LatAm: Inflation below expectations

- "Inflation data took center stage this week. It was low in Peru and in line with expectations. Although high in Chile, it was still below expectations, as it was in Brazil, Colombia and Venezuela. In Brazil and Colombia the trend was also down."
- "The indicators of economic activity have maintained their trend of pervious weeks: very strong in nearly all the region, but with clear indicators of a slowdown in Brazil and Mexico. The decision by the Central Bank of Peru to raise its policy rate by 50 bps in response to the persistent increase in domestic demand surprised markets and makes clear the complex risk balance faced by the monetary authorities in the region."
- "Global markets show divergent movements, with LatAm assets demonstrating a positive trend in general."
- "After the easing of financial tension and the region's favorable economic performance, financial assets in Latin America have maintained their positive trend in the medium term, but adjustments in the next few days cannot be ruled out, with investors taking up technical positions."

BBVA Latin Weekly Observatory 20100806

Emotional stress test for underweighted investors?u

- No new world: "Peak in ifo growth optimism urges caution. In past cycles over the last 20 years, the reward/risk ratio for equities has deteriorated at an upper turning point in the growth expectations. Overall, the leading indicators point to a slowdown in the growth dynamic looking to 2011."
- Reporting season: "Positive interim track record for Germany. In July, the German equity index reported positive earnings revisions for the index earnings estimates for 2010 and 2011. In the other large EMU countries, the negative revisions predominate."
- Outlook: "Bet on the expected direction of the leading indicators. Falling leading indicators mean a headwind for the equity market and argue for a sideways move in 2H10. The equity market is currently trading near the upper edge of the sideways movement."
- STOXX sectors: "Predominantly negative earnings revisions. Since the beginning of the 2Q10 earnings reporting, the earnings expectations were raised in only two sectors but reduced in 17 sectors."
- Hedge within the defensives: "Firmer EUR supports Telecom versus Food & Beverage. The relative performance of Telecom/Food & Beverage is closely correlated at the moment with the EUR development."

Unicredit Market Outlook 20100805

Not time to fade the wheat rally yet

- Weather-related supply shocks have compounded to send wheat prices soaring higher "Wheat prices have rallied dramatically over the past month, with the Sep-10 CBOT contract up more than 76% and trading near $7.80/bu from a $4.40/bu level at the end of June. The main driver behind this rally has been growing concerns for the Russian 2010/11 crop as hot and dry weather is significantly damaging grain production. This supply shock,
combined with a low planted acreage in Canada due to excessive rain, has led the market to swiftly reprice its expectation for an inventory build into a deficit for the 2010/11 crop year."
- Prices have likely overshot as high beginning stocks and feed substitution should absorb some of this supply shock… "The velocity and magnitude of this price rally have been exacerbated by a near-record net short positioning coming into this weather shock and we expect ongoing production uncertainty to continue to lend support to prices in the near term. However, the current situation is very different from the 2006-08 wheat bull market as we are coming into this production disruption with elevated wheat inventories, especially in the US. Accordingly, barring further major deterioration in crop production, we
would expect lower wheat prices once the market gains a better grasp on this year’s wheat production and deficit. Acknowledging the current production issues we are revising our forecasts higher to 650 cents/bu from 550 cents/bu previously."
- … but still too early to fade this wheat rally "We would look to implement our bearish wheat view with low-cost option strategies such as put spreads, but expect near-term price action to offer better entry levels. These developments in the wheat market comfort us in our long-held constructive corn view as wheat-to-corn feed substitution will likely further support already strong expected corn demand."

GoldmanSachs Agriculture Update 20100806

Japan: Cautious FY guidance despite strong 1Q

- Strong 1Q earnings "TSE1 1Q recurring profits had increased more than 3.0-fold yoy as of
August 5, when about 70% of companies had reported (including financials and February and March year-ends). The results peak was July 30 and some 90% of TSE1 companies had reported by market cap. Sales were up 12% yoy and recurring profits up 214%. The progress
toward 1H guidance was ahead of the historical average, at 58.5%."
- But poor visibility for 2H "Upward revisions far exceed downward revisions. However,
companies seem cautious on 2H. Only 12% have raised full-year recurring profit guidance vs. 21% that have raised 1H guidance. (Downward revisions are 2.2% for 1H and 2.6% for the full year.) This could be explained by the yen’s appreciation since June and concerns of a global economic slowdown led by the US."

