Friday, 30 December 2005

US existing home sales fall, but manufacturing remains strong in US and Japan

Evidence of a slowing US housing market continues to build. Reuters reports:

Sales of existing U.S. homes fell 1.7 percent in November as inventories climbed, indicating a rally in the U.S. housing market has begun to wane, a trade group said on Thursday...

November's existing-home sales at a 6.97 million unit annual rate compared with a 7.09 million unit pace in October and marked the first time the sales pace has dipped below 7 million units since March, the [National Association of] Realtors said...

Existing homes available for sale in November jumped 1.2 percent to 2.903 million -- the biggest supply since April 1986, when inventories hit 3.04 million units, the group said.

November's inventory level equates to 5 months' supply of homes for sale at the current sales pace -- the highest level since June 2003...

The national median existing-home price in November was $215,000, up 13.2 percent from a year ago.

Other economic news in the Reuters report shows that the overall US economy probably remains on a relatively firm footing.

The National Association of Purchasing Management-Chicago business index... fell slightly in December to 61.5 from 61.7 in November...

The Labor Department said initial claims for state unemployment insurance benefits rose to 322,000 last week from an upwardly revised 319,000 in the prior week... The closely watched four-week moving average of new claims...edged up to 325,000 in the week ended December 24 from 324,750...

The Conference Board said its gauge of help-wanted ad volume in the United States climbed to 39 last month, in line with analyst forecasts and compared with 38 in October.

While the US housing market is showing signs of peaking, the UK housing market continues to show signs of recovery even though overall economic conditions remain relatively weak. Yesterday, the British Bankers' Association released data on mortgage lending and consumer credit, and quoted David Dooks, its director of statistics, as saying:

Gross lending on mortgages reached a very high level in November confirming the recovery in the housing market after a relatively weaker early part of the year. Approvals, particularly for house purchase, continued to be strong with little evidence of the normal seasonal slowdown.

By contrast consumer credit was very weak with little sign that the slight improvement in retail sales was feeding through to lending.

And a measure of consumer sentiment corroborates the data on consumer credit. From Reuters:

Consultancy GfK NOP said its barometer of consumer sentiment fell to -9 in December after a reading of -8 in November. That was the lowest point since March 2003 and confounded analysts' predictions of a rise to -6.

But as shown by the Chicago manufacturing index and recent industrial production numbers from Asia, manufacturing has been performing well worldwide, not least in Japan.

The NTC Research/Nomura/JMMA Purchasing Managers Index...stood at a seasonally adjusted 55.7, the highest reading since December 2003 and up from 55.3 in November...

The new orders index...was 58.8 -- a 23-month high and up from 57.8 in November...

The input prices index came in at 62.8 versus 63.2. At the other end of the production line, the output prices index edged down to 49.3 from 49.4.

Thursday, 29 December 2005

Asian industrial production rise in November

Whether you are looking at the consumption or production side, in the West or in the East, there is ample evidence that the global economy remains strong.

Reuters reports Japan's November industrial production and retail sales.

Japanese industrial production grew for the fourth straight month in November while retail sales rose year-on-year, data showed on Wednesday, the latest in a string of upbeat figures underscoring a strong economic growth cycle.

Industrial output rose 1.4 percent in November from a month earlier. While that fell short of the market's median forecast of 1.8 percent growth, economists said it still underscored healthy business activity.

The gain followed rises of 0.6 percent in October and 0.4 percent in September...

The output index rose to 103.5, the highest since current calculation methods began seven years ago...

Manufacturers' output, the core component of production, is expected to rise 4.7 percent in December before retreating 2.0 percent in January, data from the Ministry of Economy, Trade and Industry showed...

Separate data released on Wednesday showed sales at large-scale retail stores rose 0.8 percent year-on-year on a same-store basis, the first rise in 21 months.

All-store retail sales rose 0.1 percent from a year earlier, less than the consensus forecast of 0.8 percent growth, but overall commercial sales, including wholesale, rose a healthy 3.9 percent...

In a sign of more improvement ahead in consumer sentiment, separate data showed wage earners' average overtime pay rose in November from a year earlier for the 40th month in a row.

Overtime pay, a barometer of income conditions, rose 0.8 percent from the same month last year to 19,792 yen ($170). In October, overtime pay rose 2.0 percent year-on-year, revised up from an initial estimate of a 0.1 percent decline.

Bloomberg reports strong growth in industrial production in South Korea as well.

South Korea's industrial production posted its biggest increase in more than six years in November, boosted by record exports and an increase in consumer spending.

Factory output gained a seasonally adjusted 5 percent from October, after increasing a revised 1.1 percent in the previous month, the National Statistical Office said in a report from Gwacheon, South Korea. That was more than the median forecast of a 0.9 percent gain in a Bloomberg survey of five economists...

South Korea's government said yesterday economic growth will accelerate to 5 percent in 2006, from an estimated 3.9 percent this year. Private spending will rise 4.5 percent next year, from an estimated 3.1 percent in 2005, it said...

Industrial output climbed 12.2 percent in November from a year earlier, following an 8.2 percent increase in October, the statistical office said...

Exports rose a revised 12 percent to a record $25.9 billion in November, the commerce ministry said. A central bank survey released earlier today showed South Korean manufacturers' confidence rose for the third month in five as orders are expected to increase from domestic and overseas customers, based on a survey of 1,424 companies last month.

And it is a similar picture in Singapore, where manufacturing output in November rose 22.4 percent from the same month last year and 1.5 percent from October, and non-oil domestic exports (NODX) grew 14 percent in November from a year ago. Less optimistically, though, compared to the previous month, November NODX declined 0.6 percent while non-oil retained imports of intermediate goods fell 13 percent.

US mortgage applications down but spending and consumer confidence rise

The US housing market and the US consumer have been moving in opposite directions of late. Reuters reports that home loan applications fell last week.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ended December 23 decreased 6.8 percent to 554.1 from the previous week's 594.6. Volume was at its lowest level since the week ended May 24, 2002, when the index hit 516.9.

The group's seasonally adjusted index of refinancing applications dropped 11.2 percent to 1,259.1, compared with 1,418.1 the previous week. Volume was at its lowest level since the week ended April 12, 2002, when the index touched 1,246.1...

MBA's seasonally adjusted purchase mortgage index fell 4.5 percent to 432.9 from the previous week's 453.1, its lowest level since February. The index is considered a timely gauge of U.S. home sales.

But Reuters also reports that consumer confidence is picking up.

The Conference Board, a private research group, said on Wednesday its index of consumer confidence climbed to 103.6 in December from 98.3 in November... The confidence data also indicated Americans were feeling more upbeat about the future, with the survey's expectations component rising to 91.6 from 88.4.

Redbook Research said its data, which is based on estimates from retailers, showed sales increased 3.7 percent in December compared with the same month last year, although they were flat from November... A separate report from the International Council of Shopping Centers (ICSC) and UBS Securities LLC showed sales rising 2.8 percent last week, following a 2.4 percent gain a week earlier...

A better labor market also appeared to be making people more comfortable with the economic situation. The Conference Board said the percentage of Americans saying jobs were hard to get falling to 22.2 from 23.6.

Recent retail sales were also good in Europe, Bloomberg reports.

European retailers' sales rose during the Christmas period as consumers in Germany and the U.K. become more confident about the economy and took advantage of an extra day of shopping to buy products such as MP3 players and perfume.

John Lewis Partnership Plc, a closely held U.K. department- store operator, said today that sales in the 28 days ended Dec. 24 rose 12 percent from the same period last year. Ludwig Beck AG, a German retailer, said revenue in the month of December leading up to Christmas increased 4.8 percent, exceeding the company's expectations, as shoppers opted for more-expensive products...

GfK, a market-research company, said today that German consumer confidence rose to a six-month high in December... Germans spent about the same on presents for this year's holiday season as last year, the country's HDE retail association said yesterday...

The number of people in U.K. stores in the week through Christmas rose 16 percent from last year, retail consultant SPSL said today... The number of people in stores in the U.K. on Dec. 26 and 27 was 8 percent higher than last year as shoppers sought out post-holiday bargains, FootFall, a consultant, said today in a statement.

With people in buying mood, no wonder UK house prices rose in December.

House prices rose for the first time in 18 months in December, according to property consultant Hometrack's latest survey published on Wednesday.

