US 3rd quarter growth revised up, new home sales fall

US third quarter GDP growth has been revised up. MarketWatch reports:

The U.S. economy grew at a 2.2% annual pace in the third quarter, a bit faster than the 1.6% initially estimated, but down from the 2.6% in the previous quarter, the Commerce Department reported Wednesday in its first revision to the gross domestic product report.

Revisions came largely from greater building of inventories and lower imports than originally assumed. Business investment also grew more than first estimated, while consumer spending was slightly slower. Read the full government report.

The revisions drew mixed reactions from analysts.

The report "will go a long way toward marginalizing the market's recession fears," wrote economists for Action Economics on their Web site...

Because much of the upward revision was due to inventory growth, the implications for the fourth quarter's growth could be negative, wrote Joshua Shapiro, chief economist for MFR. "Growth in the fourth quarter looks to have gotten off to a soggy start."

The inflation rate was revised down slightly.

Meanwhile, a key measure of core inflation was revised a tenth of a percentage point lower, to 2.2%. Year-over-year growth in the core personal consumption expenditure price index was unrevised at 2.4%, thus remaining well above the Federal Reserve's implied target of 1% to 2%.

And there was better news for shareholders.

Corporate profits increased 4.2% at a quarterly rate, or $66.2 billion, in the third quarter, compared with a 1.4% gain in the second quarter. Profits were up 30.9% on a year-on-year basis, the fastest growth in 22 years, but the comparison came against the devastating impact that Hurricane Katrina had on profits last year.

The report also showed that wages and salary growth was much lower than expected in the second quarter. The revised estimates show real disposable incomes falling 1.5% in the second quarter, compared with a 1.7% gain previously reported. Real disposable incomes rose 3.7% in the third quarter.

Nigel Gault at Global Insight points out that the revisions to labour compensation implies less threat for price inflation, but "profits hit 12.4% of GDP in the third quarter, their highest share in nearly 56 years".

But the third quarter is now history. The Fed's beige book looks at more recent conditions. Again from MarketWatch:

Economic conditions have improved slightly over the past month, with increasing retail sales and cautious optimism about the holiday-shopping season, the Federal Reserve's latest survey of economic conditions found.

But the survey found that housing remains weak, a view supported by figures on new homes sales. MarketWatch reports:

Sales of new homes fell 3.2% in October to a seasonally adjusted annual rate of 1.004 million, the Commerce Department estimated Wednesday.

New-home sales are now down 25.4% in the past year...

Median sales prices were up 2% in the past 12 months to $248,500, reversing a trend toward falling prices year over year. Sales of houses priced less than $200,000 decreased by 16%.

Meanwhile, the number of new homes on the market dropped 0.7% to 558,000, marking the third straight decline. The inventory represents a 7-month supply at the current sales pace, up from 6.7 months in September; it peaked at 7.2 months in July.

Mortgage applications also fell last week, according to another MarketWatch report.

The number of applications for mortgages at major U.S. banks dropped 3.9% on a seasonally adjusted basis last week compared to the prior week, the Mortgage Bankers Association reported Wednesday.

Applications were also were down on a year-over-year basis, lower by 1.6%.

However, Calculated Risk points out that "seasonally adjusted purchase applications have moved up slightly over the last few weeks", although October new homes sales had been "another very weak report".

There are no fears about a weak housing market in the UK though. FT reports:

Mortgage approvals in October reached their highest level in nearly three years, the Bank of England said on Wednesday, further evidence that higher interest rates have as yet failed to derail the property market...

Total net lending to individuals...rose by £10.9bn last month...higher than the six-month average of £10bn, and means the total amount of debt outstanding is £1,268bn.

The Bank also said that growth in broad money supply, or M4, was up by 14.1 per cent year-on-year, a pace of increase it has made clear it finds unsettling.

US and Japan show more signs of slowdown, Europe still looks hot

The OECD released its economic outlook yesterday. It said that activity has slowed in the United States and Japan but that the slowdown "should remain well-contained". In the meantime, activity has gathered speed in Europe. These conclusions certainly appear consistent with recent economic reports.

Yesterday's data from the US show that the economy continues to slow. Reuters reports:

Speaking at a luncheon in New York, [Fed chairman Ben] Bernanke said measures of core inflation...should ease gradually. He said, however, that risks to that forecast were still to the upside...

Bernanke also said the slowdown in the U.S. housing market had so far had little spillover effect on the rest of the economy and he said housing might already be stabilizing.

A report from the National Association of Realtors, which showed a surprise rise in existing home sales to a 6.24 million-unit annual rate in October, supported that view...

The pickup in home resales came on the back of falling prices. The industry group said the median home price dropped 3.5 percent from year-ago levels, the largest decline since records began in 1968.

While that spurred sales, inventories of homes for sale still rose 1.9 percent from September to 3.85 million units...

The Conference Board said its index of consumer sentiment slid to 102.9 this month from 105.1 in October. It was the lowest reading since August...

Orders for durables goods...fell 8.3 percent last month, the biggest drop since July 2000, the Commerce Department said...

The decline was propelled by a 21.7 percent fall in transportation orders...

But even excluding transportation, orders declined by 1.7 percent...

A proxy for business spending, orders for non-defense capital goods excluding aircraft, also took an unexpected dive, off 5.1 percent...

The higher inventory of existing homes means that the news on the housing market is mixed at best despite the higher sales number.

Earlier yesterday, we had news that indicates that Japan is unlikely to help offset any fall in consumer demand from the US. From Bloomberg:

Receipts at retailers fell a seasonally adjusted 0.2 percent in October from a month earlier amid warmer-than-usual weather, the trade ministry said today. Sales of winter clothes and electronics led the decline.

The good news for Japan, though, is that industrial production rose in October. Today from Bloomberg:

Factory output climbed a seasonally adjusted 1.6 percent from a month earlier, the Ministry of Economy, Trade and Industry said in Tokyo today. Gains were led by autos and semiconductors as production rose 7.4 percent from a year earlier, the biggest jump in more than two years.

At least Germany provided better news on the consumer yesterday. Again from Bloomberg:

A confidence index compiled by GfK AG and based on a November survey of about 2,000 people that aims to forecast households' expenditure one month ahead, increased to 9.4, the highest level since November 2001, from a revised 9.3, the Nuremberg-based market research company said in an e-mailed statement today. That matched the median of 24 forecasts in a Bloomberg News survey of economists.

"It was primarily driven by a rational decision to bring forward purchases, rather than shopping for fun" said Klaus Wuebbenhorst, chief executive officer at GfK. "But in general people are more comfortable with the economic outlook as unemployment falls."

In fact, the eurozone economy on the whole may still be a little too hot for the ECB. From FT:

Faster growth in eurozone lending to business on Tuesday strengthened the case for further European Central Bank interest rates increases as a governing council member dismissed French politicians’ concern about the euro’s rise as a “Pavlovian reaction”.

Lending to non-financial corporations increased at an annual rate of 12.9 per cent last month – up from 12.7 per cent in September and the fastest since the launch of the euro in 1999, according to ECB figures on Tuesday...

... M3, the broad money supply measure that the ECB uses to help forecast longer term inflationary trends, continued to grow at a brisk pace in October. However, the 8.5 per cent annual growth rate for M3 was lower than expected and unchanged from September.

... Figures for eurozone lending to households showed lending for house purchases decelerated from an annual growth rate of 11 per cent in September to 10.4 per cent in October. Growth in consumer credit slowed from 8.3 per cent to 7.7 per cent.

UK housing market robust but retailers face gloomy Christmas

Reuters reports that UK house prices are still rising.

Property consultant Hometrack said prices rose 5.3 percent in November compared with a year ago, up from 4.9 percent in October. On the month, prices were 0.6 percent higher, although the monthly figures are not seasonally adjusted.

As are mortgage approvals.

Mortgage approvals rose 3.7 percent in October from a year ago, the British Bankers' Association said on Monday, in a further sign rising interest rates have not yet dented the property market.

But UK retailers remain as gloomy as ever.