GoldmanSachs Japan Portfolio Strategy 20100806

A Stronger Commitment to Low Rates

- "Recovery’s loss of momentum coupled with less secure financial supports to growth has set the stage for Fed officials to signal a stronger commitment to accommodation efforts next week. Policymakers are expected to reinforce language that encourages lower forward rates in an attempt to seal off tail risks of renewed recession and deflation."
- "We do not expect a new wave of asset purchases but reinvesting the proceeds of MBS redemptions would reinforce the policy duration commitment. The earlier focus on exit strategies probably dulled the credibility of the Fed’s low rate commitment but highlights the difficulties of achieving policy success with unconventional strategies."
- "Financial conditions improved slightly in July, and there are encouraging signs that consumer credit is loosening. A slow rebound in car sales continues and a gradual lift in sales of pickup trucks hints that small businesses are spending more. Nonetheless, overall financial conditions remain too weak to support a solid recovery."
- "Many industries continue to add to headcount and working hours consistent with modest economic growth around 2% near term. But overall employment gains are being held back in part by downsizing in construction, finance and state and local government. The latter group lost 66,000 jobs in July. Factory employment gains likely are nearing an end."

Citigroup Comments on Credit 20100806

Higher wages have not led to higher inflation and, so far, have not impaired China’s international competitiveness

- "We have found no clear evidence that nominal wage increases have caused higher inflation in China in the past decade, or even in the past few months. Wage growth has largely been offset by labor productivity gains. Furthermore, China’s labor costs in the manufacturing sector were actually lower in 2009 than in 2001 on a per real unit output basis."
- "We expect CPI inflation to trend lower as the policy-induced slowdown in domestic
demand growth weakens further in the near term. We believe the inflation trend beyond the short term will be determined by monetary policy management."
- "Our analysis also suggests that the relative competitiveness of China’s manufacturing sector vs. the US is at approximately the same level now as in 2002, lowering the need for further significant currency appreciation (as indicated by our GSDEER model)."
- "China’s looming demographic constraints are likely to increase the upward pressure on
money wages, but we think this will at least partly be offset by the improvement in labor
quality and the release of surplus labor from the agricultural sector."
- "In our view, an increase in labor compensation as a share of total output would support domestic demand, and this is likely to be achieved through a reduction (rather than an increase) in government restrictions on the labor market."
GoldmanSachs Asia Economics Analyst 20100805

China: Trip Notes-After the Slowdown

- We visited Beijing, Chongqing, Changsha and Shanghai during July 27-30 – "We
discussed the slowdown, the 12th Five-Year Plan, property, energy efficiency and local government financing from the perspective of regulators, experts, banks and local authorities. Here is a summary of key takeaways."
- Officials are certain of a 2H slowdown, but also confident in meeting targets
"Policymakers target 9% growth for the whole year and above 8% for 4Q, in line with our forecasts. Investment in economic housing is expected to make up for some of the shortfalls elsewhere."
- Policy to curb speculative property demand would likely remain in place – "Many are waiting to buy after prices correct deeper. Thus, policy would avoid a major
correction but would keep the pressure on demand, while increasing supply."
- Principal near-term risks are energy efficiency and external weakness – "To
reduce carbon intensity, authorities are clamping down on heavy industry, reducing export VAT rebates and curbing housing investment, adding some risk of over-tightening. External demand is still the greatest near-term risk."
- Monetary policy and banking policy on hold in 2H – "There would unlikely be any rate hikes this year. The Rmb7.5 trillion loan target leaves sufficient credit supply in 2H, though effective credit demand may be questionable. Low NPL ratio and high coverage should prevent further tightening from the CBRC."
- The 12th Five-Year Plan still focuses on investment – "Local development plans
remain aggressive, with cities like Chongqing planning railways to Europe and the Indian Ocean and the 10 million urbanization plan in 10 years. Though the growth target may be set lower at 7%, most ministries believe that at least 9% growth can be achieved."
- UDIV debt: It’s much more about the land than the project – "We provide some
detail on the creation and operation of a UDIV. The key is that the capital gains from developing a UDIV’s land pays the loans much more than any income stream of a project. This obviously is predicated on a robust property market, which our hosts expect can still last a while due to urbanization. But with the aggressive investment plan, fast urbanization would be a necessity."
- Standardizing UDIV finance – "The banking regulator has required all banks to
standardize their UDIV loan portfolios by Sep 30, so that every loan is backed either by a specific asset or by project revenue. No government guarantees are allowed. So banks are seeking additional collateral or guarantors. Some local governments are finding innovative ways to attract private capital."

