Saturday, 28 June 2008

Confidence falls in US and Europe, Japanese expansion may be over

US personal spending and income held up in May. Reuters reports:

U.S. consumer spending jumped last month as government stimulus checks boosted household budgets and pushed the saving rate to a 13-year high...

Commerce Department data showed U.S. personal spending rose by a greater-than-expected 0.8 percent in May...

Disposable income jumped 5.7 percent in May, the biggest increase since May 1975, thanks in large part to the stimulus checks. The Commerce Department said that without that boost disposable personal income would have been up 0.4 percent.

Inflation accelerated or stayed low depending on which measure you consider important.

The overall price index for consumer spending rose 0.4 percent in May after a 0.2 percent gain the month before.

Excluding volatile food and energy prices, the core price index, which is the Fed's preferred measure of inflation, edged up by 0.1 percent. This compared with a forecast for a 0.2 percent rise, after a 0.1 percent April increase.

Consumers don't ignore food and energy though, which is probably why consumer sentiment weakened in June.

... [T]he Reuters/University of Michigan Surveys of Consumers...hit another 28-year low in June of 56.4 from May's 59.8 reading...

The Reuters/University of Michigan Surveys of Consumers...showed five-year inflation expectations remained steady at the peak of 3.4 percent reached in May, which was the highest in 13 years.

The consumer sentiment findings may be significant. Mark Thoma points us to a study by the San Francisco Fed that shows that "the forecasting contributions of consumer attitudes seem stronger when the economy is weaker", as is the case now.

Meanwhile, confidence has been falling in Europe too. Bloomberg reports:

European confidence dropped more than economists forecast this month and retail sales plunged, signaling that economic growth is continuing to cool as the region's central bank prepares to lift interest rates to a seven-year high to tackle inflation.

An index measuring sentiment in the euro area fell to 94.9, the lowest since May 2005, from 97.6 the previous month, the European Commission in Brussels said today...

The Bloomberg retail index, based on a survey of more than 1,000 executives by Markit Economics, dropped to 44 this month from 53.1 in May...

Separate figures today showed France's economy expanded less than initially estimated in the first quarter as household spending, the driving force of growth, stagnated.

And with inflation still accelerating in countries like Germany, the ECB has no room to ease to respond to the growing weakness in the economy.

To complete the rather gloomy statistics from yesterday, Bloomberg also gives us the reports from Japan.

Japan's household spending slumped in May, the ratio of jobs available fell to a three-year low and the inflation rate almost doubled, signaling that the economy's longest postwar expansion may be over.

Household spending declined 3.2 percent, the most since September 2006, the statistics bureau said today. Core consumer prices, which exclude fruit, fish and vegetables, rose 1.5 percent from a year earlier after climbing 0.9 percent in April...

The government downgraded its assessment of industrial production even after a report today showed output rose 2.9 percent in May from April, the first increase in three months. Production is showing signs of weakness because of higher energy costs and weakening global demand, the Trade Ministry said...

Retail sales rose 0.2 percent in May from a year earlier, a separate report showed today, prompting the government to cut its assessment for the first time since January 2007, describing sales as "flat."

Prices of daily necessities are climbing faster than wages, causing consumer sentiment to plunge to a six-year low in May. The ratio of jobs for each applicant slid to 0.92, the Labor Ministry said today. The unemployment rate stayed at 4 percent.

Friday, 27 June 2008

Dow dives 3 percent

The US stock market's latest rally had peaked in early May and then turned down. Now that downturn appears to be accelerating.

From Bloomberg:

U.S. stocks tumbled, sending the Dow Jones Industrial Average to its worst June since the Great Depression, as record oil prices, credit-market writedowns and a slowing economy threatened to extend a yearlong profit slump.

General Motors Corp., the largest U.S. automaker, plunged the most in three years as Goldman Sachs Group Inc. advised selling the stock and crude rose by $5 a barrel. Citigroup Inc. led the KBW Bank Index to an almost 10-year low as Goldman said the lender may report an $8.9 billion second-quarter charge and cut its dividend. Research In Motion Ltd., maker of the BlackBerry, posted its biggest drop since 2001 on concern competition with Apple Inc.'s iPhone is reducing earnings.

The Standard & Poor's 500 Index plunged 38.82, or 2.9 percent, to 1,283.15, its biggest drop in three weeks. The Dow decreased 358.41, or 3 percent, to 11,453.42, its lowest since September 2006. The Nasdaq Composite Index sank 79.89, or 3.3 percent, to 2,321.37, its worst loss since January. Almost nine stocks fell for each that rose on the New York Stock Exchange.

Yesterday's economic data were probably secondary.

The U.S. economy expanded at an annual rate of 1 percent in the first quarter, capping the weakest six months of growth in five years, the Commerce Department said today. The revised gain in gross domestic product was up from a preliminary estimate of 0.9 percent issued last month.

Initial jobless claims totaled 384,000 in the week ended June 21, unchanged from the previous week's tally that was higher than previously estimated, the Labor Department said. The total number of people collecting benefits rose by 82,000 to 3.139 million in the week ended June 14, the highest since February 2004.

MarketBeat has a collection of views from investors on yesterday's big drop and what it represents.

Thursday, 26 June 2008

Fed leaves rates unchanged, RBI and Norges Bank tighten

As expected, the Fed left interest rates unchanged yesterday. Bloomberg reports:

The Federal Reserve kept its benchmark rate at 2 percent and warned that faster inflation may accompany some strengthening of the economy.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the Federal Open Market Committee said in a statement in Washington after a two-day meeting.

But yesterday's economic reports remind us that the Fed probably won't be in any hurry to raise rates. From Bloomberg:

Sales of new homes extended their decline and orders for durable goods stagnated in May, underscoring forecasts that the Federal Reserve's first interest- rate increase since 2006 is still months away.