Seymour Pierce's Richard Ratner, who has followed the sector for 25 years, said his data showed sales for the bulk of the UK rag trade were down 10 to 20 percent in the past two weeks, with Debenhams and Next looking among the weakest.

"We now believe that Christmas in 2006 will be worse than 2005 and could be as difficult as or even softer than 2004, which was the worst Christmas for 23 years. If the latter is the case, it will make it the worst for 25 years," Ratner wrote.

Ratner's gloomy forecast comes after several bellwether British non-food merchants reported low-key sales and warned of the effects of two quarter-point interest rate hikes this year, soaring energy bills and rising unemployment.

US and Japanese yield curves: What they add up to

With economists divided over whether the United States economy is headed for a soft or hard landing, the debate over the reliability of forecasting models is taking on increasing importance, and probably none more than the debate over the reliability of the yield curve as a forecasting tool. And in a globalised economy, there is little reason to restrict the debate to just the yield curve in the US.

On 24 November, John Fernald and Bharat Trehan, vice president and research advisor respectively at the Federal Reserve Bank of San Francisco, published an economic letter that asked: "Is a Recession Imminent?"

"The yield curve is perhaps the best known of all the indicator models used to predict recessions," they wrote. "Based on data for November 8, the model estimates a 47% probability of recession over the next four quarters."

However, they also wrote that the probability of a recession over the next year may not as high as the yield curve suggests. "There is reason to be skeptical about the current high estimate of the probability of recession, because the unusually low rates at the long end of the yield curve are not well understood," they wrote.

They cited another model developed by Michael Dueker that also included real GDP growth and CPI inflation as variables in a vector autoregression model. According to Fernald and Trehan, this model predicts some further deterioration in business conditions over the next year but "does not see much more than a 10% chance of a recessionary quarter over this period".

Fernald and Trehan also found that surveys of forecasters had estimates of the probability of recession that "are all lower than the one based on the term spread and the yield curve", while financial markets "exhibit little evidence of distress", with the Dow Jones Industrial Average hitting record highs recently and various risk spreads at low levels.

Therefore, they concluded that "while the probability of recession might have gone up somewhat in recent months, it is not yet at worrisome levels", and suggested that "it may be useful to supplement data from the surveys with data from indicator models that attempt to measure the current state of the economy".

Actually, there is a simple way to reconcile the forecast made from the yield curve with the other forecasts -- and without even straying away from the yield curve. Just factor in the Japanese yield curve.

Because Japan is fighting deflation, the Bank of Japan has kept monetary policy easy and interest rates low. This has allowed investors to fund investments elsewhere by borrowing at the lower rates in Japan -- the so-called yen carry trade. This at least partially explains the low interest rates in the United States and elsewhere.

In other words, the low rates at the long end of the yield curve in the US could be a sign of an excessive supply of money, not just of inadequate demand for it. And excessive money supply is normally a stimulant for the economy. Fernald and Trehan have good reason to be skeptical about the high probability of recession based on the US yield curve alone.

So can we still use the yield curve to forecast the US economy? Yes, but we should also take the Japanese yield curve into account. After all, if Japanese monetary expansion tends to invert the US yield curve, US monetary restriction tends to steepen the Japanese yield curve. Adding the Japanese yield curve to the US yield curve offsets some of the misleading bearish signal from the latter alone.

The chart below shows the real US GDP year-on-year growth from 1986 to 2006, and compares it with the spread between the yield on the 10-year government note and the central bank's benchmark rate for both the US and Japan. It also shows how a simple average of the two spreads vary over the period.

The chart shows that the combined spread is actually still in positive territory. So the US economy is possibly in better shape than the US yield curve alone implies.

Two caveats, though. Firstly, the current value of the combined spread is about the same as it was in 2000, just before the 2001 recession; that is not exactly a comforting thought. Secondly, both the US and Japanese yield spreads are pointing south with no sign of an interest rate cut whatsoever from either the Federal Reserve nor the Bank of Japan, which means that the prognosis for the economy could be getting worse.

Finally, if Japan's yield curve moderates the pessimistic message from the US yield curve, Japan's stock market can also arguably be used to dampen the optimistic message from the US stock market. While the Dow Jones Industrial Average is up 14.6 percent year-to-date as at the close on 24 November and is near an all-time high, suggesting strong economic growth, the Nikkei 225 is down 2.4 percent year-to-date based on the same day's close.

That is perhaps yet another reason to watch the Japanese markets.

US dollar falls

The US dollar fell yesterday, the extent of the fall probably exacerbated by thin trading. Reuters reports:

The dollar fell sharply on Friday, pushing the euro above $1.31 for the first time since April 2005, on concerns about central banks diversifying their reserves and the greenback's narrowing yield advantage over other currencies.

The dollar's fourth consecutive session of weakness was the culmination of a host of negative developments over the last several weeks, including weaker-than-expected U.S. economic data and comments from central banks in Asia and the Middle East underscoring the risk of keeping large reserves of dollars.

The economic news from Europe would also have played a part.

Bloomberg reports that in Germany, inflation was higher than expected in November.

German inflation accelerated more than expected in November as prices for seasonal food and gas rose in Europe's largest economy, underlining the European Central Bank's case for raising interest rates next month.

Prices increased 1.5 percent from a year ago using a harmonized European Union method, the Federal Statistics office in Wiesbaden said in a faxed statement today. From October, prices dropped 0.1 percent.

Bloomberg also reports that French business confidence stayed high in November.

French business confidence held near a five-year high in November on lower oil prices and declining unemployment as executives anticipate a fourth-quarter pickup in economic growth.

Insee, the Paris-based national statistics office, said today its index of sentiment remained at 107 this month after October's reading was revised down to 107. The gauge reached 109 in April, the highest since March 2001.

And British economic growth was confirmed at 0.7 percent in the third quarter.

US stocks fell yesterday while Treasuries rose, but things may not be so bad for the economy if this Reuters report on "Black Friday" shopping is anything to go by.

Business confidence up in Germany, down elsewhere in Europe

Bloomberg reports that Germany's economy is slowing.

Gross domestic product, the value of all goods and services, rose 0.6 percent from the second quarter, when it increased 1.1 percent, the Federal Statistics Office in Wiesbaden said today, confirming a previous estimate from Nov. 14.

However, German business confidence remains high, according to another Bloomberg report.

The Ifo institute's sentiment index, based on responses from 7,000 executives, climbed to 106.8 from 105.3 in October, touching a level last reached in June. The gain exceeded all 41 estimates in a Bloomberg News survey, which showed economists expected a decline to 105.2. Bonds fell and the euro advanced...

The Ifo index's expectations component, gauging executives' assessment of business conditions in six months, rose for a second month, to 100.1 from 99.2. A separate index of current conditions advanced to 113.9, the highest since February 1991, from 111.9.

On the other hand, the Isae Institute's Italian business confidence index fell to 96.8 in November from 97.1 in October while the National Bank of Belgium's business confidence index fell to 3.5 in November from 3.8 in October.

US consumer sentiment dips, Japanese economic outlook lowered, Europe looks resilient

Consumer spending in the US appears poised to slow further. Reuters reports:

The University of Michigan's final reading of its November index of consumer sentiment fell to 92.1 from October's final reading of 93.6. Economists polled by Reuters had expected a final November reading of 93.1...

Many Americans do not plan to spend lavishly during the holidays, despite a healthy job market and income gains this year as higher energy costs and tight finances still leave many families feeling stretched, surveys have found...

Meanwhile, the Labor Department said the number of U.S. workers applying for jobless benefits rose by an unexpectedly steep 12,000 in the week ending November 18.

Overall, jobless claims rose to 321,000 in the week, which compares with Wall Street forecasts for claims of 310,000. This follows a revised 309,000 the previous week.

This comes as mortgage applications fell for the first time in three weeks.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and purchasing loans, for the week ended Nov. 17 dropped 3.7 percent to 623.6 from the previous week's 647.5.

Applications were 1.9 percent below their year-ago level.

