Tuesday, 31 January 2006

US consumer spending and Japanese industrial output rise in December

US consumer spending is not quite spent. Reuters reports:

U.S. consumer spending shot ahead a strong 0.9 percent in December... [T]he surprisingly big spending jump outstripped an as-expected 0.4 percent rise in personal income, the Commerce Department report showed.

Inflation remains relatively muted.

The department's overall price gauge held steady in December and its core inflation gauge, which strips out food and energy costs, moved up just 0.1 percent... Over the past 12 months, core prices have risen 1.9 percent...

And manufacturing remains steady.

A separate report showed manufacturing activity in the U.S. Midwest held steady last month. The Chicago Fed said its manufacturing index came in at 112.4 in December, the same as November's upwardly revised reading.

There was also steady growth in Japanese industrial production in December.

Industrial output rose by 1.4 percent in December, just under a revised 1.5 percent in November and below the market expectation of 1.8 percent growth. Year-on-year, output grew by 3.8 percent in December. Shipments picked up 1.1 percent from November while inventory stockpiles also grew, by 0.3 percent...

Production is expected to increase again by 0.9 percent month-on-month in January but then fall by 1.4 percent in February, said the survey of manufacturers by the Ministry of Economy, Trade and Industry (METI).

Monday, 30 January 2006

In the Year of the Dog, will stocks go to the dogs?

Despite some uneasiness earlier in the month, the first month of 2006 has turned out to be reasonably good for the world's stock markets, marking an auspicious start to the Chinese New Year and, if market lore is to be believed, portending a good year for stocks.

29 January was the first day of the Chinese Year of the Dog. Like all the other animals of the Chinese zodiac, it comes once every twelve years. It follows the Year of the Rooster.

Towards the end of the Year of the Rooster, it had looked as though equity investors were about to turn chicken. A scandal at a Japanese Internet company and weak earnings reports in the United States had investors scurrying out of stocks, causing massive price falls not only in these markets but around the world as well.

However, by last Friday, most markets had recovered and are now comfortably in positive territory for the month and year.

 30 Dec 2005
27 Jan 2006
S&P 5001,248.291,283.722.8
Nikkei 22516,111.4316,460.682.2
FTSE 1005,618.805,771.402.7
CAC 404,715.234,956.605.1
Hang Seng14,876.4315,753.145.9
Straits Times2,347.342,412.082.8

This is a reasonably good start to the Year of the Dog and could be a sign that stocks will do well in the rest of the year. After all, there is a market saying: As goes January, so goes the rest of the year. So if markets hold up for the remaining days of the month, this would suggest that the rest of the year would be positive for stocks as well.

Of course, this effect does not work every year. For example, it did not work last year, when the Standard & Poor's 500 was down in January but up over the rest of the year.

However, this year is the Year of the Dog. Does a Dog year hold any particular portent for stock markets?

As the Year of the Dog invariably falls on the second year in the US presidential cycle, one would suspect that it is not usually a particularly propitious year for stocks. That was true in the last Year of the Dog in 1994, when the S&P 500 Index fell 1.5 percent. The index also made significant cyclical lows in the prior two Dog years in 1970 and 1982, although it also displayed its own doggedness by making significant recoveries in the latter parts of those years to finish the years up 0.1 percent and 14.8 percent respectively.

The performances of other stock markets in the Year of the Dog have also been mixed. In the UK, the FTSE All-Share Index fell 7.5 percent and 9.6 percent in 1970 and 1994 respectively, but rose a whopping 22.1 percent in 1982. In Japan, the Nikkei 225 Index fell 15.8 percent in 1970 but rose 4.4 percent and 13.2 percent in 1982 and 1994 respectively, the latter taking place right in the middle of a full-fledged secular bear market.

However, while the Dog's bark is generally worse than its bite, investors in the Singapore stock market might want to be wary this year nevertheless. Historically, the Singapore stock market has been dogged by poor performance in the Year of the Dog, falling in each of the last three in 1970, 1982 and 1994 by 7.2 percent, 16.0 percent and 5.1 percent respectively according to the Morgan Stanley Capital International Singapore Index.

Thrice bitten, once more shy? The Dog certainly does not look like the Singapore investor's best friend.

However, recent experiences may not be good indicators of this year's stock market performance.

According to geomancer Raymond Lo, this particular Year of the Dog is symbolised by two elements: fire sitting on top of earth. As he says on his website, Raymond-Lo.com: "The fire standing on top in 2006 is yang fire which is compared to the Sun. This element symbolises openness, optimism, warmth, politeness and care."

The implications for stock markets? "It is exactly such optimism that will create the positive trend for the stock market in 2006." But he adds: "However, investors have to be cautious towards autumn and winter as there will be substantial set back as the fire element will be weakening in 2007, and such weakening could start as early as the second half of 2006."

So bulls can hope to see more gains, but bears, who have gotten a mauling over the past few years, may finally get some respite some time this year.

Which should not be surprising. After all, every bear and dog has its day, even if it comes once every twelve years.

Saturday, 28 January 2006

Economy looking bad, investors feeling good

So US fourth quarter GDP growth came out weak.

The Commerce Department said gross domestic product, the broadest measure of economic activity within U.S. borders, expanded at a weak 1.1 percent annual rate in the October-December period -- little more than a quarter of the third quarter's 4.1 percent rate.

But the US stock market took it well.

The Dow Jones industrial average ended up 97.74 points at 10,907.21 while the high tech-laden Nasdaq composite index added 21.23 points to close at 2,304.23. Strong earnings reports by blue-chip companies Microsoft Corp. and Procter & Gamble Co. stimulated buying.

Date on new homes sales also possibly helped.

A later Commerce Department report showing December new-home sales climbed by 2.9 percent to a 1.269 million unit rate helped perk up financial markets as analysts noted there still was life in the vital housing segment, where rising home prices have helped boost consumers' optimism.

But the housing data were put in perspective by Calculated Risk, whose charts show that new home sales may have peaked both in terms of sales volume and price.

So if the consumer spending outlook is as weak as the GDP and new homes sale data suggest, equity investors must be banking on lower interest rates or an acceleration in capital spending. Both at the same time would be even better. Morgan Stanley's Eric Chaney makes the case "for a long lasting but moderate capex cycle".

Friday, 27 January 2006

US factory orders and Japanese core consumer prices and retail sales up in December

December was a strong month for US factory orders. Reuters reports:

New orders for U.S.-made durable goods rose a larger-than-expected 1.3 percent in December and the previous month was revised higher, while non-transportation orders gained 0.9 percent, Commerce Department data showed...

November orders were revised up to show a 5.4 increase, the largest monthly gain since May 2005, from a previously reported 4.4 percent advance.

For 2005 as a whole, orders increased 8.2 percent, slightly below 2004's 10 percent gain. The annual increase in non-transportation goods orders was also 8.2 percent.

Non-defense capital goods orders excluding aircraft, seen as a proxy for business spending, were up 3.5 percent, the strongest gain since August. In addition, November's number was revised up to show a 0.2 percent gain from a previously reported 2.1 percent decline.

The strength in the US economy is being reflected in employment too.

The Labor Department said initial claims for state jobless aid rose 11,000 in the week ended January 21 to 283,000 from an upwardly revised 272,000 the prior week...

The four-week moving average of initial claims, which smooths weekly volatility for a more reliable indication of underlying employment trends, fell 10,750 to 288,750, the lowest level since July 2000.

In contrast, industrial output in South Korea fell by 2.6 percent in December, while in Singapore, manufacturing output fell 2.5 percent in December.

