Saturday, 29 December 2007

Inflation returns to Japan but US new homes sales keep falling

The Bank of Japan has been saying that inflation will return. Well, it looks like it has, but it doesn't seem to be making a rate hike by the BoJ any more likely. From Bloomberg:

Japan's inflation rose at the fastest pace in more than nine years in November and industrial production and household spending declined, signaling rising oil costs may derail the economy's longest postwar expansion.

Core consumer prices, which exclude fresh food, climbed 0.4 percent from a year earlier, the statistics bureau said today in Tokyo. Factory output slid 1.6 percent from a month earlier. Households cut spending 0.6 percent, the first drop since July.

Wages fell and employment prospects worsened as job seekers outnumbered vacancies for the first time in two years, the Labor Ministry said today. Surging energy costs rather than consumer spending are driving inflation, making it likely the Bank of Japan will refrain from raising interest rates as growth slows.

In the US, yesterday saw more bad news on housing. However, outside of housing, the economy showed surprising resilience. From Reuters:

New single-family home sales dropped 9 percent to an annual rate of 647,000 in November from a downwardly revised pace of 711,000 in October, the Commerce Department said...

Friday's housing report suggested the new home market may have more room to fall as the inventory of houses for sale rose to 9.3 months' supply from 8.8 months in October. The median sales price of new houses sold in November dipped to $239,100 from $240,100 a year earlier...

The National Association of Purchasing Management-Chicago's business barometer rose to 56.6, its strongest since June, from 52.9 in November...

The National Association of Purchasing Management-New York's index rose to 449.1 in December from 445.0 in November, rising for a third straight month.

Friday, 28 December 2007

Assassination and economic data trigger flight to safety

Looks like the credit crunch isn't the only thing that markets have to worry about. From Reuters:

Gold and government bond prices rose and U.S. stocks slid on Thursday as fears of regional instability following the assassination of Pakistani opposition leader Benazir Bhutto triggered demand for safe-haven assets.

The shock of Bhutto's death, combined with mostly weak U.S. economic data and potential additional write-offs by major investment banks, created a classic flight of capital to assets deemed as safe in times of geopolitical stress.

But the market reaction to a political event really just shows how nervous investors already are. And recent US economic data haven't been comforting. From another Reuters report:

Investors focused more on the Commerce Department report showing new orders up by a much less-than-forecast 0.1 percent in November...

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, declined 0.4 percent after falling 2.9 percent in October, Commerce said, pointing to cooler fourth-quarter economic activity...

Initial claims for state unemployment insurance edged up to 349,000 last week from an upwardly revised 348,000 in the prior week, the Labor Department said.

The number of people still on the unemployment rolls after drawing an initial week of benefits in mid-December rose to its highest since mid-November 2005, the Labor Department said...

On a slightly brighter note, the Conference Board said its U.S. consumer confidence index rose to 88.6 in December from an upwardly revised 87.8 in November...

Meanwhile, the US housing market continues to sink. From Bloomberg yesterday:

Mortgage applications in the U.S. dropped last week to the lowest level of the year as demand to buy homes and refinance loans fell.

The Mortgage Bankers Association's index of applications decreased 7.6 percent to 603.6 after slumping 19.5 percent the prior week. The back-to-back decline was the biggest since April 2004...

Figures yesterday showed home prices fell in October by the most in at least six years. Home values in 20 metropolitan areas fell a greater-than-forecast 6.1 percent from a year earlier, the most since records began in 2001, according to the report from S&P/Case-Shiller.

The UK housing market appears to be faring little better. From another Bloomberg report yesterday:

U.K. mortgage approvals dropped 44 percent in November from a year earlier as higher borrowing costs and concern that home prices have further to fall deterred buyers, a British Bankers' Association report showed.

Banks granted 44,811 loans for house purchase, compared with 79,367 in November 2006, the London-based BBA, which represents the U.K.'s biggest banks, said today in a statement. Approvals rose just 1 percent from a 10-year low in October...

The value of loans fell 41 percent in November from a year earlier to 7 billion pounds ($14 billion), the BBA said.

Unsecured debt outstanding rose last month, with personal loans and overdrafts climbing by 276 million pounds and outstanding credit card debt increasing by 252 million pounds, the BBA said.

A separate report today from the Bank of England showed borrowing against the value of homes rose in the third quarter from a near two-year low in the second...

U.K. house prices fell the most in three years this month, with the average cost of a home in England and Wales sliding 0.3 percent to 175,200 pounds, London-based research group Hometrack Ltd. said Dec. 24. Home prices fell for a third month in November, the longest streak of declines since 1995, HBOS Plc said Dec. 5.