On the other hand, leading indicators are pointing up.

The Economic Cycle Research Institute...said its Weekly Leading Index edged up to a 27-week high of 138.2 in the week ended Nov. 17 from a downwardly revised 138.1 in the prior week.

Japan could do with an improvement in consumer spending too, especially after yesterday's data. Reuters reports:

The October customs-cleared trade surplus was down 24.8 percent from the same month last year to 614.7 billion yen ($5.22 billion), well below analysts' median forecast of a surplus of 760.0 billion yen.

While exports rose 11.6 percent from a year earlier to 6.594 trillion yen, that was outstripped by a 17.4 percent rise in imports to 5.980 trillion yen, the Ministry of Finance data showed...

On a seasonally adjusted basis, the trade surplus rose 48.1 percent from September to 649 billion yen, the data showed...

Separate data on Wednesday showed that the all-industries index, which covers a broad range of economic activity including the tertiary activity index, fell 0.9 percent in September from the previous month.

The Japanese government has been forced to lower its assessment of the economy's prospects. Bloomberg reports:

Japan's government lowered its evaluation of the economy for the first time in almost two years, after sluggish wage growth prompted a slump in consumer spending.

"The economy is recovering, despite some weakness in consumption," the Cabinet Office said in its report for November in Tokyo today. "Private consumption is almost flat, " it added, cutting the assessment for the first time since December 2004.

There was better news on the consumer front in Europe. From Bloomberg:

In France, spending on manufactured goods, which accounts for about 15 percent of the economy, gained 0.9 percent in October from September, when it dropped a revised 2.5 percent, Insee, the Paris-based national statistics office, reported today. An index of Italian consumer confidence rose to 109.2 this month from 108.6, the Isae Institute said in Rome.

And while industrial orders fell in September, it was by less than expected. From AFX/FXstreet.com:

Euro zone industrial orders fell 1.3 pct in September from August, but were still up 7.6 pct year-on-year, EU statistics office Eurostat said.

The decline was milder than expected. Economists polled by AFX News were looking for a month-on-month fall of 2.7 pct following a sharp drop in German manufacturing orders.

Global economic outlook falls

Bloomberg reports that according to Germany's Ifo institute, confidence in the global economy's growth prospects fell in the fourth quarter while inflation risks eased.

The World Economic Climate index fell to 104.7 from 105.6 in the third quarter, the institute said in an e-mailed statement today. A gauge of current conditions rose to 120.5 from 115.1...

The measures for North America and Europe declined in the fourth quarter, according to the Ifo. The index for Asia rose to 109.3 from 102.8.

The Bank of Japan at least thinks that the Japanese economic expansion remains on track, according to the minutes from its October 12-13 meeting.

Meanwhile, a survey from the Confederation of British Industry showed export orders rebounded to +3 this month, the first positive balance since February 1996 and the highest since August 1995, helping total orders recover to -6 from -20 in October. Price expectations also rose.

Elsewhere, the economic news yesterday was somewhat downbeat.

In Italy, industrial sales fell 5.9 percent in September from August on an adjusted basis while orders fell 5.2 pct.

In Canada, a record fall in gasoline prices and tumbling auto sales drove Canadian retail sales down by a sharper-than-expected 1.2 percent in September, the largest monthly setback so far this year. However, the composite leading indicator did rise 0.2 percent in October, down from a 0.4 percent rise in September.

And the global utilisation rate of microchip plants fell to 88.6 percent in July-September, according to data compiled by the Semiconductor International Capacity Statistics (SICAS) group.

Is higher inflation a greater concern than slower growth?

The ECB continues to warn about inflation. Bloomberg reports:

European Central Bank President Jean-Claude Trichet said he and his Group of 10 colleagues must be "strongly vigilant" about the risk of inflation because of dynamic global growth.

However, the German Federal Statistical Office reported yesterday that the index of producer prices for industrial products was up 4.6 percent in October 2006 from the corresponding month of the preceding year, down from 5.1 percent and 5.9 percent in September and August respectively.

The data from the UK yesterday was perhaps more supportive of Trichet's view. M4 money supply growth eased in October to 0.9 percent, but the annual growth rate was 14.0 percent, just slightly down from the 16-year high of 14.5 percent in September. In the meantime, the latest reading of the Rightmove house price index showed that average asking prices for houses in England and Wales rose 12.4 percent year-on-year between October and November, the fastest pace in 2 years, taking prices to a record high. The UK housing market has clearly been supported by strong lending, as net mortgage lending rose by 5.5 billion pounds in October according to the British Bankers' Association yesterday, up from a 5.4 billion pounds increase in September and just below the monthly average of 5.6 billion over the last six months.

Meanwhile in the US, slow growth looks likely to continue, based on the Conference Board's leading index for the US economy.

The Conference Board announced today that the U.S. leading index increased 0.2 percent, the coincident index increased 0.1 percent and the lagging index increased 0.2 percent in October...

The leading index now stands at 138.3 (1996=100). Based on revised data, this index increased 0.4 percent in September and decreased 0.3 percent in August. During the six-month span through October, the leading index decreased 0.2 percent, with five out of ten components advancing (diffusion index, six-month span equals fifty-five percent).

Nevertheless, the increase in the leading index in October at least gives some credence to Morgan Stanley's Richard Berner's view that US growth and inflation might yet pick up.

As I see it, the case for lower inflation — over time — is solid, and we still think that inflation will peak over the next several months. But the judgment that the peak has already passed is likely premature for three reasons. First, inflation expectations are still slightly elevated despite the slide in energy quotes over the past three months. Second, while growth has slipped below trend, measures of slack in both product and labor markets continue to suggest that companies have pricing power and that costs are likely to rise. And we continue to expect a pickup in growth, which would refresh pricing power and push costs higher. Finally, and perhaps most controversially, the global dimension matters: Global growth relative to capacity is still strong, boosting US import prices despite relative stability in the dollar. As a result, I believe that the current inflation lull won’t last and that inflation risks are still tilted higher.

Singapore GDP growth and energy intensity

The Ministry of Trade and Industry has released the Singapore economy's third quarter performance.

Growth of the Singapore economy eased to 7.2 per cent in the third quarter, following an 8.2 per cent gain in the preceding quarter. Growth momentum (on an annualised quarter-on-quarter basis) rose to 5.7 per cent, up from 3.9 per cent in the second quarter.

Year-on-year growth was boosted by a 23.4 percent surge in government expenditure and a 10.3 percent jump in gross fixed capital formation. Growth in private consumption expenditure was less impressive at 2.2 percent, while the external sector continues to be an important source of growth, exports and imports growing by 10.3 percent and 10.9 percent respectively and helping manufacturing grow 10.6 percent.

All figures are in real terms.

The Ministry appears sanguine about the outlook.

Overall, the economic outlook remains benign. But there are several downside risks. First, a sharp correction in the US housing market could have knock-on repercussions on the US economy and rest of the world. Second, inventory adjustments in the semiconductor industry could pose a drag on the electronics industry. Third, although oil prices have retreated from the record levels in July, they remain high and vulnerable to supply shocks. Other risks include the huge global imbalances, Avian flu pandemic
and terrorism.

Taking into account the above factors, the Ministry of Trade and Industry has revised the 2006 economic growth forecast from 6.5 – 7.5 per cent to 7.5 – 8.0 per cent. Economic growth in 2007 is expected to be 4.0 – 6.0 per cent.

There was also a feature article on the energy intensity of the Singapore economy. The conclusion:

After accounting for marine bunkers, Singapore’s energy intensity is roughly on par with countries of the same level of development. Compared to less energy intensive economies, Singapore’s higher energy intensity is due mostly to the use of energy in the manufacturing sector, the consumption of fuels as feedstock in the petrochemicals industry and the sale of jet fuel to the international civil aviation sector.

Is the US housing market bottoming yet?

The latest data reported by Reuters suggests not.

New home starts dropped 14.6 percent to their lowest level in more than six years in October and building permits fell 6.3 percent, according to the Commerce Department.