Elsewhere in Asia, Japan provided more signs that its economy is improving. From Bloomberg:

Japan's consumer prices had the first back-to-back gain since April 1998 and retail sales rose, signaling that the world's second-biggest economy may be emerging from more than seven years of deflation.

Core prices, which exclude fresh food, climbed 0.1 percent in December from a year earlier, after increasing by the same amount in November, the statistics bureau said today in Tokyo. Retail sales rose a seasonally adjusted 0.8 percent from November, the Ministry of Economy, Trade and Industry said.

Despite the December data, Morgan Stanley economists remain sanguine about the prospects for South Korea and Singapore.

On the other hand, Andy Xie is skeptical about the prospects for Japan.

Japan has a declining population and does not have a big output gap. It is irrational, I believe, to expect a big growth boom in Japan.

Xie's other forecasts:

[U]nskilled labour in OECD countries has increased debt to sustain consumption, even as globalisation has decreased earnings. The surging credit problems in this segment mark the end of this debt-led cover-up of the income problems in the OECD economies, in my view.

[P]roperty prices have peaked in most markets. While the price declines may not be sufficient to trigger a recession, they will no longer be able to boost growth as before. The growth disappointment could expose financial distress and trigger the risk reduction trade.

[T]he commodity bubble and China's surging overcapacity are clashing. The surge in China's fixed asset investment from US$445 bn to US$1 trillion between 2001 and 2005 fuelled commodity demand. However, China will need to slow down investment as overcapacity causes product prices to decline. I expect the commodity bubble to burst in 2006 due to weak demand.

Even in the event that enthusiasm over the 'long-term' value of the hard commodities sustains the bubble, the resulting inflationary pressure could cause the Fed to tighten more and longer than the market expects. In this case, the resulting liquidity decline could burst the bubble.

Thursday, 26 January 2006

US home resales fall but other economic indicators point to growth

Apart from a slowing US housing market, recent economic indicators suggest that the world economy is on track for continued growth.

In the US, Reuters reports that existing home sales declined in December:

Home resales in the United States fell 5.7 percent in December to the lowest level since March 2004... But for the year, 7.072 million existing homes were sold, making 2005 the fifth record year in a row, the National Association of Realtors said...

Price gains have already begun to ease, the Realtors group said, noting price appreciation hit 16.6 percent in October and then slowed to 13 percent in November and 10.5 percent in December.

However, as Calculated Risk notes, mortgage application volume reported by the Mortgage Bankers Association is up from a week earlier and has been rebounding in January so far.

And on Monday, the Conference Board had reported that its US leading index increased 0.1 percent, suggesting that "the economy should continue expanding moderately in the near term".

Europe as a whole also looks headed for further growth, reports Bloomberg.

Business confidence in Germany, Europe's largest economy, rose to a five-year high this month as economic growth accelerated. The Ifo confidence index, based on a monthly survey of 7,000 executives, climbed to 102, a level last reached in May 2000, from a revised 99.7 in December...

Growth in the U.K. economy, Europe's second-largest, accelerated to 0.6 percent in the three months through Dec. 31, compared with 0.4 percent in the third quarter, the Office for National Statistics said. The annual rate held at 1.7 percent.

French business confidence remained unchanged for third month in January at the highest since February 2005. An index measuring sentiment among 2,000 manufacturers held at 103, unchanged from December's reading, which was revised from 102, statistics office Insee said today. Economists expected a level of 103, according to the median of 28 estimates in a Bloomberg News survey...

Inflation in Germany was unchanged at 2.1 percent this month, the Federal Statistics Office said today.

Germany's government today raised its growth forecast for 2006 on expectations exports will rise. The economy expanded 0.9 percent last year. The Economy Ministry said the growth will be 1.4 percent this year, better than its Oct. 21 forecast of 1.2 percent...

Italian consumer confidence fell for a second month in January as higher energy prices raised concern inflation would accelerate. An index based on a poll of 2,000 households by the Rome-based Isae Institute dropped to 106.4 from 108.2 in December, the biggest decline in six months...

Earlier, Eurostat had reported that industrial new orders had grown strongly in November.

The euro-zone industrial new orders index increased by 4.9% in November 2005 compared to October 2005. The index fell by 0.6% in October and rose by 1.7% in September. EU25 new orders increased by 3.4% in November 2005, after remaining stable in October and rising by 0.6% in September.

In November 2005 compared to November 2004, industrial new orders increased by 9.2% in the euro-zone and by 9.3% in the EU25.

Growth in Japan also continues to plod along, according to another Reuters report.

The Ministry of Economy, Trade and Industry said on Tuesday its tertiary sector business activity index rose 0.1 percent in November from the previous month on a seasonally adjusted basis... [I]t followed an upward-revised 1.3 percent rise in October... The tertiary sector index was up 2.9 percent from a year earlier.

The all-industries index, which includes the tertiary sector and industrial output, rose 0.3 percent in November from the previous month... [T]he data supports expectations that Japan's economy continued steady growth...

The Reuters Tankan...produced a diffusion index (DI) of +33 for manufacturing firms in January, up from +32 in December and the highest since the survey began in June 1998. The index for non-manufacturers rose to +22 from +20 in the previous month, although heavy stock-market losses in the past week mean sentiment is probably less buoyant now than the survey suggests...

Separately, a Finance Ministry report on regional economies kept its overall assessment unchanged that a moderate recovery continued. Three regions upgraded their views, putting all regions in a recovery trend, a first since September 1997.

But Bloomberg reports today that Japan's trade surplus shrank in December:

Japan's trade surplus... shrank 19.3 percent to 914 billion yen ($7.9 billion), the Ministry of Finance said in a report released in Tokyo today. The median forecast of 30 economists surveyed by Bloomberg News was for the surplus to narrow to 950 billion yen. Exports rose 17.5 percent and imports gained 27.3 percent.

...as did South Korea's:

South Korea's current account surplus narrowed to $541.6 million in December, the smallest in four months, as surging global crude prices raised the cost of importing oil.

The surplus compared with $2.2 billion in December 2004 and a revised $2.2 billion in November, the Bank of Korea said in a statement in Seoul today...

For all of last year, South Korea posted a current account surplus of $16.6 billion, the smallest in two years, less than the central bank's forecast of $17.5 billion.

The trade surplus, the biggest part of the current account, narrowed to $1.8 billion in December from $2.9 billion a year earlier. Exports climbed 10.8 percent to $25.7 billion on a customs-cleared basis, while imports rose 15.3 percent to $24.2 billion, today's report showed. Imports of oil rose 45.1 percent to $4.1 billion due to higher oil costs.

The fall in the trade surplus did not prevent South Korea's GDP from growing 1.7 percent in the fourth quarter -- 5.2 percent from a year earlier.

Of course, that growth rate is nothing compared to China's.

China's economy was elevated to the world's fourth biggest, overtaking France and Britain, after the government announced robust economic growth of 9.9 percent in 2005.

Fueled by booming investment and active consumer spending, China's gross domestic product (GDP) rose to 18.2 trillion yuan (2.3 trillion dollars) last year, the National Bureau of Statistics said.

Wednesday, 25 January 2006

Current account rebalancing and birth rates

Brad Setser has another post about current account rebalancing and adds these in the comments section:

i see greater potential to increase consumption in the emerging world, and for the emerging world to drive global demand growth...

i want more emerging markets to be more like India. India has enjoyed strong consumption growth recently, and, lo and behold, is now running a current account deficit!

