US 1st quarter GDP grows 3.8 percent

The US Commerce Department reported yesterday that US real GDP growth in the first quarter of 2005 has been revised up to 3.8 percent, the same as the fourth quarter of 2004. Upward revisions were made to exports and residential fixed investment.

So much for the soft patch.

The Prudent Investor analysed the GDP data and concluded that the "structure of the growth pattern does not look bad". However, "recent economic indicators pointed to a slowdown in most sectors" ahead.

AP cites the response of Mark Zandi to the news.

"The economy is performing well. Sturdy growth with modest inflation," said Mark Zandi, chief economist at Economy.com. That is especially heartening, given the high energy prices. "It illustrates the resilience of the economy and the durability of the current economic expansion," he said... Zandi is among the economists who believe the economy is growing at a rate of 3.5 percent or better in the current April-June quarter. Others, however, predict it will end up under 3 percent.

Paul Kasriel of The Northern Trust Company, however, has a less optimistic take.

The first takeaway from today's report is that despite the upward revision, real GDP and real final sales growth are moderating... For example, year-over-year real GDP growth in Q1:2005 was 3.7% -- down from 5.0% in Q1:2004... The second takeaway is that the downward revision in the core PCE price annualized inflation from 2.2% in the preliminary report to 2.0% in the final report is less than meets the eye. To wit, most of the downward revision was due to a new lower estimate of the cost of "free" banking services. Excluding these kinds of freebies, which the core market-based PCE price index does, consumer inflation was revised up from 2.1% to 2.2%.

Regardless of these varied views, the FOMC is widely expected to hike interest rates again by 25 basis points today.

Mixed views on business and consumer confidence

As usual, we are getting a mixed bag of economic news.

Following in the footsteps of Germany, French business confidence rose in June, with the INSEE business climate index rising to 99 from 97 in May. Italian business confidence, however, fell in June, with the ISAE institute's confidence index falling to 84.2, the lowest since November 2001, from 84.3 in May.

The Conference Board's consumer confidence index for the US rose to 105.8 in June from 103.1 in May. Germany's GfK consumer confidence index for July, on the other hand, dropped for the third consecutive month -- to 3.5 from 4.3 the previous month.

In Asia, things don't look much better.

Japan's retail sales in May declined 1.5 percent on a seasonally-adjusted basis from April but rose 2.7 percent from a year earlier.

Asian industrial production continues to be weak. Japan's industrial production in May dropped a seasonally-adjusted 2.3 percent from April. In South Korea, industrial production rose 0.5 percent in May, less than expected, according to Bloomberg.

We'll get a better indication of the economic outlook with PMI data due out over the next few days.

German outlook improves, industrial production down in Taiwan and Singapore

German business confidence rebounded in June after four consecutive months of falls. The Ifo institute said yesterday that its business climate index has risen from 92.9 in May to 93.3 this month.

Hans-Werner Sinn, Ifo president, said that businesses assessed their current situation as "slightly better" while expectations for the coming six months had "clearly improved". The pick-up was particularly marked among wholesalers and retailers, pointing to a possible revival in domestic demand. But Mr Sinn warned that the latest results "do not yet suffice to indicate an economic recovery in the coming months".

Prospects are a little less optimistic in the UK after Hometrack reported that the average home price dropped by 0.2 per cent between May and June, the 12th monthly decline in a row.

In Asia, industrial production outside China continues to be weak.

In Taiwan, industrial production in May fell 1.42 percent over the same month last year while manufacturing production fell 1.4 percent. Export orders received by Taiwan manufacturers in May reached US$19.52 billion, an increase of 13.14 percent over the same month last year, but the growth rate is slower than in previous months.

In Singapore, manufacturing output fell 4.8 percent in May on a seasonally-adjusted basis, pulled down mainly by biomedical manufacturing.

Apart from the unusually optimistic Ifo figure -- which many attribute to a weakened euro -- the above pieces of news are consistent with the recent pattern of slowing global economic growth. Let's see whether the data coming out the rest of this week confirms this pattern or not.

US May durable goods and new home sales

The numbers on US durable goods orders and new home sales yesterday look good until you drill down.

Aircraft, defense boost May durable goods
New orders for U.S.-made durable goods, except for civilian aircraft and defense, showed unexpected weakness last month, casting some doubt on the economy's health despite continued strength in new home sales... Orders for long-lasting goods rose a larger-than-expected 5.5 percent in May, but orders fell outside of transportation. Excluding the volatile transportation category, orders for durable goods -- big-ticket items meant to last three years or more -- slipped unexpectedly by 0.2 percent. It was the third decline in the last four months for that category.

A separate report showed new home sales rose by a larger-than-expected 2.1 percent in May, although data for the prior three months were revised lower... The national median sales price of a new home fell to $217,000, its lowest in eight months, from $232,200 in April. The average sales price on a new home fell slightly in May to $281,400 from $282,500.

Barry Ritholtz gives his take on the durable goods orders report:

What does this all mean? Expect another quarter of subdued capital spending growth, and commensurately modest GDP gains.

However, the macroblog noted the positive take at Briefing.com:

The headline data are stupendous as non-defense capital goods orders (read business investment) jumped 14.5% to leave a 28% yoy pace. Overall durable goods orders are 10.5% higher yoy as ex-defense orders stand 11% higher from a year ago. The strong return of business investment after the tax related Q1 slowdown is particularly impressive given that it comes from the airlines already belabored by high energy prices.

Meanwhile, Calculated Risk analyses the housing data.

Paul Kasriel of The Northern Trust Company analysed both the housing and manufacturing data and came away unimpressed, concluding:

[The FOMC] is going to raise its funds rate target by 25 basis points to a level of 3.25%. But it might give them some pause for thought about a pause after the June 30th rate hike. I would not be surprised if the FOMC removed the phrase "even after this action, the stance of monetary policy remains accommodative" from its policy announcement of the June 30th funds rate hike. If policy is no longer accommodative, it might be approaching "neutrality." The removal of this phrase sets the stage for the FOMC to pause either at the August 9 meeting or the September 20th one.

If manufacturing is not particularly vibrant in the US, it is not doing too well in the UK either.

