Saturday, 30 July 2005

US GDP grows 3.4 percent in second quarter

Advance estimates for the US economy in the second quarter show real GDP growth of 3.4 percent, slower than the 3.8 percent growth in the first quarter but within economists' expectations.

Reuters reports:

The U.S. economy grew at a solid 3.4 percent annual rate in the second quarter, setting the stage for steady second-half expansion as inventories fell and Midwest manufacturing picked up, government and industry reports on Friday showed.

The quarterly report on gross domestic product, or GDP, showed core inflation well contained but analysts said there was enough price pressure after nine quarters of growth exceeding 3 percent to keep U.S. interest rates on the rise.

A price index based personal consumption expenditures rose at a 3.3 percent rate that topped the first quarter's 2.3 percent. However, when food and energy were stripped out...the rate of price rises slowed to 1.8 percent in the second quarter from 2.4 percent...

The strong second-quarter GDP performance followed a 3.8 percent growth rate in the first quarter and reflected well-balanced strength in consumer spending, business investment and exports... [C]onsumer spending increasing at a 3.3 percent rate after growing at a 3.5 percent rate in the first quarter. Business investment advanced at a 9 percent rate after growing 5.7 percent in the first three months of the year.

Companies drew down inventories at a $6.4 billion annual rate during the second quarter -- the first time they reduced stocks since the second quarter of 2003.

Responses to the figures, as compiled by AP, were positive.

"The economy is rolling along like a freight train. High energy prices are less of a drag than what many people had feared," said Ken Mayland, president of ClearView Economics...

[P]aring of inventories set the stage for replenishing them in the July-to-September quarter, which would add to economic growth, economists said. "That leaves the economy well positioned for another strong quarter," said Sherry Cooper, chief economist at BMO Nesbitt Burns...

"This is not an overly exuberant economy but one that is growing at a real nice pace," said David Kelly, economic adviser at Putnam Investments.

Other indicators reported in the Reuters story also suggest good growth ahead.

Separately, the Labor Department reported that employment costs continued to gain moderately in the second quarter, by 0.7 percent, matching the first quarter's pace... [P]ay increased 0.6 percent in the April-June period, matching the gain recorded in the January-March quarter...

Another gauge of economic activity in the industrial Midwest -- the Chicago Purchasing Management Index -- posted a sharp jump in July to 63.5 from 53.6 in June. Every one of its separate measures, from new orders to current production levels, strengthened in July.

A University of Michigan consumer confidence index rose modestly to a 2005 high of 96.5, implying consumers are likely to keep adding their purchasing punch to the economy.

With such strong data, it is not surprising that Fed officials are saying that there is no clear end to Fed tightening in sight. Tim Duy agrees.

China's currency peg and deflation

Now Brad Setser warns of importing deflation from China.

[Stanford University's Ronald] McKinnon believes in China's currency peg. But he also believes China should experience real appreciation through inflation differentials. We usually think that means higher inflation in China than in the US, with the US rate staying constant at levels we in the US find comfortable... But China's inflation rate...remains very modest... China is big enough that the adjustment...could come from stable prices in China and falling prices in the US and Europe.

For more on McKinnon's article (subscription required), see also the macroblog.

Friday, 29 July 2005

Japan continues to recover, but still in deflation

The Japanese economy continues to show signs of recovery.

Industrial production rose 1.5 percent in June from the previous month. A Ministry of Economy, Trade and Industry survey, however, showed that manufacturers' output is expected to fall 0.2 percent in July but rise 1.9 percent in August. Significantly, the NTC Research/Nomura/JMMA Purchasing Managers Index rose to a seasonally-adjusted 54.1, the highest reading since last August.

In addition, the seasonally-adjusted unemployment rate fell to 4.2 percent in June, the lowest since July 1998, indicating that consumption is likely to stay strong.

As it is, average spending by Japanese wage earner households rose a real 0.1 percent in June from a year earlier. Household spending had fallen 2.0 percent in May and 3.1 percent in April.

This improvement corroborated yesterday's report that retail sales grew 3.1 percent in June from a year earlier. Sales by wholesalers gained 2.1 percent.

Housing starts rose 2.4 percent in June from a year earlier

Less positive is that Japan's recovery from deflation appears to be stalling. The nationwide core consumer price index (CPI), which excludes volatile fresh food prices, fell 0.2 percent in June from a year earlier. The core Tokyo CPI fell 0.4 percent in July from a year earlier. Both were worse than economists' forecasts.

Thursday, 28 July 2005

US economy continues to expand

There are still few signs of a slowdown in the US economy.

Sales of new homes soared to a record high in June. The US Commerce Department reported that single-family home sales jumped to a record annual pace of 1.374 million units in June, up 4 percent from May. New home prices, though, declined for a second consecutive month in June with the median price dropping by 5.5 percent to $214,800.

Manufacturing is looking in good shape too after the Commerce Department reported that orders for durable goods rose 1.4 percent in June. May's gain was revised up to 6.4 percent compared with a previously-reported 5.5 percent rise. Orders excluding transportation equipment rose 2.6 percent. Non-defense capital goods orders excluding aircraft, a proxy for business spending, rose 3.8 percent in June after a 0.6 percent decline in May, revised from a 2.5 percent fall.

The Federal Reserve's Beige Book report was also upbeat. "Reports from all twelve Federal Reserve Districts indicate that economic activity continued to expand in June and early July," it said. It also said that "retailers' expectations were generally positive" and "expectations for future factory activity were generally upbeat". It noted "a few signs of cooling" in residential real estate activity, wage pressures remained moderate and price pressures eased slightly or remained unchanged in most districts.

Wednesday, 27 July 2005

Confidence falls in US and Australia, better in Germany

US consumer confidence finally ended its strong run, falling to 103.2 in July from 106.2 in June.