Funny that he should mention India as an example. In some respects, India is more like the US than it is like other emerging Asian economies.

From the CIA World Factbook:

CountryBirths per
Children born
per woman
United States14.142.08
South Korea10.041.26
Hong Kong7.260.93

In any case, is the global current account imbalance still relevant to financial markets? As Andy Xie says: "Investors do not seem to care about imbalances anymore."

Monday, 23 January 2006

S&P 500 P/E versus real money supply growth

The macroblog posts a chart showing that the S&P 500 P/E rises and falls with the growth rate of real money balance, measured using MZM deflated by the PCE deflator.

This is a good way to predict the S&P 500, provided you can also predict corporate earnings, money supply and inflation.

In the meantime, Barry Ritholtz warns us not to make oversimplified predictions based on few variables.

Any single variable will give you an easy prediction, a goiod bumper sticker, but have a low probability of a correlated predictive outcome. The more variables you introduce -- up to a point -- the more likely your predictive outcome will be. I freely admit to not knowing precisely where the line of introducing too much complexity is -- but its likely much higher than 4 or 5 variables.

Saturday, 21 January 2006

Economy looking good, investors feeling bad

The economic news yesterday was generally upbeat.

Reuters reports an improvement in consumer sentiment in the US.

The University of Michigan's preliminary January index of consumer sentiment rose for a third straight month to 93.4 from December's final reading of 91.5, according to sources who saw the subscription-only report.

Over in the UK, December retail sales were strong, according to another Reuters report.

The Office for National Statistics said sales climbed 0.4 percent in December, the fifth consecutive monthly rise and exactly as analysts expected. That followed an upwardly-revised 0.9 percent gain in November.

Reuters also reports that the UK housing market continues to firm.

The British Bankers' Association said on Friday that underlying mortgage lending rose 5.4 billion pounds in December, above the November rise of 5.2 billion pounds and the strongest increase since June 2004...

Figures released at the same time from the Building Societies Association showed the value of mortgage approvals -- loans agreed but not yet made -- edged up to 4.098 billion pounds after 4.080 billion in November.

That was 25.8 percent up from a year-earlier figure of 3.256 billion pounds.

And prospects for Japan appear to be improving, according to the Bank of Japan, Reuters reports.

Bank of Japan Governor Toshihiko Fukui bolstered expectations that the central bank could end its super-loose monetary policy soon, saying on Friday that his thoughts on a policy shift had moved forward since December...

Earlier on Friday, the BOJ left policy unchanged after a two-day meeting, the first such session since data showed the core CPI, which excludes fresh food prices, had risen above year-ago levels for the first time in two years in November...

In a monthly economic report, the BOJ upgraded its overall economic assessment, saying the economy was recovering steadily.

But Wall Street was obviously looking at other news. Reuters again covers that story.

Stocks suffered their biggest loss in nearly three years on Friday, plummeting on disappointing earnings from blue chips Citigroup Inc. and General Electric Co. and a spike in oil caused by geopolitical tensions.

The Dow Jones industrial average and Standard & Poor's 500 stock index posted their biggest point declines since March 24, 2003, soon after the war in Iraq began. The Dow erased its gains for 2006...

The Dow Jones industrial average was down 213.32 points, or 1.96 percent, at 10,667.39. The Standard & Poor's 500 Index was down 23.55 points, or 1.83 percent, at 1,261.49. The Nasdaq Composite Index was down 54.11 points, or 2.35 percent, at 2,247.70.

Friday's decline was the biggest point loss for Nasdaq since September 2003.

Earlier in the week, it had been the Japanese stock market that was feeling jittery. Are these one-off, unrelated events, or the beginning of the end for the global bull market?

Friday, 20 January 2006

US housing starts, European inflation rate fall

Yesterday's Reuters round-up of economic news in the US provides yet more evidence that the US housing market is cooling.

The Commerce Department said December housing starts fell 8.9 percent in December to an annual rate of 1.933 million units, led by a decline in construction of single-family homes...

Total single-family starts dropped 12.3 percent in December while groundbreaking on multifamily units jumped 10.2 percent.

Permits for future groundbreaking, an indicator of builder confidence, fell 4.4 percent in December.

Manufacturing also seems to be slowing.

A separate report from the Philadelphia Fed said factory growth nearly stalled in January, with its business activity index sliding to 3.3 from 10.9 in December. That was well short of Wall Street's forecast of a rise to 12.6.

It was the weakest reading since June, although key components of the index showed signs of strength.

However, the labour market looks strong.

The Labor Department said initial claims for state jobless aid fell 36,000 last week to 271,000, the lowest since April 2000, from a revised 307,000 the previous week.

Wednesday had seen data showing that inflation moderated in the US in December. Yesterday saw moderation in the annual inflation rate in Europe as well. From Eurostat:

Euro-zone annual inflation was 2.2% in December 2005, down from 2.3% in November. A year earlier the rate was 2.4%. Monthly inflation was 0.3% in December.

EU25 annual inflation was 2.1% in December 2005, down from 2.2% in November. A year earlier the rate was 2.4%. Monthly inflation was 0.3% in December.

Thursday, 19 January 2006

Mixed economic news from US and Europe, Nikkei plunges 2.9 percent

Reuters provides a wrap-up of the economic news from the US, including news on inflation:

The Labor Department's report on consumer prices in December offered mixed inflation signals. Overall prices declined 0.1 percent last month, bucking Wall Street expectations for a 0.2 percent rise, as a drop in the cost of energy, transportation and apparel more than offset increases in education, food and shelter...

The closely watched core Consumer Price Index...rose, climbing 0.2 percent in December, matching market forecasts.

...weekly earnings:

In a separate report, the Labor Department said real average weekly earnings rose 0.1 in December after a 0.8 percent gain the prior month.

Average weekly earnings are up 3.1 percent from December 2004, but since prices have risen even faster, real earnings were down 0.4 percent from a year earlier.

...capital flows:

A separate report on Wednesday showed net flows of capital into U.S. assets fell to $89.1 billion in November, in line with market forecasts and more than enough to cover the trade deficit...

The report on capital inflows, released by the Treasury Department, showed net capital inflows slipped from October's revised record high $104.2 billion. Excluding foreign stocks and bonds, inflows declined slightly in November to $103.2 billion from a revised $107.3 billion in October.

...retail sales:

The International Council of Shopping Centers and UBS Securities LLC said chain store sales dropped 1.4 percent last week as higher gasoline prices and weaker consumer confidence cut into shopping.

Sales were up 3.1 percent compared with the same week a year ago, the report showed.

Redbook Research, an independent company, said chain store sales were down 0.6 percent so far in January, although they were up 3.1 percent last week from the same week a year ago.

...and mortgage application activity:

A separate report showed U.S. mortgage applications last week rose for a second straight week, driven by a surge in home refinancings as long-term interest rates fell to their lowest level since October.

A separate Reuters story covered the Federal Reserve beige book.

U.S. economic activity increased across the country in the last several weeks of 2005, but rising energy costs worried businesses in some areas, particularly factories, the Federal Reserve said on Wednesday.

Overall, a mixed bag of news.

It was also mixed news over in Europe where industrial production was up in November:

Seasonally adjusted industrial production rose by 1.3% in the euro-zone in November 2005 compared to October. Production fell by 0.7% in October and by 0.2% in September. In the EU25 output grew by 1.0% in November 2005, after a decrease of 0.6% in October and an increase of 0.2% in September.

