OECD raises growth forecast

The OECD has raised its economic growth forecast for its members. From Bloomberg on Thursday:

The Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year and predicted a further acceleration in 2011 as China powers a global recovery.

The economy of the group’s 30 member countries will expand 1.9 percent next year and 2.5 percent in 2011, the Paris-based organization said in a report today. Output will contract 3.5 percent this year. The OECD, which advises members on economic policy, forecast 2010 growth of 0.7 percent in June...

The U.S. economy will grow 2.5 percent in 2010 instead of the 0.9 percent predicted in June and the euro region will advance 0.9 percent instead of a projection it would stagnate, the OECD said. Japan will post growth of 1.8 percent instead of 0.7 percent. The forecast for China was raised to 10.2 percent.

US economic data on Thursday were also quite positive. Bloomberg reports:

The U.S. economic recovery will extend into next year as manufacturing expands and the pace of firings abates, reports today indicated.

The Conference Board’s index of leading indicators, a gauge of the outlook for the next three to six months, rose 0.3 percent in October, preserving a string of gains that began in April...

The number of Americans filing claims for unemployment benefits held at 505,000 in the week ended Nov. 14, matching the prior week’s reading as the lowest since January. The number of people collecting unemployment insurance dropped in the prior week, while those getting extended payments jumped...

Manufacturing in the Philadelphia region expanded in November at the fastest pace in more than two years, reflecting gains in orders and sales, figures from the Fed Bank of Philadelphia also showed today.

The bank’s general economic index rose to 16.7 this month, exceeding the median forecast of economists surveyed and the highest level since June 2007, from 11.5 in October. Readings greater than zero signal growth.

However, the positive economic reports were not matched by the stock market's performance.

Stocks extended a global drop as concern grew that the rally outpaced the prospects for economic growth and Bank of America Corp. downgraded chipmakers. The Standard & Poor’s 500 Index fell 1.3 percent to close at 1,094.9, with Intel Corp. and Texas Instruments Inc. losing ground.

US inflation accelerates, housing starts fall

As the economic recovery gets underway, inflation is also making a comeback.

MarketWatch reports that US consumer prices accelerated in October.

The consumer price index increased a seasonally adjusted 0.3% in October as energy prices increased for the fifth time in six months to offset another rare decline in rents, the Labor Department said.

The core CPI rate, which excludes food and energy prices in order to get a better look at underlying inflation in the economy, rose 0.2% last month, led by higher prices for cars and trucks, due in part to the unwinding of the government's "cash-for-clunkers" incentives program...

The consumer price index has fallen 0.2% in the past year. The core CPI is up 1.7% in the past year. In September, the CPI and the core CPI were up 0.2%.

However, for the near term, sustainability of the economic recovery is likely to remain a greater concern than inflation. MarketWatch reports that US housing starts fell back to the lowest level in six months in October.

In a blow to the optimism that had surrounded the U.S. housing sector in recent months, housing starts fell a sharp 10.6% in October, the Commerce Department reported Wednesday.

New construction on housing units dropped to a seasonally adjusted annual rate of 529,000, the lowest level since April. The 10.6% drop was the biggest percentage decline for starts since January...

Meanwhile, building permits fell 4% to a seasonally adjusted annual rate of 552,000 in October.

Still, the return of rising inflation is a global phenomenon. On Wednesday, Canada reported its first annual increase in consumer prices in five months with the CPI rising 0.1 percent in October from a year ago.

US industrial production and producer prices rise less than forecast

Tuesday's US economic data were weaker than expected. From Bloomberg:

Industrial production and wholesale prices in the U.S. rose less than forecast in October, giving the Federal Reserve more reason to keep interest rates near a record low for an “extended period.”

Total output rose 0.1 percent, restrained by the first decrease in manufacturing in four months, a report from the Fed showed today in Washington. Prices paid to factories, farmers and other producers rose 0.3 percent after dropping 0.6 percent in September, the Labor Department reported...

Production at factories, mines and utilities was forecast to increase 0.4 percent, according to the median estimate of 75 economists surveyed by Bloomberg News. Projections ranged from a gain of 1.2 percent to a drop of 0.3 percent. The Fed revised September’s gain down to 0.6 percent from a previously reported 0.7 percent increase...

The Labor Department’s report on producer prices was forecast to show a 0.5 percent increase, according to the median estimate of economists surveyed. Wholesale prices were down 1.9 percent from a year earlier.

Costs excluding food and fuel, known as the core index, unexpectedly fell 0.6 percent, the biggest drop since July 2006. Over the past 12 months core costs were up 0.7 percent, the smallest gain since 2004.

