Friday, 21 July 2006

Central banks uncertain as US leading index points to slowdown but UK retail sales soar

We are back to the slowdown story for the US economy. From Reuters:

The Index of Leading Economic Indicators rose 0.1 percent in June to 138.1, just below market expectations for a 0.2 percent rise, the private industry research group, Conference Board, said in its monthly report.

June's mild increase follows two straight months of declines, and supports economists' opinions the economy will cool further in the second half of 2006...

The Philadelphia Federal Reserve Bank said its business activity index for the Mid-Atlantic region fell to 6.0 in July from 13.1 in June. That was its lowest since January and well below forecasts of a dip to 12.0.

But as usual, there were some conflicting signals as well.

The Philadelphia's Fed index of prices paid by manufacturers edged up to 50.3 in July from 48.7 in June, while the new orders gauge softened to 10.1 from 17.7. Nonetheless, the survey's employment barometer jumped to 12.8 from 6.8...

In other data, the number of people filing initial claims for U.S. unemployment benefits last week fell 30,000 to the lowest level in a month because of fewer claims from the automobile industry, Labor Department figures showed.

Mixed signals like these have obviously been noted by the FOMC.

Minutes from the FOMC's June meeting revealed that there was "significant uncertainty" for U.S. Fed officials regarding future interest rate steps. Fed officials said they wanted to see more data before deciding whether any more tightening was needed.

Yesterday also saw the release of the minutes of the Bank of Japan's meeting in June. Reuters reports:

The Bank of Japan held off on raising interest rates from zero at a board meeting in June because it wanted to monitor factors such as global markets and the U.S. economy, minutes released on Thursday showed.

The OECD thinks that the BoJ would do well to keep holding off further interest rate increases. From AFP/CNA:

The OECD has warned Japan's central bank against jeopardising the economic recovery by raising interest rates too quickly and called on the government to take urgent steps to cut public debt...

"A significant rise in market interest rates that is too early or too large would pose important risks to both economic activity and the fiscal situation," said the OECD, which advises its 30 rich member countries on economic issues.

The Bank of England, on the other hand, may not be able to hold off raising interest rates much longer. Retail sales jumped 0.9 percent in June and M4 money increased 1.6 percent in June from May and 13.7 percent from a year earlier, the biggest annual rise since November 1990. And with mortgage approvals hitting a record high in June, the housing market looks likely to be well supported despite some easing in mortgage lending.

All of which leaves me wondering whether the BoE paused too soon, and whether the Fed will follow the same path.

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