BoJ leaves rates unchanged as Japanese economy shows signs of slipping

Claus Vistesen has doubts on the sustainability of Japan's economic recovery.

My discourse on Japan should be well known to regular readers of this blog and it basically hinges on what now clearly seems as the folly of those who has consistently claimed Japan to be under way towards a sustainable recovery...

[I]t is hard to find the inflation in Japan... but on the back of this very low inflation enviroment I can hardly see anyone arguing with certainty that Japan has decisively escaped the claws of deflation... It seems clear to me that Japan as an economy faces structural challenges greatly influenced by the demographics of the Japanese society and any economic analysis which at least does not take this question into account is not worth anything I am sad to say.

And that was before he even read the latest economic news from Japan. From AFP/CNA:

Japan got a double dose of gloomy news on the economy with the unemployment rate rising to 4.2 percent in September from 4.1 percent in August and consumer spending falling sharply...

In a separate report, the Ministry of Internal Affairs and Communications reported that average monthly household spending slumped by a bigger than expected six percent in September compared with a year earlier, declining for the ninth straight month...

On Monday the government said industrial output declined by 0.7 percent in September from August and forecast a drop of 0.2 percent in October...

The Bank of Japan announced as expected Tuesday that it had agreed to leave its benchmark interest rate unchanged at 0.25 percent where it has stood since July...

Actually, it was more like a triple dose of bad news: The manufacturing PMI for Japan out today also didn't look very good. Reuters reports:

The NTC Research/Nomura/JMMA Purchasing Managers Index...slipped to a seasonally adjusted 54.1 from 54.8 a month earlier...

The new orders index...dipped to 53.7 in October -- above 50 for the 22nd month in a row but the lowest reading in 19 months. It was 54.3 in September.

The new export orders index edged down to 51.7 from 52.2, slipping further from the two-year high of 54.5 marked in August.

But the PMI report did point towards higher employment and inflation.

Hiring remained robust, with the employment index climbing to 55.5, the highest reading in the survey's five-year history... It was 54.7 a month earlier.

An easing of oil prices helped to trigger a sharp fall in the input prices index to 66.3 from 70.6.

At the other end of the production line, the output prices index jumped to a survey-high 52.5 from 51.2, giving a boost to inflation expectations after tepid consumer prices data late last week.

US consumer spending, UK housing market resilient

The US Commerce Department reported yesterday that personal income rose by 0.5 percent in September while personal consumption expenditures (PCE) increased 0.1 percent. A 0.3 percent fall in the PCE price index -- thanks to falling gasoline prices -- means that both income and spending posted quite decent gains in real terms in September. The core PCE price index also decelerated to a 0.2 percent gain compared with an increase of 0.3 percent in August.

The improvement in inflation hasn't changed Jeffrey Lacker's view on interest rates. From Reuters:

The U.S. economy is on solid enough ground to withstand further interest rate hikes if the Federal Reserve has to curb stubbornly high inflation, Richmond Federal Reserve President Jeffrey Lacker said in a speech on Monday.

"The economy is resilient enough right now to withstand further tightening," he said, adding that this comes despite the slowdown in the housing market.

Well, the consumer at least does appear resilient enough.

But an imminent interest rate hike looks more likely in the UK. From Reuters:

British mortgage approvals hit their highest level in more than two years in September -- another sign this summer's surprise interest rate hike has done little to cool the housing market...

The BoE data also showed consumer credit rose more than expected in September, by 924 million pounds ($1.75 billion) compared with a forecast for an 800 million pound gain.

Mortgage lending, however, rose slightly less than expected, by 8.928 billion pounds last month. That was still more than the 8.763 billion pound increase in August.

The BoE also published final M4 money supply data, showing the annual rate was unrevised at 14.5 percent, the highest since September 1990.

And this as British house prices rose at their fastest annual pace in more than two years in October.

Is the bull market, like the US economy, running out of steam?

Economists' expectations for a slowdown in the United States economy were more than confirmed on Friday when the Commerce Department reported that real gross domestic product in the third quarter grew at the slowest rate since the beginning of the bull market in equities. This will inevitably affect the earnings outlook for companies, but at the same time, investors may be able to take heart from falling inflation and interest rates.

Third quarter US real GDP grew at an annualised rate of just 1.6 percent in the third quarter, well below Wall Street forecasts for a 2.2 percent growth rate. The third quarter's growth rate was down from 2.6 percent in the second quarter and the lowest since the first quarter of 2003.

The growth rate was negatively affected by a 17.4 percent annualised rate of decrease in residential investment. This confirmed economists' expectations that the weakening housing market would become a drag on the economy.

Predictably, bonds rose on Friday on the news, while the prospect for lower interest rates was apparently not enough to offset earnings fears as stocks fell.

Despite the sharp drop in the growth rate, there is still reason to think that the US economy will avoid sinking into recession. For one, the GDP report showed that consumer spending held up in the third quarter as personal consumption expenditures grew at a 3.1 percent rate, up from 2.6 percent in the second quarter. In addition, Friday also saw the final October reading of the University of Michigan's consumer sentiment index coming out at 93.6, up from a preliminary 92.3 and September's final reading of 85.4.

Other reports over the past fortnight indicated that the housing market has stopped weakening recently, with housing starts and new home sales increasing in September and homebuilder sentiment edging up in October, while in the manufacturing sector, new orders for durable goods rose a strong 7.8 percent in September, reversing previous months' declines. Adding to evidence that the economy could be stabilising is the Conference Board's Index of Leading Economic Indicators, which gained 0.1 percent in September.

Nevertheless, investors should be aware that even if the economy stabilises at a low growth rate and avoids a recession, corporate earnings could still deteriorate significantly. Note, for examples, that in the following chart, even during the soft landing of 1995 and the no-landing of 1998, reported year-on-year earnings-per-share growth actually dipped into negative territory.

What ultimately supported the stock market in 1995 and 1998 were falling interest rates. In both years, the Federal Reserve cut interest rates.

In this regard, the GDP report is encouraging in that it showed that the rate of appreciation of the price index based on personal consumption expenditures decelerated in the third quarter, slowing to a 2.5 percent annualised rate from 4.0 percent in the second quarter for the overall index and to a 2.3 percent rate from 2.7 percent for the core index that excludes food and energy.

So if the US economy does stabilise around the current growth rate -- admittedly a big "if" -- while the inflation rate continues to decline, the net effect could -- apart from possibly some volatility -- actually be quite benign for equity investors.

It would not exactly be the Goldilocks scenario that optimists often tout, but it would not be the stagflation that pessimists fear either.

US economy slower than expected

Yesterday's economic data would have reinforced that view that the ECB is likely to remain the most aggressive in tightening monetary policy among the major central banks.

Reuters reports that the US economy slowed more than most economists expected in the third quarter.

Gross domestic product...expanded at a 1.6 percent annual rate during the third quarter, the Commerce Department reported on Friday. This was down from 2.6 percent in the second quarter for the slowest advance since the first quarter of 2003...

The report showed a striking 17.4 percent annual rate of decrease in spending on new housing - the biggest decline in 15-1/2 years.

But it is not all bad.

By contrast, the GDP report showed business investment remained healthy and consumers picked up their spending pace...

[T]here were signs that price rises might be easing. In the third quarter, core prices advanced at a 2.3 percent rate after rising 2.7 percent in the second quarter.

And it might get better soon.

A final October reading of the University of Michigan's consumer sentiment index came in at 93.6, up from a preliminary 92.3 and September's final reading of 85.4, said sources who saw the subscription-only report.

And Tim Duy puts the GDP report further into perspective.

In short, the GDP report is consistent with the Fed’s view on the economy: A slowdown in the housing sector, with minimal spillover into other parts of the economy, and moderating inflation numbers. For the Fed, these are “stay the course” numbers...

