Euro-zone lending up, US consumer confidence down

Is the ECB falling behind the curve? From FT:

Eurozone lending to the private sector grew faster last month than at any time since the euro’s launch in 1999, presaging another rise in European Central Bank interest rates next month, possibly by a larger-than-usual half percentage point.

Loans to the private sector saw an annual growth rate of 11.3 per cent in April, the ECB said on Tuesday, up from 10.8 per cent in March. Economists had to refer to reconstructed data for 1989, assuming that the eurozone had existed then, to find a faster growth rate...

Unlike other central banks, the ECB puts an emphasis on money supply figures as long-term inflation indicators. Tuesday’s data showed M3, the broad money supply measure, rising at an annual rate of 8.8 per cent in April, up from 8.5 per cent in March, and the highest since April 2003.

Meanwhile, US consumer confidence fell in May. From Reuters:

U.S. consumer confidence fell to a three-month low in May, weighed down by concerns over rising gasoline prices and diminished optimism about the economy, a survey showed on Tuesday.

The Conference Board said its index of consumer sentiment slipped to 103.2 in May from an upwardly revised April reading of 109.8, which was a four-year high.

May's reading, however, was above the 101.1 expected by economists surveyed by Reuters.

Japanese economy creeps up

The Japanese economy continues to show signs of expansion, but the overall data remain mixed.

Yesterday's retail sales data were unimpressive. From Reuters:

Retail sales in Japan fell slightly in April from a year earlier, data showed on Monday, but economists stuck to the view that a recovery in consumer spending will help underpin firm economic growth.

Retail sales fell 0.6 percent in April, slightly below a median forecast by economists for a 0.5 percent decline...

Compared with March, retail sales rose 0.1 percent on a seasonally adjusted basis, the Ministry of Economy, Trade and Industry said.

Today's data were perhaps a bit better.

The unemployment rate stood at 4.1 percent in April, unchanged from March, the Ministry of Internal Affairs and Communications said.

The jobless total dropped by 260,000 from a year earlier to 2.84 million...

Despite the drop in the jobless total, however, spending by Japanese households fell 2.0 percent in April from a year ago after stripping out the effect of price changes, although bad weather was seen as partly to blame.

Meanwhile Japan's industrial output rose by 1.5 percent in April from the previous month, a second consecutive monthly gain, the trade ministry said.

Year-on-year, output was up 3.8 percent...

The ministry forecast that production will rise 0.2 percent in May from April and gain a further 1.3 percent in June, based on a survey of manufacturers' own expectations.

Stock markets fall from rising risk aversion

The fall in global stock prices over the past two and a half weeks has widely been attributed to fears of higher interest rates. However, with emerging markets suffering somewhat more than developed markets during the recent sell-off, rising risk aversion is clearly an important factor too.

According to data from Dow Jones, world equity markets fell from 10 May to 26 May. Developed markets fell 5.5 percent during this period but emerging markets fell 11.4 percent, twice as much.

In a special report today in The Straits Times on the turmoil in emerging stock markets, Ravi Velloor asks: "Why did this happen?" His answer: "Top of the list is the fear of rising interest rates, particularly in the US."

"Driven by that fear of higher interest rates in the US and other key markets such as Germany and Japan, the world's biggest investors simply decided to park their money in assets regarded as less risky, even if that meant sacrificing some returns."

Less risky assets includes US Treasuries. Ironically, however, if investors park more money in such assets, their interest rates would go down.

As it turns out, over the period 10-26 May when stocks fell, yields on 10-year US Treasuries did fall by seven basis points. So if markets fear higher interest rates, it is only at the short end of the yield curve. Over longer time horizons, markets appear more concerned about risk than about interest rates.

That could be because inflation fears actually receded during this period. The recent falls in stock prices was accompanied by falls in the prices of commodities.

In another article in the same report in The Straits Times, Chua Kong Ho provides another perspective on the recent market turmoil: "Market watchers say the market slump was the result of a rapid climb in share prices that 'over-shot' fair value -- so the market slump simply represented a return to realistic levels. The trigger: fears of rising US inflation and uncertainty whether the US Federal Reserve will keep raising benchmark interest rates."

Yet another writer, Erica Tay, writes in The Straits Times today: "[F]inancial markets have been awash with so much cash that investors have bought assets indiscriminately, pricing risks too low.

"With the Big Three central banks of the US, the euro zone and Japan all in tightening mode for the first time in 15 years, the end of easy money translates into greater sensitivity to risk -- a bane for emerging economies."

So greater uncertainty and risk aversion has been a significant factor behind the fall in stock markets, especially in emerging markets. Or as Tay's article quoted Selena Ling, an economist at OCBC Bank, as saying of the market: "The mood just turned."

There is certainly greater uncertainty now than in the past couple of years. Whereas the Federal Reserve had been on a steady path of measured rates hikes in the latter half of 2004 and in 2005, it has since declared that it is now data-dependent, leaving markets with more uncertainty over the path of Federal Reserve action in the near future and therefore greater risk in pricing assets.

Furthermore, the European Central Bank and the Bank of Japan, which had left interest rates unchanged for much of the last few years, have both started moves towards tightening of monetary policy. Unlike the rate hikes by the Federal Reserve in 2004 and 2005, however, the ECB has been hiking rates in stop-start fashion, while the BoJ has been battling politicians as it implements its plan to remove liquidity even as data show the Japanese economy to be barely out of deflation.

Compared to the past few years, such a situation leaves markets relatively uncertain over the future direction of monetary policy in these economies. Effectively, the ECB and the BoJ are injecting fluidity to market conditions even as they remove liquidity.

However, if stock markets are falling as central banks are tightening, this would hardly be the first time. If markets are re-pricing risk only now, as Tay suggests, then they might have been too complacent. After all central banks have always had to tighten as the economic expansion matures and threatens to cause overheating.

As Ling, the economist cited in Tay's article, points out: "Raising interest rates is, from an economist's point of view, the solution, not the problem."

Indeed, from an economist's point of view, one should probably ask whether interest rates should have been raised faster or sooner in some of the more strongly-expanding economies. That might have damped some of the risk appetite earlier and saved investors from the current anxieties.

Inflation a concern to US, relief to Japan, slows in Germany

Yesterday's news from the US was supposed to be about personal income and spending, but the focus was mostly on inflation. From Reuters:

Surging energy costs helped push U.S. consumer prices up by a sharp 0.5 percent in April and weighed on shoppers' moods in May as worries of higher future inflation grew, reports showed on Friday.

But the data showed core prices, which strip out volatile food and energy costs, rose only a moderate 0.2 percent last month and left financial markets none the wiser as to whether the Federal Reserve would hike interest rates in June...

The rise in overall consumer prices in April took a big bite out of American paychecks. While the Commerce Department said personal income rose 0.5 percent last month, it dropped 0.1 percent after accounting for inflation and taxes.

While consumer spending rose a hearty 0.6 percent, it edged up just 0.1 percent on an inflation-adjusted basis.

No wonder consumer sentiment is souring.

Separately, the University of Michigan said that its index of consumer sentiment fell in May to 79.1 from April's final reading of 87.4, according to sources who saw the subscription-only report.

In addition, the university found expectations of inflation five years out rose to 3.2 percent, matching October's post-hurricane reading in a troubling sign for the Fed.

Financial markets were unfazed though.

Financial markets were relieved the data, which followed unexpectedly strong readings in the popular core consumer price index, did not show greater inflation pressure.

Prices for both government bonds and U.S. stocks rose, with the blue-chip Dow Jones industrial average closing up 0.60 percent at 11,278.61 points.

