Brevan Howard: Nonfarm Payrolls Should Come in at 185k in Future

Brevan Howard: Nonfarm Payrolls Should Come in at 185k in Future
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Brevan Howard: Nonfarm Payrolls Should Come in at 185k in Future

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BREVAN HOWARD  is one of the largest alternative investment firms in the world. Based out of the UK, the firm manages several different hedge funds. Last year, the flagship fund, Brevan Howard Master Fund returned 12.12%, as we reported previously.

The flagship fund was up down 0.40% for the month of March. The fund’s various tickers are BH Global Limited (LON:BHME) (LON:BHMG) (LON:BHMU) (LON:BHGG) (LON:BHGE) (LON:BHGU) and (TPE:911608)

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The fund manager, Alan Howard, detailed his views on the economic conditions in five different ‘countries’; the US, Eurozone, UK, Japan and China.

Howard seemed to still be confident about the US recovery but noted the lower employment numbers for March, and predicted that April’s numbers will come in between 120k and 250k.

In regards to Europe, Howard noted that the economy had positives and negatives, but noted the recent problems with Spain as an area of concern.

The UK still remains at risk to Europe contagion and the recovery is weak, with a 1/5th of GDP due to quantitative easing.

Japan showed more signs of recovery this month with the PMI shooting up to 53.2, which is an all time high.

China still should have a soft landing, with Government policies carefully maintaining inflation worries, keeping up GDP growth, and deflating property prices


Below is the full commentary from the firm:

A reduction in job growth in March raised questions over the sustainability of the expansion in the US. Growth in payroll employment dropped to 120,000 in March, after having averaged approximately 250,000 per month in the previous three months. In response, risk assets gave back their recent gains and Treasury yields retreated towards historic lows. The unseasonably mild winter appears to have flattered employment growth figures in previous months. The latest drop is therefore likely to be a correction, as well as being pushed further downwards by technical factors. Our best estimate of the trend in payrolls is therefore somewhere between the prior increases and the latest data.

Consumption spending firmed during the first quarter of 2012 but is running ahead of personal income, resulting in a decline in the saving rate. Consumers are tempering their saving rate partly because they are looking through the jump in gasoline prices and partly because they are more confident about the future. Indeed, consumer sentiment has bounced back after last year’s swoon, stock prices are up nearly 10% this year, and there are tentative signs of an improvement in housing.  Meanwhile, indicators of business investment were choppy around the start of the year but now look consistent with moderate growth.

Headline and core inflation are both near 2%, which is the rate the Federal Reserve has specified as being the most consistent over the longer run with its statutory mandate. The slide in core inflation in the second half of 2011 – which was part of the reason for the Fed initiating its maturity extension programme – now appears to have been a temporary phenomenon. Looking forward, the Fed seems content to wait and see how the economy develops and to add further stimulus if the expansion falters.


In March, the focus in the euro area was predominantly on Spain, where the government announced additional fiscal measures to cut the budget deficit in 2012 by €27bn (2.5% of 2011 GDP). According to the plan, approximately half of the deficit reduction will come from tax hikes and half from expenditure cuts. The Eurogroup finance ministers’ meeting agreed on the financial firewall for the euro area. The package of €700bn total EFSF/ESM lending ceiling combines the new €500bn ESM and the existing €200bn of commitments of the EFSF. The EFSF will expire in mid-2013, however it is permitted to enter new commitments out of its remaining resources between mid-2012 and mid-2013. This is to ensure that the ESM’s total lending capacity of €500bn is fully available. In addition to the agreed firewall and the almost €1trillion in long-term repos extended by the ECB, euro area countries have also committed another €150bn for an IMF facility (plus other EU countries have committed a further €50bn). The aim of the facility is to reach a capacity of USD 600bn, so an additional €250bn is required from the international community.

On the activity side, PMI indicator releases saw the euro area composite PMI decline slightly from February to reach 49.1 in March. The orders component declined by more, to reach 47.6, well below the expansionary threshold of 50. Looking forward, the outlook for the peripheral economies remains bleak, due to both the fiscal drag and low availability of credit, with rising energy prices acting as an additional burden. At the same time, euro area HICP inflation declined to 2.6% year-on-year in March from 2.7% year-on-year in February. The reading was marginally higher than the consensus estimate of 2.5% year-on-year, due to higher commodity prices and increases in indirect taxes and administered prices. February data for money and credit aggregates showed a slight acceleration in the growth rate of money, but a renewed deceleration in credit. The slight acceleration in money reflected in large part a further accumulation in banks’ government bond holdings, particularly in Italy, Spain and Portugal. The data does not yet show the impact of the second ECB LTRO operation which was settled on 1 March 2012 and will therefore only be visible in the March money and credit data. At the April ECB press conference, ECB President Draghi confirmed that the ECB remains firmly in ‘wait-and-see mode’, although both hawkish (as regards the sensitivity of the ECB to possible second round effects of energy price increases) and dovish (as regards the need not to discuss the exit strategies from non-standard measures at the current juncture) elements could be detected.

