Wednesday, 28 February 2007

World stock markets slump

It all started in China, as Reuters reports.

Stocks plummeted and safe-haven government bonds surged around the globe on Tuesday after the biggest daily loss in a decade on China's main stock market and weak U.S. manufacturing data sent investors running for the exit on risky trades.

The Shanghai Composite index sank 8.8 percent, in part on fears Chinese authorities would crack down on the speculation that drove the index to record highs this week. Other stock markets then fell like dominoes.

The Dow Jones industrial average and the Standard & Poor's 500 Index both closed down more than 3 percent, their biggest one-day percentage drops in almost four years, while the Nasdaq suffered its biggest fall since December 2002.

... A main measure of investor fear, the Chicago Board Options Exchange volatility index, shot up more than 60 percent, topping the gain that occurred right after U.S. markets reopened following the Sept 11, 2001, attacks.

In currency markets, the Japanese yen had its biggest daily gain since at least December 2005 after the jump in market volatility caused investors to cash in their carry trades -- a popular strategy in which investors borrow a low-yielding currency to fund investments in higher-yielding regions...

The FTSEurofirst 300 index of leading European shares closed 2.86 percent lower at 1,506.05, the lowest level since Jan. 11, erasing nearly two thirds of its gains since the start of 2007.

US economic data did not help sentiment yesterday.

The selling in European and U.S. equities was exacerbated by U.S. government data showing a 7.8 percent drop in orders of durable goods. Nondefense goods orders had their biggest monthly drop on record.

On the reason for the sell-off, Barry Ritholz says "Its not China, its the Economy". Well, I think it obviously is both, with the economy being the backdrop and the trigger being the sell-down in China. The economy alone seldom moves markets to the extent they did yesterday. And remember also that there are fundamental reasons why tightening in China could affect markets elsewhere, since China is one of those places that are widely acknowledged to be supplying financial markets with liquidity.

Monday, 26 February 2007

Central banks tighten, will asset markets choke?

Asset markets around the world have been propelled higher over the past few years on the back of surging global liquidity. However, with central banks around the world now hiking interest rates and reversing the stimulative monetary policies of the recent past, this run may be coming to an end.

Or maybe not.

On 21 February, the Bank of Japan decided to raise its overnight lending rate by 25 basis points to 0.5 percent. It was the second in a series of rates hikes expected from the BoJ that would take interest rates in Japan away from zero and undermine the infamous yen carry trade that is said to pump liquidity into global markets.

Except that things did not quite turn out that way. Japanese bond yields fell instead, as did the yen, which fell to an all-time low against the euro after the BoJ decision. The carry trade carries on.

In fact, Morgan Stanley's Stephen Jen thinks that the fixation on central banks as the source of excess global liquidity is wrong. In a note on Friday, he wrote:

In contrast to the popular view that central banks’ irresponsibly easy monetary policy has led to the bloated asset prices in the world, I believe that the more important source of global liquidity is the (curiously) low capex/capital stock in the world. Until the global economy’s capex accelerates to absorb much of the savings, real long bond yields in the world should remain low and risky assets should be supported.

This type of ‘real’ liquidity will only be withdrawn when the global economy becomes capex-led. By then, risky assets could come under some modest pressures. I say ‘modest’ because a capex-led global economy will be a low-inflation, high-growth economy, much like we have seen in China in the past few years. This should provide some support for risky assets.

The main reasons for the low capital expenditure, in Jen's view, include the uncertainty over the US economic recovery as well as political risks attached to expansion in emerging economies, where investment rates have "collapsed".

Based on this view, Jen wrote that "risky assets will be surprisingly resilient to monetary tightening", and that the BoJ "could raise the policy rate to 1.00% and that would not undermine risky assets in the world".

Having said that, Jen acknowledged that "monetary policy still matters", but "as long as central banks don’t push policy rates deep into restrictive territory, and as long as the world does not fully absorb its own savings, global financial conditions will remain stimulative".

Jen as good as calls this view a "new paradigm", which should set off alarm bells among those who tend to think that new paradigms are thought up by those who wish to peddle ideas that are not supported by historical evidence.

Except that in this case, I think Jen is on to something. Certainly, global liquidity does not seem to have been much affected by global central bank tightening, if recent price trends in asset markets, especially stock markets, are anything to go by.

Jen's main claim to fame in recent years has been his view that the US dollar will not crash despite its large and growing current account deficit. That view has turned out to be correct, so he clearly knows something about global capital flows.

Or perhaps it is premature to pass judgement. After all, many people remember the words of the famous economist Irving Fisher -- "Stock prices have reached what looks like a permanently high plateau" -- uttered just before the stock market crash of 1929.

Indeed, the accompanying charts suggest that monetary policy does matter.

From 2001 to 2003, the Federal Reserve and the European Central Bank eased monetary policy quite aggressively and global 10-year government bond yields fell apparently in response. After a lag, inflation rates and stock markets bottomed, then turned up, in accordance with conventional economic theory.

Central banks then reversed course, the Federal Reserve starting interest rate hikes in 2004, the ECB in 2005, and the BoJ in 2006. The response in 10-year yields has been mild, but they are generally in a rising trend, and indeed, inflation rates appear to have peaked, which would indicate that monetary policy does have traction.

However, stock markets seem to be blithely ignoring the actions of central banks; they continue to rise. So apparently other drivers are at work. Perhaps Jen is right: low global investment rates are keeping excess savings high enough to feed asset markets even as central banks attempt to drain liquidity.

Or perhaps it just means that there is a correction in stocks coming.

Saturday, 24 February 2007

European economy stays robust, Japan posts trade surplus as yen weakens

German business confidence fell slightly in February, but other numbers from Europe are looking good. From Bloomberg:

German business confidence fell more than economists forecast in February, providing further evidence economic growth is slowing from the fastest pace in six years.

The Ifo institute's sentiment index, based on responses from 7,000 executives, declined to 107 from 107.9 in January. Economists expected a drop to 107.5, according to the median of 41 estimates in a Bloomberg News survey. The Munich-based institute's index reached 108.7 in December, the highest since records for a reunified Germany began in January 1991...

The economy expanded 0.9 percent in the last three months of the year, faster than the 0.6 percent forecast by economists and the 0.8 percent growth recorded in the third quarter...

French business confidence unexpectedly rose this month and business optimism in Italy and Belgium increased more than economists expected.

