G3 Recap 11-17-10

Main Items:

  • US Core CPI decelerated to 0.6% YoY in Oct, vs 0.7% expected and 0.8% previously. This is the lowest print in the history of the series, which dates back to 1957. This took the headline measure down to 1.2% vs 1.3% expected. Note that the weak print occurred despite a 0.1% MoM in OER.
  • US housing starts dropped to just 519k in Oct vs 598k expected and 610k previously. This is the 3rd lowest print on records, dating back to 1961. The weakness was especially prevalent in the west, where starts fell 30%, as well as in the multifamily segment.
  • PIGS:
  • LCH Clearnet raises margin requirements for Irish Bonds again, to 30%.
  • F.A.Z. reported that German banks hold a credit exposure of around EUR138bn vis-à-vis Irish borrowers – a number which was published back in July in the course of the bank stress test procedure. The largest exposure is with state-owned Hypo Real Estate, Der Spiegel reports, saying that the bank’s credit exposure vis-à-vis Irish public sector entities amounted to EUR10.3bn.
  • Italy: According to a source quoted by the Ansa press agency, as soon as the 2011 Budget Law is approved in both chambers of Parliament (likely to happen around 10 December), PM Berlusconi will face a vote of no-confidence in the lower Chamber and, at the same time, a confidence vote in the Senate. The votes are likely to happen simultaneously on the 14th of December

Overseas:

  • UK jobless claims fell -3.7k vs +5k expected.
  • A China Securities Journal story suggested that a PBoC rate hike could come on Friday

Commentary:

  • I read a very interesting HSBC report on Chinese trade statistics today. The report noted that when a company like Apple uses a Chinese entity to import raw materials into China to make an iPhone, the difference between the final wholesale price and the imported raw data cost gets added to the Chinese trade data. Specifically, Apple’s pre-tax profit on each iPhone made in China is added to China’s export total.
    This immediately brings up several points:
    1) China’s trade surplus may be very ‘overstated’ in the sense that a large portion of it is actual foreign corporate profits, not money paid to Chinese workers or FDI.
    2) Since the trade surplus is directly added to Chinese GDP growth, ‘real’ GDP growth, in the sense of higher wages and merchandise turnover, has not been growing anywhere near as fast as the headline data suggests.
    3) If US corporate profits do indeed represent a sizable portion of China’s trade surplus, (not a stretch given that it totaled $200bn in 2009 vs just AAPL’s $18bn pretax profit) USDCNY may not be anywhere near as overvalued as people think.
  • Patrick Chovanec notes that some married Chinese have gotten divorced in order to get around legal limitations of owning second home. China Daily reported on this a few months ago.
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2 thoughts on “G3 Recap 11-17-10

  1. Thanks for the link Bert! I didn’t read that article when it came out. I think Xie makes some good comments, but it appears Xie’s main rationale that the RMB is overvalued is based on Money Supply growth. While his point is valid over a multidecade horizon, I think one can also make the argument that since China’s banking system was barely existent just 20 years ago, the rapid money growth over the past couple of decades is partially due to the very low starting money velocity. So maybe he’s not wrong, but maybe he’s right for the wrong reasons.

    Cheers

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