Manufacturers' orders at weakest level since 2003
June brought no respite for the embattled manufacturing sector as orders fell further behind last year's and weak demand forced companies to cut prices, according to a survey from the CBI. Manufacturers' orders, which have deteriorated sharply over the past three months, weakened once again in June to reach their lowest level since October 2003, the CBI employers’ group said on Thursday... Price expectations of companies polled by the CBI in June were at their weakest since May 2004, with producers of consumer goods the most pessimistic. Average domestic prices are set to fall over the coming quarter, the CBI predicted...

Even in China, there is concern of a possible downturn.

Macro-control policy needs readjustment: researcher
China's overheated economy has softlanded successfully and it's time for China to readjust its strict macro-control policy to avoid possible deflation.

The remarks were made by Zhao Xiao, a researcher with the State-Owned Assets Supervision and Administration Commission (SASAC), the watchdog of state-owned assets in China, in an article published in Friday's China Securities Journal.

"The strict macro-control policy has scored remarkable achievements," Zhao said. "However, if the government sticks to a strict loan restrictions and continues to raise RMB interest rates, as some people suggested, China's economy will take a sudden turn downward," he added.

If so, the macro-control policy will have to be changed from prevention of inflation to prevention of deflation, he said...

All said, I still think it is too early to write off the US economic expansion, but as an engine of global economic growth, I think it may be losing some of its fire.

US economy shows strength, oil touches US$60 but no inflation in HK and Singapore

Yesterday's news indicate that the US economy remains strong.

Sales of previously owned homes and condominiums dipped 0.7 percent last month, according to the National Association of Realtors. That left sales at a seasonally-adjusted annual rate of 7.13 million units, the second-highest level on record. The median home price rose to an all-time record of $207,000.

Meanwhile, the Labor Department reported that new claims for unemployment benefits fell by 20,000 last week to total 314,000, the lowest level in two months.

The rise of oil prices above US$60 a barrel briefly yesterday may threaten growth, but in a sense, that rise is also a sign of economic strength. The US stock market, though, wasn't very convinced, with the major stock indices falling 1 percent or more yesterday.

High oil prices, though, are among the few indications of inflation in the world. Inflation globally has not been as great a threat as previously feared.

This is especially the case in Hong Kong and Singapore. Hong Kong's consumer prices rose just 0.8 percent in May from the year before, while Singapore's was flat.

Conundrum continues

The conundrum continues, with interest rates falling all over the world yesterday.

Treasury yields go back below 4 per cent
Yields on 10-year US Treasuries dropped below 4 per cent again on Wednesday as talk of interest rate cuts in Europe pushed up demand for US government debt. "At 4 per cent we are a high-yield market compared to some others," said John Roberts, head of Treasury trading at Barclays Capital...

In late trade in New York, 10-year Treasuries were trading at yields of 3.944 per cent, down 10.3 basis points. Two- and 30-year bond yields were also lower, at 3.604 per cent and 4.250 per cent, respectively... The yield on the two-year gilt was down 12.2bp to 4.142 per cent, and the 10-year gilt yield lost 9.3bp to 4.249 per cent. The two-year Schatz was yielding 2.005 per cent, down 2.6bp, while the 10-year Bund yield fell 6.6bp to 3.140 per cent... The yield on the benchmark Japanese government 10-year bond fell 2.5bp to 1.265 per cent...

But the recent economic news flow hasn't been that bad actually.

On Tuesday, Germany's ZEW institute's monthly index rose to 19.5 in June from 13.9 the month before.

On Wednesday, the European Union reported a 1.1 percent rise in exports for April even as its deficit widened to 9.7 billion euros. On the same day, the European Union also reported a 2.1 percent rise in industrial new orders for April, while the euro-zone reported a 1.5 percent rise, both reversing falls in previous months.

And today, Japan reported a double dose of good news. Its tertiary sector index of service industry activity rose 1.8 percent in April while the government's business survey index (BSI) for big companies for April-June rose to 0.9 from 0.6 in the previous quarter with companies showing even more confidence for subsequent quarters.

Japan's deflationary demographics

Japan's low birth-rate and ageing society is giving it fiscal problems.

Japan Should Curb Medical, Social Welfare Spending, Panel Says
Japan should curb the growth in spending on medical and social welfare because its society is aging and public debt in the world's second-biggest economy is rising, a panel advising the government said... Social welfare and medical spending is budgeted to rise 2.9 percent to 20.4 trillion yen ($187 billion) this fiscal year as the population ages, boosting expenditure on medical care and pensions, which account for a quarter of government spending. The government forecasts the economy will grow 1.6 percent this fiscal year.

Prime Minister Junichiro Koizumi has pledged to curb the expansion of public debt, which his government has projected will reach 151 percent of the gross domestic product by March 2006. The number of retirees will rise to 34 million people, or 40 percent of the population by 2050, as the populace starts to shrink from next year, the government said this month...

Japan plans tax crackdown
Japan's tax commission on Tuesday proposed a radical overhaul of income tax as early as next year in an effort to repair what it considers the country's dire fiscal position. With the fiscal deficit running at more than 5 per cent of gross domestic product before debt interest payments, the influential commission is proposing sweeping changes aimed at limiting avoidance and bringing more people into the tax net. Hiromitsu Ishi, commission chairman, told the Financial Times that immediate improvement of tax collection was needed if Japan was to meet the challenge associated with a rapidly ageing society...

Even universities are suffering the effects.

Ghosts of Low Birth Rate Haunting Japanese Universities in Real Life
A private university in Japan virtually declared bankruptcy after financial difficulties arising from a lack of students. Japanese educational institutions are anxious that the rumored "university bankruptcy" scenario was becoming true.

Hagi International University, a four-year private university in Japan's Yamaguchi Prefecture, decided in its June 20 board of administration that it was unable to manage its debts of more than three billion yen (or about 30 billion won) and will file with the Tokyo Regional Court for an application of the civil regeneration law...

Unfortunately, May trade figures show that Japan's much-vaunted export machine isn't pulling its weight in offsetting its domestic weakness at the moment.