Monday, 24 December 2007

Just a recession?

Maybe we'll have a recession soon. Maybe not.

Maybe we'll have a depression. Excerpt from Ambrose Evans-Pritchard's article at the Telegraph:

As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.

York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.

With the overall CPI up 4.3 percent over the year to November, some people think that the US economy need only fear inflation, not deflation. Evans-Pritchard says that the experience of Japan suggests otherwise.

America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.

This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.

In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per cent in February 1990. In reality, the country was engulfed by the tsunami of debt deflation quicker than the bank dared to cut rates. In the end, rates fell to zero. Still it was not enough.

Saturday, 22 December 2007

US consumer spending and sentiment hold up

Time and time again, US consumers have proven themselves a resilient lot. November data add to the evidence. From MarketWatch:

Consumers spent with abandon in November for a broad array of goods and services, the government's data showed.

Nominal consumer spending increased 1.1%, the most in two and a half years, after an upwardly revised 0.4% gain in October. Economists had been expecting November's spending to rise 0.9%.

Income has been less resilient especially after adjusting for inflation.

Nominal incomes rose 0.4% after increasing by 0.2% in October...

After taking out taxes and adjusting for the spike in inflation, real disposable incomes fell 0.3%, the second decline in a row and the fourth decline this year...

Inflation in November was mostly in energy.

Core inflation increased 0.2% for the month, less than the 0.3% gain that had been expected, but the year-over-year gain accelerated to 2.2%, the highest such comparison since March and well above the Federal Reserve's target rate of 1% to 2%.

Headline inflation, which includes food and energy costs, jumped 0.6% in November, the biggest rise since Hurricane Katrina pushed gasoline prices up. Gasoline prices surged 9.3% in November, but have declined modestly since.

In another piece of positive news on the consumer front, MarketWatch reports that consumer sentiment has crept up.

Consumer sentiment strengthened in late December but remained at two-year lows, according to media reports Friday of proprietary research from the University of Michigan and Reuters.

The UMich consumer sentiment index rose to 75.5 points in late December from 74.5 earlier in the month. Economists were expecting the index to hold steady.

And while the Economic Cycle Research Institute's Weekly Leading Index fell to 136.2 last week from a downwardly revised 137.9 in the prior week and its growth rate fell to minus 4.8 percent from minus 3.9 percent, there appears to be some hope that the threat from a credit crunch is easing.

Certainly, market fears of a recession receded yesterday, with stocks rising and Treasuries falling.

Friday, 21 December 2007

China's interest rates to rise, US and UK growth rates to slow

Yesterday, China announced that it was continuing its campaign to tighten monetary policy. From AFP/CNA:

China's central bank announced Thursday its sixth interest rate hike this year, the government's latest move to slow rising inflation and cool an economy that is growing at double-digit pace.

The hike, which takes effect on Friday, raises deposit rates 27 basis points and the lending rate by 18 basis points, according to a statement posted on the central bank's website.

The key one-year lending rate will rise to 7.47 percent, while the one-year deposit rate will stand at 4.14 percent.

In contrast, there is no chance of the Federal Reserve raising rates in the near future, despite strong third quarter growth. Reuters reports the latest US economic data.

The Commerce Department said gross domestic product, which measures the total output of goods and services within U.S. borders, expanded at a 4.9 percent annual rate in the third quarter, the same as estimated a month ago and the strongest since the third quarter of 2003...

A report from the Conference Board showed its index of leading indicators weakening sharply for a second straight month in November, with seven of the private-sector research group's 10 measures of economic activity down from October.

Separately, the Philadelphia Federal Reserve Bank said factory activity in the Mid-Atlantic region fell to a four-year low in December. Its business activity index dropped to minus 5.7 in December -- lowest since April 2003 and far below forecasts -- from 8.2 in November.

The Labor Department said initial claims for jobless benefits rose 12,000 last week to 346,000 and the four-week moving average of claims -- a more reliable gauge of labor market conditions -- hit its highest in more than two years...

Separately, the Chicago Federal Reserve Bank said its National Activity Index declined again in November, though less rapidly than in October.

UK third quarter growth, however, was revised higher. Bloomberg reports:

Gross domestic product increased 3.3 percent in the three months through September from a year earlier, the Office for National Statistics said in London today. The reading was higher than the 3.2 percent previously estimated by the government, which was the median forecast of 26 economists in a Bloomberg News survey. On the quarter, the economy expanded 0.7 percent.

The economy is set to deteriorate from here though.

