Monday, 28 February 2011

Japanese manufacturing expands

The Japanese economy appears to be back on the recovery path.

AFP/CNA reports that factory output was up in January.

Japan's industrial output rose a smaller-than-expected 2.4 per cent in January from the previous month, official data showed Monday.

It was the third successive monthly rise but was smaller than the market average forecast of a 3.8 per cent rise in a survey conducted by the Nikkei business daily.

In further evidence that Japanese manufacturing is growing, Reuters reports an increase in the manufacturing PMI in February.

Japanese manufacturing activity expanded at the fastest pace in eight months due to export demand, a survey showed on Monday, but input prices were at their highest in more than two years in an ominous sign for corporate earnings.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.9 in February from 51.4 in January.

Saturday, 26 February 2011

US and UK economic growth weaker than expected

Reuters reports that the US economy grew less than previously estimated in the fourth quarter.

Gross domestic product grew at an annualized rate of 2.8 percent in the fourth quarter, the Commerce Department said, a downward revision from its initial 3.2 percent estimate a month ago. Economists had expected GDP growth to be revised up to a 3.3 percent pace...

The government's measure of fourth-quarter growth was lowered to reflect a contraction in government spending that was more than double the initial estimate.

The good news, however, is that consumer confidence hit a three-year high in February.

The Thomson Reuters/University of Michigan survey's index on consumer sentiment climbed to 77.5, the highest since January 2008, from 74.2 in January -- indicating consumers were weathering higher gasoline prices for now amid optimism about the labor market.

The UK economy's fourth quarter performance has also been downgraded. Reuters reports:

The economy suffered an even sharper slump than expected at the end of last year and would have shrunk slightly even without December's bad weather, official data showed on Friday...

Friday's official data showed Britain's economy shrank by 0.6 percent between October and December, surprising analysts who thought last month's preliminary estimate of a 0.5 percent contraction would be unrevised.

UK consumer confidence also rose in February, although it is near a 22-month low. Again from Reuters:

Consumer confidence edged higher this month from January's 22-month low after a slight recovery in shoppers' personal financial situation and willingness to make big purchases, a survey showed on Friday.

The GfK NOP consumer confidence index rose to -28 from January's -29, but is well below the level of -14 this time last year as shoppers face rising prices and sluggish wage growth, while public-sector spending cuts put jobs at risk.

Also getting less negative is Japan's inflation rate. From AFP/CNA:

Japan's core consumer price index fell 0.2 per cent from a year earlier in January, government data showed Friday...

But the result for the core nationwide CPI, which excludes volatile fresh food prices, was slightly better than the consensus forecast for a 0.3 per cent decline.

The government said higher prices for petrol and kerosene - often used for home heating - were the main reasons for the slightly higher figure. The nationwide price index fell 0.4 per cent in December.

There are no worries about deflation in Russia, where the central bank finally moved to raise interest rates on Friday. From Bloomberg:

Russia’s central bank unexpectedly lifted the refinancing rate from a record low, the first increase since December 2008, and boosted reserve requirements for a second month to curb inflation.

Bank Rossii raised its main rates 0.25 percentage point, boosting the refinancing rate to 8 percent, the overnight deposit rate to 3 percent and the overnight auction-based repo rate to 5.25 percent, it said today in a statement on its website. Economists expected the refinancing and the repo rates to be left unchanged and the deposit rate to rise, according to the median estimate of 18 economists in a Bloomberg survey.

Friday, 25 February 2011

Eurozone confidence up but US economic data mixed

It looks like the eurozone economy is maintaining its growth. From Bloomberg on Thursday:

European confidence in the economic outlook improved more than economists forecast to the highest in 3 1/2 years in February, led by surging optimism in Germany.

An index of executive and consumer sentiment in the euro region advanced to 107.8 from 106.8 in January, the European Commission in Brussels said today. That’s the highest since August 2007. Economists had forecast a February reading of 106.8, the median of 28 estimates in a Bloomberg survey showed. A gauge of German economic confidence rose to 116.8 from 115.5.

US economic data on Thursday, though, were mixed. Reuters reports:

New U.S. claims for jobless aid fell last week, indicating healing in the labor market, but declines in new home sales and orders for a range of factory goods in January showed the recovery remains uneven...

Initial claims for state unemployment insurance benefits dropped 22,000 to a seasonally adjusted 391,000, the Labor Department said on Thursday, below economists' expectations for a fall to 400,000.

Separate reports from the Commerce Department showed orders for long-lasting manufactured goods excluding transportation items suffered the biggest drop in two years in January, while new home sales tumbled 12.6 percent as a homebuyer tax credit in California ended.

The Chicago Fed's National Activity Index for January also provided mixed signals.

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.16 in January from +0.18 in December. Three of the four broad categories of indicators that make up the index made positive contributions in January, but they were offset by continued weakness in the consumption and housing category.

The index’s three-month moving average, CFNAI-MA3, edged up to –0.10 in January from –0.14 in December, increasing for the third straight month. January’s CFNAI-MA3 suggests that growth in national economic activity was slightly below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

Thursday, 24 February 2011

Japan sees trade deficit but eurozone and US report positive data

Japan's trade balance sank back into deficit in January. AFP/CNA reports:

Japan posted its first trade deficit in almost two years last month, officials said Wednesday, amid rising commodity prices and weak demand for its exports ahead of China's Lunar New Year holiday.

The finance ministry said exports, a key driver of Japan's economy, rose just 1.4 per cent in January - the 14th consecutive month of growth, but a well off the 13 per cent on-year surge in December.

That came as instability in the Middle East and North Africa pushed the price of oil and other commodities up amid concerns supplies could be cut, sending resource-poor Japan's import bill up 12.4 per cent.

There was better news from Europe. From Bloomberg:

European industrial orders unexpectedly rose in December as surging demand for capital goods such as machines helped offset a slump in Germany.

Orders in the euro area increased 2.1 percent from November, when they gained a revised 2.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a drop of 1 percent, the median of 16 estimates in a Bloomberg News survey showed. From a year earlier, December orders jumped 19 percent.

