Economic news mixed, fund managers get defensive

On the whole, yesterday's news from the US appear to have gone down better with the stock market than with the fixed income market. Reuters reports:

Stocks rallied to nearly five-year highs... The Dow Jones industrial average gained 58.43 points, or 0.52 percent, to 11,209.77. U.S. Treasury debt prices finished lower.

The inflation picture was mixed.

[I]mport prices fell 0.5 percent in February, as expected, as the cost of imported petroleum, natural gas and food declined. The drop in import prices was the first since November and followed an upwardly revised 1.4 percent rise in prices in January...

The Fed's Beige Book survey of regional economic conditions, prepared for the upcoming policy meeting, said businesses reported input cost pressures in January and February. Elevated energy costs were frequently mentioned.

However, retail prices increased at only a moderate rate, the report said, and labor cost pressures were little changed, with most districts saying wages increased modestly.

Manufacturing activity remains strong.

The New York Fed said its "Empire State" index of manufacturing conditions surged to 31.16 in March, its highest level since July 2004, from 21.02 in February.

But foreigners appear reluctant to step up the pace of purchase of US debt.

Another set of data on Wednesday showed that net capital inflows to U.S. assets in January totaled $66 billion, the second straight month that inflows were not enough to offset the month's trade deficit.

The Treasury Department said net foreign purchases of U.S. Treasury bonds and notes slowed sharply, to $4.4 billion, far below forecasts of $18.1 billion.

There was also mixed news on the UK economy, with unemployment last month rising at its fastest rate since the 1992 recession and average earnings in January growing less than expected, but the Conference Board's leading index for the UK increasing 0.2 percent in January.

The news from Asia yesterday provides more evidence of how strong economic growth has been, with exports helping China's industrial output from state-owned and large non-state enterprises rise 16.2 percent in the first two months of 2006 compared with a year earlier, and Singapore's unemployment rate dropping to 2.5 percent in December -- the lowest level in more than four years -- on the back of the strongest annual employment growth in eight years.

In fact, perhaps growth is getting too hot -- see "TSMC’s Capacity for Q2 Fully Loaded With Excessive Orders" for example.

Some investors apparently think so. Merrill Lynch's March survey of global fund managers found that a growing number of survey respondents believe the global economy is now operating "above-trend" and expect core inflation to rise. With the global economy on balance not expected to get stronger, fund managers are getting more defensive, raising cash levels, shortening investment time horizons and reducing exposure to emerging markets.

And perhaps the expansion in the global market for credit derivatives is also a concern.