Saturday, 30 September 2006

Confidence rises in US and Europe amid mixed data

There were good news and bad news for the US economy yesterday. Reuters reports that consumer spending slipped in August.

[T]he U.S. Commerce Department said that...inflation-adjusted spending in August fell surprisingly by 0.1 percent, the first decline since a 0.3 percent drop in September 2005...

Wage and salary income edged up 0.1 percent. The personal saving rate improved to a negative 0.5 percent, but it was nevertheless the 17th consecutive negative reading in that category.

Inflation did not help.

The Commerce Department said core U.S. consumer prices rose 0.2 percent in August, as expected. But the year-on-year rate of nonfood, nonenergy inflation rose to 2.5 percent, the highest since April 1995, and well above the 1 percent to 2 percent seen as a "comfort zone" by some Federal Reserve officials.

But there is hope for improvement.

The University of Michigan's closely watched consumer sentiment index rose to 85.4 in September, up from 82.0 in August and the highest since April...

Anecdotally, Americans sense that inflation is coming down, if slowly. The Michigan survey's forecast of five-year inflation fell to 3.0 percent in September from August's 3.2 percent.

And the industrial sector may be in better shape than earlier thought.

A key indicator of business conditions in the U.S. Midwest, the National Association of Purchasing Managers-Chicago index jumped unexpectedly to 62.1 in September from 57.1, beating out even the most optimistic forecasts. Economists, on net, had expected a small decline.

But even here, the news is mixed.

Still, the purchasing managers' index from the neighboring Milwaukee, Wisconsin, area slumped to 56 points from 62 in August as new orders and production fell.

Common to both regions was a decline in the employment indices, suggesting companies are becoming less willing to hire new staff. Measures of "prices paid" were also down on the month -- as expected, given the trend in energy prices.

The news from Europe yesterday was also mixed.

Bloomberg reports rising confidence and lower inflation in the euro zone in September.

An index of sentiment among executives and consumers in the dozen nations sharing the euro rose to 109.3, the highest since February 2001, from a revised 108.3 in August, the European Commission said today in Brussels. Inflation slowed to 1.8 percent in September, dropping below the ECB's 2 percent limit for the first time since January 2005, a separate report showed.

But German retail sales disappointed.

... German retail sales unexpectedly stagnated in August on concern that the higher sales tax will contribute to slower growth next year, the Federal Statistics Office said today.

Reuters also reports some weakness in the UK.

The Bank of England said credit card lending fell 311 million pounds in August, its biggest fall since records began in 1993...

Broader consumer credit rose by 755 million pounds last month, missing forecasts for a 900 million pound rise and July's 1 billion pound increase.

Mortgage lending rose by 9.1 billion pounds in August, less than the 10 billion forecast and down from 9.3 billion in July, while approvals for home loans came in slightly lower than expected at 119,000 in August.

But again confidence seems to be improving.

GfK NOP's consumer confidence index rose to -7 from -8 in August when people's mood took a hit after the shock rate rise and a security alert at London's Heathrow airport which stranded thousands of holidaymakers.

Of course, whatever happens in the developed economies, they will not be able to match India's growth rate. From AFP/CNA:

India, the world's second-fastest growing economy after China, has reported an 8.9 percent expansion in the first quarter to June, beating most forecasts, official data shows.

Friday, 29 September 2006

Japan gets new prime minister, economic data gives new hope

Today, Japan's new prime minister made his inaugural policy speech in parliament. From Bloomberg:

Shinzo Abe, Japan's new prime minister, said he will balance the country's budget in five years, cut spending to reduce the world's largest national debt and improve relations with China and South Korea.

The day was also marked by some good news on the Japanese economy. From AFP/CNA:

Japan's jobless rate held steady at 4.1 percent last month, just above May's trough of 4.0 percent, which was the lowest since April 1998, figures from the Ministry of Internal Affairs and Communications said...

Meanwhile Japan's plants and factories boosted output in August for the first time in two months, lifting industrial output by 1.9 percent from July, the trade and industry ministry said.

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

And core consumer prices rose by 0.3 percent in August from a year earlier as deflation finally fades.

Including volatile prices of fresh food prices were up 0.9 percent year-on-year, the government reported...

On a less upbeat note, however, spending by households in August dropped 4.3 percent from a year earlier after stripping out the effect of inflation, down for an eighth straight month.

The strength in industrial production was corroborated by the NTC Research/Nomura/JMMA Purchasing Managers Index, which rose to 54.8 from 54.6 a month earlier, according to a Reuters report.

US growth revised down

US second quarter growth has been revised down. Reuters reports:

Gross domestic product, which measures total economic activity within the United States, advanced at a revised 2.6 percent annual rate in the second quarter, down from the 2.9 percent estimated a month ago, the Commerce Department said...

The GDP report underlined how a cooling housing sector is affecting the overall economy. Investment in residential structures tumbled at the sharpest rate in more than a decade -- down at a revised 11.1 percent rate instead of the 9.8 percent reported a month ago...

There was some evidence of the housing sector's limited spillover in a separate report from the Labor Department. New claims for unemployment pay dipped 6,000 last week to a seasonally adjusted 316,000, a level economists consider shows a healthy hiring environment.

However, a third report from the Conference Board, measuring the number of help-wanted ads in U.S. newspapers, suggested that companies were not rushing to add to payrolls. Its help-wanted index dropped to a 45-year low 31 in August from 32 in July...

A prices gauge favored by the Fed -- personal spending excluding food and energy items -- rose at a revised 2.7 percent rate instead of the 2.8 percent reported a month ago. That topped the first quarter's 2.1 percent and was the highest since 2.8 percent in the first quarter of 2001.

The GDP report said corporate profits barely grew by a revised 0.3 percent in the second quarter rather than the 2.1 percent the Commerce Department estimated a month ago. That was a steep plunge from a 14.8 percent rate of profit growth in the first three months of this year.

There are fewer signs of cooling in Europe's economy. Bloomberg reports that Germany's unemployment rate fell in September.

The number of people out of work, adjusted for seasonal swings, fell 17,000 from August to 4.43 million, the lowest since August 2004, the Nuremberg-based Federal Labor Agency said today. Economists expected a decline of 25,000, according to the median of 39 forecasts in a Bloomberg News survey. The adjusted jobless rate held steady at 10.6 percent.

And house prices in the UK are up sharply this month, reports Reuters.

House prices jumped in September, the Nationwide Building Society said on Thursday, evidence that August's interest rate rise had done little to cool the property market.

The Nationwide said the cost of an average home rose 1.3 percent, bringing the annual rate of house price inflation to 8.2 percent -- its fastest rate since February 2005.

Thursday, 28 September 2006

US durable goods orders down, mostly upside surprises elsewhere

There some upside surprises in the economic data yesterday.

Reuters reports the positive data on new homes sales in the US.

Sales of new U.S. homes unexpectedly rose in August after July sales came in much weaker than first thought, while new orders for durable goods fell, according to government reports on Wednesday that signaled continued economic softness.

New single-family home sales increased 4.1 percent in August to an annual rate of 1.050 million from the downwardly revised July rate of 1.009 million, the Commerce Department said.

"The key thing is don't make too much out of the 4.1 percent increase in home sales in August," said Patrick Fearon, senior economist at A.G. Edwards & Sons Inc. in St. Louis.

"If you take into account the downward revisions in each of the previous three months, the story is that the housing market is still on a downward trend. The mortgage applications data that came out today also confirm that," Fearon said...

The supply of new homes available for sale in August at the current sales pace fell to 6.6 months' worth from 7.0 months in July. There were 568,000 homes available for sale at the end of August, down 0.4 percent from the 570,000 available at the end of July.

U.S. mortgage applications fell last week for the first time in four weeks even as interest rates dropped to a six-month low, the Mortgage Bankers Association said in a separate report on Wednesday, providing further evidence that the U.S. housing market slump is deepening.

Calculated Risk also puts the data in perspective here, here and here.