Economic growth may have peaked after a worldwide credit market slump swelled losses at banks and provoked a slowdown in the housing market...

While a pool of pent-up demand will support property values next year, the credit squeeze will keep prices from rising, the Royal Institution of Chartered Surveyors said in a report today...

Thursday, 20 December 2007

Swedish and Japanese growth forecasts cut, interest rates unchanged

Sweden's central bank left interest rates unchanged yesterday after it cut growth forecasts for the Swedish economy. From Bloomberg yesterday:

The repurchase rate remained at 4 percent, after 10 increases from a record 1.5 percent in January 2006, the Stockholm-based Riksbank said today. While the bank kept a forecast for one more increase in the first half of 2008, it cited "considerable uncertainty due to the turmoil" on global markets...

The bank today cut its economic growth estimate for 2007 and 2008 to 2.6 percent and 2.4 percent from 3.1 percent and 2.8 percent, respectively...

Today, it is the Bank of Japan's turn. Bloomberg reports:

The Bank of Japan cut its assessment of the economy for the first time in three years, signaling it's unlikely to raise the benchmark interest rate from 0.5 percent anytime soon.

The central bank today kept the key rate unchanged in its first unanimous decision since June and said the pace of growth "seems to be slowing" because of a slump in housing...

The government yesterday lowered its growth forecast for this fiscal year to 1.3 percent from 2.1 percent.

Trade data out today also showed that Japan's export growth cooled in November.

Wednesday, 19 December 2007

Stagflation worries as US housing stays weak

Stagflation appears to be a growing concern nowadays.

The US housing market remains in the doldrums.

Monday saw a report showing that the NAHB/Wells Fargo Housing Market Index stayed at 19 this month, its lowest reading since the series began in January 1985.

Yesterday brought news that single-family housing starts and building permits hit 16-year lows after the former fell 5.4 percent in November and the latter fell 5.6 percent. Total starts fell 3.7 percent in November while total building permits fell 1.5 percent.

The weakening US economy hasn't brought any respite on inflation. On Friday, the Labor Department had reported that consumer prices rose 0.8 percent in November. Energy prices drove the increase but even core prices which exclude food and energy rose 0.3 percent.

Europe is facing similar problems with slower growth and higher inflation.

The Royal Bank of Scotland Group Plc's preliminary estimate of its composite index for the euro zone fell to 53.3 in December from 54.1 in November. The services index dropped to 53.2 this month, the lowest since June 2005, from 54.1 in November, while the manufacturing index slipped to 52.5 from 52.8.

This followed a report on Friday that the inflation rate in the euro area had risen to 3.1 percent in November from 2.6 percent in October.

Friday, 14 December 2007

Swiss National Bank pauses

The Swiss National Bank left the three-month Libor target unchanged at 2.75 percent yesterday, the first time since December 2005 that a policy meeting was not followed by a rate increase.

Speaking of unchanged rates, the Bank of Japan's extended pause in its tightening cycle looks set to continue after today's Tankan report showed a fall in manufacturer sentiment to 19 points in December from 23 in September.

Meanwhile, the Federal Reserve, which is already on an easing cycle, might also want to consider a pause after yesterday's economic data.

US retail sales were up sharply by 1.2 percent in November, the strongest sales pace since May, after rising 0.2 percent in October.

Producer prices were also up sharply by 3.2 percent in November, the largest gain since August 1973. Energy prices were the main driver, but even the core producer price index, which excludes food and energy, rose 0.4 percent.

And the US labour market remains resilient, with initial jobless claims falling 7,000 to 333,000 last week and the four-week moving average falling 2,000 to 338,750.

The Bank of England may also have to tread carefully with rate cuts after reporting that future inflation expectations rose to a record 3 percent in November, up from 2.7 percent in August.

Thursday, 13 December 2007

US and Japanese data show greater trade imbalances, inflationary pressures

The US trade deficit widened in October. MarketWatch reports:

The nation's trade deficit widened 1.2% in October to $57.8 billion from a revised $57.1 billion in September, the Commerce Department said.

This is the biggest trade gap since July. Read full report...

The lion's share of the deterioration in the trade gap was due to sharp increases in the quantity and price of petroleum imports.

The non-petroleum deficit narrowed 2.9% in October to $38.5 billion for the fourth-straight monthly improvement. This is the lowest level since March 2004...

Exports rose 0.9% to $141.7 billion in October. Imports rose 1% to $199.5 billion.