Bloomberg also reports positive news from the US.

Sales of U.S. previously owned homes unexpectedly climbed in January to the highest level in eight months as investors used all-cash transactions to snap up distressed properties.

Purchases increased 2.7 percent to a 5.36 million annual rate, figures from the National Association of Realtors showed today in Washington. The share represented by foreclosures and short sales rose to a 12-month high, pushing the median price to the lowest level in almost nine years.

Wednesday, 23 February 2011

Markets in turmoil as more bloodshed looms in Libya

The unrest in the Middle East now centred on Libya appears to be getting worse. From Bloomberg today:

Libyan leader Muammar Qaddafi vowed to fight a growing rebellion until his “last drop of blood,” as parts of the capital, Tripoli, resembled a war zone and some of his followers defected to the opposition.

In Tripoli, bodies were left in the streets after an attack on protesters by pro-Qaddafi gunmen, the opposition National Front for the Salvation of Libya said. In the eastern city of Benghazi, where the protests began, the flag of the constitutional monarchy overthrown by Qaddafi in 1969 flew on streets and over several buildings and there were no security forces in evidence except traffic police, witnesses said.

Already, markets have been in turmoil. Bloomberg reports the action on Tuesday.

Oil surged to a two-year high, while the Standard & Poor’s 500 Index sank the most since August, as escalating violence in Libya spurred concern that Middle East instability will hurt the world economy. Treasuries and the Swiss franc rose. New Zealand’s dollar slid after an earthquake.

Oil for March delivery jumped 8.6 percent from the Feb. 18 settlement to $93.57 a barrel. The S&P 500 Index lost 2.1 percent to 1,315.44, its biggest drop in six months, as Wal-Mart Stores Inc. tumbled after sales trailed its own forecast. The Chicago Board Options Exchange Volatility Index climbed 27 percent, the most since May. Ten-year Treasury yields slid 13 basis points and the franc gained 0.9 percent versus the dollar...

Oil’s rally today triggered losses in other commodities amid concern rising energy prices will slow economic growth.

The Stoxx Europe 600 Index lost 0.6 percent to extend a three-day retreat, with four shares falling for every one that rose...

The MSCI Emerging Markets Index lost 1.9 percent, its largest drop in almost two weeks. Indexes in Abu Dhabi, Dubai, Tunisia, South Africa, Taiwan and South Korea slid more than 1 percent. China’s Shanghai Composite Index declined 2.6 percent, the most in a month.

Mixed domestic economic data provided little support for US markets.

U.S. equities also declined after the S&P/Case-Shiller index of home values in 20 cities fell 2.4 percent in December from the same month in 2009, the biggest 12-month decrease in a year. Benchmark indexes briefly pared losses as a gauge of consumer confidence rose to the highest level in three years. The Conference Board’s index of sentiment rose to 70.4, topping the median forecast for a little changed reading of 65.5.

Tuesday, 22 February 2011

ECB turns hawkish as eurozone economy turns hot

The eurozone economy showed no sign of slowing in Monday's economic reports.

PMIs are at new post-recession highs. Reuters reports:

For the euro zone as a whole, Markit's flash manufacturing PMI leapt to a near 11-year high of 59.0 from 57.3 in January, beating expectations for 57.3.

The flash euro zone services PMI, which measures activity in companies ranging from banks to hotels, rose to 57.2 from 55.9 in January, its highest reading since August 2007...

Worryingly, for policymakers concerned about inflation, the costs of raw materials and energy soared at their fastest pace in the survey's near 14-year history. The factory input price indicator jumped to 85.7 this month from 79.2 in January.

The output price index also climbed to a survey high, suggesting firms were passing on some of the increases to customers...

The euro zone composite index, compiled from the services and manufacturing sectors and often used to predict overall growth, bounced to 58.4 this month from 57.0 in January, smashing expectations for 56.9 and notching up its highest reading since July 2006.

In Germany, business confidence has hit a record high. Bloomberg reports:

German business confidence unexpectedly rose to a fresh record high in February as booming exports spurred hiring and consumer spending.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, increased to 111.2 from 110.3 in January. That’s the highest since records for a reunified Germany began in 1991. Economists predicted the index would hold steady, according to the median of 38 forecasts in Bloomberg News survey.

Little wonder that ECB officials are sounding hawkish. From Bloomberg:

European Central Bank policy makers signaled they may support raising interest rates in coming months as the economy recovers and imports fuel price pressures.

“We’re prepared to act decisively and immediately if needed,” ECB Executive Board member Juergen Stark said at an event in Frankfurt tonight. “The objective is pretty clear. In order not to risk un-anchoring inflation expectations, we have to change the monetary policy stance if need be.”

With inflation above the ECB’s 2 percent ceiling and its benchmark rate at a record low of 1 percent, officials must gauge whether the resulting liquidity situation “is still appropriate,” fellow Executive Board member Lorenzo Bini Smaghi said in Hong Kong today. “Clearly as the economy is better, maybe this assessment has to be revised.”

Meanwhile, flash PMI readings from China indicate that its tightening measures may already be having some impact. The Wall Street Journal reports:

The preliminary HSBC China Manufacturing Purchasing Managers' Index, a gauge of nationwide manufacturing activity, fell to 51.5 in February from January's final PMI reading of 54.5, HSBC Holdings PLC said Monday...

However, measures of both input and output prices rose, meaning inflation pressures remain.

China's Lunar New Year holiday in February may also have contributed to the slowdown though.

Monday, 21 February 2011

Fed's latest easing came after inflation accelerated

Inflation has begun to accelerate in the United States. And not for the first time, the Federal Reserve may be falling behind the curve.

Last week, the Labor Department reported that the consumer price index rose 0.4 percent in January. From January 2010, consumer prices rose 1.6 percent.

The consumer price index excluding food and energy rose 0.2 percent in January. This was the fastest pace of increase in 15 months. From January last year, this measure of core inflation rose 1.0 percent.