Japan, on the other hand, is quite happy to see some inflation. From AFP/CNA:

Japan reported Friday a further easing of deflationary pressures in April when core consumer prices rose for a sixth straight month with a gain of 0.5 percent from the same month a year earlier.

While in Germany, inflation actually slowed. From Bloomberg:

The inflation rate declined to 1.9 percent from 2 percent in April, the Wiesbaden-based Federal Statistics Office said today in a faxed statement. The slowdown matched the median of 38 forecasts in a Bloomberg News survey.

US first quarter growth revised up to 5.3 percent

If you are looking for a slowdown in the US economy, don't look at first quarter growth, which has been revised upwards, although not by as much as expected. From Reuters:

The U.S. economy shot ahead at an upwardly revised 5.3 percent annual rate in the first quarter, the fastest pace of growth in 2-1/2 years, but prices remained in check, a Commerce Department report on Thursday showed.

But the GDP report is backward-looking. For more recent data...:

...April sales of existing or pre-owned homes dipped 2.0 percent to a seasonally adjusted annual rate of 6.76 million units, implying possible broad-based slowing ahead...

Separately, the Labor Department reported that new claims for unemployment benefits fell by 40,000 last week to a seasonally adjusted 329,000. That was partly because filings from Puerto Rico dropped after the end of a partial government shutdown.

The UK also updated its first quarter GDP. Again from Reuters:

The Office for National Statistics said gross domestic product rose by an unrevised 0.6 percent in the first quarter -- exactly as expected and the same rate as the previous quarter.

US durable goods orders fall, Canadian interest rates rise

On the whole, yesterday's economic data look a bit weaker than usual.

Reuters reports yesterday's economic data from the US, including the poor durable goods orders.

New orders for U.S.-made durable goods tumbled an unexpectedly large 4.8 percent in April...

Orders for durable items, those meant to last three years or longer, fell the most since January due to big declines in civilian aircraft and computer and electronic products orders.

Even with transportation goods stripped out, orders for durable goods were down 1.1 percent...

Non-defense capital goods orders excluding aircraft, viewed as a proxy for business spending, dropped a larger-than-expected 1.7 percent...

In contrast to the disappointing durable goods data, housing showed surprising strength.

New home sales rose a more-than-expected 4.9 percent... April's median home price rose 2.8 percent from March to $238,500.

But even in housing, it was not all positive.

Some analysts noted that in spite of gains in new home sales in April, downward revisions to data for five earlier months pointed to an overall cooling of a sector whose strength has contributed heavily to recent U.S. economic robustness...

[T]he April pace was down 5.7 percent from the year-ago rate...

A separate report from the Mortgage Bankers Association showed U.S. mortgage applications fell last week, driven by a steep decline in home buying loans despite a dip in long-term interest rates.

Meanwhile, Reuters reports that factory orders fell in the UK too.

The Confederation of British Industry said its monthly manufacturing order books balance eased to -12 in May from -11 in April, lower than analysts' expectations for a reading of -9.

However, the CBI's export order books balance picked up sharply in May to zero from -13 in April -- the strongest since February 1996 when it was +1 -- driven by renewed demand for capital goods like aerospace equipment and industrial engines.

Elsewhere in Europe, German business confidence fell in May, although by less than expected. From Bloomberg:

Business confidence in Germany fell less than expected in May, indicating Europe's largest economy is weathering near-record oil prices and a rising euro.

The Ifo institute said its confidence index, based on a survey of 7,000 executives, slipped to 105.6 from a 15-year high of 105.9 in April. Economists expected a decline to 105, according to the median of 43 estimates in a Bloomberg survey...

In France, business confidence fell in May for the first time since April 2005, a government report showed yesterday...

In Japan, the service sector slowed in March. Reuters reports:

The tertiary sector index, a key gauge of activity in the services sector, fell 0.6 percent in March from the previous month, the Ministry of Economy, Trade and Industry said on Wednesday.

Forecasts in a Reuters poll had centred on a fall of 0.4 percent. In February the index fell 1.4 percent, but for the January-March quarter it rose slightly...

The all-industries index, which covers a broader range of economic activity and includes the tertiary index, fell 0.4 percent from the previous month, compared with a median forecast of a 0.3 percent fall.

But in Canada, the composite leading indicator continued to increase, rising 0.5 percent in April after rising 0.6 percent gain in March. It was enough for the Bank of Canada to raise interest rates yesterday, although maybe not in the future.

The Bank of Canada raised its overnight interest rate on Wednesday by a quarter of a percentage point to 4.25 percent, as expected, but signaled an end to its nine-month tightening cycle.

Markets mixed as they re-price risk

Stock markets were mixed yesterday. The US market was down, Europe was strongly up, Asia was mixed.

	23 May close	Pts change	% change
S&P 500	1,248.29	-5.49	-0.4
Nasdaq	2,158.76	-14.10	-0.6
FTSE 100	5,678.7	146.0	2.6
DAX	5,678.49	132.25	2.4
CAC 40	4,931.53	118.03	2.5
Nikkei 225	15,599.20	-258.67	-1.6
Hang Seng	15,864.56	59.04	0.4
Sensitive	10,822.78	341.01	2.8

However, the differences in performances largely reflect the differences in closing times.

Despite the recent volatility in markets, the OECD remains upbeat on world economic growth. From FT:

Jean-Philippe Cotis, chief economist of the Paris-based organisation, said the disruption in the markets indicated a correction in the pricing of risk more than the early stages of a disorderly unwinding of global trade imbalances.

It raised its global growth forecast to 3.1 per cent in 2006 from its 2.9 per cent projection of November. Its twice-yearly Economic Outlook said that the buoyancy of the world economy, entering its fifth successive year of expansion, was all the more remarkable for having withstood shocks, such as high and volatile oil prices.

However, Eurostat reported yesterday that industrial new orders were down in March compared to February.

The euro area industrial new orders index fell by 2.4% in March 2006 compared to February 2006. The index increased by 3.4% in February and decreased by 6.0% in January. EU25 new orders dropped by 1.7% in March 2006, after a rise of 0.8% in February and a fall of 3.7% in January. Excluding ships, railway and aerospace equipment industrial new orders declined by 1.0% in March 2006 in the euro area and grew by 0.2% in the EU25.

Which makes it yet another piece of data that contradicts other pieces of data. And with the world's main central bank having announced that further policy action would be data-dependent, no wonder markets are re-pricing risk.

Markets turn risk-averse again

Yesterday was another bad Monday for risky assets. From Bloomberg:

Emerging-market stocks declined for a 10th day, the longest losing streak in almost eight years, as investors fled riskier assets because of sliding commodity prices and rising interest rates...

The Morgan Stanley Capital International Emerging Markets Index, which tracks shares in 26 developing nations globally, slumped 4.6 percent to 750.01. The measure has tumbled 15 percent from a record close set May 8...

Government bonds in developing countries from the Philippines to Turkey and Brazil also fell today...

The yield gap between emerging-market dollar-denominated bonds and U.S. Treasuries widened 8 basis points, or 0.08 percentage point, today to 2.16 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The spread is 43 basis points above a record low of 1.73 percentage points reached May 1.

European stock markets were not spared. From Reuters:

European shares tumbled nearly 3 percent on Monday to their lowest close in five months, hit by weakness in oil and mining shares as some commodity prices fell but persistent concerns about inflation hit global markets.

The pan-European FTSEurofirst index of 300 leading shares closed down 2.7 percent at 1,271.4 points, its lowest since Dec. 20 and dropping to negative territory for 2006...