The data on US durable goods orders were more unambiguously negative. The Reuters report continues:

In a sign of future weakness for U.S. manufacturers, orders for U.S.-made durable goods, items meant to last three years or more, fell 0.5 percent in August, the second straight monthly decline and defying analyst expectations for a 0.5 percent increase. The Commerce Department also revised downward the July drop to 2.7 percent from a previously reported 2.5 percent fall...

Excluding transportation, durable goods orders fell 2 percent...

When defense orders were stripped out, orders fell 0.8 percent...

A proxy for business spending also posted a surprising drop, as nondefense capital goods orders excluding aircraft slipped 0.3 percent...

If the US data look cool, those from Europe look a bit hotter.

AFX/Forbes reports that eurozone money supply accelerated in August.

Euro zone M3 money supply grew 8.2 pct year-on-year in August, up from a 7.8 pct growth rate in July, the European Central Bank said...

The annual growth rate of M1, which is the currency in circulation and overnight deposits, fell to 7.2 pct in August from 7.4 pct in July.

Loans to the private sector grew 11.3 pct year-on-year in August, up from a growth rate of 11.1 pct in July...

And confidence looks resilient in much of Europe, Bloomberg reporting the situation in Italy and Germany:

Italian business confidence unexpectedly rose for the first time in three months in September as exports gained and declining oil prices cut manufacturing costs.

The Isae Institute's confidence index rose to 97.3 from a revised 94.9 in August, the state-funded research center said today in Rome...

Consumer confidence in Germany...rose to the highest in almost five years in September, according to the GfK's confidence index published today...

...while Reuters reports the situation in the UK:

Retail sales grew at their fastest rate in nearly two years in September helped by strong sales of household goods, a survey showed on Wednesday, bolstering the likelihood of another rate hike this year.

The Confederation of British Industry's distributive trades survey showed its reported sales balance rose to +14 in September from +12 in August, above retailers' own expectations of +13 and the highest reading since December 2004...

Retailers are expecting sales to pick-up further in October, with the expectations balance rising to +16 from +13 -- its highest since September 2004.

The main negative was a downward revision to UK second quarter growth.

The Office for National Statistics said the economy grew by 0.7 percent in the April-June period, down from an originally estimated 0.8 percent, though it left the year-on-year rate unchanged at 2.6 percent.

Wednesday, 27 September 2006

US consumer confidence up, German business confidence down

Yesterday's economic data erased some of the negativity that followed the Philadelphia Fed's report last week. From Reuters:

The Conference Board said its index of U.S. consumer confidence rose more sharply than expected in September to 104.5, up from an upwardly-revised 100.2 in August, as energy costs fell and job prospects improved slightly...

The Federal Reserve Bank of Richmond reported its manufacturing index rose to 9 in September, up from 3 in August and above economists' expectations for a rise to 5.

However, German business confidence edged down in September. Bloomberg reports:

The Ifo research institute in Munich said today its sentiment indicator based on a survey of 7,000 executives slipped to 104.9 from 105 in August, as executives became more pessimistic about the outlook for the next six months. Economists expected a decline to 104.4, the median of 44 estimates in a Bloomberg survey showed...

Ifo's index of executives' expectations in the next six months fell to a 10-month low of 98.9 from August's 101.4, while the gauge for the current situation jumped to 111.3, the highest since April 1991, from 108.7. The overall index reached a 15-year high of 106.8 in June.

On Monday, the Conference Board had reported that the leading index for Germany declined 0.1 percent in July, its third consecutive decline.

However, the Conference Board reported yesterday that the leading index for Australia increased in July by 0.3 percent, its fifth consecutive increase.

Meanwhile, in yet another sign that deflation is receding in Japan, its corporate services price index (CSPI) posted the first annual rise in more than eight years, rising 0.3 percent.

Tuesday, 26 September 2006

Cooling, for now

There were signs of cooling in the global economy yesterday.

The National Association of Realtors reports that existing-home sales and prices declined in August.

Total existing-home sales...slipped 0.5 percent in August to a seasonally adjusted annual rate of 6.30 million units from a level of 6.33 million July. Sales were 12.6 percent lower than the 7.21 million-unit pace in August 2005, which was the second highest on record...

The national median existing-home price for all housing types was $225,000 in August, down 1.7 percent from August 2005 when the median was $229,000...

Total housing inventory levels rose 1.5 percent at the end of August to 3.92 million existing homes available for sale, which represents a 7.5-month supply at the current sales pace — the highest supply since April 1993.

In Europe, business confidence fell in France in September. Bloomberg reports:

French business confidence fell in September after industrial production in Europe's third-largest economy declined.

Insee's index of sentiment among 2,000 manufacturers in Europe's third-largest economy dropped to 107 from a revised 108 in July, the national statistics office said today in Paris. Economists expected a decline to 108 from the originally reported reading of 109, according to the median of 22 estimates in a Bloomberg News survey.

Bloomberg also reports that in Germany, the inflation rate dropped in September.

The inflation rate in Germany, Europe's largest economy, dropped to the lowest level in more than 2 years in September after oil prices retreated from a record.

Consumer prices rose 1.1 percent from a year earlier after increasing 1.8 percent in August, the Federal Statistics Office in Wiesbaden said in a faxed statement, using a harmonized European Union method. Economists expected an inflation rate of 1.2 percent, according to the median of 28 estimates in a Bloomberg News survey. From August, consumer prices fell 0.4 percent.

In Asia, Singapore reported that consumer prices were flat in August. From Channel NewsAsia:

Singapore's consumer prices rose at a slower-than-expected pace in August, as falling prices for cars and gasoline outweighed rising costs for food and housing.

The Department of Statistics said on Monday that the consumer price index (CPI) rose 0.7 percent from a year earlier.

Last month's annual increase was the slowest rise in nearly a year.

However the August CPI was unchanged from July in seasonally adjusted terms after rising 0.2 percent in July from June.

Yesterday, though, the decline in oil prices came to a halt. Reuters reports:

Oil rebounded above $62 on Monday, after briefly sliding to a six-month low on abundant supplies in top consumer the United States and fears that slower U.S. economic growth would stunt fuel demand.

U.S. crude settled up 90 cents at $61.45 a barrel on short covering, after sliding as low as $59.52 and as high as $62.15. London Brent rose 39 cents to $60.80 a barrel...

Metals prices also rebounded from weeks of sharp losses, with gold up 50 cents to $595.90 an ounce and copper up 0.40 cent to $3.4475 a pound.

And don't expect further measures to cool the Chinese economy for now. From The Standard:

A State Council-level government economist predicts new measures to rein in rapid economic growth are unlikely because fresh signs are emerging that fixed-asset investment is slowing and the rise in property prices has moderated.

In an exclusive interview with The Standard and its sister publication Singtao Daily in Beijing Friday, Qiu Xiaohua said macroeconomic measures taken by the central government so far this year in an attempt to cool overheated economic sectors have started to bite, so further tightening measures are not needed.

Monday, 25 September 2006

Slower rise in producer prices but inflation pressures remain

The Federal Reserve left interest rates unchanged after its 20 September meeting. A slower rise in producer prices in August reported last week would have reinforced expectations that inflation in the United States is on the wane. However, inflationary pressures in producer prices are still present.

Last week, in "Will US inflation persist?", I had looked at what the August manufacturing capacity utilisation figures implied for the outlook on inflation. The conclusion: With capacity utilisation still high, inflation is likely to persist around current levels for quite a while longer.

On 19 September, the US Labor Department released its report on producer prices for August. It showed that the producer price index (PPI) for finished goods edged up just 0.1 percent in August while the core index, which excludes the prices of food and energy goods, actually fell 0.4 percent.

Compared to a year ago, the finished goods PPI was 3.7 percent higher in August while the core index was just 0.9 percent higher. In July, the rates of increase were 4.2 percent and 1.3 percent respectively.

While these figures look good, other data in the report look less benign.