Industrial new orders grew nicely in December. From Eurostat:

The euro area (EA12) industrial new orders index increased by 2.8% in December 2006 compared to November 2006. The index grew by 1.1% in November but fell by 0.3% in October. EU25 new orders gained 2.7% in December 2006, after increases of 0.8% in November and 0.4% in October. Excluding ships, railway and aerospace equipment industrial new orders rose by 0.6% in the euro area and remained stable in the EU25 in December 2006.

And Reuters reports that UK fourth quarter GDP growth was strong.

The Office for National Statistics' second estimate for economic growth showed GDP up 0.8 percent in the last three months of 2006, the strongest rate since mid-2004, taking the annual rate to an unrevised 3.0 percent.

The Japanese economy has not been doing too badly recently either, thanks to strong export growth. From AFP/CNA:

Japan logged a trade surplus of 4.44 billion yen (37 million dollars) last month, much better than a deficit of 353.53 billion yen seen a year earlier, the finance ministry reported...

The solid start to 2007 was mainly due to robust exports to China, particularly strong shipments of computer equipment for video games ahead of the Lunar New Year holiday.

Overall exports rose 18.9 percent in January year-on-year to 5.953 trillion yen, the largest ever for January, the ministry said.

Imports gained 10.9 percent to almost 5.949 trillion yen as the weakness of the Japanese yen raised the cost of incoming shipments despite a drop in the volume of crude oil imports, it added.

And Japan's trade performance could be sustained if the yen stays weak. From Bloomberg:

Japan's currency fell to a record low versus the euro this week when it declined against the dollar, British pound and South African rand after central bank Governor Toshihiko Fukui reiterated in parliament his board will keep rates low for some time...

The yen fell 1.5 percent this week to 159.35 per euro at 4:12 p.m. in New York, and reached an all-time low of 159.65, from 156.89 on Feb. 16. It was the biggest loss since a 1.6 percent decline for the week ended Sept. 2, 2005.

Japan's yen is the worst performer compared with 16 most- active currencies in the past three months, dropping 3.9 percent against the dollar and 5.5 percent versus the euro.

Thursday, 22 February 2007

BoJ raises rates, time to get back into yen carry trade

So the Bank of Japan opted to raise rates yesterday. Bloomberg reports:

The Bank of Japan yesterday voted 8-1 to increase the overnight lending rate by a quarter percentage point to 0.5 percent, the highest since 1998...

The BOJ said in a statement yesterday that core consumer prices, which exclude food, will stay around zero percent and policy makers will maintain an extremely accommodative monetary policy. It also said consumer spending and the economy will expand. Deputy Governor Kazumasa Iwata voted against the rate increase.

"There's no change in our stance that adjustments will be made slowly," Fukui said at a press conference yesterday following the bank's policy board meeting. "It's not as if we have a set schedule and plan to raise rates consecutively."

JGB yields fell at the dovish statements.

The yield on the 1.7 percent bond due in December 2016 dropped 2 basis points to 1.665 percent as of 9:04 a.m. in Tokyo, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. The level is the lowest since Jan. 26.

And the yen reached a record low against the euro. As Osao Iizuka, head of foreign exchange trading at Sumitomo Trust & Banking Co. in Tokyo, is quoted as saying: "The BOJ didn't give a clear picture of when the next rate hike will be. The time is right to get back into the yen carry trade."

That is especially likely if the Federal Reserve maintains its own interest rates at current levels, as appears likely after the latest economic data. From Reuters:

Consumer prices rose 0.2 percent while core prices, which exclude food and energy costs, climbed 0.3 percent, the Labor Department said.

Analysts were expecting the overall Consumer Price Index to inch up 0.1 percent and for core prices to rise by 0.2 percent.

The higher-than-expected consumer prices and minutes of the Federal Reserve's Jan. 30-31 meeting, which showed a predominant concern about inflation risks, diminished market expectations the Federal Reserve would lower interest rates more than once in 2007...

A key forecasting gauge for the economy rose for the second straight month, but at a smaller-than-expected 0.1 percent in January.

The rise in the U.S. Composite Index of Leading Economic Indicators was short of market expectations for a 0.2 percent gain and followed a sharp, upwardly revised 0.6 percent gain in December, the private Conference Board said.

The Bank of England also released its minutes for its February MPC meeting, showing that seven members voted for no change in interest rates while two voted for an increase. An increase still looks likely at some point later this year though, especially with the UK economy still holding up well, as reflected in the latest manufacturing data, reported by Reuters.

The Confederation of British Industry said its monthly manufacturing order books balance rose to +4 this month from -9 in January. That was the highest since June 1995 and well above analysts' forecasts for a reading of -8.

Manufacturers predicted an even sharper rise in output ahead. The expectations balance rose to +28 from +12, the highest since May 1995, and firms also appeared more confident about raising prices.

Wednesday, 21 February 2007

BoE to hike again soon

That appears to be what the latest news reports are pointing to. From Reuters:

Inflation has been unusually low and stable over the last decade but this benign situation may not last, the Bank of England said on Monday.

In a report for parliament's Treasury Committee, the central bank also said that the current account will eventually have to move to balance and this would require a depreciation of the real effective exchange rate...

The BoE, which left interest rates steady this month after three rises since August, also noted that sharply rising asset prices could raise the risk of a future correction.

"In principle, policymakers should take account of this possibility and may therefore decide to raise interest rates and undershoot the inflation target in the near-term in order to increase the chances of meeting it further in the future," the report said.

Recent data have indicated some moderation in the housing market, for example, from this Reuters report:

Asking prices for homes rose an annual 11.5 percent this month, the weakest reading in four months, in a sign the market is stabilising amid higher borrowing costs.

Property Web site Rightmove said February's annual rate compared with a 13.5 percent rate in January and was the lowest since last October.

But lending data released yesterday suggest that more tightening may still be needed. From Reuters:

The British Bankers' Association said mortgage lending rose 5.6 billion pounds last month, compared with a downwardly revised 5.7 billion rise in December and similar to the robust average over the previous six months.

Furthermore, the Building Societies Association said seasonally adjusted approvals -- loans agreed but not yet made -- hit a record 5.949 billion pounds last month while net advances amounted to a 1.613 billion, a record for January...

Separately, the Council of Mortgage Lenders said gross mortgage lending hit an all-time January high of 26.8 billion pounds, although it cooled from December's 28.6 billion. "We expect this strength to continue over the next few months," said CML director general Michael Coogan...

Provisional figures on Tuesday showed annual broad money supply growth picked up to 13 percent last month from 12.8 percent in December...

Credit card lending fell for a sixth straight month. It was down 496 million pounds in January, according to the BBA, more than double the average fall of 219 million over the last six months.