It said that prices rose by 0.1 percent in December, bringing the average cost of a home to 160,900 pounds. Prices were 1.59 percent lower than a year earlier.

Of course, houses are not the only assets being bought up. European companies have been busy issuing shares to raise cash over the past year amid strong stock markets, reports Reuters.

European companies raised $213 billion (122 billion pounds) in equity and equity linked markets this year, the highest tally since the technology boom of 2000, with bankers and investors cautiously hopeful of similar levels next year.

There have been lots of liquidity worldwide to fuel spending, but the US mortgage application data, coupled with the recent yield curve inversion in the US, could be a harbinger of things to come.

Wednesday, 28 December 2005

Consumer sentiment rising, yield spread declining

US consumers seem to be in reasonably good buying mood of late, with reports of a decent holiday shopping season and a rise in the ABC/Washington Post consumer comfort index last week.

Investors, on the other hand, were concerned about the inversion in yields in the fixed income market. Reuters reports:

The U.S. Treasury yield curve inverted on Tuesday, with two-year notes yielding more than 10-year notes for the first time in five years in a possible signal the U.S. economic recovery is topping out...

The spread between 2-year and 10-year notes...oscillated between positive and negative throughout Tuesday, falling to a low of negative 1.4 basis points (0.014 percent).

Late in the afternoon, a price rise of 10/32 of U.S. 10-year notes put benchmark yields at 4.343 percent -- 0.4 basis point below two-year yields of 4.347 percent.

Stocks did not react too well to the yield inversion. The S&P 500 fell 12.12 points, or 0.96 percent, yesterday to close at 1,256.54.

Tuesday, 27 December 2005

Mixed news from Japan as Nikkei hits 16,000; China shows signs of slowdown

The news from Japan recently has been mixed. Manufacturers gained confidence this quarter, as reported by Bloomberg.

Japan's manufacturers gained in confidence for a second straight quarter, adding to signs that they may sustain investment and fuel economic expansion in the world's second-largest economy.

Confidence among manufacturers with at least 1 billion yen ($8.6 million) in capital was 10.5 points in the three months ending December, up from 6.4 points in the previous quarter, according to a survey jointly released by the Cabinet Office and Ministry of Finance in Tokyo today. A positive number means more companies indicated conditions have improved compared with the previous three months...

Confidence among large non-manufacturers fell to 10.5 points from 11.6 points, today's report showed. Overall business confidence rose to 10.5 points, from 9.7 points. Manufacturers expect confidence to fall to 6.9 points in the first quarter next year and decline further to 6.2 points in the following three months.

Manufacturers plan to increase spending by 14.3 percent in the year to March 31 and non-manufacturers plan to spend 10.3 percent more, today's report said. Profits at manufacturers will rise 6.8 percent this fiscal year which ends March 31, while non-manufacturers predict a 6.8 percent increase as well in profits.

But consumers remain reluctant to increase spending, according to another Bloomberg report.

Japan's households spent less in November, suggesting spending by individuals may not help sustain growth in the world's second-largest economy.

Spending by households headed by a salaried worker fell 0.7 percent to 307,309 yen ($2,638), seasonally adjusted from October, the statistics bureau said in Tokyo today. Unemployment rose to 4.6 percent, higher than the median estimate of 4.3 percent by 30 economists in a Bloomberg survey.

There were mixed indications on the inflation front as well.

Japan's consumer prices rose last month for the first time in two years, gains the central bank says need to be sustained before changing its policy of keeping interest rates at almost zero.

Core prices rose 0.1 percent from a year earlier, the first increase since October 2003, and only the second time in more than seven years, the government's statistics bureau said today in Tokyo. The gain, which excludes prices of fresh food, matched the median forecast of 30 economists surveyed by Bloomberg News...

Excluding energy and all food, Japan's consumer prices fell 0.2 percent in November, according to the statistics bureau, which released that gauge for the first time at the request of Internal Affairs Minister Heizo Takenaka...

Prices in Tokyo, home to one in 10 Japanese, fell 0.2 percent in December from a year earlier, the statistics bureau said today. That matched economists' estimates in the Bloomberg survey.

But investors remain enthusiastic about Japan, with the Nikkei 225 closing above 16,000 yesterday.

Japanese share prices closed above 16,000 points Monday for the first time in over five years, gaining 1.04 percent as investors returned from a three-day weekend in an upbeat mood, dealers said.

They said after a year in which the main Nikkei has now risen by 40 percent, investors are betting on further gains in 2006 as the world's second-largest economy recovers after a decade in the doldrums.

The Tokyo Stock Exchange's benchmark Nikkei-225 index climbed 166.30 points to 16,107.67, the highest close since October 5, 2000.

The broader TOPIX index of all first-section shares closed up 11.05 points or 0.67 percent at 1,648.94 on turnover of 1.87 billion shares.

Meanwhile, in China, car production hit a record in November.

China's car production in November grew 52.1 percent from the same month last year to a record 291,900 units, breaking the previous record set in June of 275,100 units, according to data released by the National Bureau of Statistics Friday.

But there are signs that the breakneck pace of expansion in China may be coming to an end, with house prices slipping:

The Chinese Ministry of Construction said Monday the average housing prices in China's 70 major and medium-sized cities dropped by about 0.6 percent on a month-to-month basis since early July of 2005.

...and crude oil imports falling:

CHINA last month experienced its biggest drop in crude oil imports since January due to high prices and mild growth in demand, according to the latest figures.

China imported 10.33 million metric tons of the fuel in November, down 7.1 percent from a year earlier, the Customs General Administration of China said yesterday.

Saturday, 24 December 2005

US new home sales fall but consumer sentiment and durable goods orders rise

There were more signs of a slowdown in the US housing market yesterday. From Reuters:

The Commerce Department said sales of U.S. single-family homes slumped 11.3 percent in November, the largest one-month decline since January 1994.

The annual selling rate of 1.245 million units was below forecasts for a 1.305 million unit rate, and was down from October's record 1.404 million unit rate. Sales declined in three of the four regions.

Inventories of unsold homes are bulging, with some 4.9 months of supply now on hand, the highest since December 1996.

As usual, Calculated Risk puts the numbers in perspective, adding that the median and average sales prices are "trending down", but overall, the "report is still reasonably strong".

Meanwhile, the same Reuters report also mentions that consumers remain relatively cheery.

The University of Michigan's final sentiment index for December rose to 91.5 from a preliminary of 88.7, and was up from 81.6 in November. Wall Street economists had forecast the index at 89.0.

The overall durable goods orders number for November was good too.

Earlier, the government reported that new orders for U.S.-made durable goods surged in November on a jump in civilian aircraft purchases. Non-transportation orders slid as defense outlays tumbled.

The 4.4 percent rise was the largest in overall durable goods orders since May, trouncing economists' forecasts for a rise of 1 percent in orders for expensive items built to last three years or more...

A closely watched proxy for business spending, non-defense capital goods orders excluding aircraft fell 2 percent.

The November dip in non-defence capital goods orders ex aircraft notwithstanding, the pace of durable goods orders has been strong over the past year. Year to date, new orders for durable goods have risen 7.5 percent over the corresponding period last year. Over this time frame, non-defence capital goods ex aircraft have done even better, rising 10.4 percent.

So it's been good, but can it last?

Friday, 23 December 2005

Good economic news from US and Japan

The US economy was in good shape in November, according to this Reuters report. Personal spending and income posted good gains in November, especially after adjusting for inflation.

U.S. consumer spending rose a moderate 0.3 percent in November...

In its report on personal income, the Commerce Department said consumer prices fell a record 0.4 percent last month, reflecting plunging energy costs from hurricane-induced peaks...

Taking into account the price drop, consumer spending rose a steep 0.7 percent in November. At the same time, personal income climbed 0.3 percent, or a 0.7 percent gain after adjustment for inflation.

... Excluding volatile food and energy, the department's price index for consumer spending...edged up just 0.1 percent.

The mild November core inflation rise put the year-on-year increase at 1.8 percent, below the upwardly revised 1.9 percent gain for October and the slimmest increase since March 2004...

... The saving rate, the percentage of after-tax income socked away, held steady at a negative 0.2 percent in November -- a sixth straight month in negative territory.

Things look good on the employment front too.