New-home sales fell to a 512,000 annual pace, the second- lowest level since 1991, the Commerce Department said today in Washington. Bookings for goods meant to last several years totaled $213.6 billion, the same as in April, Commerce reported. Both figures matched the median forecast of economists.

Meanwhile, though, other central banks continue to tighten monetary policy. Like India on Tuesday.

The Reserve Bank of India increased the repurchase rate by 0.5 percentage point late yesterday to 8.5 percent, the biggest move since 2000, and adjusted the cash-reserve ratio by a similar margin to 8.75 percent. A "heightened vigil" was needed to anchor inflation expectations, the central bank said in a faxed statement.

And Norway yesterday.

Norway's central bank raised its benchmark interest rate to 5.75 percent, the second increase this year, as it seeks to prevent accelerating wage and price growth.

Policy makers raised the overnight deposit rate by a quarter point, Oslo-based Norges Bank said in a statement on its Web site today. The decision had been expected by nine of the 20 economists surveyed by Bloomberg. Eleven had expected no change.

Elsewhere in Europe, the economic data also looked better yesterday, the euro area reporting a 2.5 percent increase in industrial orders in April while the Confederation of British Industry reported that retail sales fell less than expected in June.

Wednesday, 25 June 2008

Confidence deteriorates in Europe and US

Bloomberg reports a deterioration in confidence in the euro area.

Consumer confidence in Germany and Italy dimmed as soaring energy prices sapped households' purchasing power, adding to evidence that economic growth is faltering across the euro region.

GfK AG's index for July, based on a survey of about 2,000 Germans, fell to 3.9 from a revised 4.7 in June, the Nuremberg- based market-research company said today. That's the lowest in more than two years. Italy's Isae Institute's index slipped to 100 from 103.2 this month. In France, housing starts slumped and business confidence held at the weakest since December 2005.

Reuters reports similar deterioration in the US.

The Conference Board's monthly survey of consumers showed the overall index of consumers' mood fell to 50.4 in June, the lowest since 47.3 in February 1992.

Inflation appears to be a big factor.

In addition, the survey showed an index measuring consumer expectations for the future sank to a record low as inflation forecasts matched an all-time high this month.

The inflation threat has been highlighted in the past 24 hours by massive price increases announced by some of the world's largest basic materials conglomerates.

At the same time, however, house prices in the US are moving in the opposite direction.

U.S. home prices in April, meantime, extended their record annual slump in April although the pace of decline subsided a bit in the month, according to Standard & Poor's/Case-Shiller data.

S&P's 20-city index for April posted a smaller-than-expected 1.4 percent drop from March, but it also slumped by a record 15.3 percent annually and by 17.8 percent since hitting its peak in July 2006.

By another measure, the Office of Federal Housing Enterprise Oversight, which gauges prices based on relatively low risk loans purchased by Fannie Mae and Freddie Mac, said its home price index fell 0.8 percent in April from March for a 4.6 percent annual downturn.

The UK housing market appears to be following in the same footsteps, with house prices cooling, home sales falling and home loan approvals diving.

Tuesday, 24 June 2008

Eurozone economy tips over

The ECB might want to think again about a rate hike. From Bloomberg:

Europe's manufacturing and services industries unexpectedly shrank and German business confidence slumped in June, increasing concern the European Central Bank's plan to raise interest rates next month will hurt growth.

Royal Bank of Scotland Group Plc's composite index fell to 49.5 from May's 51.1, the first time it's dropped below 50, the dividing line between expansion and contraction, in five years. The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, declined to 101.3 from 103.5. That's the lowest since January 2006.

"The ECB is taking a great risk with the economy by raising rates," said Holger Schmieding, chief European economist at Bank of America Corp. in London. "The data clearly show that a sharp economic downturn is in the pipeline and the bank may end up getting the blame for it."

On the other hand, the ECB cannot ignore persistently high inflation.

The PMI's price index makes "painful reading," said Kenneth Wattret, chief euro-area economist at BNP Paribas in London. An index of input costs jumped 3 points to 67.4 in the month, the highest since October 2008, while the reading for output prices rose to 55.6 from 54.8.

And there is always the hope that, somewhat like in the US so far, the dip in the PMI below 50 will be limited.

Friday, 20 June 2008

Global economy holding up

How bad is the global economy? Well, maybe not so bad after all, at least for the time being.

Japan's all-industries index managed to rise by 0.8 percent in April.

In the UK, retail sales jumped 3.5 percent in May.

The US data were somewhat mixed though. Bloomberg reports:

The Conference Board's leading-indicator measure rose 0.1 percent in May, the New York-based research group said today. The Philadelphia Federal Reserve's general economic index dropped to minus 17.1, lower than forecast, from minus 15.6 in May. Its prices-paid gauge soared to the highest level since 1980...

A government report today showed the number of Americans filing first-time claims for unemployment benefits fell last week to 381,000, from 386,000 the prior week. Total benefits rolls slipped to 3.06 million for the week ended June 7.

One piece of good news yesterday was that oil prices fell after China announced that it would be raising fuel prices, which should help cool demand.

Meanwhile though, demand for stocks in China may be cooling faster than the authorities there wish. Chinese stocks plunged yesterday, the CSI 300 Index falling 7.3 percent to close 53 percent below its peak in October.

Thursday, 19 June 2008

Stocks fall; Mervyn King says slowdown necessary

US stocks fell about one percent yesterday. Bloomberg reports:

U.S. stocks fell, sending the Dow Jones Industrial Average to a three-month low, as FedEx Corp.'s results and Fifth Third Bancorp's dividend cut reinforced concern bank losses and record oil will prolong the slump in profits...