Inflation in the 16% trimmed-mean consumer price index and the median consumer price index, other measures of core inflation monitored by the Federal Reserve Bank of Cleveland, also registered increases in January.

 Percent change from previous month
CPI less food & energy0.
16% trimmed-mean CPI0.
Median CPI0.
 Percent change, past 12 months
CPI less food & energy0.
16% trimmed-mean CPI0.
Median CPI0.

So the trend in the inflation rate appears to be up, and it will probably continue to accelerate in coming months. Other recent data show that resource utilisation rates have continued to improve in recent months, which would typically be followed by higher inflation.

Last week, the Federal Reserve reported that industrial capacity utilisation was 76.1 percent in January, slipping from the 28-month high of 76.2 in December as the output of utilities fell 1.6 percent in January after unseasonably cold weather boosted the demand for heating in December.

Manufacturing capacity utilisation, however, rose to 73.7 percent in January, the highest rate since August 2008.

Earlier this month, the Labor Department had reported that the unemployment rate had declined to 9.0 percent in January. Although still high, this was the lowest unemployment rate since April 2009.

With inflation probably on an uptrend, it is now quite safe to say that the 12-month inflation rate of the overall CPI bottomed in July 2009 while that for the CPI excluding food and energy probably bottomed in October last year.

This means that the Federal Reserve may have introduced its latest Treasury securities purchase programme -- popularly called quantitative easing 2 (QE2) -- after inflation had started to re-accelerate. QE2 had been officially announced after the Fed's monetary policy meeting on 3 November 2010, one month after the bottom in core inflation and 16 months after the bottom in headline inflation.

It is hard to say whether the Fed would have introduced QE2 in November if they had known with the same degree of certainty that we now have that inflation was already accelerating. After all, the Fed is also concerned about the unemployment rate which, at 9.0 percent in January, remains high.

However, it probably does not help the Fed's monetary policy-making that the bottom in core inflation -- the measure that it monitors more closely -- had followed the bottom in headline inflation by 15 months, one of the longest lags on record. The duration of the lag was surpassed only by the 17-month lag after the prior recession.

In the last cycle, the ability of food and energy prices to rise faster than core prices persisted throughout the expansion phase (see "Elevated US headline inflation proves persistent"). By focusing on the lower core inflation, the Fed may have accommodated the excessive credit growth that eventually resulted in high overall inflation as well as contributed to the housing bubble and culminated in a financial crisis and the worst recession since the Great Depression.

With headline inflation again being much quicker off the starting blocks than core inflation this time, let's hope that this cycle will not end the same way as the last one.

Saturday, 19 February 2011

Chile and China tighten

The monetary tightening trend continues in emerging economies.

Chile's central bank raised interest rates on Thursday. The Wall Street Journal reports:

After taking a short pause last month, the Central Bank of Chile raised interest rates and continued to withdraw the sizable monetary stimulus it began in 2009.

At its monthly monetary policy meeting Thursday, the bank increased its benchmark overnight rate by 25 basis points to 3.5%, in line with consensus.

The central bank reiterated that it will be "necessary" to continue withdrawing its stimulus in coming months, but the pace at which it does so will depend on how domestic and international macroeconomic conditions evolve.

Then on Friday, China raised banks' reserve requirement ratio again. AFP/CNA reports:

China's central bank said Friday it would raise the amount of money banks must keep in reserve, in the latest of a series of moves aimed at bringing high inflation under control.

The reserve requirement ratio will be raised by 50 basis points from February 24, the People's Bank of China said in a statement -- already the second time this year it has announced such a measure.

Friday, 18 February 2011

US inflation accelerates

Reuters reports a rise in inflation in the US in January.

Consumer prices, excluding volatile food and energy costs, rose at the quickest pace in 15 months in January, suggesting a long period of slowing inflation had run its course.

The core Consumer Price Index increased 0.2 percent after a 0.1 percent rise in December, the Labor Department said on Thursday. It was the largest increase since October 2009...

Overall consumer prices rose 0.4 percent after increasing by the same margin in December, with food and energy accounting for more than two-thirds of the increase. Economists had expected the headline CPI to rise 0.3 percent last month.

A slow recovery in employment is expected to keep inflation in check.

"The soft jobs market and a broad lack of wage pressures are helping to constrain core inflation. It's unlikely that inflation moves to an uncomfortable level without a much tighter jobs market," said Jim Baird, a partner at Plante Moran Financial Advisors in Kalamazoo, Michigan.

In a separate report, the Labor Department said initial claims for unemployment benefits increased 25,000 to 410,000 last week, partially reversing a hefty drop the prior week.

However, Calculated Risk notes that core inflation in January was at or above the Fed's inflation ceiling and higher than might have been expected considering the output gap.

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.0% annualized rate) in January. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.7% annualized rate) during the month.

... This is just one month, but the annualized rate for these key measures is at or above the Fed's inflation target. With the slack in the system, I have been expecting these core measures to stay below 2% this year.

Meanwhile, other reports on Thursday continue to point to further growth in the economy.

Reuters reports a rise in factory activity in the mid-Atlantic region.

The Philadelphia Federal Reserve Bank said its business activity index rose to 35.9 in February from 19.3 the month before. It was the highest reading since January 2004.

MarketWatch reports a rise in the US leading economic index.

The U.S. economy’s expansion is expected to continue in coming months, though current conditions, while slowly improving, remain weak, the Conference Board said Thursday.

The research organization reported that its leading economic index rose 0.1% in January.

Thursday, 17 February 2011

BoE to raise rates, Fed to complete QE2

The Bank of England is set to raise interest rates this year, albeit slowly. Reuters reports:

New Bank of England forecasts opened the door on Wednesday for interest rates to rise slowly later this year but Governor Mervyn King told investors not to assume the central bank was in any hurry to pull the trigger...

A Reuters poll of economists pointed to rates rising to 0.75 percent in the final quarter of the year, with ten out of 50 expecting a move before July...