... I believe the risk of a hard landing is not insignificant, but recent data does not point in that direction. We are not seeing the hallmarks of a hard landing such as collapsing core durable goods orders, rising jobless claims, or plummeting consumer confidence. Without those signals, the Fed will stick to the soft landing story. Consequently, the Fed is not likely to view 3Q06 report as disastrous; they will view as in line with their expectations. Will those expectations be correct? Time will tell.

There were also downside surprises in Japan yesterday. Bloomberg reports that retail sales fell a larger-than-expected 1.4 percent in September while core prices excluding fresh food climbed a less-than-expected 0.2 percent in September.

In contrast, the euro zone data surprised on the upside. AFX/Forbes reports that M3 growth accelerated to 8.5 percent year-on-year in September from 8.2 percent in August while private sector loan growth accelerated to 11.4 percent year-on-year in September from 11.3 percent in August.

US data mixed but continued monetary tightening likely elsewhere

The economic news from the US yesterday was mixed. Reuters reports on housing:

New single-family home sales increased 5.3 percent to an annualized rate of 1.075 million units in September, the Commerce Department said. It was the second straight monthly gain, but the increase reflected a greater willingness by sellers to slash prices.

The department said the median price for a new home was down 9.7 percent from $240,400 a year earlier, the biggest year-on-year price drop since December 1970...

While the pace of new home sales picked up in September, it was still off 14.2 percent from year-ago levels -- a sign of how far the once high-flying market has fallen.

Still, the supply of homes available for sale at September's sales pace fell to 6.4 months' worth from 6.8 months in August, as the number of homes on the market fell 1.9 percent to 557,000.

...durable goods orders:

The department said orders for durable goods...leaped 7.8 percent in September, the biggest jump since June 2000, on a rush of civilian aircraft orders...

While the overall increase in orders was much greater than economists had expected, orders were up a smaller-than-forecast 0.1 percent when transportation orders were stripped out...

Offering an upbeat sign on capital spending plans, orders for non-defense capital goods excluding aircraft, a proxy for business spending, rose a larger-than-expected 1.1 percent.

...and employment:

A separate report from the Labor Department showed the number of workers applying for jobless benefits rose by 8,000 last week to 308,000, in line with expectations and still pointing to a relatively healthy job market.

The rest of the world's central banks still look more likely to emulate the Riksbank's 25 basis-points increase in interest rates to 2.75 per cent yesterday than the Federal Reserve's decision to hold rates the day before, although the Reserve Bank of New Zealand, after yesterday's decision to hold rates, may not be one of them.

In the UK, the NIESR expects inflation to accelerate. Bloomberg reports:

U.K. inflation will accelerate to the fastest pace in at least nine years this quarter, requiring two interest-rate increases to bring it back down to target, the National Institute for Economic and Social Research said.

The consumer-price index will average 2.6 percent in the fourth quarter, the highest since that measure of inflation was introduced in 1997, the London-based research group said today. Higher prices of household goods and housing costs caused it to raise its forecast from 2.2 percent in July.

Meanwhile, consumer confidence in Germany rose to the highest level in five years. From Bloomberg:

A confidence index compiled by GfK and based on an October survey of about 2,000 people that aims to forecast households' expenditure one month ahead, climbed to 9.2 from a revised 8.9 in the previous month, the Nuremberg-based market research company said today. That's the highest level since November 2001, when the index stood at 9.6...

Gfk's sub-index measuring households' willingness to spend rose to 64.4, the highest since records began in 1980. A gauge of income expectations rose to 0.2 from minus 8.8...

A gauge of consumers' assessment of future economic developments fell to 6.9 from 12.4, today's report showed.

Fed holds rates, ECB may keep raising

As expected, the Fed left interest rates unchanged yesterday. From Reuters:

The U.S. Federal Reserve on Wednesday kept its benchmark interest rate steady for a third meeting in a row, predicting moderate economic growth ahead with some reason to expect easing price pressures.

Bonds reacted positively to the announcement.

The statement seemed to reassure investors, despite being little changed from the previous one. In futures trading, the chances the Fed will lift rates another quarter percentage point by January dropped to 10 percent from 16 Tuesday.

Bond prices rallied in relief that the Fed had not struck a more hawkish tone on inflation as many market observers had suggested was possible.

Economic data yesterday also helped bonds.

There were new signs of economic cooling even before the Fed wrapped up its two-day meeting. A realtors' group reported U.S. sales of existing homes fell for a sixth straight month in September and median prices were down from a year ago.

But stocks also moved up yesterday.

Stock prices closed modestly higher, influenced more by corporate earnings reports than by the widely anticipated Fed decision. The Dow Jones industrial average gained 6.80 points, to close at a record 12,134.68.

European stocks also rose, helped by rising business confidence. Bloomberg reports:

Business confidence in Germany and France unexpectedly rose in October as lower oil prices and exports to Asia brightened the outlook for economic growth in Europe. Stocks rose to the highest in five years and bonds fell.

The Ifo institute in Munich said today its index climbed to 105.3 from 104.9 in September. Economists expected a decline to 104.5, the median of 39 forecasts in a Bloomberg News survey showed. In France, a gauge of optimism advanced to 108 from 106 in September. Germany and France together account for more than half the euro region's economy...

The Stoxx 600 index rose as much as 0.4 percent to 356.35 points, the highest since February 2001. Yields on two-year German government notes, among the securities most sensitive to the outlook for interest rates, climbed 2 basis points to 3.727 percent at 12:43 p.m. in Frankfurt...

In Italy, the Isae institute said today its index of confidence remained near a four-month high, slipping to 97.1 from 97.3 in September. That exceeded the median forecast of 97 in a Bloomberg survey. In France, economists had expected a reading of 107, according to a separate survey.

That should boost chances of further ECB rate hikes. Not that ECB officials weren't already thinking about it. From another Bloomberg report:

European Central Bank council member Axel Weber said the bank may need to continue raising interest rates next year to ensure it doesn't over-stimulate the economy of the dozen nations sharing the euro.

And this is despite inflation looking likely to stay low in Germany in October. From AFX/Forbes:

Consumer prices in Germany rose 0.2 pct in October from September and were up 1.2 pct from a year earlier, according to preliminary data from the Federal Statistics Office.

Of the big stock markets, only Japan's fell yesterday, the Nikkei 225 falling 0.5 percent to close at 16,699.30. It was not for want of good news, though. From AFP/CNA:

Japan's trade surplus hit an 18-month high in September thanks to strong exports of fuel-efficient cars, steel and electronic products, the government said.

The trade surplus swelled to a bigger-than-expected 1.01 trillion yen (8.50 billion dollars), up 6.9 percent from a year earlier and above one trillion yen for the first time since March 2005, the finance ministry said.

Exports gained 15.3 percent from a year earlier to 6.83 trillion yen while imports climbed 16.9 percent to 5.82 trillion yen, largely because of high oil prices, the ministry said in a statement.

Manufacturing momentum fading?

European industrial new orders were strong in August, rising 3.7 percent in the euro zone and 2.6 percent in the EU25.

The latest UK data, however, paint a different picture. From the CBI:

Momentum in the UK manufacturing sector faded over the past three months as overseas demand levelled out and the decline in domestic orders accelerated, according to the latest industrial trends survey from the CBI published today (Tuesday).

Consequently total orders fell slightly, confounding expectations of continued growth, and order book levels are seen as marginally below normal. Output growth, which in July had been expected to maintain the strong performance of the first half of the year, slowed considerably.

In the US, the Richmond Fed's manufacturing index for October was also weak, falling to -2 from 9 in September, while the service sector grew at a slower pace in October.

We'll get a better picture of the health of manufacturing after Thursday's US durable goods orders and next week's global PMIs.

Consumer spending expected to boost China's economy

China's economic growth may not slow much next year. From Bloomberg:

JPMorgan Chase & Co. and Deutsche Bank AG raised their estimates for economic growth in China as a two- year push by Premier Wen Jiabao to encourage consumer spending begins to gain traction.