...but unemployment rose in the UK:

The jobless rate spiked to a two-year high of 5.0 percent while...annual average earnings growth slowed to 3.4 percent [in the three months to November] from 3.6 in the prior three-month period -- the weakest gain in 2-1/2 years and in line with economists' forecasts.

The real excitement for markets came from Japan. AFP/CNA reports:

A scandal rocking Japanese Internet pioneer Livedoor has erupted, sparking a stampede out of the stock market that forced Asia's largest bourse to close early for the first time ever.

Investors took fright at fresh allegations that Livedoor cooked the books to hide losses -- leading the market to question the very foundations of the boom in Japan's Internet trailblazers...

The benchmark Nikkei-225 index tumbled by almost five percent in early afternoon trading before clawing back to end the day down 464.77 points or 2.94 percent at 15,341.18 as the bourse shut 20 minutes early...

The Tokyo bourse, which in November suffered its worst-ever technical crash, announced a halt to trading in a totally unprecedented move for fear that the huge volumes going through could bring down the system.

The Japanese stock market has been doing very well for the past few months, but it sure is getting jittery.

Wednesday, 18 January 2006

UK CPI shows little inflation but house prices accelerates

Following the previous day's news, yesterday provided further evidence that inflation in the UK is subdued.

The Office for National Statistics said the consumer price index rose by 0.3 percent for a 2.0 percent annual gain, in line with forecasts. That compared with 2.1 percent in November and was the lowest since June.

Inflation has now eased for three consecutive months since hitting a peak of 2.5 percent last September... The fall in inflation was largely due to falling petrol and diesel prices...

Core CPI, which excludes volatile items like food, energy, alcohol and tobacco, slowed to 1.3 percent on the year, its weakest in 10 months...

Retail price index inflation, or RPI, on which most pay deals are based, slowed more than expected to 2.2 percent from 2.4 percent in November, the weakest since October 2002...

For the full year 2005, the ONS said CPI averaged 2.1 percent, the highest since records began in 1997.

But house prices may be turning up again.

The Royal Institution of Chartered Surveyors (RICS) said that house-price growth had accelerated last month. Its balance of surveyors reporting a rise in prices minus those reporting a fall rose to plus 8, from plus 4 the previous month after 15 months of negative numbers...

Surveyors said that they expected modest price rises in the next three months, with expectations that interest rates will fall further boosting buyer confidence. The number of new buyers rose for the seventh month in a row, the longest unbroken run since 1999.

US industrial output shows strength in December; Japanese consumer confidence on uptrend

US industrial production was strong in December, reports Reuters.

Industrial production climbed 0.6 percent last month, as energy-related industries recovered from storms that battered the Gulf Coast last summer, while capacity utilization climbed to 80.7 percent, the highest level in over five years...

The Fed's industrial production report showed manufacturing output rose 0.2 percent in December even though motor vehicles and parts production fell 2.8 percent. Computer and aerospace output both gained.

Utilities' production climbed 2.7 percent and output at mines advanced 2.5 percent.

In the fourth quarter, industrial production increased at an annual rate of 3.8 percent. For the full year, production rose 3.2 percent...

A separate New York Fed report showed growth at New York State factories slowed in January with a drop in inventories although new orders remained positive.

But US consumer sentiment has deteriorated recently.

ABC News and the Washington Post said their Consumer Comfort Index fell to -13 in the week ended January 15, down from -8 the prior week.

Japanese consumer sentiment also shows a similar recent deterioration, although the longer-term trend is improving, reports Bloomberg.

Confidence among households with two or more people rose to 48.2 in the three months ending in December, the highest since the second quarter of 1991, from 44.8 in the third quarter, the Cabinet Office said today in Tokyo...

Unadjusted consumer confidence among households with two or more people fell to 46.5 in December from 48.2 in November, the Cabinet Office said. Overall confidence, which includes single households sank to 46.7 from 48.2.

The monthly consumer confidence indicator has fallen in the last month of every quarter for the seven quarters that the monthly data has been collected, according to Bloomberg data.

Tuesday, 17 January 2006

UK producer prices give conflicting signals, BoE to watch asset prices

Data from the UK yesterday show that inflation is accelerating:

Data from the Office for National Statistics on Monday showed input prices rose by a larger than expected 0.9 percent in December taking the annual rate to 17.2 percent, the highest since records began in 1991.

Or maybe not:

[O]utput prices fell for a third month running, suggesting firms are absorbing rising costs, not passing them on to their customers... [P]rices at the factory gate fell 0.2 percent in December, for a weaker-than-expected annual rate of 2.4 percent...

But in deciding on interest rates, the Bank of England also tries to look at more forward-looking data. From Reuters:

Policymakers need to watch for signals from a range of world asset prices when setting interest rates and should be forward-looking in keeping inflation low and stable, Bank of England Governor Mervyn King said on Monday.

King also said that growth has picked up and inflation has fallen back close to the Bank's 2.0 percent target but he reiterated that remarkable economic stability during the past decade has been less evident over the past year.

In a speech to a business audience in Kent, King cited "remarkably low" long-term real interest rates, which central bankers cannot fully explain and therefore do not know how long will persist, as one factor to watch.

"Monetary policy will, therefore, need to be alert to the information contained in a wide range of asset prices, to be forward-looking in its aim of maintaining low and stable inflation, and be ready to respond to changes in the signposts," he said according to the text of the speech.

No doubt, those asset prices include house prices, which may be picking up again in the UK.

The government said house price inflation rose to 2.5 percent in the year to November from a nine-year low of 1.8 percent the month before...

A separate report from property web site Rightmove said average asking prices on a home edged up 0.1 percent in the period from early December to early January after a...0.8 percent decline in the previous period and took the annual rate of increase to 3.6 percent from 3.4 percent in the previous survey...

The survey also showed that the average number of unsold properties on estate agents' books fell to 61 in December from 65 in November -- the lowest since June 2004, when it was 56.

Monday, 16 January 2006

Positive signs for Japanese economy

The news flow on Japan's economy has often been mixed. Not today's. From AFP/CNA:

The surplus in the current account, the broadest measure of trade in goods and services, rose 15.1 percent [in November] from a year earlier to 1.42 trillion yen (12.5 billion dollars), the finance ministry said.

The trade surplus alone edged up 0.3 percent year-on-year to 703.6 billion yen. Imports rose 16.5 percent to 4.91 trillion yen while exports were up 14.2 percent to 5.62 trillion yen...

The government also revised upwards its estimates for industrial production to show a gain of 1.5 percent in November from October...bigger than the 1.4 percent rise reported in an initial estimate last month and an improvement on October's 0.6 percent gain.

Year-on-year, industrial output growth was revised upwards to 3.4 percent in November from 3.3 percent.

The industrial output index hit a record high in November, reaching 103.6 and surpassing a previous all-time peak of 103.4 struck in May 1991...

The wholesale goods price index in December rose 2.2 percent from November, the 22nd straight monthly gain and at the fastest pace since 1990, the Bank of Japan said. Month-on-month the index rose 0.2 percent in December.

Saturday, 14 January 2006

Dark matter don't matter

Brad Setser explains why "dark matter" -- "the gap between the assets implied by the fact that the US receives more on its international investments than it pays on its external debt...and the United States' formal debt position" -- may not be able to sustain the US current account deficit.

Dark matter doesn't stem from particularly high reported returns on US investment abroad. It stems from unusually low returns on foreign investment in the US...

Rising debt was offset by falling US rates... The problem going forward? Simple. US rates are rising. So too are US interest payments...