The central bank's February report showed consumer price inflation spiking up to between 4 and 5 percent in the middle of this year before falling back to around 1.7 percent in early 2013, a higher forecast profile than in November.

Those forecasts were based on the assumption that interest rates would rise to 1 percent by the end of this year, hitting 2.1 percent at the end of 2012...

The Bank predicted a bumpy ride for the economy this year, with its 2011 forecasts for growth lower than those in its November quarterly forecasts, but it is seen picking up to around 3 percent in the medium term.

Of course, the ability of the UK economy to sustain growth will influence the BoE's monetary policy. The reports on Wednesday were not particularly encouraging.

Reuters reports that consumer morale fell sharply in January.

Consumer confidence fell sharply in January to near its weakest level since early 2009, after a rise in sales tax dented shoppers' willingness to spend, a survey by building society Nationwide showed on Wednesday.

Nationwide's consumer confidence index declined to a seasonally adjusted 47 in January from 54 in December and just off November's 20-month low of 46.

Reuters also reports that the number of Britons claiming unemployment benefit unexpectedly rose in January for the first time in four months.

The number of people claiming jobless benefit rose by 2,400 last month, data showed on Wednesday, wrongfooting analysts who had forecast another modest decline.

The number of those without a job on the wider International Labour Organisation measure rose by 44,000 in the three months to December to 2.49 million, or 7.9 percent of the workforce...

Average weekly earnings growth slowed to just 1.8 percent in the three months to December, less than half the rate of inflation.

US economic data on Wednesday were mixed. Bloomberg reports:

Production at U.S. factories climbed in January for a fifth consecutive month, while builders began work on fewer single-family houses, showing the expansion remains driven by manufacturing as housing stagnates.

Manufacturing output increased 0.3 percent after a revised 0.9 percent jump in December that was more than twice as large as previously reported, figures from the Federal Reserve showed today. Total production, including mining and utilities, unexpectedly dropped. Single-family home starts decreased 1 percent to a 413,000 annual pace, the fewest since May 2009, according to the Commerce Department...

The Fed’s report also showed total production was unexpectedly restrained by a decline in utilities as milder temperatures curbed demand for heating. Output fell 0.1 percent after a 1.2 percent increase in December...

The Commerce Department report showed total housing starts, including single- and multifamily units, climbed 15 percent to a 596,000 annual rate, exceeding the median forecast of economists surveyed. Work started on 78 percent more dwellings with two or more homes, overshadowing the drop in single-family construction that makes up about 70 percent of the market.

But the US could have an inflation problem of its own.

Another report today showed wholesale costs increased for a seventh consecutive month in January, led by higher prices for fuel. The producer price index rose 0.8 percent, according to data from the Labor Department, matching the median forecast of economists surveyed. The so-called core measure, which excludes volatile food and energy costs, rose 0.5 percent, the biggest rise since October 2008.

The Fed had recently raised its forecast for US growth while remaining relatively sanguine about inflation. Reuters reports:

Federal Reserve officials raised their forecasts for economic growth last month but remained unhappy with the job market's recovery.

Minutes of the Fed's January 25-26 policy session released on Wednesday suggested the consensus was still firmly aligned with completing the planned purchase of $600 billion in government bonds. A few Fed members questioned whether continued stronger data would call for curtailing the program...

Fed officials raised their 2011 growth forecast to a range of 3.4 percent to 3.9 percent from their November projection of 3 percent to 3.6 percent, although projections for 2012 and 2013 were little changed.

Policymakers also made only minor changes to forecasts for unemployment and inflation.

While global monetary policy could be slow to tighten this year, JPMorgan thinks things could change dramatically next year. From Bloomberg:

Emerging-market central banks are failing to counter rising inflation, risking a “scary” and “synchronized” global monetary-policy tightening as early as next year, JPMorgan Chase & Co. said.

Real interest rates in emerging markets remain at “recession lows” because policy makers believe increases would pressure currency pegs to the dollar and risk exacerbating capital inflows, said chief economist Bruce Kasman in an interview in Beijing today.

The risk is that emerging markets tighten policy only after inflation leaks into developed economies and the U.S. Federal Reserve reacts, prompting simultaneous interest rate increases across the world after a longer period of “financial excesses,” Kasman said. JPMorgan strategists cut their year-end target for the MSCI Emerging Markets Index to 1,300 from 1,500 yesterday on expectations that accelerating inflation in developing nations will spur tighter monetary policy.

Wednesday, 16 February 2011

Euro area grows 0.3 percent in fourth quarter

Fourth quarter growth in the euro area came out on the weak side of expectations. Reuters reports:

The euro zone economy ended last year with stable growth, missing expectations as expansion rates in the region's three largest nations fell short of forecasts and Greece and Portugal contracted...

The European Union's statistics office Eurostat said gross domestic product in the 16 countries using the euro at the time grew 0.3 percent in the October-December period, the same as in the third quarter, and 2.0 percent year-on-year...

German gross domestic product increased by 0.4 percent, against expectations of a 0.5 percent rise and decelerating from 0.7 percent in the third quarter...

In France, the economy grew just 0.3 percent, half the forecast increase and the same level as in July-September, despite a rush to buy cars before a French scrappage subsidy scheme ended last year.

In the US, January retail sales were also weaker than expected. Bloomberg reports:

Sales at retailers rose less than forecast in January, showing it will be difficult for American consumers to sustain last quarter’s pickup in spending without bigger gains in employment.

Purchases increased 0.3 percent, the smallest gain since a drop in June, according to Commerce Department figures today in Washington...

Excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, sales increased 0.4 percent after a 0.1 percent drop the prior month that was previously reported as a gain.

Other US data were less disappointing.

Manufacturing in the region covered by the Fed Bank of New York expanded this month at the fastest pace since June, another report showed. The bank’s general economic index rose to 15.4 from 11.9 in January. Readings greater than zero signal growth in the so-called Empire State Index, which covers New York, northern New Jersey, and southern Connecticut.