JPMorgan boosted its forecast for 2006 to 10.6 percent from 10 percent and said the economy may grow 9.5 percent next year, up from 9 percent previously. Deutsche Bank increased its 2006 estimate to 10.6 percent from 10.4 percent and its 2007 forecast to 9.5 percent from 8.9 percent.

Another economy that can probably afford to boost domestic demand is Singapore, if its inflation rate is any indication. From the Department of Statistics:

On a seasonally adjusted basis, the consumer price index in September 2006 decreased by 0.1 per cent over August 2006.

Compared with the same month a year ago, the consumer price index in September 2006 was 0.4 per cent higher. For the first nine months of 2006, the consumer price index rose by 1.1 per cent over the same period of 2005.

Slowdown takes a break

US economic data took a break yesterday. The global economy does not seem to be having any.

The UK economy grew at its fastest annual pace in two years in the third quarter of 2006. Reuters reports:

The Office for National Statistics said on Friday GDP growth held steady at 0.7 percent in the three months to September, confounding market forecasts of a slowdown to 0.6 percent and lifting the annual rate to 2.8 percent.

That was the fastest yearly pace since Q3 2004 and marked the fourth consecutive quarter of growth running above its long-run trend. 2006 growth now looks set to exceed Chancellor Gordon Brown's budget forecast of 2.0 to 2.5 percent.

Bloomberg reports that the German government has raised its growth forecasts to match those of six leading economic institutes (reported yesterday).

Gross domestic product will expand 1.4 percent in 2007, more than the 1 percent predicted in the last official forecast in April, the Economy Ministry in Berlin said today. The prediction for 2006 was revised to 2.3 percent from 1.6 percent.

Meanwhile, Japan's all industry activity index rebounded in August by 0.7 percent after having fallen in recent months.

The strength in the global economy is keeping core inflation up even as oil prices fall. Take Canada as an example, as reported by Bloomberg.

Canada's consumer price index, excluding volatile goods such gasoline, accelerated unexpectedly in September, damping speculation the Bank of Canada may cut interest rates soon.

The annual core rate, which tracks prices minus eight items such as fruit and energy products, rose a more-than-expected 1.7 percent from 1.5 percent in August, Statistics Canada said today in Ottawa. Monthly core inflation sped 0.5 percent...

Overall inflation accelerated at a slower-than-expected annual rate of 0.7 percent in September, a 2 1/2 year low, as gasoline prices fell 17.4 percent on a monthly basis, the most since 1949. Consumer prices fell 0.5 percent in September from the previous month, the biggest decline since last October, the statistics agency said.

US leading index edge up amid mixed data

The economic data released yesterday were mixed.

Reuters reports the US data:

The Philadelphia Federal Reserve Bank said its business activity index fell to -0.7 in October from -0.4 in September, below economists' forecasts for a rise to 7.0 in October... The new orders component of the Philadelphia Fed index...rebounded to 13.4 in October from -1.3 in September. The jobs component fell to 9.4 from 10.7 in September...

In a separate report, the Labor Department said first-time claims for state unemployment insurance dropped 10,000 last week to 299,000 from a revised 309,000. The level was below Wall Street forecasts of a rise to 312,000 new claims.

The Conference Board, a private business-backed research group, said its Index of Leading Economic Indicators gained 0.1 percent in September to 137.7 after falling 0.2 percent in August. Analysts had forecast a slightly stronger 0.3 percent rise.

There was also better outlook for Germany. From Bloomberg:

Germany's six leading research institutes today raised their forecasts for economic growth this year and next as stronger than expected demand for exports prompts executives to invest more in plants and machinery.

Europe's largest economy will expand 2.3 percent in 2006 instead of the 1.8 percent forecast in April, the state-funded institutes said today in a report for the government. They raised the 2007 forecast to 1.4 percent from 1.2 percent.

This came as producer prices reportedly fell in September. AFX/Forbes reports:

Producer prices in Germany fell 0.3 pct in September from August and were up 5.1 pct from a year earlier, the Federal Statistics Office said...

Excluding energy, September producer prices rose only 2.8 pct from a year earlier and were up 0.1 pct month-on-month, the statistics office said.

In the UK, Reuters reports that retail sales fell 0.4 percent in September, the biggest fall since the start of the year, but prices were 0.6 percent higher than a year ago, the first gain since January 2002 and the biggest rise since June 2001, while M4 money supply grew 1.8 percent on the month in September and by 14.5 percent on the year, a 16-year high.

Another Reuters report said that underlying net mortgage lending rose by 5.4 billion pounds in September, the smallest increase since April, according to data from the British Bankers' Association. However, the Council of Mortgage Lenders reported that gross mortgage lending hit a record high for the month of September, while the Building Societies Association said mortgage approvals were also at record levels for the month.

Finally, in China, GDP grew 10.4 percent in the third quarter, down 0.9 percentage point from the second quarter, but consumer prices rose 1.5 percent in September over the previous year, up 0.2 percentage point from August.

US consumer prices down, BoE and BoJ release minutes

Yesterday's economic data from the US probably did not change many people's views on the outlook. Reuters reports:

The Labor Department said overall U.S. consumer prices dropped 0.5 percent in September after rising 0.2 percent in August. But core prices, which exclude food and energy, crept up 0.2 percent for a third successive month, enough to keep inflation risk at the forefront as a potential worry...

Separately, the Commerce Department said housing starts hit an annual pace of 1.772 million units in September, compared with an upwardly revised 1.674 million pace in August.

The scope for a housing pickup seems limited, however, since permits for future groundbreaking that gauge builders' optimism fell 6.3 percent in September to 1.619 million units a year, the lowest rate since October 2001.

Meanwhile, the release yesterday of the minutes of the recent Bank of England policy meeting momentarily raised expectations for another rate hike soon. Reuters reports:

The Bank of England's two newest policymakers opposed this month's decision to keep interest rates steady...

Both newcomers voted for an immediate increase at the Monetary Policy Committee's October meeting, while most other members also contemplated raising rates but felt they could wait to see how their next quarterly forecasts look in November.

But UK labour data were cooler than expected.

The Office for National Statistics said average earnings rose 4.2 percent in the three months to August, below expectations for a 4.3 percent rise and down from 4.4 percent in the three months to July.

Excluding bonuses, average earnings growth eased to 3.6 percent in the three months to August from 3.7 percent -- the lowest rate since January 2004...

The number of people claiming jobless benefits jumped 10,200 in September, the strongest increase since March and confounding forecasts for an unchanged reading.

That took the overall claimant count level to 962,000 -- the highest since December 2001, but left the unemployment rate unchanged at 3.0 percent.

Central bank minutes were also out in Japan yesterday. From Bloomberg:

The Bank of Japan is monitoring the risk that business investment may overheat, derailing the longest economic expansion since World War II, minutes of its September policy board meeting show.

"A few members commented that they would continue to pay attention to whether there was a possibility of any acceleration of business fixed investment causing large economic swings," according to the minutes of the Sept. 7-8 policy meeting. The board voted unanimously to keep rates unchanged at the meeting, after raising them for the first time in almost six years in July...

Consumer prices will probably stay on a rising trend even after the revision, the board members said at the meeting. They agreed that the change hasn't affected the central bank's view of price stability.

But leading indicators for Japan are not looking very bright. From Kyodo/Yahoo! News:

The index of coincident indicators was raised from a preliminary 77.8 percent to 80.0 percent, but that of leading indicators was cut from a preliminary 20.0 percent to 18.2 percent, the Cabinet Office said...

Real private-sector machinery orders, excluding those from shipbuilders and power utilities due to their volatility, turned out to be "negative" for August, causing the downward revision of the leading indicators, the office said.

Inflation moderates

The Bank of Canada left interest rates unchanged yesterday, just one of several indications yesterday suggesting that inflation fears are receding.