Sentiment in Australia also deteriorated. The National Australia Bank's business confidence index fell to a seasonally-adjusted 3.0 points in the June quarter from an index reading of 8.0 points in the March quarter. The reading of current business conditions remained at 14 index points, but the seasonally-adjusted 12-month expectations index of business conditions fell by 4.0 points.

Sentiment in Germany, however, continued to recover. The Ifo business climate index of business sentiment rose for the second consecutive month in July, to 95.0 from 93.3 in June.

There was also some good news from Asia.

South Korea's economy grew 3.3 percent in the second quarter compared to a year earlier, up from a 2.7 percent year-on-year gain in the first quarter. Seasonally-adjusted, second-quarter GDP rose 1.2 percent from the first quarter.

In Singapore, manufacturing output grew 11.1 percent year-on-year in June, or 9.2 percent on a seasonally-adjusted month-on-month basis. The inflation rate, though, turned negative, with the consumer price index falling 0.7 percent in June from the previous month on a seasonally-adjusted basis.

A widely-expected recovery in the semiconductor industry from the second half of the year onwards should boost prospects for Asian and global economic growth, and possibly semiconductor stocks.

Tuesday, 26 July 2005

The fall and rise of home prices

The housing market in the UK continues to deteriorate...

House prices fell for the 13th straight month in July, taking annual deflation to its sharpest in at least four years, a survey said on Monday. Research company Hometrack said its measure of average house prices based on agreed sales reported by estate agents fell 0.2 percent from a month ago after the same monthly fall in June. Prices were down 3.74 percent over the last 12 months, the most marked fall since Hometrack records began in March 2001. At 161,300 pounds the average house price was the lowest since November 2003, Hometrack said.

...but that in the US powers on.

Sales of previously owned U.S. houses hit a record pace in June, climbing 2.7 percent as home prices soared 14.7 percent from a year ago, the biggest jump in nearly 25 years, a trade group said on Monday. Sales of existing homes surged to a seasonally adjusted 7.33 million unit annual rate last month from May's upwardly revised 7.14 million unit clip, the National Association of Realtors said. The total includes both single-family homes and condominiums... The national median home price rose to $219,000, up from $191,000 a year ago and the strongest increase since November 1980, when annual appreciation was 15.6 percent, the group said.

What a contrast in fortunes.

Monday, 25 July 2005

A new regime for the renminbi

I have expanded my views on the recent renminbi revaluation.

A new regime for the renminbi
After so much speculation, China announced a new exchange rate regime on 21 July for the Chinese currency, the renminbi, together with a new exchange rate with the US dollar. However, this move may have less impact than many hope.

Read more.

Friday, 22 July 2005

US leading index rises, jobless claims fall, Philly Fed up

There was more evidence of strength in the US economy yesterday.

The Conference Board announced yesterday that the US leading index increased 0.9 percent in June to 137.7. Based on revised data, this index remained unchanged in May and increased 0.2 percent in April. Seven of the ten indicators that make up the leading index increased in June. The Board remarked that the increase "is consistent with the economy continuing to expand moderately in the near term, but at a slower pace than in recent quarters".

Employment data was also good, with initial claims for state unemployment insurance falling an unexpectedly large 34,000 to 303,000 last week from a revised 337,000 the prior week, according to the Labor Department. This was the largest one-week decline since December 2002 and brought new claims to the lowest level since April. The four-week moving average fell to 318,000 from 321,250 in the prior week.

And the Federal Reserve Bank of Philadelphia's business outlook survey shows an upturn in the manufacturing sector, with the diffusion index of current activity increasing from -2.2 in June to 9.6 this month. Expectations for future growth, though, showed some deterioration this month, with the index for future activity falling from 30.6 in June to 15.3, its lowest reading since February 2001.

China revalues renminbi...sort of

So, China has finally decided to revalue the renminbi from 8.28 to 8.11 yuan per dollar -- a whopping 2 percent increase. As Brad Setser said, "the change against the dollar is small. Very small".

I think the main significance of yesterday's announcement is that the renminbi moves to a managed float against a basket of currencies, which allows it the flexibility to move against the US dollar as well as paves the way for full currency convertibility. Apart from that, there is probably more political than economic significance.

At least American politicians appear to be pleased, according to this Reuters report.

U.S. Treasury Secretary John Snow applauded the shift as a significant contribution to global financial stability, while a senator who has been a leading critic of Beijing's currency policies called it a welcome "first baby step."

"If there are not larger steps in the future, we will not have accomplished very much. But after years of inaction, this step is welcome," Sen. Charles Schumer, a New York Democrat, said in a statement.

China was not the only country that removed its rigid peg to the US dollar yesterday. So did Malaysia, although Hong Kong did not.

The Japanese yen leapt 2 percent on speculation other Asian governments, afraid until now of giving China a competitive edge, would let their currencies rise on the yuan's coat-tails.

Malaysia promptly did just that, scrapping the peg that had frozen the ringgit since 1998 and switching like China to a managed float. But Hong Kong, whose currency is also fixed against the dollar, said it had no intention of changing policy.

Some people have suggested that yesterday's moves also paves the way for further revaluation of the renminbi. Apparently, though, the China Daily does not think so.

Expectation for a bigger appreciation of the yuan's value was, and will be, unrealistic. Exceedingly drastic response to the change could throw China's and many other Asian nation's economy into chaos, which would be bad news for everybody.

No doubt, the Chinese authorities would be aware of the risks outlined in my post yesterday.

Meanwhile, Nouriel Roubini and David Altig have an interesting debate on "Whither the Yuan?" hosted by The Wall Street Journal.

Thursday, 21 July 2005

Euro-zone, Japanese trade surpluses fall

Data released by Eurostat yesterday shows that the euro-zone trade with the rest of the world in May 2005 produced a 2.2 billion euro surplus, compared with +7.2 bn in May 2004. The April 2005 balance was +2.0 billion. On a month-on-month seasonally-adjusted basis, though, the trade surplus fell in May as exports rose 1.4 percent while imports rose 2.6 percent.