Another report today showed homebuilder confidence in November was lower than anticipated as companies fretted over the possible expiration of a government tax credit. The National Association of Home Builders/Wells Fargo sentiment index held at 17 for a second month. A reading below 50 means most respondents view conditions as poor.

Despite the weaker-than-expected producer price inflation in the US in October, other data show that global deflationary pressure has eased. For example, Reuters reports that consumer price inflation accelerated in the UK in October.

The Office for National Statistics said consumer price inflation rose to 1.5 percent year-on-year last month, in line with the consensus forecast, from a five-year low of 1.1 percent in September...

The ONS said October's pick-up was due to the statistical impact of a record fall in fuel prices in October 2008 not being repeated this year.

US retail sales rebound in October

US retail sales are holding up. From Bloomberg:

Retail sales in the U.S. rebounded more than forecast as demand for autos climbed, and a regional gauge of manufacturing showed expansion for a fourth month, easing concern the recovery will cool after government incentives end.

Purchases increased 1.4 percent in October after a 2.3 percent drop in September that was larger than the previously estimated, Commerce Department figures showed today in Washington. The Federal Reserve Bank of New York’s general economic index, where positive readings signal growth, fell to 23.5 this month from a five-year high of 34.6 in October...

A Commerce Department report today also showed inventories at U.S. businesses fell in September to the lowest level in almost four years, signaling orders will rise in coming months as spending picks up.

However, the data will not be enough to remove doubts about the strength of the recovery.

“Significant economic challenges remain,” [Fed Chairman Ben] Bernanke said in a speech to the Economic Club of New York. “The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.”

Certainly, it hasn't removed doubts from Meredith Whitney. From CNBC:

Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC...

The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point"...

The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.

Still, the economic recovery so far means that global deflationary pressure has eased. Again from Bloomberg:

European consumer prices declined for a fifth month in October as rising unemployment discouraged household spending.

Prices in the 16-nation euro region declined 0.1 percent from a year earlier after falling 0.3 percent in September, the European Union statistics office in Luxembourg said today. That matched an initial estimate published on Oct. 30 and the median forecast of 35 economists in a Bloomberg survey. In the month, consumer prices rose 0.2 percent.

Japanese economy grows for a second consecutive quarter

Japan's economy managed to expand again in the third quarter.

The Cabinet Office reported today that Japan's gross domestic product increased 1.2 percent in the third quarter. This was the second consecutive quarter of expansion after the economy had grown 0.7 percent in the second quarter.

Exports made an important contribution to third quarter growth, jumping 6.4 percent for the quarter, but capital spending also made a positive contribution, increasing 1.6 percent from the previous quarter, its first increase in six quarters.

The third quarter growth rate was the fastest since the first quarter of 2007 but the acceleration in the economy is unlikely to be maintained in subsequent quarters. Fiscal stimulus has so far helped boost economic growth but as the stimulus effects start to wane, growth may slow. Indeed, reports last week showed that some indicators have stopped improving.

On Friday, the Cabinet Office reported that the consumer confidence index for households in October was 40.5, unchanged from September. Prior to last month, the index had risen every month since hitting a low in December last year.

Earlier last week, the Cabinet Office had reported that its economy watchers index, based on a survey of workers in economically-sensitive jobs, fell to 40.9 in October. This was the lowest reading in five months and the biggest decline in 10 months.

Still, a second consecutive quarter of expansion for the Japanese economy rounds out a relatively positive third quarter for the global economy as some of the other major economies also returned to growth. On Friday, the euro area reported that GDP in the region grew 0.4 percent in the third quarter after contracting 0.2 percent in the second quarter. Last month, the United States reported that its economy grew 0.9 percent, or 3.5 percent annualised, after having contracted at an annualised rate of 0.7 percent in the previous quarter.

So Japan's GDP report today confirms that, at least in the third quarter, the global economy remained on a path to recovery.

Eurozone economy returns to growth

From Bloomberg:

The euro-area economy emerged from its worst recession since World War II in the third quarter as exports from Germany and France helped compensate for households’ reluctance to increase spending.

Gross domestic product in the economy of the 16 nations using the euro rose 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to grow 0.5 percent, according to the median of 34 estimates in a Bloomberg survey...

In the year, euro-area GDP declined a seasonally adjusted 4.1 percent in the July-September period after dropping 4.8 percent in the second quarter. In the 27-nation EU, GDP rose 0.2 percent from the previous three-month period, when it dropped 0.3 percent. The statistics office is scheduled to publish a breakdown of third-quarter GDP on Dec. 3.