The National Association of Home Builders/Wells Fargo said its sentiment index registered a reading of 16 in February for the fourth consecutive month, in line with the median forecast of economists surveyed by Bloomberg. Readings below 50 mean more respondents said conditions were poor.

Also today, figures from the Labor Department showed import prices climbed 1.5 percent in January, propelled by higher costs for commodities like food and fuel.

Over in China, lower-than-expected data on Tuesday were probably more welcome. From AFP/CNA:

China said Tuesday its inflation rate stayed stubbornly high at 4.9 percent in January, sparking analyst predictions that the government would take further aggressive fiscal steps to cool prices.

The consumer price index, the key gauge of inflation in the world's second economy, was "lower than market expectations" according to the National Bureau of Statistics but still above Beijing's four percent full-year target...

New monthly lending data also released on Tuesday provided a ray of hope for policymakers.

The value of new loans fell to 1.04 trillion yuan (US$158 billion), down about 23 percent year on year.

Meanwhile, UK inflation in January turned out not much lower than China's. From Reuters:

Inflation jumped to twice the Bank of England's target in January, prompting Bank Governor Mervyn King to acknowledge that interest rates might rise more rapidly than economists had expected.

Consumer price inflation surged to a two-year high of 4.0 percent from 3.7 percent in December, providing an awkward backdrop for the central bank's updated quarterly growth and inflation forecasts on Wednesday.

Unlike the BoE, the Riksbank has already taken action to head off inflation. Bloomberg reports its latest monetary policy decision:

Sweden’s central bank raised its benchmark repo rate for a fifth time since July and signaled it will pick up the pace of monetary tightening to keep inflation and credit growth in check in Europe’s fastest-growing economy.

The Stockholm-based Riksbank raised the seven-day repo rate a quarter of a percentage point to 1.5 percent, it said today on its website. The decision was expected by all 22 economists surveyed by Bloomberg. The bank also raised its rate path and now expects the repo to average 2.5 percent in the first quarter next year, compared with 2.2 percent previously.

Understandably, the BoJ has taken its time in tightening monetary policy, despite upgrading its outlook for the economy recently. AFP/CNA reports:

The Bank of Japan (BoJ) on Tuesday upgraded its view of the country's economy for the first time in nine months due to a pick-up in global growth, as it kept its key rate unchanged between zero and 0.1 per cent.

"Japan's economy is gradually emerging from the current deceleration phase," the BoJ said in a statement, noting that Japanese exports and production are "showing signs of resuming an uptrend" amid global growth led by emerging markets...

After a two-day meeting, the bank's board unanimously decided to leave its key rate near zero, as Japan remains mired in deflation.

Tuesday, 15 February 2011

Market increasingly expensive

Cullen Roche at Pragmatic Capitalism says the US stock market is getting increasingly expensive.

As the market continues to grind higher each and ever day it’s useful to gain some perspective on just how much Bernanke is impacting valuations and generating disequilibrium in the market. In order to do so we’ll review a number of long-term valuation indicators.

The first is Warren Buffett’s self proclaimed favorite valuation tool (see here for more). He uses the total market cap of the US stock market compared to GNP. He has generally maintained that levels below 80% are bullish. The latest reading of 106% is well below the levels seen at the last two market peaks, but well above the historical average levels...

John Hussman’s latest piece succinctly describes the current market environment...

Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this “cyclically-adjusted P/E” or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation). Prior to the mid-1990′s market bubble, a multiple in excess of 24 for the CAPE was briefly seen only once, between August and early-October 1929...

Using his expected returns methodology Mr. Hussman is looking for annual returns of just 3.15% in the coming decade...

Dshort brings us the Q Ratio which has now hit “nosebleed” territory again. This is consistent with the other metrics which all showed relatively stable ranges until the Fed began its unusual policy of propping up markets following the 87 crash. The latest reading of 1.17 is well below the Nasdaq bubble peak, but is higher than any other historical peak. “Nosebleed” could be an understatement.

See the original post for charts.

Among economic reports released on Monday, Japan's economic contraction in the fourth quarter was among the most significant. Japan's relatively weak growth in 2010 allowed China to overtake it as the second largest economy in the world.

As for China, AFP/CNA reports that its trade surplus shrank in January.

China said Monday its politically sensitive trade surplus shrank in January but analysts warned the data may have been skewed by a surge in imports leading up to the Lunar New Year holiday...

The trade surplus fell 53.5 per cent to $6.45 billion in January as both exports and imports grew strongly ahead of the holiday, the General Administration of Customs said.

Exports increased 37.7 per cent from a year earlier, while imports surged 51 per cent.

Meanwhile, in Europe, Eurostat reports that industrial production dipped in December.

In December 2010 compared with November 2010, seasonally adjusted industrial production fell by 0.1% in both the euro area (EA16) and the EU27. In November 2010 production rose by 1.4% and 1.2% respectively.

In December 2010 compared with December 2009, industrial production grew by 8.0% in the euro area and by 7.7% in the EU27.

Monday, 14 February 2011

Japan's economy shrank at end of 2010

The Japanese economy contracted at the end of last year.

The Cabinet Office reported today that Japan's real gross domestic product decreased 0.3 percent in the fourth quarter of 2010. It had grown 0.8 percent in the third quarter.

The decline in GDP was mostly the result of a fall in domestic demand. Household consumption in particular decreased 0.8 percent in the fourth quarter, a sharp turnaround from the 0.9 percent increase in the third quarter, after the government ended or reduced purchase incentive programmes in the fourth quarter. Domestic demand contributed minus 0.2 percent to GDP growth in the fourth quarter.

Net exports contributed minus 0.1 percent to GDP growth in the fourth quarter, the second consecutive quarter that it had detracted from GDP growth.

The contraction in the economy may prove to be a short-term phenomenon. The sharp fall in household consumption, being related to the timing of government programmes, is unlikely to be repeated in the first quarter. And exports, which had fallen back after hitting a post-recession peak in July last year, may be resuming growth after bouncing back to record a new post-recession peak in December.