The Eurozone annual inflation rate fell to 1.7 percent in September, according to Eurostat. Monthly inflation was zero. Not surprisingly, fuels for transport had the biggest downward impact on inflation in September.

It was a similar story in the UK, where lower petrol prices pushed headline inflation lower to an annual 2.4 percent in September from 2.5 percent in August.

And it was a similar story for producer prices in the US. From Reuters:

Producer prices fell 1.3 percent in September, the sharpest drop since April 2003, due to a record fall in gasoline costs, the Labor Department said. Prices excluding food and energy rose 0.6 percent, mainly because of higher auto prices... But when the effect of higher auto prices was excluded, the change was a much slighter 0.1 percent rise, the Labor Department said.

Data on industrial production provide hope that the moderation in inflation is sustainable.

... U.S. industrial output fell 0.6 percent in September, compared with forecasts for no change...

The drop in capacity utilization to 81.9 percent last month from 82.4 percent in August also provided helpful economic slack at a time when some policy-makers think the economy is running at full employment and still at risk from inflation.

Meanwhile, hopes that the slowdown does not turn into a recession got a slight boost yesterday from homebuilder sentiment.

U.S. homebuilder sentiment climbed slightly in October for the first time in eight months, thanks to lower mortgage rates and a more upbeat consumer outlook... The homebuilders index rose to 31 from 30 in September, offering a ray of hope that the worst may be over for the housing sector.

Other economic data elsewhere were mixed.

Industrial production in the euro area rose 1.8 percent in August after falling 0.4 percent in July. However, the ZEW index of investor and analyst expectations in Germany dropped from minus 22.2 in September to minus 27.4 in October, the lowest since March 1993.

In Japan, the tertiary index, a measures of spending on services, rose 0.7 pct in August from July. It was the first gain in three months.

Dow, UK house prices at record highs

There was more to cheer about yesterday in the US stock market as the Dow hit another record high. From Reuters:

U.S. stocks rose on Monday, pushing the Dow to an all-time intraday high just short of 12,000, amid positive assessments of the economy and an advance in energy shares, boosted by a jump in oil prices...

The Dow Jones industrial average rose 20.09 points, or 0.17 percent, to end at a record 11,980.60. The Standard & Poor's 500 Index gained 3.43 points, or 0.25 percent, to 1,369.05, after hitting a fresh 5 1/2-year intraday high at 1,370.20. The Nasdaq Composite Index advanced 6.55 points, or 0.28 percent, to close at 2,363.84.

A relatively good report from the October Empire State Manufacturing Survey helped.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved at an accelerated pace in October. The general business conditions index rose 9 points to 22.9.

Other asset prices have also been hitting record highs. From another Reuters report:

House prices in England and Wales surged an annual 11.5 percent in October, taking asking prices to a record high, a survey showed on Monday, in a further sign higher borrowing costs have not stifled demand.

The Rightmove house price index showed prices rose 2.0 percent in October month-on-month, pushing the annual rate to its highest level this year. The figures are not adjusted to take into account seasonal changes in the market.

Stock markets charge to new highs, but watch interest rates

A few weeks back, stock and bond prices had been rising on hopes for an imminent interest rate cut in the United States. Those hopes have largely evaporated and over the past week or so, bond prices have fallen. However stock prices continue to go up, this time on renewed optimism on the economy.

Last week saw many stock markets around the world hit multi-year and even all-time highs.

The Dow Jones Industrial Average closed at a record 11,960.51 on Friday. Some smaller markets achieved the same feat. Singapore's Straits Times Index closed at a record 2,666.68 on Friday. The Swiss SMI hit a record 8,673.7 on Thursday, although it fell back a bit on Friday.

Emerging markets were not left out. India's Sensitive Index rose to a record 12,736.42 on Friday.

Other markets hit multi-year highs. The pan-European FTSEurofirst 300 index closed at a five-year high of 1,440.8 on Friday, with the FTSE 100 closing at 6,157.3, its highest close since February 2001. Hong Kong's Hang Seng Index closed at 17,988.86 on Friday, its highest close since March 2000.

Stock markets have been boosted by reports suggesting that the global economy and, especially, the US economy, is not slowing as dramatically as some feared. For example, on Friday, the Commerce Department reported that although US retail sales fell 0.4 percent in September, retail sales excluding gasoline rose 0.6 percent. In addition, the University of Michigan said its index of consumer sentiment rose to 92.3 this month, the highest since July 2005, from 85.4 in September.

Fixed income investors finally seem to agree with this assessment of the economy, as indicated by a recent rise in bond yields, reversing earlier falls. No doubt, indications from the Federal Reserve -- from the last Federal Open Market Committee meeting minutes and from recent speeches by Fed officials -- that it remains concerned about inflation were also taken into consideration by the market.

Last week, the yield on the benchmark 10-year US Treasury note rose 10 basis points to 4.80 percent, the highest since 19 September. In Europe, government bonds fell for a third week last week, the yield on the German ten-year note rising 7 basis points to 3.83 percent.

What is interesting about the recent market movements is that while bond prices have reversed in recent weeks on the changed outlook, stocks have maintained their direction of movement: up. When the economy looked to be weakening, some took it as a signal of impending rate cuts by the Federal Reserve -- a good thing for stocks. With the economy looking more resilient now, some are taking it as implying better earnings prospects -- a good thing for stocks.

I am not sure whether that is irrational or just exuberance, but such thinking should cause investors to question what exactly is driving this market.

What does seem important to the market, in my opinion, is that, the recent rise in yields notwithstanding and despite all the rate hikes by the Federal Reserve and the European Central Bank (ECB) over the past few years, bond yields remain relatively low. In fact, the 10-year Treasury note is currently yielding about the same as it did around the middle of 2004, when the Federal Reserve started hiking interest rates. Yields on euro zone government bonds are even lower than they were then and not much above where they were at the end of 2005 when the ECB started its rate hike cycle.

If interest rates that were around current levels or even higher in 2004 could not stop the bull market then, it is quite reasonable to suspect that they might not be able to stop it now either.

So why have interest rates been persistently low? At a conference in Canada on 6 October, former Federal Reserve chairman Alan Greenspan suggested that global integration is the reason.

According to a report in the Financial Times, Mr Greenspan said that the collapse of Communism in eastern Europe and the shift towards more market-based economies in China and other parts of the developing world increased the global labour supply and "brought disinflation and lowered inflation risk premiums and long-term interest rates, creating a decline in real interest rates and equity-risk premiums". As a consequence, "the real market value of assets increased faster than GDP".

Apparently things have not changed much recently. The US trade deficit, a reflection of global integration -- especially the integration of China -- continued to rise in August to a record US$69.9 billion. China's trade surplus also hit a high in August, and exports continued to grow in September.

And the disinflationary impact of trade persists, with prices of imports into the US rising just 2 percent in the 12 months to September, and that is inclusive of oil imports. Non-petroleum import prices rose just 0.1 percent in September.

Mr Greenspan also said that the tightening cycle from 1994 to 1995 was "highly disruptive" but failed to rein in stock prices. "We didn't diffuse the bubble, we made it worse," he said. "The stock market was flat during the tightening period and when the tightening ended in 1995 the stock market took off."

So far, that episode seems to be repeating itself this year. Global stock markets were indeed highly disrupted around May and June when all the major central banks were tightening monetary policy in synchrony. When the Federal Reserve paused in August, stock markets took off.

Then again, it may be too soon to conclude since the tightening cycle may not be over yet. Neither the Federal Reserve nor the ECB have given clear signals that rate hikes are at end. In fact, the ECB is expected to hike rates further, while even the Federal Reserve has made it clear that if it moves at all, it is more likely to hike than to cut.

So with bond yields already rising once again, stock investors would do well to keep a close watch on the actions of central banks and interest rates.