The US has effectively financed some high yielding investment abroad with low-yielding US debt. But that is not the primary source of dark matter... The real source of dark matter is that a dollar of US investment abroad yields a far higher return than a dollar of foreign investment in the US...

What...might explain the difference between US profits abroad and foreign profits in the US...? Easy. Tax avoidance and transfer pricing...

That doesn't necessarily mean the US current account deficit is mismeasured... That just shifts US external revenues from the export line to the income line of the balance of payments.

The above excerpt doesn't do the post justice. Read the full post for details and numbers.

It's a complex issue and Setser's post is definitely not the final word, but at least it sheds some light on "dark matter".

US PPI and retail sales, Japanese machinery orders and European growth outlook

Overall US producer prices jumped in December, but core prices remained tame. Reuters reports:

Soaring prices for energy and food pushed U.S. producer prices up 0.9 percent last month... The Labor Department said the so-called core PPI, which excludes food and energy, edged up 0.1 percent for the second straight month...

The same report mentions that auto sales pushed US retail sales up in December.

U.S. retail sales rose a slightly smaller-than-expected 0.7 percent in December and were up just 0.2 percent when auto purchases were excluded, but overall November sales were revised sharply higher...to a 0.8 percent gain from an initially reported 0.3 percent advance.

Autos had also pushed up business inventories in November.

In other data, the Commerce Department said that U.S. business inventories rose 0.5 percent in November, slightly higher than forecast, with much of the increase fueled by a rise in automotive stocks.

If December US retail sales disappointed, so did Japan's machinery orders for November. From another Reuters report:

Core private-sector machinery orders rose 2.3 percent from October on a seasonally adjusted basis, government data showed, below a consensus forecast of a 5.5 percent increase. They had risen 4.8 percent the previous month.

Compared with the same month last year, core machinery orders, which exclude those for ships and for machinery at electric power firms, rose 0.2 percent.

Overall orders, including ships and electric power equipment, rose 11.2 percent from a month earlier.

A breakdown showed core orders from manufacturers rose 11.7 percent from a month earlier, while those from non-manufacturers rose 7.7 percent, indicating the economic recovery was broad-based.

Meanwhile, in Europe, Eurostat affirmed earlier estimates of 0.6 percent growth in GDP in the third quarter for both the euro-zone and EU25, while the European Commission projected quarterly euro-zone GDP growth in the range of 0.4-0.8 percent for the last and current quarters and 0.4-0.9 percent for the second quarter of 2006.

For the UK, the Conference Board announced that the leading index was unchanged in November, and suggested that "slower economic growth is likely to persist in the near term".

Friday, 13 January 2006

US trade deficit narrows, interest rates unchanged in Europe

The US trade deficit backed off a little from record levels in November. Reuters reports:

The U.S. trade gap...narrowed 5.8 percent to $64.2 billion, still the third-highest level, from a record $68.1 billion in October, when imports of oil and petroleum products surged to make up for a drop in U.S. Gulf output after hurricanes Katrina and Rita...

U.S. exports of goods and services rose 1.8 percent to a record $109.3 billion. Exports of both capital goods and consumer goods set records in November...

Oil import prices...fell further in November... The volume of crude oil imports rose in the month, but the volume of all petroleum-product imports...fell from October levels.

Both factors helped trim imports to $173.5 billion, down 1.1 percent from the record set in October but still the second-highest ever.

Despite the fall in the deficit, Brad Setser thinks "higher trade deficits lie ahead". Menzie Chinn at Econbrowser also thinks that the trade balance remains in a downtrend, but adds that "deficits of this magnitude can't go on foreover" and "the economy is eventually headed toward a deficit of around $30 billion per month".

Elsewhere, the European Central Bank and the Bank of England both left interest rates unchanged yesterday. The latter, who had been contemplating interest rate cuts, would probably have second thoughts after the latest data on the UK economy, showing manufacturing output grew 0.4 percent in November -- its fastest pace in seven months -- as well as an estimate by the National Institute of Economic and Social Research that the UK economy grew by 0.5 percent in the three months to December, its fastest rate in four months.

Thursday, 12 January 2006

Trade surpluses and deficits widen

Global trade imbalances look like they are going to get worse before they get better.

In China, the trade surplus soared last year. Reuters reports:

China's trade surplus more than tripled to $102 billion in 2005, data showed on Wednesday, but December figures also reinforced a more recent trend of weakening export growth...

China's December exports rose 18.2 percent from a year earlier to $75.41 billion, according to precise figures posted on the Web site (www.customs.gov.cn) of the General Administration of Customs...

Imports, up 22.2 percent at $64.4 billion, rose faster than exports for the second consecutive month, pulling in the trade surplus to $11 billion from $11.1 billion a year earlier.

Things may change this year.

The latest trade figures showed a steady slowdown in the growth of the trade surplus last year. A first-quarter gap of about $25 billion over a year earlier narrowed to only about $5 billion in the fourth quarter... Some economists forecast the trade surplus would narrow in 2006 to about $100 billion...

Also on Wednesday, the National Bureau of Statistics said its business confidence index had fallen to 125.4 in the fourth quarter, down 2.2 points from the previous three months. The official Xinhua news agency reported that consumer sentiment toward the housing market in the southern city of Guangzhou had fallen sharply. Only 7.8 percent of families surveyed by the Guangzhou Municipal Bureau of Statistics planned to buy housing in 2006, a 4.8 percentage point fall from 2005, the agency said.

However, Brad Setser does not expect China's trade surplus to narrow this year, if at all.

To keep the trade surplus from expanding, Chinese imports need to grow about 15% faster than Chinese exports. Right now, I doubt that will happen.

Another major economy that reported an increased trade surplus this week is Germany. From Bloomberg:

Sales abroad, adjusted for working days and seasonal changes, declined 1.4 percent from October, when they dropped 0.8 percent, the Federal Statistics Office in Wiesbaden said...

Germany's trade surplus widened to 13.3 billion euros in November from 12.2 billion euros in October, said the statistics office. Adjusted for seasonal effects, the balance was 13.9 billion euros in November. Adjusted imports fell 4 percent, the report showed.

Elsewhere in Europe, though, we see trade deficits get bigger, for example, in France:

The French foreign trade deficit widened in November from October and analysts said the country was heading for a record shortfall in 2005, raising concern about exports and the competitiveness of French industry.

Data from the French customs authority showed on Wednesday that France had a trade deficit of 3.138 billion euros (3.8 billion dollars) in November compared to 2.434 billion euros in October.

And in the UK:

The goods trade deficit widened much more than expected to a record high in November on a dip in exports, surge in imports, and a deficit in oil for a fifth straight month.

The Office for National Statistics said on Wednesday the goods trade gap widened to 5.97 billion pounds from a revised 5.05 billion in October and more than a billion pounds above economists' forecasts for a deficit of 4.9 billion.

Meanwhile, the trade in services surplus narrowed to 1.48 billion pounds from 1.67 billion in October although within a range seen in recent months.

If the UK trade deficit improves, it might not be a cause for celebration; imports could fall if falling consumer confidence translates into weaker consumer spending.

Consumer confidence fell in December, the second consecutive year that seasonal cheer has failed to help Britons feel more optimistic about their economy, Nationwide Building Society said on Wednesday.

Its monthly index showed that overall consumer confidence fell 5 points to 96 from its November level of 101.

One country that, at the moment, probably doesn't have too much to worry about on its external balance is Japan.

Japan's foreign exchange reserves rose 3.63 billion dollars to 846.9 billion dollars in December, the second highest level on record, the finance ministry said.