Brad Setser notes the divergence in the oil and non-oil deficits too, stating that the overall improvement in the trade deficit recently "stems much more from a slowdown in non-oil import growth" rather than a major acceleration in export growth. In addition, US imports from China are "growing far faster than US non-oil imports", indicating that the increase in imports from China is coming at the expense of imports from the rest of Asia.

The rising Chinese share of US non-oil imports didn't stop Japan's surplus from rising in October though. From Bloomberg yesterday:

Japan's current-account surplus widened for a 10th month in October as automobile exports surged and investors earned more from overseas assets.

The surplus expanded 45.7 percent to 2.23 trillion yen ($20.1 billion) from a year earlier, the Finance Ministry said in Tokyo today...

Export growth accelerated to 13.7 percent in October from a year earlier to 7.11 trillion yen, the ministry said. Imports climbed 8.3 percent to a record 5.95 trillion yen.

Meanwhile, data for November in both the US and Japan indicate that inflationary pressures still exist.

Data released by the Labor Department yesterday showed that US import prices surged 2.7 percent in November, mainly due to higher prices for petroleum and natural gas. But even excluding fuels, import prices rose 0.5 percent.

Meanwhile Japan's wholesale prices rose 2.3 percent in November from a year earlier based on the corporate goods price index, the sharpest annual jump since September 2006.

Major central banks act on credit squeeze

To deal with the consequences of financial innovation, global central banks led by the Federal Reserve have come up with their own financial innovation. From Bloomberg:

The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.

The Fed said in a statement it will make up to $24 billion available to the ECB and Swiss National Bank to increase the supply of dollars in Europe. The Fed also plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the U.S...

A Fed official told reporters that the U.S. central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash. The Fed will balance its various operations, including daily repurchases of Treasury notes and direct loans to banks...

[A]ll "generally sound" deposit-taking institutions can participate in the term auction facility, the Fed said. The Fed's 12 district banks will accept the same "wide variety" of collateral that is used for discount-rate loans, the statement said. The regional banks determine the haircuts on the assets submitted.

WSJ's Real Time Economics summarises economists' reactions to the plan as describing it to be a "solid first step".

Similarly, in the blogosphere, Mark Thoma thinks that this is a "useful step".

However, Nouriel Roubini thinks that the plan is "too little too late".

And Steve Randy Waldman does not like the plan, suggesting that the TAF is just a palliative and will result in the Fed taking on private risk that the market refuses to. Nevertheless, he admires it "for tactical brilliance".

Meanwhile, the Norges Bank doesn't seem to be catching the spirit of the season. From Bloomberg:

Norway's krone rose to a four-week high against the euro after the central bank raised its benchmark interest rate for a seventh time since January.

The krone gained against 12 of the 16 most actively-traded currencies after Norges Bank lifted borrowing costs to a 4 1/2- year high of 5.25 percent. The economy of the world's fifth- biggest exporter of oil is growing at the fastest pace in 22 years, with unemployment at a 20-year low boosting spending and pushing prices up. "Inflation is low, but rising," bank Governor Svein Gjedrem said.

Wednesday, 12 December 2007

Fed cuts rates, stocks dive

The Federal Reserve cut its target for the federal funds rate 25 basis points to 4.25 percent yesterday. Investors weren't impressed, according to Reuters.

U.S. stocks sank on Tuesday after the Federal Reserve trimmed interest rates rather than slashing them, letting down investors who fear the economy might slip into recession unless the central bank becomes more aggressive...

Many traders were expecting a 50-basis-point cut, said Tim Biggam, lead option strategist at online brokerage thinkorswim, in Chicago.

"In addition, the Fed's outlook did not present a slam dunk case for a further rate cut, which led many traders to trim their long positions in stocks," Biggam said.

The Dow Jones industrial average slid 294.26 points, or 2.14 percent, to end at 13,432.77. The Standard & Poor's 500 Index dropped 38.31 points, or 2.53 percent, to 1,477.65. The Nasdaq Composite Index lost 66.60 points, or 2.45 percent, to 2,652.35...

"People realize it's tough out there. They were looking for the Fed to 'quote unquote, come to the rescue' and now I think you're seeing the negative knee-jerk reaction on the quarter point cut," said Scot Ciccarelli, retail analyst at RBC Capital Markets.

In other words, there may have been a bit of wishful thinking out there.

To put things in perspective, after yesterday's fall, the S&P 500 is still down only 6 percent from its October high and still up 4 percent for the year. That's not bad heading towards what could be a pretty tough period for the US economy.

Tuesday, 11 December 2007

China's inflation accelerates

The latest data out of China are pointing to a need for tighter monetary policy and, more specifically, faster appreciation of the renminbi.

