Global - Economy and Market

Gasoline pushes inflation up in January

WASHINGTON - Gasoline prices jumped in January, leading overall consumer prices higher and offering a reminder of the risks energy costs pose to the economic recovery.

Bernanke says recovery slow but small banks climbing back

WASHINGTON - The weak economic recovery has made it harder for banks to make money from loans but the financial conditions of smaller institutions appear to be solidifying, Federal Reserve Chairman Ben Bernanke said on Thursday.

Manufacturing, housing data flag underlying strength

WASHINGTON - U.S. manufacturing output rose in January and a gauge of factory activity in New York state hit a 1-1/2-year high in February, showing a solid underpinning for the economic recovery. Housing starts rose more than expected in January as groundbreaking on rental property surged, boosting hopes the still-weak housing sector could help economic growth this year.

Fed is open to boosting economy if recovery falters

The Federal Reserve appears willing to stimulate the U.S. economy more if necessary, according to minutes of the central bank's January meeting. Officials are worried that recent signs of a strengthening economy are short-lived, the minutes show.

Europe posts economic shrinkage for Q4

The EU and eurozone economies each contracted 0.3% in the fourth quarter, sending Belgium, Italy, the Netherlands and Portugal into recession. The gross domestic product of Germany, Europe's biggest economy, declined 0.2%. France, the second-largest, saw GDP grow 0.2%.

Greek cabinet tackles austerity, rescue hopes rise

ATHENS - Greece's cabinet tackled on Saturday how to implement austerity demanded by the EU and IMF as a 130-billion-eurorescue seemed within reach, while the euro zone considered modifying a deal with private creditors to help Athens reduce its huge debts.

China says it will invest in Europe's bailout funds

People's Bank of China Governor Zhou Xiaochuan said China will invest in the EU's rescue funds and maintain its euro investments. "China will always adhere to the principle of holding assets of EU sovereign debt," he said. "We would participate in resolving the euro debt crisis." Premier Wen Jiabao made a similar statement.

China cuts banks' reserve ratios for second time

SHANGHAI - China's central bank cut the amount of cash that commercial lenders must hold as reserves on Saturday for the second time in nearly three months, the latest step to shore up the slowing economy. The government is reluctant to give the green light to another bout of big bank lending, with inflation risks lingering and, more importantly, policymakers are determined to cool down the property sector to ward off a speculative bubble. Few analysts believe the central bank will cut interest rate cuts this year, with annual inflation staying stubbornly higher than the one-year deposit rate of 3.5 percent.

China: January New Loans

• Banks lent out Rmb738.1bn in new loans in January, less than the market's expectation of a Rmb1tn rise, although we believe this was influenced by the fewer working days in January this year due to the Chinese new year festival.

• This coincides with the government's measured easing approach, but we need to take into account the amount of new loans in February to view the whole picture. M2 growth also decelerated further to 12.4% yoy in January.

• We suspect lending must have been very slow after the robust activities during the first week after the calendar new year. Banks granted a large sum of credit to local governments and local investment vehicles in the first week of January, but that momentum might have quickly cooled off.

• We think the current credit easing is selective, with property developers being excluded. Demand from businesses for real investments is also weak. The liquidity situation has improved, however, especially among the SMEs. We think growth prospects remains biased on the weak side.

Japan slowly wakes up to doomsday debt risk

TOKYO - Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks -- that is what Japan may have to contend with if it fails to tackle its snowballing debt.

India - Economy and Market

Industrial production provided a modest downside surprise relative both to consensus and our own forecast – coming in at 1.8% yoy. This was down from 5.9% in the previous month, while we estimate that output fell 1.6% on a seasonally adjusted month-on-month basis.

What's the underlying trend? In truth, production has been even more volatile than normal in the last few months, falling very heavily in October, before bouncing back even more strongly in November and then partially correcting in December. The best guide to the underlying trend is probably given by the three month-on-three month seasonally adjusted annualized rate. This has moved up from a low of -13% in October to 3.3% in December. As such, it is beginning to look as though production has bottomed in underlying terms – a view supported by the strong improvement we have seen in India's manufacturing PMI.

India's January wholesale price inflation came in at 6.6% yoy, slightly below the market's and our expectations, and the lowest inflation rate since 2009. We estimate that WPI rose only 0.1% on a seasonally adjusted basis from the previous month.

Another piece of good news is that the RBI's measure of core inflation, the manufacturing WPI ex-food, also moderated to 6.7% yoy from 7.7% in December, and the lowest level since January 2011.
These developments further support our rate cut call. We recently changed our interest rate view, and are now expecting the first repo rate cut to come in March (rather than April), with reductions totaling 175bps by January 2013.