Separately, the Labor Department said first-time claims for jobless aid fell a sharp 13,000 last week to 318,000, the lowest level in more than a month...

The drop in initial claims pulled the closely watched four-week moving average of new claims...down to 324,500 from 329,250 a week earlier.

And to top it off, the leading index rose in November.

The private sector Conference Board said on Thursday its Index of Leading Indicators, which is supposed to forecast economic trends up to six months ahead, rose for the second straight month in November, climbing by 0.5 percent after a revised 1 percent rise in October.

There was also good economic news from Japan, according to this Bloomberg report.

Japan's trade surplus widened for the first time in eight months and the nation's service industries expanded more than expected, adding to evidence that the world's second-largest economy will grow for a fifth year.

The November trade surplus rose to 600.6 billion yen ($5.1 billion) from 597.3 billion yen a year earlier, the Ministry of Finance said in a report today. An index measuring services provided by industries including construction and transport rose 1.2 percent in October from September, beating the 0.7 percent median estimate of 33 economists in a Bloomberg survey...

Exports in November climbed 14.7 percent to 5.91 trillion yen, the second highest ever. Imports advanced 16.6 percent to a record 5.31 trillion yen.

The news from Europe was not so good, though. Industrial new orders slowed in October.

The euro-zone industrial new orders index fell by 0.5% in October 2005 compared to September 2005. The index rose by 1.6% in September and remained unchanged in August. EU25 new orders remained stable in October 2005, after rises of 0.7% in September and of 0.2% in August.

In October 2005 compared to October 2004, industrial new orders increased by 4.4% in the euro-zone and by 4.9% in the EU25.

In the UK, the current account deficit hit a record high in the third quarter.

The Office for National Statistics said the current account gap widened to 10.2 billion pounds from 1.36 billion pounds in the second quarter.

That was the highest cash deficit since records began and equalled 3.4 percent of GDP, the highest since the fourth quarter of 2000...

Separately, the ONS left GDP growth for the third quarter unrevised at 0.4 percent on the quarter, as expected, but services output was marked up to a rise of 0.7 percent from 0.6 percent.

The ONS also released third quarter data showing business investment grew by 0.3 percent on the quarter and by 1.9 percent on the year.

Thursday, 22 December 2005

US 3rd quarter GDP revised down, mortgage activity declines

US economic growth for the third quarter has been revised down, but not by much. Reuters reports:

Gross domestic product, or total output within U.S. borders, expanded at a 4.1 percent annual rate in the July-September quarter, the Commerce Department said in its final estimate of growth for the period.

The rate was below the 4.3 percent the department had estimated a month ago, partly because new-car sales were slower and investment in home building was less than thought.

Providing more indication of the direction of the housing market -- and contradicting the previous day's data showing rising housing starts -- a report yesterday showed a decline in mortgage application activity last week. From the same Reuters report:

Separately, the Mortgage Bankers' Association said U.S. mortgage applications dropped to an 11-month low last week as fewer people sought loans to buy new homes. "Housing has passed its peak," said Robert Brusca, chief economist at Fact and Opinion Economics.

The association's seasonally adjusted index of mortgage application activity for the week to December 16 fell 4.0 percent to 594.6 from 619.3 the previous week.

For a chart of the index, see Calculated Risk, who says: "Overall this report shows purchase activity might be weakening, but it is still at a very high level."

Meanwhile, Barry Ritholtz at The Big Picture maintains that housing will slow next year, downplaying the data on housing starts as it is "not a leading indicator of the housing cycle".

Wednesday, 21 December 2005

Housing in good shape in US and UK; China GDP revised up, may slow in 2006

Rising housing starts and low inflation -- in other words, more good news for the US economy. Reuters reports:

U.S. housing starts rose 5.3 percent in November, defying Wall Street expectations for a slowdown...

The Commerce Department said November housing starts rose to a 2.123 million unit annual rate... October starts were revised up to a 2.017 million unit annual pace from the originally reported 2.014 million unit rate...

Permits for future construction, an indicator of builders' confidence, shot up 2.5 percent to a 2.155 million unit pace...

U.S. producer prices fell a larger-than-expected 0.7 percent last month, the biggest drop in 2-1/2 years, according to a Labor Department report.

The drop in the producer price index, a gauge of prices received by farms, factories and refineries, was the largest since April 2003 and reflected a 4 percent drop in energy costs, which swamped a 0.5 percent gain in food prices, the department said.

The core PPI, which strips out those volatile costs to provide a better gauge of underlying inflation pressures, edged up just 0.1 percent.

No wonder consumer sentiment is improving.

ABC News and the Washington Post said their Consumer Comfort Index rose to -11 in the week ending December 18 from -13 the prior week.

The strong US housing market may be defying analysts' expectations, but the UK housing market is not doing too badly either. From another Reuters report:

Mortgage lending posted its biggest rise in more than a year in November, the British Bankers' Association said on Tuesday, in a further sign that the housing market is picking up.

The improvement echoed a report overnight from the Royal Institution of Chartered Surveyors showing house prices rose for the first time since July 2004 in the three months to November, with surveyors optimistic about further gains.

BBA said the 5.1 billion pounds increase in underlying mortgage lending was the highest since July 2004. The increase was well above growth of 4.3 billion pounds in October and the average 4.4 billion pounds over the last 6 months.

Meanwhile, China's upward revision of its GDP made headlines in the mainstream media, even though nobody seems surprised by it.

A new economic census found output in China's service sector had been under-reported by some 262 billion dollars, largely due to the way the government compiled statistics, Li Deshui, commissioner of the National Bureau of Statistics, told reporters.

"Preliminary estimation using results from the economic census indicates that China's GDP for the year 2004 was 15,987.8 billion yuan (1.98 trillion dollars) at current prices," Li said.

This represents "an increase of 2,300 billion yuan (284 billion dollars) or 16.8 percent over the preliminary estimated figure using regular annual statistical data."

In its latest Asia Economic Monitor, the Asian Development Bank expects China's growth rate to slow in 2006, but not for other East Asian economies.

Although several components of the external environment are likely to remain more or less unchanged in 2006, a turnaround in global IT demand, a recovery in Japan’s domestic demand, and continued strong, but slower, growth in the PRC bode well for the region’s economic prospects.

Thus, despite the much-anticipated economic slowdown in the PRC, emerging East Asia’s average GDP growth in 2006 is forecast to be 7.2%, broadly the same as the likely outturn in 2005.

Performance in 2006 is expected to vary significantly across countries. In the PRC, growth is projected to ease to a shade below 9%, but it is expected to strengthen in most other major economies.

Excluding the PRC, countries in emerging East Asia are forecast to grow by 5.3% next year, higher than the estimated 4.6% figure for this year.

Tuesday, 20 December 2005

Chip stocks fall as prospects improve

Weakness in the semiconductor industry drove US stocks down yesterday. Reuters reports:

U.S. stocks fell on Monday on weakness in semiconductor shares after a brokerage cut ratings on six major stocks in the sector, including Texas Instruments Inc. driving the Nasdaq Composite index to its biggest one-day percentage loss in nearly eight weeks...

The Dow Jones industrial average was down 39.06 points, or 0.36 percent, at 10,836.53. The Standard & Poor's 500 Index was down 7.40 points, or 0.58 percent, at 1,259.92. The technology-laced Nasdaq Composite Index was down 29.74 points, or 1.32 percent, at 2,222.74...

Brokerage Stifel, Nicolaus & Co. cut its rating on six semiconductor stocks, saying the market has already taken into account most of the industry's strengths and it was "time to take profits" on the sector...

Declining stocks outnumbered advancers by a ratio of about 8 to 3 on the NYSE, while on Nasdaq, the number of stocks that fell beat advancers by about 7 to 3.

A case of selling on good news, it seems. And the news in the semiconductor industry has been good recently.

About two weeks ago, Semiconductor Equipment and Materials International (SEMI) had reported that chip-equipment makers had forecasted that sales would rise 9.1 percent in 2006 followed by another two years of double-digit growth after falling 11.2 percent in 2005, according to an Electronic News report.

Yesterday, the Semiconductor Equipment Association of Japan (SEAJ) reported that Japanese chip-equipment makers saw orders continue to grow in November, according to another Electronic News report. November's bookings were up 6.5 percent from October and 15.2 percent from the previous year, while the book-to-bill ratio rose to 1.05 in November from 1.01 in October and 0.9 in September.