At the earlier stages of processing, the price index for intermediate goods rose 0.4 percent, or 8.8 percent from a year ago. Core intermediate goods prices also rose 0.4 percent, or 8.4 percent from a year ago.

While these numbers also show some moderation, they remain at relatively elevated levels. Unless they fall further soon, they are likely to serve as drags on further moderation in the inflation rate.

One thing that could lead to further falls in the inflation rate is the recent fall in oil prices. With increasing signs of a slowing economy, rising crude inventories and a reduction of threats to oil production, crude oil is now trading at around US$60 a barrel, well below its recent peak of over US$78 a barrel.

Then again, some economists say that cheaper oil means consumers can spend more on other things, possibly raising core inflation. From the Federal Reserve's perspective especially, that may be more relevant for monetary policy.

So the story that producer prices are telling is generally similar to that being told by capacity utilisation and other indicators. A slowing US economy is helping to put a cap on inflation. However, years of past monetary accommodation have resulted in the accumulation of enough inflationary pressures to keep the inflation rate elevated for a while longer.

The Federal Reserve seems to agree. In its statement following the meeting on 20 September, the Federal Reserve said that "inflation pressures seem likely to moderate over time", but "the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures" and that "some inflation risks remain".

The markets may think that the Federal Reserve is done with rate hikes, but an imminent rate cut still looks unlikely.

This week, we will get a better idea of where the US economy is heading, with plenty of economic data due to be released. Among the most watched will be those on home sales, personal consumption expenditures and its associated price index.

Saturday, 23 September 2006

Positive economic news from Europe and Japan

There was no major economic news from the US yesterday. Which means that positive news has a chance to take centre stage.

Europe saw industrial new orders bounce back in July. From Eurostat:

The euro area industrial new orders index increased by 1.8% in July 2006 compared to June 2006. The index decreased by 2.2% in June and rose by 2.8% in May. EU25 new orders grew by 1.6% in July 2006, after a fall of 1.0% in June and a rise of 2.4% in May. Excluding ships, railway and aerospace equipment industrial new orders grew by 1.1% in July 2006 in the euro area and by 1.0% in the EU25.

In July 2006 compared to July 2005, industrial new orders increased by 9.7% in the euro area and by 9.5% in the EU25. Total industry excluding ships, railway and aerospace equipment grew by 9.8% in the euro area and by 9.1% in the EU25.

There were also positive data from France and Belgium. Bloomberg reports:

French consumer spending jumped and Belgian business confidence unexpectedly rose, in signs that Europe's economy may be weathering higher interest rates.

Purchases of manufactured goods in France, Europe's third- biggest economy, gained 3.3 percent in August, the most in seven years. In Belgium, the business-confidence index, considered a leading indicator for Europe, rose to 4.5 in September, counter to a drop expected in a Bloomberg News survey of economists.

And in Japan, business confidence improved this quarter. The Japan Times reports:

Business confidence among large companies improved in the July-September quarter for the first time in three quarters on the back of rising corporate profits and economic growth, the government said Friday.

The index of business conditions at companies capitalized at 1 billion yen or more came to 10.5 for all industries, a jump from 1.8 in the April-June quarter, according to the survey conducted jointly by the Cabinet Office and the Finance Ministry...

Looking ahead, the business confidence index for large companies is projected to be 10.7 for the October-December quarter and 7.9 for the January-March quarter.

The poll also indicates companies remain bullish about boosting their capital investment in the current fiscal year, although the pace of growth is likely to slow in the second half of the period.

Friday, 22 September 2006

Indicators point to weaker US economy

It is not looking good for the US economy. Reuters reports:

In the regional factory report, the Philadelphia Federal Reserve Bank said its business activity index tumbled to -0.4 in September from 18.5 in August, far below Wall Street economists' consensus forecast for a reading of 14.8. It was the first time the index had fallen below zero since April 2003. When the index turns negative, it means manufacturing is declining...

First-time claims for state unemployment insurance benefits rose to a seasonally adjusted 318,000 last week from an upwardly revised 311,000 in the prior week, the Labor Department said.

Separately, the New York-based Conference Board said its index of leading economic indicators fell 0.2 percent to 137.6 in August -- the lowest since October 2005 -- after a downwardly revised 0.2 percent fall in July. It was the fourth decline in the past five months.

Another report also helped fill out a picture of a slowdown. The Chicago Federal Reserve Bank said its gauge of national economic activity fell to -0.18 in August from an upwardly revised -0.07 in July, weighed down by weaker production and employment indicators.

It is enough for Nouriel Roubini to increase his recession probability "to a figure higher than 70%".

But at least manufacturing is showing an improving trend in the UK, according to the CBI.

Manufacturing demand has continued to improve with order books at their strongest in 21 months, according to the CBI’s latest monthly industrial trends survey published today (Thursday).

Increased export orders have helped drive this improved demand, leading to stronger expectations for output over the coming months.

The balance of manufacturers reporting 'below normal' orders was five per cent. Although negative, this is an improvement on August’s minus eight per cent and the strongest since December 2004 (-4%).

Yesterday also saw some trade data being reported.

AFX/Forbes has the report on the euro zone.

The current account was 4.8 bln eur in deficit in July in seasonally adjusted terms, the European Central Bank said. This compares with a revised June surplus of 5.2 bln eur.

Earlier, Japan had reported a higher trade surplus for August. From Reuters:

The trade surplus widened 95.5 percent to 200.5 billion yen ($1.71 billion) as exports to the United States grew 19.3 percent and sales to China expanded 20.0 percent, government data showed...

Exports rose 17.7 percent from a year earlier to mark the 33rd straight month of increase. Imports were up 16.1 percent to rise for the 30th consecutive month, as high oil prices inflated the value of Japan's import bill.

Thursday, 21 September 2006

Fed leaves rates unchanged, BoE may move

The Federal Reserve left interest rates unchanged yesterday. Reuters reports:

The U.S. Federal Reserve on Wednesday held its benchmark interest rate steady for a second straight meeting, saying that while inflation risks remain, they should abate as economic growth slows.

The Federal Open Market Committee's decision to hold the overnight federal funds rate target at 5.25 percent -- the level hit in June after 17 straight increases -- was widely expected.

Economist's View covers the decision, Mark Thoma analysing the press statement which left Tim Duy unsatisfied.

Meanwhile, the Bank of England released the minutes of its last policy meeting yesterday. Again Reuters has the report.

All eight members of the Bank of England's Monetary Policy Committee voted to keep interest rates steady at 4.75 percent this month, but policymaker David Blanchflower suggested he may want a cut in due course.

Minutes of the Sept 6-7 meeting published on Wednesday showed that MPC members thought the economy was performing in line with forecasts issued in August but were concerned that higher inflation expectations could boost pay demands.

The next move still looks more likely to be a rate hike rather than a cut, though, after the latest figures on mortgage lending.

Underlying mortgage lending rose by a record amount in August, British Bankers' Association data showed on Wednesday, in another sign the Bank of England's surprise rate hike last month has not deterred house buyers.

Net mortgage lending rose by 6.2 billion pounds, up from a 5.8 billion increase in July and well above the monthly average rise of 5.4 billion over the previous six months...

On the consumer side, the BBA said underlying credit card lending fell by 399 million pounds in August compared with a fall of 77 million in July and an average monthly drop of 143 million over the previous six months.

But while the world watches central banks, William Polley warns that we are just "[o]ne nasty little shock away from recession". He cited the military coup in Thailand as an example, with Asian stock markets mostly lower yesterday on the news, although markets elsewhere largely ignored it.

Wednesday, 20 September 2006

US data show cooling, Germany too

Yesterday saw more signs of cooling in the US economy and possibly in the German economy as well. But there were upbeat news elsewhere.

Reuters reports the fall in US housing starts:

The Commerce Department said U.S. housing starts fell 6.0 percent in August to an annual pace of 1.665 million units, the lowest since April 2003 and 19.8 percent below the July 2005 pace.