Resilient US consumer stands out among global economic news

US retail sales were down in September, but underlying consumer demand appears relatively resilient. Reuters reports:

Overall retail sales posted a fall of 0.4 percent in September, the Commerce Department said, but when a record 9.3 percent drop in gasoline sales was stripped out, they showed a healthy rise of 0.6 percent, helped by strong clothing and department store purchases...

Meanwhile, the University of Michigan said its index that gauges consumer sentiment jumped to 92.3 in October, higher than the reading of 86.5 economists had predicted in a Reuters poll and up from September's result.

Meanwhile, inflation looks likely to moderate further in the near future.

The University of Michigan data also showed inflation expectations for the next year were lower, though they were slightly higher for the next five years.

A report from the Labor Department showed U.S. import prices dropped by a more-than-expected 2.1 percent in September, the largest decline in almost 3-1/2 years, due largely to the big fall in petroleum prices.

It was the first fall in overall import prices since March and was led by a 10.3 percent fall in petroleum prices while the cost of non-petroleum imports inched up 0.1 percent.

Inflation has already fallen in Germany:

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

Consumer prices rose 1 percent from a year earlier after gaining 1.8 percent in August, according to the harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. The inflation rate, revised down from a preliminary estimate of 1.1 percent, is the lowest since February 2004. From August, consumer prices fell 0.5 percent.

...and in France:

French inflation eased in September to the slowest pace in more than four years as energy prices fell.

The inflation rate fell to 1.5 percent from 2.1 percent in August, the Paris-based national statistics office said today, using a harmonized European Union method. The rate was below the 1.7 percent expected by economists in a Bloomberg News survey and was the lowest since June 2002, when it also was 1.5 percent. From a month earlier, prices fell 0.2 percent.

And the Bank of Japan looks sanguine enough about inflation to leave interest rates unchanged yesterday, although it left the door open to a rate rise later this year.

Bank of Japan governor Toshihiko Fukui said there was still a chance of another interest rate rise this year after the central bank held fire for a third straight month...

The Bank of Japan's nine-member policy board unanimously agreed earlier to leave the central bank's benchmark lending rate unchanged at 0.25 percent, as expected at the close of a two-day meeting Friday

"If I am asked whether or not there is any chance for another rate hike before the end of this year, I would say I do not rule this out," Fukui told a press conference.

A rate hike in Japan certainly cannot be ruled out, considering that producer prices rose the most in more than 25 years in September. Bloomberg reports:

An index of prices that companies pay for energy and raw materials such as iron ore surged 3.6 percent from a year earlier, up from a revised 3.5 percent gain in August, the Bank of Japan said in Tokyo today. The result beat the median 3.3 percent forecast of 33 economists surveyed by Bloomberg News.

And Japanese industrial production continues to grow. From Kyodo/Yahoo! News:

Japan's industrial production grew a seasonally adjusted 1.8 percent in August from the previous month, down 0.1 percentage point from the preliminary reading, the Ministry of Economy, Trade and Industry said Friday.

China too might do well to consider additional tightening measures. From AFP/CNA:

Chinese banks stepped up their lending in September compared with August, marking the second consecutive month-on-month increase as the economy continued to move ahead strongly, analysts said.

New yuan-denominated loans last month totaled 220 billion yuan (27.8 billion dollars), the China Securities Journal reported, citing unnamed sources, implying a 16 percent expansion from August...

Consumer prices rose 1.5 percent in September from a year earlier, against a 1.3 percent rise in August, the China Securities Journal also reported, suggesting again an uptick in demand...

The China Securities Journal also reported a 16.8 percent increase in M2, the broad money supply measures, in September.

While this was down from 17.9 percent year-on-year M2 growth in August, the figure did suggest a slight month-on-month rise in the measure, which includes cash in circulation and all deposits.

But China's foreign exchange policy isn't helping. From Xinhua Online:

China's foreign exchange reserves had climbed to 987.9 billion U.S. dollars by the end of September, up 28.46 percent on the previous year, the People's Bank of China reported on Friday.

The central bank report said the reserves increased by 169 billion dollars in the first nine months of the year.

Official figures show the increase in reserves fell to 15.9 billion dollars in September from 17.5 billion dollars in August, but still higher than July's 13.6 billion dollars.

It could all lead to overheating in China, but at least in the meantime, it is surely helping to keep interest rates and inflation in the US low -- prices of imports from China to the US fell 0.2 percent in September after increasing the previous two months.

US trade deficit, Chinese and Japanese trade surpluses persist

The US trade deficit continued to rise in August. Reuters reports:

America's deficit with the rest of the world hit a fresh high of $69.9 billion in August, partly because of lofty oil prices that since have eased...

[E]xports grew in August by 2.3 percent to $122.4 billion but import growth was a slightly stronger 2.4 percent to $192.3 billion.

To a large extent, the trade deficit reflects continued growth in the US economy.

The Federal Reserve's periodic Beige Book survey of the economy, issued in mid-afternoon, said moderate overall expansion continued in September across the 12 regions where Fed banks are located but a "couple" said growth was slowing.

Another survey from manufacturing executives similarly pointed to some slackening in the pace of expansion during September and forecast further slowing in the fourth quarter.

The Manufacturers Alliance/MAPI index of future business activity fell to 64 in September from 71 in June, its lowest level since June 2003. Anything over 50 indicates growth...

Separately, the Labor Department said new applications for unemployment benefits inched up 4,000 to 308,000 last week -- not enough to be troubling in the view of analysts who said they did not see any widespread trimming of payrolls.

Higher oil prices were partly behind the higher trade deficit, but as Brad Setser points out, non-oil imports also played a part.

The $70b ($69.9b) August trade deficit means the US is squarely on track for a $900b or so current account deficit this year...

[N]on-oil import growth is picking up. Non-oil goods imports were $133 in August, above their recent $128-29b range. The y/y growth rate in non-oil imports was 9.85% in June, 10.8% in July and 13.4% in August.

That's the cue for us to turn to China's latest trade data, provided by AFP/CNA.

China's trade surplus dropped sharply in September from a month before, although net exports were safely on track for a record year in 2006, official data shows.

The world's fourth-largest economy reported a surplus last month of 15.3 billion dollars, down from 18.8 billion dollars in August, official figures showed...

Exports in September were up 30.6 percent year-on-year at 91.6 billion dollars, the General Administration of Customs said in a statement posted on its website.

Imports during the month reached 76.3 billion dollars, a rise of 22 percent from a year earlier.

Despite the month-on-month drop, the September surplus was still the second-highest on record, after the all-time high in August...

China said Wednesday it aimed to reduce its ballooning trade surplus to zero by the end of the decade via a drastic decline in the growth of its exports.

Through to 2010, China will target 10 percent annual growth in foreign trade, down from 24 percent in the first half of the decade, the commerce ministry said in a statement on its website.

But China is far from the only country enjoying a surplus at the expense of the US. Bloomberg reports Japan's current account surplus for August.

Japan's current account surplus widened more than expected in August, as automakers in the world's second-largest economy shipped more cars overseas.

The surplus rose 22 percent to 1.48 trillion yen ($12.4 billion) from a year earlier, the Ministry of Finance said today in Tokyo. The median forecast of 33 economists surveyed by Bloomberg News was for a surplus of 1.42 trillion yen...

The current account tracks the flow of goods, services and investment income from overseas. Exports climbed 17.3 percent in August from a year ago and imports rose 16.4 percent, today's report showed.

Meanwhile, with bank lending and money supply increasing, the Cabinet Office was able to give a relatively upbeat assessment of the Japanese economy.

The economy is "recovering," the Cabinet Office said in its October report released in Tokyo today, maintaining its overall evaluation for an eighth month. The world's second-largest economy is now in its 57th month of growth, equaling the so-called Izanagi boom of 1965-1970.

