Wednesday, 14 December 2005

Fed raises rates, European inflation minimal, confidence up in Germany and Japan

As expected, the Federal Reserve raised interest rates yesterday. Reuters reports:

The U.S. central bank's rate-setting Federal Open Market Committee voted unanimously to increase the benchmark federal funds rate by a quarter-percentage point to 4.25 percent, the highest level since April 2001.

In a statement outlining its widely expected step, the Fed dropped an oft-repeated description of policy as accommodative, or stimulative -- acknowledging that rates have risen to more-normal levels from an emergency low of 1 percent hit in mid-2003.

Still, the Fed indicated at least one more quarter-point hike lay ahead by repeating its expectation that rates would need to rise further to keep inflation at bay.

"The committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," the Fed said.

Retail sales data also reported by Reuters perhaps support the Federal Reserve's notion that monetary policy is no longer obviously accommodative:

U.S. retail sales rose a smaller-than-expected 0.3 percent in November but fell when excluding a surge in auto purchases... much of the weakness was due to a 5.9 percent drop in sales at gasoline stations in November...

When the drop in sales at gasoline stations is excluded, retail sales rose 1.0 percent in November.

Sales of motor vehicles and parts rose for the first time since July, surging 2.6 percent. But without the auto sales, retail demand fell 0.3 percent, the Commerce Department said. That was the first decline since April 2004...

October sales were also revised higher, helping take some sting out of the disappointing result. Total sales rose 0.3 percent that month, up from the 0.1 percent decline initially reported...

A report by the International Council of Shopping Centers and UBS said chain store sales rose 0.9 percent last week, while a competing report by Redbook Research showed chain store sales fell 0.3 percent in the second week of December...

A second Commerce Department report showed U.S. business inventories rose a smaller-than-expected 0.3 percent in October, while sales rose 0.8 percent. The inventories-to-sales ratio, a measure of how long it would take to deplete stocks at the current sales pace, remained at a record low 1.25 months.

If the Fed is less fearful of inflation, it can take encouragement from data elsewhere. Based on yesterday's reports, consumer price inflation was practically non-existent in Europe last month.

Not in the UK:

The Office for National Statistics said on Tuesday that overall consumer prices did not change last month and falling petrol prices helped bring the annual inflation rate down two-tenths of a point to a lower-than-expected 2.1 percent.

Nor in France:

The French consumer prices index for November showed a fall of 0.2 pct compared with a flat reading in October, according to figures from the Insee statistics office. Year-on-year CPI was up 1.6 pct against a 1.9 pct rise the previous month.

Nor in Sweden:

Swedish consumer prices decreased on average with 0.2 % from October to November. The inflation rate in November was 0.8 % (0.5 % in October and 0.4 % in November 2004).

And Bloomberg's report on Italian industrial production in October emphasised the downside in the European economy.

Italian industrial production unexpectedly fell in October, signaling the recovery in Europe's fourth-largest economy may be losing momentum.

Production by factories, utilities and mines fell 0.9 percent from September, when it declined a revised 1.3 percent, the Rome-based national statistics office Istat said today. Economists expected a 0.3 percent increase, according to the median of 21 estimates in a Bloomberg survey. Production fell 2.7 percent in the year...

The production report is the second in a week to indicate manufacturing in the fourth quarter is weakening in the euro region. Industrial production in France, Europe's third-largest economy, unexpectedly fell the most in more than six years in October, a government report said Dec. 9.

No doubt, some of that production has gone to China, as AFP reports:

China's industrial output increased 16.6 percent year-on-year in November to 659 billion yuan (81 billion dollars), the National Bureau of Statistics said. The November rise was up from an increase of 16.1 percent in October, the bureau said in a statement.

But even in Europe, it's not all negative, according to this Bloomberg report.

Investor confidence in Germany, Europe's biggest economy, rose the most in more than 12 years amid signs export-led growth is encouraging companies to invest more at home.

A gauge of institutional and analyst expectations increased to 61.6, the highest since February 2004, from 38.7 in November, the ZEW Center for European Economic Research said today in Mannheim. Economists predicted a reading of 41, according to the median of 39 estimates in a Bloomberg survey.

And confidence is also positive in Japan.

Confidence among Japan's largest manufacturers rose to the highest in a year, as a weakening yen spurs exports and deflation abates in the world's second-largest economy.

The Bank of Japan's Tankan confidence index climbed to 21 in the fourth quarter from 19 in the third, below the median forecast of 23 in a Bloomberg survey of 37 economists. Non- manufacturers' confidence rose to 17, the highest since 1992, from 15. Economists expected 17. A positive number means optimists outnumber pessimists.

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