EU25 trade showed a 7.3 billion euro deficit compared with -3.2 billion in May 2004. In April 2005, the balance was -8.9 billion. On a month-on-month seasonally-adjusted basis, exports rose by 0.8 percent in May while imports rose by 0.4 percent.

The previous day, Eurostat had released data showing that industrial production in the euro zone fell 0.3 percent in May compared to April. Production had risen 0.7 percent in April and fallen 0.1 percent in March. In EU25, production fell 0.2 percent in May after rising 0.9 percent in April and falling 0.4 percent in March.

Today, Japan's Finance Ministry reported that the country's trade surplus shrank 23.5 percent in June from a year earlier to 873.1 billion yen, the third straight month of falls. The fall, however, was smaller than expected. Exports rose 3.6 percent in June from a year earlier while they rose 2.4 percent from a month earlier on a seasonally adjusted basis. Imports jumped 11.0 percent from a year earlier and 2.9 percent on a month-on-month basis, mainly due to higher oil prices.

Most economists remain optimistic for the Japanese economy, though. Yesterday's report by the Semiconductor Equipment Association of Japan that the book-to-bill ratio for Japanese chip-making equipment in June hit 1.09, the first time in six months that orders exceeded sales, would seem to support that optimism. The US-based research group VLSI reported yesterday that worldwide, the book-to-bill ratio for chip-making equipment rose to 0.91 in June from 0.83 in May.

China's GDP rises 9.5 percent

China's red-hot economy is not getting cooler despite the government's efforts.

China's GDP grows 9.5 percent in first half year
China's gross domestic product (GDP) for the first half of this year reached 6,742.2 billion yuan (812.3 billion US dollars), a year-on-year increase of 9.5 percent. "It was 0.2 percentage points lower than the growth rate for the same period of last year," said Zheng Jingping, spokesman of the National Bureau of Statistics, at a press conference on Wednesday...

China's fixed assets investment reached 3289.5 billion yuan in the first six months of this year, a year-on-year increase of 25.4 percent. China's industrial production grew by 16.4 percent in the first six months of this year on a year-on-year basis, says a report released by the National Bureau of Statistics...

Meanwhile, Chinese companies' efforts at acquiring US companies seem to be floundering. Appliance manufacturer Haier America and two investment partners have dropped their bid to buy US appliance maker Maytag, while US oil producer Unocal Corp has endorsed the latest US$17 billion takeover offer from Chevron Corp, favouring it over CNOOC's financially-superior but politically-problematic offer.

China needs to think again about whether it wants to continue accumulating US dollars if the only assets it can buy with them are US fixed income instruments.

On the other hand, maybe China will not continue to accumulate US dollars at the current rate. Barry Ritholtz points to a John Mauldin post that points to some research from GaveKal Research Limited covering the renminbi revaluation and the US dollar carry trade.

[W]e are very confused by the recent protectionist rhetoric coming out of Washington DC. Indeed, the efforts to push China to revalue appear to us to be both clumsy, and dangerous.

It is dangerous because it is playing into the hands of the protectionist lobbies all over the world. It is clumsy for a revaluation, even a large one, would have no impact on the US current account deficit. Why? Because given the state of excess capacity in China in almost all industries, the costs of a RMB revaluation would simply be passed on to the margin of Chinese companies...and not unto the US consumer...

We will turn that question around and ask you to put yourself in the shoes of a Chinese policy maker. This is the situation you are facing today: a) you have the world's worst performing stock market which is hitting 8 year lows), b) you have the world's best performing bond market (Chinese 10 years have moved from 5.25% to 3.7% in the past ten weeks), c) you have industrial production rolling over (weak oil consumption, weak iron ore imports, weak Baltic, weak steel prices, weaker industrial production numbers...), d) you have real estate activity rolling over... e) inflation has fallen from +5.3% to 1.8% in ten months, f) M1 growth has fallen from +20% to +10% in the past year... In other words, nothing in China's economic data, or market performance points to the need for a RMB revaluation.

It does seem to me that the idea that it is not -- or no longer -- in China's interests to revalue is becoming an increasingly held one. GaveKal warns of the consequences when more people take to this idea:

[T]he excess US$ that have showed up in [Asian] central bank reserves represent borrowed US$; not earned US$... With an economic slowdown unfolding in China, a revaluation becoming increasingly unlikely, a rising US$, rising US interest rates, and Chinese companies lining up to get money out of China...some will sell...their RMB... [T]he Chinese money supply will shrink... We believe the unwinding of the US$ carry trade will affect Asia disproportionately; especially countries with pegged currencies (HK, Malaysia, China) which will be unable to cope with the unwinding of the US carry-trade by allowing their currencies to weaken...

GaveKal also thinks that if the US$ carry trade unwinds as US interest rates rise, it would leave the euro vulnerable as the euro zone's interest rates "can only go down".

Morgan Stanley also has recent commentary on China that arrives at somewhat similar conclusions with those of GaveKal's.

Consistent with strong indicators of the past few months, China reported faster top-line real GDP growth in 2Q05... [I]t is unambiguous to us that investment-driven growth in China has maintained a strong bias... [I]n the absence of sufficient tightening, growth may accelerate this year before slowing...

[W]e believe that the investment-driven cycle will come under the pressure of its own weight - overcapacity, unfavorable pricing, reduced cash flow and shrinking margins... Deteriorating profitability and corporate cash flow are set to force a slowdown in capex, bringing down the unsustainably strong economic growth.

Amid runaway growth and persistently excessive investment, we see a change to the renminbi exchange rate regime less imminent. Investment excesses are raising our concerns over financial system health once again. We believe the fixed exchange rate should serve as a crucial anchor of stability for the time being.