"We'll continue efforts to keep robust economic expansion," Prime Minister Shinzo Abe told reporters in Tokyo today. "Many people may not be feeling this strong recovery."

Indeed, Japan's consumer confidence worsened in September. From Kyodo/Yahoo! News:

Japanese consumer confidence fell in September from the previous month for the second straight month of deterioration, the Cabinet Office said Thursday...

The index of confidence among households with two or more people came to an unadjusted 46.3 for September, down 1.3 points from August, the office said in a monthly report...

On a seasonally adjusted quarterly basis, the index of consumer confidence came to 45.6 in September, down 0.6 point from June.

Eurozone growth to slow, UK house prices still rising

Eurozone growth may be at a peak. From AFP/Yahoo! News:

The eurozone economy grew 2.7 percent in the second quarter, the European Union's Eurostat data agency has said, revising slightly upwards a previous estimate of 2.6 percent...

On a quarterly basis, the bloc's economy expanded 0.9 percent in the second quarter after growth of 0.8 percent in the first quarter, Eurostat said Wednesday, sticking with a previous estimate...

The EU's executive arm forecast that eurozone quarterly growth would cool to 0.4-0.8 percent in third quarter, 0.2-0.7 percent in fourth quarter and 0.0-0.5 percent in the first quarter of 2007.

But asset prices are still rising. Reuters reports that UK house prices rose at their fastest rate in nearly four years during the three months to September.

The Royal Institution of Chartered Surveyors said its house price balance rose to +45.1 in September from +34.9 in the three months to August -- the strongest reading since October 2002.

The sales-to-stock ratio, which some economists say is a more reliable gauge of housing market health, rose to 38.8 in September from 37.3 in August -- its highest in two years.

Together with rising stock prices, that suggests ample global liquidity. No wonder the Fed was "quite concerned" on US inflation in its September meeting. Reuters reports:

While Fed policy-makers decided at their September 20 meeting to hold interest rates steady for a second straight time, minutes of the gathering released on Wednesday made plain the degree to which they remained focused on inflation risks.

"Recent rates of core inflation, if they persisted, were seen as higher than consistent with price stability, and participants underscored the importance of ensuring a moderation in inflation," the minutes of the rate-setting Federal Open Market Committee meeting said.

Japanese core machinery orders up less than expected

Japan's machinery orders data disappointed yesterday. Reuters reports:

The core orders, a volatile figure regarded as a key gauge of corporate capital spending, rose 6.7 percent in August from July on a seasonally adjusted basis, data from the Cabinet Office showed on Tuesday.

The figure was below a median forecast of an 11.4 percent rise and followed a 16.7 percent decline in July, the biggest drop since the government began compiling the data in 1987.

Some economists are concerned.

"Core orders fell from a year earlier for the second straight month, which could be a turning point," said Seiji Adachi, a senior economist at Deutsche Securities.

"We cannot determine the future trend by looking only at the August figures, but September data will be very important. If orders fall, it would be a sign that capital spending may flounder," Adachi said.

Others are not.

Few economists take the weak machinery orders of the past two months as an omen of a sharp slowdown in corporate investments or the overall economy.

"Machinery orders will likely post negative growth in July-September (compared with the previous quarter). But there is no need to worry about the possible drop because it is mostly a rebound from exceptionally strong growth in April-June," said Yoshimasa Maruyama, an economist at BNP Paribas.

The news from Europe was more upbeat. France and Italy reported better-than-expected industrial production for August, rising by 0.8 percent and 1.2 percent respectively. In the UK, the August trade deficit was wider than expected, but retail sales were up in September, as were wages and commercial property development, while the Conference Board's leading index for the UK increased 0.2 percent in August.

Meanwhile, in the US, stocks are still rising in more ways than one, as the Dow Jones industrial average rose to another record close of 11,867.17 yesterday and August wholesale inventories rose 1.1 percent.

Pyongyang nukes Seoul

North Korea's nuclear test sent Asian markets reeling yesterday. AFP/CNA reports:

Asian stocks tumbled on Monday after North Korea defied international pressure and announced it had conducted a nuclear test, realising the region's worst fears...

In South Korea, the KOSPI index was down 2.41 percent after recovering from a near four percent slump...

The won also fell sharply - from 949 Friday to around 963 against the US dollar as investors dumped the local currency in reaction to North Korea's announcement that the test was carried out.

Bloomberg columnist Andy Mukherjee, however, has an interesting take on the matter, saying that "A Nuclear North Korea Is a Gift to Investors".

Markets elsewhere, however, showed little reaction and closed mostly up yesterday. Perhaps the economic data had something to do with it.

Germany saw its industrial production rise by the most in almost three years in August, reports Bloomberg.

Production jumped 1.9 percent from July, when it rose 0.8 percent, the Economy and Technology Ministry said today in Berlin. August's gain was the biggest since October 2003. Economists expected a 0.3 percent increase, according to the median of 40 estimates in a Bloomberg News survey. From a year earlier, production rose 7.2 percent...

The Cologne-based IW economic institute today raised its forecast for German growth this year to 2.4 percent from 2 percent...

German exports slipped 0.1 percent in August from July, when they jumped 2.2 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted a 0.2 percent gain.

In the UK, producer prices fell, reports Reuters.

British manufacturers' input prices fell at their sharpest monthly rate in nearly two years in September, helped by the biggest monthly drop in crude oil prices in more than three years, data showed on Monday...

The Office for National Statistics said input prices fell 1.8 percent on the month in September against expectations of a 1.5 percent drop. That took the annual rate of growth down to 5.2 percent from 7.3 percent in August, the slowest increase since December 2004.

Output prices slipped 0.3 percent last month, after a rise of 0.1 percent in August and were below expectations of a 0.1 percent rise. The annual rate of growth eased to 1.8 percent from 2.7 percent in August, its slowest rate in more than two years...

Separately, government data showed house prices in Britain rising 7.7 percent in August, chiming with strong readings from mortgage lenders Halifax and Nationwide which have shown a robust market in spite of August's increase in borrowing costs.

In the US, retail sales were up in September, according to another Reuters report.

Seasonal adjusted retail sales, excluding autos, grew 0.3 percent for a second straight month in September, below the preliminary reading of a 0.4 percent gain released a week ago, said SpendingPulse.

In dollar terms, September seasonally adjusted ex-auto sales reached $287.7 billion, up 5.3 percent from a year ago...

Factoring out gasoline and autos, retail sales improved 0.6 percent from August's levels, SpendingPulse said.

Rate cut hopes fall with unemployment

One employment report and suddenly the markets are having second thoughts about a rate cut by the Federal Reserve.

On Friday, the US Labor Department reported that nonfarm payroll employment rose by an unexpectedly low 51,000 in September. Average weekly hours was unchanged while average hourly earnings rose by just 0.2 percent.

On the other hand, average hourly earnings rose 4.0 percent from a year earlier, the highest since a 4.1 percent gain in March 2001, and the monthly average job gains for the third quarter was 121,000, up from 115,000 in the second quarter after August payrolls were revised up to show a gain of 188,000 from an originally-reported 128,000 and July's gain was revised up to 123,000 from 121,000.

And there could be more upward revisions to come. In a preliminary estimate, the Labor Department said establishment survey employment for the 12 months through March will be revised up by 810,000, a figure that it describes as "larger-than-normal".

Suddenly, the establishment survey employment data look a bit more consistent with the low unemployment rate obtained from the household survey -- 4.6 percent as reported for September, down from 4.7 percent in August -- than previously thought.

And suddenly, markets are worried that the US labour market is a bit tighter than previously thought, and that an interest rate cut by the Federal Reserve is a little further off.

As a result, US Treasuries fell at the end of last week, pushing the yield on the 10-year note up to 4.7 percent, while US stocks fell from multi-year highs on Friday. Based on federal funds futures, traders think that the odds that the federal funds rate will be cut to 5 percent by the end of January have fallen to 20 percent from 32 percent on 2 October.