And Reuters reports that Samsung Electronics Co Ltd, the world's top memory chip maker, said yesterday that it would spend 786.8 billion won (US$774.4 million) to upgrade and expand lines for dynamic random access memory and flash chips to capitalise on an expected recovery in chip prices.

But this story highlights the fact that while growth may be good, there are concerns over profitability, at least in Europe.

Although the worldwide semiconductor industry is anticipating growth over the next two years, the capacity utilization of fabs, the silicon supply outlook, and uncertainties in the backend could give chip companies some unpleasant surprises during that time, according to SEMI Europe.

And of these, the back-end could be the most shocking. Many test and assembly contractors are being so starved of adequate returns on their existing investments that they cannot afford to upgrade for the future, according to Otto Kosgalwies, STMicroelectronics General Manager Supply Chain, who was a guest speaker at a SEMI event held here. As the semiconductor industry now contracts out a major portion of the test and the assembly of its chips, the supply chain could simply fail in a catastrophic domino effect.

US home builder sentiment, European industrial output decline, German prospects improve

There is more evidence -- though not conclusive -- from the NAHB that the US housing market may be peaking.

Confidence of single-family home builders slid further this month from its summer peak, yet remained well within the positive range, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for December, released today. The overall HMI declined four points from a slightly revised November number to 57, while the component measuring builder expectations for future sales held firm at 65...

The overall HMI declined from 61 to 57 in December – its lowest level since April of 2003, when it stood at 55. The components for current sales and traffic of prospective buyers were each down this time around, by four points to 63 and seven points to 39, respectively. However, the component gauging builder expectations for the next six months held firm at 65.

There was confirmation from Eurostat yesterday of Europe's weak industrial production in October.

Seasonally adjusted industrial production fell by 0.8% in the euro-zone in October 2005 compared to September. Production decreased by 0.3% in September but grew by 0.8% in August. Output in the EU25 fell by 0.7% in October 2005, after increases of 0.1% in September and of 0.3% in August.

In October 2005 compared to October 2004, industrial production rose by 0.1% in the euro-zone and by 0.2% in the EU25.

German industrial production was quite good, though, rising 1.1 percent in October. And there was more good news for Germany yesterday as the Ifo institute raised its forecast for growth next year to 1.7 percent from a June forecast of 1.2 percent, saying export-led growth may spur companies to increase domestic spending, even as the Economy Ministry noted that prospects for a recovery "have strengthened further".

Rising prices reflect the economic recovery, although German producer prices did fall from October.

Producer-price inflation in Germany, Europe's largest economy, accelerated to the fastest rate in 23 years in November on higher energy costs.

Prices for goods from plastics to newsprint were 5 percent higher in November than a year earlier compared with October's 4.6 percent annual gain, the Federal Statistics Office in Wiesbaden said in a statement today. Economists expected the rate to quicken to 4.9 percent, according to the median of 30 estimates in a Bloomberg survey. From October, prices fell 0.1 percent.

Monday, 19 December 2005

Awash with liquidity, drowned by overcapacity?

As 2006 comes to a close, the world's central banks are still mainly on inflation watch. However, it is also quite clear that many central bankers are keeping one eye on growth -- or more specifically, its potential shortfall.

December saw the world's two leading central banks raise interest rates. The European Central Bank (ECB) raised the interest rate on the main refinancing operations by 25 basis points to 2.25 percent on 1 December, while the Federal Reserve raised the target federal funds rate by the same amount to 4.25 percent on 13 December.

Ironically, the prior month, November, was the month that saw consumer prices fall in both Europe and the United States. The harmonised indices of consumer prices in the European Union rose 2.3 percent from the previous year in November but fell 0.3 percent from October. The US consumer price index rose 3.5 percent rose from the previous year in November but fell 0.6 percent from October, its largest monthly drop since July 1949.

However, the fall in energy prices was a big factor behind the fall in consumer prices in November. For example, the US core consumer price index -- excluding food and energy -- rose 0.2 percent in the month and 2.1 percent over the year, around the same rate as previous months.

Nevertheless, both the Federal Reserve and the ECB have given markets reason not to price in too many more rate hikes in the near future. In its statement accompanying the rate hike, the Federal Reserve dropped its previous description of monetary policy as accommodative, implying a move into a tightening stance and hence, the possibility of an imminent end to rate hikes, while the ECB has also made clear that its interest rate increase was not part of a series of hikes.

Having said that, not too many central bankers are actually declaring that the battle against inflation has already been won. There are indicators that suggest that underlying inflationary pressures remain.

For example, on 15 December -- the same day that the November US CPI was announced -- the Federal Reserve reported that capacity utilisation for total industry in November was at 80.2 percent. This is well up from the trough of 73.9 percent at the end of 2001.

And just one week prior to that release, the Federal Reserve had released its flow of funds data that show that US debt levels continued to rise in the third quarter. Total debt outstanding in non-financial sectors hit US$25.7 trillion in the quarter, a record high.

With the rate at which US consumer spending has increased over the past few years, it is no surprise that the increase in household debt has been the main reason for the overall rise in debt levels. Household debt grew in the third quarter at a 11.6 percent annual rate -- the highest since 1987 -- to hit US$11 trillion. This is 45 percent higher than the debt level at the end of 2001 and is 87 percent of GDP, a record high.

Debt in the US has grown despite the Federal Reserve's interest rate hikes of the past one and a half years. The rate hikes have helped to reduce US M2 growth to only 3.9 percent in November over the previous year, down from 5.2 percent growth over the preceding year. On the other hand, M3 growth rate hit 7.4 percent in November, up from the preceding year's 5.6 percent.

Liquidity indicators are similarly strong elsewhere in the world. In the euro-zone, M3 grew at an annual rate of 8.0 percent in October while credit grew at a 7.7 percent rate. China, where much of the world's liquidity is flowing to, saw M2 surge 18.3 percent in November from the previous year.

And even in deflation-ridden Japan, prices are stabilising, with prospects for further reflation as, on Friday, the Bank of Japan elected to keep pumping liquidity into the economy by maintaining the reserve target at between 30 trillion yen and 35 trillion yen. This in a country saddled with a national debt that is projected to reach 774 trillion yen -- 151 percent of gross domestic product -- by March.

However, outside the consumption binge in the US, the most obvious manifestation of the expansion in global liquidity in the real economy has been the rise in investment spending in China.

In an article in the Global Economic Forum on 12 December, Morgan Stanley's chief economist Stephen Roach claimed that while some economists studying developed economies have noted an accumulation of corporate savings and are waiting for an upsurge in capital spending, investment spending has in fact been alive and well. Roach pointed out in his article that once one takes into account investment spending in China, it can be seen that the surge has already happened.

According to him, if one takes investments in the G-5 countries (the US, Europe, Japan, Canada, and the UK) plus China as a proxy for global capital expenditure, then, by his reckoning, that expenditure "surged to an estimated 15.4% of world GDP in 2005 -- a sharp increase from the cycle low of 13.7% established in 2002 and a ratio that now surpasses the prior peak of 14.9% hit at the end of the bubble in 2000". Accounting for China's fast-rising share of global capital expenditure is critical, according to Roach.

Indeed, so fast is investment rising in China that many economists in the country are concerned about overcapacity. At a conference over the weekend, Cao Yushu, deputy secretary-general with the State Development and Reform Commission, said that eleven sectors including cement, steel and auto making are facing, or will face, surplus in production capacity.

Morgan Stanley's chief Asian economist Andy Xie concurs. "China faces massive overcapacity and an overextended property market", Xie wrote on 15 December in the Global Economic Forum. "China has over-invested substantially in steel, auto, electronics, cement, chemicals, and many other industries. The excess capacity sometimes exceeds 100% of current sales."

Speaking of overcapacity, it is probably worthwhile noting that even in the US, although industrial capacity utilisation has been rising strongly in the past few years, the Federal Reserve's data show that it is still 0.8 percentage point below its 1972-2004 average.

And despite the global economic expansion of the past few years, labour market slack remains considerable. The unemployment rate in the European Union in October was at 8.5 percent. While the unemployment rate in the US, at 5.0 percent in November, is much better, a considerable proportion of the employment gains in recent years have been built on housing foundations -- Marisa DiNatale of estimates that housing and related industries have produced nearly one out of four new jobs in the US since 2003 -- a precarious situation to be in if central bank tightening deflates the housing boom at the same time it slows the overall economy.