There are changes coming to China's economic scene, and despite most people's expectations and the latest GDP figures, it may not be to the exchange rate.

Wednesday, 20 July 2005

Yesterday's housing stories

Housing was the main story yesterday.

In the US, housing starts were flat in June after a revised fall in May, but building permits rose 2.4 percent. On balance, the housing sector appears to remain strong, especially in the South.

There was also some mixed news on the housing market in the UK. The Financial Times reported that according to the Royal Institution of Chartered Surveyors, the "number of inquiries from would-be house buyers with estate agents rose for the first time this year in June but an overwhelming majority of surveyors still saw house prices decline".

Singapore has not been associated with a strong housing market for some time, but things may be about to change. Yesterday, the Singapore government announced that it is easing rules on property financing and foreign home ownership. The Singapore stock market leapt 2 percent as a result, led by property and finance stocks.

In non-housing specific news, Japan saw its index of leading economic indicators for May revised downward to 36.4 percent from the previously-reported 40.0 percent while its index of coincident economic indicators was revised up to 60.0 percent from 55.6 percent. In Germany, the ZEW economic research institute's economic expectations index rose 17.5 points to plus 37 in July, the highest level since September 2004 and much better than expected.

Tuesday, 19 July 2005

China surplus and US deficit

Brad Setser has his usual insightful commentary on China's trade surplus and growing reserves.

China indicated its reserves have increased to $711 billion at the end of June -- up $101 billion from the end of December 2004. Actually, they are up more than that. China transferred $15 billion to a state bank, and valuation losses from the falling euro and yen probably subtracted another $15 billion to its reserves (that would be roughly consistent with a 75/25% dollar/ non-dollar spit in China's reserves). That implies an underlying increase of $130 billion, give or take a few billion, in the first half of the year -- a bit over $20 billion a month.

And he thinks that China's rapid pace of reserve accumulation will continue in the second half of the year.

China's official GDP will be a bit under $2 trillion, say $1850 billion, at the end of 2005. I think there is a reasonable chance China will add $280 billion or more to its reserves this year -- or 15% of its GDP... China's reserve accumulation seems every bit as unprecedented [as] current account deficits of close to 7% of GDP in the world's largest economy, and the issuer of the world's reserve currency.

The latter is, of course, referring to the US and its current account deficit. Setser suggests that the pace of Chinese surpluses is problematic. So, for that matter, is the US current account deficit.

The factors behind the US current account deficit and the possibility that it may stabilise as the economy moderates are discussed in my commentary "US current account deficit may stabilise as economic growth moderates".

Fed chairman on oil prices and economic growth

The Fed chairman sees moderate growth for the US economy in the face of high oil prices.

Greenspan said Fed research found that the rise in oil prices since 2003 to above $60 a barrel is likely to shave about three-quarters of a percentage point from the U.S. gross domestic product this year. Rising energy costs sapped growth by a half-percentage point in 2004, he said in written responses to questions from Congressional Joint Economic Committee Chairman Jim Saxton, a New Jersey Republican.

Greenspan is sanguine about the message being sent by the yield curve.

The central bank head also said flat long-term interest rates, despite the Fed's short-term rate hikes, should not be interpreted as a clear sign of economic faltering. "A sharp flattening of the yield curve is not a foolproof indicator of economic weakness," he said. Greenspan said most statistical models that look at the yield curve -- different interest rates along the spectrum of Treasury debt maturities -- to forecast economic trends project moderate growth.

Respondents to a survey by the National Association for Business Economics (NABE) also seem upbeat about the economy. "The NABE respondents see continued solid growth in the economy," said Gene Huang, Chief Economist, FedEx Corporation.

Monday, 18 July 2005

Singapore's June exports show weak recovery

Singapore's economy is looking rather weak. Non-oil domestic exports rose only 1.3 percent in June after falling 5.3 percent in May. The trend is clearly down.

The only good news is that non-oil retained imports of intermediate goods (NORI), a short term leading indicator of manufacturing activity, rose 11.3 per cent, which would be consistent with the recovery in manufacturing in the second half of the year that many economists forecast.

Earlier, advance estimates of second quarter GDP showed 12.3 percent growth, but that is after a 5.5 percent contraction in the first quarter. The Singapore government has a 2.5-4.5 percent economic growth target for 2005.

Saturday, 16 July 2005

US producer prices flat as industrial production and consumer sentiment rise

There was more good news on the US economy yesterday.

Continuing the recent signs of benign inflation, the Labor Department reported yesterday that the US producer price index (PPI) showed no change in June from the previous month. The index had fallen 0.6 percent in May and risen 0.6 percent in April. The core PPI -- foods and energy -- decreased 0.1 percent in June, following a 0.1 percent rise a month earlier. The year-on-year rise in total PPI was 3.6 percent, well below the 4.9 percent peak in March.

Also yesterday, the Federal Reserve reported that US June industrial production rose 0.9 percent, more than twice the expected 0.4 percent gain and the biggest gain since February 2004. Most of the gain came from a jump of 5.3 percent in the output of utilities as a result of warmer-than-usual temperatures. Manufacturing output rose 0.4 percent. Capacity utilization hit 80.0 percent, the highest since December 2000.

To add to the positive outlook, the Federal Reserve Bank of New York reported that its manufacturing index jumped to 23.9 in July, the highest since December while the Commerce Department reported that business inventories in May rose only 0.1 percent from April, reducing the headwind from excess inventories.

Positive consumer sentiment added to yesterday's good news. The University of Michigan's preliminary consumer sentiment survey for July came in above expectations at 96.5, the highest for 2005.

