WEEKLY ECONOMIC COMMENTARY, 29 APRIL 2012 (By DIFC)

See: http://www.difc.ae/difc-blogs/weekly-economic-commentary-april-29-2012

Markets were volatile, though strong corporate earnings results overshadowed the soft data releases, especially the muted GDP growth in US, and the S&P downgrade of Spain’s sovereign debt last Thursday. Regional markets were mixed, with Q1 profits announcements key; many UAE listed companies, including real-estate firms, announced better-than-expected earnings. The US$ weakened on soft US data though the euro held surprisingly strong in spite of the downgrade; the pound, meanwhile, hit a 22-month high against the euro. Gold prices were up and EIA’s announcement that increased Saudi output helped global oil supply exceed demand by 500k bpd in Feb-Mar also led to some minor fluctuation in oil prices.



Global Developments
Americas:

The US posted lacklustre GDP growth for Q1 at 2.2% yoy (Q4: 3.0%) on the back of a slowdown in inventory investment. Real personal consumption expenditure rising 2.1% qoq in the same period (1.3%).
Bernanke said US monetary policy was "more or less in the right place" but the Fed is ready to launch another QE round if the economy falters.
The S&P/Case-Shiller 10-City Composite Home Price Index slid for the sixth consecutive month, dropping 3.6% yoy in Feb 2012 (Jan: -4.1%). New home sales experienced a sharp decline of 7.1% mom (Feb: +7.3%), amounting to 328k units, saar, in March.
Durable goods orders slumped in March 4.2% mom (Feb: +1.9%), a record since Jan 2009, due to a drop in demand for civilian aircrafts and parts.
Initial jobless claims dropped by 1k to a seasonally adjusted 388k. The 4-week moving average rose 6,250 to 381,750, the highest since Jan 7.

Europe:

UK GDP in Q1 contracted 0.2% qoq after a 0.3% drop in Q4 2011, implying recession. Construction was the biggest drag with a 3% qoq drop.
Flash Composite PMI for Euroland in Apr was 47.4 versus 49.1 in Mar, signalling that the recession in Europe is worsening. Flash German Manufacturing PMI came in at 46.3 in Apr (Mar: 48.4), contracting at the fastest pace since July 2009. The French index rose to 47.3 (46.7).
German inflation eased mildly to 2.0% yoy in April (Mar: 2.1%) as energy prices rose at a slower pace.
According to the ECB’s Ewald Nowotny, the EU will never issue general obligation euro-zone bonds because Germany is opposed to this.
BIS reported that in Q4 2011 banks cut lending to Italy by USD 68.5bn, to Spain by USD 54bn, to Portugal by USD 12bn and to Greece by USD 18.6bn.
S&P cut Spain’s credit rating to BBB+ on account of a dismal economic outlook and the current state of its budget deficit, down two notches from A. Spanish unemployment hit 24.4% in Q1 2012 (Q4: 22.9%), reinforcing the S&P downgrade. Inflation accelerated to 2% in Apr (Mar: 1.8%).

Asia and Pacific:

S&P changed the outlook for India to negative and threatened to downgrade its sovereign debt unless the widening fiscal deficit, currently at 6% of GDP, is brought under control. Fiscal discipline however is sapped by a political gridlock which makes it impossible to reduce subsidies and modernize tax collection.
China’s Flash HSBC Manufacturing PMI rose to 49.1 in Apr (Mar: 48.3), indicating a contraction in the sector, but at a slower rate.
The National Consumer Price Index in Japan saw a mild 0.5% yoy increase in March (Feb: 0.3%), while its unemployment rate came in flat at 4.5%. Japanese construction orders were down 0.3% yoy in March (-1.8%), rising 7.1% for the whole of FY2011. Housing starts were up 5% yoy for the month (7.5%). Bank of Japan left interest rates unchanged at 0.1%.
Japanese IP rose 1% mom (Feb: -1.6%), surging 13.9% on a yoy basis, while Thai IP fell 3.2% yoy and Singapore’s dropped 3.4% yoy (Feb: +11.8%), but rose 2.7% mom.
South Korean GDP rose 0.9% qoq and 2.8% yoy during Q1 2012 (Q4: 0.3% qoq & 3.3% yoy) as manufacturing and exports (+3.4% qoq) expanded, but was weighed down by the 0.7% qoq drop in construction investment.
Taiwanese Industrial Production (IP) fell 3.42% yoy in Mar led by a 3.77% drop in manufacturing.
Singapore’s March CPI inflation accelerated to 5.2% yoy from 4.6% year in Feb, led by higher costs of housing (+9.1%) and transport (+8.6%).
Thailand’s trade deficit in Mar ballooned to USD 4.6bn as imports surged 25.6% yoy and exports decreased by 6.5% yoy. Thai Capacity Utilization for the month increased to 68.1, from Feb’s 62.5.

Bottom line: The week was a mildly worrisome on the macro front: soft GDP data from US and UK in recession, S&P action on Spain and India, but equities held strong on company profit announcements. Politics could play havoc as Greece and France prepare to go to polls next week; meanwhile, Romney is de facto anointed as the Republican nominee; Sarkozy is trailing the Socialist challenger Francois Hollande; in Egypt, the Presidential candidates have been announced, with 13 names including that of former Prime Minister Ahmed Shafiq.