Therein lies the risk facing central banks. While optimists point to the low inflation numbers as a good sign -- that economies are able to expand credit without overheating -- the reality may be that they are actually signs of overcapacity.

In other words, central banks tightening monetary policy today to prevent an excess of credit and capacity growth face the risk that they may already be too late.

Saturday, 17 December 2005

US current account, European inflation fall, German confidence rises

Yesterday's news had more of what we had earlier in the week.

On the US external front, the current account deficit reportedly shrank in the third quarter. Reuters covers this news.

The U.S. current account gap narrowed in the third quarter to $195.8 billion as government transfers fell, the services surplus grew and income shifted to a surplus from a deficit, government data showed on Friday.

The quarterly shortfall was smaller than Wall Street forecasts for a deficit of $204.8 billion. However, the Commerce Department revised the second-quarter gap to $197.8 billion from the $195.7 billion originally reported.

Hurricanes that hammered the U.S. Gulf Coast mid-quarter helped narrow the closely watched current-account deficit, as extensive damage from the storms led to large insurance claims and donations from abroad, the Commerce Department said.

Brad Setser analyses the data and projects that "the q4 current account deficit will be much, much larger".

On the inflation front, we have Eurostat confirming the fall in EU November prices.

Euro-zone annual inflation was 2.3% in November 2005, down from 2.5% in October. A year earlier the rate was 2.2%. Monthly inflation was -0.3% in November.

EU25 annual inflation was 2.2% in November 2005, down from 2.4% in October. A year earlier the rate was 2.2%. Monthly inflation was -0.2% in November.

And there was more evidence of improvement in German confidence. Bloomberg reports:

Business confidence in Germany, Europe's largest economy, climbed to a five-year high in December, suggesting economic growth will accelerate as increasing exports help fuel corporate investment.

The Ifo confidence index, based on a monthly survey of 7,000 executives, rose to 99.6 from November's 97.8. Economists expected the Munich-based institute's indicator to rise to 98.2, the median of 40 estimates in a Bloomberg survey showed.

Friday, 16 December 2005

US consumer prices fall but manufacturing holds up

Yesterday's report on US consumer prices showed a large drop in November. Reuters reports:

The 0.6 percent drop in consumer prices last month, led by a 16 percent drop in the cost of gasoline, was slightly larger than the 0.4 percent reversal expected by Wall Street and was the biggest decrease since July 1949.

Excluding food and energy costs, so-called core inflation rose 0.2 percent in November, in line with market forecasts...

Over the past year, consumer prices have climbed 3.5 percent, a slowdown from October's 4.3 percent inflation rate... The annual increase in core inflation...remained at a comparatively tame 2.1 percent in November.

This report from the US follows those in Europe over the past few days showing falls in consumer prices in November (see my previous two posts).

There were also plenty of other economic news from the US.

A separate report from the Fed showed output from U.S. factories, mines and utilities rose a better-than-expected 0.7 percent in November, pushed higher by a post-hurricane recovery in the petrochemical and energy sectors.

The gains were echoed in a report from the New York Fed Bank showing an unexpected jump in manufacturing conditions in that state, with new orders up but shipments and employment down...

A report from the Philadelphia Fed Bank showed factory activity in the U.S. Mid-Atlantic region improved slightly in December while new orders slipped.

The Philadelphia Fed's business activity index edged up to 12.6 in December from 11.5 in November, below Wall Street forecasts for a rise to 14.0...

Separately, the Labor Department reported the number of U.S. workers filing new claims for jobless aid rose 1,000 last week to 329,000, bucking expectations for a small decline.

A four-week moving average of claims, which smooths weekly volatility to provide a better picture of the job market, rose 6,000 to 328,750, the highest in five weeks.

Overall, a rather mixed batch of data from the US. Indeed, Asha Bangalore at Northern Trust warns us to read beyond the headline numbers. On inflation:

The headline number speaks only for the decline in petroleum based energy prices... The mix of price data is still biased toward higher prices, which makes it almost certain that the Fed will raise the federal funds rate to 4.50% at the close of the January 31 FOMC meeting.

On manufacturing:

These sharp increases in industrial production in the October-November period reflect recoveries after the hurricanes in the petrochemical and energy industries... The underlying momentum of the factory sector is more moderate than what the October and November data convey.

On jobless claims:

After adjusting for hurricane-related filings, seasonally unadjusted initial claims rose 4.6% on a year-to-year basis. This bodes poorly for the labor market.

At least, though, there was something to cheer about in the UK. From another Reuters report:

British retail sales rose at their sharpest rate in five months in November, in a further sign that consumer demand is picking up and boding well for the key Christmas shopping season.

The Office for National Statistics said on Thursday that sales rose 0.7 percent last month after an upwardly revised 0.4 percent in October. This was more than double analysts' forecasts and took the annual rate to 2.1 percent...

Prices on average were 1.1 percent lower than a year ago.

Thursday, 15 December 2005

US trade deficit rises in October but November sees more price declines

The US trade numbers for October are out. Reuters reports:

The U.S. trade deficit widened unexpectedly in October to a record $68.9 billion, government data showed on Wednesday, setting the stage for a sharp slowdown in economic growth in the fourth quarter.

Economists had expected the trade gap to shrink in October to $63.0 billion, but deficits with China, Canada, the European Union, Mexico and OPEC all ballooned to fresh highs, while petroleum imports hit a record despite falling prices...

The Commerce Department said imports of goods and services rose 2.7 percent to a record $176.4 billion as petroleum imports rushed to fill the gap left by hurricane-depleted domestic production.

While oil import prices declined in the month to an average $56.29 per barrel, the volume of crude imports surged 9.3 percent, driving the value of imports to their second-highest level on record.

Exports increased a smaller 1.7 percent to $107.5 billion, the second-highest on record, as an end to a strike at Boeing pushed aircraft exports up 173 percent in the month.

The trade data adds to downward pressure on the US dollar. Bloomberg reports:

The dollar fell by the most in almost five months against the yen after Japanese business confidence rose to the highest in a year and the U.S. trade deficit unexpectedly widened to a record....

Against the yen, the dollar slid 2.2 percent to 117.32 by 3 p.m. in New York from 119.95 yen yesterday, according to foreign- exchange system EBS. The dollar's decline is the biggest since July 21, when it fell 2.3 percent... The dollar weakened to $1.2006 per euro, from $1.1945.

The dollar's decline began on concern the Federal Reserve may soon be ending its interest-rate increases...

The Reuters report also covered November import prices.

More up-to-date information on the economy showed U.S. import prices eased last month, which could help ease the trade deficit in November. The Labor Department said import prices fell an unexpectedly large 1.7 percent last month on the back of the biggest decline in the cost of petroleum imports in almost a year.

The report also showed a surprise 0.9 percent drop in prices received by U.S. exporters, the largest decline since December 1991.

This seems consistent with recent price trends in Europe, as mentioned in yesterday's post plus the November CPI data from Germany (via A Few Euros More):

As reported by the Federal Statistical Office, the consumer price index for Germany rose by 2.3% in November 2005 on November 2004. Compared with October 2005, the index was down 0.5%. In October 2005, the year-on-year rate of price change was also +2.3%.

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.

Tuesday, 13 December 2005

Good news for Japan, mixed for the UK, Chinese M2 surges

There is yet more good news for Japan. The October current account surplus was up, according to AFP/CNA:

Japan's current account surplus rose 2.6 percent in October from a year earlier as a surge in investment income more than offset a shrinking trade surplus, the finance ministry said. The surplus in the current account, the broadest measure of trade in goods and services, rose for a second straight month to hit 1.38 trillion yen...

The trade surplus alone, however, tumbled 29.2 percent to 939.1 billion yen for a 12th consecutive monthly decline, the ministry said. Imports were up 20.8 percent to 4.69 trillion yen while exports rose 8.0 percent to 5.63 trillion yen...

The income account posted a surplus of 855.2 billion yen, rising 44 percent from a year earlier, spurred by sharp increases in portfolio and dividend income.