Data earlier this week had been more optimistic.

... The National Association of Homebuilders/Wells Fargo Housing Market Index on Thursday got a two-point bump to 33 points in November...

On Wednesday, the Mortgage Bankers Association reported that applications for U.S. home mortgages rose last week to their highest level since January as falling interest rates encouraged more loan refinancing.

Perhaps that is why Rodrigo Rato, managing director of the International Monetary Fund, is still warning of inflation risks. Reuters reports:

"We see a need for central bankers, not only in industrialized countries but certainly in emerging ones, to be extremely vigilant on inflationary pressures," Rato told a briefing ahead of a two-day G20 meeting of finance ministers and central bank chiefs.

Rato said he sees no sign that oil prices will fall any time soon and the scope for excess production capacity in the world economy is becoming more limited.

Oil markets apparently think otherwise.

Oil fell on Friday to the lowest level since June 2005 amid fund selling across commodity markets and worries of an economic slowdown in the United States.

High U.S. oil inventories heading into winter and selling pressure ahead of the expiry of the front-month U.S. crude contract at the close of trading fueled the selling.

The expiring December U.S. crude contract settled down 45 cents at $55.81 a barrel, the lowest settlement price since June 15, 2005. The price of oil has fallen nearly 30 percent from the record high of $78.40 in July.

London Brent crude for January delivery settled up 45 cents at $58.99...

Base metals also slid on concern that global demand for raw materials would suffer if the world's largest economy slows. London copper prices fell to their lowest levels since June.

BoJ holds rates amid mixed global inflation and economic data

As expected, the Bank of Japan kept interest rates unchanged yesterday. FT reports:

The BoJ kept interest rates at 0.25 per cent on Thursday, after a disappointingly low headline inflation rate of 0.2 per cent in September. However, [central bank governor Toshihiko] Fukui has made it clear the bank is prepared to move pre-emptively against inflation, even if there are no obvious signs of pricing pressure in the core consumer price index.

A fall in the demand for services in September probably factored in the BoJ decision, Bloomberg reporting on Wednesday that the tertiary index dropped 1.3 percent from a month earlier and 0.7 percent for the three months to September, the biggest quarterly drop since 1998.

Inflation has been low in the United States recently as well. Reuters reports the economic news from the US yesterday.

A fall in energy prices helped drive U.S. consumer prices down by a more-than-expected 0.5 percent in October and even stripping away volatile food and energy costs, prices were up only 0.1 percent, according to a Labor Department report on Thursday...

A separate Labor Department report showed little change in labor market conditions. The number of workers signing up for jobless benefits inched down to a seasonally adjusted 308,000 last week from 310,000 the prior week. The four-week average of these claims, which irons out weekly fluctuations, inched up to 313,750 from 311,750.

On the industrial front, however, output at U.S. factories, mines and utilities rose a smaller-than-expected 0.2 percent in October, as production of motor vehicles dropped for the second month in a row.

Factory production fell 0.2 percent as output at motor vehicle plants sunk 3.9 percent last month and more than 10 percent from the same time a year ago, according to Fed data...

Another survey of manufacturing showed a rebound in activity in the Mid-Atlantic region during November. According to the Philadelphia Federal Reserve Bank, business at factories in that region rebounded in November after contracting for the past two months, in line with Wall Street expectations.

However, an index for new orders in that report, which is seen as a key gauge of future growth, fell and the six-month business outlook slipped.

Another regional survey released the day before, the Empire State Manufacturing Survey, had shown that the general business conditions index for New York climbed for a third consecutive month to 26.7 in November, its highest level since June.

As for inflation, Calculated Risk remarks that monthly CPI "is a very noisy series" and that he prefers the Cleveland Fed's median CPI, which showed a less-benign 0.3 percent increase for October.

But more good news -- relatively speaking -- came in the form of improved home builder confidence.

[H]ome builder confidence in November edged up for the second consecutive month, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI gained two points from the previous month to stand at 33.

There was also inflation news from the euro area. Bloomberg reports:

Consumer prices rose 1.6 percent from a year earlier, below the 1.7 percent gain in September and matching the estimate published Oct. 31, Eurostat, the European Union's statistics office in Luxembourg, said today. The October inflation rate is the lowest since February 2004...

Excluding volatile energy, food and tobacco prices, the so- called core rate of inflation was 1.5 percent in October, unchanged from the previous month.

But the ECB is still widely expected to raise rates further, even with the news the day before that seasonally-adjusted industrial production in the euro area fell 1.0 percent in September, reversing the strong 1.7 rise in August.

Even China is cooling. On Wednesday, Xinhua Online reported that China's year-on-year growth rate in industrial production fell to 14.7 percent in October, down 1.4 percentage points from September, while yesterday, Reuters reported that annual growth in Chinese fixed investment eased more than expected in the first 10 months to 26.8 percent, down from 28.2 percent in the first nine months and a peak of 31.3 percent in the first half.

The data from the UK have been more contradictory. On Wednesday, Reuters reported that average earnings growth in the three months to September slowed to its weakest rate since January while the jobless rate rose to its highest in more than six years, although the number of people claiming jobless benefits rose by less than expected in October.

Yesterday, however, it reported that house prices rose at the quickest pace in more than four years during the three months to October. And retail sales rose 0.9 percent in October, their fastest monthly pace in almost a year and reversing September's 0.4 percent drop, though the price deflator eased to stand 0.1 higher percent on a year ago compared with September's upwardly revised 0.7 percent rise.

The Bank of England, however, expects inflation to rise in the near term. From Reuters:

Inflation will likely rise further above its 2 percent target in the near term before falling back to meet it, Bank of England Governor Mervyn King said on Thursday in a speech that repeated comments in the Inflation Report.

Possibly. And hopefully, when it does fall, consumer price inflation stays down longer than house price inflation did.

US retail sales, producer prices fall, mixed news elsewhere

The data from the US yesterday were consistent with continued slowdown in the economy. MarketWatch reports that retail sales fell:

Retail sales fell 0.2% in October after sinking a downwardly revised 0.8% in September... Excluding gasoline, retail sales rose 0.4%... Excluding autos, retail sales dropped 0.4%... Sales excluding both cars and gas rose 0.3% for the second straight month.

...as did producer prices:

In a separate report, the Labor Department said producer prices fell a greater-than-expected 1.6% in October, while core prices (which exclude food and energy) tumbled 0.9%.

Some economists downgraded their growth forecasts yesterday.

The weaker-than-expected sales figures led Lehman Bros. to lower its estimate of fourth-quarter growth to 2.8% from 3.2% annualized.

"We anticipate an average Christmas sales season, followed by aggressive discounting by retailers late in the month and into early January," said Roger Kubarych, an economist for HVB. "The rest of the winter will be much tougher for retailers, we suspect."

But some remain hopeful.

"While sales growth will slow, it will not collapse," [Scott] Hoyt wrote in an analysis published on Economy.com.

The news from the rest of the world was somewhat mixed.

Bloomberg reports a slowdown in Europe.

The euro-area economy expanded 0.5 percent from the previous quarter, when it grew 0.9 percent, Eurostat, the European Union's statistics office in Luxembourg, said today...

The German confidence index declined to minus 28.5 in November from minus 27.4 in October, the ZEW Center for European Economic Research said...

U.K. inflation was a slower-than-expected 2.4 percent in October, according to a report today by the Office for National Statistics in London...

Germany's economy, Europe's largest, expanded 0.6 percent in the latest three months from the second quarter, when it grew 1.1 percent, a government report showed today. That was slower than the 0.7 percent forecast in a Bloomberg survey. Italy's economy expanded 0.3 percent in the latest quarter, half the pace of the prior period.

Japan, on the other hand, performed better than expected. From Channel NewsAsia:

GDP growth came in 0.5%, much better than the 0.3% the markets were expecting...

Exports led the growth -- expanding by 2.7% -- while capital investment grew 2.9%...

[P]rivate consumption, which accounts for 55% of GDP, dropped 0.7% -- its biggest fall in three quarters.