Japan's Trade Surplus Narrows as Oil Boosts Imports
Japan's trade surplus shrank by more than two-thirds as record oil prices depressed demand for exports and boosted the value of imports, threatening to sap a recovery in the world's second-largest economy. The surplus narrowed 68 percent to 297 billion yen ($2.7 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The surplus was expected to shrink to 499.1 billion yen, according to the median forecast of 31 economists surveyed by Bloomberg News. Exports rose 1.4 percent, and imports gained 18.6 percent.

[...]

From a month earlier, the surplus shrank 1 percent to 690 billion yen, seasonally adjusted. Exports fell 0.1 percent, and imports were unchanged...

Meanwhile, A Fistful of Euros looks at the relatively more optimistic demographic trend in France, whose population is projected to hit 75 million and be the largest in the EU by 2050, as well as how demographics may be impacting textbook economics.

US leading index falls further in May

The Conference Board announced yesterday that the US leading index decreased 0.5 percent to 114.1 in May. The April figure was revised to show no change from the previous month, while the index declined 0.6 percent in March. The index has declined 1.1 percent in the six months through May.

Not all economists are worried. As MarketWatch reported:

Economists have been skeptical of the weakness in the leading index, saying the flatting yield curve isn't the sign of economic weakness it once was.

Drew Matus, Lehman Bros. economist, summed up this line of thinking by titling a note to clients: "Don't believe the leading economic index."

"We found that the shape of the yield curve has become less significant as a predictor of recessions in recent years," Matus said.

Similarly from Reuters:

Economists are divided on the degree to which this might presage slower growth ahead, and the Conference Board said it would be changing the way it constructs the index so that the yield curve would only subtract from the index if long rates were to move below short rates.

"We continue to believe that the leading index is a poor leading indicator of the economy," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Paul Kasriel of The Northern Trust Company, however, says "Pay Attention To Your Leaders!".

Even though the LEI may be currently sending too negative an economic signal, I believe there still is much merit in paying attention to its directional signal... Although at 114 basis points average in May, the yield spread was not sending a recessionary S.O.S., it was sending a signal that economic growth would soon be settling down near its long-term trend... Another component of the LEI, real M2 money supply is sending out a more foreboding signal. In the past three months, real M2 growth has contracted at an annual rate 2.8%. Neither the yield spread not real M2 are as good leading indicators as they used to be. Nevertheless, they still are better than any others I know of. Both are sending a warning to the Fed to tread carefully going forward lest it precipitate a recession...

A recession call would probably be premature. The Economic Cycle Research Institute's leading index, for example, has been more benign, and recently turned up.

Booms and gluts

There has been quite a lot of discussion on the global housing boom of late. After the feature by The Economist on 16 June, there were commentaries by Paul Kasriel of The Northern Trust Company and Caroline Baum of Bloomberg, for examples. And just yesterday, Barry Ritholtz and Calculated Risk had new posts on housing on their blogs to add to previous ones.

With so much said already, there is very little for me to add on "The housing boom".

However, with oil above US$59 a barrel, the topical issue may be shifting to oil anyway.

Brad Setser has a post on oil last Friday. Or to be more exact, about the global savings glut.

But this post is really not about rising oil prices -- or even the shifting balance of power between oil producing countries and the world's major oil firms. Rather, it is about the hottest topic in global macroeconomics, Ben Bernanke's global savings glut...

If you look around and ask where savings are rising, the answer is really in two places. China, which obviously does not produce oil. And, the oil exporting countries...

... It is pretty clear that the huge surge in oil prices -- and the absence, i gather, of a comparable surge in either consumption or investment in oil exporting countries -- has a little something to do with the apparent glut of global savings. According to the IMF, savings in fuel exporters averaged 22.9% of GDP from 91-98. In 2004 it was 34.2% of GDP. To state the obvious, that is a big swing.

But China seems to keep popping up whenever we talk about excesses or gluts. Note the following excerpt of the BusinessWeek article, "China: Too Many Factories?".

Six additional ethylene crackers, as they're known in industry jargon, are expected to win government approval and come online by 2010. China's ethylene capacity is expected to grow by 22% annually through 2009, while domestic demand will climb by just under 13%, figures Qu Guangdong, a Beijing analyst with chemical industry researcher SRI Consulting. Already the excess capacity has helped whack global ethylene prices by 50%, to about $600 per ton, since September. Qu thinks that for emerging petromajors such as Sinopec and CNOOC, it's a matter of having too much cash. "They have the money, and they want to spend," he says, "and they don't really care about the international markets." A Sinopec spokesman says the company is not worried about overcapacity in ethylene.

And according to the article, it's a similar story for steel, cement, autos and semiconductors.

US consumer confidence, current account deficit rise

The US economy continues to look upbeat even as economies elsewhere appear to slow.

Reuters reports that the University of Michigan's measure of consumer sentiment rose to 94.8 from 86.9 in May, its highest level since January.

"I think we are beginning to see a shift in the tempo of the expansion. Other variables have indicated that lately. We may see an acceleration," Bill Hummer, chief economist at Wayne Hummer Investments, was quoted as saying.

An acceleration in consumer spending would almost certainly widen the current account deficit. As it is, the current account for the first quarter, as reported by the US Commerce Department yesterday, shows a deficit of US$195.1 billion. The fourth quarter 2004 deficit was revised up to US$188.4 billion from the previously-reported US$187.9 billion.

Brad Setser projects that the annual deficit will be over US$800 billion for two reasons.

I still think the income balance will turn ever so slightly negative for the full year. And I expect the goods and services deficit -- 5.6% of GDP -- to widen over the course of the year, particularly if oil stays in the high 50s and if the dollar's recent rally is sustained. The large gap between the US import and US export base makes it difficult for imports to grow by much without widening the deficit, and I don't expect the relatively strong q1 US export performance to be sustained in the face of a rising dollar and a slowing world economy.

If the US deficit widens, Singapore probably wouldn't be contributing much to it. Singapore's non-oil domestic exports fell 5.6 percent in May, with exports to the US contracting 17 percent. Non-oil retained imports of intermediate goods contracted 5.0 percent, indicating that exports are likely to continue falling in the months ahead.