The FTSEurofirst index has lost more than 10 percent from a near-five-year high of 1,407.5 points struck on May 11 and is now off 0.3 percent so far this year.

Safer assets -- namely government notes and bonds -- gained. From Bloomberg:

U.S. Treasuries, European bonds and Japan's debt rallied as a slide in stocks and commodities spurred investors to buy government-guaranteed securities...

Investors' tolerance for risk is the lowest since the U.S.- led invasion of Iraq in 2003, according to a measure calculated by UBS AG, the world's largest money manager. Yields on 10-year U.S. notes, German bunds and Japanese government securities with the same maturity dropped at least 5 basis points today, for the first time since July 2004.

The yield on the benchmark 10-year Treasury fell to 5.02 percent at 2:17 p.m. in New York, after dipping below 5 percent. The 5 1/8 note due May 2016 rose 5/16 to 100 13/16. Germany's 4 percent bund yield closed 7 basis points lower at 3.91 percent. Japan's 10-year bonds posted their biggest rally since October 2004, sending yields down 8.6 basis points to 1.83 percent.

But by late Monday US time, some of the movements had been reversed. From Reuters:

Gold prices fell 3.5 percent early as a stronger dollar prompted selling. But late in New York, spot gold was at $655.60/656.40, down only slightly from $659.20/660.00 late on Friday...

Other metals also gyrated, with silver slipping 4 percent to a one-month low before rebounding, while platinum and palladium lost ground on fund and speculative selling...

A rally in the dollar fizzled late on Monday and the euro rose, buoyed by comments from euro zone finance ministers who said they were not worried about the single currency's recent gain.

And US stocks were relatively resilient compared to other stock markets.

The Dow Jones industrial average was down 18.73 points, or 0.17 percent, to end at 11,125.33. The Standard & Poor's 500 Index was down 4.96 points, or 0.39 percent, to finish at 1,262.07. The Nasdaq Composite Index was down 21.02 points, or 0.96 percent, to close at 2,172.86...

Blue-chip stocks trimmed earlier losses as oil futures recovered from a sell-off to settle higher, pushing up heavily weighted energy shares like Exxon Mobil Corp.

And US Treasuries trimmed earlier gains.

U.S. Treasury bond prices rose on Monday as traders pulling out of tumbling equities and commodities markets sought out the relative safety of fixed-income.

Gains were trimmed late in the day though after some hawkish comments from a Federal Reserve official and a rebound off the day's lows by major U.S. stock indices and some commodities prices.

The benchmark 10-year Treasury note , whose yield briefly traded below 5 percent for the first time in a month, rose 6/32 in price for a yield of 5.04 percent, down from 5.06 percent late on Friday.

Sold in May, should investors go away?

After a serene three-year bull-run in the stock market, Singapore investors were given a fright over the past week or so. The benchmark Straits Times Index (STI) fell in five of the last six sessions, including an almost 86-point -- or 3.3 percent -- fall on 15 May that was the biggest one-day points fall since the September 2001 plunge in the wake of the terrorist attack in the United States.

The latest stock market sell-off started on 11 May, and in just over a week, took the STI from 2,642.89 -- less than a percent from its all-time high attained earlier this month -- to 2,493.98 last Friday, a drop of 5.6 percent. Analysts gave several reasons for the sell-off.

One is fear of inflation -- or to be more exact, fear of higher interest rates. This certainly was the case last Thursday, after inflation in the United States in April was reported to be higher than economists had expected, triggering fears of more rate hikes by the Federal Reserve.

Another is a weakening economy. The Singapore economy managed to perform surprisingly strongly in the first quarter, growing at an annualized 6.8 percent after a breakneck 12.5 percent growth in the fourth quarter of last year. This had prompted the Singapore government to raise its 2006 growth forecast to between 5 percent and 7 percent from between 4 percent and 6 percent.

However, Singapore's key export market, the United States, is widely expected to see its economic growth rate slow later this year as a weaker housing market becomes a drag on consumer spending. As it is, Singapore's April non-oil domestic exports disappointed economists, rising a mere 0.3 percent from the previous month on a seasonally-adjusted basis.

And it could get worse. A third fear specifically relates to declining export competitiveness arising from a stronger currency. Much like many of its Asian counterparts, the Singapore dollar has been rising for much of this year and even after some sell-down last week, trades at around S$1.58 to the US dollar, significantly stronger than around S$1.70 about six months ago.

The technical indicators are also worrying. Some analysts have pointed out that the STI broke below its 50-day moving average last week. Others are looking beyond that.

On Saturday, an article in The Business Times written by Wong Wei Kong quoted a technical analysis report by OCBC Investment Research: "On a longer-term scale, we are looking at a three-wave correction unfolding in the coming weeks. As such, we expect the 200-day moving average to be tested and broken. Our forecast for the final resting point for this three-wave correction is set between the support zone of 2,370-2,420."

Wong also quoted another report from DBS Vickers Securities on the STI: "If it breaches below 2,415, we anticipate the index to slip lower towards our target of 2,350 as the indicators are severely toppish. The recommendation for 'long' only investors is to stay out of the market for the moment, or short-sell the market as we expect another 5 per cent dive towards 2,350 levels."

Wong gave other reasons for investors to stay out of the market.

One is that it is May, so investors should go away. This alludes to the widely-held view that the six-month period starting from May is often a bad time for stocks. Furthermore, this year, May is followed in June by the World Cup in Germany, and Wong suggests that "investors may not miss much by staying away".

Incidentally, the reference to the four-yearly World Cup also highlights the fact that this is the second year in the US presidential election cycle, usually not a good time for stocks.

Another consideration that was not mentioned by Wong is that the bull run in the Singapore stock market is looking a bit long in the tooth. It has now lasted over three years, over which time the STI has more than doubled. It is said that stock prices do not go up in a straight line. However, a chart of the STI over the past three years does look like a straight line.

It is not surprising then that many analysts think that the Singapore stock market is overbought. After a run of such duration and magnitude, a correction of around 20 percent or more is quite normal for the Singapore market. Such a correction would bring the STI down to about 2,100. That makes the downside targets from OCBC and DBS look rather tame in comparison.

Not all factors point towards bearishness though. Despite the run-up over the past three years, strong earnings growth over the period means that valuations are not as stretched as is often the case at this point in the cycle. Wong cites a UBS Investment Research report saying that the Singapore market now trades at 15.4 times earnings, lower than the five-year mean of 16 times and the 10-year mean of 18 times.

Nevertheless, mounting market nervousness appears to be a global phenomenon. Singapore stocks were not the only ones that suffered in the recent sell-off. Most markets around the world fell as well.

Indeed, Merrill Lynch's May survey of global fund managers shows that many of the concerns affecting the Singapore market -- higher inflation, higher interest rates, lower growth -- applies globally as well. The survey found a decline in risk appetite among managers, with many shortening their investment time horizon and increasing their cash holdings.

And market unease is not limited to stocks. Commodity prices have fallen too on the same fears of higher interest rates and slower growth in demand.

The Singapore stock market is obviously just one victim of this global investor nervousness. If the nervousness persists, the Singapore stock market is unlikely to be spared.

Investor psychology can be very fickle though. Despite the concerns mentioned above, the recent turn towards greater investor nervousness and market volatility may not persist. And even if it does, seasoned investors with longer investment time horizons could conceivably ride out the volatility with relatively little harm to their long-term financial, physical or psychological health.

However, for investors who do not have the stomach for high risk and market volatility, selling in May and going away -- perhaps to watch the World Cup in Germany -- might not be a bad idea.