For rapidly growing consumption, look to China. From Reuters:

China's annual retail sales growth quickened to 14.3 percent in October, the government said on Tuesday, beating expectations and confirming a well-entrenched trend of sturdy spending.

However, the World Bank thinks the Chinese economy needs to place even more reliance on domestic demand even as the overall economy cools in 2007. AFP/CNA reports:

The World Bank expects China's economy to grow by 10.4 percent this year and cool to 9.6 percent in 2007, but has warned that such fast paced growth was exacerbating structural imbalances...

Beijing needed to shift production from industry to services and rely more on domestic demand, strive for more even economic development across its population and environmentally sustainable growth, the report said.

The yield curve: Not so bearish for the economy

James Hamilton at Econbrowser does a very nice summary of the latest research on the yield curve. The key conclusions, drawn primarily from a recent paper by Glenn Rudebusch, Brian Sack and Eric Swanson, are as follows:

[T]he yield spread can be decomposed into an expectations component and the term premium...

... [T]he term premium appears to be countercyclical, rising when output is low. This is the opposite of the relation found by myself and other previous researchers, and suggests that it is only the expectations component that accounts for the anticipatory procyclical behavior of the yield spread...

The Kim-Wright measure of the term premium has declined substantially over the last four years... To the extent that the decline in the yield spread does represent a fall in the term premium, and if indeed a fall in the term premium itself does not signal an economic slowdown, it means that the current negative yield spread does not have quite as bearish a connotation as the historical correlation between the yield spread and output might otherwise suggest.

China's money supply growth accelerates but inflation decelerates

China's money supply growth unexpectedly accelerated in October. Bloomberg reports:

M2, the broadest measure of money supply, jumped 17.1 percent to 33.3 trillion yuan ($4.2 trillion) at the end of October after rising 16.8 percent in September, the central bank said on its Web site today. Economists expected growth of 16.5 percent, according to the median of 17 estimates collected by Bloomberg News...

Outstanding yuan loans stood at 22.1 trillion yuan at the end of last month, 15.2 percent higher than a year earlier, the central bank said today. Growth in outstanding loans has slipped from 16.3 percent in July...

Net of redemptions, banks issued 17 billion yuan of new loans last month, down from 26.4 billion yuan a year earlier. October is typically a slow month for new lending.

But the rapid expansion of money supply is producing little inflation at the moment. From another Bloomberg report:

The consumer price index advanced 1.4 percent from a year earlier after rising 1.5 percent in September, the Beijing-based National Bureau of Statistics said in a statement today. That's less than the 1.6 percent median forecast in a Bloomberg News survey of 16 economists...

... Producer-price inflation unexpectedly slowed in October... The producer price index, which shows the price of goods at the factory gate, climbed 2.9 percent from a year earlier, the government said last week, the smallest increase since May.

House prices, though, continue to rise rapidly. From Xinhua Online:

The prices of newly-built houses in 70 major Chinese cities rose an average 6.6 percent in October over the same period of last year, up 0.3 percentage point from the previous month, said the National Bureau of Statistics (NBS) and the National Development and Reform Commission (NDRC) Monday in a joint statement...

Second-hand house prices in these 70 cities rose 5.2 percent in October over the same period last year, 0.3 percentage point faster than September, according to figures from the NBS and NDRC.

The inflation story in the UK is similar, Reuters reporting that factory gate inflation slowed to its weakest rate in 2-1/2 years in October but house prices rose 8.0 percent year-on-year in September, the highest since March 2005.

There also appears little inflation pressures in Japan, Kyodo/Yahoo! News reporting that wholesale prices rose 2.8 percent in October from a year earlier but fell 0.3 percent from September.

APEC drives for free trade in Vietnam as Japanese surplus rises in September

The Asia-Pacific Economic Cooperation group usually does not get too much done at its meetings. Nevertheless, as the following AFP/CNA report says, its members collectively represent a large part of the global economy.

HANOI : The drive for free trade emerged as the early focus of the annual Asia-Pacific forum as senior officials opened a week of talks in Vietnam ahead of a summit of leaders from 21 key economies.

North Korea's nuclear ambitions also feature large on the agenda after its shock October 9 atom bomb test and subsequent promise to return to six-nation disarmament talks.

For communist Vietnam, though, the Asia-Pacific Economic Cooperation (APEC) meeting is perhaps above all a chance for East Asia's fastest-growing economy after China to underline its arrival on the world stage.

The banners are in place, security has been ramped up and a new convention centre built at a cost of nearly US$270 million to host Vietnam's biggest ever diplomatic event.

Hosts Vietnam last week received approval from the World Trade Organization (WTO) to become its 150th member (see Reuters story). Its average economic growth rate over the past five years has been 7.4 percent, higher than any other Asian country except China. With WTO membership, will it also replicate China's trade performance?

But China is not the only major Asian economy with a large trade surplus. AFP/CNA reports the latest current account balance for Japan:

Japan's current account surplus in September rose 9.4 percent year-on-year to 2.25 trillion yen (19.2 billion dollars), the finance ministry said Monday.

The surplus was higher than the consensus forecast of 2.01 trillion yen by economists polled by the business daily Nihon Keizai Shimbun.

The trade surplus edged up 0.2 percent in the month from a year ago to 1.11 trillion yen, with exports rising 14.8 percent to some 6.49 trillion yen.

The income, which includes investment income and compensation of employees, increased 19.4 percent to about 1.21 trillion yen due to expansion in income from both direct investment and portfolio investment.

Slow economic expansion lies ahead

The OECD Composite Leading Indicators for September is out.

The latest composite leading indicators (CLIs) suggest that slow economic expansion lies ahead in the OECD area. September 2006 data show improved performance in the CLI’s six month rate of change in the United States and Japan, but weakening performance in the Euro area. The latest data for major OECD non-member economies point to a weakening outlook for Russia and India, moderating growth in China and steady expansion in Brazil.

Morgan Stanley also updated its latest analysts' outlook for the US:

The October rebound in business conditions we reported a month ago proved as short-lived as it was moderate. The Morgan Stanley Business Conditions Index (MSBCI) declined by five points in early November to 40%, reversing most of the October gain. The less-volatile three-month average remained at 41%. At best, our canvass of industry analysts suggests that business conditions are bumping along the bottom, and at worst, the level persisting below 50% suggests deterioration. That stands in sharp contrast with our own expectation that growth is improving in the current quarter.

Meanwhile, the latest indicator from Japan casts doubts on whether the outlook for Japan is really improving. From Bloomberg:

Japanese machinery orders unexpectedly slumped, signaling economic growth may stall and prevent the central bank from raising interest rates, already the lowest among major economies. Stocks fell.

Non-government machinery orders, excluding shipping and utilities, dropped a seasonally adjusted 7.4 percent to 997.5 billion yen ($8.5 billion) in September from a month earlier, the Cabinet Office said in Tokyo today. Third-quarter orders sank 11.1 percent, the biggest decline ever.

As for the expected weakening in the euro area, it may be coming sooner than expected. Again from Bloomberg:

Gross domestic product in France was unchanged from the April-June period, when it expanded 1.2 percent, the most in almost six years, Insee, the national statistics office, said today in Paris. The lowest forecast among the 26 economists surveyed by Bloomberg was for an increase of 0.4 percent...

French industrial production fell 0.1 percent in the quarter after an unexpected drop of 0.9 percent in September, Insee added today. Italian industrial output dropped 1 percent in the month, the national statistics office in Rome said today.

BoE raises rates, UK and US report smaller trade deficits

As expected, the Bank of England raised interest rates yesterday. Reuters reports:

The Bank of England raised interest rates on Thursday to 5.0 percent, their highest level in five years, but gave little sign it would hike again in the new year...

Explaining its second hike in three months, the BoE said pricing pressures were on the rise and money supply was increasing rapidly. But the central bank also said consumer spending was volatile and noted unemployment had gone up.