We know from an earlier report that the US economy also returned to growth in the third quarter. A jump in the US trade deficit corroborates the economy's expansion, but a fall in consumer confidence could undermine growth in coming months. Again from Bloomberg:

Confidence among U.S. consumers unexpectedly dropped in November as the loss of jobs threatened to undermine the biggest part of the economy.

The Reuters/University of Michigan preliminary sentiment index decreased to a three-month low of 66 from 70.6 in October...

The U.S. trade gap widened 18 percent to the highest level since January, the Commerce Department said. Imports rose 5.8 percent, the most since March 1993, as the cost of a barrel of crude climbed to the highest level since October 2008 and volumes also rose. Exports increased 2.9 percent, propelled by sales of aircraft and industrial machines.

Renminbi peg draws criticism

It is not just the US that has a problem with the renminbi's peg to the US dollar. From Bloomberg:

President Barack Obama may find on his Asian visit that began today that discontent about China’s currency peg to the dollar isn’t confined to Washington’s lawmakers and business lobbyists.

From Mumbai-based Alok Industries Ltd., which supplies Wal- Mart Stores Inc. with textiles, to Bangkok-based semiconductor packager Hana Microelectronics Pcl, Asian companies say Chinese rivals have an unfair advantage because of the yuan-dollar link. The dollar has declined 14 percent in the past year against the currencies of six major trading partners...

“It’s just outrageous, the impact on their neighbors and on relatively poor countries,” said Simon Johnson, chief economist at the International Monetary Fund in 2007 and 2008 and now a senior fellow at the Peterson Institute for International Economics in Washington.

As Obama seeks to push the Group of 20 goal of rebalancing the world economy from excessive U.S. consumer spending and Asian exports, South Korea’s won gained 8 percent against the yuan in the past six months. Japan’s yen has risen 6 percent, while India’s rupee gained 6 percent and the Thai baht 4 percent. The yuan is a denomination of China’s currency, the renminbi.

But the renminbi's peg to the US dollar also creates a problem for China. Again from Bloomberg:

China is facing the biggest challenge to its currency policy since the start of the global recession as economists warn the peg to the dollar risks causing an asset bubble.

As recently as Nov. 9, People’s Bank of China Governor Zhou Xiaochuan said he didn’t feel much pressure to let the yuan rise, deflecting calls for an increase as exports start to recover and President Barack Obama prepares to discuss the issue in Beijing next week. China’s stance risks adding to liquidity after credit surged by $1.3 trillion this year, according to Fred Hu at Goldman Sachs Group Inc.

China’s sales of yuan to keep it fixed to the dollar contributed to a 29 percent jump in money supply, and the peg helped spur more than $150 billion in speculative funds from overseas in the past six months, China International Capital Corp. says. Record apartment prices and a 74 percent climb in the benchmark stock index this year are prompting warnings that the policy is inflating asset prices excessively.

Sometimes, though, it may be more convenient to blame the usual suspects for asset bubbles. From Bloomberg:

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out and watch out,” said Donald Tsang, chief executive of the Chinese city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that the Bank of Japan’s zero interest rate policy contributed to the Asian financial crisis and U.S. mortgage meltdown...

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

To be fair, most central banks are keeping interest rates very low and are contributing to some extent or other to global asset price appreciation. The US, China and Japan tend to be blamed more simply because they are big.

Strong data from China, currency may rise

China reported a strong set of economic numbers on Wednesday. From AFP/CNA:

China said Wednesday that massive government spending was paying off as a new wave of data showed the world's third-largest economy continued to strengthen, following the worst global crisis in decades.

Industrial production and retail sales picked up pace in October, while demand for Chinese exports improved, official data showed, putting the government's growth target of eight per cent well within reach for 2009...

China's industrial output, which shows activity in the millions of factories and workshops around the country, expanded by 16.1 per cent in October from a year ago.

Exports fell 13.8 per cent to US$110.76 billion on-year in October - the best result since exports dropped by 2.8 per cent in December 2008 as the worldwide crisis began to set in.

Retail sales - the main measure of consumer spending, which the government sees as a key factor in boosting the economy - rose 16.2 per cent in October from a year ago, up from 15.5 per cent in September...

Fixed-asset investment in urban areas rose 33.1 per cent in the January to October period, the statistics bureau said, after growing 33.3 per cent in the first three quarters of 2009.