Slower but steady growth for Japan

Japan's economy slowed in the first quarter of 2006 from the previous quarter, but still grew faster than expected. From AFP/CNA:

Japan's gross domestic product (GDP) grew 0.5 percent in the three months to March from the previous quarter, when the economy had expanded a revised 1.1 percent, the Cabinet Office said.

On an annualized basis, GDP grew 1.9 percent, slowing from a revised 4.3 percent pace in the previous quarter...

The GDP figures were also better than market expectations for a 0.3 percent quarterly rate and a 1.2 percent annualized pace...

A slowdown in exports and consumer spending were partly behind the weaker overall growth while rising import costs on the back of rising oil prices and stronger domestic demand also took their toll...

The GDP deflator showed a slower year-on-year drop of 1.3 percent in the three months to March after a 1.6 percent decline in the previous quarter.

The Bank of Japan appears confident on the outlook for the economy, although it left interest rates unchanged yesterday.

The Bank of Japan (BoJ) has upgraded slightly its outlook for the economy while keeping its zero interest rate policy unchanged as expected and leaving its options open for the future.

"Growth is continuing with a good balance between domestic and external demand and between the corporate and household sectors," BoJ governor Toshihiko Fukui said after news of 1.9 percent annualized growth in the first quarter.

"Looking ahead, we think the economy is highly likely to continue steady growth for a long time," he told reporters Friday.

In its monthly report, the central bank tweaked the wording of its outlook, saying: "Japan's economy is expected to expand moderately".

The BoJ is not giving away much, but July looks increasingly likely to see the first rate hike.

Policy-makers may have more work to do

Yesterday's economic news from the US may pose a bit of a dilemma for the Federal Reserve. From Reuters:

The headline figure in the Philadelphia Federal Reserve's business activity index rose...to 14.4 in May from 13.2 in April...

But the survey's jobs component slumped to 1.1, its weakest level since November 2003, from 21.7 in April. A measure of prices paid by manufacturers jumped to 55.3 from 29.0, its strongest since October 2005...

The Philadelphia survey's new orders index, a gauge of future growth, fell to 2.7 in May from 12.2 in April.

The Reuters report also highlighted a surge in first-time claims for state unemployment insurance benefits last week but mainly due to a partial government shutdown in Puerto Rico.

But corroborating evidence of a slowdown in the US economy comes from the Conference Board.

The Conference Board announced today that the U.S. leading index decreased 0.1 percent, the coincident index increased 0.2 percent and the lagging index increased 0.3 percent in April... The current behavior of the leading index suggests economic growth should continue moderately in the near term.

And as for inflation, Fed members seems to agree that there is reason for concern. From Reuters:

"Containing inflation has to be our primary focus," said Richmond Fed Bank President Jeffrey Lacker...

"The inflation outlook right now is at the borderline of acceptable, and perhaps even beyond," Lacker, a voting member of the central bank's FOMC this year, told reporters after speaking to the Conference of State Bank Supervisors in Norfolk, Virginia.

St. Louis Fed Bank President William Poole, a non-voting FOMC member this year, later said at a Global Interdependence Center luncheon in Philadelphia that inflation risks were "tilted to the upside" even though he expects inflation to be contained and healthy growth to prevail...

Earlier, Fed Chairman Ben Bernanke mostly steered clear of questions about the economy at a Chicago Fed conference on bank regulation, but said the housing market is "clearly weakening."

While the Federal Reserve has to steer between worries about inflation and economic slowdown, the concern for policy-makers in China appears more straightforward, as industrial output continued to grow strongly in April:

China's industrial output rose 16.6 percent in April from a year ago, with analysts pointing to a continued rise in domestic demand and sustained export growth...

The growth in production output in April was slightly lower than growth in March, during which output increased 17.8 percent year-on-year, and about the same as the 16.7 percent output growth in the first quarter.

...as does fixed asset investment.

China's urban fixed asset investment rose 29.6 percent in the first four months of 2006, official figures show, as the government and analysts said more must be done to cool the booming economy...

In the first three months of the year, China's fixed asset investments had increased 27.7 percent compared with the same period in 2005, those figures being already well above Beijing's annual target for investment growth of 18 percent.

And even the Bank of England may have to start tightening after the latest UK retail sales data.

The Office for National Statistics said sales rose by 0.6 percent in April after an upwardly revised 0.9 percent increase in March. Annual growth, at 3.0 percent, was the strongest since December and topped forecasts for a reading of 2.6 percent.

Stock markets plunge on inflation data

Inflation is still creeping up. Reuters reports the US CPI data:

The Labor Department said the consumer price index rose 0.6 percent in April, while the closely watched core index, which strips out volatile food and energy prices, rose 0.3 percent for a second consecutive month.

Both figures were above expectations on Wall Street, where economists had looked for overall prices to rise 0.5 percent, with core prices up just 0.2 percent...

Over the past 12 months, the core consumer price index has risen 2.3 percent, a pickup from the 2.1 percent gain registered in the period through March and the biggest 12-month advance in more than a year.

Headline inflation has moved up even quicker because of big gains in energy costs, with overall consumer prices up 3.5 percent in the past 12 months.

US stock markets did not like the data.

The data sent stock markets reeling. The blue-chip Dow Jones industrial average closed down 214 points, its biggest one-day drop since March 2003, while the tech-laden Nasdaq composite wiped out its gains for the year.

It is a similar story in Europe. AFX/Forbes reports the inflation data for April.

The euro zone's harmonised index of consumer prices rose a final 2.4 pct year-on-year in April, unchanged from a provisional estimate, EU statistics office Eurostat said.

In March, the HICP rose 2.2 pct year-on-year.

Month-on-month, the HICP rose 0.7 pct in April.

European stock markets reacted in the same way as their US counterparts, as FT reports.

European equities suffered their worst one-day points fall in 3½ years on Wednesday after inflationary fears returned to haunt commodities and stock markets for the second time this week.

The FTSE Eurofirst 300 dropped 2.8 per cent to 1,310.01.

Markets may have been too complacent. Inflation is unlikely to decelerate without a deceleration in economic growth, of which there has been little indication so far. The housing slowdown we have seen so far signals a future economic slowdown, so a stabilisation in inflation is still possible, but probably at least several months down the road. And it might still need a bit more help from central banks.

Mixed inflation and other economic data

Yesterday's global economic data were mixed, not least those on inflation.

Reuters reports the economic news from the US.

The U.S. Labor Department said on Tuesday overall producer prices rose a steep 0.9 percent in April, but prices outside of the volatile food and energy areas rose just 0.1 percent for the second consecutive month.

Separately, the Commerce Department said housing starts fell 7.4 percent in April to a 1.849 million unit annual pace. It was the third straight monthly drop, taking starts to their lowest since November 2004.

But in a sign of vigor, a report from the Federal Reserve showed industrial output rose by a greater-than-expected 0.8 percent in April, pushing the percentage of industrial capacity employed to its highest since July 2000...

The pickup in output at the nation's factories, mines and utilities pushed the industrial capacity use rate up to 81.9 percent, the highest in more than 5-1/2 years.

Reuters reports a similar inflation story in the UK.

Office for National Statistics data on Tuesday showed consumer prices increased by 0.6 percent in April -- the biggest monthly rise in nearly five years -- taking the annual rate of inflation up to 2.0 percent, as expected, from 1.8 percent.

UK house prices also appear to be accelerating. Again from Reuters:

The RICS said its house prices balance rose for the sixth month in a row to +15 in the three months to April from a downwardly revised +12 in March...

The survey showed the number of inquiries from new would-be buyers rose in April for the 11th straight month, the longest stretch of rises since RICS began polling for that information in 1998. But it was the weakest growth since June 2005.