Based on yesterday's commentaries in the Global Economic Forum, Morgan Stanley economists are probably not surprised by the direction of the US economy. Stephen Roach on inflation:

Inflation appears to be down and out, but there are lingering fears of a comeback. Those fears are based on the closed-economy inflation models of yesteryear. In the timeworn jargon of the dismal science, the "Phillips curve" tradeoff between growth and inflation is still thought to be alive and well. These fears are overblown, in my view. If anything, the risks are skewed more toward another deflation scare rather than a worldwide acceleration of inflation. Financial markets are not aligned with those risks.

Richard Berner and Shital Patel on business conditions:

Business conditions improved again in early July, according to the Morgan Stanley Business Conditions Index (MSBCI), confirming other indicators pointing to rebounding growth. The index increased three points to 57%, and now stands 10 points above its April trough; this is the biggest three-month gain in the index since September 2003.

The US economy continues to give positive surprises. No wonder the S&P 500 rose to 1,227.92 yesterday, its highest close in four years.

Friday, 15 July 2005

Economy remains good for US, but deteriorating in Europe

The US economy continues on a sanguine path, with retail sales holding up and inflation moderating.

The Commerce Department reported yesterday that retail sales for June rose 1.7 percent from the previous month. It also reported that May sales were revised up to a 0.3 percent fall compared with the previously-reported 0.5 percent decline. The auto sector was a big contributor in June, rising 4.8 percent, more than reversing its 1.3 percent decline in May.

At the same time, the Labor Department reported that the consumer price index was unchanged in June from the previous month after seasonal adjustment. The core CPI -- less food and energy -- rose 0.1 percent. The year-on-year rise in total CPI was 2.5 percent, well below the 3.5 percent peak in April.

While the headline inflation rate appears to be moderating, the macroblog notes that the growth rate of the median CPI tracked by the Federal Reserve Bank of Cleveland has been relatively stable, fluctuating by between 0.2 to 0.3 percent each month since the beginning of 2005, or between 2.3 to 2.4 percent on a year-on-year basis.

While the inflation trend in the US appears to be good, that for the euro zone is deteriorating, according to European Central Bank chief economist Otmar Issing, as reported by the macroblog and The Prudent Investor. Euro zone inflation for June has been estimated at 2.1 percent, above the ECB's 2 percent ceiling, thus reducing the likelihood of a cut in interest rates. Germany, the largest economy in the euro zone, reported yesterday that its consumer price index rose 1.8 percent in June from a year earlier, up from 1.6 and 1.7 percent in April and May respectively.

The Prudent Investor also reported that euro zone and EU25 GDP grew by 0.5 percent quarter-on-quarter in the first quarter, improving on the 0.2 and 0.3 percent growth respectively in the previous quarter. However, Europe is expected to slow down for the rest of 2005, especially in the face of high oil prices, although a mitigating factor is that oil-exporting countries may import more from the euro area.

Thursday, 14 July 2005

US trade deficit falls in May

The US trade deficit for May turned out lower than most economists expected.

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $106.9 billion and imports of $162.2 billion resulted in a goods and services deficit of $55.3 billion, $1.6 billion less than the $56.9 billion in April, revised. May exports were $0.2 billion more than April exports of $106.7 billion. May imports were $1.4 billion less than April imports of $163.6 billion.

However, an AP report points out that the deficit with China rose to US$15.8 billion, the highest since last November. Furthermore, the fall in the deficit mainly reflected a US$1.3 billion decline in the oil bill following falls in oil prices in May. With oil prices rising again, analysts expect the deficit to set new record highs this year and in 2006.

In the blogosphere, Brad Setser, General Glut and The Prudent Investor also analysed the trade data and all agree that the trade deficit is set to get worse.

House prices, inflation measurement and asset bubbles

The macroblog explains why the Bureau of Labor Statistics uses the rental equivalence approach to measure the cost of shelter rather than house prices.

What is the cost of owning a home to someone who already owns a home? Well, it's the opportunity cost of living in your home rather than renting it out. So, in this sense, there is no "mismeasurement"...

However, house prices may be a leading indicator of inflation.

I think it entirely possible that assets can provide a leading signal of a generalized, monetary inflation. But admittedly, this is mostly an article of faith and not science--the statistical link between these cost-of-living measures and asset prices is very tenuous. And economists have not been able to map the link that leads from excess money growth to a generalized inflation. So until that day, I think one who ignores asset prices when looking for signs of rising inflation does so at some peril.
But I am reminded of Japan. For all its asset bubble in the 1990s, CPI inflation there peaked out around 3-4 percent, not particularly high. Of course, what followed was deflation.

Once you have an asset bubble, it's bad if it is followed by inflation, but it may be worse if it's not. Of course, if you deny that there is a bubble, then there's nothing to worry about.

Wednesday, 13 July 2005

Moderate economic rebound for Japan

Japan's Cabinet Office announced yesterday that the economy is bouncing back at a moderate rate. This is despite the fact that its consumer confidence index for June fell 1.7 point from the previous month to 46.6.

Exports may not help the Japanese economy much either. Japan's Finance Ministry reported today that exports in May were up by only 1.7 percent from a year earlier. Imports surged 21.2 percent due to higher oil prices. As a result, Japan's current account surplus fell 19.5 percent.

And the Ministry of Economy, Trade and Industry today reported a revision in Japan's industrial production for May to a fall of 2.8 percent compared to the previous month from a preliminary 2.3 percent decline.

The moderate rate of economic recovery in Japan was undoubtedly taken into consideration by the Bank of Japan when it announced that it was keeping monetary policy unchanged today. In addition, the Bank of Japan had reported yesterday that the corporate goods price index (CGPI) rose 1.4 percent in June from the same month a year earlier but fell 0.1 percent from May, indicating that the threat of deflation lingers.

And there are signs that inflation remains relatively tame worldwide. Consumer price indices in June rose 1.7 percent from a year ago in Norway, 0.6 percent in Sweden and 2.0 percent in Britain.