Economists had forecast August housing starts to decline to 1.75 million units from July's originally reported pace of 1.795 million...

Permits for future groundbreaking, an indicator of builder confidence, fell 2.3 percent to a 1.722 million-unit annual pace, the lowest in four years. Economists had expected the Commerce Department to report August permits at a 1.745 million pace.

...and the cooler producer price inflation:

Producer prices edged up a smaller-than-expected 0.1 percent in August and core prices posted a surprise drop of 0.4 percent, the biggest since April 2003.

The Labor Department said the decline in the core producer price index, which strips out volatile food and energy costs, reflected a 2.6 percent drop in auto prices and a 3.4 percent decline in the price of light trucks and SUVs.

The decline in core producer prices followed a 0.3 percent dip in July, marking the first back-to-back monthly declines since November and December 2002.

But retail spending does not seem to be hurting too much.

Indeed, retail industry reports on Tuesday showed U.S. chain store sales rose last week as cooler weather boosted sales of seasonal items. Redbook Research said sales last week were up 4.1 percent from a year ago, following an increase the week before.

Another Reuters story covering another retail report also suggest that retail sales "remained robust".

Sales fell 1.1 percent in the week ended Sept 16, compared with a 0.3 percent drop the previous week, the International Council of Shopping Centers and UBS said in a joint report. The report attributed the decline to observance of the September 11 attacks.

Compared with the same week a year ago, sales rose a strong 4.9 percent following a sharp 3.8 percent year-ago gain the preceding week.

And yet another Reuters report says that holiday sales are expected to hold up.

Total holiday retail sales are expect to rise 5 percent, compared with a 6.1 percent jump during the same season last year, the National Retail Federation forecast.

There were also signs of cooling in Europe. Bloomberg reports cooling in German producer price inflation as well.

Prices for goods from newsprint to plastics rose 5.9 percent from a year earlier, after increasing 6 percent in July, the Federal Statistics Office in Wiesbaden said in a statement today. That matched the median expectation in a Bloomberg News survey of 35 economists. From July, prices advanced 0.2 percent.

... Excluding energy costs, producer-price inflation was 3 percent last month, the statistics office said.

And German investor confidence fell in September:

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 22.2, the lowest since January 1999, from minus 5.6 in August. Economists expected the index to slip to minus 8, the median of 38 estimates in a Bloomberg News survey showed.

But consumer confidence in Italy went in the other direction. Again from Bloomberg:

Italian consumer confidence jumped in September to the highest in four years as falling gasoline prices gave households more money to spend and revised growth forecasts indicated the economic expansion has accelerated.

The Rome-based Isae Institute's index, based on a poll of 2,000 households, rose to 110.1 from a revised 108.1 in August, the biggest increase in seven months. The reading was higher than the 108.3 median forecast of 19 economists surveyed by Bloomberg News.

Also giving a more positive signal is Japanese land prices. AFP/CNA:

Commercial land prices in the Tokyo, Osaka and Nagoya metropolitan areas went up for the first time in 16 years as investment money poured in, the Ministry of Land, Infrastructure and Transport said...

Commercial land prices jumped 3.9 percent year-on-year in the Tokyo area, 3.6 percent in Osaka and 2.4 percent in Nagoya as of July 1, it said...

Residential land prices also showed gains in the survey out Tuesday, at an average of 0.4 percent in the three metropolitan areas but the upbeat tone in the capital was not felt across the nation.

Tuesday, 19 September 2006

US current account deficit widens, inflation fears dominate in Europe

The US current account deficit widened by more than expected in the second quarter. Reuters reports:

The current account shortfall totaled $218.4 billion in the second quarter, larger than Wall Street forecasts of $214 billion, a Commerce Department report showed.

The government also raised its estimate of the first-quarter current account deficit to $213.2 billion from a previously reported $208.7 billion...

The Treasury's capital flows report showed net flows of capital to the United States fell to $32.9 billion in July, less than half of the U.S. trade deficit in that month...

Alan Ruskin, chief international strategist at RBS Greenwich Capital, said the most interesting feature of the current account report might have been the record $4.1 billion deficit on investment income flows in the second quarter...

The Commerce Department revised its first-quarter estimate of the investment income balance to a deficit of $2.5 billion, from a previously reported surplus of $1.9 billion.

And there was bad news elsewhere in the US economy.

The National Association of Home Builders said its index of homebuilder sentiment declined 3 points in September to 30, the lowest since February 1991, when the economy was in recession.

In Europe, inflation seems to be the main concern.

From Reuters:

Asking prices for homes in England and Wales grew almost 10 percent on a year ago in the period from mid-August to early September, even after the Bank of England's shock quarter-point rate hike, a survey showed.

Property Web site Rightmove said on Monday asking prices rose by 0.2 percent in the monthly period, an improvement from the prior month's 1.6 percent decline.

Inflation expectations in the UK were not too comforting either.

Britons' expectations of future inflation steadied in August, but were still way above the Bank of England's 2.0 percent inflation target, reinforcing analysts' expectations the BoE will raise interest rates again this year.

The central bank's August inflation attitudes survey showed median expectations for the rate of inflation over the coming year were 2.5 percent, the same as in the May survey.

Meanwhile, European Central Bank officials have been sounding hawkish of late. From another Reuters report:

Euro zone interest rates are still low and inflation risks are rising, European Central Bank policymakers said on Monday, while central bank sources said the ECB may have to raise interest rates into 2007.

A senior euro zone monetary source told Reuters the ECB key rate can be expected to reach "at least 4 percent" by the end of next year, if trend growth materialised as expected.

And that is despite the euro area's annual inflation rate edging down to 2.3 percent in August from 2.4 percent in July -- or a monthly rate of just 0.1 percent for August -- and industrial production falling by 0.4 percent in July.

Monday, 18 September 2006

Will US inflation persist?

This Wednesday, the Federal Open Market Committee will decide whether to raise interest rates. The consensus view is that it will not, especially after the latest US inflation figures. However, at least one measure of resource utilisation indicates that some inflationary pressure persists and further rate hikes down the road cannot be written off.

On Friday, the US Labor Department reported that consumer prices, both overall as well as core prices (excluding food and energy), rose 0.2 percent in August. This is a slower pace than in previous months, and suggests that inflation in the US has passed or is at least nearing a peak.

Signs of a slowing economy reinforce this impression. Friday also saw the Federal Reserve report that industrial production declined 0.1 percent in August compared to an increase of 0.4 percent in July. Industrial capacity utilisation slipped to 82.4 percent in August from 82.7 in July while manufacturing capacity utilisation slipped to 81.0 in August from 81.2 in July. Rising capacity utilisation over the past few years had been a source of inflationary pressure.

However, not all data are showing lower inflationary pressure. Another report from the Labor Department on Thursday showed that US import prices rose by 0.8 percent in August while nonpetroleum import prices climbed 0.5 percent. Even prices for imports from China were up -- for a second consecutive month -- albeit by a slight 0.1 percent.

Even where the data indicate a slowing economy, the question remains whether it is slowing fast enough to make an appreciable dent on inflation in the near future. For example, Thursday also saw the Commerce Department report that US retail sales rose 0.2 percent in August. While this shows that consumer spending is slowing, underlying consumer demand may still be relatively strong, as retail sales excluding autos and gas actually rose 0.4 percent.

Let us take another look at the capacity utilisation data and relate them to inflation.

The accompanying chart shows that historically, the annual rate of consumer price inflation -- for both headline and core -- follows manufacturing capacity utilisation. It does so with a lag -- a considerable lag in fact, especially for core inflation.

The chart also shows that, despite the recent drop, from a longer-term perspective, a peak in capacity utilisation is hardly discernible at the moment, and the manufacturing capacity utilisation of 81.2 percent is already above its 1972-2005 average of 79.8 percent.

So if the chart is any indication, inflation is likely to persist around current levels for quite a while longer.

