12 million on annual basis. Construction spending in September rose by 0.5% versus August - though the previous month’s figures were revised from +0.4% to -0.2%. Private incomes in September fell by 0.1% m/m (the worst dynamics since July 2009) against the forecast of +0.3%; real disposable incomes fell by 0.2% in nominal terms, but adjusted for inflation – by 0.3%; in the last 4 months (since June) this figure fell by 0.1%. Private spending rose in September by 0.2% nominally and by 0.1% when adjusted for inflation – and while the statisticians routinely underestimate the latter, real spending has not changed. Savings rate fell from 5.6% to 5.3% of disposable incomes - but still, as can be seen, the demand is nailed down. This is shown by the statistics of retailers: according to the International Council of Shopping Centres, in October the annual growth of sales in stores open at least a year ago was 1.6% versus 2.6% in September and 3.2% on average since February – however, researchers blame the warm weather, but we do not doubt that if October was chilly, then this would be the root of bad results. Retailers are gloomy - they rush to pre-launch an aggressive advertising on television and offer the discounts surpassing the last year’s one; some have already started to reduce prices – and the first to become cheaper are electronic gift toys. Holiday purchases (from late November until the end of the year) will show whether these measures will help to pull out the key shopping season.
Russia. According to Rosstat, consumer prices in October were higher by 0.5% than in September, by 6.8% - than in December of the last year and by 7.5% - than a year ago. Over the past 12 months, cereals and beans went up by 37.5%, fruits and vegetables - by 33.9%, butter - by 26.4%, milk and dairy products - by 16.1%; Russians paid 15.0% more for utilities, including the cold water - 17.5%, hot water - by 16.4%, gas - by 17.2%, heating - 13.8%. Ubiquitous head of RosPotrebNadzor Onishchenko, having finished with smoking and drink, now wants to ban the frozen chicken – and how the towns with bleak communications and in remote areas would then be supplied? Innovations are thriving: for instance, the Russian Union of Industrialists and Entrepreneurs offered to allow 60-hour working week – prompting such a public outcry that the authors had to quickly disown the idea. Population census results also showed the bosses’ imaginations - it is obvious that a fair amount of pages was filled by scribes with no thought. For the first time Moscow authorities have allowed the political rally undertaken by the opposition at 31-st of each month - but then the disagreers themselves have quarrelled: irreconcilable Limonov still perpetrated an unauthorized gathering and ran into a fresh innovation - the police forcibly dragged the writer, but not from rally, as usual, but instead to the rally officially sanctioned by the authorities. Well, that our political process is just like circus is not a sensation.
Pic: Artyom Popov, ITinvest
But there still exist diehard people among the Russian superiors, who are sacredly protecting the key traditions of their environment. For example, certain Oleg Matveychev – some say, a prominent political consultant who was decorated for his services by the presidential administration; however, he’s was overseeing the politics in the Kaliningrad region - and was sent into retirement after the mass opposition rallies there; the current nomenclature, however, does not betrays its people - and the guy went us vice-governor to the Vologda region. The innovative impulse prompted official to start a blog - there he expressed himself fully at Wednesday. Indignant at the facts criticism against the authorities, Matveychev firstly showed people their place: saying that their destiny is to feed the bosses. Then he likened the country’s population to animals, shepherded by the authorities: “take away the power - and the whole country will go nuts”. Finally, the bureaucrat expressed his deepest wish – seeing all the corruption fighters coming out on a square, where they would be “wounded on the tracks” by a tank squadron; and this procedure must be repeated every 20-30 years. Presumably, after the holidays bosses will tell the state-crazy “not to spoil the image of power”, but the search-engine’s cache saved everything - and puzzled bloggers also made some screenshots. For us important is another thing: what the bureaucratic stone faces have in their minds, the blinded spirit matveychevy have on their tongues – and so this is how our government thinks about the people. And we are still sometimes criticized for excessive fault-finding regarding the authorities...
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