Tuesday, 12 July 2005

Stocks rise on Monday, Korean market nears high

Stock markets around the world continued to do well yesterday.

 8 July close11 July closePercent change
S&P 5001,211.861,219.440.6
Nikkei 22511,565.9911,674.790.9
FTSE 1005,232.25,242.40.2
CAC 404,300.314,321.560.5
Hang Seng13,964.4714,157.241.4
Straits Times2,215.992,241.191.1

Note that the KOSPI in particular is now at its highest level since its peak at the beginning of 2000.

A fall in oil prices contributed to yesterday's gain in stock markets. NYMEX light sweet crude fell 71 cents to $58.92 a barrel yesterday as Hurricane Dennis in the Gulf of Mexico proved less destructive to oil facilities than feared. In addition, the Xinhua News Agency reported that Chinese crude oil imports rose by only 3.9 percent in the first half of 2005, compared to a 39.3 percent increase in the same period last year, indicating that China's oil demand is slowing.

China's slowdown could also be seen in its trade data released yesterday. China's trade surplus for June surged five-fold from a year earlier to US$9.68 billion as exports grew 30.6 percent while imports grew just 15.1 percent, far slower than the growth seen for much of last year.

Other trade-related news saw Britain's trade deficit narrow to £4.962 billion in May from £5.132 billion pounds in April.

Still in Britain, wholesale prices rose 2.1 percent in June from May, mainly due to high oil prices. Coupled with a fall in output prices by 0.2 percent, that is bad news for British manufacturers.

British house price inflation, however, slowed. According to the Office of the Deputy Prime Minister, house prices rose by 6 percent in the year to May compared with 6.9 percent in the year to April. However, the average house price rose slightly in May, standing at £182,651, compared with £181,832 in April.

In other news out of Europe, French industrial production rebounded in May, rising 0.3 percent. This is its first rise since January. French unemployment, however, rose in May, leaving the jobless rate at 10.2 percent, its highest level in more than five years.

On the whole, the data from yesterday seem compatible with a continued but gradual moderation in the global economy, something that stock markets are apparently not uncomfortable with. A lot, though, will depend on how bad price pressures are. The next few days will provide more clues on the latter.

Sunday, 10 July 2005

London bombings fail to sink stock markets

Did bombs explode in London recently? Just looking at the performances of stock markets in the past week, you wouldn't have guessed so.

 8 July
6 July
% chg
1 July
% chg
S&P 5001,211.861,194.941.41,194.441.5
Nikkei 22511,565.9911,603.53-0.311,630.13-0.6
FTSE 1005,232.205,229.600.05,161.001.4
CAC 404,300.314,279.950.54,269.620.7
Hang Seng13,964.4714,149.93-1.314,201.06-1.7
Straits Times2,215.992,234.13-0.82,209.950.3

It does look as though the bulls are in control of stock markets at the moment. And it seems fitting too, in the context of the typical bulldog spirit being shown by the British in the wake of the incident.

Barry Ritholtz has more on stock market reactions to terrorism. Start from here.

Saturday, 9 July 2005

US job growth moderate, other data mixed

There was relatively little to shout about in yesterday's news, the biggest of which was probably the US non-farm employment report from the Labor Department.

Nonfarm employment increased by 146,000 in June, and the unemployment rate continued to trend down, reaching 5.0 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the month, payroll employment continued to grow in several industries, notably professional and business services and health care.

The job growth was less than economists expected, as AFP reported

Analysts were expecting a June rise in the closely watched "non-farms payroll" figure of 195,000. But the Labor Department also revised up the data for previous months. For May, the figure was raised to 104,000 from 78,000 given initially. The number for April was increased to 292,000 from 274,000.

Economists generally reacted moderately to the news.

In the blogosphere, Barry Ritholtz at The Big Picture did some digging into the data and concluded as follows:

The headline data may appear benign, but digging beneath shows a less than robust economy. Not awful -- just not as rosy as the scenario painted by the cheerleaders . . .

Meanwhile, Morgan Stanley chief economist Stephen Roach gave a broader view of the labour situation at the Global Economic Forum.

... Not only has private sector job growth fallen nearly 10 percentage points short of the typical recovery path, but fully 42 months into this recovery, the inflation-adjusted hourly wage rate is fractionally below the level prevailing at the trough of the last recession in November 2001...

While there are many factors that may be accounting for this squeeze on worker compensation, I continue to believe that globalization is playing the most important role. I don't think it's a coincidence that America is currently in the midst of the weakest recovery of both employment and worker compensation on record.

In other news out of the US, the Federal Reserve reported that consumers reduced their borrowing in May for the first time in 18 months. New debt declined by US$3 billion in May from the previous month, a drop of 1.7 percent on an annualized basis.

There was bad news out of Japan yesterday. Reversing the upbeat trend in recent days, the Cabinet Office reported that core private-sector machinery orders fell in May by a larger-than-expected 6.7 percent, and re-assessed the trend for machinery orders as "flat" from one showing "signs of improvement".

There was better news out of Germany. Although industrial production in May fell 0.2 percent from April, it was better than economists had expected. Furthermore, German exports rose 3.8 percent in May after a 0.5 percent drop in the previous month.

Nevertheless, the OECD's May leading indicator pointed to slowing activity ahead. The leading indicator read 103.0 in May, unchanged from a revised April figure but down an annualised 0.6 percent when compared with the average of the previous 12 months.

Friday, 8 July 2005

Terrorism strikes again

Terrorism reared its ugly head again, this time in London.

London Terror Bombings Kill 37, Wound 700
Terror struck in the heart of London on Thursday as explosions ripped through three subway trains and blasted the roof off a crowded red double-decker bus. At least 37 people were killed and more than 700 wounded in the deadliest attack on the city since the blitz in World War II.