Also, both the coincident and leading indices of business conditions compiled by the Economic and Social Research Institute bottomed in October and rose in the subsequent two months.

So despite the contraction in the fourth quarter, the Japanese economy may already be resuming its recovery.

Saturday, 12 February 2011

US consumer confidence and trade deficit increase

US consumer confidence is recovering gradually. Bloomberg reports:

Consumer confidence rose in February to the highest level in eight months as decreasing unemployment lifted Americans’ spirits.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for the month climbed to 75.1 from 74.2 in January, in line with the median forecast of economists surveyed by Bloomberg News...

Along with an improving economy comes a widening trade deficit, although oil was the main culprit in December.

Also today, a report from the Commerce Department showed the trade deficit widened in December for a second month as the cost of imported oil climbed to the highest level in two years.

The gap grew 5.9 percent to $40.6 billion, in line with the $40.5 billion median forecast in a Bloomberg survey of economists. Excluding petroleum, the shortfall shrank to $15.3 billion, the smallest since March...

Exports increased 1.8 percent to $163 billion, the most since July 2008, led by sales of autos, chemicals and industrial machines.

China has been an important destination for US exports but this trend could be affected if China keeps tightening policy. From AFP/CNA on Friday:

China's central bank has ordered some small and medium-sized banks to raise their reserves in the latest in a series of such hikes aimed at reining in inflation, state media said on Friday.

The reserve requirement ratio hike, which effectively reduces the amount of money banks can lend, is mainly targeted at regional institutions, the state-run China Securities Journal reported, citing unnamed sources.

The increase took effect this week, the report said without naming the affected banks or specifying the size of the hike.

Friday, 11 February 2011

BoE holds rates as UK economy rebounds

The Bank of England left monetary policy unchanged on Thursday.

Considerations for an exit from the current easy monetary policy have been complicated by lingering weakness in the economy. A report from Reuters on Thursday showed that UK factory production fell in December.

Factory output fell unexpectedly in December, but a weather-related surge in energy production offset the decline, and economists said they expected a manufacturing bounce-back in January.

The Office for National Statistics said that manufacturing output dropped by 0.1 percent in December -- its first decline in 8 months -- after a 0.6 percent rise in November. Analysts had forecast an increase of 0.4 percent...

Helped by a surge in electricity and gas output, the wider industrial output measure rose by 0.5 percent as expected. As a result, the ONS said the figures did not point to a revision of the 0.5 percent fall in economic output recorded for the last three months of 2010.

However, another Reuters reports showed that GDP rebounded in January.

The economy rebounded strongly last month after its unexpected weather-related contraction in December, the National Institute of Economic and Social Research estimated on Thursday.

NIESR, an academic forecasting body, calculated that gross domestic product grew by 0.6 percent on the month in January. Private-sector surveys have also pointed to a rapid rebound from the coldest December in 100 years.

Thursday, 10 February 2011

Emerging markets lead global stocks down

Global stocks finally retreated on Wednesday. Bloomberg reports:

Stocks fell, sending emerging markets down for a fifth day, amid concern accelerating inflation will push up borrowing costs. Corn, wheat and soybeans rose to the highest prices since 2008, while the dollar slid and Treasuries rebounded.

The MSCI Emerging Markets Index lost 1.5 percent at 4 p.m. in New York to extend its longest slump since November. The Standard & Poor’s 500 Index decreased 0.3 percent in a retreat from its highest close in 2 1/2 years, while European shares extended losses as Ireland said it will postpone planned capital injections into banks. Wheat jumped as much as 2.2 percent, and corn added 4 percent. The Dollar Index lost 0.5 percent and 10- year Treasury yields fell from the highest level since May.

One index that did hold on to gains though was the Dow.

Walt Disney Co. rallied 5.3 percent after sales topped estimates and lead the Dow Jones Industrial Average higher for an eighth straight day, its longest rally since March. The 30- stock Dow climbed 6.74 points, or 0.1 percent, to 12,239.89, its highest close since June 16, 2008.

The ability of the Dow and the S&P to close near 2½ year highs illustrate how much developed and emerging markets have been on divergent paths so far this year.

The MSCI Emerging Markets Index has declined 3.6 percent this year, compared with a 4.9 percent rally in the MSCI gauge for developed countries, as central banks from China to India and Brazil raised borrowing costs...

Joe Weisenthal also notes that stocks finally fall. But if you're still interested in investing in emerging markets despite their recent underperformance, he also has a chart showing some of their P/E multiples.

Wednesday, 9 February 2011

China's interest rates jump as Year of Rabbit hops in

China celebrated the start of the Year of the Rabbit by raising interest rates again.

On Tuesday, on the sixth day of the new lunar year and while China's stock markets were still closed for New Year celebrations, the People's Bank of China announced that it would raise both the one-year deposit and lending rates by 25 basis points to 3.0 percent and 6.06 percent respectively on Wednesday.

Chinese central bankers must somehow think that rate hikes add to festive cheer. The previous rate hike had occurred on Christmas Day.

The move by the PBC was not totally unexpected. Most major Asian stock markets open on Tuesday had declined yesterday even prior to the announcement. Central bank tightening in the region was no doubt among the chief concerns held by investors. The Japanese stock market was the notable exception.

Asian stock market performance on 8 Feb
 CloseChange% change
Nikkei 22510,636.0043.940.41
Hang Seng23,484.30-69.29-0.29
Sensex 3017,775.70-261.49-1.45

Japanese stocks may have been buoyed by positive economic reports on Tuesday. The Finance Ministry reported that Japan’s current account surplus widened 30.5 percent in December from a year earlier to 1.195 trillion yen. Exports accelerated, rising 14.0 percent in December from a year earlier compared to 9.3 percent in November.

Not all the economic data for Japan on Tuesday were positive though. The economy watchers survey by the Cabinet Office showed that the diffusion index for current conditions fell to 44.3 in January from 45.1 in December. However, the diffusion index for future conditions rose to 47.2 from 43.9 for the third straight monthly gain.