The rise was largely because of the rising value of US government bonds, the ministry said.

And the overall health of the Japanese economy looks good too.

A key gauge of the current state of Japan's economy stood above the boom-or-bust threshold of 50 percent in November for the fourth straight month, the Japanese government said Wednesday.

Propelled by strong industrial production and a healthy job offers-to-seekers ratio, the index of coincident economic indicators marked 66.7 percent, the Cabinet Office said in a preliminary report...

The index of leading indicators, predicting economic developments six months ahead, came to 60.0 percent, moving above the 50-percent line for the second straight month.

Wednesday, 11 January 2006

German confidence, French industrial output jump; data elsewhere less positive

The positive news from Europe just keeps coming. From FT:

The Mannheim-based ZEW institute said its German economic sentiment indicator jumped by 9.4 points to 71 in January - the highest level since January 2004 and significantly above its historical average...

Meanwhile, France's economic outlook also brighten a little with the country's Insee economic institute reported that industrial production leapt by 3.1 per cent in November, easing worries about the sustainability of French economic growth.

Japan, on the other hand, continues to give mixed signals. From AFX:

Household spending in November averaged 284,465 yen, unchanged from a year before, the Ministry of Internal Affairs and Communications said. However, household spending in November fell a seasonally adjusted 1.3 pct from October, declining for the third consecutive month... On a nominal basis, household spending in November fell 1.0 pct from a year earlier.

There was also economic news from the US. From MarketWatch:

Inventories at U.S. wholesalers expanded in November, the Commerce Department said Tuesday. Monthly sales dropped 0.7% while inventories climbed 0.4%, the government data showed. The inventory-to-sales ratio rose from a record low 1.14 months in October to 1.15 months in November...

The decline in November sales was the first since February and the largest drop since April 2003. The decline in sales in November was widespread, and sales in October were also weaker than first believed. Sales rose a revised 0.9% in October, down from the initial estimate of a 1.2% gain.

Tuesday, 10 January 2006

US consumer credit falls in November, European retail sales rise in December

Is the US consumer turning frugal? Reuters reports the latest consumer credit numbers.

U.S. consumer credit unexpectedly slid by $648.8 million in November, on a drop in loans for cars and boats, a Federal Reserve report showed on Monday.

After a record drop by a revised $8.4 billion in October, it was the first time since May-June 1992 that consumer credit has declined for two months in a row, the Fed said.

At least the European consumer has been doing his bit of late. From Bloomberg:

European retail sales rose in December by the most in at least two years, the Bloomberg purchasing managers' index showed, the seventh report in a week showing the region's economy is gaining momentum.

A seasonally adjusted index of sales in the dozen nations sharing the euro rose to 52.2, the highest since the series began in January 2004, from 50.7 in November, according to a survey for Bloomberg LP by NTC Research Ltd...

Rising retail sales echoed reports suggesting a revival in the euro-region economy. Confidence among investors in the dozen euro nations rose this month to the highest level since at least July 2002, the Sentix research group said today.

And it's pretty good in the UK too, at least in December.

U.K. stores' holiday sales rose by the most in more than a year and a half in December, driven by demand for food and goods such as jewelry and handbags, the British Retail Consortium said.

Revenue at stores open at least a year advanced by 2.6 percent, the group, which represents 80 percent of U.K. retailers, said today in London. The gain was the largest since May 2004 and compared with a 0.8 percent increase in November.

Record trade surplus for China -- and Taiwan and Chile too

China's export machine maintains its record-breaking pace. From Reuters:

China had a record monthly trade surplus of about $13 billion in December, data indicated on Monday, a figure likely to lead to further U.S. calls on Beijing to move more quickly to allow the yuan to appreciate.

The December figure, well above the $10.3 billion surplus expected by economists polled by Reuters, brought the excess of exports over imports for all of 2005 to around $104 billion.

The Commerce Ministry issued data for 2005 high-tech trade, including its share of total imports and exports -- enough information for the overall trade figures to be calculated fairly accurately. The final figures may be slightly different.

The Reuters report also said that the National Bureau of Statistics has revised its estimate of gross domestic product after a national census found that the services sector was bigger than previously measured.

Gross domestic product in 2004 was 10.1 percent larger than a year earlier, rather than the previously reported 9.5 percent, the bureau said. Growth for every year back to 1993 was also revised up, except for 1998.

Domestic consumption in China may be bigger, but exports are still key. As a result, China's foreign exchange reserves may have hit US$820 billion at the end of last year, according to a Shanghai Daily report.

Incidentally, Taiwan's trade surplus also hit a record in December, according to a Central News Agency report.

Taiwan's exports reached US$17.17 billion in December, 2005, while imports totaled US$14.25 billion, leaving the country with a trade surplus of US$2.92 billion, the highest single-month record in the history, the Ministry of Finance (MOF) reported Monday.

Exports for the month posted a year-on-year increase of 15.4 percent, while imports recorded a decline of 10.9 percent. The changes represent a historic trade record, according to Hsu Kuo-chung, head of the MOF's department of statistics.

... Taiwan posted a trade surplus of US$7.79 billion for 2005, marking a significant year-on-year growth of 27.2 percent, according to the MOF.

Another report says that Taiwan's trade surplus is expected to hit US$10 billion in 2006.

And a record trade surplus isn't just an Asian phenomenon. Reuters reports Chile's trade surplus.

Chile posted a record annual trade surplus of $9.236 billion in 2005 as its exports climbed by nearly a quarter to almost $40 billion, boosted by the soaring price of copper, central bank figures showed on Monday.

But high prices of commodities did not prevent Australia's trade balance from going the other direction in November. Bloomberg reports:

Australia's trade deficit widened to an eight-month high in November as imports of consumer goods, machinery and aircraft increased, outpacing a gain in exports.

The trade gap rose to A$2.47 billion ($1.8 billion), from a revised A$1.38 billion in October, the Bureau of Statistics said in Sydney today. Imports jumped 7 percent to a record. The statistics agency said problems with a new Customs computer system that caused a backlog in recording imports contributed to November's increase.

Monday, 9 January 2006

Muddle through 2006

I could write my forecasts for 2006. But this being a Monday, I'll just link to John Mauldin's forecasts instead. His forecasts cover the US economy, global economy, currencies, interest rates, housing, stocks and commodities. Excerpt:

I define what I call a "Muddle Through Economy" as an economy that grows below trend...

By the end of this year, I think we will see growth slow into Muddle Through territory. Clearly, a slowdown will not be good for the US stock market. Last year I said the market would be flat with risk to the downside. This year I think the market actually ends the year down, and by at least 10% or more during the year...

By the end of the year, consumer spending is going to slow down as the "wealth effect" from both housing and stocks becomes negative. Enough to put us into recession? I don't think so, at least not this year. But it will slow the economy down. Thus, I think it is quite possible that Bernanke actually starts to lower rates before the end of the year.

Saturday, 7 January 2006

US and European employment reports, plus an article on China

The US economy added disappointingly few jobs in December, but November numbers were revised up. Reuters reports.

U.S. employers added an unexpectedly few 108,000 jobs last month, but November's tally was revised up sharply, showing the U.S. economy was on track and bolstering a view that the Federal Reserve will soon end a string of interest rate rises.

The Labor Department on Friday revised up its estimate of November new jobs to 305,000 -- the best monthly showing since April 2004 -- bringing total jobs creation in 2005 to just over 2 million.

The U.S. unemployment rate fell to 4.9 percent from 5 percent in November and, for a second consecutive full year, more than 2 million new jobs were created...

