Sharp slowdown in job growth in Aug12. Non-farm payrolls grew by
96000 sharply lower than consensus estimates of 125000 and
141000 jobs added in July12 (The average for 1QCY12 and 2 QCY12
is 226000 and 76000 respectively)
• Unemployment rate falls to 8.1% against expected 8.3% and down
from 8.3% in July12. Unemployment above 8% for 43rd consecutive
month, holding an ominous portend for President Obama’s reelection
prospects in November
• Broader gauge of jobless rate measured by percentage of Americans
who are either unemployed or are working part-time as they could
not find full-time employment or have given up hope and not
looking for jobs has fallen to 14.7% in Aug12 from 15% in July12
• The participation rate i.e. the labor force as a percentage of the
population as a whole has fallen to 63.5%- the lowest since Sept81
• Uncertainly related to Euro debt crisis, US fiscal policy & fiscal cliff,
November polls holding back executives from fresh hiring
• University of Michigan’s (UM) Aug12 Consumer sentiment gauge at
3-month high at 74.3. Consumption was bolstered by price
discounts, low interest rates & success in trimming debt
• UM’s gauge of Consumer Expectations in Aug12 fell to 65.1 from
65.5 last month- its lowest level since Dec 01 due to belief that
financial situation today is worse than five-years ago and no wage
gain expected over next year
• In Aug12, Conference Board’s Consumer Confidence Index hits its
lowest level since Nov 11 partly due to higher petrol prices
• Retail sales are estimated to grow at 0.9% in Aug12 following a 0.8%
advance in July12. However rising food & fuel prices and stubbornly
high unemployment rate is expected to act as a dampener for
continuing the buoyancy in 2HCY12
• ISM index of non-manufacturing activity (i.e. services firms which
contribute 70% of US GDP) grew to 53.7 in Aug12 vis-à-vis 52.6 in
July12 due to a jump in hiring. It is 32 straight month of growth for
services sector
• Strength in services offset by weakness in manufacturing. ISM index
of manufacturing activity shrank in Aug12 to 49.6 from 49.8 in
July12- the lowest reading in three years due to a fall in new orders,
production and employment
• Construction spending dropped by 0.9% in July12 (the first decline
since March12) verses an estimated growth of 0.4% and a growth of
0.4% in June12 due to both public and private sector cutting back on
investments
• All eyes on the US FOMC meeting on 12th and 13th Sept12 where
the Fed is expected to announce third round of unsterilized asset
purchases (QE3) and possibly indicate that federal funds rate would
continue to remain at near-zero levels beyond late 2014
• U.S. GDP is expected to grow at 2% in 3QCY12 following 1.7% growth
in 2QCY12, 2% in 1QCY12 and 4.1% in 4QCY11
The composite PMI for euro-zone rose fell to 46.3 in Aug12 from
46.5 in July12 indicating a continued contraction in business activity
in the crisis-ridden region due to sharp declines in new orders for
both manufacturing & services sectors and further job losses
• PMI for services fell to 47.2 from 47.9 in July12 –seventh straight
month of contraction
• Despite cutting prices, manufacturing PMI in Aug12 was at 45.1
(thirteenth straight month of contraction) above July12’s three-year
low of 44.0. Germany- Europe’s manufacturing powerhouse saw
sixth consecutive month of contraction at 44.7
• Spain & Italy see severe decline in economic activity while Germany
& France witness modest downturns
• Unemployment rate in Euro zone remained at record high at 11.3%
in July12 (same as June12). Spain at 25% and Austria at 4.5%
recorded the highest and the lowest rates in the 17 member zone.