There are also signs of cooling in Europe. Inflation in the European Union was down to 1.9 percent in May from 2.1 percent in April. Industrial production in the European Union edged up 0.6 percent in April. Although this reversed the falls in the previous two months, industrial production has essentially been flat over the past year or so.

The apparent strength of the US economy remains a relative oddity among the developed economies. Little wonder that its current account deficit continues to widen.

Uncertain economic conditions amid concerns over global housing market

Yesterday's news was somewhat mixed.

In Asia, Japan's core private-sector machinery orders reportedly fell in April, but by a smaller-than-expected 1.0 per cent, while China's fixed-asset investment in urban areas rose 26.4 percent from a year earlier in the first five months, accelerating from the 25.7 percent gain for the first four months, but investment in real estate slowed to 24 percent from 26 percent in the first four months and 30 percent last year.

Meanwhile, in the UK, retail sales rose by 1.3 percent in May from the same month in 2004, the slowest growth since January 1999.

Yesterday's news out of the US was also not as positive as those from the previous day.

The Federal Reserve Bank of Philadelphia's business outlook survey index of manufacturing activity fell to -2.2 in June from 7.3 in May. This is the index's first negative reading in 25 months. Set against that is that the index for future activity increased from 22.3 in May to 30.6, its highest reading in six months. And in line with the moderating inflation picture, the indices for prices paid and received both fell.

In other news, jobless claims rose by 1,000 to 333,000 last week, while the four-week average rose 2,750 to 335,000. US housing starts in May rose by a less-than-expected 0.2 percent, while permits for future groundbreaking fell a larger-than-expected 4.6 percent.

Brad Setser takes a look at the global housing market bubble, as does The Economist. Both point the finger at low interest rates as a key factor for the housing boom.

"Japan provides a nasty warning of what can happen when boom turns to bust," The Economist said. "Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991."

And although low interest rates have been a factor in driving up house prices, The Economist says that "contrary to conventional wisdom, it does not require a trigger, such as a big rise in interest rates or unemployment, for house prices to decline", citing the cases in Britain and Australia.

Speaking of interest rates, David Altig looks at the federal funds rate and concludes that the Federal Reserve "faithfully -- and consistently -- pursues both" aspects of its dual mandate of price and output stability, which, as he admits, is not the same as saying that it "behaves...optimally".

Global economy shows strength despite low inflation

Inflation may be cooling around the world, but don't write off the global economic expansion yet.

The US Labor Department reported yesterday that the US consumer price index fell 0.1 percent in May after rising 0.5 percent in April. While the fall was mainly due to a decline in energy prices, which fell 2.0 percent, the core index -- excluding food and energy -- rose only 0.1 percent in May.

At the same time yesterday, the US Commerce Department reported that US business inventories grew 0.3 percent in April while sales rose 1.2 percent.

Also yesterday, the Federal Reserve reported that industrial production rose 0.4 percent last month after a 0.3 percent drop in April, powered by a 0.6-percent rise in manufacturing. And in its Beige Book report, the Federal Reserve reported that the overall economy continued to expand with only moderate price pressures.

Further evidence that there is still life left in manufacturing comes from the Empire State Manufacturing Survey by the Federal Reserve Bank of New York, whose general business conditions index, which had slipped to a two-year low of -11.1 in May, rebounded to 11.7 in June.

The economic expansion may be further underpinned by continued strength in the housing market. The National Association of Home Builders/ Wells Fargo Housing Market Index (HMI) released yesterday rose one point to 71 in June, its highest level since December 2004.

Certainly, there were no signs of a slowdown in the other engine of global economic growth, China. According to the National Bureau of Statistics yesterday, China's industrial output rose 16.6 percent in May from a year earlier. And the previous day, the bureau had reported that China's retail sales rose 12.8 percent in May from a year earlier.

But don't count too much on other economies making substantial contributions. The Conference Board reported yesterday that the leading index for the UK decreased 0.4 percent in April. However, it did add that the "leading index is still on a rising trend despite small declines in the last two recent months".

More signs of cooling in May

Inflation in the US appears to be cooling, but so does consumer demand.

The producer price index fell 0.6 percent in May on a seasonally-adjusted basis, according to the Labor Department yesterday. This followed a rise of 0.6 percent in April and 0.7-percent in March. The core index -- less food and energy -- was up 0.1 percent in May, compared with a 0.3-percent gain in April. Energy prices fell 3.5 percent in May.

At the same time, the Commerce Department reported that retail sales for May fell 0.5 percent from the previous month on a seasonally-adjusted basis. April sales, however, were revised to show an increase of 1.5 percent compared with the previously-reported 1.4 percent. Excluding autos, retail sales dropped 0.2 percent after a 1.4 percent jump in April.

Softness is also apparent in Europe.

While UK consumer price inflation, at an annual rate of 1.9 percent in May, remained at a seven-year high, elsewhere in Europe, France's annual inflation rate fell to 1.7 percent in May from 2 percent in April in European Union harmonized terms, Spain's dropped to 3 percent from 3.5 percent and Sweden's fell to all of 0.2 percent from 0.4 percent.

Little wonder that in Merrill Lynch's latest monthly survey of fund managers, inflation has stopped being a big worry. 48 per cent of fund managers expected global inflation to be higher a year from now, down from 70 per cent two months ago. At the same time, 33 per cent more managers expected the outlook for corporate profits to deteriorate over the next 12 months than expected it to improve.

In spite of these expectations, the survey found that 67 per cent of fund managers are underweight bonds and only 7 per cent overweight. In equities, 56 per cent are overweight, against 16 per cent underweight.

UK prices cooling

More indications that prices in the UK, especially those in the housing market, are cooling off.

FT reports that factory price inflation has abated.

The price of goods made in British factories unexpectedly fell in May on the back of a sharp drop in the price of petroleum products and goods made of recycled materials such as scrap steel, official figures showed on Monday.

Prices at the factory gate were on average 0.2 per cent lower than in April, which pushed the annual rate of input price inflation down to 2.7 per cent from 3.3 per cent a month earlier.