Monday, 19 February 2007

Boom in Beijing hurts 125

Some people have been burnt even before the start of the Year of the Fire Pig. From Xinhua Online:

A total of 125 people were wounded in Beijing as citizens set off fireworks on Saturday to celebrate the eve of the Spring Festival, according to the capital's fireworks administration authorities.

Three were seriously wounded, including a person whose eyeballs had to be removed by doctors, said a spokesman with the Beijing Fireworks Administration Office.

There have also been fireworks recently in Chinese stock markets. From Shanghai Daily:

The Shanghai Composite Index, which tracks yuan-backed A shares and hard-currency B shares, jumped 0.18 percent to end the day at 2,998.47, the best close since the bourse started trading in 1990.

Stock prices are not the only ones that may be going up. From Xinhua Online:

China's central bank has warned that although last year's consumer price index was a moderate 1.5 percent, there is increased pressure on price hikes in the coming year.

A recent report by the People's Bank of China said...that there is considerable pressure on the rebound of investment and credit demands, and enterprises will see higher cost in labor, raw materials, energy, land, water and other resources products, largely due to the state's tightened control on environment protection, social security and work safety.

The hike in the reserve ratio announced on Friday may help to curb the rise in prices. Or it may not. From Shanghai Daily:

The reserve ratio...will increase 0.5 percentage points to 10 percent on yuan deposits starting on February 25, the People's Bank of China said...

"The hike has delivered a strong tightening signal right before the Chinese New Year," said Liang Hong, a Goldman Sachs economist. "This surprise move by the PBOC could have been triggered by the strong credit growth in January."

China's M2, the broadest measure of money supply which includes cash and all deposits, grew 15.9 percent in January, against a 16.9 percent in December.

Despite the M2 growth dip, M1, or cash plus current accounts, rose 20.1 percent year on year, the fastest in some 3 1/2 years. It triggers concerns that bank lending is off to a strong start again...

"Chinese New Year usually involves everyone giving out cash bonuses," said Stephen Green, a Standard Chartered Bank senior economist. "Today, the PBOC decided to reverse tradition with the hike."

Green expects a 50-basis-point increase on the reserve once a quarter this year as an effective and cheap tool to cut liquidity in the banking system...

Economists believe the latest ratio increase will have a limited effect.

"In the short run, the reserve requirement hike will likely push up market interest rates and the yield curve modestly in China," said Liang. "However, we do not expect this tightening measure to have much impact on the real economy or the financial markets."

Saturday, 17 February 2007

China raises reserve requirement

Yesterday, China announced that it is continuing its efforts to slow the economy down. Xinhua Online reports:

The required reserve ratio for financial institutions engaging in deposit business will be raised by 0.5 percentage points from Feb. 25 to 10 percent, the second hike in two straight months, sources with China's central bank said here on Friday.

This move comes as property prices continue to climb in China.

Housing prices in 70 large and medium-sized cities rose an average of 5.6 percent year on year in January, 0.2 percent faster than December last year, the country's top planner, the National Development and Reform Commission (NDRC), said yesterday.

The rest of the global economy may need less prodding to cool if yesterday's data were any indication.

Reuters reports the US data.

U.S. home construction fell sharply last month while producer prices moderated, according to government data on Friday that lent weight to expectations the Federal Reserve will lower interest rates later this year.

A poll of consumer sentiment also dipped, although the decline in February of the Reuters/University of Michigan Surveys of Consumers, to 93.3 from a two-year high of 96.9 last month, had not been as steep as some had feared...

The Commerce Department said the pace of U.S. home construction shrank 14.3 percent in January, the sharpest drop since October that bucks two months of increases and was much worse than economists had expected...

Housing starts clocked an annual pace of 1.408 million units in January compared to 1.643 million units in December. Economists had forecast January housing starts to fall to a 1.60 million unit pace from December's originally reported pace of 1.642 million units...

In other data released on Friday, U.S. producer prices shrank a slightly bigger-than-forecast 0.6 percent in January, as energy prices declined sharply...

Analysts polled by Reuters had predicted producer prices would fall 0.5 percent while core, non-food, non-energy producer prices were forecast to rise 0.2 percent last month, which they did.

Also down in January were German consumer prices despite an increase in the value-added tax, although they were up on a year-on-year basis. Bloomberg reports:

Consumer prices rose 1.8 percent from a year earlier after increasing 1.4 percent in December, when measured using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. The report confirmed an initial estimate reported on Jan. 30. In the month, prices fell 0.2 percent.

Indeed, the European Commission has cut its forecast for inflation even as it raised its forecast for economic growth for the euro zone. Again from Bloomberg:

The euro-area economy will expand 2.4 percent in 2007, faster than the 2.1 percent growth the commission forecast in November, the commission, the European Union's executive arm, said in Brussels today. Consumer prices will rise 1.8 percent this year, slower than the earlier 2.1 percent prediction and below the European Central Bank's 2 percent limit.

The outlook for the Japanese economy is also looking a little better, as the government revises its index of leading economic indicators for December to a still-low 31.8 points from an initial estimate of 25.0.

Friday, 16 February 2007

Japanese economy ends 2006 on strong note, recent US and UK data weaker


Japan's gross domestic product (GDP) grew 1.2 percent in the three months to December for an annualised pace of 4.8 percent, an eighth straight positive quarter and the strongest since early 2004, the government said.

This puts an interest rate hike by the BoJ next week back on the table. Significantly, private consumption grew 1.1 percent from the previous quarter. On the other hand, third quarter growth was revised down to 0.1 percent quarter-on-quarter from 0.2 percent.

In the meantime, the data out from the US yesterday were mixed. Reuters reports that industrial production was weak in January, falling 0.5 percent, mainly due to the auto sector. In addition, the Philadelphia Fed's index on activity in the Mid-Atlantic region fell to 0.6 in February from 8.3 in January, although manufacturing activity in New York State improved in February. Weekly claims for jobless benefits jumped 44,000 to hit 357,000.

On the other hand, import prices fell 1.2 percent in January and the NAHB/Wells Fargo Housing Market Index rose to 40 in February from 35 in January.

Not surprising then that Fed Chairman Ben Bernanke told Congress yesterday that the Federal Reserve would raise interest rates again if the economy proved stronger than expected and inflation moved higher.

But in the UK, past rate hikes may finally be having an effect on the economy as house price inflation eased to its slowest in seven months in January and retail sales fell at their sharpest rate in four years.

Thursday, 15 February 2007

US economy to expand at moderate pace, inflation pressures easing

Reuters reports that the Fed chairman thinks that the outlook for the US remains positive.