Bloomberg reports China's latest inflation and trade data today.

China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy.

Consumer prices rose 6.9 percent in November from a year earlier after climbing 6.5 percent in October, the statistics bureau said today. That was more than the 6.5 percent median estimate of 21 economists surveyed by Bloomberg News...

The trade surplus climbed 14.7 percent to $26.3 billion in November from a year earlier, the third-highest monthly total, the customs bureau said today. The $15.2 billion trade surplus with the U.S. pushed the 11-month total with that country to $149.2 billion.

People's Bank of China Governor Zhou Xiaochuan said today that the nation's currency policy will be used to help narrow the gap. Export growth has slowed from the 29 percent pace in the seven months through July to between 22 percent and 23 percent for each of the past four months, after cuts to tax incentives.

Yesterday, the PBC had reported that M2 money supply had risen 18.5 percent in November from a year earlier, the same rate as in October.

Monday, 10 December 2007

The Fed has company but it's not the BoJ

The Federal Reserve is set to announce its decision on monetary policy tomorrow. Investors and economists expect a 25 basis point cut. If the Fed meets this expectation, it would be doing so in the knowledge that it is no longer alone among major central banks in cutting interest rates.

The past week saw central banks garner much of the attention in markets as three central banks representing five of the Group of Seven economies made interest rate decisions, with two of the three choosing to cut interest rates.

On 4 December, the Bank of Canada announced that it was lowering its target overnight lending rate by 0.25 percentage point to 4.25 percent. It cited global financial market difficulties and a weaker outlook for the United States economy as posing downside risks to its inflation projection.

On 6 December, the Bank of England announced that it was cutting its official bank rate by 0.25 percentage points to 5.5 percent. It cited a deterioration in financial markets and credit tightening as posing downside risks to the outlook for both output and inflation.

The European Central Bank though chose to keep its refinancing rate unchanged at 4 percent. If anything, it appears more likely to hike rates next rather than cut them. In a press conference after its meeting on 6 December, President Jean-Claude Trichet said that "there are upside risks to price stability over the medium term" and "some" voices among Governing Council members in favour of a rate increase.

Among other central banks, Indonesia's also cut its benchmark interest rate last week by 0.25 percentage point to 8.0 percent.

So on the whole, global central bank policy rates appear to have peaked. However, the trend is far from uniform.

On 6 December, the South African Reserve Bank raised its repurchase rate by 50 basis points to 11.0 per cent, citing upside risks to the inflation outlook.

Over the weekend, the People's Bank of China announced that it was raising the reserve requirement ratio for commercial banks by one percentage point. This followed an announcement at the 2007 Central Economic Work Conference earlier last week that it was shifting its monetary policy from "prudent" to "tight".

Another central bank that still appears to be leaning towards tighter monetary policy is the Bank of Japan. The BoJ's monetary policy meeting is scheduled for next week. It has not raised interest rates since February as inflation in consumer prices has been almost non-existent so far this year while economic growth, already weak at an annualised rate of 1.5 percent in the third quarter, is threatened by the on-going global financial market turmoil.

Having said that, the Cabinet Office reported today that Japanese core private-sector machinery orders, a measure of corporate capital spending, rose 12.7 percent in October from the previous month.

While the economic data have been somewhat ambiguous, BoJ officials have not softened their rhetoric much recently.

Last week, Governor Toshihiko Fukui said in a speech to business leaders in Nagoya that with economic growth "expected to continue at a rate somewhat higher than the potential growth rate", consumer prices is "expected gradually to rise in the longer run". More explicitly on monetary policy, he said that "Japanese financial conditions have been extremely accommodative, and if Japan's economy is to follow a path of sustainable growth under price stability, the level of interest rates is to be raised".

Back in September, Miyako Suda, a member of the Policy Board, had said much the same thing in another speech, adding -- in stark contrast to the attitude of officials at the Federal Reserve -- that "it is difficult for an economy to achieve a soft landing by monetary policy measures alone once concerns about the possible bursting of the bubble start to strengthen" and that therefore, "it is important for a central bank to preempt the emergence of an asset price bubble".

Clearly, where you want to go depends on where you came from.

With the Federal Reserve now widely expected to keep cutting interest rates in an attempt to keep a credit crunch at bay, time will tell whether it is the Fed or the BoJ who has the right road map.

Sunday, 9 December 2007

China raises reserve requirement ratio by one percentage point

It didn't take long for China's tighter monetary stance to start taking effect. From China View:

China will raise the reserve requirement ratio by one percentage point for commercial banks in an effort to cool the booming economy, the central bank announced Saturday.