If that turns out to be the case, how would the markets, economists, and most importantly of all, the Federal Reserve react? We can try to guess, but at least we already have an idea of what the International Monetary Fund thinks the Federal Reserve should do. Its recent World Economic Outlook report had this to say about inflation in the US:

Despite the recent slowing in growth, inflationary pressures have begun to edge up as excess capacity in product and labor markets has diminished (and actually been eliminated on some measures), energy prices have risen and begun to feed through into some other prices (particularly transportation), and the restraining effect that globalization has had on inflation in recent years has faded.

Then, after noting the pause in the Federal Reserve's rate hiking campaign in August, it added that "given the importance of keeping inflation expectations firmly in check, some further policy tightening may still be needed".

Let us see whether the Federal Reserve agrees.

Saturday, 16 September 2006

US consumer prices rise 0.2 percent in August

The US economy is slowing and inflation remains contained. That is essentially what yesterday's data mean. Reuters reports:

The Labor Department said prices at the consumer level rose a slight 0.2 percent in August. The core rate, excluding often-volatile food and energy costs, also rose 0.2 percent...

For the 12 months ended in August, core consumer prices rose 2.8 percent, in line with forecasts, compared with 2.7 percent for the 12 months to July.

Overall consumer prices rose 3.8 percent in the 12 months ended in August, compared with 4.1 percent for the July period and Wall Street forecasts of 3.9 percent...

In a separate report, the Labor Department said inflation-adjusted hourly earnings fell in August and were flat over the past 12 months, a sign that rising nominal wages were have not kept up with energy price-induced inflation.

Output at U.S. factories, mines and utilities fell 0.1 percent in August as utility production declined with cooler weather, the Federal Reserve said. Capacity use slipped to a smaller-than-expected 82.4 percent, the lowest level since May...

The University of Michigan's preliminary September consumer sentiment index posted a headline reading of 84.4 -- up from 82 in August and slightly above forecasts of 84.0 -- which analysts attributed to lower gasoline prices.

The survey showed one-year U.S. inflation expectations were at their lowest since March, and five-year inflation expectations also declined.

Friday, 15 September 2006

IMF raises growth forecast

The International Monetary Fund is relatively optimistic about the world economy. From Reuters:

The global economy is set for another year of strong growth, the International Monetary Fund said on Thursday, but it warned that rising inflationary pressures and a U.S. economic downturn posed growing dangers.

In its twice-yearly World Economic Outlook, the IMF raised its 2006 forecast for global growth to 5.1 percent from an April forecast of 4.9 percent. It also predicted 4.9 percent growth in 2007 versus a previous projection of 4.7 percent.

Market perception of the threat from inflation appeared to have gone up a bit relative to that from a downturn after yesterday's economic data. Again from Reuters:

U.S. consumers spent at a stronger-than-expected pace in August and import prices rose steadily, according to government reports on Thursday that hinted the economy may not be slowing quickly enough to curb inflation pressures.

Retail sales rose 0.2 percent, the Commerce Department said, as lower gasoline prices spurred spending in areas like automobiles and school-related purchases...

Excluding sales of motor vehicles and parts, retail sales also rose by 0.2 percent in August, just below the 0.3 percent rise forecast by analysts. However, the July ex-autos sales were revised downward to a 0.6 percent gain from an originally reported 1.0 percent surge, suggesting the overall spending trend may be softer than the headline numbers indicate...

Excluding gasoline and motor vehicles, retail sales rose 0.4 percent in August after a 0.5 percent rise in July...

In a separate report, the Labor Department said U.S. import prices rose by a more-than-expected 0.8 percent in August, and the cost of nonpetroleum imports climbed 0.5 percent...

Another Labor Department showed new claims for U.S. state jobless aid unexpectedly fell by 5,000 last week to 308,000, compared with an upwardly revised 313,000 the prior week...

And business inventories...rose a slightly more than expected 0.6 percent in July after an upwardly revised 0.9 percent rise in June. The inventories-to-sales ratio, a measure of how long it would take to deplete stocks at the current sales pace, was unchanged at a lean 1.26 months.

Reuters also reports that retail sales rose in the UK as well in August.

The Office for National Statistics said sales rose 0.3 percent in August, putting them up 4.3 percent on the year. July's figure was revised higher to show sales were flat on the month, after an initially reported decline of 0.3 percent.

Thursday, 14 September 2006

Some positive economic data amid more signs of cooling in China

The US housing market is collapsing. Or is it? Reuters reports the latest news on US home loan demand.

U.S. mortgage applications rose for a second consecutive week as demand for home purchase loans hit its highest in two months, an industry trade group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and purchasing loans, for the week ended Sept. 8 increased 3.2 percent to 584.2 from the previous week's 566.3, its highest since mid-May.

The UK economy has also been quite resilient recently, not least its job market. From Reuters:

Wednesday's data showed the number of people claiming jobless benefits fell by 3,900 in August, the biggest decline since January 2005.

Income growth was mixed though.

[A]verage earnings growth picked up to a weaker-than-expected 4.4 percent in the three months to July, leaving it just below the Bank of England's 4.5 percent tolerance level...

Still...Wednesday's data showed earnings growth was at its highest in over a year and followed a report by the Recruitment and Employment Confederation which showed wage growth for permanent staff at its fastest in two years.

Meanwhile house prices continue to surge, rising at their fastest pace in over two years in the three months to August, according to the Royal Institution of Chartered Surveyors. Little wonder that homeowners are struggling to meet mortgage payments.

China's property market, on the other hand, could be showing signs of cooling, with the year-on-year growth rate of the average price of new homes growing 5.5 per cent in August compared to 5.8 per cent in June.

And this is occurring as China's industrial output in August rose 15.7 percent from the previous year, one percentage point lower than July and 3.8 percentage points lower than June.

But China's retail sales grew 13.8 percent in August, slightly up from July's 13.7 percent growth.

Meanwhile, in Japan, the current account surplus grew more than expected in July. Reuters reports:

The current account surplus grew 7.1 percent to 1.81 trillion yen ($15.35 billion), the highest level ever for July, data from the Ministry of Finance showed...

The surplus in the income account expanded 23.5 percent from a year earlier to 1.22 trillion yen as Japanese companies and investors reaped more returns from foreign investment they had made in the past.

The gains from overseas investment more than offset a narrowing trade surplus, which shrank 8.5 percent to 950.9 billion yen...

Soaring oil prices continued to inflate the nation's import bill, boosting imports by 19.0 percent...

Exports also rose 13.6 percent in July, suggesting the scenario of a slower U.S. economy curbing Japanese exports had yet to materialise.

Wednesday, 13 September 2006

US trade deficit widens, inflation persists elsewhere but China cools

The US trade deficit widened in July. Reuters reports:

The U.S. trade deficit widened sharply in July to a record $68 billion, as oil import prices and demand for foreign goods and services rose to new highs, a government report showed on Tuesday...

However, some economists saw a silver lining because oil prices have fallen about 20 percent since setting a record above $78 per barrel in July. U.S. light crude for October delivery was trading around $65 a barrel on Tuesday...

The Commerce Department report showed U.S. exports dropped for the first time in four months, but were still the second highest on record...

For more analysis on the trade figures, refer to Brad Setser, Menzie Chinn and Calculated Risk.

Elsewhere, inflation was very much in the news.

In the UK, consumer prices rose 0.4 percent in August, lifting the annual rate to 2.5 percent.

In Germany, wholesale prices rose o.6 percent in August and were 5.3 percent higher than in August 2005.

In Japan, the corporate goods price index (CGPI) rose 0.2 percent in August and was up 3.4 percent from a year earlier, matching the rate in July and maintaining the fastest pace of increase in 25 years. On the other hand, the Cabinet Office survey's sentiment index for general households fell to 47.6 in August from 48.6 in July.