In remarks to lawmakers, Federal Reserve Chairman Ben Bernanke on Wednesday expressed confidence in the health of the U.S. economy despite a housing slowdown.

"Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes," Bernanke said in remarks to the Senate Banking Committee...

He said there were some signs inflationary pressures were easing but added a few words of caution.

"It will be some time before we can be confident that underlying inflation is moderating as anticipated," Bernanke said. "The prices of oil and other commodities are notoriously difficult to predict, and they remain a key source of uncertainty to the inflation outlook."

Yesterday's economic data were somewhat mixed.

January retail sales were unexpectedly flat as motor vehicle, gasoline and electronics sales fell sharply in the post-holiday season after a December that was stronger than originally indicated, a Commerce Department report showed on Wednesday...

... [R]etail sales rose 0.3 percent in January after excluding the volatile automotive sector, which can skew the overall sales figures because automakers frequently change sales incentives...

Separately, applications for U.S. home mortgages rose last week, driven by an increase in loan refinancing, the Mortgage Bankers Association said on Wednesday. The trade group said its seasonally adjusted index of mortgage application activity rose 1.5 percent to 639.8 in the week ended February 9.

And ever mindful of the shifting winds of demand, U.S. businesses kept their inventories unchanged in December, which is the first time they did not add to their stocks since the summer of 2005, a Commerce Department report said.

US stock markets appear to be happy with Bernanke's testimony, according to another Reuters report.

U.S. stocks rallied on Wednesday, sending the Dow Jones industrial average to a record close, as investors were relieved by Federal Reserve Chairman Ben Bernanke's comments that inflation is poised to ease while the economy grows moderately...

The Dow Jones industrial average rose 87.01 points, or 0.69 percent, to end at a record 12,741.86, its 28th since the beginning of October.

The Standard & Poor's 500 index advanced 11.04 points, or 0.76 percent, to finish at 1,455.30. The Nasdaq Composite Index gained 28.50 points, or 1.16 percent, to close at 2,488.38...

Besides the Dow itself, the Dow Jones transportation average and Dow utilities average hit record closes, according to Dow Jones Indexes. The last time this happened was on March 17, 1998, it said.

The Dow Jones transportation average rose 2.1 percent to end at 5,117.27, while the DJ utilities average gained 0.4 percent to finish at 477.07.

Across the Atlantic, the Bank of England also released its outlook for UK inflation yesterday. Reuters reports:

Interest rates will probably need to rise one more time to keep inflation on track to hit its 2 percent target, the Bank of England signalled on Wednesday.

The central bank's quarterly Inflation Report showed CPI falling sharply to dip below 2 percent at the end of the year before picking up to the target at the two-year horizon...

Risks to the Bank's inflation forecasts were weighted to the downside in the near-term but to the upside further out and policymakers remain worried that wage demands are picking up and firms are more confident about raising their prices.

However, data earlier on Wednesday showed average earnings rose by less than expected in the three months to December, which may ease policymakers' fears...

The central bank also said a recent period of labour market loosening may be coming to an end. Wednesday's data showed the number claiming jobless benefits fell in January by its biggest amount in nearly three years.

Meanwhile, China's inflation appears to have cooled. Bloomberg reports:

Consumer prices rose 2.2 percent from a year earlier after climbing 2.8 percent in December, the government said. M2, the broadest measure of money supply, rose 15.9 percent, after gaining 16.9 percent in the previous month, according to a statement posted on the Web site of the People's Bank of China...

While consumer prices are likely to pick up "steadily" this year, potential asset bubbles will be a bigger concern for policy makers, said Qian Wang, an economist at JPMorgan Chase & Co. in Hong Kong.

China's M1 money supply, a measure made up mainly of cash and demand deposits, rose 20.2 percent in January, the biggest jump since June 2003. M1 growth has outpaced M2 since December because of an increase in deposits intended for speedy investment in the stock market, according to Wang.

Wednesday, 14 February 2007

European economy ends 2006 on strong note

Reuters reports eurozone fourth quarter GDP:

Growth surged to 0.9 percent in the single currency area in the final quarter of 2006, according to EU statistics office Eurostat...

The Mannheim-based ZEW economic research institute said on Tuesday its economic expectations indicator, based on a survey of 309 analysts and institutional investors, rose to +2.9 this month from -3.6 in January.

Industrial production in December was strong, growing 1.0 percent from November.

And news on the inflation front was also good, particularly in the UK. Reuters reported yesterday that UK consumer prices fell 0.8 percent in January, taking the annual rise to 2.7 percent from 3.0 percent in December. On Monday, Reuters had reported that manufacturers' input prices fell 2.0 percent in January.

On similar note, Japan's producer prices rose 2.2 percent in January from a year earlier, the slowest pace in more than a year, as oil costs fell.

On the other hand, China's producer price inflation accelerated to 3.3 percent in January from 3.1 percent in December.

Meanwhile, Reuters reports that the US trade deficit rose 5.3 percent to $61.2 billion in December percent as oil prices rebounded and Americans imported record amounts of consumer goods and autos.

Tuesday, 13 February 2007

Chinese trade, carry trade, capital controls

China's trade surplus fell in January compared to December, despite a late Lunar New Year. From AFP/CNA:

China's trade surplus remained high in January as exports rose 33 percent year-on-year to 86.62 billion dollars...

Imports reached 70.74 billion dollars in January, up 27.5 percent over the same period 12 months earlier, the customs bureau said on its website...

Based on Monday's data, the trade surplus stood at 15.88 billion dollars, up 67.3 percent from 9.49 billion dollars in January last year but down 24 percent from 21 billion dollars recorded in December.

Analysts attributed the rise compared with the same period a year ago due to seasonal factors involving the Chinese Lunar New Year, which in 2007 falls in the month of February instead of January.

A cheap currency helps boost China's exports, but Stephen Jen thinks that the Japanese yen is even more undervalued.

... Most economic theories predict that the JPY and the CHF should have appreciated in 2006. In fact, our valuation models, which are based on these economic theories, suggest that the JPY is now more under-valued than the Chinese RMB. For the JPY and the CHF to depreciate, their low cash yields have almost certainly played an important role.

That leads to the following conclusion:

... In the absence of structural pressures, the dollar will strengthen against some currencies and weaken against others. The re-rating of the US economic outlook since mid-December and the persistence of a ‘carry culture’ are the two main motivations for our forecast revisions, but our story for 2007 remains basically unchanged: (1) The EUR is overvalued against both the dollar and the yen. While overshoots are possible, EUR/USD above 1.30 or EUR/JPY above 155 should not be sustained. We still expect a downward-sloping trajectory for EUR/USD and EUR/JPY, but now see slightly flatter paths. (2) While we still believe that a stronger JPY makes more sense, and are retaining a downward trend in USD/JPY, we warn that our conviction level is no longer as high as before, since we are struggling to predict when the ‘carry culture’ will end. (3) In any case, we maintain our view that USD/AXJ will trend lower, led by USD/CNY.