The move, which will take effect on Dec. 25, will push the ratio to a new high of 14.5 percent, after it reached a ten-year high of 13.5 percent on Nov. 26.

This is the country's tenth rise in the reserve requirement ratio this year. It is aimed at "strengthening liquidity management in the banking system and checking excessive credit growth", the People's Bank of China said in a statement posted on its website.

Saturday, 8 December 2007

Economies grow but may be losing momentum

US employment continued to grow at a moderate pace in November. MarketWatch reports:

The economy added 94,000 nonfarm payroll jobs last month, according to a survey of business establishments, the Labor Department said in a mixed report released Friday...

Payrolls had risen a revised 170,000 in October. Payroll growth in September and October was revised lower by a total of 48,000.

However, a separate survey of households showed the strongest job growth in nearly six years, with 696,000 more people saying they had jobs in November. As a result, the unemployment rate was steady at 4.7%.

But the economy could still deteriorate.

US consumer confidence is still weakening, with the Reuters/University of Michigan consumer sentiment index falling to 74.5 in December from 76.1 in November.

In addition, while the Economic Cycle Research Institute's Weekly Leading Index rose to 138.7 last week from 136.9 the week before, its annualised growth rate fell to minus 2.7 percent from minus 2.2 percent, reaching its lowest since the week of 22 November 2002.

In the meantime, other economies are also showing sluggish growth. For example, Japan's economic growth rate for the third quarter has been revised down to an annualised pace of 1.5 percent from an initial estimate of a 2.6 percent expansion while its leading index continues to signal a weak outlook.

And out of the UK comes some justification for Thursday's rate cut by the BoE as the National Institute of Economic and Social Research reports that the economy grew by 0.6 percent in the three months to end-November, its slowest in more than a year, and expects “further deceleration leading to a period of below-trend growth next year and probably in 2009”.

Europe's economy has so far proven relatively resilient, and Italy's economy even accelerated to a 0.4 percent growth rate in the third quarter. Nevertheless, German industrial production fell 0.3 percent in October.

Friday, 7 December 2007

BoE cuts rates, maybe room for more

The tide turns in UK monetary policy. From Reuters:

The Bank of England cut interest rates for the first time in over 2 years on Thursday in order to shore up the economy in the face of a global credit crunch after a week of feverish speculation over what it would do.

The quarter-point cut to 5.5 percent, which reversed July's hike, was needed, the central bank said, because economic growth was slowing and the state of financial markets was getting worse, piling pressure on both companies and consumers.

In contrast, the ECB is still seriously contemplating a rate hike. Bloomberg reports:

The European Central Bank left interest rates unchanged as policy makers weigh the risks of accelerating inflation against signs of slowing economic growth.

The ECB kept the benchmark refinancing rate at 4 percent today, as predicted by all 62 economists surveyed by Bloomberg News. "Some" members in the 19-member Governing Council voted for an increase, President Jean-Claude Trichet said...

Euro-region inflation will probably average about 2.5 percent next year instead of 2 percent projected in September, according to ECB staff forecasts published today. In 2009, inflation may slow below the bank's 2 percent limit, averaging 1.8 percent.

The OECD would probably have applauded both the BoE and ECB's decisions. From Bloomberg:

The Organization for Economic Cooperation and Development said the Federal Reserve and European Central Bank should avoid cutting interest rates, predicting the world economy will weather the fallout from the U.S. housing slump.

Economic growth in the OECD's 30 members will slow to 2.3 percent in 2008, down from the 2.7 percent forecast in May, before picking up to 2.4 percent in 2009, the Paris-based group said today in its semi-annual outlook. The prediction for 2007 was left unchanged at 2.7 percent...

Unless recession risks intensify, a short-term deceleration in growth doesn't "necessarily" warrant further rate cuts from the Fed after it pared its benchmark to 4.5 percent, the OECD said. Growth will fall only slightly below its long-term trend next year and higher energy costs and a weaker dollar could sustain inflation, the group said...

While the ECB should show "vigilance," the mix of weaker growth and inflation at a six-year high means it should avoid raising or cutting borrowing costs for now, the OECD said...

The Bank of Japan should also avoid lifting its benchmark rate from 0.5 percent given an absence of inflationary pressures and weak consumer spending, the report said. Rates should remain on hold until inflation is "firmly positive and the risk of renewed deflation is negligible," something that may not occur until 2009, it said...

The Bank of Canada should also avoid following this week's rate cut with another, the OECD said.