Meanwhile, China may finally be showing signs of slowing. From Reuters:

Spending in urban areas on fixed assets such as property, factories and roads was up 21.5 percent in August from a year earlier, much smaller than July's 27.4 percent increase, statistics chief Qiu Xiaohua told a news conference.

The growth rate was the slowest for a single month since December 2004...

The People's Bank of China...showed its determination to curb money supply growth by mopping up a record 225 billion yuan ($28.3 billion) in its regular open market operations on Tuesday.

... The Shanghai Securities News reported on Tuesday that annual growth in China's broad M2 measure of money supply slowed to 17.9 percent in August from 18.4 percent in July.

Tuesday, 12 September 2006

UK factory gate inflation slows, China consumer price inflation rises

There was downside surprise on inflation in the UK yesterday. From Reuters:

The price of goods at the factory gate slowed more than expected in August and firms' costs fell at their sharpest monthly rate in 1-1/2 years, in a sign that inflationary pressures may be easing...

Output prices were flat on the month in August, the Office for National Statistics said, bringing the annual rate of increase down to a lower-than-expected 2.6 percent...

Core output prices defied expectations for a rise and fell a seasonally-adjusted 0.2 percent -- the sharpest decline since December 2004.

Input prices, too, showed their biggest fall in 1-1/2 years, down 1.2 percent on the month, helped by lower crude oil prices, which were 2.8 percent lower on the month, the ONS said.

Other economic news from the UK:

Separately, the ONS reported Britain's global goods trade deficit was largely as expected but non-EU trade posted a record deficit of 4.281 billion pounds ($8 billion) in July...

The Department for Communities and Local Government said house prices rose 6.0 percent year-on-year in July compared with 5.3 percent the previous month. Property inflation in London, at 7.1 percent, led the way.

But consumer price inflation continued to creep up in China. From Xinhua Online:

China's consumer prices were up 1.3 percent in August over a year ago, said the National Bureau of Statistics (NBS) Monday.

The growth rate was 0.3 percentage points higher than in July, said an NBS report.

Monday, 11 September 2006

Japanese machinery orders fall in July

Japan has revised its second quarter GDP growth to an annual rate of one percent from 0.8 percent, but the more significant news for today was the fall in July machinery orders. From Bloomberg:

Japan's machinery orders fell the most in almost 20 years, dashing expectations that the central bank will raise interest rates before the end of the year.

Non-government orders excluding shipping and utilities dropped a seasonally adjusted 16.7 percent in July from a month earlier, the largest slide since October 1986, the Cabinet Office said today. Orders from semiconductor, steel and mobile-phone companies paced the drop...

The Nikkei Stock Average sank 1.8 percent, the biggest slide in a month, led by companies including Advantest Corp., a maker of chipmaking equipment. The median forecast of 30 economists surveyed by Bloomberg News was for orders to fall 5.4 percent.

Yields on Japan's benchmark 10-year bond declined 5 basis points to 1.665 percent at 4:54 p.m. in Tokyo.

Some remain hopeful that Japan's expansion remains intact.

"We have to monitor these trends carefully to see if a general retreat in demand is in the works," Takehiro Sato, an economist at Morgan Stanley Japan Securities Co., wrote in a report. "But we think the decline is mostly being driven by special factors."

Today's drop "is payback for strong orders in recent months," said Itsushi Tachi, director of business statistics at the Cabinet Office. "The trend is for growth."

Saturday, 9 September 2006

BoJ keeps interest rates unchanged, OECD economies slowing

The Bank of Japan left interest rates unchanged yesterday, but is still expected to raise rates later this year. Bloomberg reports:

Bank of Japan Governor Toshihiko Fukui said consumer prices will keep rising, reinforcing speculation that the central bank will increase interest rates before the end of the year.

"Prices are basically on a positive trend," Fukui told reporters in Tokyo today. Last month's revision to the way consumer prices are measured "won't prompt us to change our basic stance."

The Bank of Japan kept its overnight lending rate at 0.25 percent earlier today, as expected by all 62 economists surveyed by Bloomberg News, and said the economy is expanding moderately. Fukui said the bank maintains its view that interest rates should be adjusted gradually depending on the economy and prices.

The Bank of Japan also reported gains in bank lending and money supply. Again from Bloomberg:

Japanese bank lending rose for a seventh month in August as companies in the world's second- largest economy sought cash to fund increases in capital spending.

Loans climbed 1.9 percent in August from the same month a year earlier, a Bank of Japan report in Tokyo today showed. Lending adjusted for factors including currency fluctuations, securitizations and bad-loan write-offs gained 2.7 percent...

Japan's money supply, or M2 plus notes in circulation, rose 0.5 percent in August, the same pace as July, the central bank said in a separate report. Broad liquidity rose 2 percent after gaining 1.8 percent the previous month.

Yesterday also saw the Federal Reserve report consumer credit growth. From MarketWatch:

Consumer credit grew at a 2.8% annual rate in July, slowing markedly from the fast clip of a month before, the Federal Reserve said Friday.

Consumer credit outstanding rose by $5.5 billion in July to $2.349 trillion, the Fed said.

Consumer credit rose by a revised $14.1 billion, or a 7.27% seasonally adjusted annual rate, in June. The June number was previously estimated as $10.3 billion.

A slowdown in US consumer credit growth would be consistent with a general slowdown in economic growth, which seems to be what the OECD composite leading indicators are signalling for the OECD countries.

The latest composite leading indicators (CLIs) suggest that slowing economic expansion lies ahead in the OECD area, with July data showing weakening performance in the CLI’s six month rate of change in all the Major Seven economies except Canada. The latest data for major OECD non-member economies point to a slightly weakening outlook for China and steady expansion in India, Russia and Brazil.

One thing that does not seem to be slowing is China's trade surplus. From Yahoo! Asia News:

China posted a record trade surplus of $18.8 billion in August, far exceeding forecasts and the previous record of $14.6 billion in July, Dow Jones Newswires reported on Friday.

Citing an unnamed source, the news agency said exports in August rose 32.8 percent from a year earlier to $90.77 billion, while imports rose 24.6 percent to $71.97 billion.

But Brad Setser reminds us that China does not have a monopoly on surpluses.

China’s July reserve increase [of] $14b total was topped by the combined $20b from its fellow BRICs...

For that matter, Russia and Saudi Arabia combined to add almost $25b to their central bank’s foreign assets in July... There are a lot of other oil exporters with an awful lot of cash on hand right now.

Friday, 8 September 2006

BoE keeps rates unchanged

The Bank of England kept interest rates unchanged yesterday. Reuters reports:

The Bank of England left interest rates unchanged on Thursday but analysts say growing inflationary pressures mean higher borrowing costs are likely before the end of the year.

The decision to leave rates at 4.75 percent was widely predicted after last month's surprise rate hike and prompted little reaction from markets...

Money markets show investors fully expect rates to rise to 5 percent in November when the bank issues new forecasts on growth and inflation...

Halifax data showed house prices rose a punchy 1.0 percent last month alone...

The European Central Bank may raise rates soon. AFP reports:

The European Central Bank has reinforced market expectations of a pending rise in eurozone interest rates in October, stressing the need to remain vigilant with regard to inflationary risks in the single currency area.

"It is essential that inflation expectations remain firmly anchored at levels consistent with price stability," the ECB wrote in its September monthly bulletin Thursday.

"Accordingly, strong vigilance is warranted in order to ensure that risks to price stability are contained."

There was some economic news yesterday to support a hawkish view. From Bloomberg:

Industrial production in Germany, Europe's largest economy, rose more than economists forecast in July, led by spending on household appliances and construction.

Production expanded 1.2 percent from June, when it declined 0.4 percent, the Economy and Technology Ministry in Berlin said in a faxed statement today. Economists expected an increase of 0.5 percent, the median of 45 forecasts in a Bloomberg News survey showed. From a year earlier, output jumped 4.7 percent.

In Asia, South Korea also left interest rates unchanged yesterday, while in Japan, the index of leading economic indicators fell in July to 40.0 from a revised 58.3 in June.