Yesterday's data at least supported the BoE decision, as Halifax reported that house prices rose 1.7 percent in October -- their sharpest monthly increase in six months -- after September's upwardly-revised gain of 1.2 percent while a survey of business conditions in the commercial property sector by property agency Savills Plc showed that building construction picked up at its fastest pace in seven months in October.

Another report from the UK by the Office for National Statistics showed that Britain's goods trade gap narrowed to 6.560 billion pounds in September from 6.856 billion in August.

The trade deficit for the US also narrowed in September. Reuters reports:

The Commerce Department said the U.S. trade gap totaled $64.3 billion in September, below Wall Street expectations for a $66 billion shortfall and down 6.8 percent from August...

Oil import prices fell for the first time in five months to $62.52 per barrel in September from $66.12 in August... The volume of oil imports also declined in September...

A second government report suggested falling oil prices could continue to help narrow the trade gap.

U.S. import prices fell 2 percent in October, or twice as much as analysts expected, due mainly to an 8.3 percent drop in petroleum prices, a Labor Department report showed.

Other data covered in the report:

The University of Michigan's preliminary reading on consumer sentiment in November was 92.3, down from October's 93.6, said sources who saw the subscription-only report. The median forecast of Wall Street economists polled by Reuters was for a reading of 93.6...

Also, the number of U.S. workers applying for jobless benefits fell to 308,000 last week, according to data on Thursday.

Data from the Commerce Department showed inventories at U.S. wholesalers rose by a larger-than-expected 0.8 percent in September, while sales fell for the first time in nearly a year.

The US trade deficit narrowed as China's trade surplus hit a new high in October. From Xinhua Online:

China's monthly trade surplus reached 23.8 billion U.S. dollars in October, 8.5 billion U.S. dollars higher than in September, according to statistics from the General Administration of Customs.

In October, exports jumped 29.6 percent year on year to 88.1 billion dollars, while imports grew 14.7 percent to 64.3 billion dollars.

China is not the only country whose exports have done well recently. From Bloomberg:

German exports rose the most in more than four years in September as demand from Asia helped fuel growth in Europe's largest economy.

Sales abroad, adjusted for working days and seasonal changes, climbed 6.6 percent from August, the biggest gain since June 2002, the Federal Statistics Office in Wiesbaden said [Wednesday]. Economists predicted a 1.1 percent gain, according to the median of 11 estimates in a Bloomberg News survey...

In August, exports rose 0.5 percent, the statistics office said today. Imports increased 3.8 percent from August when they slipped 0.1 percent, the release showed.

BoJ talks tough, not likely to act

The Japan Times Online reports that Bank of Japan Governor Toshihiko Fukui said on Tuesday that the central bank may take pre-emptive action on inflation.

"If we deal with problems of prices and the economy after they arise, we have to make radical adjustments and the economy will be affected," Fukui said during a speech he gave in Tokyo.

"The point is, we take a forward-looking approach to avert such risks," he said. "This is intended to maintain long-term economic growth and not to nip growth in the bud."

Based on the latest data, though, there may not be all that much growth to nip.

The Conference Board reported on Tuesday that both the leading and coincident indexes for Japan decreased 0.2 percent in September. It was the third consecutive fall in the leading index.

That report was corroborated by data yesterday from Japan, reported by AFX/Forbes:

The index of leading economic indicators rose slightly to 20.0 in September from 18.2 in August, matching market expectations, preliminary data from the Cabinet Office showed...

The coincident index, which measures the state of the economy at the time, fell to 50 from 80 in August, also in line with market's consensus forecast.

And growth in Japan's bank lending slowed for a third month in October. Bloomberg reports:

Loans rose 1.1 percent in October from the same month a year earlier, a central bank report in Tokyo today showed. Lending adjusted for factors including currency fluctuations, securitizations and bad loan write-offs climbed 2.1 percent...

Japan's money supply, or M2 plus notes in circulation, edged up 0.7 percent in October, the central bank said in a separate report. Broad liquidity, which includes bonds and investment trusts, climbed 2.1 percent.

So pre-emptive or not, when it meets next week, the BoJ is likely to take the same course of action as its South Korean counterpart today. From Bloomberg:

Bank of Korea Governor Lee Seong Tae and his policy makers left the overnight call rate at 4.5 percent, as forecast by all 11 economists surveyed by Bloomberg News...

The majority of economists say the bank may raise borrowing costs, possibly next year, after five increases since October 2005...

"Consumer prices are stable, helped by a drop in food and oil prices," the central bank said in a statement today. "But house price increases have been accelerating since September on rising seasonal demand."

Retail sales in Europe accelerates in October

Despite Monday's economic news, Europe's economy continues to show some resilience.

AFX/Forbes reports that euro zone retail sales fell 0.6 percent in September from August but the Bloomberg retail PMI for October was more upbeat.

Retail-sales growth in the dozen nations sharing the euro accelerated in October as cheaper oil prices and increased hiring bolstered consumer spending, the Bloomberg purchasing managers index showed.

An index of retail sales rose to a seasonally adjusted 52.8 from 52.4 in September, a survey of more than 1,000 retail executives compiled for Bloomberg LP by NTC Economics Ltd. showed today. A level above 50 indicates growth.

Outside the euro zone, British retail sales accelerated in October according to the British Retail Consortium. Reuters reports:

The BRC said like-for-like sales rose an annual 2.6 percent in October, up slightly from 2.4 percent in September. Last week, the Confederation of British Industry said sales volumes fell at their sharpest rate in seven months...

Total sales, which include new floorspace, decelerated in October to be up 5.0 percent on a year ago against 5.2 percent in September.

Outside retail, Bloomberg reports that German industrial production fell in September.

Production slipped 0.3 percent from August, when it advanced 1.4 percent, the Economy and Technology Ministry said today in Berlin. Economists forecast a decline of 0.1 percent, according to the median of 37 estimates, in a Bloomberg News survey. From a year earlier, production jumped 6.1 percent.

In the US, the main news is the congressional elections, but there was also an economic report out from another part of the government. From MarketWatch:

U.S. consumer credit outstanding fell by the biggest amount since April 1992 in September as households took out fewer loans for items like automobiles and boats, the Federal Reserve said Tuesday.

Total consumer credit fell by $1.20 billion in September, or by a seasonally adjusted annual rate of 0.61%, to $2.366 trillion, the Fed said.

That news certainly doesn't suggest that the Federal Reserve is going to follow the Reserve Bank of Australia's move today any time soon. From Bloomberg.

Australia's central bank raised its benchmark interest rate to the highest in almost six years today as Governor Glenn Stevens attempts to curb an inflation rate he says may continue to breach the bank's target range.

The Reserve Bank of Australia raised the overnight cash rate target a quarter percentage point to 6.25 percent, as predicted by all 24 economists surveyed by Bloomberg News. It was the third increase this year and the first since Stevens became Governor.

Manufacturing, services slow in Europe, producer prices fall

This week's data reporting kicks off on a somewhat downbeat note for Europe.

In the UK, manufacturing production unexpectedly stagnated in September. Bloomberg reports:

Factory output was unchanged after gaining in each of the previous four months, the Office for National Statistics said today in London. Economists had expected an increase of 0.2 percent, according to the median of 30 forecasts in a Bloomberg survey...

Manufacturing output...rose 0.3 percent in August instead of the 0.4 percent reported a month ago.

Industrial production...rose 0.2 percent in September from August. The median of 30 forecasts in a Bloomberg survey was for a 0.4 percent increase. Utilities output fell.

Lower-than-expected industrial production will shave 0.04 percentage point from the third quarter's 0.7 percent growth, the statistics office said.

And the signal from Germany was negative too. From Bloomberg:

German factory orders declined the most in more than a year in September as foreign demand fell, suggesting Europe's largest economy will slow next year.

Orders slipped 2.5 percent from the previous month, the biggest drop since August 2005, the Economy and Technology Ministry in Berlin said in a faxed statement today. Economists had forecast a drop of 0.9 percent from a month earlier, when they jumped 3.7 percent, according to the median of 36 estimates in a Bloomberg News survey.

Bloomberg also reports that services slowed across the euro zone.