According to Andy Mukherjee, a delayed strengthening of the yen could have negative repercussions on countries such as Vietnam and New Zealand.

Vietnam would probably not be losing the fight against inflation if global liquidity were correctly priced, which it might have been without Japan making it possible for hedge funds to borrow at half a percent for three months.

The monetary policy in Vietnam had been compromised, Standard & Poor's said in a Jan. 29 report...

It's facile to argue that Vietnam's central bank should have used higher interest rates to contain inflation. That would have exerted further pressure on the dong to strengthen. And appreciation in the home currency, if allowed by the central bank, would have further whetted foreign investors' appetites by giving them a higher return on their dollar investments...

In separate reports, analysts at Australia & New Zealand Banking Group and JPMorgan Chase & Co. last week raised the specter of capital controls in Vietnam...

It isn't just emerging markets that are reeling from cheap global money. New Zealand Finance Minister Michael Cullen's comment last week about a mortgage levy shows the frustration...

From South Korea to India and China, authorities are becoming aware that they must use tools other than interest-rate increases to meet their monetary-policy objectives...

"By the end of the year or next, capital controls would be fashionable," says Julius Baer's Anantha-Nageswaran.

Monday, 12 February 2007

In Year of Fire Pig, will stock markets light up or will investors get roasted?

18 February marks the first day of a new lunar year. According to the Chinese zodiac, this coming year will be the Year of the Pig. It succeeds the Year of the Dog, which has turned out to be a good year for stocks. Will the Year of the Pig provide another feast for stock investors?

Stock markets have started 2007 on a generally positive note. According to the Morgan Stanley Capital International indices, most markets are in positive territory year-to-date.

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US dollars

However, emerging markets, after stellar performances in 2006, have done less well so far this year.

 Local currency
US dollars

Professional feng shui researcher and practitioner Raymond Lo has written an article in which he provides an outlook for the year based on Chinese feng shui principles.

According to Lo, the 2007 Year of the Pig is symbolised by fire sitting on top of water. This is yin fire and symbolises tension, temperamental emotions, agitations, and illusions. It can be compared to a candle flame, a spark of fire that "can burn down the whole plain". He says that the illusion of a good market can generate over-optimism "that will drive up the stock market in the first half of 2007".

However, Lo thinks that there may be a substantial setback towards autumn and winter as the fire element will disappear in 2008, the year of the Earth Rat, although he does not think that the setback will be as serious as, say, in 1997, which was also a yin fire year, because a hidden wood element in the Pig will provide support to the yin fire even in winter.

In fact, historically, Pig years have usually been good for stock markets. This is probably not surprising since Pig years coincide with the third year of the United States presidential cycle. Those who are familiar with the latter cycle know that such years are usually good years for stock markets.

According to Charles E. Kirk, who publishes The Kirk Report and who incidentally was born in 1971, a Pig year, the S&P 500 has on average gained 16 percent in each pig year since 1935 (see "Year Of The Pig: Market Performance").

Looking back even further, Randolph Buss, editor of Der Invest Informant says that going back to 1899, Pig years have all been positive for the Dow Jones Industrial Average except in 1923 when it fell 3.3 percent (see "Year of the Pig"). However, he does not need "esoteric indicators" to forecast that for 2007, world markets will have a "benign to positive-tendency year" as liquidity will remain intact.

The prospect of liquidity staying intact remains to be seen, although recent events tend to support this view. Last week, both the European Central Bank and the Bank of England left interest rates unchanged, although many analysts still think that hikes are likely later. On the other hand, the Bank of Japan and the Federal Reserve are seen as less likely to hike rates soon, as I discussed last week (see "BoJ and Fed likely to stay sedate on interest rates").

Most analysts agree that stocks have potential for more gains this year.

In an article on 1 February, SmartMoney noted that the analysts it monitored generally expected a "good, though not great, investing year". However, some of the analysts warned that the path for markets may not be smooth.

The article cited Jeffrey Kleintop, chief investment strategist at PNC Wealth Advisors, as saying in his February investment outlook that volatility could rise as a lagged effect of previous changes in the federal funds rate. Citigroup's Tobias Levkovich wrote in January that slowing earnings might not have been fully factored by investors and could contribute to a market pullback in early 2007. Similarly, Thomas McManus of Bank of America Securities wrote in January that "equity markets may experience some disappointment in 2007" as earnings slow.

In fact, last week provided a taste of what could happen. US stocks fell, the Standard & Poor's 500 Index dropping 0.7 percent over the week on concerns that earnings may disappoint after warnings were issued by some major corporations, particularly those linked to the housing sector such as financials and homebuilders. This is despite the fact that the deterioration in the housing market has been known for months.

European stocks, on the other hand, rose last week, the Dow Jones Stoxx 600 Index adding 0.3 percent as investors remained optimistic about earnings prospects. The same appears to hold true with Asian stocks, the Morgan Stanley Capital International Asia-Pacific Index adding 0.5 percent last week to bring the index to a record 143.42.

So the momentum generally remains with the bulls. This means that as stock markets enter the Year of the Pig, they are also entering the fifth year of the bull run.

However, this is a bull run that is getting long in the tooth. Bulls do not run forever. Something or other has always come along to put an end to them. The earnings disappointment suggested by the pundits in the SmartMoney article is just one potential trigger among many. Or as Raymond Lo says, in the Year of the Fire Pig, the apparently rosy outlook could well turn out to be just an illusion.

So while there may still be gains to be made in stocks, investors who are not prepared to face higher volatility might be well-advised not to be too greedy and start taking some bets off the table instead. As the saying goes: Bulls make money, bears make money, pigs get slaughtered.

Saturday, 10 February 2007

Carry trade, carry on

It looks like moves by European officials to halt the yen's slide has foundered. Bloomberg reports:

Japan's yen dropped for a fourth straight day against the euro, approaching a record low, as speculation faded that the Japanese currency's decline will be a focus of the Group of Seven meeting.

The yen also touched the lowest in more than a week against the dollar as German Finance Minister Peer Steinbrueck said today he doesn't think a weak yen has hurt German trade. France's Finance Minister Thierry Breton said the G-7 won't single out one currency in its statement. Traders cut bets on an interest-rate boost by the Bank of Japan.