Under 25-age group jobless rate hovers above 50% in Spain and
Greece
• Euro-zone GDP is expected to contract between 0.2 to 0.5% in
3QCY12 on the back of 0.2% contraction in 2QCY12 confirming a
recession
• Mario Draghi announced ECB’s unlimited bond buying program for
debt-stricken members, targeting shorter end maturities between 1
and 3 years, renouncing ECB’s seniority (i.e. bonds purchased by it
will be on a par with other lenders) and confirming that bond buying
would be sterilized (to allay apprehensions of flare-up in money
supply & inflation amongst hawks like Germany’s Bundesbank),
purchases to be revealed on a weekly and monthly basis
• Most importantly, strict & effective conditionality attached i.e. any
country wanting to be rescued must first submit to outside oversight
on fiscal matters
• Program to help lower sovereign debt yields of stricken nations but
would impose a painful austerity program on already battered
nations with record-high double digit unemployment rates and
spike-up social strife
• Draghi justifies that the program does not violate ECB’s mandate as
it would be buying in secondary markets and not funding
governments directly in primary markets
• Bond yields fall, equities look up and euro strengthens in the wake of
Draghi’s announcement. But it remains whether the citizenry in
Spain & Italy will react to the strict conditionality in a manner similar
to that in Greece
• Global markets are watching with trepidation at the ruling of the
German Constitutional Court expected this week on whether to
grant temporary injunction to petitioner and disallow the German
President from signing into law the EU’s permanent 500-billion-euro
rescue fund European Stability Mechanism (ESM) and European
Fiscal Pact- both of which have already been approved by a twothirds
majority by the German Parliament in end-June12.
• If the Court were to throw out the petitioner’s plea, the German
President can then sign the ESM and European fiscal pact
immediately. ESM was to come into effect from July 1, 2012.
• If the Court were to grant temporary injection, it would inject
turmoil in the markets. Markets believe that ESM is more-or-less
similar to the current temporary rescue fund of EU European
Financial and Stability Fund (EFSF) and the Court had last year
approved EFSF
• An injunction would strengthen the worries that the Court may be
inclined to finally rule that ESM and European Fiscal Pact are
incompatible with German’s Basic Law. (Basic Law demands that
Germany cannot surrender its budgetary sovereignty without
necessary democratic backing)
• China’s HSBC manufacturing PMI fell to 47.6 in Aug12 - its lowest level since Mar09 while its services PMI fell to 52.0 in Aug12 from 53.1
in July12
• Contraction in manufacturing expected to feed into slowly growing services sector (that account for 43% of GDP)
• Curbs in real estate sector and slowdown in China’s export markets have weighed heavily on growth
• Retail sales were up by 13.2% in Aug12 in line with estimates. Inflation perked up to 2% from July12’s 30-month low of 1.8% and with
rising house prices will limit scope for further rate cuts
• GDP in 2QCY12 had grown at three-year low of 7.8% and the trend is expected to continue in 3QCY12 with growth lower at 7.4%
• Central Bank has cut interest rates twice since June12, trimmed reserve requirements thrice by 0.5% each since Nov11, loosened bank
lending norms, given a push to some high profile investment projects and sought to cut red tape and bureaucratic hurdles for businesses
• Government has unveiled a US $150 billion program to push 60 large infrastructure projects to kick-start growth. This program is roughly
a fourth in size to that launched after the Lehman crisis
• India’s GDP growth in 1QFY13 languished at near three-year lows and grew at 5.5% as against 5.3% in 4QFY12.
Agriculture grew at 2.9% (vis-à-vis 3.7% yoy), manufacturing at anemic 0.2% (vis-à-vis a robust 7.3% yoy) and most
concerning was the hitherto growth engine of services growth which grew at decade-low of just 6.9% vis-à-vis 10%
in 1QFY12
• In ominous sign of slowing consumption, India’s real private final consumption has slowed down to a 29-month low
at 4% yoy
• Gross fixed capital formation has come to a virtual standstill and grown at a paltry 0.4%
• Investment rate (Gross fixed capital formation/GDP) fell to 29.9% in 1QFY13 from 31.2% in 1QFY12
• With no revival in sight for capital expenditure cycle, slowing consumption, weak (although lately reviving)
monsoons and synchronized global slowdown impacting exports, we expect India’s GDP to grow between 5.25% to
5.75% in FY13
• Marking a year of uninterrupted monthly growth, India’s services sector PMI in Aug12 grew to 55.0 from 54.2 in
July12 possibly reducing hopes of a rate cut from RBI in its meeting scheduled later in Sept12. New business Index at
55.9 (54.7 in July12) rose to a six-monthly high and index measuring future business expectations also grew at the
fastest pace since April12.