The S&P 500 dropped 13.12 points, or 1 percent, to 1,337.81. The Dow Jones Industrial Average decreased 131.24, or 1.1 percent, to 12,029.06, its lowest since March 17. The Nasdaq Composite Index lost 28.02, or 1.1 percent, to 2,429.71. Three stocks fell for each that rose on the New York Stock Exchange.

European stocks were down even more. Reuters reports:

European stocks fell on Wednesday, as slipping crude knocked oil shares and financials took a fresh battering after U.S. banks Morgan Stanley and Fifth Third revealed credit-related struggles.

The pan-European FTSEurofirst index ended down 1.4 percent at 1,251, having earlier fallen to 1,246.62, its lowest level since the end of March...

Around Europe, Britain's FTSE 100 index .FTSE fell 1.8 percent, Germany's DAX .GDAXI shed 1 percent and France's CAC-40 .FCHI dropped 1.4 percent.

The large fall in the FTSE 100 occurred despite a surprise improvement in the Confederation of British Industry's monthly industrial total order books balance to +1 in June from -10 in May.

Perhaps the latter means that, with one survey showing UK inflation expectations at the highest level since 1992, monetary policy will not be loosened as much as some had expected. Reuters reports BoE Governor Mervyn King's latest speech:

The economy is slowing and has to do so to help cool inflation, Bank of England Governor Mervyn King said on Wednesday.

In his annual Mansion House speech to City of London bankers, King repeated it was still unclear where interest rates would have to go to get inflation back to the two percent target but said the BoE would take whatever action was needed.

"The rise in commodity prices cannot, by itself, generate sustained inflation in the United Kingdom unless we allow it. We will not. So although inflation in the UK will rise in the short term, inflation will then fall back," King said.

"We believe that a slowdown in the economy this year, creating a margin of spare capacity, will be necessary to dampen price and wage pressures and ensure that we fulfil our remit by returning inflation to the target."

Wednesday, 18 June 2008

More of the same: higher inflation, weaker growth

Yesterday's economic data showed a pattern that has become familiar.

Reuters reports the latest UK inflation figures.

The inflation rate rose in May to its highest since the Labour government came to power in 1997 but the Bank of England played down the risk of early interest rate rises by saying the path for rates was still "uncertain".

The Office for National Statistics said on Tuesday consumer prices rose 0.6 percent last month, taking the annual rate up to 3.3 percent from 3.0 percent in April -- higher than forecasts for an inflation rate of 3.2 percent.

The rise above 3.0 percent meant Bank Governor Mervyn King had to write an open letter to the government explaining what the central bank would do to bring inflation back to its 2 percent target. (TO SEE LETTER CLICK here)

The Bank revised up its short-term inflation forecast but said there were both upside and downside risks to the outlook and that the central bank faced a difficult balancing act between slower growth and rising prices.

Slower growth and rising prices are certainly what the US economy also faces. From Bloomberg:

The U.S. economy may be suffering from its first bout of stagflation since the start of this decade, reports on housing, prices and manufacturing indicated.

Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported in Washington. Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast. A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.

And in Germany, investor confidence could be leading the economy down. Bloomberg reports:

German investor confidence dropped to the lowest in more than 15 years in June as surging inflation dimmed the outlook for growth in Europe's largest economy.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 52.4, the lowest since December 1992, from minus 41.4 in May. Economists expected a decline to minus 42.5, according to the median of 37 forecasts in a Bloomberg News survey. A negative reading means that pessimists outnumber optimists.

A bit of positive news, though, came from Japan. Bloomberg reports:

Japan's demand for services rose in April, gains economists say are too small to prop up the nation's faltering economy.

The tertiary index, a gauge of money households and businesses spend on phone calls, power and transportation, increased 1.8 percent from March, the Trade Ministry said today in Tokyo, after being unchanged the previous month. The median estimate of 33 economists surveyed by Bloomberg News was for a 0.6 percent gain.

Tuesday, 17 June 2008

Eurozone inflation at 16-year high, US economy still facing weakness

With all the anti-inflation talk from central banks, you will need eagle eyes to spot the true hawks. A look at underlying economic trends could help.

The latest inflation figures for the euro area should at least boost the European Central Bank's near-term determination to raise rates. From Bloomberg yesterday:

European inflation accelerated to the highest in 16 years last month as food and energy costs soared, intensifying what finance ministers from the world's richest nations said is becoming a "more complicated" dilemma.

The inflation rate in the euro area rose to 3.7 percent, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said today. The rate for May is higher than the 3.6 percent estimate published on May 30.

Soaring commodity prices have pushed up costs for companies and consumers and at the same time are posing a "serious challenge" to economic growth, officials from the Group of Eight nations said yesterday after a meeting in Japan. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate a quarter point in July, signaling he is setting aside concerns about the economy's expansion to combat inflation.

Some think that a rate hike from the ECB would not be enough to prevent the euro from falling against the US dollar, according to another Bloomberg report.

Currency forecasters are betting that the dollar rally is just getting started as the Federal Reserve's shift to fighting inflation makes it likely to raise interest rates more aggressively than the European Central Bank.

The currency will strengthen 2.5 percent to $1.50 per euro by year-end, according to the mean estimate of 39 firms surveyed by Bloomberg. Economists anticipate that the ECB will raise rates a quarter-percentage point by September and then cut borrowing costs by yearend. Fed Chairman Ben S. Bernanke, who said he's "attentive" to the U.S. currency, will boost rates three-quarters of a percentage point by the end of the third quarter of 2009, according to data compiled by Bloomberg.

Some, though, have doubts.

Dollar bulls are still in the minority, in part because ECB President Jean-Claude Trichet has also said inflation is a concern and the ECB rate is double the Fed's.

UBS AG, the second-biggest currency trader, last week cut its one- and three-month dollar forecasts against the euro to $1.60 and $1.53, from estimates of $1.50 and $1.47, respectively. Citigroup Global Markets Inc. reversed its bet on dollar gains, expecting the currency to fall to $1.63 within two months.

And while recent US economic indicators had generally turned out better than expected, yesterday's data reminds us that the economy remains weak.

Manufacturing in the New York region shrank more than forecast in June as customers reduced orders because of the slowdown in consumer spending and business investment.

The Federal Reserve Bank of New York's general economic index dropped to minus 8.7 from minus 3.2 a month earlier, the bank said today. Readings less than zero signal contraction...

Another report showed confidence among homebuilders unexpectedly dropped this month, signaling the housing slump may worsen. The National Association of Home Builders/Wells Fargo sentiment index fell to 18, matching a record low, from 19 in May, the Washington-based group said. Readings under 50 mean most respondents view conditions as poor.

Still, there were also signs that maybe a rate hike by the Fed wouldn't be inappropriate.

The New York Fed' showed raw-material costs continue to hamper business. The index of prices paid eased to 66.3 from a record 69.6. The gauge of prices received increased to 26.7, the highest since January 27.4, from 15.2...

Companies were more upbeat about their prospects. The index measuring the outlook for six months from now increased to 32.2, the highest this year, from 23.9 in May. Area factories were optimistic the slump in orders and sales wouldn't persist.

However, John Hussman thinks that the Fed is in no position to hike rates as growth concerns will soon overcome inflation concerns again.

... The Fed is on the fast track to destroying its own credibility. In my view, no sooner will all of this “tough love” leave the lips of Fed governors than the Fed will be forced to announce some novel emergency “liquidity facility” to address a fresh round of credit concerns...

Most likely, the surge in food and energy prices will diminish by the end of the summer as the result of two factors. First, it is typical for commodity prices to “hang on” early into a recession and then dive as employment losses build. Whether or not we have seen the peak of the recent vertical push, the evidence of an early recession is already in from the standpoint of anything that has provided useful warning...

Second, as mortgage foreclosures and writeoffs predictably increase in the coming quarters, we are likely to observe a fresh demand for Treasury bonds as a safe-haven because of their lack of default risk. That is likely to place downward pressure on monetary velocity, which will act as a major brake on inflation...

Monday, 16 June 2008

Bond markets wake up to inflation

Inflation concerns and central bank rhetoric have made their marks on government bonds. From Bloomberg:

The bear market for U.S. government bonds that began three months ago is just getting started.

For the longest period since 1980, U.S. inflation has been higher than what investors earn on 10-year notes, a sign that yields have further to rise. Treasuries paid 2.88 percentage points more than the consumer price index the past two decades, according to data compiled by Bloomberg. Investors who buy $10 million of the securities would lose $1.4 million over the next year if the relationship returns to normal...

The combination of rising commodity prices, Federal Reserve Chairman Ben S. Bernanke's renewed focus on inflation and his success in reviving capital markets after the collapse of subprime mortgages has turned Treasuries into a quagmire. Investors who bought notes due February 2018 on March 17, just after the Fed helped arrange the bailout of Bear Stearns Cos., have lost 6.2 percent, according to Bloomberg data.

The 10-year note, at 4.25 percent, yields no more than the inflation rate, leaving investors with real returns of zero. Consumer prices have exceeded 10-year yields by an average of 36 basis points since December, Bloomberg data show. In 1980, inflation reached a 33-year high of 14.8 percent and yields averaged 11.4 percent.

Consumer prices advanced 4.2 percent in May from a year earlier, the Labor Department said June 13...

Ten-year note yields rose 35 basis points last week, according to bond broker BGCantor Market Data. The increase was the biggest since July 2003, when they advanced 37 basis points...

Inflation concerns have become so pervasive that traders are pricing in Fed interest rate increases as soon as this month, according to fed fund futures...

Despite last Friday's decision by the BoJ to leave rates unchanged, Japanese government bonds have suffered a similar fate. From Bloomberg:

Japanese bonds completed a fifth weekly decline on concern quickening inflation will prompt the Bank of Japan to raise interest rates later this year.

Ten-year yields touched the highest since July as BOJ Governor Masaaki Shirakawa and his colleagues kept the overnight interest rate unchanged at 0.5 percent yesterday. Euroyen futures traders have added to bets that the central bank will boost rates. The BOJ said yesterday economic growth is slowing mainly because of rising prices, and Shirakawa said global inflation risks are escalating...

The yield on the 1.8 percent bond due June 2018 rose 4 basis points yesterday to 1.84 percent at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.338 to 99.662 yen. The yield gained 4.5 basis points this week.

It was the same story for Europe.

European 10-year government bonds declined for a fifth week on speculation the central bank will be forced to raise interest rates more than once this year to stem accelerating inflation.

The losses sent the yield on the German bund to an 11-month high as oil traded near $134 a barrel and policy makers warned about the risk of faster price growth. Inflation expectations as measured by French index-linked bonds soared this week to the highest level in at least 3 1/2 years...

The yield on the 10-year bund, Europe's benchmark government security, rose 21 basis points in the week to 4.63 percent in London. It climbed to 4.67 percent, the highest level since July 10. The price of the 4.25 percent bond due July 2018 fell 16.5, or 16.5 euros per 1,000-euro ($1,534) face amount, to 97.00.

Saturday, 14 June 2008

US inflation up, consumer sentiment down

The economic data out of the US yesterday were not good. Bloomberg reports:

U.S. consumer prices rose more than forecast in May as record oil prices reduced American confidence to the lowest level since Jimmy Carter was in the White House.

The consumer price index increased 0.6 percent, the most since November, after a 0.2 percent gain the prior month, the Labor Department said today in Washington. The Reuters/University of Michigan preliminary index of consumer sentiment fell to 56.7 in June, a reading unseen since 1980, from 59.8 in May...

So-called core prices, which exclude food and energy, increased 0.2 percent in May from April, matching economists' forecasts...

The Reuters/University of Michigan report also showed the inflation rate that Americans expect over the coming five years remained at 3.4 percent, the highest since 1995.

However, US stocks rose anyway. From Bloomberg:

U.S. stocks rose, paring the week's losses, after oil retreated and some measures of inflation matched economists' forecasts, damping speculation the Federal Reserve will boost interest rates this year...

The Standard & Poor's 500 Index added 20.16, or 1.5 percent, to 1,360.03. The Dow Jones Industrial Average jumped 165.77, or 1.4 percent, to 12,307.35. The Nasdaq Composite Index advanced 50.15, or 2.1 percent, to 2,454.5. Five stocks gained for each that slipped.

Investors need to be careful about interpreting the data though. Research by Raphael Auer and Andreas Fischer shows that globalisation and cheap imports from low-wage economies had helped hold down inflation over the past decade -- primarily through productivity growth -- but may now keep core inflation elevated.

Indeed, inflation continues to show few signs of diminishing worldwide. India's inflation rate hit a 7-year high of 8.75 percent in the week ended 31 May while Germany's May inflation rate has been revised higher to 3.1 percent.

Friday, 13 June 2008

More rate hikes, but inflation could prove persistent

There has been no let-up recently in global monetary policy tightening.

India raised interest rates on Wednesday. South Africa raised rates yesterday. With industrial production in the euro area rising 0.9 percent in April, the ECB is likely to raise rates next month after noting in its latest monthly bulletin that "risks to price stability over the medium term have increased further".

The Federal Reserve could hike rates too, especially after yesterday's economic data. From Bloomberg:

Retail sales in the U.S. rose twice as much as forecast in May as Americans used their tax rebates to shop at electronics and department stores, and record gasoline prices swelled service-station receipts.

Purchases climbed 1 percent, the most since November, following a 0.4 percent gain the prior month that was previously reported as a drop, the Commerce Department said in Washington. Purchases excluding gasoline increased 0.8 percent last month.

But the US economy is far from out of the woods.

Initial claims for unemployment benefits rose to 384,000 last week from 359,000 the prior week, the Labor Department also reported today.

Still, the Federal Reserve has to watch out for inflation.

A separate report today showed that prices of goods imported to the U.S. rose 2.3 percent in May from the previous month, less than economists had forecast.

Disinflation from China is no longer helping out on this front. From AFP/CNA:

China's inflation rate was 7.7 percent in May, easing from April's 8.5 percent, the government said on Thursday, as analysts cautioned that some prices had been kept artificially in check.

Food prices have eased but, at the same time, price controls meant pent-up inflation had accumulated in the world's fastest-growing major economy, according to economists...

"We all know about fuel and electricity controls, but we hear reports of firms in the food and construction industries also being told not to raise prices," said [Standard Chartered economist Stephen] Green.

"There is a lot more bottled up inflation in this economy than meets the eye."

A surge in China's money supply in May certainly does not suggest that inflation is moderating, although FDI does appear to be slowing.

Morgan Stanley economists are not convinced that there will be all that much tightening to come though. From a recent commentary by Joachim Fels and Manoj Pradhan:

Central bankers around the world continue to worry about ‘stag’, but ‘flation’ has now become their main concern. This is the loud and clear message sent by monetary policy decisions and hawkish comments over the past week or so...

Our central bank watchers around the world remain less impressed by the hawkish rhetoric than the markets. The one notable exception is in the euro area, where Elga Bartsch now expects the ECB to follow up words with action in the form of a 25bp rate hike in July and another one later this year. Yet, in the US, the UK and Japan, our central scenario remains that policy rates will be left unchanged this year... Also, we don’t expect a tightening of monetary policy in Australia and Switzerland this year, even though the risks in these countries are probably skewed towards a rise. Norway and Sweden look likely to hike, but only once, and we maintain our call for 75bp of rate cuts in New Zealand.

They conclude that inflation is likely to prove persistent in the coming years.

We looked at what would happen to the real monetary policy rate between now and end-March 2009 if central banks would in fact raise rates as implied by the money markets right now and if inflation behaved as our country economists are forecasting. Initially, the real rate would fall further into negative territory as headline inflation rises sharply in the next few months, but thereafter the real rate increases due to easing headline inflation and the rate hikes that markets expect. However, by end-March 2009, the real policy rate would only go back to zero in this simulation. In other words, monetary policy would still be expansionary at that point, unless one believes that the neutral rate of interest is zero too (we don’t). We conclude that inflation is likely to be a persistent problem in the years to come. This is not to say that inflation won’t fall after this summer. However, we are likely to see higher average inflation rates and higher peaks and troughs in the next inflation cycle(s).

Thursday, 12 June 2008

Japan's first quarter growth revised up

AFP/CNA reports the upward revision in Japan's first quarter GDP growth.

Japan said on Wednesday its economy grew at a brisk 4.0 percent annualised pace in the first quarter of 2008, despite slowing US growth and high oil prices...

Gross domestic product (GDP) grew by 1.0 percent in the three months to March from the previous quarter, up from a preliminary reading of 0.8 percent.

The upgrade was mainly due to higher-than-expected investment by companies in new equipment and factories, with corporate capital spending up 0.2 percent from the previous quarter, against an initial estimate of a 0.9 percent drop.

However, the strong growth is not likely to be sustained.

But many analysts warn that a slowdown is inevitable in the second quarter of 2008 as the global economic climate chills due to the economic problems in the United States sparked by a housing slump and a related credit crunch.

Business investment and brisk exports have been key pillars of the economic recovery.

But now US-bound exports are declining while rising oil prices and a stronger yen are pressuring company earnings, making corporate Japan more cautious about investing aggressively in new facilities.

Indeed, the current account surplus shrank again in April. AFP/CNA reports:

Japan's current account surplus shrank for a second straight month in April as soaring oil prices inflated the value of imports and US-bound exports continued to fall, the government said on Wednesday...

Exports rose 4.9 percent to 6.60 trillion yen as solid demand from the rest of Asia cushioned the impact of falling shipments to the United States.

Imports jumped 13.4 percent to 5.97 trillion yen, boosted mainly by rising energy prices.

Higher energy prices were also behind a deterioration in the US trade deficit in April and a narrowing of China's trade surplus this year, although China's exports did accelerate in May.

If Japan's economy does slow, it would only be following trends elsewhere. The US economy has already slowed and the Federal Reserve's Beige Book reported yesterday that "economic activity remained generally weak in late April and May". Also yesterday, the National Institute of Economic and Social Research reported that UK GDP growth fell to 0.2 percent in the three months ending in May, down from 0.4 percent in the three months to April.

Wednesday, 11 June 2008

Interest rate expectations reverse

Contrary to the expectations of many, the transition to a global monetary easing cycle is being delayed as inflation remains a concern among central banks. From Bloomberg yesterday:

The world's central banks are halting interest rate cuts as inflation picks up from Indonesia to Canada.

The Bank of Canada today unexpectedly kept its benchmark rate unchanged after four straight reductions. Federal Reserve Chairman Ben S. Bernanke yesterday said he'll "strongly resist" any surge in inflation expectations, while European Central Bank President Jean-Claude Trichet reiterated he may raise rates as soon as next month...

Vietnam today raised its rate to the highest in Asia. Brazil, the Philippines and Indonesia also lifted borrowing costs this month. Chile's central bank raised its benchmark lending rate half a percentage point late today, more than expected, to help contain the fastest inflation since 1994.

China had also announced tightening measures over the weekend, measures that made themselves felt yesterday when its stock markets reopened. From Bloomberg:

China's stocks plunged 8.1 percent, the most since February 2007, after the central bank ordered lenders to set aside record reserves to curb credit growth and inflation.

More than half of the benchmark stock measure's 300 members slumped by the 10 percent daily limit, dragging the CSI 300 Index 45 percent below its Oct. 16 record. The gauge fell 282.94 points to 3,206.56 in Shanghai, its lowest close since April 19, 2007. Shares resumed trading after a holiday yesterday.

Industrial & Commercial Bank of China Ltd. led banks lower after the central bank said June 7 it will raise the reserve ratio for the fifth time this year by a full percentage point, withdrawing about $61 billion from the financial system. China Vanke Co. dropped on concern institutions will curb loans to developers and home buyers. Air China Ltd. fell on concern surging oil prices will increase fuel costs.

Treasuries are also being hit by the concerns about rising interest rates. Again from Bloomberg:

Treasury two-year notes posted their biggest back-to-back decline in at least 20 years after Federal Reserve Chairman Ben S. Bernanke pledged to "strongly resist" any deterioration of the public's confidence in stable prices.

Demand for U.S. government debt fell after Bernanke said late yesterday that the risk of a "substantial downturn" in the U.S. economy has diminished. Traders now see an 88 percent probability policy makers will raise interest rates by at least a quarter-percentage point in September, futures show. A week ago, the odds were 19 percent amid concern that mounting losses in credit markets would keep the economy from rebounding...

The benchmark two-year note's yield climbed 21 basis points to 2.91 percent at 5:34 p.m. in New York, according to BGCantor Market Data. It touched 2.95 percent, the highest since it reached 3.10 percent on Jan. 2 and up from the low this year of 1.24 percent on March 17... The 10-year note's yield gained 10 basis points, or 0.10 percentage point, to 4.10 percent.

Unlike his predecessor Alan Greenspan, Bernanke has less room for manoeuvre on interest rates. Persistent inflation is forcing him to pause on monetary easing well before the uncertainty over the economy is dissipated.

Not surprisingly, markets are not taking this well.

Tuesday, 10 June 2008

US stocks rebound but Japanese economy may be turning down

US stocks bounced back somewhat from Friday's losses yesterday. Reuters reports:

The Dow staged a modest rebound on Monday from Friday's nearly 400-point drop, as concerns about consumer spending and the housing market were eased by better-than-expected sales figures from McDonald's Corp and a surprising gain in pending home sales.

Financial shares were among the worst-performing sectors, dragged down by Lehman Brothers which forecast a $2.8 billion second-quarter loss and unveiled a plan to raise $6 billion to strengthen its capital.

Lehman's troubles remind us that the worst may not be over.

In fact, in Japan, economic difficulty may be just starting. Notwithstanding a rebound in machinery orders in April reported today, the Japanese economy appears to be losing steam. From Reuters:

Japanese bank lending in May rose at its fastest annual pace in over a year, but firms were borrowing more to cover rising energy and material prices, and analysts said the increase did not signal a stronger economy...

The leading indicator rose 2.0 point, based on comparative historical data, the biggest rise in two years.

But the cabinet office figures showed the index has been declining since a peak in May 2006.

The coincident index fell 0.7 point in April, prompting the cabinet office to cut its assessment, saying the economy "may be facing a change in phase". Until March it had said "the economy was essentially flat"...

Separately, a sentiment index of Japanese service sector workers, called "economy watchers" for their proximity to consumer and retail trends, dropped to 32.1 in May from 35.5 in April, marking the second straight month of decline.

Monday, 9 June 2008

Unemployment data show US recession still likely

Despite the recent spate of better-than-expected economic data, employment in the United States economy continued to shrink in May, indicating that a recession is still on the cards.

Last week, reports from the Institute for Supply Management (ISM) showed that economic activity held up relatively well in May.

The ISM's manufacturing PMI rose to 49.6 in May from 48.6 in April. This indicates that manufacturing activity was essentially flat, an improvement over the contraction in previous months when the index was well below 50.

The ISM's non-manufacturing index fell to 51.7 from 52.0. This indicates that non-manufacturing activity continues to expand, albeit at a slower rate.

Both indices were better than expected in May. Economists surveyed by Bloomberg had expected the manufacturing index to fall to 48.5 and the non-manufacturing index to fall to 51.0.

Flat manufacturing activity and expansion in non-manufacturing activity together indicate that the US economy on the whole is still expanding.

However, while these data look hopeful, James Hamilton, Professor of Economics at the University of California, San Diego, says that in a recession, things can take a sudden turn for the worse. He wrote recently at the Econbrowser:

... [R]ecessions represent distinct and objectively identifiable episodes in which the usual dynamic factors that drive economic growth -- technological progress, population growth, and capital accumulation -- are replaced by a distinctly different dynamic in which lost income in some sectors feeds back into declines in output for others. One of the defining characteristics of this phenomenon is the rapid rise in the unemployment rate that we've seen in every historical recession.

Unfortunately, a rapid rise in unemployment is exactly what we are seeing.

On Friday, the Labor Department reported that non-farm payrolls fell by 49,000 in May. While the number of jobs lost was smaller than the 60,000 projected by economists according to a Bloomberg survey, it was nevertheless the fifth consecutive month that employment in the US has contracted based on the establishment survey.

The separate household survey also showed a large 285,000 fall in employment and, together with a jump in the number of re-entrants and new entrants to the labour force, resulted in the unemployment rate surging to 5.5 percent in May from 5.0 percent in April, the biggest one-month increase in the unemployment rate since 1986.

In other employment-related news last week, the Labor Department reported that the number of initial claims for unemployment insurance benefits fell to 357,000 in the week ended 31 May from 375,000 the week before. This resulted in the four-week average falling to 368,500 from 371,250 in the previous week.

Also showing a decline is the number of continuing claims for unemployment insurance benefits, which fell by 16,000 from a four-year high to 3.093 million in the week ended May 24.

Nevertheless, the longer-term trends for initial and continuing claims, like the trend in the unemployment rate, are clearly up. As clearly as the trend for employment is down. The accompanying charts show that similar deterioration in the employment indicators in the past have almost invariably occurred during or were followed soon after by recessions.

So if history is any guide, a US recession looks likely.

Saturday, 7 June 2008

Stocks fall, oil surges; economic data show weakness

What an end to the week for markets. From Bloomberg:

The Dow Jones Industrial Average fell the most in 15 months, the dollar slid to a one-week low and Treasuries rallied after unemployment and fuel prices surged, heightening speculation the U.S. faces a protracted recession.

U.S. equities declined, led by a 395-point drop in the Dow, as crude jumped more than $10 a barrel. The Standard & Poor's 500 Index decreased 3.1, the steepest sell-off in three months, and Europe's Dow Jones Stoxx 600 slid 2 percent to the lowest since April 15.

The dollar lost 0.9 percent against a basket of six currencies including the euro, against which it weakened 1.1 percent to $1.5775, as investors pared bets the U.S. Federal Reserve will raise interest rates this year. Yields on 10-year U.S. Treasury securities and European government bonds declined as the price of fixed-rate investments climbed.

The fall in US employment in May was actually less than expected, but a jump in the unemployment rate unnerved investors. From Bloomberg yesterday:

Payrolls fell by 49,000 after a 28,000 drop in April, the Labor Department said today in Washington. The jobless rate increased by half a point to 5.5 percent, higher than every forecast in a Bloomberg News survey, partly because an influx of teenagers into the workforce exceeded jobs available...

Revisions subtracted 15,000 from payroll figures previously reported for March and April.

Economists had projected payrolls would drop by 60,000 after a previously reported 20,000 decline the prior month, according to the median of 79 forecasts in a Bloomberg News survey. The jobless rate was forecast to rise to 5.1 percent.

The US employment report wasn't taken well by European stock investors either, the Dow Jones Stoxx 600 Index falling 2 percent yesterday to 310.29, the lowest since April 15. But the European economy faces its own problems, as Bloomberg reported yesterday.

Industrial production in Germany, Europe's largest economy, unexpectedly declined in April, the second report in as many days to suggest Europe's largest economy is cooling.

Output, adjusted for seasonal swings and inflation, fell 0.8 percent from March, the Economy Ministry in Berlin said today. Economists expected a 0.2 percent gain according to the median of 43 forecasts in a Bloomberg News survey...

Manufacturing orders in Germany unexpectedly fell for the fifth month in succession, figures showed yesterday, the longest streak since 1992, as demand from the euro area slumped.

Friday, 6 June 2008

Trichet to tighten?

Instead of cutting interest rates as many had expected, the ECB may be preparing to raise rates instead. From Reuters:

The European Central Bank said on Thursday it may raise rates as soon as July against a backdrop of rising inflation pressures, shocking financial markets and dashing economists' hopes of lower rates later this year.

ECB President Jean-Claude Trichet dropped a clear hint that rates could go up next month, saying a quarter of a percentage point rise was "possible" although not "certain".

He said the Governing Council had agreed to leave rates on hold at 4 percent for this month but was determined not to fall behind the curve on tackling inflation...

More recently, rising food and record fuel costs have pushed up prices and were a major factor in the ECB's staff revising up their quarterly inflation projections on Thursday.

They saw inflation at around 3.4 percent on average in 2008 and 2.9 percent in 2009, assuming interest rates and commodity prices move in line with market expectations, sharply higher than forecasts just three months ago when they saw inflation at about 2.9 percent this year and 2.1 percent in 2009...

