Friday, 11 March 2011

US and China report trade deficits, markets sink

Reuters reports that the US trade deficit widened in January.

The U.S. trade deficit widened much more than expected in January as higher oil prices and surging imports of capital goods and cars overpowered record exports in a signal of strengthening domestic demand.

The trade gap grew by 15.1 percent to $46.3 billion from $40.3 billion in December, the Commerce Department said on Thursday. Analysts had expected a deficit of $41.5 billion.

The shortfall in trade with China, a sore point in bilateral relations, grew 12.5 percent to $23.3 billion...

A second report from the Labor Department showed new claims for jobless benefits rose 26,000 last week to 397,000. While economists had looked for a smaller increase, they said the gain was not enough to suggest the labor market recovery was running off the rails.

Some of the increase in the trade deficit with China was probably unwound in February, if the latter's trade data are anything to go by. From AFP/CNA:

China said Thursday it had returned to a trade deficit in February for the first time in nearly a year, in line with efforts to wean the world's number two economy off its reliance on exports...

Customs blamed a sharp slowdown in exports on the Lunar New Year holiday which this year was celebrated at the beginning of February...

Exports rose just 2.4 per cent from a year earlier to $96.74 billion, compared with a rise of 37.7 per cent in January, and imports gained 19.4 per cent to $104.04 billion, compared with a 51 per cent increase in the previous month.

Analysts said exports and imports typically see strong growth ahead of the festive season when factories crank up production to meet demand, and then slow in the following month.

The other export powerhouse, Germany, also saw weaker exports recently. Bloomberg reports:

German exports unexpectedly declined in January after gaining in the previous two months.

Exports, adjusted for work days and seasonal changes, dropped 1 percent from December, when they rose 0.5 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.7 percent increase, according to the median of 13 estimates in a Bloomberg News survey. Imports gained 2.3 percent from December, when they declined 2.6 percent.

On a more positive note, Reuters reports that UK manufacturing bounced back in January.

The Office for National Statistics said manufacturing output rose 1.0 percent in January, more than reversing a 0.1 percent fall in December, and the strongest rate of growth since March 2010. Analysts had expected an increase of 0.8 percent.

Output in the broader industrial sector also rose slightly more than expected, by 0.5 percent on the month, but was tempered by a 6.2 percent fall in utilities output, which reversed a cold-weather boost in December.

Continued growth in the economy could mean that a rate hike might not be too far off. From Reuters:

The Bank of England kept interest rates at a record low Thursday, reluctant to jeopardise a fragile economic recovery and hopeful the recent surge in inflation will prove temporary.

All but one of the 63 economists polled by Reuters last week had predicted rates would stay at 0.5 percent. However, with inflation double the central bank's 2 percent target and still rising, most expect a rate rise later this year.

Money markets show a 70 percent chance the Bank will raise rates by a quarter percentage point in May and are fully pricing such a move by the middle of the year.

Meanwhile, South Korea continued the recent monetary policy trend in Asia on Thursday. From AFP/CNA:

South Korea's central bank on Thursday raised its key interest rate by 25 basis points to 3.0 per cent to control a surge in inflation.

The rise in the benchmark seven-day repo rate was the fourth since July last year, when it stood at a record low of 2 per cent in the aftermath of the global economic downturn.

However, New Zealand went in the opposite direction. AFP/CNA reports:

New Zealand announced an "emergency" interest rate cut in response to the Christchurch earthquake Thursday, warning that the already struggling economy risked nosediving after the disaster.

The Reserve Bank of New Zealand slashed the official cash rate (OCR) 0.5 points to 2.5 per cent in a bid to cushion the quake's economic fallout, equalling a record low set in the midst of the global financial crisis.

New Zealand's central bankers were not the only ones feeling anxious on Thursday. Markets were shaken apparently by the economic data, yet another European sovereign credit rating cut and further expansion of the Middle East turmoil. Reuters reports:

World stocks and commodities sank on Thursday after an unexpected trade deficit in China fueled concerns about the global economy, while the euro fell after a downgrade of Spain's credit rating by Moody's.

Stocks were pushed even lower and oil prices erased part of early losses in the afternoon as police confronted protesters in Saudi Arabia. Witnesses said shots were heard and some people were wounded...

Still, U.S. crude oil prices fell 1.6 percent to $102.70 a barrel as investors fretted about negative economic data from China, the world's second-largest consumer of oil. Brent prices ended 51 cents lower at $115.43...

The Dow Jones industrial average lost 228.48 points, or 1.87 percent, to 11,984.61...

Global stocks measured by MSCI's All-Country World Index slid 1.9 percent.

The euro fell 0.8 percent to $1.3796 after Moody's downgraded Spain to Aa2 from Aa1, warning of further cuts to the country's credit ratings.

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