Later on Tuesday, developed markets in Europe and the United States were able to shrug off the Chinese rate hike. Most of the major US and European stock markets closed higher.

Western stock market performance on 8 Feb
 CloseChange% change
S&P 5001,324.575.520.42
FTSE 1006,091.3340.300.67
CAC 404,108.2717.470.43

In Europe, stocks not only shrugged off the Chinese rate hike but also disappointing economic data from Germany. Germany's Economy Ministry reported on Tuesday that industrial production fell 1.5 percent in December.

On the bright side, the Bank of France reported that its business sentiment Indicator in industry rose to 110 in January, the highest since October 2007, from 107 in December, while in the United Kingdom, the British Retail Consortium reported that sales at stores open at least 12 months rose 2.3 percent from a year earlier in January, the fastest pace in 10 months.

So on the whole, economies and markets appear relatively resilient. It looks like while the global monetary tightening cycle has begun, it will take action from one or more of the leading central banks, namely the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, before we see a more pronounced impact on the global economy and markets.

Tuesday, 8 February 2011

Japanese economy improving

The Japanese economy is clearly improving. From Reuters:

Japan's index of coincident economic indicators rose a preliminary 0.7 points in December from the previous month, the Cabinet Office said on Monday, in a sign that the country's economy is in a recovery trend.

The index of leading economic indicators, compiled using data such as the number of job offers and consumer sentiment and a gauge of the economy a few months ahead, climbed 0.8 points from November.

But German factory orders gave back some of the November gains in December. From Bloomberg:

German factory orders fell in December after jumping five times more than economists expected in the previous month.

Orders, adjusted for seasonal swings and inflation, dropped 3.4 percent from November, when they surged 5.2 percent, the Economy Ministry in Berlin said today. Economists forecast a 1.5 percent decline for December, according to the median of 37 estimates in a Bloomberg News survey. From a year earlier, orders climbed 19.7 percent, when adjusted for working days.

Monday, 7 February 2011

Global economy accelerates into 2011

According to purchasing managers surveys, the global economy accelerated in January, beginning 2011 on a strong note.

The JPMorgan global all-industry output index rose to 58.3 in January from 57.0 in December. The January reading was the highest since April 2006.

JPMorgan Global All-Industry Indices
New orders56.458.7
Input prices63.365.6

The rate of expansion accelerated in both the manufacturing and service sectors. The global manufacturing PMI rose to 57.2 in January from 55.6 in December while the global services business activity index rose to 58.2 from 56.9.

In the United States, the Institute for Supply Management's manufacturing PMI rose to 60.8 in January from 58.5 in December. The ISM's non-manufacturing index rose to 59.4 in December from 57.1 in December.

In the euro area, the Markit composite PMI rose to 57.0 in January from 55.5 in December. The manufacturing PMI rose to 57.3 in January from 57.1 in December while the services PMI rose to 55.9 from 54.2.

While most of the other major economies appear to be accelerating, Japan appears to be turning around. Markit's Japan composite PMI rose to 50.9 in January, the first time it was above the neutral 50 level since May last year. This was on the back of the manufacturing PMI reading above 50 for the first time in six months, rising to 51.4 in January from 48.3 in December. The services PMI edged up to 50.4 from 50.2.

Saturday, 5 February 2011

US unemployment rate falls

Bloomberg reports the US employment report for January.

The U.S. jobless rate unexpectedly fell in January to the lowest level in 21 months, while payroll growth was depressed by winter storms.

Unemployment declined to 9 percent from December’s 9.4 percent, the Labor Department said today in Washington. Employers added 36,000 workers, short of the 146,000 median gain projected by economists in a Bloomberg News survey...

Average hourly earnings increased to $22.86 from $22.78 in the prior month. The average work week for all workers slipped to 34.2 hours from 34.3 hours...

Bad weather prevented 886,000 Americans from going to work in the January survey week, the Labor Department’s survey of households showed. That compares with an average of 282,000 over the previous five Januarys. Economists at Morgan Stanley said the storms may have subtracted about 150,000 workers from the payrolls count, they said in a note to clients.

Despite the weak headline number, markets took the report relatively positive.

The yield on the 10-year Treasury note climbed to 3.64 percent at 4:20 p.m. in New York from 3.55 percent late yesterday. The dollar strengthened to $1.3587 per euro from $1.3634. The Standard & Poor’s 500 Index rose 0.3 percent to 1,310.87 at the 4 p.m. close.

Elsewhere, Indonesia's central bank raised its benchmark interest rate by a quarter percentage point to 6.75 percent on Friday, the first increase since October 2008.

Friday, 4 February 2011

Services accelerate in Europe and US

The ECB is in no rush to raise interest rates, Bloomberg reports.

European Central Bank President Jean- Claude Trichet signaled no immediate plans to raise interest rates even though the bank expects inflation to stay above its 2 percent limit for longer than it predicted just three weeks ago.

Trichet said the ECB’s benchmark rate, which it left at a record low of 1 percent today, remains “appropriate” and despite “short-term upward pressure,” inflation risks are balanced. The euro fell more than a cent against the dollar as investors pared expectations for an increase in borrowing costs.

This is despite evidence that the economy and inflation in Europe are accelerating. From Reuters:

Vibrant growth in the euro zone and British services sectors brought with it new evidence of surging inflation pressures during January, according to business surveys published on Thursday...

Thursday's PMIs showed the costs paid by companies for raw materials and fuel grew at the fastest rate in more than two years in the euro zone and UK...

The Markit Eurozone Services PMI rose to 55.9 in January from 54.2 in December, higher than an earlier flash estimate of 55.2 and its 17th month above the 50 mark that divides growth from expansion. However, surveys from individual bloc countries showed ongoing weakness in Spain and Italy.

Britain's services PMI hit an eight-month high of 54.5, according to preliminary figure, up from the 49.7 in December that foreshadowed a shock economic contraction of 0.5 percent in the fourth quarters.