And Bloomberg reports that households are less pessimistic:

Japan's households became less pessimistic in November for a second straight month as wages rose and job prospects improved, adding to signs that consumer spending will help sustain growth in the fourth quarter.

Confidence among households with two or more people rose to 48.2 from 47.9 in October, the Cabinet Office said today in Tokyo. A reading below 50 means pessimists outnumber optimists. Overall consumer sentiment, which includes single households, also rose to 48.2 from 47.9 in October, according to the report.

In the UK, the economic indicators reported yesterday were more mixed. Reuters reports that asking prices for homes fell in December but could turn around next year:

Average asking prices on a home fell in December, as sellers cut their prices to book a sale before Christmas, but house price growth is set to pick up in 2006, according to a report on Monday.

Property Web site Rightmove said house prices fell by 0.8 percent in its November 13 to December 3 survey compared with the previous period, taking the average asking price down to 196,181 pounds from 197,855 pounds in the previous survey.

... Rightmove said stable economic growth should support demand and drive house price inflation to around 4.0 percent in 2006, pushing average asking prices above 200,000 pounds.

Reuters also reports that a survey sees consumer services business picking up:

A quarterly survey of consumer services by the Confederation of British Industry and accountancy firm Grant Thornton, showed business volumes are expected to rise in the next three months, with a balance of +19 after a reading of 0 in the August survey.

...but another survey sees negative expectations for manufacturing:

The Confederation of British Industry said its monthly manufacturing order books balance rose to a five-month high of -22 in December after -25 in November and against analysts' forecasts for only a slight improvement to -24...

The CBI said manufacturers' expectations of future output remained modestly negative, with that balance unchanged at -4.

And factory gate inflation for November also left a mixed picture.

Factory gate inflation slowed to its weakest rate in over a year and a half, according to official data on Monday that should ease concerns of inflationary pressures building in the supply chain.

The Office for National Statistics said output prices fell 0.2 percent on the month in November as petrol prices fell taking the annual rate down to a slower than expected 2.3 percent...

However, Monday's data also showed input prices unexpectedly rose in November by 1.4 percent, taking the annual rate to 12.5 percent compared to analysts' forecast for an annual rate of 9.2 percent.

And speaking of inflation, to add to yesterday's post on China's inflation, reports that China's M2 surged in November:

China's broad M2 money supply rose 18.3 pct year-on-year to 29.24 trln yuan at the end of November, the highest growth rate since April last year, the People's Bank of China said

In a statement posted on its website, the central bank said the narrower M1 money supply rose 12.7 pct year-on-year to 10.41 trln yuan, with M0, a measure of the cash in circulation, up 10.9 pct at 2.24 trln yuan

Monday, 12 December 2005

Inflation in China up in November

Chinese economists may be worried about deflation but it is not quite showing up in the data yet.

AFP/CNA reports that consumer price inflation in China accelerated in November:

China's consumer price index (CPI) rose 1.3 percent in November compared with the same period last year, ticking up slightly from the 1.2 percent rate in October, official data showed on Monday.

According to Xinhuanet, so did house price inflation.

Housing prices of 70 Chinese cities rose on average 6.8 percent year on year in November this year, and the growth rate was 0.2 percentage points higher than October, said a report of the National Development and Reform Commission on Friday.

Saturday, 10 December 2005

China's trade surplus and UK trade deficit shrink

The rise in China's trade surplus came to a halt in November. Bloomberg reports:

China's trade surplus narrowed in November to $10.5 billion... The surplus shrank from a record $12.02 billion in October and was higher than the $9.93 billion a year earlier, the Beijing- based Commerce Ministry said today. Exports rose 18.4 percent from a year ago, the smallest gain since June 2002. Imports gained 20.9 percent, the ministry said.

The UK also reported trade data yesterday, relayed by Reuters:

The Office for National Statistics said that the goods trade gap narrowed to 4.55 billion pounds in October from a revised 5.6 billion the month before and was much tighter than the 5.3 billion economists had expected.

That one billion pound narrowing came as the country once again became a small net oil exporter after three straight months in deficit, leaving a surplus of 64 million pounds.

The ONS said the improvement was also driven by large exports of aircraft and aircraft parts to the EU in October, leaving total monthly goods exports at 18.5 billion pounds, the highest since records began in 1697...

The total goods and services trade gap also narrowed, to 2.88 billion pounds from 3.9 billion the month before.

US consumer sentiment, leading index rise, so do debt and maybe recession risk

The US economy continues to throw up positive indicators. Yesterday, we saw the University of Michigan's consumer sentiment indicator for December rise to 88.7 from November's 81.6, according to a Reuters report. The report also mentions that the Economic Cycle Research Institute's leading index for the US economy rose at an annualized growth rate of 1.8 percent, up from 1.5 percent a week ago.

However, Barry Ritholtz at The Big Picture reminds us that the US economy "has been propped up by borrowing and spending, rather than production" and suggests that investors look at "other potential investment opportunities globally".

For more blogging on debt, read David Altig at the macroblog, who traces the rise in household debt, and James Picerno at The Capital Spectator, who cites William Conerly of Conerly Consulting as saying that despite the surge in household debt, the talk of a savings crisis is overblown, that the US economy will grow above 3 percent in 2006, but "the risk of recession will rise next year".

Friday, 9 December 2005

Japan GDP grows 1 percent in 3rd quarter

Japan has revised its third quarter GDP to show a lower-than-expected rise. Bloomberg reports:

Japan's economy expanded in the third quarter at a slower pace than originally estimated partly after the previous quarter's figure was revised higher.

Gross domestic product grew at an annual 1 percent pace in the three months to Sept. 30, the Cabinet Office said today in Tokyo. The rate was less than the median forecast of a 2.3 percent rise in a Bloomberg survey of 16 economists, partly because GDP for the second quarter was revised to a 5 percent pace of growth, from 3.3 percent. Third-quarter growth had previously been estimated at 1.7 percent...

The world's second-largest economy grew a seasonally adjusted 0.2 percent in the third quarter from the second...

Other more forward-looking indicators released earlier suggest that growth in Japan will continue. Bloomberg reports a rise in Japan's index of leading economic indicators:

Japan's index of leading economic indicators gained in October for the fifth month this year, signaling the world's second-largest economy will keep expanding.

The index, which measures consumer confidence and other indicators, rose to 80 percent from a revised 41.7 percent in September, the Cabinet Office said in Tokyo today. The median forecast of 25 economists in a Bloomberg survey was for 80 percent. A number at or above 50 indicates faster growth in three to six months.

...while Reuters reports a rise in core machinery orders:

Core private-sector machinery orders, a volatile series regarded as an indicator of capital spending in the coming six to nine months, rose 4.8 percent on a seasonally adjusted basis in October from the previous month, just below economists' forecasts of a 5.9 percent increase...

Compared with the same month last year, core orders, which exclude those for ships and machinery at electric power firms, rose 8.5 percent, below a median forecast of a 9.9 percent rise in a Reuters poll.

...and bank lending:

Bank lending data earlier in the day also indicated improving business conditions.

It showed the balance of outstanding loans held by Japan's four main categories of banks fell 0.5 percent in November from a year earlier, the smallest decline since the central bank began collecting data in the current form in January 2001...

Excluding special factors such as loan write-offs, the loan balance has been rising from year-ago levels since August. It rose 0.8 percent in November from a year earlier.

Amid more signs of strength in global economy, S Korea raises rates

There was more confirmation of the strength in manufacturing yesterday. Reuters reports:

The U.S. factory sector is poised to grow through 2007, although the pace of its expansion is slowing, a manufacturing group said on Wednesday.

The Manufacturers Alliance/MAPI said 20 of 27 industries enjoyed stronger new orders or production in the third quarter than a year ago, the same number of industries that showed growth in the second quarter.

"Energy, medical and high-tech industries are leading growth this year," said Daniel Meckstroth, the group's chief economist, in a statement. "The capital equipment markets are generally strong but decelerating."


Overall, the group expected manufacturing to grow by an average of 3.42 percent during the 2006-10 period.

There was mixed reading on the unemployment front.

Initial claims for state unemployment insurance benefits climbed to a seasonally adjusted 327,000 in the week ended December 3 from an upwardly revised 321,000 the previous week, the Labor Department said.

A Labor Department analyst said that historically, claims tend to rise in the week following the holiday-shortened Thanksgiving week...