The jobs data only added to the doubts on a rate cut triggered by earlier remarks from Federal Reserve officials.

On 4 October, Federal Reserve Vice Chairman Donald Kohn had said in a speech to the Money Marketeers of New York University: "I think that the risks to my outlook for economic activity may be skewed a bit to the downside, while those to my forecast of gradually declining inflation are tilted to the upside. In my view, in the current circumstances, the upside risks to inflation are of greater concern."

On 5 October, Philadelphia Federal Reserve President Charles Plosser spoke to the CFA Society of Philadelphia. "There remains some risk that policy is not yet firm enough to ensure a return to price stability over a reasonable time horizon," he said. "So we need to remain vigilant and recognize that maintaining the current stance of policy, or even firming further, may be in the best interests of the economy’s long run performance."

Indeed, if past patterns hold, the unemployment rate may be telling us that inflation as measured by the personal consumption expenditures (PCE) price index -- the Federal Reserve's preferred measure of inflation -- has yet to peak.

The accompanying chart relates the 12-month rate of increase of the PCE price indices for both overall and core with the unemployment rate.

The chart shows that at inflation peaks, a sustained downtrend in the PCE inflation rate -- for both overall and core -- usually does not start until after the unemployment rate has bottomed. With the unemployment rate of 4.6 percent still at a five-year low, the year-on-year PCE inflation rates look likely to stay elevated for a while more.

And that in turn makes it unlikely that the Federal Reserve is about to cut the federal funds rate any time soon.

Mixed US jobs report, strong European factory reports, but slowdown still expected

The US jobs report was the focus of attention yesterday, and perhaps more so than usual. Reuters reports:

U.S. employers added a scant 51,000 jobs in September, far fewer than expected, but the job count for prior months was revised sharply higher and wage earnings rose, dimming hopes for interest rate cuts next year.

The Labor Department's closely-watched jobs report on Friday also revealed an unexpected drop in the unemployment rate to 4.6 percent -- matching a five-year-low -- from 4.7 percent in August.

The department said it had drastically undercounted job growth in the 12 months through March, indicating labor market tightness which is likely to keep the Federal Reserve on high alert for inflationary pressures.

Prior revisions notwithstanding, 51,000 for September does look awfully low. But over the last few years, such a low number does turn up every once in a while, so it is not necessarily the start of a trend, even assuming that it does not get revised up subsequently.

Meanwhile, the Federal Reserve also released its report on consumer credit yesterday.

Separately, the Federal Reserve said higher credit card usage pushed up U.S. consumer credit by $5.0 billion in August to $2.352 trillion for an annualized 2.6 percent increase that was in line with analyst expectations.

The news from Europe was a little more upbeat.

Bloomberg reports that German factory orders unexpectedly surged in August.

Orders increased 3.7 percent in August compared with a revised 2.1 percent in the previous month, the Economy Ministry said in a faxed statement today. Economists expected a 0.4 percent drop, the median of 42 forecasts in a Bloomberg News survey showed. From a year earlier, orders rose 14.6 percent.

While Reuters reports that British factory output rose twice as fast as expected in August.

The Office for National Statistics said manufacturing output increased by 0.4 percent in August, the fourth consecutive rise and double expectations for a 0.2 percent gain, although the annual rate was in line with forecasts at 1.5 percent.

But it was not all rosy.

[F]alls in oil and utilities production kept output growth in the wider industrial sector at a more subdued 0.1 percent in August...

Friday's data showed factory output rose by 0.7 percent in the three months to August compared with the previous three months, down from 0.8 percent in the three months to July.

The wider industrial measure, meanwhile, slowed to be flat over the period.

And the National Institute of Economic and Social Research sees Britain's economy growing by just 0.4 percent in the third quarter.

Japan looks to be slowing too, according to its leading index. Bloomberg reports:

The leading index, which comprises indicators including machinery orders and stock prices, sank to 20 percent in August, from 27.3 percent in July, the Cabinet Office said today in Tokyo. A number below 50 indicates the economy will slow in three to six months. The median forecast of 24 economists surveyed by Bloomberg News was for the index to drop to 10 percent.

The Conference Board's leading index for Japan leads to the same conclusion.

The Conference Board reports today that the leading index for Japan decreased 0.4 percent, while the coincident index increased 0.3 percent in August... With this month's decline, the level of the leading index is now -0.9 percent below its most recent peak in April.

And the OECD sees the same fate for the rest of the OECD economies.

The latest composite leading indicators (CLIs) suggest that slowing economic expansion lies ahead in the OECD area, with August 2006 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 weakening outlook for China and steady expansion in India, Russia and Brazil.

The CLI for the OECD area decreased by 0.1 point in August to 109.6 from 109.7 in July, and its six-month rate of change was down for the fifth consecutive month

ECB raises rates, more hikes to come

Interest rates still look as though they are on an upward trajectory.

Reuters reports the Bank of England's interest rate decision yesterday:

The Bank of England kept interest rates steady at 4.75 percent for the second month running on Thursday, but most economists predict a hike next month.

The European Central Bank didn't wait. Bloomberg reports:

ECB policy makers meeting in Paris increased the benchmark lending rate to 3.25 percent from 3 percent, as predicted by all 50 economists surveyed by Bloomberg News. Investors anticipate an increase in the rate to 3.5 percent this year, and Trichet said "I would not say anything that would correct this sentiment." He declined to comment on the course of rates next year.

Even the Federal Reserve may have to raise rates again. From another Reuters report:

U.S. interest rates may not be high enough to quell a recent bout of inflation, Philadelphia Federal Reserve President Charles Plosser said on Thursday...

"There remains some risk that policy is not yet firm enough to ensure a return to price stability over a reasonable time horizon," Plosser told the CFA Society of Philadelphia.

"We need to remain vigilant and recognize that maintaining the current stance of policy, or even firming further, may be in the best interests of the economy's long-run performance," he said.

He worried that inflation excluding food and energy costs could remain above 2 percent for at least another year but declined to say what would be an optimal inflation rate.

All of this is not stopping stock markets from also continuing their upward trajectories in Europe:

European stocks rallied to close at their highest levels in more than five years on Thursday, boosted by takeover activity and a rebound in commodity prices...

The pan-European FTSEurofirst 300 index jumped 0.6 percent to end at 1,410.1, its strongest close since July 2001 and pushing up gains to about 10 percent so far this year.

Fund managers said equities were supported by strong corporate earnings and global growth despite an increase in borrowing costs in Europe...

Around Europe, London's FTSE 100 index closed 0.6 percent stronger, its highest close since May 2006. Paris's CAC-40 rose 0.6 percent and Frankfurt's DAX advanced 0.5 percent.

...and in the US:

U.S. stocks rose on Thursday, pushing the Dow Jones industrial average to a record closing high for a third day and the S&P 500 to a fresh 5-1/2-year high...

The Dow Jones industrial average gained 16.08 points, or 0.14 percent, to close at a record 11,866.69. The Standard & Poor's 500 Index added 3.00 points, or 0.22 percent, to finish at 1,353.22. The Nasdaq Composite Index climbed 15.39 points, or 0.67 percent, to close at 2,306.34.

Diverging trends in Europe and US

The Reuters global wrapup probably says it all:

Growth in the global services sector slipped in September, reports showed on Wednesday, but investors expect monetary policy in Europe and the United States to follow separate paths in coming months.

The numbers:

The Institute for Supply Management on Wednesday said its non-manufacturing index fell to 52.9 in September from 57.0 in August. Economists had expected a smaller decline to 56.0...

In the euro zone, the RBS/NTC Research survey showed that services growth in the region slipped to a 10-month low in September... The euro zone services activity index fell to 56.7 from an upwardly revised 57.4, still well above the 50 mark that separates growth from contraction. Economists had expected a stable reading of 57.0...