The Fed also looks unlikely to raise rates soon with Chairman Ben Bernanke saying on Thursday that the US needs to see faster job growth for a sufficient time before policy makers can be assured the economic recovery has taken hold.

Meanwhile, US economic data on Thursday continued to be positive. Bloomberg reports:

Service industries in the U.S. expanded in January at the fastest pace since August 2005, indicating the economic recovery is broadening.

The Institute for Supply Management’s index of non- manufacturing businesses rose to 59.4, exceeding the median forecast in a Bloomberg News survey, after December’s 57.1. Readings above 50 signal expansion in the gauge that covers about 90 percent of the economy...

The number of Americans filing first-time claims for jobless benefits fell last week, a report from the Labor Department showed today. Applications for unemployment insurance dropped by 42,000 to 415,000 in the week ended Jan. 29. Economists surveyed by Bloomberg projected 420,000 claims, according to the median estimate.

Factory orders rose 0.2 percent in December, led by demand for business equipment, Commerce Department figures showed. Orders for non-defense capital goods excluding aircraft increased 1.9 percent.

Wednesday, 2 February 2011

Manufacturing accelerates in US and Europe

Bloomberg reports that in January, manufacturing in the US grew by the most since 2004.

Manufacturing in the U.S. unexpectedly accelerated in January at the fastest pace in more than six years, reinforcing forecasts the economic recovery will strengthen in 2011.

The Institute for Supply Management’s factory index rose to 60.8, exceeding the most optimistic forecast in a Bloomberg News survey of economists and the highest level since May 2004, figures from the Tempe, Arizona-based group showed today. Readings greater than 50 signal growth...

Figures from the Commerce Department showed housing remains the economy’s weakest link. Construction spending in December fell 2.5 percent, the biggest drop since July, bringing the value of all projects to the lowest level in a decade.

Another Bloomberg report showed that manufacturing also accelerated in the euro area.

European manufacturing growth was stronger than initially estimated in January, accelerating to the fastest pace in nine months on stronger output in Germany.

A gauge of manufacturing in the euro region rose to 57.3 from 57.1 in December, London-based Markit Economics said in an e-mailed report today. That’s the highest since April and above the initially reported 56.9. A reading above 50 indicates growth. In Germany, output growth slowed less than initially estimated, with a gauge at 60.5, down from 60.7.

It was a similar story in the UK. Again from Bloomberg.

U.K. manufacturing grew at a record pace in January as domestic and export demand boosted orders, while price pressures intensified, a report today showed.

A gauge based on a survey of companies by Markit Economics and the Chartered Institute of Purchasing and Supply surged to 62 from a revised 58.7 in December, according to an e-mailed statement today in London. That’s the highest since the survey began in 1992. A measure above 50 indicates expansion.

The data were more ambiguous in China. AFP/CNA reports:

Manufacturing growth in China slowed in January, official figures released Tuesday showed, but rising input costs signalled Beijing has not yet tamed inflation.

The country's Purchasing Managers Index fell to 52.9 in January from 53.9 in December, the China Federation of Logistics and Purchasing, which issues the data with the National Bureau of Statistics, said in a statement...

However, an independent seasonally adjusted PMI reading released by HSBC bank indicated manufacturing activity stayed relatively stable in January at 54.5, up slightly from 54.4 in December.

Tuesday, 1 February 2011

US consumer spending rise, Japanese and S Korean industrial production jump

Monday's data show that the US consumer continued to be a major driver of the economy at the end of last year. From Bloomberg:

Consumer spending in the U.S. rose more than forecast in December, giving the world’s largest economy a lift heading into 2011.

Purchases, which account for about 70 percent of the economy, increased 0.7 percent after climbing 0.3 percent the prior month, Commerce Department figures showed today in Washington...

The Commerce Department’s report also showed incomes increased 0.4 percent for a second month, matching the median forecast in the Bloomberg survey...

Today’s report also showed inflation slowed further below the central bank’s long-term forecast. The Fed’s preferred price index, which is tied to spending patterns and excludes food and fuel, increased 0.7 percent from December 2009, the smallest advance since records began in 1959.

Other reports suggest that the economy is continuing to improve.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose this month to 68.8, the highest level since 1988. Figures greater than 50 signal expansion, and economists projected the gauge would slip to 64.5, based on the median estimate in a Bloomberg News survey...

Also today, results of a Fed survey of senior loan officers showed most banks expect fewer loans will become delinquent in 2011 and charge-off rates will improve. The poll also found that lending rules eased and demand for business credit increased in the fourth quarter from the previous three months.

Reuters reports positive data for Japan and South Korea as well.

Industrial output in Japan and South Korea jumped more than expected in December in a sign that a draw down of inventories and a rebound in export demand will help to underpin recovery in the global economy this year...

Japan's industrial output rose 3.1 percent in December, more than a median market forecast for a 2.9 percent increase, on strong overseas demand for cars and electronic parts, the Ministry of Economy, Trade and Industry said on Monday.

Manufacturers surveyed by the ministry expect output to rise 5.7 percent in January and decline 1.2 percent in February...

South Korea's seasonally adjusted reading in the industrial output index rose 2.8 percent in December, compared with the median forecast for a 2.0 percent gain in a Reuters poll and following a revised 1.5 percent rise in November.

The improvement in Japan is also reflected in the Nomura/JMMA manufacturing PMI rising to a six-month high of 51.4 in January from 48.3 in December.

With good growth comes inflation concerns for those not willing to ignore commodities. Bloomberg reports the latest inflation rate for the euro area:

European inflation accelerated more than economists forecast in January, keeping pressure on policy makers to monitor price gains that are exceeding the European Central Bank’s limit.

Inflation in the euro region quickened to 2.4 percent from 2.2 percent in December, the European Union’s statistics office in Luxembourg said today in a preliminary estimate without providing a breakdown. That’s the fastest since October 2008 and exceeded the 2.3 percent median estimate of 37 economists in a Bloomberg News survey.