Stocks of available properties on surveyors' books fell to an average 71.4 in April from 72.1 in March -- their lowest level since October 2004.

Earlier, the Japanese government reported optimistic news on consumer confidence. From AFX/Forbes:

The consumer confidence index improved to 50.0 in April from 47.9 in March, rising for the first time in two months to its highest in nearly 16 years, the Cabinet Office said.

However, German investor confidence fell in May. From Bloomberg:

The ZEW Center for European Economic Research said in Mannheim today that the index of institutional and analyst expectations fell to 50 from 62.7 in April. It was the biggest decline since April 2005. Economists predicted a reading of 60, according to the median of 42 estimates in a Bloomberg News survey. The measure reached a two-year high of 71 in January.

But industrial production in the euro zone grew in March.

Euro-region industrial production rose in March from February, a report from the European Union's statistics office in Luxembourg showed today. The euro economy expanded 0.6 percent in the first quarter from the fourth, when it grew 0.3 percent, the European Union's statistics office said last week.

Investors turn defensive

Investors turned defensive yesterday, abandoning investments that had been doing well in the past few years on the back of strong economic growth. Investments that are likely to out-perform in a weak economy, on the other hand, gained.

Commodity prices fell across the board. Gold futures for June delivery fell US$26.80 or 3.8 percent to close at US$685 an ounce, June US light crude futures closed down US$2.63 or 3.7 percent at US$69.41 a barrel while July copper futures fell 11.75 US cents or 3 percent to close at US$3.7465 a pound.

Stocks fell, especially those in emerging markets. Benchmark stock indices fell 6.3 percent in Indonesia, 3.8 percent in India, 3.3 percent in Singapore and 3.0 percent in Argentina. China bucked the trend, the Shanghai market surging 3.8 percent.

However, emerging markets were not the only ones that suffered. Europe was not spared either. In the UK, stocks fell 2.2 percent, German stocks fell 1.0 percent and French stocks 1.7 percent. The Norwegian stock market plunged 5.3 percent.

Investors did not abandon the US market though. Blue chips especially gained, with the Dow Jones Industrial Average rising 0.4 percent and the Standard & Poor's 500 rising 0.3 percent. The Nasdaq Composite, however, fell 0.2 percent and market breadth was generally negative, with declining stocks outnumbering advancers by a ratio of about 4 to 3 on the New York Stock Exchange and close to 2 to 1 on Nasdaq.

The US dollar recovered from recent losses yesterday, especially against the currencies of emerging economies. Indonesia's currency in particular tracked its stock market's losses, the rupiah falling 4.5 percent against the US currency.

US bonds not surprisingly gained, the 10-year Treasury note closing up 11/32 at 99 25/32, with a yield of 5.16 percent, down from 5.19 percent at Friday's close. The spread between the yield on emerging market bonds and Treasuries widened by 12 basis points to 1.96 percentage points, according to the JPMorgan Chase EMBI+ index.

If markets acted as though the global economy is slowing, economic data from the US yesterday gave them some justification. The New York Federal Reserve Bank reported yesterday that its Empire State Manufacturing index fell to 12.4 in May from 15.8 in April, while the National Association of Home Builders reported that the NAHB/Wells Fargo Housing Market index fell to 45 in May -- the lowest level since mid-1995 -- from 51 in April.

Does yesterday's market action signal the end of the bull run in asset and commodity prices? Possibly, but it is obviously too soon to tell. The global economy is widely expected to slow, but markets appear to be driven as much by liquidity as by economic prospects.

In this respect, the major central banks have not shown themselves to be particularly hawkish on interest rates. Last week, the Federal Reserve raised interest rates by 25 basis points but gave little firm indication that it is likely to raise rates further. In the previous week, the European Central Bank left interest rates unchanged. The Bank of England has expressed the view that little interest rate increase is required, even though its housing market appears to be re-accelerating. And just yesterday, Bank of Japan Governor Toshihiko Fukui gave two speeches, neither of which provided any hint of an imminent rate hike.

Benign central bank action means that interest rates are unlikely to spike upwards and asset markets are therefore likely to stay relatively well-supported.

Nevertheless, recent increases in market volatility indicate that investors may be getting nervous, as well they should be in view of the extent and duration of the run-up in markets in this cycle so far. For the more risk-averse investors, a rebalancing of portfolios out of riskier assets into more defensive ones at this point in time appears to be appropriately prudent.

BoJ may takes its time, PBC makes a move

Suddenly, an interest rate hike in Japan looks slightly less imminent. From Reuters:

Japanese machinery orders fell surprisingly sharply in March, government data showed on Monday, dampening speculation that the Bank of Japan might end its zero-interest-rate policy imminently.

BOJ Governor Toshihiko Fukui himself played down speculation of an imminent policy tightening, saying the central bank would not necessarily raise rates immediately when it finishes mopping up excess funds in the banking system.

While Fukui said the BOJ could take its time in raising interest rates if the economy moved in line with its scenario for sustained but slower growth, he also pointed out the risks were more to the upside than to the downside...

Core private-sector machinery orders, a key but volatile gauge of capital spending, fell a seasonally adjusted 5.2 percent in March from the previous month, compared with a consensus market forecast for a 0.5 percent increase, Cabinet Office data showed.

The Nikkei share price average dropped on the machinery orders numbers, compounding a loss of some 5 percent over the past week, but it rebounded after Fukui's remarks. The Nikkei ended at 16,486.91, down 0.69 percent on the day but more than 1 percent above the day's low.

The Nikkei also probably fell because of inflation fears.

[T]he BOJ's own data showed Japanese wholesale prices rose more than expected in April due to higher prices of commodities, which was slowly filtering through the economy. The corporate goods price index (CGPI) for April was up 2.5 percent from a year earlier, above a consensus market forecast of a 2.3 percent rise.

And investors must also be fearful that the recently-rising yen may curb its exports, which has been strong so far. From AFX/Forbes:

The current account surplus in March surged 32.8 pct from a year earlier, rising for the second straight month, despite the trade surplus shrinking due to costlier oil, the Ministry of Finance said.

The current account was in surplus by 2.39 trln yen, against the year-earlier's 1.80 trln...

But the trade surplus dropped 6.0 pct to 1.11 trln yen as imports rose faster than exports due to higher crude oil prices.

Exports increased 18.2 pct to 6.51 trln yen, up for the 28th straight month, while imports jumped 24.8 pct to 5.40 trln, the 25th consecutive monthly increase...

The income account posted a surplus of 1.61 trln yen, an all-time high, up from 1.03 trln a year earlier, because of sharp increases in portfolio income and dividend income.

Concerns arising from an appreciation of the yen and other Asian currencies must have been boosted by developments in China today. From Bloomberg:

The yuan strengthened beyond 8 to the dollar for the first time in more than 12 years, prompting speculation China's government is allowing faster gains to win U.S. support for its currency policy...

The central bank today set its reference rate for yuan trading at 7.9982 against the dollar, stronger than 8 for the first time since the revaluation...

A report today also showed China's money supply expansion unexpectedly picked up in April and bank lending more than doubled. The central bank may need to reduce yuan liquidity in the market, said Qing Wang, a currency strategist with Bank of America in Hong Kong.

M2, which includes cash and all deposits, rose 18.9 percent from a year earlier after gaining 18.8 percent in March, the People's Bank of China said on its Web site. Growth was expected to slow to 18.5 percent, according to the median estimate of 23 economists surveyed by Bloomberg News.

Whatever the reason for the Chinese currency's dip below 8, it did not last very long.

The yuan closed at 8.003 at 5:30 p.m., according to the Web site of the China Foreign Exchange Trade System in Shanghai.

