13 July 2009

Weekly Macro Comment

Han de Jong, Chief Economist

Biggest in the world: the Chinese car market

• German industry experiences tangible growth (albeit from depressed levels)
• Chinese car market overtakes US for first time ever! Perhaps for good?
• Dutch house prices down 5.6% yoy in Q2
• Lower bond yields and lower oil prices supportive of the recovery

Equity markets are under pressure. According to most US: ISM non-manufacturing
commentators that is because of doubts concerning the index
economic recovery. Nevertheless, last week’s macro data (of
65
which there was not much) mostly provided positive surprises.
This underscores our cautiously optimistic view on the outlook 60

for the next six to twelve months. On fundamental grounds, I 55

therefore suspect that the correction in the equity market is just
50
that, a correction. With many market participants still on the
sidelines, I think the market will at some stage change direction 45
once more. What is needed for this to occur? Three things 40
probably. First, we need confirmation that the recovery is not
35
faltering. Second, we need more positive corporate news flow.
2005 2006 2007 2008 2009
And third, we need an end to the recently displayed very tight
correlation between short term movements in various markets. Source: Bloomberg
In recent weeks some developments have occurred strictly
simultaneously: lower equity prices, higher bond prices, a US initial jobless claims fell to 565,000 in the most recent
stronger dollar, a lower gold price and lower oil prices. The week, from 617,000 in the previous week. This is a meaningful
rationale seems to be based on uncertainty about the improvement. The peak in this series was 674,000 in March.
sustainability of the improvement in macroeconomic data. This Our cautiously optimistic view requires a continuation of the
hurts equities. It also casts doubts over demand for oil and decline in this series in the weeks ahead. On the negative side,
thus pushes down the price for oil. Slower economic growth is US consumer confidence fell unexpectedly in July according to
also supportive of rising bond markets. The fear factor preliminary data provided by the University of Michigan.
stimulates a safe haven flow into the dollar, which in turn
undermines gold, given the strong inverse relationship Germany: Factory orders and industrial production
between the two. These relationships must be broken. Market % yoy
participants must come to realise that rising bond prices and 20
lower oil prices are good for the economic outlook and should
10
therefore support risky assets, not undermine them. If market
0
participants are slow to figure this out, the facts will overtake
them. Falling oil prices will lead to a further drop in inflation, -10
which will support real spending power in the economy. And -20
lower government bond yields will push mortgage rates lower -30
and support housing markets.
-40
05 06 07 08 09
The non-manufacturing ISM index in the US, which measures
Factory orders Industrial production
business confidence in the services sector rose from 44 to 47
in June. This was the highest reading since September last Source: Bloomberg
year. 47 is still quite low from an historical perspective, but we
are now quickly approaching the make-or-break point of 50, Data on German orders and industrial production was positive.
above which the sector is supposed to be expanding. Orders rose 4.4% mom in May and fell 29.4% yoy. That is a
massive decline, but better than February’s 38% decline.

HAN DE JONG +31 (0)20 628 4201 ECONOMICS DEPARTMENT

 13 July 2009

Industrial production rose 3.7% mom in May to reach a level
that was 17.9% lower than a year earlier, also better than the
trough of -22.3% yoy reached in April. Manufacturing output
increased by 5.1% mom in May.
Chinese car sales are surging. In June, 872,900 passenger
cars and light vehicle trucks were sold, a rise of 48%, in
response to stimulus measures. Allegedly, June marks the first
month ever when Chinese car sales outpaced US car sales.
Will the US market ever take top spot again? It probably will as
the US market is currently very depressed while the Chinese
market is on steroids.
China: Export and import growth
% yoy
60
Dutch house prices do not usually make international
headlines. Nor are they likely to do so now. However, as we
are a Dutch bank, we follow the domestic market with interest.
The NVM, the association of real estate agents, reported an
improvement in the number of transactions in the second
quarter and a small rise in prices (not seasonally adjusted)
compared to the previous quarter. According to the NVM data
prices were down 5.6% yoy. Rival data from the Land Registry
show prices were down 2.5% yoy in May. The Land Registry
data is more comprehensive, the NVM data more timely. The
pace of price decline is still very modest compared to some
other countries. However, we fear that the correction has only
recently begun and house prices will remain under pressure for
some time yet. We reckon that in 2009 and 2010 together,
prices will drop by some 15% or a little more. Downside risks
probably outweigh upside risks.

40
In recent weeks we have felt some discomfort over oil prices
20
and bond yields. The rise in both in recent months is
0 undermining the recovery. Higher oil prices eat away real
-20 disposable income while higher bond yields push up mortgage
interest rates. Indeed, as US Treasury yields rose from 2%
-40
early in the year, to 4% recently, US mortgage applications
-60
have fallen. More recently, however, yields are falling again, as
05 06 07 08 09
are oil prices. We welcome this development as it increases
Export Import
the chance that the green shoots will develop into mature,
Source: Bloomberg flower-bearing plants.

China’s trade balance registered a surplus of USD 8.25bn in

June. The country’s monthly trade balance shows a strong
seasonal pattern, but this was the smallest surplus for the
month of June since 2004. Exports performed relatively poorly,
-21.4% yoy, but imports were down ‘only’ 13.2%, the strongest
reading since October last year. This should be good for the
trade partners. Meanwhile, the US trade balance deficit
amounted to USD 26.0 bn, the lowest in almost a decade. The
peak in the deficit was reached in 2006 of more than USD
67bn. Declining Chinese surpluses and shrinking US trade
deficits suggest that the global economy is in the process of
rebalancing.

Another small positive came from India, where industrial

production was up 2.7% yoy, the strongest reading since
September last year. In the other hand, Japanese machinery
orders were poor, casting doubt on the recovery of investment
spending in the region.

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HAN DE JONG +31 (0)20 628 4201 ECONOMICS DEPARTMENT