Manufacturers’ cost inflation, which has run in double digits over the last year, also slowed between April and May but not as markedly as expected. Input prices rose on average 0.2 per cent, bringing the annual inflation rate from 10.2 per cent in April to 7.8 per cent.

So has house price inflation, according to the same report.

Separately, house price inflation as measured by the Office of the Deputy Prime Minister, which had been showing much higher levels than other indices in recent months, fell back into line with the general consensus in May.

House prices rose 6.9 per cent in the year to April, compared with a 12.6 per cent rise in the year to March, according to the ODPM. Annual house price inflation in London was 2.7 per cent compared with 9.8 per cent a month earlier.

According to another FT report, sentiment among professionals in the housing market appears to corroborate the figures.

Estate agents and surveyors were more pessimistic in May about house prices than at any time since November 1992, the Royal Institution of Chartered Surveyors reports on Tuesday... In its closely watched monthly survey, Rics said 49 per cent more estate agents reported house prices had fallen over the past three months than said prices were rising, the worst seasonally adjusted reading for more than 12 years.

However, yet another FT report indicates that househunters think that prices are stabilising.

Confidence among househunters rebounded in May as six months of fairly stable house prices left homebuyers to predict that prices will remain robust over the next year, according to a survey. The average expectation for house price inflation over the next 12 months was for a drop of just 0.3 per cent in May, compared with expectations of a sharp fall of 7.7 per cent in April, according to Propertyfinder.com. Further evidence of stabilisation came from the fact that buyers and sellers had similar expectations in May, the internet property portal said.

More inflation data out of Europe and the US later today and tomorrow.

GDP, industrial output in Japan revised down, little inflation in China

Japan today saw downward revisions to two previously-reported data. GDP growth in the January-March quarter was revised down to 1.2 percent from an earlier estimate of 1.3 percent, while industrial output in April was revised down to a month-on-month rise of 1.9 percent from an initial estimate of 2.2 percent.

Meanwhile, there is still scant inflation in China. The National Bureau of Statistics reported today that China's consumer price index in May rose 1.8 percent from a year earlier, the same rate as in April. Consumer prices in Chinese cities reportedly rose 1.4 percent on an annual basis in May while in rural areas they rose 2.4 percent.

So is China cooling? A recent Reuters report indicate that even property prices there may be slowing down.

According to figures compiled by China Index Academy, a property research group, prices in Shanghai rose 14.78 percent in January from a month earlier, but just 0.45 percent in February and fell 0.45 percent in March before rising 1.05 percent in April. In Beijing, prices rose 5.86 percent in January from December, were flat in February, and then rose 0.69 percent in March and 0.49 percent in April.

Better outlook for semiconductor industry

It does look as though the semiconductor industry is picking up, with the past week seeing a string of positive news on the industry.

On 8 June, the US Semiconductor Industry Association (SIA) reported that global semiconductor sales are expected to rise by 6 percent in 2005 to a record $226 billion, more than previously forecast, driven by demand for personal computers and mobile phones. The association also projected a compound annual growth rate of 9.8 percent through 2008.

Excess inventories seem to be a diminishing concern. "By the end of the first quarter of this year, excess inventories had been largely worked off and are no longer a factor in our outlook," George Scalise, president of the SIA, was quoted as saying.

These optimistic projections appear to be backed up by corporate forecasts last week.

Texas Instruments raised its second-quarter earnings forecast from a range of 25 cents to 29 cents a share to 27 cents to 30 cents per share, while its revenue target was raised from a range of $3 billion to $3.24 billion to a range of to $3.12 billion to $3.24 billion. Rising demand for its wide array of microchips that power cell phone, communication products and entertainment systems is expected to feed these increases. Further, it said that excess inventory, which had weighed on revenue in recent quarters, had been cleared.

Taiwan Semiconductor Manufacturing, the world's top contract microchip maker, raised its forecast for shipments to an increase of 11 to 13 percent from the first quarter and its estimate for gross profit margins to about 40 percent, the high end of its previous 38-40 percent estimate. It's main competitor, United Microelectronics, had earlier reported a 1.6 percent rise in sales for May from April.

Intel, the world's largest chip maker, raised its revenue and profit margin forecast for the second quarter, citing strong demand for its Centrino notebook computer chips. Its sales target was raised to $9.1 billion to $9.3 billion from $8.6 billion to $9.2 billion in April, while quarterly gross margins was raised from 56 percent to 57 percent.

Intel's rival, Advanced Micro Devices, also said last week that demand for the chip maker's products is "robust" across the board.

National Semiconductor, a maker of chips that control power consumption in electronics, reported that earnings in its fiscal fourth quarter rose to $132.1million from $94.2 million a year earlier and reported that orders for new chips rose 12 percent from the previous quarter.

LSI Logic, a maker of microchips used in data storage devices, raised its revenue forecast for the second quarter to a range of $465 million to $475 million from its previous estimate of $450 million to $465 million. It cited better-than-expected growth in its DVD recorder products as a reason for the improved estimate.

And in a further sign of bullishness for the industry's future, Semiconductor Equipment and Materials International reported on 9 June that China is expected to build 20 new semiconductor fabrication plants over the next four years.

Trade data from around the world

Yesterday, the big economic news was trade.

In China, the trade surplus reportedly doubled in May to US$8.99 billion from US$4.59 billion in April. Exports rose 30 percent from a year earlier to US$58.4 billion and imports increased 15 percent to $49.4 billion.

While many observers focus on China's exports, Bloomberg's report on the news points out the effect of import substitution as well.

The problem of China's widening trade surplus "is not so much about exporting, it's more about import substitution," says CSFB's [chief regional economist] Tao [Dong]. "In the chemical industry, we see quite clear evidence that domestically-made materials are replacing materials imported from Korea and Taiwan. Twelve months down the road this may also happen in the steel industry."

China's textile exports to the European Union, though, may moderate after an agreement was reached between the two parties to limit shipments of 10 types of textiles to the latter through 2007, according to a Bloomberg report. The agreement limits 10 products, including T-shirts and flax yarn, to import growth in the region of 10 percent a year, according to an EU statement.