Citigroup China Macro View 20100803

Market rewards “revenue beaters” more than “cost cutters” during strong earnings season

- "The results are in: with 443 stocks and 89% of market cap reporting, the S&P 500 closed out a strong first half as 52% of companies beat estimates by at least 1 standard deviation, in-line with 1Q 2010, but above the historical average of 41%. The market rewarded those firms positively surprising on both top and bottom line (“revenue beaters”) more than just bottom-line surprises (“cost cutters”)."

GoldmanSachs US Weekly Kickstart 20100806

Introducing the EMEA Inflationary Pressure Index

- Market movers ahead: GDP and inflation numbers "Next week will be busy in terms of economic releases. On Monday we will get industrial production in Turkey, which should show that industrial production growth has dropped to 9.6% y/y in June from 15.6% y/y in May. This will be yet another sign that Turkish economic growth is decelerating. On Friday we will get a bunch of GDP numbers for Q2. In general we expect the Q2 GDP numbers in EMEA to show gradual improvement. In Czech Republic we expect Q2 GDP growth of 1.4% y/y compared to 1.2% y/y in Q1. We are, however, more concerned about a possible setback in growth in Q3. There is also a lot of inflation numbers due next week in EMEA. Overall, we expect the numbers to show that inflationary pressure remains limited. Our new EMEA Inflationary Pressure Index (see more on page 3 and 4) shows that EMEA inflation is decelerating. Finally, Hungarian Minutes on Wednesday could prove interesting."
- FX Outlook: Stronger EUR/USD supports CEE currencies "The recent move up in EUR/USD is especially supportive for the euro-sensitive EMEA currencies CZK, PLN and HUF, while it is negative for the dollar-sensitive currencies TRY and ZAR. As the euro might continue to outperform the dollar we are looking for CZK, PLN and HUF to outperform TRY and ZAR in the short term. We are therefore quite comfortable with the Scorecard continuing to recommend to be long in CZK/ZAR."
- Fixed Income Outlook: Decelerating inflation "The calendar is fully booked with inflation numbers next week. It will be especially interesting to watch the outcome of Polish inflation on Friday. Although we expect Polish inflation to ease slightly to 2.1% y/y in July from 2.3% y/y in June, our new EMEA Inflationary Pressure Index (see more on page 3 and 4) shows that Polish inflation is still accelerating."
- Scorecard-based trade of the week Buy CZK/ZAR "For a fourth week in a row the Scorecard-based trade of the week is CZK/ZAR with the Czech koruna still the highest scoring currency on our EMEA FX Scorecard and the South African rand the lowest. A further move up in EUR/USD will support this trade which has performed rather well for most of this week."

DenDanske EMEA Weekly 20100806

Rally has more legs; Greater China led the run again among major markets

- MXAPJ +2.4%, Hong Kong (+4%), Phils (+3%) and Taiwan (+2%) led the rally; Indonesia (-2%) was in red
- MXAPJ 12M forward P/E at 12.4X, 12M trailing P/B at 2X
- Asian earnings tracking 54% of full year estimates
GoldmanSachs Asia Pacific Weekly Kickstart 20100806

Saving private payrolls

- Macro viewpoint: Saving private payrolls "Upward revisions to the saving rate suggest a faster pace of household rebalancing."
- Fed watch: Slippery slope
"Expectations for the Federal Reserve to step in with additional easing are growing, but we think it is a little too soon for the Fed to embark on a significant shift in its policy stance."
- The week ahead: All eyes on the FOMC
"All eyes will be on the Fed. The FOMC delivers its policy decision on Tuesday and even though the payroll report was a disappointment, we believe it was not such a disappointment that the Fed is about to reboot quantitative easing. In addition, we’ll be watching for consumer price inflation (CPI) and retail sales. On CPI, we expect a donut on core, which would take the YoY rate to 0.9% in July from 1.0% in June - well below the Fed's implicit target. On retail sales, we are expecting an auto-driven 0.4% increase on the headline. The core retail control measure, which strips out autos, gas, and building materials is also expected to rise 0.4%, which is consistent with a modest recovery in consumer spending from
the current pace."
Merrill Lynch US Economic Weekly 20100806