Inflation fears hit US stocks as global economy continues to show strength

It's back to inflation fears for the US stock market yesterday. As Reuters reports:

The stock market dropped around midday after a report from the Federal Reserve Bank of Philadelphia showed a key U.S. regional inflation measure rose to its highest level since November 1980... The Dow Jones industrial average fell 133.03 points, or 1.28 percent, to end at 10,281.10. The Standard & Poor's 500 Index sank 17.96 points, or 1.50 percent, to finish at 1,177.80. The technology-laced Nasdaq Composite Index dropped 23.13 points, or 1.11 percent, to close at 2,068.11.

Another Reuters report provided the details of the economic data.

The Philadelphia Federal Reserve Bank said its business activity index rebounded to 17.3 in October from 2.2 in September, beating economists' forecasts for a rise to 10.0... with the key prices paid index jumping to 67.6 from 52.7, reaching its highest level since November 1980... prices received... index rose to 32.6 from 8.6... the new orders index, jumped in October to 18.6 after a minus 0.5 reading in September. The employment index also rose sharply, to 17.0 from 2.7 in September...

Meanwhile, first-time jobless claims...fell for the second week in a row, dropping 35,000 last week to a seasonally adjusted 355,000, the Labor Department said... The four-week moving average last week fell to 376,000 from 396,000, its lowest level in more than a month.

However, the New York-based Conference Board said in another report that its index of leading indicators fell 0.7 percent in September to 136.8. The three-month drop follows an unbroken string of advances from April through June and was greater than the 0.5 percent decline Wall Street economists had forecast.

Meanwhile, the economy is not as bad as feared in the UK.

Retail sales rose at more than twice the expected rate in September, denting expectations of further Bank of England interest rate cuts. The Office for National Statistics said on Thursday sales rose 0.7 percent last month. That compared with analysts' forecasts for a rise of 0.3 percent... August's figures were also revised up to a rise of 0.2 percent in sales from the flat reading the ONS reported last month. But higher sales volumes were accompanied by lower prices which the ONS said were on average 0.9 percent lower than a year earlier. The value of retail sales actually fell 0.1 percent on the year, the weakest outcome since records began just after World War Two...

Separately, industry data showed mortgage lending posted its strongest monthly rise in nine months in September, in further evidence that the BoE's quarter-point August rate cut is helping stabilise the housing market. The British Bankers' Association said underlying mortgage lending rose by 5.0 billion pounds last month.

While the economy looks as strong as ever in China, reportedly growing 9.4 percent in the first nine months of the year. Morgan Stanley's Denise Yam and Andy Xie analyse the numbers and conclude:

With the gradual slowdown in exports, fixed investment is now the key pillar of growth for China, sustained by the availability of cheap money that disregards diminishing returns on investment. The supply of liquidity, kept alive by buoyant US house prices and accommodative monetary policies in Japan and Europe, continues to chase quick profits in China’s investment boom and currency optimism. While the Statistics Bureau highlights investment as excessive and "unreasonably structured" in its latest statement, the government still seems reluctant to introduce tougher tightening measures. We continue to await the drying up of this cheap global liquidity, which should trigger a correction in investment and bring China its much needed cyclical adjustment.

But Morgan Stanley's Elga Bartsch is more sanguine about the outlook for European capital expenditure.

Starting with our simple fundamental capex model, we find that, in the last few quarters, capex growth was slightly stronger than underlying fundamental factors would have suggested. On average, actual capex outpaced model predictions by 3/4 of one percentage point... [The ECB's] overall easing campaign since the summer of 2001 has likely lifted capex by nearly 4%... [A]t the present juncture, macroeconomic profits measured by the gross operating surplus and aggregate demand, especially consumer spending, have remained relatively sluggish. By contrast, the marked reduction in the corporate debt burden over the last several quarters has helped capital expenditure. Going forward, we expect all three factors (demand, profits, and debt) to underpin capex further.