In contrast, there is room for the Bank of England to embark upon a "series" of rate cuts after inflation slowed through this year, it said...

While China is not a member of the OECD, the group said faster appreciation of its currency would be in its "own interest," with inflation likely to accelerate in 2008 amid another year of double-digit growth.

In other central bank news yesterday, Indonesia's central bank cut its benchmark interest rate to 8 percent from 8.25 percent but South Africa's central bank raised its benchmark interest rate by half a percentage point to 11 percent.

Thursday, 6 December 2007

Stocks rise on hopes of falling rates

US stocks jumped more than one percent yesterday on strong US economic data.

UK stocks surged almost 3 percent yesterday on weak UK economic data.

Apparently, investors will be happy with higher stock prices as long as central banks cut interest rates.

China, though, looks set to tighten monetary policy further. From China View:

China concluded its three-day 2007 Central Economic Work Conference on Wednesday with a pledge to shift its monetary policy from "prudent," an approach it has followed for the last ten years, to "tight."...

China will maintain a "prudent" fiscal policy for the coming year.

Various monetary instruments should be used to regulate liquidity and to strictly control the size of loans and frequency of credit extension, so as to better regulate domestic demand and balance international payments, said the conference.

There seems to have been no explicit mention -- in this or another report -- of a currency revaluation or faster appreciation, though.

Wednesday, 5 December 2007

BoC cuts rates, others to follow?

While everyone is watching the Fed's interest rate decision next week and the ECB and BoE's tomorrow, it turns out that the BoC provided the first major market-moving central bank decision this week. Bloomberg reports:

The Bank of Canada unexpectedly lowered interest rates by a quarter point after the Canadian dollar's rally slowed inflation and market "volatility" threatened to cool economic growth...

Bank of Canada officials, led by Governor David Dodge, cut the target rate for overnight loans between commercial banks to 4.25 percent. "The Bank now expects inflation over the next several months to be lower than was projected," the bank said today in Ottawa. The statement also cited "global financial- market difficulties" and an "increased risk" to exports.

The BoC is obviously looking into the future. Of the present:

The central bank repeated today the economy is operating beyond full capacity. In recent months it has said the economy is strained by strong domestic demand and high prices for the country's energy and metals.

In its decision today, the RBA chose not to follow in the BoC's footsteps. Bloomberg reports:

Australia's central bank left its key interest rate unchanged, citing "heightened uncertainty about the international outlook" and rising credit costs.

Governor Glenn Stevens and his board left the overnight cash rate target at an 11-year high of 6.75 percent in Sydney today, and for the first time released a statement explaining its decision to leave borrowing costs unchanged. All 27 economists surveyed by Bloomberg News forecast today's decision.

"Sentiment in global credit markets has deteriorated recently" and "prospects for growth in the major economies appear to be weakening," the central bank said. Borrowing costs at an 11-year high would contain consumer demand, the bank said, raising speculation Governor Stevens won't raise rates early next year to stem inflation, as had been predicted by most economists.

Nouriel Roubini suggests though that the ECB and BoE should emulate the BoC. In fact, he suggests:

... that all major central should cut policy rates as soon as possible. It is not time to temporize and wishfully hope that the credit crunch will go away; conditions in interbank markets and credit markets are much worse now than they were in the peak of the crisis in August as measured by various Libor spreads relative to policy rate or to same maturity government bond yields; thus, the minimum that central banks should do now is to cut policy rates.

Paul Kasriel thinks they will. And that could be good for gold.

[C]entral banks in the developed world are cutting their policy interests as their all-items inflation rates go vertical. So, while fiat currencies float along in tandem as their supplies increase in tandem, all of them are likely to sink in value relative to the genuine “reserve currency” -- gold. As this is commentary is being wrapped up (1:55 pm CST), the nearby gold futures contract in terms of U.S. dollars is up in price 1.90%. As developed-world central banks attempt to figuratively and literally “paper-over” the credit market implosion by creating more central bank money, the price of gold in terms of these fiat currencies -- not just the U.S .dollar -- is likely to keep on rising.

Tuesday, 4 December 2007

Global manufacturing PMI up

On the whole, manufacturing worldwide appears to be holding up well, with the JP Morgan Global Manufacturing PMI index rising to 52.2 in November from 51.9 in October. There were diverging performances though, as Reuters reports

The Institute for Supply Management said its monthly index of U.S. factory activity edged down for a fifth straight month, to 50.8 from 50.9 in October...