Recent economic data reinforced the yen move. From Bloomberg yesterday:

Japan's machinery orders fell in December, signaling economic growth may slow this year as companies scale back spending on factories and equipment.

Non-government orders, excluding shipping and utilities, declined a seasonally adjusted 0.7 percent from November, the Cabinet Office said in Tokyo today. The result was in line with the median estimate of economists surveyed by Bloomberg News...

The drop in machinery orders is a reflection of the previous month's 3.8 percent gain, Economic and Fiscal Policy Minister Hiroko Ota said at a press conference in Tokyo today. The economy is on a mild recovery trend, she said...

The government said it expects orders, which point to capital spending in three to six months, to climb 2.2 percent in the first quarter of this year from the fourth quarter of 2006, when they rose 2 percent.

The day before had provided yet more indications that rate rises may not materialise as fast as previously expected.

January bank lending failed to accelerate.

Loans excluding trusts rose 1.8 percent in January from a year earlier, matching the increase in December, the Bank of Japan said in Tokyo today... Lending adjusted for currency fluctuations, bad loan write- offs and securitizations advanced 2.8 percent, matching the December gain, the central bank said. Loans including trusts increased 1.7 percent, also unchanged from December...

Japan's money supply, or M2 plus notes in circulation, rose 1 percent in January, the central bank said in a separate report. Broad liquidity, which includes bonds and investment trusts, gained 2.6 percent.

And views from a BoJ board member:

The Bank of Japan doesn't need to be hasty about raising interest rates as there's no threat that rising prices will cripple economic growth, policy board member Hidehiko Haru said.

"Given that there's no evidence of any inflationary risk, there's no need to rush," Haru, 69, said today in a speech to business executives in Shizuoka city, Japan. "Gradual adjustments will be needed and will be made based on improvements in the economy and prices."

So it looks like the yen will stay weak and continue to boost the Japanese economy. As Reuters reports:

As the yen's broad value has withered to a 21-year low, the boon to Japan's economy has been such that it's as if the Bank of Japan never lifted interest rates from zero last year.

The fillip from the weakening yen has proved so potent that some economists believe it has been the equivalent of a half-percentage point cut in rates, more than offsetting the BOJ's raising its key rate to 0.25 percent last July.

Friday, 9 February 2007

ECB, BoE leaves interest rates unchanged

No surprise from either the ECB or BoE yesterday. From Bloomberg:

European Central Bank President Jean- Claude Trichet signaled the ECB will raise interest rates next month as the pace of economic growth threatens to fuel inflation.

"Strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialize," Trichet said at a press conference in Frankfurt today. The bank left its benchmark rate at 3.5 percent, a level he referred to as "low."...

The Bank of England also left its key interest rate unchanged today, holding it at 5.25 percent. Investors are still betting on it reaching 5.5 percent by April, futures trading shows.

Other data yesterday cast doubts on whether interest rates have much further to rise.

In Germany, exports fell in December. Bloomberg reports:

Sales abroad, adjusted for working days and seasonal changes, fell 2 percent from November, when they dropped 0.6 percent, the Federal Statistics Office in Wiesbaden said today...

Imports rose 5 percent in December from the previous month, when they dropped 3.9 percent, today's report showed. The seasonally adjusted trade surplus narrowed to 14.4 billion euros ($18.8 billion) from 19.1 billion euros.

Meanwhile, UK house prices continued to rise in January. Reuters reports:

House prices rose 1.3 percent in January, according to the Halifax house price index, erasing a 0.9 percent fall in December.

But UK house price inflation may have peaked according to another Reuters report.

Median forecasts in a survey of 25 analysts carried out February 5-8 before the rate decision showed house price inflation at about 6 percent this year -- down from around 10 percent last year -- and then easing to just 3.5 percent in 2008.

An overwhelming majority of analysts -- 18 of 22 -- now say house price inflation has peaked. That compares with just 2 out of 32 analysts who said the British property market had peaked in a similar poll carried out just three months ago.

In the US, Reuters reports that the economic news was "generally upbeat".

...U.S. retailers said a blast of frigid weather and redemption of gift cards helped boost sales in January, with many retailers reporting sales above expectations.

According to the International Council of Shopping Centers, chain store sales rose a strong 3.7 percent in January from a year earlier, a pickup from December's 3.3 percent gain...

The Labor Department said 311,000 workers filed initial claims for state unemployment insurance aid last week, up only slightly from the 308,000 submitted a week earlier...

A separate report from the Commerce Department showed an unexpected fall in inventories at wholesalers in December.

The 0.5 percent decrease -- the biggest drop since May 2003 -- reflected slimmer auto and petroleum stocks and followed a 1.1 percent November gain...

Wholesalers reported a 1.8 percent increase in sales, capping a strong year...

The inventory-to-sales ratio, the number of months it would take to deplete existing stocks at the current sales pace, was 1.17 in December, down from 1.19 in November.

Thursday, 8 February 2007

US productivity up, UK industrial output and German factory orders fall

US productivity rose in the fourth quarter. Reuters reports:

Nonfarm business productivity, a gauge of how much a worker produces per hour, mounted at a 3 percent annual pace in the final three months of 2006, the Labor Department said on Wednesday...

Handily beating expectations on Wall Street for a 1.8 percent advance, the rise marked a big step up after a revised 0.1 percent third-quarter decline. Productivity in the third quarter was initially reported as a 0.2 percent gain...

"The strength of productivity meant that unit labor costs remained under control despite a 4.8 percent rise in hourly compensation," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a research note. "These numbers ought not to be seen as unduly threatening by the Fed."

Unit labor costs, a gauge of inflation and profit pressures watched closely by the Fed, rose at a 1.7 percent annual rate, a big slowdown after a 3.2 percent gain in the previous three months. This was despite the jump in compensation per hour, which accelerated after a 3.1 percent third-quarter increase.

In other news, mortgage applications fell last week.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended Feb. 2 dipped 0.2 percent to 630.1. A four-week moving average of mortgage applications, which smooths the volatile weekly figures, moved down 1.6 percent.

Meanwhile, a Federal Reserve report yesterday showed that growth in consumer credit slowed in December. MarketWatch reports:

With credit-card debt growing at the slowest pace in nine months, consumer credit debt increased by $6 billion, or 3% annualized, in December, less than half the growth of November, the Federal Reserve reported Wednesday.

Total outstanding debt increased by a seasonally adjusted $6.01 billion in December to $2.4 trillion after a $13.7 billion, or 6.9%, gain in November.

There were also signs of cooling in Europe.