• India’s manufacturing PMI in Aug12 fell to a nine-month low of 52.8 from 52.9 in July12. Slowing exports and major
power outages in the early part of Aug12 were responsible for this fall
• India’s monsoon deficiency came down to just 9% due to a surplus rain in August. This contrasts with a whopping
31% deficiency in June and 13% in July that had prompted the government to roll out some emergency drought
relief measures
• 26 out of 36 meteorological divisions have received excess or normal monsoons with nine sub-divisions receiving
deficient (deficiency ranges from 28% to 60%) and one (Saurashtra & Kutch) receiving scanty rainfall
• The grain bowl states of Northwest India (Punjab, Haryana etc) have received heavy rains in the last fortnight and
the region’s deficiency has reduced to just 13%
• Improvement in moisture content in soil and adequate filling in of major reservoirs will help a better winter (rabi)
crop especially in wheat growing Northwestern States and alleviate concerns on drinking water problems over next
one year
• WPI inflation for Aug12 to be announced by RBI on Sept 14, 2012 is expected to inch-up to 7% vis-à-vis 6.9% in
July12 although core inflation is expected to continue to remain around 5% due to limited pricing power among
producers. Any hike in diesel prices expected to be announced next week would feed into inflation going forward. A
10% hike in diesel prices would add nearly 0.8% to WPI inflation
• The Prime Minister appointed Parthasarathi Shome Committee set up to address investor concerns on GAAR has
proposed a deferral of the controversial tax proposal by three years from FY14 till FY17
• GAAR was aimed at investors and companies routing money through tax havens
• GAAR to be applicable only if the tax threshold is above Rs 30 million
• Abolition of capital gains tax on sale of listed securities by both resident and non-resident investors
• Increase in STT to make good loss from abolition of capital gains tax on listed securities
• No invocation of GAAR provisions to examine genuineness of residency of entities routing money through Mauritius
which happens to be the most preferred route for investment by non-residents in India. India has a double taxation
avoidance agreement with Mauritius which has no capital gains tax
• Recommendation on so-called indirect transfers or overseas deals in which some or all of underlying assets are
Indian will be made public by Sept-end. Government in its last Budget had passed a tax amendment bringing such
deals under the ambit of taxation with retrospective effect affecting many deals including Vodafone Plc’s purchase of
an overseas firm having substantial underlying telecom assets in India from Hutchison
• The monsoon session saw a complete washout amidst a
fusillade of CAG reports that galvanized the Opposition which
targeted the government and did not allow the Parliament to
function.