This agreement should relieve some pressure on the EU's current account, which recorded a deficit of 15.7 billion euro in the first quarter of 2005, as compared with a deficit of 3.9 billion euro in the first quarter of 2004 and a deficit of 2.3 billion euro in the fourth quarter of 2004.

And the EU's current account does not seem to be improving. After the worsening of the UK trade deficit in April reported the previous day, yesterday, France reported a record trade deficit of 3.22 billion euros for April from a revised 2.34 billion euros in the previous month. This news came on top of a reported fall in French industrial production by 0.3 percent in April.

North America, however, had some better news yesterday.

Canada added twice as many jobs as expected in May, the trade surplus widened for a third month to C$5.1 billion in April -- the biggest since August -- and the Conference Board of Canada's confidence index rose 1.5 points to 122.6 in May.

Across the border to the south, the US Commerce Department reported that the US trade deficit widened to US$57 billion in April -- its fourth-highest level ever -- amid record-high imports and exports. However, the deficit was not as large as expected, and the March deficit was revised down to US$53.6 billion from US$55.0 billion previously.

Simultaneously, the Labor Department reported that prices of goods imported into the US fell 1.3 percent in May while prices of goods exported decreased 0.1 percent.

Reuters reported some positive reactions to the US trade data.

"The trade numbers are a little more moderate. The rate of deterioration is slowing. That's good news for the economy. It's being less of a drag," said Dana Johnson, chief economist with Comerica Bank in Ann Arbor, Michigan.

Bloggers are not as impressed. General Glut emphasised that so far this year, "the US trade deficit is a whopping 22% larger than in 2004", while Ben Carliner at Cynic's Delight asks: "Why is the US running a sustained trade deficit on 'Advanced Technology Products?'"

Edward Hugh also has some things to say about the US -- as well as Chinese -- trade numbers at A Fistful of Euros. And David Altig at macroblog, who also posted on the Chinese trade surplus and the US import/export prices, provides a comprehensive round-up of what the experts said of the US trade data.

But let's give the last word to Federal Reserve chairman Alan Greenspan, who had said on Thursday in his testimony to the US Congress: "[A]lthough prices of imports have accelerated, we are, at best, in only the earliest stages of a stabilization of our current account deficit -- a deficit that now exceeds 6 percent of U.S. gross domestic product."

Fed not done tightening, but BoE may have to cut

Economic news yesterday followed the recent pattern: okay in the US, weak elsewhere, specifically in the UK.

The US Labor Department reported yesterday that new claims for jobless benefits fell 21,000 to 330,000 last week. More importantly perhaps, the four-week moving average of claims fell to 331,750 from 334,500 in the prior week.

Federal Reserve chairman Alan Greenspan appeared quite sanguine about the US economic outlook in his testimony to the US Congress yesterday.

"The most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more-serious slowdown in the pace of activity," he said. "Consumer spending firmed again, and indicators of business investment became somewhat more upbeat."

And in his concluding remarks, he said that "the US economy seems to be on a reasonably firm footing, and underlying inflation remains contained".

Steve Ricchiuto, chief US economist at ABN AMRO in New York, was quoted by Reuters as saying: "He's telling you that they're not going to stop tightening."

If only the same could be said for the UK.

UK interest rates held steady as economy weakens
The Bank of England left interest rates at 4.75 percent for the 10th month running on Thursday as evidence builds that the economy may be weakening quickly enough to warrant a rate cut later this year... [M]any in financial markets and a growing number of forecasters now expect the BoE's next rate move to be down, perhaps as soon as August...

A survey this week showed retail sales fell in May on a year earlier and companies have lined up to complain about tough trading conditions... Another fall in house prices in May was further evidence that a property market slowdown which began in earnest late last year is persisting and hurting spending...

Data released shortly before the MPC's decision showed factory output rose 0.9 percent in April, more than expected, but not enough to reverse March's sharp 1.6 percent fall...

Visit National Statistics Online for other UK manufacturing data.

Other indicators reported by the Office for National Statistics yesterday were those for the UK trade deficit, which worsened in April to £3.4 billion compared with the revised deficit for March of £3.2 billion.

Low interest rate conundrum and the housing froth

Brad DeLong tries to explain the low long-term interest rate conundrum.

Now what happens when the Federal Reserve raises short-term interest rates r? That narrows spreads between short- and long-term interest rates, and induces the hedge fund to increase its demand L for long-term Treasuries. That means that increases in short-term rates are associated with increased demand -- higher prices -- lower interest rates -- on long-term bonds. In other words, hedge-fund demand for long-term Treasuries slopes the wrong way: when prices rise, demand does not fall but increases.

So does Barry Ritholtz.

[U]nderfunded pensions have to buy long bonds. But hedge funds know this, and they "front run." That's even more buyers (on top of China and Japan) helping to drive rates lower...

The effect of low interest rates on the housing market obviously has Federal Reserve chairman Alan Greenspan worried. In his testimony to the US Congress yesterday, he said:

[T]here can be little doubt that exceptionally low interest rates on ten-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices. Although a "bubble" in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.

So no bubble yet, but some froth.

In a Bloomberg article, Caroline Baum compared the Fed chairman's recent actions on the housing market with his inaction during the 1990s stock market bubble.

Back in the go-go years of the late 1990s, when everyone with a crazy idea and dot-com domain name became a rock star, some economists encouraged the Federal Reserve to utilize one of its little-used tools to rein in the bubble in technology and Internet stocks [i.e. initial margin requirement]... In public, Fed chief Alan Greenspan dismissed the idea of raising margin requirements...to reduce speculation. He steadfastly maintained, even after the bubble burst, that identifying a bubble was possible only after the fact.

As reluctant as the Fed was in 1999 to use non-traditional policy instruments, six years later, with cumulating signs of a bubble in the housing market, the Fed is dipping into its tool chest for some moral suasion... That's exactly what the Fed and other bank regulators, including the Office of the Controller of the Currency and Federal Deposit Insurance Corp., resorted to on May 16 when they issued guidance to financial institutions "for sound risk management practices for home equity lines of credit and loans."

The difference in the reactions to the two situations is apparent to Baum.

Greenspan has gone from a bubble denier to a froth conceder. Other Fed officials now routinely mention the real estate market in their public appearances. So has Greenspan changed his view that bubble management is strictly an ex-post job for a central banker?