British Prime Minister Tony Blair blamed Islamic extremists and said the bombings were designed to coincide with the opening in Scotland of a G-8 summit of the world's most powerful leaders. Foreign Secretary Jack Straw said the bombings -- which came the day after London won the bid to host the 2012 Olympics -- have the "hallmarks of an al-Qaida-related attack"...

Predictably, European stock markets sagged on the news, but were well off their lows for the day -- the FTSE 100 fell 1.36 percent, the DAX index fell 1.9 percent and the CAC 40 fell 1.4 percent. US markets actually rose, the S&P 500 rising 0.2 percent.

Apparently, after so many similar incidents over the past few years, markets have lost some of their sensitivity to such attacks.

The fall in oil prices probably helped. Light sweet crude futures closed at $60.73 yesterday even though the US Energy Department reported a 3.6 million barrel decline in oil inventories for last week.

Thursday, 7 July 2005

Good news clouded by record oil prices

There was more good news yesterday.

In Europe, German manufacturing orders surged 2.7 percent in May while manufacturing output in Britain was steady in May compared with April and industrial production rose 0.1 percent.

In the US, the ISM non-manufacturing index rose to 62.2 percent in June from 58.5 percent in May, the Mortgage Bankers Association's seasonally-adjusted index of mortgage application activity increased 9.6 percent to 853.4 in the week ended July 1, with purchase applications up 9.1 percent, and chain store retail sales rose 0.5 percent in the week ended July 2, compared with a 0.6 percent decline the previous week.

The US stock market, however, ignored the good news and focused on high oil prices instead. With NYMEX light crude settling at US$61.28 a barrel yesterday, up US$1.69, the Dow Jones Industrial Average fell 101.12, or 0.97 percent, to 10,270.68, the Standard & Poor's 500 index fell 10.05, or 0.83 percent, to 1,194.94, and the Nasdaq composite index lost 10.10, or 0.49 percent, to 2,068.65.

A fixation on the negative by the stock market is normally not a bullish sign, but I guess a record oil price is rather hard to ignore.

Wednesday, 6 July 2005

Signs of improvement in the global economy

There are continuing signs of improvement in the global economy, although signs of weakness still linger.

The euro zone's service sector purchasing managers' index fell to 53.1 in June from 53.5 in May, but the Chartered Institute of Purchasing and Supply said its purchasing managers index of activity in the UK services sector rose to 55.8 in June from 55.1 in May.

There was good news in retail. In Europe, euro zone retail sales rose 1.1 pct in May from April while the British Retail Consortium reported that UK like-for-like sales fell by 0.5 percent in June from the same period a year earlier, an improvement on May's 2.4 percent fall and April's 4.7 percent decline. In the US, retail sales are also expected to be good after Wal-Mart raised its forecast for June same-store-sales growth to 4.5 percent from an earlier projection of 2 to 4 percent.

In other news out of the US, the Commerce Department reported that factory orders rose 2.9 percent in May, the biggest gain in 14 months. However, excluding orders for airplanes and other transportation equipment, factory orders fell 0.1 percent in May.

And in Japan today, the Cabinet Office reported that Japan's index of leading economic indicators stood at 40.0 for May, up from a revised 31.8 for April but still below the boom-or-bust line.

Tuesday, 5 July 2005

Asian growth may moderate, high oil prices not helping

The news flow from East Asia outside China and Japan have not been very good recently.

First of all, soaring oil prices are expected to moderate growth in a region that is highly dependent on oil imports.

Indeed, today, South Korea's central bank lowered its economic growth forecast for this year to 3.8 percent from 4.0 percent, saying record high oil prices were slowing an overall economic recovery. While private consumption growth is expected to accelerate in the second half of the year, and service sector output grew in May for a third consecutive month, the government is not taking any chances. Finance and Economy Minister Han Duck-Soo has promised to increase spending on public works and would consider a further cut in sales taxes.

In Taiwan, the trade surplus has shrunk 86.6 percent in the first five months of this year, mainly because of a sharp increase in the price of imported crude oil, according to the Ministry of Economic Affairs. Meanwhile, Taiwan's composite index scores dropped two points in May from a month earlier to 18, the lowest in two years, according to the Cabinet-level Council for Economic Planning and Development, although the leading indicator index managed to edge up 0.8 percent to 105.5.

And in contrast to improvements in much of the rest of the world, Singapore's purchasing managers' index fell in June -- to 50.5 from 51.0 in May -- as did Hong Kong's.

In spite of these difficulties, fund managers remain most positive on equities in Asia ex-Japan among global equities, according to a Dow Jones Newswires survey in June.

Monday, 4 July 2005

Top stock market newsletters are bullish

According to MarketWatch's Mark Hulbert, the top US stock market newsletters are bullish.

In a recent article, he picked out nine newsletters that are top in market timing over the past 10 years. Every single one was bullish.

If you are thinking of going contrarian against this consensus, note that Hulbert also warns that the consensus among the ten worst performing market timing newsletters over the last decade is quite bearish.

"To be bearish yourself, therefore, you in effect have to bet that the last decade's worst are more likely to be right than the last decade's best," he wrote.

Or to put it another way, past performance may not be a good predictor of future performance, but you would probably at least want to think twice before betting against it.

As for me, I'll stick to watching the financial and economic indicators (see "Outlook for stocks and bonds may depend on PMI").

Saturday, 2 July 2005

Global manufacturing, US consumer confidence up in June

Yesterday was good news day, especially for manufacturing.

In the US, the Institute for Supply Management said its index of national factory activity climbed to 53.8 in June from 51.4 in May. Most of the sub-indices improved, with the new orders index surging to 57.2 in June from 51.7 in May. The prices index slumped to 50.5 from 58.0.

