Recap 6-7-12

Main Items:

  • China cut deposit and lending rates by 25bps, for the first time since 2008. The 1yr lending rate will be 6.31%. Banks will also be allows to lend at a larger discount to the benchmark rate, although this is will likely just favor SOE’s.
  • Fitch cut Spain 3 notches to BBB with outlook negative. Fitch estimates that a Spanish bank recap will cost 60bn-100bn vs 30bn previously. S&P has a BBB+ rating and Moody’s has an A3 rating.
  • Bernanke’s testimony didn’t surprise. He spent a large part of his prepared remarks on avoiding fiscal tightening.
  • US Initial Jobless Claims declined to 377k last week vs 378k exp and 383k prev
  • BoE kept policy unchanged as expected
  • Yellen: “it may well be appropriate to insure against adverse shocks”


  • UK PMI Services was unchanged at 53.3 in May vs 52.4 exp
  • French ILO Employment increased 86k in 1Q, but the Unemployment rate increased to 9.6% vs 9.5% exp and 9.4% prev
  • Swiss Unemployment increased to 3.2% in May vs 3.1% exp and prev
  • Swiss CPI was unchanged at -1.1% YoY in May
  • Australia Employment jumped 38.9k in May vs 0 exp and 15.5k prev. Unemployment ticked higher to 5.1% as exp vs 4.9% prev as a result of an increase in the participation rate to 65.5% vs 65.2% prev.

Upcoming Data:

  • Thurs: French Unemployment, Swiss Unemployment, Swiss CPI, UK PMI Services, BoE, US initial jobless Claims, Japan Trade Balance
  • Fri: Japan Eco Watchers Outlook Survey, UK PPI, Canada Employment, China CPI, PPI
  • Weekend: China IP, Retail Sales, Trade balance, money supply
  • Mon: UK Rics House Prices, Shirakawa Speaks, AU Business Confidence
  • Tue: US Import Price index, AU Consumer Confidence
  • Wed: US PPI, Retail Sales
  • Thurs: SNB, EU Core CPI, Labor Costs, US CPI, Jobless Claims


The lower perceived risk of a Spanish bank collapse continues to support risk assets. However, at some point they will have to contend with the fact that the forecast for EU growth remains negative, while US growth is slowing. Growth expectations remain the driver for asset prices, and at this juncture, the data continues to disappoint. US equities are near support/resistance levels that broke in mid May. Those levels will likely to be difficult to breach in the absence of better data, and so should provide good spots to set up tactical shorts.

Separately, the China rate cut news sparked hopes of a new expansion of credit toward fixed investment, but that remains unlikely at this juncture. Policy makers appear willing to continue the process of economic rebalancing. It will likely take a larger growth shock before that stance changes. This view is confirmed by the fact that the real lending rate is actually higher now than a year ago, since CPI is ~2% lower: