Thursday, 28 October 2010

Mixed economic data, negative real interest rates

Reuters reports that US economic data on Wednesday were mixed.

Orders for durable goods excluding transportation fell 0.8 percent after rising 1.9 percent in August as bookings for communications equipment tumbled sharply. Economists, who track this core figure closely, had expected a 0.5 percent gain.

Overall orders, however, jumped by 3.3 percent -- the largest increase since January -- lifted by a surge in demand for aircraft. Orders had dropped 1 percent in August and economists had looked for a 2 percent increase in September.

The second report showed new home sales rose 6.6 percent last month to a still-weak 307,000 unit annual rate.

European economic data were also mixed.

Bloomberg reports that French consumer spending rose in September.

French consumer spending climbed more than economists forecast in September as expectations of better job prospects and higher wages boosted confidence.

Spending rose 1.5 percent from August, when it declined 1.6 percent, national statistics office Insee said in a statement from Paris today. Economists predicted a gain of 0.4 percent, the median of nine forecasts gathered by Bloomberg News showed. Spending increased 1.1 percent from a year earlier.

Bloomberg also reports that Italian business confidence has risen to a 29-month high.

Italian business confidence rose in October to the highest in almost two and half years as executives grew more optimistic that an export-led economic recovery is gaining momentum.

The Isae institute’s manufacturing-sentiment index climbed to 99.8, the highest since May 2008, from a revised 98.6 in September, the Rome-based research center said in a statement today. Economists had predicted a reading of 98.5, according to the median of 18 forecasts in a Bloomberg survey.

But loan growth in the euro area as a whole remains sluggish, reports Reuters.

Growth rates in money supply and private sector loans in the euro zone were sluggish in September, supporting the European Central Bank's careful approach to winding down measures designed to boost lending activity.

Underlining the still fragile nature of the single currency zone's economic recovery, loans to the private sector rose 1.2 percent year-on-year, ECB data showed on Wednesday, missing a Reuters forecast for 1.4 percent growth.

M3 money supply, a measure of cash readily available to spend which the European Central Bank sees as a leading indicator for inflation, rose 1.0 percent on an annual basis, versus expectations for a 1.3 percent rise.

And sovereign debt issues continue to dog European financial markets. From Bloomberg:

Portuguese and Greek bonds led so- called peripheral European markets lower after the failure of Portugal’s budget talks and tax-revenue shortfalls in Greece reignited concerns countries may struggle to cut their deficits...

The yield on Portugal’s 10-year bond increased 24 basis points, the most since Sept. 20, based on closing prices, to 5.93 percent as of 3:39 p.m. in London. That left the extra yield, or spread, investors demand to hold the bonds instead of similar German bunds at 328 basis points.

Greece’s 10-year yield rose 79 basis points, the most since June 15. The spread with bunds widened to 779 basis points, the most since Oct. 1. Ireland’s 10-year bonds yielded 408 basis points more than similar bunds, up from 393 yesterday.

Uncertainty in the global economy and financial systems means that most central banks will keep monetary policy accommodative. From Bloomberg:

Central banks in Sweden and Norway are bowing to pressure to delay interest-rate increases next year as the prospect of a global recovery dwindles and borrowing costs in the U.S. and Europe remain low.

The Stockholm-based Riksbank on Oct. 26 said faltering recoveries in the U.S. and Europe will prevent it from raising interest rates next year as fast as it signaled in September. Oslo-based Norges Bank yesterday said it won’t raise its rate from 2 percent until the middle of 2011, compared with a June forecast for tightening to resume at the “turn of the year.”

And the Federal Reserve, of course, is widely expected to launch another round of quantitative easing next week. In his latest investment outlook, Bill Gross says that QE

... is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates...

James Hamilton points out that negative real interest rates means that

... there's an incentive to buy and hold those goods that are storable. And in terms of the historical experience, episodes of negative real interest rates have usually been associated with rapidly rising commodity prices.

Commodities are storable. So are homes, as investors in Hong Kong are no doubt aware. From AFP/CNA:

Hong Kong's luxury home prices have topped their pre-Asian crisis peak, data showed Wednesday, frustrating government efforts to cool one of the world's most expensive real estate markets.

Average prices for homes of at least 100 square metres (1,100 square feet) are now 14 percent above what they fetched before the 1997 downturn, the Hong Kong Monetary Authority (HKMA) said.

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