The nation's consumer price index, the main gauge of inflation, fell 0.5 per cent in October compared with the same month a year earlier, after falling 1.1 per cent in the first nine months of the year.

New Chinese bank loans dropped to 253.0 billion yuan (US$37.1 billion) in October, the lowest monthly level since the beginning of the year, the central bank said.

With the economy apparently returning to strong growth, China may be about to let its currency appreciate. From Reuters:

China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate.

In its third-quarter monetary policy report, the People's Bank of China departed from well-worn language on keeping the yuan "basically stable at a reasonable and balanced level." It hinted instead at a shift from an effective dollar peg that has been in place since the middle of last year.

"Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism," the central bank said in a 46-page monetary policy report.

Japanese machinery orders rise

Bloomberg reports some good news for the Japanese economy today in the form of higher machinery orders.

Orders for Japanese machinery rose more than economists estimated in September, signaling that a recovery in corporate profits may be encouraging firms to start spending on plant and equipment.

Orders, an indicator of business investment in three to six months, climbed 10.5 percent from a month earlier, the Cabinet Office said today in Tokyo. The median estimate of 25 economists surveyed by Bloomberg was for a 4.1 percent gain.

Yesterday, Japan reported an unexpected widening of its current account surplus in September.

The surplus rose 0.2 percent to 1.57 trillion yen ($17.5 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg was for the gap to narrow to 1.51 trillion yen...

Exports slid 32.1 percent in September from a year earlier, less than August’s 37.1 percent drop. Imports fell 37.7 percent, compared with a 42.8 percent decline a month earlier...

On a seasonally adjusted basis, the current-account surplus widened to 1.34 trillion yen in September. Exports rose 2.5 percent from August, and imports climbed 5.9 percent.

However, yesterday's economy watchers survey data showed that the Japanese economic recovery may be slowing.

Confidence among Japanese merchants slid to a five-month low in October, a sign that the country’s export-led recovery isn’t spreading to consumers.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, fell to 40.9, the Cabinet Office said today in Tokyo. It was the biggest decline in 10 months.

Markets rally amid bubble concerns

Markets rallied strongly on Monday. Bloomberg reports:

U.S. stocks extended a global rally, sending the Dow Jones Industrial Average to a 13-month high, and the dollar slid after the Group of 20 nations agreed to maintain economic stimulus efforts. Commodities climbed, with gold reaching a record above $1,100 an ounce.

Adding fuel to markets, economic data continued their positive trend.

In Germany, industrial output rose more than forecast. Bloomberg reports:

German industrial output rose more than economists forecast in September as factories ramped up production of investment goods to meet export demand.

Output increased 2.7 percent from August, when it advanced 1.8 percent, the Economy Ministry in Berlin said today. Economists had forecast a 1 percent gain, according to the median of 37 forecasts in a Bloomberg survey. From a year earlier, production declined 12.9 percent when adjusted for the number of work days.

So did exports. Again from Bloomberg.

German exports rose more than economists forecast in September as a global recovery stoked demand for goods made in Europe’s largest economy.

Sales abroad, adjusted for working days and seasonal changes, increased 3.8 percent from August, when they fell 2.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a gain of 2.5 percent, the median of 13 forecasts in a Bloomberg News survey showed. Exports still declined 18.8 percent from a year earlier.

And in Canada, housing starts rose to the highest this year in October.

However, a renewed boom in housing poses its own risk, something that Asian policymakers recognise, at least in Singapore. From CNA:

The rise in risk appetite and sharp rebound in financial markets since the start of the year may have outpaced economic fundamentals, according to the Monetary Authority of Singapore (MAS) in its annual Financial Stability Review on Monday...

Despite such uncertainties in the global outlook, Singapore's property market has taken on its own dynamics. Private home prices rose almost 16 per cent in the third quarter – the highest quarterly increase in almost three decades.

This has led MAS to warn that a speculative bubble could form...

There are similar concerns in China. From Bloomberg:

China’s central bank and banking regulator may “soon” issue measures to limit the use of debt in real-estate purchases after asset prices climbed, a Shanghai official said.

Regulators may reduce “leverage ratios,” Fang Xinghai, the director-general of Shanghai’s financial services office, said at a forum in Beijing today. “I would think that soon you will see these measures coming out of the central bank and banking regulatory commission.”

Certainly, policymakers in Asia and elsewhere won't want to repeat the experience of the US. While the Fed's report on Monday that fewer banks tightened lending standards in the third quarter indicates that the credit crisis may be abating, John Hussman warns in his latest commentary that the second wave of mortgage foreclosures is beginning.