Falls in US consumer sentiment, trade deficit and Chinese trade surplus, rise in inflation

A quick summary of yesterday's key economic data from the US reported by Reuters:

The University of Michigan's closely watched sentiment survey slumped to 79.0 in May from April's final 87.4, far below the median Wall Street forecast for a reading of 86.1...

Earlier, the Commerce Department said record high exports pushed the trade deficit down to $62 billion in March, its lowest since August and a second straight month of narrowing...

The Labor Department reported on Friday that the cost of imported petroleum jumped 11.5 percent in April, the biggest gain since March 2005.

The increase boosted overall US import prices by an unexpectedly sharp 2.1 percent in April, although nonpetroleum prices were flat, the report showed.

Meanwhile, yesterday also saw trade data released from China.

China's monthly trade surplus fell slightly in April to US$10.46 billion from March's US$11.2 billion, according to the General Administration of Customs...

The statistics show exports rose 23.9 per cent in April from a year earlier to US$76.95 billion, while imports rose 15.3 per cent year on year to US$66.49 billion.

As well as inflation data.

China's consumer inflation rate was 1.2 percent in April compared with the same period last year, the National Bureau of Statistics said Friday...

Inflation ran at 1.8 percent for all of 2005, coming in at 1.9 percent in January, then 0.9 percent in February and 0.8 percent in March.

Germany also saw an increase in inflation in April, but the outlook for economic growth in Germany in particular and Europe and the OECD area in general is good, according to the latest OECD indicator, summarised by Reuters.

The Paris-based Organisation for Economic Cooperation and Development said the composite leading indicator for the 30-nation OECD area rose to 109.6 in March from a revised 109.2 the previous month. It climbed to 105.3 from 105.0 in February for all of the G7 countries combined.

US retail sales weaker than expected but markets fear higher interest rates

US retail sales in April were weaker than expected, Reuters reports.

Commerce Department data showed sales at U.S. retail stores rose a smaller-than-expected 0.5 percent in April... But retail sales excluding gasoline edged up just 0.1 percent after rising 0.7 percent in March...

Retail sales excluding cars and parts increased 0.7 percent in April after a revised 0.5 percent rise in March. This was previously reported as a 0.4 percent gain.

The Reuters report also highlighted the fact that business inventories rose in line with sales in March.

Commerce Department data showed that March business inventories rose a larger-than-expected 0.7 percent in March as automotive and building material stocks climbed...

Business sales kept pace with inventories, rising 0.7 percent in March after an unrevised 0.6 percent decline in February. This kept the inventories-to-sales ratio, a measure of how long it would take to deplete stocks at the current sales pace, unchanged at 1.26 months, just above the record low of 1.25 months in January.

And jobless claims fell last week.

Labor Department data showed new claims for jobless aid fell 1,000 last week. But they were higher than expected due to a partial government shutdown in Puerto Rico that added about 20,000 claims.

First-time claims for state unemployment insurance benefits dipped to 324,000 last week...

The four-week moving average of new claims...rose to 317,250 last week, up 2,500.

The number of people who continued to collect jobless benefits after drawing an initial week of aid fell 49,000 to 2.392 million in the week ended April 29, the lowest since January 2001 and below forecasts of 2.450 million claims.

Despite the weaker-than-expected retail sales, US bond yields rose yesterday, without helping the US dollar.

Yields on the benchmark U.S. Treasury 10-year note were up in late New York trade at 5.16 percent from 5.13 percent on Wednesday. The dollar slipped to a year-low against the euro while stocks fell, upset by rising oil prices.

And US stocks were pummelled yesterday, as Bloomberg reports.

U.S. stocks fell the most since January as surging gold and oil prices increased concern the Federal Reserve will raise interest rates to contain inflation...

The Dow average fell 141.92, or 1.2 percent, to 11,500.73, retreating from its second-highest close. The Standard & Poor's 500 Index lost 16.93, or 1.3 percent, to 1305.92. The Nasdaq Composite Index dropped 48.04, or 2.1 percent, to 2272.70. All indexes had their worst declines since January 20.

And rising interest rates appear likely to be global, with euro zone economies continuing to accelerate.

The $10 trillion economy expanded 0.6 percent in the first quarter from the last three months of 2005, when it grew 0.3 percent, the European Union's statistics office said in Luxembourg today. The 2 percent growth rate from a year ago was the fastest since the second quarter of 2004.

And perhaps in the UK too, after strong growth in March manufacturing output:

The Office for National Statistics said manufacturing output rose 0.7 percent in March, after a 0.1 percent fall in February. That was more than three times higher than analysts' expectations and the strongest rise since April 2005...

The broader measure of industrial production, which includes North Sea oil fields as well as electricity, gas and water, also rose more than expected -- up 0.7 percent in March, and by 0.3 percent on the year.

...and April GDP:

The country's economy probably grew by 0.6 percent in the three months to April, economic think tank NIESR said on Friday, with steady growth and price pressures warranting an imminent rise in interest rates from 4.5 percent.

And very probably in Japan too.

Loans held by Japan's four main categories of banks rose 1.2 percent in April from a year earlier, Bank of Japan data showed on Thursday. It was the biggest rise since the current method of calculation began in January 2001...

Excluding special factors such as loan write-offs, the overall loan balance rose 2.1 percent from the same month a year earlier.

"The uptrend in bank lending is continuing," a BOJ official told reporters...

Data on Tuesday also showed Japan's most widely watched measure of money supply -- M2 plus certificates of deposit (CDs) -- rose 1.7 percent in April from a year earlier.

But overheating China faces a dilemma as its inflation rate appears to be falling. Xinhua Online reports China's industrial producer prices for April:

China's industrial producer prices increased by 1.9 percent in April over the same period of 2005, the National Bureau of Statistics (NBS) said here Thursday...

The industrial producer prices in the first four months were up 2.6 percent over the same period of last year....

Fed raises rates, BoE may not, BoJ still likely to

Yesterday, the Federal Reserve raised interest rates as expected. From Reuters:

The Federal Reserve lifted interest rates for a 16th straight time on Wednesday and, while leaving the door open to a possible pause, said it would keep raising them if necessary to check inflation.

In announcing its decision, the Fed emphasized that future moves would be highly dependent on how the economic outlook unfolds and it scaled back the forward-looking guidance it had been giving financial markets.

The unanimous decision by the central bank's policy-setting Federal Open Market Committee took the benchmark federal funds rate target up a quarter-percentage point to 5 percent, its highest since April 2001.

The Fed is now clearly in data-dependent territory, and since there was no major economic news from the US yesterday, let's move elsewhere.

Across the Atlantic, despite recent strong increases in raw material costs and retail sales in the UK, the Bank of England sees little need for an interest rate hike this year. From Reuters:

The Bank of England tempered expectations that interest rates will rise this year after it said on Wednesday hardly any tightening was needed to keep inflation on course to hit its target...

The Bank said inflation would probably rise later this year on the back of higher energy and import costs but then fall back to the 2.0 percent target in two years -- the central bank's usual policy horizon.

And that is assuming interest rates slope upwards only very gently -- to 4.6 percent by the end of the year, 4.7 percent by the middle of 2007 and peaking at 4.9 percent throughout 2008...

On economic growth, the Bank painted a slightly weaker picture than in February but removed the downside bias to its forecast.

It said growth was likely to stay close to its long-run average over the next three years, underpinned by steady expansion in consumer spending as a housing market revival continues.

An interest rate rise appears more likely in Japan, but even there, leading indicators are falling. From the Conference Board:

The Conference Board reports today that the leading index for Japan decreased 0.2 percent and the coincident index decreased 0.3 percent in March.