A four-week moving average of new claims, which smooths weekly volatility to provide a better picture of labor market trends, fell for the second straight week, dropping to 322,500 from 322,750 the prior week.

While a Federal Reserve report on Wednesday had shown that total consumer debt outstanding fell in October, another report yesterday showed that household debt had grown in the third quarter.

The net wealth of American households rose in the third quarter of 2005 as real estate and financial assets gained value, but household debt grew at the fastest rate since 1987, the Federal Reserve said on Thursday.

In its quarterly "Flow of Funds" report, the central bank said household balance sheet values rose to $51.09 trillion in the quarter, up from a revised $49.77 trillion in the second quarter...

Household real estate assets grew by $615 billion in the third quarter, while financial assets rose by $959.3 billion.

At the same time, household liabilities rose $338 billion, with mortgage debt climbing $289.5 billion to $8.2 trillion.

And Bill Cara highlights the fact that M3 continues to grow, hitting US$10,058.1 billion in October.

And some central banks remain reluctant to rein in money supply. Yesterday, the Bank of England left interest rates unchanged, as did the Reserve Bank of South Africa. These were as expected by markets.

What was not expected was the decision by the Bank of Korea to raise rates. FT reports:

The Bank of Korea delivered a surprise interest rate rise on Thursday, increasing its benchmark rate to 3.75 per cent on concerns that strengthening economic growth will stoke inflation in Asia’s third-largest economy next year...

Earlier on Thursday, the statistics office released separate figures showing further improvement in consumer confidence. Its consumer expectation index rose to 98.5 in November from 97.5 in the previous month, the third consecutive improvement, taking the index closer to the 100 mark that shows optimists outnumbering the pessimists.

And there were signs of economic strength coming from Germany as well. Bloomberg reports:

German industrial production rose more than expected in October, supporting the European Central Bank's forecast that European growth will accelerate through next year.

Production at factories, utilities, construction sites and mines gained 1.1 percent from September, when it rose 1.5 percent, the Economy and Technology Ministry said today in Berlin. Economists expected a 0.5 percent increase, according to the median of 37 economists' estimates in a Bloomberg survey...

Germany's Kiel Institute for World Economics, one of six that provide forecasts for the government, today raised its estimates for German growth this year and next.

Thursday, 8 December 2005

US consumer credit falls in October, rate hikes continue in Canada and NZ

The Federal Reserve's latest report on consumer credit shows a large fall in October, according to Reuters.

U.S. consumer credit unexpectedly slid by a record $7.20 billion in October, on a big drop in loans taken for cars and boats, a Federal Reserve report showed on Wednesday.

The central bank said total consumer debt outstanding fell 4 percent to a seasonally adjusted $2.157 trillion from a revised $2.164 trillion in September. The rate of decline was the steepest since December 1990, and the dollar drop was the largest fall on record, the Fed told reporters.

Are the Fed rate hikes beginning to bite?

From the previous day's productivity report, the macroblog noted the slow pace of labour cost increase and its implication for inflation. The macroblog also noted that in raising rates on Tuesday, the Bank of Canada had said that inflation "has come down more quickly than expected".

It is probably a trend that is not lost on the Reserve Bank of Australia, which left interest rates unchanged yesterday. Of course, Australia has to contend with a slowdown in GDP growth, with the economy rising 0.2 percent in the third quarter, down from 1.3 percent in the second quarter.

The Reserve Bank of New Zealand, though, has other ideas. Bloomberg reports today:

New Zealand's central bank raised its benchmark interest rate a quarter point to a record 7.25 percent, saying the ninth increase since January 2004 is needed to curb household spending and inflation.

"We remain concerned about the tightness of resources and the persistence of inflation pressures," Reserve Bank Governor Alan Bollard said in Wellington today. "The main driver of the strong demand is household spending, linked to a buoyant housing market."

Wednesday, 7 December 2005

Growth in US productivity, factory orders and European retail sales

There was more evidence that the US economy remains strong. From Reuters:

The Labor Department said nonfarm business productivity advanced at a 4.7 percent annual rate in the third quarter, the swiftest increase in two years.

The strong productivity gain pushed unit labor costs -- a key gauge of profit and price pressure -- down at a 1 percent pace despite a solid 3.7 percent rise in hourly compensation...

Separately, the Commerce Department said new orders at U.S. factories rose 2.2 percent in October after a 1.4 percent September drop, as soaring demand for aircraft offset weakness in cars, computers, metals and electrical equipment...

Demand for durable goods, big-ticket items meant to last at least three years, rose 3.7 percent in October, even as orders for autos fell 1 percent...

[T]he inventories-to-shipments ratio [slipped] to 1.17 months, matching a record low hit in August...

Not all indicators were positive though.

Separately, two reports showed U.S. chain store sales slipping in early December...

In the latest sign of cooling in the housing market, the National Association of Realtors said an index of pending sales of existing U.S. homes slipped in October to its lowest level since March...

Nevertheless, consumer confidence showed further evidence of recovery. From another Reuters report:

ABC News and the Washington Post said their Consumer Comfort Index rose to -14 in the week ending December 4 from -15 the prior week.

There was also some good news from Europe. Bloomberg reports:

An index of retail sales in the dozen nations sharing the euro rose to 50.7 from 50.4 in October, according to a survey for Bloomberg LP by NTC Research Ltd. published today. Factory orders in Germany rose 2 percent from September, the Economy Ministry in Berlin said, more than the 0.5 percent gain forecast by economists...

The UK industrial sector, however, continues to struggle, according to another Bloomberg report:

U.K. industrial production had its biggest decline in seven months in October... Industrial production unexpectedly fell 1 percent, after increasing 0.5 percent in September, the London-based Office for National Statistics said today... Manufacturing, which makes up 15 percent of the economy, fell 0.7 percent in October from September, the statistics office said...

But UK retail sales is finally showing some signs of recovery, according to yet another Bloomberg report:

Sales at U.K. stores rose for the first time in eight months in November as colder weather stoked demand for products such as clothing before the peak holiday season, the British Retail Consortium lobby group said today.

Revenue at outlets open at least a year rose 0.8 percent from November last year, the first increase since March, according to an e-mailed report from the London-based group that represents 80 percent of U.K. retailers. Sales of coats, sweaters and women's boots were boosted by the start of a cold snap, the BRC said.

Tuesday, 6 December 2005

Slowdown in 2006?

The US economy is expected to slow in 2006, according to this Reuters report.

U.S. economic growth could soften in 2006 but inflation should decline and the jobless rate drift lower as well, according to participants at a Federal Reserve Bank of Chicago conference released on Monday.

Real gross domestic product growth was forecast at 3.2 percent, down from a projected 3.6 percent this year, as the rate of consumer spending levels off.

Yesterday's ISM report on the US services sector did show some slowdown.

The pace of growth in the U.S. service sector eased slightly more than expected in November, with prices paid decreasing and employment picking up, a report published on Monday showed.

The Institute for Supply Management's services index eased to 58.5 in November from 60.0 in October, just below Wall Street's median forecast of 59.0.

But in Europe, services accelerated, according to this Bloomberg report.

Service industries such as banks and airlines, one-third of the euro-region economy, expanded in November at the fastest pace in 16 months as higher earnings lifted European growth.

A CIPS/RBS index of growth in services rose to 55.2, the highest since July 2004, from October's 54.9, a statement today by Edinburgh-based Royal Bank of Scotland Group Plc, the survey's sponsor, showed...

A level of 54.7 was forecast, according to the median estimate in a survey of 32 economists.

In the UK, though, the services sector slowed, according to the same report.

Expansion of U.K. services slowed in November. The RBS index today fell to 55.8, from 56.1 in October. The result was lower than the median forecast of 56 in a Bloomberg survey of 23 economists.

In line with these data, Euro-zone officials are hopeful about growth:

Finance ministers from the 12 countries that use the euro said Monday that the European Central Bank's decision to raise interest rates last week would not hurt Europe's recovery.

"We were unanimous in saying that growth is taking shape in the euro-zone and will carry on at a steady rate," Luxembourg Prime Minister Jean-Claude Juncker told reporters.

...but the UK has had to downgrade its growth forecast:

British Treasury chief Gordon Brown lowered his forecast for domestic economic expansion on Monday to 1.75 percent for the year, marking the slowest growth since 1992...