Growth in European service industries from banking to telecommunications, the biggest part of the economy, unexpectedly slowed in October, a sign the region's expansion has peaked.

Royal Bank of Scotland Group Plc said today its services index fell to 56.5 in October, the fourth straight decline, from 56.7 in September. Economists expected an increase to 57, the median of 33 estimates in a Bloomberg News survey showed. A level above 50 indicates growth.

Yet another report from Bloomberg says that corporate profit margins are starting to shrink in Europe.

Analysts expect margins to decline next year for the first time since 2002 as economic growth slows, wages increase and borrowing costs climb, according to estimates compiled by FactSet Research Systems Inc. in London.

Some fund managers remain hopeful that stock prices will rise.

"Stocks could still go up as profitability comes down," said Arjan Palthe, a fund manager at ABN Amro Asset Management in Amsterdam, which manages $240 billion. "This is a peak level in profitability, but not on valuations."

Others are less so.

"If margins fall, we would have not only decelerating sales growth in terms of what is going on with the economy, but also shrinking profitability," said Franz Wenzel, senior strategist at Axa Investment Managers in Paris, which oversees $464 billion. "That would be a double whammy for European equities."

On the other hand, industrial producer prices in Europe did fall in September. From Eurostat:

The euro area industrial producer price index fell by 0.5% in September 2006 compared with August 2006, and EU25 prices decreased by 0.7%. In August prices gained 0.1% in the euro area and 0.2% in the EU25.

In September 2006 compared to September 2005, industrial producer prices rose by 4.6% in the euro area and by 5.0% in the EU25.

Will record-breaking run in Asian stocks continue?

After the turmoil in May and June this year, Asian stock markets have recovered and are now mostly up for the year, with many in record territory.

The year-to-date performances of the major Asian markets based on the Morgan Stanley Capital International indices are as follows:

	Local currency (percent)	US dollars (percent)
China	44.0	43.5
Hong Kong	15.2	14.8
India	38.6	39.1
Indonesia	38.8	49.8
Japan	1.2	1.2
Korea	-0.4	7.4
Malaysia	12.3	16.4
Singapore	18.2	25.7
Taiwan	7.2	6.9
Thailand	2.8	14.8

As a result of the strong gains this year, many Asian market indices are at or near all-time highs. Stock indices in Hong Kong, India and Indonesia in particular closed at record highs on 2 November.

Asia's growth story -- centred around the emergence of China and India -- are well known and is the force behind much of the stock market gains. Growing signs over the past few months of a slowdown in the United States economy -- the biggest market for many companies in Asia -- have not stopped investors from continuing to pour money into Asian stocks.

Joining the fray recently is Cumberland Advisors. In a commentary written on 30 October, Bill Witherell, vice President and portfolio manager at Cumberland Advisors, suggested investing in Singapore stocks as a way to gain exposure to the region.

"At Cumberland, we believe that Singapore offers an attractive way for our investors to participate in one of the most dynamic regions of the global economy in a sound market within a stable, well-managed economy," he wrote. "As part of our move to fully invested positions in our managed ETF portfolios, we have added an overweight position in Singapore to our International Portfolios."

Witherell cited some statistics to support his recommendation. He pointed out that Singapore's economy is likely to grow over 8 percent this year and perhaps 7 percent next year. The market earnings yield is 7.3 percent while the 10-year bond rate is 3.2 percent, giving an implied equity risk premium of 4.1 percent. The average dividend yield in the Singapore market is 3.1 percent.

"These measures are bullish for stocks," he wrote.

As far as seasons are concerned, he may be entering the market at a relatively good time. In a report on 2 November, Forbes cited Citigroup as saying that over the past 16 years, Asian markets outside of Japan offered their best returns in the three months from November through January.

Valuation, though, may weigh on markets. Citigroup also said that the current price-to-book value ratio of 2.2 for Asia is the second-highest in 16 years. The only year in which it was higher was 1994, when the price-to-book value was 2.4; Asian stocks lost money then.

The same applies to the Singapore market as well. While the earnings yield cited by Witherell sounds good, it is based on the good run of earnings growth over the past few years. Earnings growth is expected to slow with economic growth next year. In terms of book value, the Singapore market is already trading at about 2.1 times book value. The last time it traded higher was in 2000 and we know what happened after that.

Mark Laudi, chief executive officer of Investor Central, would no doubt have known too when he wrote recently that he was getting worried about the continued run-up in prices in Singapore.

"Right now the market is being pushed into record territory by 'me-too' money coming in. That is, people who are joining the rally because the market has already had a good run," he wrote in the Investor Central blog on 16 October. "That is the WORST possible time to be jumping in."

Apparently, not many investors agree as many Asian market indices, including Singapore's Straits Times Index, went on to record new all-time highs after that commentary. Perhaps these investors are aware of and are trying to exploit the year-end effect highlighted by Citigroup.

Or perhaps they remember that ten years ago, in 1996, with the Standard & Poor's 500 Index near an all-time high and US stocks trading at higher than average historical valuations on record high earnings, then-Fed chairman Alan Greenspan worried about "a stock market bubble" and "irrational exuberance", only to see the S&P 500 double over the next four years.

Is it Asia's turn now?

US and UK economies show resilience, China tightens again

Market hopes for relief from monetary policy took another knock yesterday.

In the US, the economy showed fresh signs of resilience. From Reuters:

The U.S. unemployment rate fell to a 5-1/2 year low in October as 92,000 jobs were added and hiring in the two prior months was revised up, the government said on Friday, leading financial markets to slash bets on interest-rate cuts...

[The Labor Department] revised up September's job-creation total to 148,000, or nearly three times the 51,000 it reported a month ago, and said there were 230,000 new jobs in August instead of 188,000.

The unemployment rate fell in October to 4.4 percent from 4.6 percent in September. It was the lowest jobless rate since 4.3 percent in May 2001...

At mid-morning, the Institute for Supply Management...said its monthly services index climbed to 57.1 last month from 52.9 in September..

Notwithstanding softer overall growth, the Labor Department said average hourly earnings in October rose 0.4 percent to $16.91 -- higher than the 0.3 percent that analysts had anticipated -- while the average work week edged up to 33.9 hours from 33.8. Over the year, average hourly earnings have risen by 3.9 percent, the department said.

The story is similar in the UK. Reuters reports that pay rises next year will be more generous than in 2006. It also reports that the service sector grew faster than expected in October.

The Chartered Institute of Purchasing and Supply/Royal Bank of Scotland's services business index jumped to 59.3 last month, one of the highest readings in the survey's 10-year history.

That was up from 57.0 in September and well above analysts' forecasts of 56.7. Any reading above 50 indicates expansion and the service sector -- which accounts for about 75 percent of the economy -- has been growing for 43 straight months...

However, input prices rose at their slowest pace since July 2005 and the average prices charged index registered its lowest level of growth since February, indicating that inflationary pressures may be cooling slightly.

In China, the central bank has seen enough. From Xinhua Online:

The People's Bank of China, or the central bank, announced on Friday that it is to raise the deposit reserve ratio of banks, excluding rural cooperative banks and credit cooperatives, by 0.5 percentage points from Nov. 15...

The hike will bring the reserves that most banks are required to deposit with the central bank to nine percent.

ECB likely to hike rates as economy shows strength

There appears to be no worries about a slowdown in the ECB. From Bloomberg:

European Central Bank President Jean- Claude Trichet signaled the ECB will raise interest rates in December for the sixth time in a year and left open the possibility of further increases in 2007.

"We will do all that is necessary to ensure price stability" next year, Trichet said at a news conference in Frankfurt. The ECB today left its benchmark lending rate at 3.25 percent. "Strong vigilance remains of the essence," he said, a phrase he has used in the past to signal an increase is imminent.

Yesterday's data appear to justify the ECB's stance. Again from Bloomberg:

European manufacturing expanded for the 16th month in October as exports and lower oil prices fanned economic growth, strengthening the European Central Bank's case for raising interest rates again next month.