Meanwhile, Reuters reports that the number of Americans submitting new claims for state unemployment benefits dropped by 9,000 last week while stockpiles of wholesale durable goods in the US rose for the 35th straight month.

Thursday, 7 September 2006

US labour costs rising, but inflation and growth outlook mixed elsewhere

Inflation fears were reignited yesterday after US labour costs were reported to be rising faster than previously thought. From Reuters:

The Labor Department's report contained revisions to first-quarter data showing hourly worker compensation shot up by 13.7 percent, well ahead of the previously reported 6.9 percent gain.

In the second quarter, compensation rose at a more subdued, but still strong, 6.6 percent pace...

The gains in worker compensation helped push unit labor costs...up 5 percent over the past year, the largest increase since a matching rise in the period ended in the third quarter of 2000.

In the first quarter, unit labor costs rose by 9 percent and they rose 4.9 percent in the April-June period, well ahead of the 3.8 percent gain economists had expected...

The Labor Department said U.S. productivity has risen 2.5 percent over the past year, a solid increase in line with the gains seen since the mid-1990s.

The Fed's Beige Book report painted a mixed picture on growth and inflation.

The Fed said the overall economy expanded from mid-July to late August, but five of its 12 districts reported slowing growth as residential construction slackened and energy costs rose...

[T]he Fed said there were widespread price increases for energy, metals and other commodities, but these did not appear to be triggering more general consumer inflation.

But growth in the services sector is holding up.

The Institute for Supply Management's services index rose to 57 in August from 54.8 in July. The median forecast of Wall Street economists was for an increase to 55.

And even the housing sector had a piece of good news.

Separately, the Mortgage Bankers Association said applications for U.S. home mortgages edged higher last week as lower loan rates helped encourage more home purchases for the first time since early August.

The picture is mixed in Europe, with the Bloomberg retail PMI falling to 52.3 in August from 53.8 in July, but German factory orders rising 1.8 percent in July.

In the UK, industrial and manufacturing output rose 0.2 percent in July while shop prices rose 1.4 percent in August from a year ago, but annual take-home pay growth slowed to 4.7 percent in August and sentiment among consumer services firms deteriorated sharply.

Under the circumstances, and with the IMF warning of the risk of "sharply slower growth", watching and waiting may be the more prudent action for central banks. Apparently, the Bank of Canada and the Reserve Bank of Australia think so, choosing to leave rates unchanged yesterday, as reported by Bloomberg and The Sydney Morning Herald respectively. Weaker than expected second quarter GDP growth in the case of the latter adds to the cautionary mood.

Wednesday, 6 September 2006

Mixed news from Europe

The news from Europe yesterday was mixed.

Retail sales were up in July, as reported by Eurostat:

In July 2006, compared to July 2005, the volume of retail trade grew by 2.5% in the euro area and by 3.3% in the EU25. Compared to June 2006, the retail sales index rose by 0.6% in the euro area and by 0.3% in the EU25.

But services sector growth in the euro zone eased in August, as AFX News reports:

The purchasing managers' index for the services sector slowed for the second month in a row... The headline index eased to 57.1 in August from 57.9 in July and a six-year high of 60.7 in June...

There were falls in Germany and Italy while France registered a small rise from the previous month.

The UK service sector also slowed in August. Reuters reports:

The Chartered Institute of Purchasing and Supply/Royal Bank of Scotland services business index slipped for a fourth month to 56.7 from 57.9 in July.

UK consumer confidence also fell in August, according to the Nationwide Building Society's consumer confidence index, but retail sales growth held up in August, with the British Retail Consortium reporting that like-for-like sales grew 2.5 percent on a year ago while total sales rose 5.5 percent.

Tuesday, 5 September 2006

Stock markets and economies look hot

Yesterday, I wrote about how well the S&P 500 has recovered from its May-July losses. Well, it's not just the US stock market. From Bloomberg:

Shares in Europe, Asia and Latin America climbed to three-month highs as investors bet economies and earnings will keep growing even as interest rates rise....

The Morgan Stanley Capital International World Index, a measure for equities globally, added 0.6 percent to 1373.02...

Europe's Dow Jones Stoxx 600 Index added 0.4 percent to 337.80, the highest since May 11...

The MSCI Asia-Pacific Index rallied 1.8 percent to 131.66, closing at the highest since May 19...

The MSCI Latin America Index climbed 1.7 percent to 2539.53, its highest since May 16...

The economic news yesterday was generally positive.

In the UK, construction activity accelerated in August, the Chartered Institute for Purchasing and Supply reporting that its index for construction rose to 54.5 from 53.2 in July, while a survey by the Engineering Employers' Federation showed that robust export orders helped the manufacturing sector expand for a 13th consecutive quarter in the latest three months.

Japan also saw positive news, with the Ministry of Finance reporting that capital spending in the April-June quarter rose 16.6 percent from a year earlier and recurring profits at Japanese companies rose 10.1 percent. However, in an indication of the tighter monetary stance of the Bank of Japan, Japan's monetary base fell 20.2 percent in August from a year earlier, the sixth consecutive month of decline.

Meanwhile, the European Central Bank also looks likely to continue monetary tightening after producer prices in the euro zone rose 0.6 percent in July, up from 0.3 percent in June. In the EU25, prices were up 0.7 percent in July compared to 0.2 percent in June.

Monday, 4 September 2006

If the US economy is slowing, the stock market's not showing

Most economists think that the United States economy is slowing. Some even think it is headed for a recession. Stock investors, though, appear unconcerned.

Last week, the Standard & Poor's 500 Index gained 15.01 points or 1.2 percent to close at 1311.01, the highest level since May 10 and just over one percent below its high for the year.

Apparently, fears of an economic slowdown -- or even a recession -- are being brushed aside by stock investors.

Economic data released last week generally indicate that the US economy slowed over the past few months, although at a gradual pace.

Second quarter GDP reported by the Commerce Department confirmed a slowdown in the growth rate from that in the first quarter, but the rate was revised up to a 2.9 percent annual pace from the 2.5 percent rate initially reported. Tellingly for stock investors, the growth rate of corporate profits also fell to 2.1 percent, well down from 14.8 percent in the first quarter.

Another Commerce Department report, however, showed that consumer spending actually picked up pace at the beginning of the third quarter, personal consumption expenditures rising 0.8 percent in July. Sales reported by retailers so far indicate that retail spending largely held up in August, but auto sales were down.

Consumer confidence deteriorated in August, which does not bode well for consumer spending. The Conference Board's consumer confidence index fell to 99.6 in the month from 107.0 in July while the University of Michigan's sentiment index fell to 82.0 from 84.7.

The manufacturing sector also showed some slowing. Another Commerce Department report showed that factory orders fell 0.6 percent in July. The Institute for Supply Management said its manufacturing purchasing managers' index slipped to 54.5 in August from 54.7 in July while the new orders index fell to 54.2 from 56.1.

The data from the housing sector continued to show weakness, with the Commerce Department reporting a 1.2 percent fall in construction spending in July and the National Association of Realtors reporting a 7.0 percent fall in pending home sales in the same month.

On Friday, the Labor Department reported that employers added 128,000 jobs in August, somewhat moderate, but about the same rate as previous months. More ominously perhaps was that average hourly earnings rose only 0.1 percent while the length of the average work week dipped by 0.1 hour.

Another piece of data released last week was the PCE price index, which was reported by the Commerce Department to have increased 0.3 percent in July. This is about the same rate as the previous months' average, while the core PCE price index, excluding food and energy, increased just 0.1 percent.

So on the whole, the picture is one of a slowing economy with inflation contained, if not quite falling yet.

The fixed income market is telling a similar story. 10-year Treasury yields fell 6 basis points last week to end at about 4.73 percent. Since the beginning of August, it has fallen about a quarter of a percent.

The yield on the 10-year Treasury note is now significantly below that of the 3-month Treasury bill, which is at about 5 percent. This points to at least a slowdown.