Brown said that GDP growth would rise to 2 percent to 2.5 percent next year and 2.75 percent to 3.25 percent in the following two years.

There are more economic forecasts at Morgan Stanley, with Stephen Roach providing global forecasts:

Our first cut at 2007 calls for a 3.8% increase in world GDP growth -- down slightly from an upwardly revised 4.1% increase for 2006 (versus our previous estimate of 3.8%)...we are forecasting industrial world CPI increases averaging just 2.0% over 2006-07...

Within the developed world, a slowing in European growth is most pronounced (downshifting from 2.2% in 2006 to 1.8% in 2007), whereas we have penciled in more modest downshifts to trend-like outcomes in the US (from 3.8% in 2006 to 3.5% in 2007) and Japan (from 2.5% in 2006 to 2.3% in 2007). In the developing world, the biggest shift is an upgrade to our 2006 Chinese growth forecast from 6.7% to 7.8%... Our first cut at 2007 calls for a further moderation in Chinese economic growth to 7.5%. We also look for growth in India to slow somewhat to an average of 6.6% over the 2006-07 interval... Elsewhere in the developing world -- Asia, Latin America, and Emerging Europe -- we see growth in 2006-07 averaging close to the above-trend 2005 pace.

More detailed forecasts for the US economy are provided by Richard Berner and David Greenlaw.

Monday, 5 December 2005

Japanese capital spending up 9.6 percent in 3rd quarter

Japan's third quarter GDP should get another boost from today's report on capital spending. From Bloomberg:

Japan's capital spending rose at the fastest pace in a year in the third quarter, led by property developers, suggesting the government may raise its economic growth estimate.

The broadest measure of investment climbed 9.6 percent from a year earlier, the Ministry of Finance said in Tokyo today, higher than the 6.8 percent median forecast of seven economists in a Bloomberg survey. Spending by developers had the biggest increase, surging by surged 74 percent.

Investors apparently like the reading.

The Nikkei 225 Stock Average climbed 0.8 percent to 15,551.31 at the close in Tokyo, the highest since Oct. 10, 2000. The yield on the benchmark 1.5 percent bond due Dec. 2015 rose 5.5 basis points to 1.56 percent, the highest since Nov. 14.

But the stock market also got a boost from the yen, which fell despite the reading on capital spending. From another Bloomberg report:

The yen fell to a 32-month low against the dollar after Japanese Finance Minister Sadakazu Tanigaki and Bank of Japan Governor Toshihiko Fukui signaled they are comfortable with the currency's 15 percent drop this year.

Japan's currency also declined to a record versus the euro after Fukui told reporters in London on Dec. 3 a weaker yen is "not a problem" and Tanigaki said the slide reflects relative economic performance. The yen is set for the biggest annual drop against the dollar since 1979 as the BOJ keeps rates near zero and the Federal Reserve lifts rates at a "measured" pace...

Against the dollar, the yen fell to 121.15 at 9:51 a.m. in London from 120.60 in New York on Dec. 2, according to electronic currency trading system EBS. The yen weakened to 141.77 per euro from 141.30. The dollar traded at $1.1702 versus the euro, from $1.1717.

Saturday, 3 December 2005

US adds 215,000 jobs in November

The US employment numbers yesterday more or less met expectations. Reuters reports:

The U.S. job market rebounded last month from a hurricane-induced slowdown as nonfarm employers added 215,000 workers, according to a government report on Friday that showed the economy on solid ground.

The closely watched Labor Department report also said the unemployment rate held steady in November at 5 percent, just off the four-year low of 4.9 percent hit in August...

The department revised up its measure of employment for hurricane-ravaged September, saying payrolls expanded by 17,000 workers. Previously, it had reported they had shrunk 8,000.

However, job growth in October was a bit weaker than first thought as employers brought on only 44,000 new workers, not the 56,000 the department had reported a month ago.

This piece of news, together with the positive economic data over the past week and the speeches made yesterday by Federal Reserve officials, suggests that rate hikes will continue for a while longer.

Friday, 2 December 2005

US data positive but PMIs mixed as ECB raises rates

US economic data continued to be good yesterday. Reuters reports that personal spending and income were up:

Personal spending climbed 0.2 percent in October while personal incomes rose 0.4 percent, broadly in line with Wall Street estimates, according to a Commerce Department data... The personal savings rate, the percentage Americans put away after spending, taxes and interest payments, was negative for the fifth straight month to stand at minus 0.7 in October.

...while inflation remained subdued:

The same report showed an inflation index favored by the Federal Reserve -- personal consumption expenditures excluding food and energy -- rose a tame 0.1 percent, only half the gain expected by Wall Street... [T]he year-on-year figure [was] 1.8 percent.

Manufacturing remained strong:

U.S. factories responded to robust consumer demand by ramping up activity, with the Institute for Supply Management's measure of national manufacturing dropping to 58.1 in November from 59.1. However, the figure was still above the 50 mark that points to expansion in the sector.

...and the labour situation improved:

A separate report by the Labor Department showed the number of U.S. workers making new jobless claims fell last week to below the levels they were at before huge hurricanes hit the U.S. Gulf Coast earlier this year. Initial claims for state unemployment benefits dropped 17,000 to 320,000, largely in line with Wall Street forecasts.

In Europe, manufacturing slowed in the UK but accelerated in the euro-zone, according to another Reuters report.

The Chartered Institute of Purchasing and Supply/RBS PMI index fell to 51.0 -- below the 51.9 forecast by analysts -- from a downwardly revised 51.6 in October... A comparable survey of the 12-member euro zone showed the sector expanding at the fastest pace in 14 months. The factory PMI there edged up to 52.8 from 52.7...

The increase in the euro-zone PMI perhaps makes the ECB's interest rate hike more palatable. FT reports:

The European Central Bank on Thursday lifted interest rates for the first time in five years, ignoring concerns that the quarter-point increase could stifle Europe’s fragile economic recovery.

Jean-Claude Trichet, president, said the rise to 2.25 per cent in the ECB's main interest rate was a response to inflationary pressures and would adjust the bank's "accommodative monetary policy stance".

But Mr Trichet, who had to resolve splits within the bank's policymaking governing council, made clear that a series of rate rises was not planned.

He insisted the rate rise was agreed unanimously by the 18-strong governing council, but admitted that some members had urged a half percentage point rise, while others had wanted rates to remain unchanged.

What remained unchanged was the European unemployment rate:

Euro-zone seasonally-adjusted unemployment stood at 8.3% in October 2005, the same as in September. It was 8.8% in October 2004. The EU25 unemployment rate was 8.5% in October 2005, unchanged compared to September. It was 9.0% in October 2004.

But back to manufacturing, things look worse in Australia.

The Australian Industry Group/PricewaterhouseCoopers (PwC) Australian performance of manufacturing index (PMI) fell by a seasonally adjusted 3.6 points to 44.2 in November.

In other news on Australia, FT reports on Australia's current account:

Australia's third-quarter current account deficit increased by a higher-than-expected 13 per cent, according to figures released on Thursday, as the mining sector continued to cast its shadow over the country's economy.

The deficit in goods, services and investment widened from A$12bn in the second quarter to A$13.5bn in the September quarter, against an expected A$12.7bn.

...and business investment.

[F]igures...showed a higher-than-expected increase in business investment in the third quarter, as mining companies expanded production to satisfy surging Chinese demand for commodities.

Business investment in the third quarter was A$16.3bn, up 2.9 per cent on the second quarter, and 23 per cent higher than the corresponding period last year.

But again, back to manufacturing. In Asia, the upbeat PMI figures in Japan I reported yesterday were replicated in Singapore, where the PMI rose 2.1 points to 53.5 in November -- its highest level in 15 months -- but not in manufacturing powerhouse China, based on this Reuters report.

An official survey of purchasing managers produced for the National Bureau of Statistics showed that...[t]he index derived from the survey, conducted by the China Logistics and Purchasing Association, stood at 54.1 last month, unchanged from October. It trended down from March to July but has since recovered...

By contrast, the purchasing managers' index produced for Hong Kong brokerage CLSA fell below the critical no-change level of 50 for the first time in the 20-month history of the survey. The index dipped to 49.8 last month from 50.1 in October, pointing to a slight deterioration in China's manufacturing economy.