The leading index fell slightly in March, the first decline in the last ten months. The leading index has been growing at about a 3.5 -4.5 percent annual rate in recent months, up from zero to slightly negative growth at the end of 2004. But its growth in 2005 and through the first quarter of 2006 has not been as rapid as in the first half of 2004. In addition, the strengths and weaknesses among the leading indicators have been somewhat balanced in recent months.

And from Reuters:

The diffusion index of coincident indicators...fell to 11.1, down from 50.0 in February, Cabinet Office data showed on Tuesday...

But its sister index...remained above 50 for the sixth month in March, though at 60.0 it was down from February's dizzying heights of 90.9.

Chip industry to grow but faces "restructuring" period

Barry Ritholtz says that "big cap tech has not been the place to make money for some time now". One reason he offers is the "rapid commoditization of their products".

At least some industry leaders themselves seem to think so too. From The Korea Times:

Samsung Electronics’ chief of semiconductor business warned of a major shakeup in the flash memory industry in the near future, adding his company will be the eventual winner in the chip war.

Hwang Chang-gyu, one of the memory chip industry’s most influential figures, last week said flash chip makers will go through a major "restructuring" period, and less than five companies will remain when the market finally stabilizes.

A respite may be in store though for memory chip makers. From EETIMES:

Samsung Electronics Co. Ltd. and Hynix Semiconductor Inc. have separately raised their NAND flash-memory prices for the first time this year, according to Bloomberg.

And the chip industry in general may be in for a period of steady growth, helped by Asian emerging economies, according to another EETimes report.

Stanley Myers, president and CEO of the Semiconductor Equipment and Materials International (SEMI), told the Semicon Singapore 2006 conference that SEMI expects the market as a whole to expand by up to 10 percent this year, driven mainly by growing demand for consumer gadgets such as mobile phones and digital audio players...

Philip Koh, research vice president for semiconductors at Gartner here, said it expects the industry to register a compound annual growth rate of 7.9 percent over the next five years, with surging demand for 3G phones and storage devices making up for "saturation" in the PC market.

But emerging Asia is both opportunity and threat, as Scott Jewler, chief strategy officer for STATS ChipPAC, warns:

IP rights protection and industry standards will become "bigger issues over the next three to five years," Jewler predicted, especially with manufacturing shifting to locations like China...

He also advised companies to keep an eye on China-based IDMs, noting that some were already "competing on the leading edge" and that the Chinese industry is seeking to "replace imported chips with local designs."

China to continue rapid growth, may dump dollar peg, but job creation remains worry

China expects to see continued rapid economic growth in 2006. From Reuters:

China's vice finance minister, Li Yong, said on Saturday economic growth could reach 9.5 percent in 2006 but did not rule out a slowdown to below 9 percent if the country tightened monetary policy further.

Li said at the annual meeting of the Asian Development Bank that he expected rapid growth in China's foreign exchange reserves to slow and said Beijing would implement prudent fiscal and monetary policy this year, adjusting interest rates if necessary.

In his latest Bloomberg article, Andy Mukherjee makes reference to Li Yong's remarks at the ADB meeting on foreign exchange.

Li Yong, China's vice minister for finance, said he had heard a "rumor" that the U.S. dollar was headed for a 25 percent drop. If the gossip was true, the consequences would be "shocking," he said.

Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the U.S. Treasury undersecretary of international affairs.

The unspoken message was: "Don't try to talk the dollar down." And Adams knew better than to ask, "Well, what are you going to do about it?" The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.

Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.

At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled "Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units."

A stronger Chinese currency is inevitable in my opinion, regardless of whether an Asian currency unit is formed. And yet, a stronger currency has potentially deflationary effects. China has to be mindful of the fact that, despite its rapid economic expansion, it may not be creating enough jobs. From the People's Daily Online:

China will face serious employment difficulties during the next two quarters with 60 percent of new graduates facing unemployment, according to a report published by the National Development and Reform Commission.

The number of graduates will increase by 22 percent over the previous year to reach 4.13 million while the job market can only soak up 1.66 million new graduates, down 22 percent on the previous year.

US consumer credit, machine tool demand slows

If the jobs report on Friday was a little ambiguous in indicating the direction of the US economy, there have been other reports recently suggesting that the economy may yet be cooling.

Also out on Friday was the Federal Reserve's report on consumer credit. Reuters has the story:

U.S. consumer credit rose a smaller-than-expected $2.52 billion in March, the smallest rise since November, due to a drop in credit card debt, a Federal Reserve report showed on Friday...

Consumer credit outstanding rose to $2.161 trillion in March, rising at a 1.4 percent annual rate from $2.159 trillion the previous month.

US machine tool demand also fell in March although the longer-term uptrend appears to be intact.

The American Machine Tool Distributors' Association (AMTDA) and the Association for Manufacturing Technology (AMT) said total U.S. March machine tool demand stood at $247.21 million, down 5.8 percent from $262.35 million in February. March demand was also 10 percent lower than $274.57 million in March 2005...

Total U.S. machine tool demand in the first three months of this year stood at $725.59 million, up 4.8 percent from $692.41 million in the same 2005 period.

US economy adds 138,000 jobs in April

The US April jobs data as reported by Reuters:

U.S. employers added 138,000 jobs in April, far fewer than had been expected, while annual wages rose at the strongest rate in more than 4-1/2 years, a Labor Department report on Friday showed...

It revised March job growth down to 200,000 from 211,000 originally estimated and February down to 200,000 from 225,000.

The unemployment rate was unchanged from March at 4.7 percent...

Average hourly earnings rose 3.8 percent in the 12 months through April -- the stiffest year-over-year rise since a matching 3.8 percent pickup in August 2001.

That, together with the fact that hourly earnings in the month climbed 0.5 percent to $16.61, is likely to fan concerns about risks of wage-induced inflation...

The length of the average workweek increased to 33.9 hours in April after holding at 33.8 hours for the seven prior months. The department said April's workweek was the longest since September 2002...

Manufacturing employment increased by 19,000 in April -- the strongest for any month since May 2004 when 23,000 were hired -- after growing by a slim 1,000 in March. But the number of jobs at retailers contracted by 36,100 after growing in March by 23,300.

Bond and stock markets took the report positively, obviously focusing on the headline number, but hourly earnings and weekly hours were strong, so overall, the data actually provide a mixed picture and may not impress the Fed very much either way.

Central banks pausing, data suggest more hikes still possible

Following the recent trend, the data yesterday suggest that, pause or no pause, the end to Fed tightening is not quite near. Reuters reports the US labour market data released yesterday.

Unit labor costs gained 2.5 percent as hourly compensation surged, preliminary Labor Department data showed. Meanwhile, nonfarm productivity rose at a faster-than-expected 3.2 percent annual rate in the quarter.

Wall Street had been looking for a slower 1.3 percent advance in unit labor costs -- a key gauge of profit and price pressures watched closely by the Fed -- after costs jumped 3.0 percent in the previous quarter. This reading was revised down slightly from a previously reported 3.3 percent gain.

But jobless claims continued its recent rising trend.

Separately, the Labor Department said new claims for state unemployment insurance benefits increased to 322,000 in the week ended April 29, the highest level since November, compared with an upwardly revised 317,000 the previous week...

The four-week moving average of new claims, which smoothes volatile weekly data to provide a better picture of underlying labor market trends, advanced 5,250 last week to 314,250.