In the UK, Reuters reports that industrial output fell 0.1 percent in December as a sharp fall in oil and gas production offset a 0.2-percent increase in manufacturing output. Meanwhile, the British Retail Consortium said shop prices rose an annual 1.84 percent in January, down from 2.28 percent in December.

Earlier, Bloomberg reported that German manufacturing orders unexpectedly fell 0.2 percent in December.

Wednesday, 7 February 2007

Retail sales rise in Europe, Japanese economy may slow

Retail sales in the euro zone was less than expected in December. RTÉ reports

Euro zone retailers saw their sales grow 0.3% in December from November, and 2.1% over one year, which was less than expected.

But retail sales are looking good in the UK in January. From Reuters:

The British Retail Consortium said the value of like-for-like sales grew an annual 3.1 percent last month compared with a strong 2.5 percent increase in December.

Total sales growth, which includes new floorspace, rose to 5.2 percent from 4.4 percent. The three-month annual rate for like-for-like sales picked up to 2.1 percent from 1.9 percent.

Meanwhile, Japan's economy looks headed for slower growth. From Bloomberg:

The leading index was at 25 percent in December, below 50 percent for a second month, the Cabinet Office said today in Tokyo. A number below 50 indicates the economy will cool in three to six months. The result matched the median estimate of 27 economists surveyed by Bloomberg News.

On the other hand, the Conference Board's leading index for Japan increased 0.7 percent in December, up from 0.2 percent in November and 0.6 percent in October.

Tuesday, 6 February 2007

Services stay strong

Global manufacturing may be in a slowdown but services look relatively robust. Bloomberg reports:

Expansion in European service industries, the biggest part of the economy, unexpectedly accelerated in January after unemployment fell to the lowest on record.

Royal Bank of Scotland Group Plc's services index, based on a survey of purchasing managers in industries from banking to airlines, rose to 57.9 from 57.2 in December...

Growth at U.S. service industries also accelerated last month, the Institute for Supply Management said today, with its index of non-manufacturing businesses increasing to 59.0 from 56.7 in December...

Still, in the U.K. services growth slowed in January, a separate report showed. An index of growth based on responses from about 700 companies fell to 59.2 from 60.6 in December.

Doug Noland at notes the powerful impact the service sector growth has had on US employment but thinks that it is largely due to "rampant Credit and asset inflation". He thinks they are "Bubble Manifestations similar to the tech employment boom" and when it bursts, will "initiate job and Income losses that will make post-tech Bubble dislocations look inconsequential by comparison".

Monday, 5 February 2007

BoJ and Fed likely to stay sedate on interest rates

The central banks of Japan and the United States both left interest rates unchanged in January. Neither central bank has been very aggressive in moving interest rates either up or down recently, and this looks unlikely to change in the near future.

On 18 January, the Bank of Japan held its benchmark interest rate at 0.25 percent. The decision disappointed many analysts as it contradicted earlier signals that the BoJ was likely to hike rates at that particular meeting. Some attributed the decision to pressure from politicians unwilling to risk a deterioration in the economy.

However, data subsequently released arguably put the decision in a better light. Core consumer prices in Japan rose by just 0.1 percent in December from a year earlier, retail sales fell 0.3 percent, the biggest decrease in eight months, while household spending fell 1.9 percent.

Indeed, the trend of rising consumer prices is looking shaky at the moment with oil prices having been relatively weak over the past few months. And energy prices have been an important contributor to the overall inflation rate; core inflation excluding food and energy have actually not been able to move into positive territory in recent years.

Nevertheless, most analysts still think that the BoJ will hike rates this year. Interest rates remain low not only in absolute terms but in real terms while the overall economy continues to expand. And BoJ Governor Toshihiko Fukui himself has repeatedly indicated a willingness to raise rates, although it is likely to be at a very measured pace.

On 31 January, the Federal Reserve also decided to leave its target federal funds rate unchanged at 5.25 percent. In its accompanying statement, the Federal Open Market Committee noted the "somewhat firmer economic growth" and the moderate improvement in core inflation, concluding that "some inflation risks remain".

Indeed, on the same day, the US Commerce Department released its advance GDP report for the fourth quarter, showing a robust 3.5 percent expansion of the economy.

However, other data last week provided indications that rate cuts are not completely off the table either.

On 2 February, the Labor Department reported that the US economy added 111,000 jobs in January but the unemployment rate edged up to 4.6 percent. The recent bottom in the unemployment rate was in October at 4.4 percent.

A day earlier, the Institute for Supply Management reported that the PMI, its composite index measuring national manufacturing activity, eased to 49.3 in January from 51.4 in December. The January number was the second time in three months that the PMI has fallen below 50. A level below 50 indicates that manufacturing activity is generally declining.

The following charts show that increases in the unemployment rate and declines in the PMI have historically been closely followed by cuts in the federal funds rate.

Of course, it is also possible that the unemployment rate and PMI stabilise or even turn around from their recent trends. After all, the stock market has been strong, which has more often than not in the past pointed to a strong economy ahead. The Dow Jones Industrial Average has been on a record-breaking run, closing last week at another all-time high of 12,653.49. And its performance is now being duplicated by the Dow Jones Transportation Average, which also closed last week at an all-time high of 5,006.89, confirmation to some that the trend is positive.

So on balance, the Federal Reserve appears likely to remain on hold for some time to come.

Saturday, 3 February 2007

US economy adds 111,000 jobs in January

The US jobs report for January looks reasonably good. From Reuters:

The U.S. economy added a modest 111,000 jobs in January, but the job picture was much brighter than first estimated in the final quarter of last year, a government report showed on Friday...

Wall Street analysts polled before the employment report expected the report to show 149,000 jobs were added outside the farm sector last month. They had also expected the unemployment rate to hold steady at 4.5 percent, but it edged up to 4.6 percent in one of the report's weak spots.

The report showed the employment picture for the last three months of 2006 was better than first thought, with the payroll count for the final three months of last year revised up by a total of 104,000 jobs...

On the wage front, average earnings per hour rose 0.2 percent in January to $17.09. That was a smaller gain than in December and below the 0.3 percent increase expected on Wall Street...

The jobs report also contained an annual revision in which the Labor Department recalculated its job count for the 12 months through March 2006 based on state unemployment insurance records. It said it had undercounted employment growth during that period by a hefty 752,000 jobs, or 0.6 percent.

Other indicators of the economy released yesterday also look good.

The Reuters/University of Michigan Surveys of Consumers said its final index on consumer sentiment in January rose to 96.9 from 91.7 in December. The January reading was the highest since December 2004...