The ECB's new growth projections, which do not offer a quarterly breakdown, foresee around 1.8 percent growth in 2008 and 1.5 percent in 2009 -- versus March's 1.7 percent and 1.8 percent forecasts.

The BoE left interest rates unchanged yesterday.

While we wait for a possible rate hike from the ECB, other central banks have already made their move.

On Wednesday, Bloomberg reported that the Brazilian central bank raised interest rates.

Brazilian central bank President Henrique Meirelles raised the benchmark lending rate a half percentage point to curb accelerating inflation fueled by higher food costs and record consumer demand.

The central bank increased rates to 12.25 percent from 11.75 percent, as expected by economists surveyed by Bloomberg, after inflation quickened to a two-year high through mid-May...

Yesterday, Indonesia's central bank did the same.

Indonesia's central bank increased its benchmark interest rate for a second straight month, as surging food and energy prices force policy makers across Asia to tackle inflation.

Governor Boediono, in his first policy decision since taking over the post, raised the rate used as an indication for bill sales to 8.5 percent from 8.25 percent...

As did the Philippine central bank.

The Philippine central bank raised its key interest rate for the first time in more than two years after record energy and rice prices pushed inflation to a nine- year high last month.

Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 25 basis points to 5.25 percent, Governor Amando Tetangco told reporters in Manila today...

Which means that for all the hawkish talk from the Federal Reserve recently, interest rate differentials between the US and other economies are widening, not narrowing.

Thursday, 5 June 2008

US economic data looking better, Europe looking worse

The US economic data continue to beat expectations. After Tuesday's better-than-expected report on factory orders, yesterday provided better-than-expected ISM non-manufacturing data and an improvement in the employment picture. From Bloomberg:

Growth in U.S. services industries slowed less than economists forecast in May as a jump in new orders offset a decline in employment.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 51.7 from 52 in April; readings above 50 indicate expansion. The Labor Department said separately that worker productivity in the first quarter accelerated more than previously estimated as companies cut jobs without losing output.

A private survey today indicated companies unexpectedly added 40,000 jobs in May, after a gain of 13,000 the prior month...

There was also better-than-expected data from Japan yesterday. From Bloomberg:

Japanese businesses cut investment less than economists predicted last quarter, signaling that the world's second-largest economy may avoid a recession.

Capital spending excluding software fell 5.3 percent in the three months ended March 31 from a year earlier, the Finance Ministry said today in Tokyo. The median estimate of six economists surveyed by Bloomberg News was for a 7.3 percent drop.

The reports from the euro area have been mixed though. There was an upward revision to first quarter GDP growth from 0.7 percent to 0.8 percent but services turned out weak in May, the Royal Bank of Scotland Group Plc's services index falling to 50.6 from 52 in April. Weak retail sales, as reported by Bloomberg yesterday, certainly won't help the eurozone economy.

European retail sales declined 2.9 percent in April, more than three times as much as economists forecast, as soaring fuel and food prices undermined consumer spending.

The annual drop in euro-area retail sales is the largest since the European Union's statistics office in Luxembourg started collecting the data in 1995. Sales fell 0.6 percent from the prior month, according to today's report. Economists had expected a 0.8 percent annual decline and a monthly gain of 0.2 percent, according to Bloomberg News surveys...

The EU statistics office revised the annual decline in March retail sales, which are inflation-adjusted and exclude automobiles, to 2.3 percent from an initially reported 1.6 percent. The monthly drop was revised to 0.9 percent from 0.4 percent.

Meanwhile, the flow of data coming out of the UK has been consistently negative. On Tuesday, Reuters reported that construction activity dropped last month.

The Chartered Institute of Purchasing and Supply's construction PMI fell to 43.9 in May from 46.1 in April. That was the third consecutive month of decline and weakest reading since the survey began in 1997...

Yesterday, Bloomberg brought more bad news for the UK economy.

U.K. services from banks to airlines unexpectedly contracted for the first time in five years and consumer confidence fell to the lowest level since at least 2004, as the economy edged closer to a recession.

An index based on replies from about 700 service companies fell to 49.8 in May, the Chartered Institute of Purchasing and Supply said today in London. A reading below 50 shows contraction. Nationwide Building Society's consumer sentiment index dropped 1 point to 69, the lowest since the survey began in May 2004.

Wednesday, 4 June 2008

Bernanke concerned about US dollar, China wants to fix it

The Federal Reserve has finally expressed concern about the weakness of the US dollar. Bloomberg reports:

Federal Reserve Chairman Ben S. Bernanke threw the weight of the central bank behind Treasury Secretary Henry Paulson's efforts to strengthen the dollar after its 10 percent drop over the past year.

Bernanke said in a speech yesterday the Fed is "attentive" to the currency and will guard against a jump in inflation expectations. Paulson a day before reiterated that he "very strongly" favors a "strong" dollar.

The Fed chief's signal that he's done for now with lowering interest rates may help stabilize the dollar after 3.25 percentage points of rate cuts since September reduced returns on U.S. investments and demand for the currency...

Bernanke yesterday omitted previous comments on how the dollar helps U.S. exports and stressed instead that it contributes to an "unwelcome rise" in inflation. Speaking to a conference in Barcelona, he said Fed and Treasury officials are collaborating to "carefully monitor" exchange rates.

However, averting a US dollar crisis may require a more permanent solution. From Reuters yesterday:

A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6 trillion reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.

Tuesday, 3 June 2008

Global manufacturing index rises in May

The global manufacturing PMI increased slightly last month.

Global PMI50.250.4
New orders48.949.7
Input prices76.176.3

Interestingly, the US index was the only one among those for the major economies that showed an improvement, although it remained below 50. The UK index fell and is now bordering on contraction.

Euro area50.750.6