Royal Bank of Scotland Plc said today its manufacturing index rose to 57 from 56.6 in September. A reading above 50 indicates expansion. The gauge, compiled by NTC Economics Ltd. from a survey of 3,000 purchasing managers, has been above that level since June 2005. Economists had forecast a gain to 56.8, the median of 38 estimates in a Bloomberg News survey showed.

And German unemployment fell to the lowest level in more than two years in October.

The jobless rate, adjusted for seasonal swings, fell to 10.4 percent, the lowest since March 2004, from 10.6 percent in September, the Nuremberg-based Federal Labor Agency said today. The number of people out of work fell 67,000 to 4.35 million. Economists expected a decline of 23,000, according to the median of 36 forecasts in a Bloomberg News survey.

Meanwhile, Reuters reports that construction activity in Britain expanded in October at its fastest pace in more than two years -- the Chartered Institute for Purchasing and Supply's index for construction rose to 58.1 from 53.6 in September -- although construction orders had fallen 10 percent in the three months to September, according to the Department for Trade and Industry.

And even in the US, inflation concerns returned somewhat yesterday. From Reuters:

U.S. business productivity stalled unexpectedly in the third quarter, government data showed on Thursday, while unit labor costs rose at a pace that may vex the inflation-wary Federal Reserve...

Compensation per hour grew 3.7 percent, almost half the pace in the second quarter, helping trim unit labor cost growth to 3.8 percent in the third quarter.

This was higher than the 3.4 percent gain forecast by Wall Street, but was an improvement on an upwardly revised 5.4 percent reading in the April to July period, in a series watched closely by the U.S. central bank...

Unit labor costs...have grown 5.3 percent since the third quarter in 2005. That was the biggest gain on a quarter from the year-ago quarter since the fourth quarter of 1982, when the increase was 5.8 percent...

The Labor Department said the number of U.S. workers applying for jobless benefits rose 18,000 to 327,000...

The four-week moving average...rose to 311,250 from 305,500 the week before.

Offering better news for the jobs outlook, planned U.S. layoffs fell 31 percent in October from the previous month, with the biggest cuts in the automotive and retail industries...according to Challenger, Gray & Christmas Inc., an employment consulting firm.

In a separate release, Commerce Department data showed that new orders at U.S. factories rose 2.1 percent in September as strength in durable goods, particularly transportation, more than offset weakness in nondurable items.

But October retail sales have disappointed.

U.S. retailers posted disappointing October sales on Thursday, and Wal-Mart Stores Inc. forecast flat November sales at U.S. stores open at least a year, raising fears about the critical holiday shopping season...

... 61 percent of U.S. retailers reported October sales below expectations, according to Retail Metrics.

Manufacturing indices and other indicators looking negative

The downtrend continues for the US economy. Reuters reports:

The Institute for Supply Management's factory index slipped to 51.2 last month from 52.9 in September, below Wall Street forecasts and its lowest level since June 2003...

The housing sector was leading the way. U.S. construction spending fell 0.3 percent in September led by a sixth straight monthly drop in private residential building. In a separate report, a real estate group said pending sales of existing homes dropped 1.1 percent in September.

News from the auto industry was also not too encouraging. U.S. domestic cars and light trucks were sold at an annual rate of 12.3 million units for October, short of estimates for 12.7 million.

The detailed ISM report shows that the prices paid index plunged to 47.0 in October from 61.0 in September.

And it is not much better elsewhere.

In the UK, Reuters reports that the CIPS/RBS Purchasing Managers' Index slipped to 53.7 in October from an upwardly revised 54.5 in September. The output prices index rose to 56.0 in October from 55.1 in September.

In China, AFX/Forbes reports that the CLSA PMI dipped to 52.1 in October from 52.4 in September. The October reading marked its lowest level in seven months and its third consecutive fall.

China reports trade deficit

With ASEAN, that is. Xinhua Online reports:

China welcomes goods from ASEAN countries despite a trade deficit of 20 billion U.S. dollars in 2005, said Chinese Commerce Minister Bo Xilai here on Tuesday.

"China's market is open, vast. The two-way trade is mutually beneficial," said Bo at the third China-ASEAN Expo that opened here on Tuesday. "I hope China's vast market could bring benefits to companies in ASEAN."

And they seem quite serious about it. Xinhua Online also reports on a proposed free trade pact.

China and the 10-member Association of Southeast Asian Nations (ASEAN) are determined to establish a Free Trade Area (FTA) by 2010 as scheduled, according to a joint statement issued yesterday.

Meanwhile, China's economic growth is expected to slow further in the fourth quarter. Again from from Xinhua Online:

China's economic growth is expected to slow to 10 percent in the forth quarter, down from 11.3 percent in the second quarter and 10.4 percent in the third quarter, according to a joint study by the State Information Center (SIC) and the Shanghai Securities News.

"With the implementation of the state's macrocontrol policies and the further tightening of land and credit supply, the effect of the macro control measures will be further felt," said the study report, carried on Tuesday's Shanghai Securities News...

The study predicts that the growth for the whole year will be around 10.5 percent.

The IMF apparently agrees. From AFP/CNA:

The IMF notched up its 2006 economic growth forecast for China to over 10.5 percent, while urging the country to rein in excess investment and reform its currency regime.

"We would estimate that growth this year would probably be a little over 10.5 percent," the International Monetary Fund's mission chief for China, Steve Dunaway, told reporters on a conference call.

US faces slower growth but confidence rises in Europe

Slower growth but with persistent inflation pressure remains the outlook for the US economy after the latest economic data. Reuters reports:

The business barometer from the National Association of Purchasing Management-Chicago fell to 53.5 this month, below economists' expectations of a reading of 58.0, from 62.1 in September. A reading above 50 indicates expansion.

During the same period, U.S. consumer confidence slipped to 105.4 from an upwardly revised 105.9 in September, according to The Conference Board. The median forecast from economists was for a reading of 108.0 for October...

The Employment Cost Index, a broad gauge of what employers pay in wages and benefits, rose by a larger-than-expected 1.0 percent in the third quarter, marking the largest increase since the second quarter of 2004...

The National Association of Purchasing Management-New York's index of local business activity climbed to 425.3 in October from 421.0 in September.

The picture is not too different in the UK. Again from Reuters:

The Nationwide Building Society said house prices rose another 0.7 percent this month. That was just over half the rate of increase in September but still left the cost of an average home 8 percent or some 12,500 pounds higher than a year ago.

Consumer spirits, meanwhile, appear to have lifted after August's surprise interest rate hike and security scare at Britain's biggest airports.

Pollster GfK NOP said its monthly consumer confidence barometer rose two points to -5 in October as rising house prices and the FTSE-100 index of leading shares at a 5-year high brightened people's outlook for their own finances.

Feeling flush or not, Britons were shopping less than usual in October, according to the country's biggest business lobby group, the Confederation of British Industry. Its retail survey showed sales volumes falling at their fastest pace in 7 months.

So where are UK interest rates headed?

BoE Governor Mervyn King told a parliamentary committee that there was no such thing as a "done deal" when it comes to interest rate decisions but markets paid little heed and are fully pricing in a hike to 5.0 percent next week.

Retail sales fell in Germany too, reports Bloomberg.

Sales, adjusted for inflation and seasonal swings, fell 1.7 percent from August, the biggest decline since May 2004, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.6 percent gain, the median of 29 estimates in a Bloomberg News survey showed. In France, consumer confidence dropped for the first time in five months in October.

But confidence in the euro zone generally remains relatively buoyant while inflation receded, according to another Bloomberg report.

An index of sentiment among executives and consumers in the dozen nations sharing the euro rose to 110.3, the highest since February 2001, from 109.3 in September, the European Commission said today in Brussels. Inflation slowed to 1.6 percent in October, holding below the ECB's 2 percent limit for a second month, a separate report showed...

In a separate report, the commission said its business climate indicator "remained broadly stable" in October. The indicator slipped to 1.42 from 1.44 in September, holding "at a very high level, last achieved in 2000," the commission said.