• Only 4 bills were passed as against 30 listed for debate amidst
acrimonious scenes over an alleged scam dubbed as ‘Coalgate’
• India’s national auditor CAG has in its report to the Parliament
has estimated a presumptive loss of Rs 186000 crores (nearly
US $ 33.81 billion) to the public exchequer due to nonadoption
of transparent competitive bidding route by the
government in allocation of 44 billion tons of coal through 194
mining concessions to private sector companies
• The Opposition has demanded cancelation of all coal mine
allotments and resignation of the Prime Minister who was
holding the charge of Coal Ministry when the allotments took
place
• The federal investigator (CBI) has already filed five cases
against companies alleging misrepresentation of facts, fraud,
forgery and criminal conspiracy between the concessionaires
and some politicians and bureaucrats. It is examining some
more cases too
• ‘Coalgate’ dwarfs the previous record of 2G telecom scam
where the national auditor had estimated a presumptive loss
of Rs 176000 crores (US$ 32 billion)
• CAG estimated a presumptive loss of Rs 29000 crores (US$
5.27 billion) to the government by allowing Reliance Power to
divert excess coal from its Sasan plant (tariff Rs 1.196/unit) to
Chitrangi plant (tariff Rs 2.450 for MP and Rs 3.702 for UP)
after the award of Sasan project
• A presumptive loss of Rs 24000 crores (US$ 4.36 billion) (the
estimated market value) to the government due to award of
239 acres of land for building terminal at ‘throwaway rate’ of
Rs 100 per annum and allowing the Delhi airport operator to
charge user development fee after signing the initial
agreement
• Supreme Court appointed Justice Shah Commission in its final
report submitted to the Parliament has concluded that illegal
mining to the tune of Rs 35000 crores (US$ 6.36 billion) took
place in the State of Goa over the last ten years and has
blamed several top politicians and bureaucrats for not taking
action. It has recommended closing down of several mines and
asked the State government to verify clearances as it found
‘dubious’ environmental clearances granted to many mines
• According to another CAG report failure to complete 16 hydroelectric
projects on time resulted in cost overruns of Rs 14700
crores (US$ 2.67 billion), missing of 10-year power generation
target of 11813 MW and actual generation of a measly 1150
MW, a loss of Rs 10000 crores (US$ 1.81 billion) caused by the
Power Ministry by not following proper procedures and trying
to help private companies at the cost of the exchequer
• The plunge in investor sentiment is symptomatic of the general
sense of drift in decision-making in the government and its
inability to push through reforms and improve macroeconomic
stability
• If the government is serious about avoiding a downgrade in
India’s credit rating it needs to urgently spell out a credible and
transparent fiscal consolidation plan over the medium term
• Control of gargantuan amounts of wasteful subsidies towards
various interest groups need to be curtailed and an immediate
beginning needs to be made by atleast hiking diesel, kerosene
and LPG prices if not partially de-controlling them. The last
hike was done in June 2011 and the prices have since then
soared by 28%. Prices of petrol which is decontrolled on paper
by the government must be allowed to be hiked by the Oil
marketing companies (OMC) to immediately stop their
hemorrhaging
• OMC’s are losing nearly Rs 551 crores per day due to losses
incurred by selling various auto & cooking fuels below cost.
Losses on various fuels are diesel Rs 17/liter, kerosene Rs
32.7/liter and domestic LPG Rs 337 per cylinder. At current
prices total under-recoveries are estimated to cross Rs 200000
crores (US$ 36 billion) in FY13 if there is no price hike
• Government needs to aggressively pursue its ambitious
disinvestment target of Rs 30000 crores and target from
auction of 2G spectrum of Rs 40000 crores
• We expect a large slippage in fiscal deficit of atleast 1% to 6.1%
from a budgeted target of 5.1% entailing a large Rs 100000
crores of additional gross borrowing. This would put further
pressure on the government’s already humungous gross
borrowing program of Rs 570000 crores and constrain RBI’s
pace and extent of interest rate reduction over the next few
quarters
• We expect the current account deficit in FY13 to decrease to
3.5% of GDP (from 4.2% in FY12) based on lesser gold imports
and sharp fall in rupee (from Rs 45 to Rs 55 per US$ over last
12-15 months) against most global currencies benefiting India
terms of trade positively especially vis-à-vis other competing
exporting powerhouse China
• Global crude oil prices unfortunately have shown tremendous
resilience even in the wake of anemic global growth. This could
possibly be due to surge in global systemic liquidity in the wake
of mammoth bond buying programs unveiled by various
Central Banks. After plunging from US$ 125/barrel in March12
to a low of US$ 90/barrel in June12, Brent Crude firmed up to
US$ 113/barrel since start of Aug12
• In the wake of toxic political discourse no meaningful reforms
have happened over past several years. The government must
utilize the eight-week window between the end of monsoon
session and elections in the politically crucial state of Gujarat
in Nov12 to push through reforms
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