It certainly does look as though he has -- at least as far as his publicly-expressed view is concerned. And it wouldn't be too soon.

Japan's leading indicators, Japan as leading indicator

Despite the recent pick-up in capital spending, Japan's economy remains vulnerable.

Japan's index of leading economic indicators fell to 25 percent in April from 36.4 percent in March, indicating that growth will slow. Set against this was the news that Japanese consumer confidence rose to 48.3 in May from 47.4 in April.

For the first quarter, economists surveyed by Bloomberg think that Japan's economy may have expanded at an annual rate of 5.4 percent, slightly more than the 5.3 percent initially estimated by the government.

Meanwhile, Japan's current account surplus in April expanded to 1.39 trillion yen (US$13 billion) from 1.37 trillion yen in March, seasonally-adjusted, according to the Ministry of Finance today. From a year earlier, the surplus widened 5.2 percent to 1.63 trillion yen. Exports increased a seasonally-adjusted 0.8 percent to 4.98 trillion yen in April from March while imports, boosted by high oil prices, rose 5.4 percent to 4.12 trillion yen.

Following the posts by Barry Ritholtz and myself on US Treasury yields declining in a similar manner to Japan in the 1990s, Michael of Global Trader's Diary says that the trend in Japanese yields may not be a leading indicator of US yields. Rather, US yields have in fact been declining along with Japanese yields for the past 15 years, and that if the downtrend in JGB yields is reversed, then US yields would "continue tracking JGB yields and head higher".

Of course, while asset bubbles and their consequences often show some similarities, there are usually differences as well. In the comparison between Japan and the US, I would point to the fact that in the 1980s, Japan's stock market and property bubbles were largely simultaneous phenomena, and their respective peaks occurred about a year apart from each other.

The US housing boom, on the other hand, largely occurred after the end of the stock market bubble of the 1990s and is obviously not over, five years after the stock market bubble peak. So there is a difference between the bubble phenomena in the two countries, and their aftermaths are therefore likely to be at least somewhat different.

Michael pointed out some of the differences between the two in an earlier post.

Bill Fleckenstein also recently discussed the differences at MSN Money.

German output up, orders down in April, RBA leaves rate unchanged

The global economy continues to produce rather downbeat news.

Industrial output in Germany rose 1.1 percent in April, its first rise in three months. However, factory orders fell 2.9 percent in April, pointing to likely weakness in industrial production ahead.

Meanwhile, Australian businesses are preparing themselves for their worst start to a new financial year since the 1991 recession, according to credit agency Dun and Bradstreet's June survey of business expectations. The survey found that sales and profit expectations for the coming quarter were the lowest since the 1991 recession, while expectations for employment growth were the worst in two years.

Not surprisingly, the Reserve Bank of Australia left its cash rate unchanged at 5.5 percent today. National Australia Bank chief economist Alan Oster was quoted in a news report today as saying that the reserve bank's next move could be to lower rates.

Following in Japanese footsteps

Barry Ritholtz provided a chart that showed how US 10-year Treasury yields have been following the path taken by JGB 10-year yields in the early 1990s.

For completeness, equity investors would probably be interested to know what happened to the Japanese stock market during that period and in the years thereafter.

Mixed signals on capital spending but markets positive

Lack of capital spending in much of the world economy has held back economic growth. South Korea appears to be no exception.

Corporate spending at pre-'97 crisis level
Corporate capital spending in the first quarter stood at a pre-1997 financial crisis level, the Bank of Korea said yesterday, casting further doubt about a sustained economic recovery.

The expenditures totaled 18.3 trillion won ($18.25 billion) in the January-March period. It was at the same level eight years ago, months before the Asian financial crisis engulfed Korea. Since then Korean companies have tightened spending and placed production in China and other Asian nations.

[...]

Some companies have amassed record-high cash reserves but are still reluctant to make a fresh investment simply because they have failed to find new investment opportunities in the weak domestic business environment...

Things may be improving in Japan, though.

Japan's 1st-Qtr Capital Spending Growth Accelerated
Japan's capital spending growth accelerated in the three months ended March 31, signaling that corporate investment is supporting a recovery in the world's second-biggest economy.

Capital spending, including investment in software, rose 7.4 percent from a year earlier, the Ministry of Finance said in a report in Tokyo today. That compares with growth of 3.5 percent in the previous three months. Excluding software, spending rose 6.9 percent in the first quarter...

Like other indicators, it looks like capital spending is sending mixed signals.

Investors seem to have largely chosen to look at the signals positively of late. Over the past month or so, equities have gained. As have bonds. "Sell in May and be dismayed" is how I put it.

However, as this story says, the summer has barely begun, and tightening money supply amid an uncertain economic outlook may yet hit stock markets, especially in Asia.

More upside for stocks and bonds?

Barry Ritholtz gives his views on the stock market to SmartMoney.com. He is optimistic for the next few months.

"If my timing is correct, and if my macroeconomic assessment is correct," says Ritholtz, "there will be a rally from June through November. That period -- that five-month period -- will encompass a significant rally. Historically, the last rally of a bull market tends to be the strongest within the cycle."

But he is pessimistic thereafter.

"I suspect the present rally will run longer and further than many expect," he says, "but I also think that the potential downside into 2006 is quite substantial. I don't want to put a number on it, but it could surprise people a great deal."

Bonds may also be in for a good spell near-term, according to Mark Hulbert at MarketWatch.

[T]he average short-term bond timing newsletter remains almost completely out of bonds. From a contrarian point of view, that is encouraging. It means that we are nowhere close to the excessive bullishness that often characterizes market tops.

The basis for his conclusion? The Hulbert Bond Newsletter Sentiment Index (HBNSI), which measures the average exposure to the bond market among bond market timing newsletters tracked by the Hulbert Financial Digest.

As of Wednesday night, the HBNSI stood at just 1.1 percent. To be sure, this is the first positive HBNSI reading (even if only barely) since February. It is significantly higher than the record low reading of negative 67.4 percent registered in early April... Nonetheless, the HBNSI remains well below its all-time high of 72.2 percent.