Separate data from the Commerce Department on Friday also pointed to a strong 2006 finish, as new orders at U.S. factories rose a larger-than-expected 2.4 percent in December.

Non-defense capital goods orders, excluding volatile aircraft, increased 3.1 percent after a November drop. Economists see that figure as a good measure of business spending.

Nigel Gault at Global Insight summarises the employment report as follows:

Today's report tentatively suggests some slowdown in overall economic growth in the first quarter. It also suggests that manufacturing is currently undergoing a sharp inventory correction. This notion is reinforced by the evidence from the ISM survey earlier in the week, which showed inventory decumulation. But it seems that much of the correction is being accomplished by lower hours, suggesting that once stocks are cleared, manufacturing should be ready to grow again. The report also suggests some stabilization in wage inflation.

All of this news is consistent with the Federal Reserve's outlook for moderate growth and declining inflation. It supports the view of an extended hold on interest rates, with a (small) rate cut still possible in the second half of the year if inflation comes down as anticipated.

Friday, 2 February 2007

Mixed data on US economy and global manufacturing

The US data yesterday were mixed. Reuters reports:

The Institute for Supply Management said its index of national factory activity eased to 49.3 from 51.4 in December, below economists' median forecast for a slight rise to 51.9...

Another report contributed to the mixed economic picture. Pending sales of existing U.S. homes advanced a stronger-than-expected 4.9 percent in December, the biggest monthly gain since 2004...

Incomes rose 0.5 percent in December after a 0.3 percent gain in November while spending climbed 0.7 percent after a 0.5 percent rise in November, a Commerce Department report showed.

Core consumer prices, which exclude volatile energy and food costs, rose 0.1 percent in December after being unchanged in November. Analysts polled by Reuters were expecting a 0.2 percent rise...

The number of U.S. workers applying for jobless benefits fell a much sharper-than-expected 20,000 last week, according to a separate report from the Labor Department, underscoring strength in the labor market.

However, a report from employment consulting firm Challenger, Gray & Christmas showed planned job cuts by companies in the United States rose 15 percent in January from December to 62,975.

The weakness in US manufacturing pulled the global January PMI down. Again from Reuters:

The global indicator produced by JP Morgan with research and supply management organisations fell to 52.4 in January -- its lowest level since August 2005 -- from 53.4 in December but held above the 50.0 mark dividing growth from contraction.

Improvements were seen in Japan, where the NTC Research/Nomura/JMMA Purchasing Managers Index edged up to 53.4 from 53.1 in December, and in the UK, where the CIPS/RBS Purchasing Managers' Index rose to 52.8 from 52.0.

On the other hand, the eurozone RBS/NTC Manufacturing PMI fell to 55.5 in January from 56.5 in December while in China, the CLSA PMI fell to a ten-month low of 52.0 in January from 52.4 in December.

Thursday, 1 February 2007

Fed holds rates as slowdown vanishes

The Federal Reserve left interest rates unchanged yesterday; that was not a surprise. US fourth quarter GDP growth hit 3.5 percent; that was a surprise. Reuters reports:

The U.S. economy grew at a stronger pace than expected in the final quarter of 2006 without raising inflation pressures, government data showed on Wednesday, as robust consumer spending more than offset the biggest slump in housing in 15 years.

That report was followed by Federal Reserve policy-makers' decision later on Wednesday to keep the benchmark overnight federal funds rate steady at 5.25 percent. The Fed again warned about the risks of inflation but also pointed to some signs of a stabilizing housing market.

Gross domestic product, the broadest measure of overall economic activity within U.S. borders, expanded at a 3.5 percent annual rate during the October-through-December quarter, according to the Commerce Department...

Business investment during the quarter fell 0.4 percent, breaking a streak of 14 consecutive quarterly increases.

But aided by lower energy prices as well as strong growth in real wages, consumer spending advanced at a 4.4 percent rate in the fourth quarter...

On the inflation front, the central bank's favorite measure of nonfood, nonenergy inflation -- the so-called core personal consumption expenditures price index - moved ahead at just a 2.1 percent rate, down from the 2.2 percent seen in the prior quarter. That was just slightly above the top of the range many Fed officials have identified as their "comfort zone."

Among other US data released yesterday:

The National Association of Purchasing Management-Chicago Index showed a reading of 48.8, which was well below expectations and pointed to a contraction for business in that region...

A separate Labor Department report showed that employment costs -- another piece of the economy's pie that inflation-wary Fed officials are watching -- rose a less-than-expected 0.8 percent in the fourth quarter.

Bill Conerly at the Businomics Blog analysed the GDP report and remarked that it "smelled like a rose". Nigel Gault at Global Insight called it a "Goldilocks Economy" and adds the following summary:

The overall 3.5% outcome was generated by a mixture of big positives and some big negatives. Overall domestic demand growth slowed, from 2.0% to 1.7%, but in effect the United States passed on the demand softness to the rest of the world, as imports declined. Meanwhile, the rest of the world propped up U.S. production growth through surging export demand. This is the reverse of the picture to which we have become accustomed—instead of the United States propping up the global economy, the rest of the world is now supporting U.S. growth.

Meanwhile, the FOMC statement was analysed by Mark Thoma, who finds it "a bit of a departure from the Fed's last few statements", and William Polley, who concludes that there will not be any change in rates for some time.

Meanwhile, there was also no sign of accelerating inflation in the euro zone. AP/CNBC reports yesterday's data from Europe.

Euro inflation stayed at 1.9%, the same as the previous two months, while unemployment in the 13-nation euro area hit a new record low, falling to 7.5% in December from 7.6% a month earlier, the EU statistics agency Eurostat said...

However, unemployment in the entire 27-nation EU remained stable at 7.6%...

Euro confidence went down to 109.2 from an October high, while the EU figure fell to 110.7% from its November peak. The economic bellwether is still above its historic average though, the Commission said.

And over in the UK, consumer confidence improved in January, reports Reuters.

Research company GfK NOP's monthly consumer confidence index improved to -7 in January, above forecasts for a deterioration to -9 and better than December's -8 reading.

But following the data earlier in the week, the outlook for Japanese consumer spending continues to be poor. Bloomberg reports that Japanese workers can only afford to buy more beer.

Japan's wages fell at the fastest pace in 16 months in December as companies paid lower winter bonuses, signaling consumer spending may remain too sluggish for the central bank to raise interest rates.

Monthly wages, including overtime and bonuses, unexpectedly fell 0.6 percent from a year earlier, the labor ministry said today in Tokyo. Workers brought home an extra 5,500 yen ($45) in total pay in 2006, about enough to buy a case of beer.