In other news out of the US, consumer confidence was reported to be up too. The University of Michigan's measure of confidence rose to 96.0 in June from 86.9 in May. The preliminary June reading was 94.8.

Construction spending, though, was down 0.9 percent in May.

The Economic Cycle Research Institute reported that its weekly leading index edged up to 133.7 in the week ended June 24 from a downwardly revised 133.3 in the prior week. Anirvan Banerji, director of research at ECRI, was quoted by Reuters as saying that "economic growth will remain firm in the second half of the year".

The good manufacturing data in the US found parallels elsewhere around the world. The global purchasing managers' index (PMI) rose to 52.4 in June from 51.1 in May. The new orders index rose to 54.4 from 51.6 in May, its highest level so far in 2005.

Apart from Japan, which I reported on yesterday, Europe and Australia also saw improvements in their PMIs. The euro zone PMI rose to 49.9 in June from 48.7 in May. The Chartered Institute of Purchasing and Supply's PMI for the UK rose to 49.6 in June from a downwardly revised 47.0 in May. Similarly, Australia's PMI rose 4.7 points to 55.2 in June, helped by a hefty 12.1 point jump in new orders.

These are just one month's data, but together with other forward-looking indicators released recently, they do provide hope that the global economy, particularly manufacturing, may be stabilising.

Friday, 1 July 2005

Improved outlook in Japan in June

The news flow from Japan continues its gradual shift towards a more positive balance.

The Nomura/JMMA Purchasing Managers' Index (PMI) rose for the sixth straight month in June to 54.0, its highest level since last August, from 53.5 in May.

The Bank of Japan's quarterly Tankan survey revealed today that business confidence at large Japanese manufacturers recovered more than expected in June from three months ago, with the headline index hitting plus 18, up from plus 14 in March. The index of large non-manufacturers also improved to plus 15 from plus 11. Among small- and medium-sized firms, the index for manufacturers rose to plus 2 in June from zero in March, while that for non-manufacturers rose to minus 12 from minus 14.

Capital expenditure was forecast to rise 5.4 percent in the current year to March 2006, up sharply from a fall of 2.2 percent in the March survey. Companies, though, were cautious on earnings, and labour indices did not indicate tightness in the demand for workers.

Japan's jobless rate did stay at 4.4 percent in May, remaining at a more than six-year low. Spending and income in salaried households in May remained weak, though, falling 2.0 percent and 1.9 percent respectively on a real, year-on-year basis.

Deflation continued to abate. Core consumer prices in Japan were flat in May from a year earlier while month-on-month, the core consumer price index (CPI) rose 0.2 percent, its third straight month of increase. Less positively, core consumer prices in Tokyo, a leading index of nationwide trends, fell 0.4 percent in June from a year earlier and 0.1 percent from the previous month.

The positive pieces of news from Japan still come in fits and starts, but that may not be a bad thing, remembering that a bull market climbs a wall of worry.

Fed raises rate as signs of softness return

As widely expected, the FOMC decided to raise the target federal funds rate by 25 basis points to 3.25 percent yesterday. The rate hike came despite the fact that other indicators out of the US yesterday were showing signs of a soft patch.

[T]he National Association of Purchasing Management-Chicago business barometer slipped to 53.6 in June from 54.1, meaning that businesses grew a bit less than expected...

The Commerce Department said personal income in May increased 0.2 percent, just below Wall Street forecasts for a 0.3 percent gain. That followed a 0.6 percent advance in April and was the weakest reading since January. Consumer spending was flat compared with forecasts for an advance of 0.1 percent after a 0.6 percent increase in April. The price index for consumer expenditure, a measure of inflation favored by Fed Chairman Alan Greenspan, was also unchanged after rising 0.4 percent in April.

Jobs numbers, however, looked better.

The number of Americans seeking initial jobless compensation unexpectedly fell by 6,000 last week to the lowest in more than two months, the Labor Department said. First-time claims for state unemployment insurance, an early reading on the resilience of the job market, fell for the second straight week, slipping to 310,000 in the week ended June 25 from a revised 316,000 in the previous week... The four-week moving average also fell for a second consecutive week, dropping to 323,500 from 333,750.

Tim Duy, for one, was somewhat surprised by the optimistic tone of the FOMC statement.

The thinking in the FOMC remains more optimistic on growth compared to the view of many market participants. FOMC members do not believe they have entered the ninth inning. The FOMC intends to continue raising rates, and likely do not have an end target in mind.

Kash at Angry Bear pointed out that the real federal funds rate: still far, far short of where the real federal funds rate typically is during periods of reasonably good economic growth... If one believes in an exogenously 'neutral' real federal funds rate...such a neutral fed funds rate is probably somewhere in the neighborhood of 3-4%.

But I have my doubts...because I wonder if relative interest rates aren't sometimes just as important as absolute levels of interest ... So while today's interest rates are indeed low in an absolute sense, I worry that raising interest rates will still chill economic growth from its current level, which is only mediocre to begin with.

No doubt, he is worried that the US would follow in the footsteps of the UK, which, as Michael Shedlock (Mish) opined, may be headed for recession, based on the downwardly-revised first quarter GDP, hard-pressed retailers, declining consumer confidence and a worsening current account deficit. Mish pointed out, though, that these, together with other global economic conditions, might actually be good for the US dollar.

US dollar bears need ponder this: The UK has now recorded a current account deficit for every quarter since the third quarter of 1998. The EU is in shambles, Chinese banks are deep in trouble, and the UK does not exactly seem to be such a pillar of strength either... [T]here is not another currency worth buying. Of course this bodes well for gold over the long haul. One of the reasons gold has begun to rally in other currencies is simply because there are few other places to hide.

Well, rising interest rates followed by a rising US dollar and weakening economy is not exactly an illogical sequence of events. It would even account for the low long-term rate "conundrum". Whether that's the scenario that policy-makers have in mind is another matter.