The All-Industry Output Index for September, issued on Wednesday by JPMorgan with several research and supply organizations, fell to 55.3 in September from 56.9, the weakest in a year. But like the ISM and RBS/NTC surveys, it remained above the 50 line that divides growth from contraction.

The global services PMI fell to 54.5 -- its lowest since September 2005 when the index was at 54.2 -- from 57.0.

US factory orders tell a similar story, although durable goods orders have been revised up. From another Reuters report:

New orders at U.S. factories were unchanged in August, a stronger showing than expected...

But after stripping out transportation orders, factory orders fell 0.7 percent in the month, the Commerce Department said...

Durable goods orders in August were upwardly revised to unchanged from the first estimate of a 0.5 percent drop...

But house prices continued to rise in the UK, albeit at a slower rate. From Reuters:

House prices rose a robust one percent last month, Halifax data shows, suggesting the property market has remained resilient in the wake of August's interest rate rise.

However, the annual rate of house price inflation eased for a third month to 8.0 percent in the three months to September on a year ago, its lowest rate since April and compared with 8.2 percent in August.

The British Retail Consortium Shop Price Index also rose at a slower rate in September.

Meanwhile, retail sales in the euro zone remained robust in August. AFX/Forbes reports:

The data slightly exceeded expectations with a rise of 0.7 pct from July and a year-on-year increase of 2.4 pct. Economists had forecast a month-on-month rise of 0.6 pct and an increase of 2.0 pct from a year earlier.

Equally, Eurostat revised July retail sales downwards to a month-on-month rise of 0.4 pct and an increase of 1.9 pct from a year earlier. Its original estimate was for 0.6 pct and 2.5 pct respectively.

Central banks ponder interest rates, Dow hits record high

This Reuters report makes an interesting backdrop for tomorrow's ECB interest rate decision.

Euro zone producer price growth slowed in August thanks to a monthly fall in energy costs but unemployment inched up due to a rise in the number of German jobless, data showed on Tuesday.

The European Union's statistics office said producer prices rose 0.1 percent in August against July, below a market forecast of 0.2 percent, for a consensus-matching year-on-year increase of 5.7 percent.

It revised upwards July producer price growth by 0.1 percentage point to 0.7 percent month-on-month and 6.0 percent year-on-year...

Eurostat said unemployment in the 12 countries using the euro, a measure that helps gauge trends in household confidence, purchasing power and demand, rose to 7.9 percent of the workforce in August from 7.8 percent in July.

The Bank of England also has an interest rate decision to make tomorrow, but meanwhile yesterday, it reported that mortgage equity withdrawal fell to 11.3 billion pounds in the April to June period from an upwardly revised 12.9 billion in the first three months of the year. And it would also note that construction activity eased in September, the Chartered Institute for Purchasing and Supply's index for construction falling to 53.6 in September from 54.5 in August.

On the other hand, UK house prices rose 4.3 percent in September compared with a year earlier, the fastest annual rate since September 2004, according to property consultant Hometrack, while mortgage lender Nationwide's consumer confidence index added to signs of improving consumer sentiment, rising to 89 in September from 83 in August.

Meanwhile, Japan reported more direct evidence of monetary contraction. From Kyodo/Yahoo! News:

Japan's monetary base posted its biggest fall on record, of 21.2 percent, in September from a year earlier due to a sharp drop in the balance of the current-account deposits of financial institutions at the Bank of Japan, the central bank said Tuesday.

But today, the Reserve Bank of Australia left interest rates unchanged. Bloomberg reports:

The Reserve Bank of Australia's new Governor, Glenn Stevens, 48, who chaired his first board meeting yesterday, left the overnight cash rate target at 6 percent, as forecast by all 24 economists surveyed by Bloomberg News.

No change in interest rates has been good enough for US equity investors so far. From Reuters:

The Dow Jones industrial average hit an all-time high on Tuesday, surpassing the previous record set in 2000, as investors bet that sliding crude oil prices will stimulate consumer spending and lift profits.

During the session, the 110-year-old Dow climbed to 11,758.95, topping its previous intraday record of 11,750.28 reached on January 14, 2000, when investors rode the Internet stock mania. It crashed two months later.

The blue-chip Dow average also hit a record closing high, rising 56.99 points, or 0.49 percent, to end at 11.727.34 -- above its previous record close at 11,722.98, set on January 14, 2000.

Falling oil prices was key.

U.S. crude oil futures prices ended nearly 4 percent lower, after hitting fresh seven-month lows, dragged down by a U.S. inventory glut and a fading hurricane threat.

Crude for November delivery fell $2.35, or 3.9 percent, to settle at $58.68 a barrel on the New York Mercantile Exchange. Its session low was $58.60, the lowest front-month crude futures price since February 16.

US manufacturing slows, stronger elsewhere

After some contradictory data in the past few weeks, we have confirmation that US manufacturing growth slowed in September. From Reuters:

The Institute for Supply Management's manufacturing index fell to 52.9 in September, its lowest since May 2005. That was down from 54.5 in August and modestly beneath a median Wall Street forecast of 53.5. A reading above 50 indicates an expansion.

But elsewhere in the US economy, the slowdown does not appear to be too drastic.

At the very least, a recent drop-off in home sales appeared to be abating, with an index of pending home sales rising 4.3 percent in August -- the first increase since May.

Construction spending also grew unexpectedly in August, but that was only because commercial and public projects offset more declines in home-building. Spending rose 0.3 percent, confounding estimates for a 0.3 percent decline.

There was also little evidence of a manufacturing slowdown elsewhere in the world. The JPMorgan Global Manufacturing PMI edged down just 0.1 point to 54.9 in September. The PMI for the euro zone was unchanged from the upwardly-revised August reading of 56.6, while in the UK, it rose to 54.4 from a downwardly revised 53.0 in August.

David Hensley, director of Global Economics Coordination at JPMorgan, commented on the global manufacturing survey as follows:

The latest PMI report showed an improvement in the flow of new orders and, at the same time, a slower pace of inventory accumulation. These developments, if sustained, would remove some of the downside risk to production growth in coming months. The survey also recorded a notable reduction in input cost pressures.

South Korean exports, Japanese business sentiment up

The latest economic news from Asia point to continued growth.

Yesterday, AFP/CNA reported that South Korean exports hit a record high in September.

South Korea's exports jumped 22 percent year-on-year to hit a record high of some US$30 billion in September thanks to robust overseas demand, government data showed Sunday...

Imports also rose 22.8 percent year-on-year to US$27.90 billion in September, putting the trade surplus at US$2.03 billion, 13 percent up from a year earlier, the report said.

Today, we have news of improved business sentiment in Japan.

Sentiment among large manufacturers rose to plus 24 from plus 21 in June, the Bank of Japan said in its closely watched "Tankan" survey of almost 10,000 companies.

The figure was well above the 21 level expected by the market. A positive reading means that confident firms outweigh pessimistic ones.

That helped the Nikkei 225 rise 126.71 points to close at 16,254.29 today, but unlike the US and Europe, the Japanese stock market is still quite some way off its high for the year.

Andy Xie resigns

Morgan Stanley's Global Economic Forum won't be as much fun to read from now on.

From Reuters/Yahoo! News:

Morgan Stanley's star Asia analyst Andy Xie has left the firm to embark on a new career elsewhere, the U.S. investment bank and an industry source said on Sunday.

Xie, whose widely-read reports on the Chinese economy have boosted Morgan Stanley's image in the region, tendered his resignation last week and had left the firm as of Friday, said Hong Kong-based spokeswoman Po-ling Cheung.

"An internal memo was sent out (on Friday) informing employees that he has resigned from the firm," she said by telephone. "He has left the firm," she added.

Hong Kong-based Xie confirmed the news by telephone, but declined to say what he would do next.

A source close to Morgan Stanley said Xie would likely join another firm in the industry in the near future. Another source said he could become involved with the fund management sector.