In the UK, March activity data suggests little change to the broader picture of positive, but below-trend, growth. The recent improvement in the housing market is likely to be primarily due to an acceleration of activity ahead of the expiry of the stamp duty holiday. Consumer confidence remains stable, but low. Labour market data suggests some increases in employment, but not a sufficient enough increase to prevent unemployment from drifting higher at a slow pace. An increase in GDP in the first quarter should steer the economy clear of two consecutive negative growth quarters. Fiscal austerity and household and bank deleveraging continue to represent substantial headwinds to growth, and a return to above-trend growth is unlikely until these forces start to abate meaningfully. Effective new bank lending to households and firms has been zero for approximately three years now. Money growth has started to pick up marginally, although it remains very subdued.

The risk of a further downturn driven externally by the eurozone crisis eased following the ECB liquidity action and the Greek debt restructuring. However, the deeper balance of payments problems in the eurozone remain unresolved, and cannot be resolved by liquidity assistance alone. The UK remains highly exposed to this situation. The drag from high inflation on real income growth that prevailed in 2011 is subsiding. With nominal wage growth at around 2-2.5%, real wage growth is likely to be approximately zero in 2012, a marked improvement relative to the sharp real wage contraction in 2011. Inflation has already dropped to halfway between its peak and the Bank of England target of 2%. From here, we expect further moderation in inflation, but at a more gradual pace. Given somewhat resilient underlying CPI inflation and renewed increases in producer prices and energy prices, inflation is unlikely to fall quite as fast or as far as the Bank of England expects. Against this background of a stable but subdued growth outlook, and slightly increased inflationary pressures, the Bank of England seems unlikely to add further stimulus to the economy. Stimulus is already provided by existing monetary policy, with a stock of quantitative easing that represents a fifth of GDP and a third of the stock of gilts outstanding. Additional easing cannot be ruled out, but could only be justified by a renewed deterioration in growth prospects or a sharper-than-expected fall in inflation.


In March, there were stronger indications of the revival of the Japanese economy which has been evident in the last few months. The combination of expansionary fiscal policy, renewed quantitative easing and consequent weakening of the value of the Yen is providing support to demand arising from both domestic and foreign sources. Indeed, the composite PMI shot up by 2 points, to 53.2, an all-time high in the history of this survey. This increase stemmed from both manufacturing and, in particular, services. Other business and consumer surveys recorded similar increases, indicating a broad-based recovery. Actual data for February also painted a strong picture, with the exception of industrial production, but this seems poised to rebound. In particular, both consumption and the labour market are improving at a relatively fast pace, helping to slow the pace of deflation. Indeed, thanks also to temporary factors, the year-on-year growth rate of the core CPI surprised the consensus on the high side, rising from -0.9% to 0.6% year-on-year.

The Chinese economy is experiencing a policy-engineered soft landing, aimed at curbing inflationary pressures in both the CPI and the property market. A moderation is thus observable in most indicators of domestic demand for the first few months of 2012, including retail sales, auto registrations, investments and imports. In the first quarter of 2012, China’s GDP growth slowed from 8.9% to 8.1% year-on-year, the slowest pace since mid-2009. The official March PMI and HSBC surveys provided conflicting indications, as the former bounced (mainly due to seasonal factors), while the latter (which is adjusted for both seasonality and working days) moderated. In particular, HSBC composite orders PMI fell by approximately one point to 50.0, well below its 54.4 long-term average. Looking forward, fine tuning of monetary conditions is likely to put a floor on activity; credit formation rebounded in March following dismal dynamics in the first two months of the year, but the degree of freedom of monetary policy appears to be constrained by inflation dynamics. Indeed, CPI inflation picked up again in March, from 3.2% to 3.6% year-on-year, due to higher food and energy prices. Moreover, Premier Wen reaffirmed that property prices are at far from reasonable levels. Fiscal policy, however, is moderately expansionary.

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