Friday, 5 May 2006

Central banks pausing, data suggest more hikes still possible

Following the recent trend, the data yesterday suggest that, pause or no pause, the end to Fed tightening is not quite near. Reuters reports the US labour market data released yesterday.

Unit labor costs gained 2.5 percent as hourly compensation surged, preliminary Labor Department data showed. Meanwhile, nonfarm productivity rose at a faster-than-expected 3.2 percent annual rate in the quarter.

Wall Street had been looking for a slower 1.3 percent advance in unit labor costs -- a key gauge of profit and price pressures watched closely by the Fed -- after costs jumped 3.0 percent in the previous quarter. This reading was revised down slightly from a previously reported 3.3 percent gain.

But jobless claims continued its recent rising trend.

Separately, the Labor Department said new claims for state unemployment insurance benefits increased to 322,000 in the week ended April 29, the highest level since November, compared with an upwardly revised 317,000 the previous week...

The four-week moving average of new claims, which smoothes volatile weekly data to provide a better picture of underlying labor market trends, advanced 5,250 last week to 314,250.

Meanwhile, in Europe, the European Central Bank is on pause at the moment, but probably not for long. Bloomberg reports:

European Central Bank President Jean- Claude Trichet signaled policy makers may raise interest rates next month because faster economic growth, record oil prices and loan demand are fanning inflation.

"If our scenario is confirmed, it's clear that a further withdrawal of monetary accommodation will be warranted," said Trichet at a press conference in Frankfurt today after the ECB kept its benchmark rate at 2.5 percent. It raised rates twice, from a six-decade low of 2 percent, since the start of December.

Some justification for higher euro zone rates came yesterday in the form of a rise in the services sector purchasing managers' index to 58.3 in April from 58.2 in March, a 6-1/2 year high. However, not all indicators were positive, as March euro zone retail sales fell 0.8 percent from February and 0.2 percent from a year ago.

UK official interest rates are also on hold, but it is less clear there where interest rates will go next. From Reuters:

The Bank of England kept interest rates steady for the ninth month running on Thursday and a growing number of economists are now wondering whether the next move will be up.

All but one of the 45 analysts polled by Reuters last week had predicted no change from 4.5 percent at this month's Monetary Policy Committee meeting and many said the central bank would cut rates later this year.

But the data keeps getting stronger and several economists who have long been predicting a rate cut this year have abandoned that forecast in favour of no move. Others are more worried about the risk of a rise.

And yesterday provided more reasons for worry on that score. Again from Reuters:

The Bank of England said on Thursday that mortgage lending rose by a bigger than expected 9.279 billion pounds, the biggest rise since November 2003 when the central bank had just embarked on a series of rate hikes...

[M]ortgage lender Halifax reported that house prices jumped by 2 percent in April, the biggest rise in two years...

Consumers' unsecured borrowing, meanwhile, rose by just 281 million pounds in March, the lowest since February 1994 and well below a forecast for a 1.3 billion pound rise.

Loans agreed for house purchase -- widely seen as a guide to house prices six months out -- rose to 116,000 in March from 114,000 in February.

And the service sector is doing well in the UK too, with the CIPS/RBS Purchasing Managers' Index for services rising to 59.7 in April from 57.4 in March.

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