In Europe, the RBS/NTC November Purchasing Manager's Index was revised up to 52.8 from a 52.6 flash estimate, well above the 50.0 cut-off mark between growth and contraction. The UK PMI confounded expectations for a fall and jumped to 54.4 from 52.9.

The eurozone PMI, together with a Eurostat report showing that unemployment in the euro zone fell to 7.2 percent in October, the lowest since the currency bloc was formed, suggests that the eurozone economy is not seeing much deceleration so far.

In the meantime, inflation pressures do not seem to have abated much around the world.

While manufacturing activity picked up in Europe and the UK, so did prices charged at the factory gate -- particularly in Britain, where the rate of increase was just a sliver below a record high logged a few months ago.

The U.S. ISM data painted a similar picture, with the prices measure jumping to 67.5 from 63.0 a month earlier.

Meanwhile, there were conflicting signals from China. While the PMI rose to 55.4 in November from 53.2 in October according to a survey by the China Federation of Logistics and Purchasing, the CLSA PMI fell to an eight-month low of 52.8 in November from 55.2 in October.

Monday, 3 December 2007

Decline in global stocks led by China, rate cuts seen increasingly likely

November was somewhat unusual in that China's stock market was among the world's worst performers according to the Morgan Stanley Capital International indices.

 Local currency
US dollars

Of course, stock markets all over the world did poorly in November. However, things started looking up for stock markets in the last week of November on expectations for more rate cuts by the Fed. In his latest analysis, Tim Duy says the expectation is justified based on the latest remarks by top Fed officials.

However, before we get to the next Fed meeting next week, the ECB and the BoE give us their latest interest rate decisions this Thursday. Both are expected to leave rates unchanged but calls for the BoE to cut rates are growing. Even for the ECB, the next move is now seen as a rate cut.

Saturday, 1 December 2007

US consumer spending flat, eurozone inflation hits 3 percent

Growth in US consumer spending and income turned out unexpectedly weak in October. Reuters reports:

U.S. consumer spending inched up by an unexpectedly small 0.2 percent last month...

Personal income grew by just 0.2 percent in October, half the amount economists were expecting. Disposable income went up a scant 0.1 percent and when adjusted for inflation disposable income fell 0.1 percent.

Indeed, both spending and income had trouble keeping up with inflation.

While personal spending rose slightly, the Commerce Department said consumer prices climbed an even greater 0.3 percent, leaving inflation-adjusted spending flat in October after a slim 0.1 percent rise in September...

While the Commerce Department said consumer prices as measured by the personal consumption expenditures price index rose 0.3 percent, core prices that strip out volatile food and energy costs gained a more modest 0.2 percent.

And many home-owners have trouble keeping up payments.

A Federal Reserve Bank of of New York report on Friday showed that 12 percent of U.S. subprime adjustable-rate mortgages were delinquent by at least 60 days and 7 percent were in foreclosure.

As if there isn't enough bad news for housing, construction continued to suffer in October.

A separate Commerce Department report showed construction spending fell 0.8 percent as home building continued to wither. The drop was the biggest since July and it took construction spending down to a $1.158 trillion annual rate, the lowest in two years.

Manufacturing appears to be holding up though.

The National Association of Purchasing Management-Chicago business barometer rose to 52.9 from 49.7 in October, moving back into territory that indicates expansion after falling below the 50 break-even level in October.

And if positive economic data are in short supply, investors can always look to the US government.

U.S. stocks were up in early afternoon and prices for U.S. government securities fell as the gloomy data helped reinforce expectations the Federal Reserve would lower borrowing costs at an upcoming meeting on Dec. 11.

That sentiment was reinforced by Philadelphia Federal Reserve Bank President Charles Plosser who said there was uncertainty from the renewed turmoil in financial markets.

"We will watch and see and react as appropriate," he said.

A report that the U.S. Treasury will soon unveil a plan to help stem the subprime mortgage crisis also buoyed sentiment on Wall Street.

So the Fed will cut rates. Or else.

Or else it could do nothing. Like the ECB is likely to in the near future. From Bloomberg:

European inflation accelerated in November to the fastest in more than six years, adding pressure on the European Central Bank to raise interest rates even as economic expansion cools.

The inflation rate in the 13-nation euro area rose to 3 percent this month from 2.6 percent in October, the European Union's statistics office in Luxembourg said today. An index of executive and consumer sentiment fell to a 20-month low of 104.8 from 106 in October, according to a separate report, which also showed inflation expectations rising...

The statistics office said the economy expanded 0.7 percent in the quarter from the prior three months, unchanged from its initial estimate. It revised the annual growth rate to 2.7 percent from 2.6 percent.