And yet, the stock market is near a high.

One possible explanation for this apparent anomaly is that investors think that the stock market weakness from May to July already reflects all the economic slowdown that is going to occur. The current strength in the market might even be anticipating the economic recovery that is expected to follow the slowdown. Since from peak to trough, the S&P 500 fell less than 8 percent over its period of weakness, this means that the market is expecting a relatively mild slowdown, at least from a corporate perspective.

However, another possible explanation is that the stock market is still adjusting to incoming data and may see renewed weakness once the evidence of a slowdown becomes more apparent.

In any case, saying that the stock market is not pointing to a slowdown is probably an overstatement. After all, although the large-cap S&P 500 has recovered almost all of its losses from its peak, the small-cap Russell 2000 is still 7.7 percent below its peak, having recovered only about half its losses since then.

This leads to an interesting comparison. Back in 2000, the S&P 500 had shown similar resilience. Having reached an all-time high in March, it fell sharply in April. However, it soon recovered and was back to around its high by September. The Russell 2000, on the other hand, after having reached its peak in March, fell and stayed down, not even coming close to its high again until well into the next bull market four years later.

As we now know, it was the Russell 2000's performance in that year that proved to be the better forecaster. The Russell 2000's weakness was sustained over the next few years, the S&P 500's resilience was not, and the US economy went into a recession.

Will things turn out the same way again six years later?

Saturday, 2 September 2006

US economy adds 128,000 jobs but global manufacturing cools

The data yesterday appeared consistent with a gradual cooling in the US and global economies.

Reuters reports the US data.

U.S. employers added 128,000 workers to their payrolls in August, evidence of a cooler -- but still solid -- pace of economic growth that could let the Federal Reserve hold interest rates steady.

The closely watched Labor Department report...showed the unemployment rate dipped to 4.7 percent from 4.8 percent in July, suggesting the job market remains sturdy...

Average hourly earnings rose a slim 2 cents, or 0.1 percent, last month...

In addition, the length of the average work week dipped by 0.1 hour to 33.8 hours...

Separately, the Institute for Supply Management said its index of factory activity slipped to 54.5 in August from 54.7 in July, showing continued growth at a slightly slower pace.

At the same time, the prices paid index fell to 73.0 from 78.5, a sign of receding price pressures.

Another report showed consumer sentiment falling in August, but by less than expected. The University of Michigan's sentiment index fell to 82.0 from 84.7 in July...

The Commerce Department said construction spending tumbled by 1.2 percent in July, the biggest drop since August 2001, as spending on homebuilding plummeted 2 percent.

At the same, the National Association of Realtors said its index of pending homes sales...plunged 7 percent in July to the lowest level in more than three years. The drop was the biggest on records dating to 2001.

Manufacturing also slowed just about everywhere else.

In the euro zone, the Royal Bank of Scotland Plc index fell to 56.5 in August, the lowest level in five months, from July's 57.4.

In the UK, the Chartered Institute of Purchasing and Supply/RBS Purchasing Managers' Index (PMI) slipped to 53.1 last month from 53.6 in July.

In China, the CLSA purchasing managers' index (PMI) slipped to a five-month low of 52.6 points in August, down from a 14-month high of 53.0 in July.

The JPMorgan Global Manufacturing PMI slipped to 55.1 in August from 55.5 in July. The output index fell to 55.8 from 57.7 while the new orders index fell to 55.4 from 56.8. Even the input prices index fell, to 69.8 from 73.1.

Commenting on the survey, David Hensley, director of Global Economics Coordination at JPMorgan, said:

The PMI indicates that growth of global manufacturing output and employment remained solid in August. There are however, signs of moderation in the report. The pace of new order growth has slowed significantly, while inventory build is relatively rapid. This combination has been a sure signal of weaker manufacturing activity in the past, and we look for global output growth to slow to a 3-4% annual rate in coming months.

Friday, 1 September 2006

US consumer spending up, ECB holds rates

It looks like the US consumer remains the engine of the global economy.

According to the US Commerce Department's latest report on personal income and spending yesterday, personal income rose by 0.5 percent in July while personal consumption expenditures rose by 0.8 percent. The personal saving rate dipped to a negative 0.9 percent.

The news on the inflation front is also relatively good. The PCE price index increased 0.3 percent in July but the core PCE price index, excluding food and energy, increased 0.1 percent.

Reuters has more on this and other economic news from the US.

The NAPM Chicago business barometer slipped to 57.1 in August from 57.9 in July and compared with economists' median forecast for a 57.0 reading...

Also on Thursday, the Commerce Department said new orders at U.S. factories fell by a smaller-than-expected 0.6 percent in July, lead by sharp declines in orders for transportation and defense goods...

After stripping out transportation, factory orders increased 1.1 percent in July.

The government also said the number of Americans filing new claims for jobless benefits edged down by 2,000 last week, in a report showing stability in the pace of layoffs...

Meanwhile, New York City companies reported business conditions improved in August but were slightly less optimistic about current and future business conditions, according to the National Association of Purchasing Management-New York.

Across the Atlantic, the European Central Bank held interest rates unchanged yesterday. FT reports on this and other economic news.

Eurozone interest rates were left at 3 per cent by the European Central Bank on Thursday as concerns over economic growth outweighed the need for vigilance on inflation.

Although growth in the second quarter was strong, pushing up to 0.9 per cent from 0.6 per cent in the first quarter, there were possibly temporary factors contributing to this, including the Football World Cup in Germany...

The European Commission’s index of economic sentiment on Thursday showed its first fall in nine months, driven by a fall in industrial confidence and consumer sentiment...

August inflation data on Thursday showed a further fall in the headline measure to 2.3 per cent, but this remains well above the 2 per cent ceiling, and most economists believe that the ECB has two more 25 basis point rate increases up its sleeve for later in the year.

The ECB's updated economic forecasts do suggest that interest rates are headed higher. From AFX/Forbes:

The ECB raised its 2006 GDP growth forecast to 2.5 pct from 2.1 pct previously and its 2007 growth forecast to 2.1 pct from 1.8 pct.

It also raised its forecast for 2006 inflation to 2.4 pct from 2.3 pct, and its projection for 2007 inflation to 2.4 pct from 2.2 pct.

But the news from Germany yesterday was somewhat mixed. Bloomberg reports:

Germany's unemployment rate held at a two-year low in August after three straight declines as employers in Europe's largest economy paused hiring during the summer vacation period.

The adjusted unemployment rate was unchanged from July at 10.6 percent, matching the median forecast in a Bloomberg survey of 34 economists. The number of people without work, adjusted for seasonal swings, rose 5,000 from July to 4.45 million, the Federal Labor Agency in Nuremberg said today. In unadjusted terms, German unemployment fell to 4.37 million, the agency said...

Still, retail sales in Germany dropped more than expected in July as the World Cup soccer tournament ended and record temperatures kept people out of stores. Sales, adjusted for inflation and seasonal swings, fell 1.5 percent from June, when they rose a revised 1.1 percent, the Federal Statistics Office in Wiesbaden said today.

There were also mixed signals from the UK. From Reuters:

House prices jumped sharply in August, the Nationwide Building Society said on Thursday, indicating the Bank of England's rate hike at the start of the month has done little to cool the property market.

But a separate survey showed people's optimism on the economy falling to its lowest since the start of the Iraq war in 2003, perhaps pushed lower by scenes of chaos at airports after police said they had foiled a plot to blow up aircraft in mid-air...

Nationwide said the cost of an average home rose 0.8 percent on the month, taking the average price to 167,721 pounds, and lifting the annual rate of house price inflation to 6.6 percent, its fastest rate since April 2005...

GfK's headline consumer confidence barometer slipped to -8 from -4 in July, while people's perception about the economic outlook in the coming year plummeted to its weakest since the Iraq war, with an index reading of -23 from -14.

Update on 2 September: Gain in personal consumption expenditures corrected to 0.8 percent.