There also was a revision in the October jobs totals -- to an increase of 25,000 rather than 44,000 -- but for the two months of October and November, the net effect was 71,000 more jobs than the government previously had estimated...

U.S. manufacturers added 18,000 employees in December on top of 8,000 in November and 13,000 in October -- the first time since March-May 2004 that manufacturers have increased jobs for three consecutive months. But construction jobs declined by 9,000 last month, a reversal from November's 42,000 gain.

Overall, the employment figures imply a relatively strong hiring outlook. But modest gains in employment income -- with average hourly earnings up 5 cents in December to $16.34 -- may help to heighten expectations the Fed will soon be able to bring its 1-1/2-year rate-rise cycle to an end.

Tim Duy provides a monetary policy perspective of the jobs report at Economist's View.

I tend to think that despite a few setbacks in the details, policymakers will walk away with a relatively upbeat perspective on the labor markets. And that means it may be premature to think the Fed will shortly be done for good.

Meanwhile, Eurostat reported European unemployment figures for November yesterday.

Euro-zone seasonally-adjusted unemployment stood at 8.3% in November 2005, the same as in October. It was 8.8% in November 2004. The EU25 unemployment rate was 8.5% in November 2005, unchanged compared to October. It was 9.0% in November 2004.

European unemployment has been falling for over a year now, and with reports like this from Bloomberg, it's no wonder.

German industrial production rose 4.7 percent in November from a year earlier, the fastest pace in almost five years, capping a week of economic data suggesting growth in the dozen euro nations is gathering momentum.

But when you talk about the global employment and industrial picture, it's hard to leave out China. And the Economist's View posts a very good read on China's industrial development extracted from Harper's Magazine.

Friday, 6 January 2006

Low US jobless claims and strong services indices but other data mixed

Yesterday, Reuters reported some good economic data from the US:

In its weekly report, the Labor Department said 291,000 initial claims for state jobless benefits were filed last week, the lowest since September 2000 and down from a revised 326,000 in the prior week. It was the largest weekly drop since late September...

The larger-than-expected drop brought a four-week moving average of initial claims, which smooths weekly volatility to provide a better view of underlying labor market trends, down by 9,250 to 316,750, its lowest level since August...

A separate report from the Institute for Supply Management showed the U.S. services industry expanded further in December, thanks to lower energy costs, rising new orders and continued job growth.

ISM said its non-manufacturing index rose to 59.8, from 58.5 in November, above forecasts for a rise to 59.0... The employment component edged up to 57.1 in December from 57.0, while the prices-paid gauge fell to 69.5 from 74.2.

...as well as some not-so-good data:

In other data, major U.S. retailers on Thursday reported that deep discounts lured holiday shoppers last month and pushed sales slightly ahead of expectations...

[But] Wal-Mart, the world's biggest retailer, said its fourth-quarter profit would likely reach only the low end of its forecast after a weak December. Wal-Mart posted just a 2.2 percent increase in December sales at U.S. stores open at least a year...

In a separate report on Thursday, the employment consulting firm Challenger, Gray & Christmas Inc said planned U.S. layoffs rose 8.6 percent in December, pushing the 2005 annual total of job cuts 3.1 percent higher than in 2004.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in December, fell to 120.6 in November, down 2.5 percent from both October and a year ago and its lowest reading since January 2005.

Reuters also reported that the rest of the world saw more upbeat news.

In Europe, the euro zone Purchasing Managers' Index for the services sector surprised financial markets by rising to 56.8 in December from 55.2 in November, well above the 50 divide between growth and expansion and its highest level since January 2004.

The UK service sector survey was also unexpectedly strong, with the main index rising to 57.9 in December from 55.8.

In Japan the Reuters Tankan, a monthly survey of major companies, showed manufacturers' business confidence rose strongly in December to an index level of plus 32, the highest since the survey started in June 1998. Non-manufacturing confidence held steady.

Bloomberg reported much of the same good news plus the following:

A gauge of consumer sentiment showed consumers were the least pessimistic in more than three years, rising to minus 11 from minus 13, the European Commission said today in Brussels. German factory orders rose 1.7 percent in November...

The commission's measure of confidence among businesses rose to minus five from minus seven, the best since January, and its index of retail sentiment increased to minus four from minus six. Employment expectations among manufacturers and consumers were the highest since 2000.

...as well as some not-so-good news:

The commission today said a gauge of confidence among service companies dropped to 13 from 14 and its barometer for constructions firms dropped to minus three from minus one.

German retail sales also unexpectedly fell in November as plans by Chancellor Angela Merkel to raise value-added tax hurt consumer sentiment. Sales, adjusted for inflation and seasonal swings, dropped 1 percent from October, the Federal Statistics Office in Wiesbaden said today.

Retail sales for November were a little more mixed in the wider region, falling 0.1 percent in the euro-zone but rising 0.4 percent in the EU25, according to Eurostat.

Eurostat also reported similarly mixed trends for producer prices in November, falling 0.2 percent from the previous month in the euro-zone but rising 0.5 percent in the EU25. On Wednesday, it had reported a flash estimate of 2.2 percent inflation rate in December for the euro-zone, slightly down from the 2.3 percent in November.

Thursday, 5 January 2006

Andy Xie on globalisation

Morgan Stanley's Andy Xie thanks Federal Reserve chairman Alan Greenspan for giving him a job. Excerpt from his article entitled "Goodbye, Mr. Greenspan":

The quadrupling of US imports during Alan Greenspan’s 18-year reign summarizes his global impact. This increase in US import demand has underwritten globalization, led by the integration of developing economies with the US. In that regard, his policy has affected manufacturing-led Asia most.

Rising trade deficits have accounted for 38% of US import growth during the Greenspan era. One could argue that the rising US trade deficit has been the driver for globalization, and in particular financial globalization. Why does the US trade deficit keep rising, and why is it so well funded? The sustainability of globalization depends on the answers to these questions, in my view.

Mr. Greenspan’s ability to sustain investor confidence and his accommodative monetary policy towards asset demand are the answers to the above questions, I believe. The global economy suffered a huge deflationary shock when the Berlin Wall fell. The planned economies that accounted for half of the global population (China, India and the Soviet bloc) abandoned economic planning and looked to trade as the driver for economic development.

These former planned economies had to accumulate capital quickly to join the global economy, as their assets from the planning era could not add much value. The fall of the Berlin Wall was equivalent to a big outward shift of the global supply curve. The deflationary shock would have led to a prolonged global recession without an offset inflationary force.

Mr. Greenspan was instrumental in propping up optimism, which led to rising risk appetite and demand for risk assets. He accommodated such demand by tolerating a rapidly rising demand for money from asset markets. Rising asset prices in the US led to unusually strong consumption. This inflationary force has offset the deflationary force from globalization.

The high level of wealth and institutional credibility of the US have allowed it to play such a critical role in giving birth to globalization. The credibility of the US Treasury as the modern equivalent of gold for wealth hoarding is the instrument for sustaining the funding of the US trade deficit.

Mr. Greenspan has been the right person at the right time in right place to play such an important role. If there were a midwife to the current era of globalization, it would be him.

The epidural for suppressing the birth pain of globalization is the vast global property bubble, thanks to financial globalization. Mr. Bernanke, successor to Mr. Greenspan, will have to handle its aftermath carefully to prevent a backlash against globalization when the bubble bursts, as I believe it will.