I have one caveat though. Nowadays, any gauge of sentiment for bonds that does not take Asian central banks into account risks underestimating the true demand for bonds.

US May non-farm employment disappoints

The main story yesterday was US non-farm employment for May, which was up 78,000, according to the Labor Department. Job gains were seen in health care and construction, but manufacturing continued to shed jobs. The unemployment rate was reported to be 5.1 percent.

The numbers were well below consensus. It certainly did not impress Barry Ritholtz, who wrote: "This Nonfarm payrolls report stunk the joint up." Other economists' reactions to the report were summed up by him in this post.

Fed-watcher Tim Duy, however, is not convinced that this report will cause the Federal Reserve to halt its tightening.

One, however, could look at the drop in the unemployment rate, coupled with the rise in Q1 labor costs reported yesterday, and conclude that the labor market is tighter than many analysts believe... I believe policymakers will look at the whole of the data and conclude that the pace of hiring continues its erratic behavior, while the falling unemployment rate and rising unit labor costs suggest the possibility of incipient inflation pressures -- implying Fed officials believe they will have more work to do after this month's meeting.

The ISM's Non-Manufacturing Business Activity Index does not suggest so, however. It fell to 58.5 in May from April's 61.7. The Global Services Business Activity Index, on the other hand, edged up to 57.8 in May from 57.4 in April. Both the US and global price sub-indices, however, recorded falls in May, like their manufacturing counterparts reported a few days earlier.

With such data, it's not surprising that James Picerno said that "it's not too early to wonder if the yield curve will soon invert".

Mixed economic news does not preclude further rate hikes

The macroblog looked at the US Commerce Department's April manufacturing report -- showing a 0.9 percent rise in factory orders and a 1.9 percent rise in durable goods orders -- the Labor Department's US productivity report for the first quarter -- which went up at an upwardly-revised annual rate of 2.9 percent but was accompanied by an annualised 3.3 percent rise in the unit labour costs -- and the Labor Department's initial unemployment insurance claims -- which increased by 25,000 last week, the biggest weekly increase in 14 months, to hit 350,000 -- and, after reviewing the views of other economists, concluded that the inflation risk is "a toss-up".

Roger Nusbaum is less equivocal. In his post "What Should The Fed Do?", he wrote that price increases in energy and health care "have not spilled over into the other parts of the economy", and with economic growth looking weak, "I would like to see [the Fed] stop now".

Meanwhile, in Europe, Eurostat reported yesterday that the eurozone's industrial producer price index rose by 0.4 percent in April. Nevertheless, the European Central Bank left interest rates unchanged yesterday. As Edward Hugh wrote in A Fistful of Euros: "No real surprise here", citing Julian Jessop, economist at Capital Economics, who said: "Whether others like it or not, the ECB isn't an activist central bank."

Furthermore, in the purchasing managers' surveys for May, the global input prices sub-index had fallen sharply from 64.2 in April to 56.4 in May, its lowest level for one and a half years. The US, eurozone, China and UK all saw sharp deceleration in input prices.

Of course, the Fed may choose a different path from the ECB. The US is not Europe, and as Fed-watcher Tim Duy said: "[M]anufacturing accounts for just 12.7% of the value added in the economy... To put it another way, 87.3% of the economy is NOT manufacturing. Just ask the homebuilders... The Fed makes policy for the whole economy, not individual sectors."

Well put. Don't write off further interest rate hikes by the Fed yet. Of course, how long rates respond is another story.

PMIs continue to slide, US house prices continue to rise

The big news from yesterday was that manufacturing continued its downtrend.

Global manufacturers stalling, soft patch persists
Factory activity across the world fell to its lowest level in almost two years in May, raising concerns about a protracted "soft patch" in the global economy and depressing long-term interest rates... Only Japan bucked the trend...

A global Purchasing Managers Index (PMI), which aggregates all national surveys and is compiled by JP Morgan, fell to 51.1 from 51.9 in April -- still just above the 50 level representing the divide between contraction and expansion... In the United States...the Institute for Supply Management's May manufacturing index fell to 51.4 from 53.3 in April... The euro zone PMI fell to a 22-month low of 48.7 in May, after slipping below the 50 watermark in April...

Bill Cara commented that the ISM trend "should be interpreted one way, and one way only: Good jobs are disappearing".

Data from the Office of Federal Housing Enterprise Oversight (OFHEO), though, show that house prices continued to rise in the US in the first quarter while the National Association of Realtors report that the Pending Home Sales Index, supposedly a leading indicator for the housing market, has risen to 128.2 in April, the highest level on record.

Calculated Risk looked at house prices in the US in terms of the price-rent ratio and concludes that "housing is overvalued in most of the United States and significantly overvalued in the larger metropolitan areas".

US consumer outlook only one to rise

Yesterday, there was not a lot of good news on the global economic front.

European Business, Consumer Confidence Dropped in May
European business confidence dropped to a 21-month low in May and consumers were the most pessimistic in a year as oil prices around $50 a barrel and unemployment near a five-year high dimmed the outlook for economic growth.

An index gauging confidence among 35,000 executives in the dozen euro nations fell to minus 11 from April's minus 9, the European Commission said today in Brussels. Economists expected minus 10, the median of 29 forecasts showed. An index of consumer sentiment dropped to minus 15 from minus 13, the commission said...

U.S. Economy: Consumer Confidence Rises; Manufacturing Slows
U.S. consumer confidence unexpectedly rebounded this month and business in the Chicago area expanded at a slower pace, evidence of uneven growth in the economy, private reports showed.

The Conference Board's index of consumer sentiment increased to 102.2 during the month from 97.5 in April, the New York-based research group said today. An index of Chicago-area business, a center of manufacturing, fell to an almost two-year low of 54.1, the National Association of Purchasing-Management-Chicago said. Readings above 50 indicate growth...

Again, the US consumer seems to be the last man standing. He may be getting lonely.

Morgan Stanley's economists possibly think so. Andy Xie warns in his latest commentary that the trade cycle has turned while his chief economist Stephen Roach now thinks that global imbalances may be resolved not by a rise in US interest rates but by a fall in interest rates elsewhere.