Meanwhile, in Europe, the European Central Bank is on pause at the moment, but probably not for long. Bloomberg reports:

European Central Bank President Jean- Claude Trichet signaled policy makers may raise interest rates next month because faster economic growth, record oil prices and loan demand are fanning inflation.

"If our scenario is confirmed, it's clear that a further withdrawal of monetary accommodation will be warranted," said Trichet at a press conference in Frankfurt today after the ECB kept its benchmark rate at 2.5 percent. It raised rates twice, from a six-decade low of 2 percent, since the start of December.

Some justification for higher euro zone rates came yesterday in the form of a rise in the services sector purchasing managers' index to 58.3 in April from 58.2 in March, a 6-1/2 year high. However, not all indicators were positive, as March euro zone retail sales fell 0.8 percent from February and 0.2 percent from a year ago.

UK official interest rates are also on hold, but it is less clear there where interest rates will go next. From Reuters:

The Bank of England kept interest rates steady for the ninth month running on Thursday and a growing number of economists are now wondering whether the next move will be up.

All but one of the 45 analysts polled by Reuters last week had predicted no change from 4.5 percent at this month's Monetary Policy Committee meeting and many said the central bank would cut rates later this year.

But the data keeps getting stronger and several economists who have long been predicting a rate cut this year have abandoned that forecast in favour of no move. Others are more worried about the risk of a rise.

And yesterday provided more reasons for worry on that score. Again from Reuters:

The Bank of England said on Thursday that mortgage lending rose by a bigger than expected 9.279 billion pounds, the biggest rise since November 2003 when the central bank had just embarked on a series of rate hikes...

[M]ortgage lender Halifax reported that house prices jumped by 2 percent in April, the biggest rise in two years...

Consumers' unsecured borrowing, meanwhile, rose by just 281 million pounds in March, the lowest since February 1994 and well below a forecast for a 1.3 billion pound rise.

Loans agreed for house purchase -- widely seen as a guide to house prices six months out -- rose to 116,000 in March from 114,000 in February.

And the service sector is doing well in the UK too, with the CIPS/RBS Purchasing Managers' Index for services rising to 59.7 in April from 57.4 in March.

US and euro zone show few signs of cooling

The strong data just keep coming. Reuters reports the data from the US:

The Institute for Supply Management's services index rose to 63.0 in April from 60.5 in March, with new orders hitting a two-year high, confounding Wall Street estimates for a slowdown to 59.2.

In addition, the government reported new factory orders rose a stronger-than-expected 4.2 percent in March, beating estimates for a 3.5 percent gain, as demand for transportation equipment, computers and electronics proved robust.

The data from Europe is also coming in hot. AFX/Forbes reports euro-zone PPI:

Euro zone producer prices rose 0.4 pct in March from February, and were up 5.1 pct from a year earlier, EU statistics office Eurostat said...

Excluding the energy sector, producer prices rose 0.3 pct from February, and were up 1.8 pct year-on-year.

...and unemployment:

Euro zone unemployment eased unexpectedly in March to a four-year low of 8.1 pct from 8.2 pct in February, EU statistics office Eurostat said.

But things looked a bit cooler in the UK yesterday, with construction growth slowing in April:

The Chartered Institute for Purchasing and Supply said its seasonally adjusted index for construction fell to 53.7 in April from 54.7 reported for March...

...and shop prices falling:

The British Retail Consortium said its shop price index for April showed overall prices down 1.28 pct on the previous year, the lowest inflation rate since January 2005 and following a steep 1.17 pct fall in March.

Prices have now fallen on an annual basis for seven months running.

The BRC added that prices fell by 0.10 pct between March and April, following the 0.35 pct fall recorded from February to March.

Manufacturing booms, interest rates and oil prices still on uptrend

It is not just the US economy that is performing well. Reuters reports the global boom in manufacturing.

Manufacturing worldwide expanded at its fastest pace in 20 months in April, but economists warned of signs this year's factory boom may soon tire as inventories start to climb.

Surveys of some 10,000 manufacturing firms, seen as one of the earliest monthly indicators of global activity, paint a robust picture of the world economy in 2006 and underline the push by most major central banks to tighten credit conditions.

April's readings are consistent with annualized growth in world industrial production of 7 percent, economists estimate.

Some numbers:

JP Morgan, which compiles a global aggregate index from the underlying national surveys, said its global purchasing managers' index (PMI) rose to 55.9 in April from March's 55.2.

That was the highest since August 2004 and was well above the 50 mark that divides growth from contraction...

The PMI for the 12-nation euro zone hit its highest since September 2000 at 56.7...

The rise in the Chinese manufacturing index hit an 11-month high at 52.7, from 51.0 in March, reinforced expectations Beijing will soon take extra steps to cool the red-hot economy following last week's rise in interest rates.

In the UK, the strong data in manufacturing and elsewhere is causing a rethink on interest rates, according to another Reuters report.

The Chartered Institute of Purchasing and Supply/RBS said its gauge of manufacturing business activity rose to 54.1 in April, its highest since late 2004. That was well above 51.0 in March and expectations of a rise to 51.3.

The Confederation of British Industry said that its retail sales balance rose to +2 in April from -16. Easter falling in April this year instead of March boosted the figures but most economists were upbeat about the prospects for a pick-up.

And British Bankers' Association figures showing a 33 percent rise in mortgage approvals in March compared with a year ago added to evidence the housing market has revived and could make policymakers wary of stoking it any further with lower rates.

While the Bank of England makes its decision tomorrow, we already know today that the Reserve Bank of Australia is raising rates.

Australia's central bank has raised its benchmark interest rate by 25 basis points to 5.75 per cent, the first increase in 14 months, in a bid to keep inflation in check.

And just to complicate things, central banks have also to disentangle the demand and supply factors behind the continuing saga of higher oil prices.

Oil rose toward $75 a barrel on Tuesday, pushed higher by persistent fears about supply disruption, especially from Iran, and by aggressive fund buying across the commodities sector.

US spending up, income up, prices up, manufacturing up, but Fed not worked up

Yesterday's data gave little indication that the US economy is cooling. Reuters reports the news on consumer spending and income:

In Monday's first report, the Commerce Department said consumer spending rose 0.6 percent in March as incomes jumped, although much of the gain was eroded by the pickup in inflation.

The price index for consumer spending shot up 0.4 percent, while the core price index closely watched by policy-makers at the Federal Reserve rose 0.3 percent. The rise in the core inflation measure was a touch ahead of Wall Street forecasts and the largest one-month rise since October...

According to the consumer spending report, personal income rose 0.8 percent in March, partly reflecting a big pickup in transfer payments from the Medicare health-care program.

Other data were similarly positive.

In a later report, the Institute for Supply Management said its index of factory performance climbed to 57.3 last month from 55.2 in March. Economists had expected little change. A reading above 50 indicates growth in the sector, which -- according to this measure -- has been expanding steadily for nearly three years.

In another report, the Commerce Department said construction spending jumped 0.9 percent in March, more than double expectations, to a record high on the back of soaring outlays on private residential building.

But the Fed may pause anyway, according to another Reuters report.

Federal Reserve leaders on Monday emphasized their determination to keep inflation under control after a key measure of prices rose last month, but hopes for a pause in policy tightening remain intact.

This is despite the fact that real bond yields are still relatively low.



Update on 6 May: The Commerce Department has issued a correction to the personal income number. From AP/LAT:

Personal income...rose by 0.5% in March from the previous month, the department's Bureau of Economic Analysis now says. On Monday, the government put the increase at 0.8%. The mistake involved the treatment of payments related to the new Medicare prescription drug plan. The payments had the effect of boosting overall income for March and should not have been included in the March report. They are supposed to be logged for April, the bureau said.