Wednesday, 4 January 2006

Manufacturing slowing but consumer electronics sales to hit record; German unemployment falls

Many commentators see the minutes of the last FOMC meeting as signalling an impending end to interest rate hikes. The latest manufacturing data would probably have reinforced this view.

Global manufacturing activity improved in 2005, but showed signs of losing momentum at year-end, bogged down by slower growth in the United States, the world's largest economy.

Japan's economic turnaround and ongoing improvement in the euro zone have offset slower U.S. growth. After posting record highs in September in the aftermath of Hurricane Katrina, falling energy costs have been a relief for manufacturers.

A global Purchasing Managers Index (PMI), compiled by J.P. Morgan from national and regional polls of thousands of companies worldwide, slipped to 54.0 in December from November's 54.6, but was above a reading of 53.6 a year ago...

In the United States, [t]he ISM manufacturing index...fell to 54.2 in December from 58.1 in November...

The Japanese index rose to 55.7, the highest reading since December 2003 and up from 55.3 in November...

The overall euro zone PMI...rose to 53.6 in December from 52.8 in November, while Italy's PMI hit a five-year high...

But in Britain, the main index inched up to 51.1 from 51.0 in November...

The China index rose to 50.1, buoyed by new export orders, from 49.8 in November...

Reuters covers the US reports, including the milder-than-expected 0.2 percent rise in construction spending and the US markets' excited responses.

Slowdown or not, the Consumer Electronics Association forecasts record sales in consumer electronics this year. Bloomberg reports.

Worldwide sales of consumer electronics will probably rise to a record $135.4 billion this year, fueled by demand for televisions, a trade association said.

Industry sales will probably rise 8 percent this year after growing a better-than-expected 11 percent in 2005, the Consumer Electronics Association said in a statement. Digital TV sales are poised to grow more than 35 percent and exceed $23 billion, according to the Arlington, Virginia-based group.

Spending on consumer electronics would depend on the employment picture, on which there was good news from Germany yesterday.

The number of people without work, adjusted for usual seasonal swings, fell by 110,000 to 4.64 million, the Federal Labor Agency in Nuremberg said today. That's the biggest monthly drop since German reunification in October 1990, the agency said...

The Berlin-based DIW institute...today raised its forecast for 2006 growth to 1.7 percent from 1.5 percent and said it expects the average unemployment rate to fall by 0.2 percentage points this year.

Tuesday, 3 January 2006

Interest rate movements threaten sanguine outlook for stocks

Stocks around the world generally performed well in 2005, continuing a global bull run in equities that has now lasted around three years. Investors generally seem to expect this run to continue, despite the fact that many central banks around the world are still raising interest rates.

The following table shows the strength of the global bull run in equities in 2005, with most markets showing double digit returns. Japan's Nikkei 225 in particular rose a whopping 40 percent to close the year near five-year highs.

 Start of
End of
S&P 5001,211.921,248.293.0
Nikkei 22511,488.7616,111.4340.2
FTSE 1004,814.35,618.816.7
CAC 403,821.164,715.2323.4
Hang Seng14,230.1414,876.434.5
Straits Times 2,066.142,347.3413.6

On the whole, analysts are sanguine about the prospects for stocks in 2006. A BusinessWeek survey of market forecasters in December showed a consensus forecast for the Standard & Poor's 500 Index of 1,347 for end 2006, 7.9 percent higher than its close at the end of 2005. Similarly, a CNBC survey of 2006 forecasts for the S&P 500 from seven big Wall Street firms showed an average of 1,348.

A rise in the S&P 500 of around 8 percent would represent a relatively good performance, considering widespread expectations for a slowdown in the economy and corporate earnings growth and the fact that the stock market has already been in a bull run for about three years.

And the optimism is not restricted to the US stock market. Despite its strong run in 2005, the Japanese market remains popular among investment managers, with one being quoted recently by Bloomberg as saying: "Japan is by far the most exciting equity market in the world." And despite the good performances of European stock markets in 2005, many fund managers remain overweight in European stocks.

All this optimism in stocks may sound strange when seen against the backdrop of rising interest rates worldwide. The Federal Reserve has been hiking interest rates since the middle of 2004 while the European Central Bank made a tentative start to monetary tightening last month and is expected to hike interest rates further this year. Even the Bank of Japan has been making noises about ending quantitative easing in its deflation-riddled economy. Interest rate increases are supposed to be bad for stocks.

However, one oft-cited reason for a relatively good showing by stocks this year, especially in the United States, is the expectation that the Federal Reserve will soon stop raising interest rates. If interest rate increases are bad for stocks, then an end to interest rate hikes should be good for stocks, or so the reasoning goes.

However, investors thinking this way need to look at the evidence more closely. While it may be true that the Federal Reserve indeed stops raising interest rates some time in 2006, stock market history does not suggest that stocks do well when interest rate hikes stop. Rather, it suggests that stocks do relatively poorly at the end of Federal Reserve tightening and only do well when the Federal Reserve starts cutting interest rates.

John Hussman of the Hussman Funds put things in perspective in a commentary on 19 December. In the commentary, he pointed out that since 1950, following the last hike of each tightening cycle where the Federal Reserve has raised rates at least twice, the S&P 500 has delivered annualised total returns averaging 2.47 percent over the following six months, 5.06 percent over the following year, and 8.55 percent over the following 18 months.

"In other words, the market's return has actually been sub-par for a reasonably long period following the final hike of a rate tightening cycle," he wrote.

Stocks only do well when the Federal Reserve starts cutting interest rates. According to Hussman, following the first cut of a new easing cycle, the S&P 500 has delivered annualised total returns averaging 23.01 percent over the following six months, 21.18 percent over the following year, and 22.12 percent over the following 18 months.

Hussman further points out that in periods in which the stock market is trading at price/peak earnings multiples of 16 or above -- as it is now -- the returns were even poorer. In such periods, total annualised returns following the final rate hike of a tightening cycle averaged -7.18 percent over the following six months, -9.94 percent over the following year, and -5.87 percent over the following 18 months.

Even after the first rate cut, annualised total returns during these periods have only averaged -3.63 percent over the following six months, 5.47 percent over the following year, and 5.52 percent over the following 18 months.

So investors looking to an end in Federal Reserve rate hikes for a boost in stock prices may be in for some disappointment.

The other phenomenon that has recently caused investors some concern is the flattening of the yield curve -- specifically, the spread between 10-year and 2-year Treasuries. On 30 December, 10-year Treasury yields stood at 4.39 percent while 2-year yields stood at 4.40 percent.

Historically, stocks have usually not done well when the spread between the 10-year and 2-year has been negative for a sustained period. This happened in 1980-81, 1989 and 2000, periods which were accompanied or followed by substantial falls in the S&P 500.

While economists generally do not think that the current shape of the yield curve is forecasting a recession, a slowdown at least certainly looks plausible. One question for investors is whether markets are pricing a possible slowdown in the economy. Based on the rather meagre rise in the S&P 500 last year, it is possible that it already has.

However, probably a more important question is whether the yield curve could become significantly inverted and for a sustained period. This can easily happen if the Federal Reserve raises interest rates higher than markets expect, or if the economy proves weaker than many think.

Under such conditions, the current consensus analyst forecasts could prove overly sanguine, and leave stock markets vulnerable to a substantial correction some time this year, a correction that might not be reversed until the Federal Reserve actually starts cutting interest rates.

However, even the prospects for a quick uplift in stock prices once interest rates are cut cannot be taken for granted. During the last bear market starting 2000, the Federal Reserve started cutting interest rates in January 2001. The bear market did not end until 21 months later.