Saturday, 30 December 2006

Data from UK and euro zone raise likelihood of further rate hikes

It looks like the Bank of England may not be done with interest rate hikes. Not with the continued house price increases reported by Reuters.

British house prices rose in December at their fastest annual rate in two years, the Nationwide Building Society said on Thursday, indicating higher borrowing costs have done little to cool the market this year.

The Nationwide house price index showed a 1.2 percent monthly rise this month, against a 1.4 percent rise in November, taking the annual increase up to 10.5 percent.

That was the first double digit annual growth since February last year and the strongest rate of growth since December 2004 when prices were 12.7 percent higher on a year earlier, the mortgage lender said...

"There are still few signs that the rate of house price growth will moderate in the very short term," said Fionnuala Earley, Nationwide group economist.

"The stock to sales ratio -- a good leading indicator of house prices -- has continued to increase, suggesting a few more months of firm price growth."

Indeed, Reuters also reports that mortgage approvals are still rising.

British mortgage approvals rose 9.1 percent in November from a year ago, a survey showed on Friday, boosting expectations of further interest rate rises and helping sterling to an eight-year high against the yen.

The British Bankers' Association said mortgage approvals totalled 77,788 last month. It also revised up its figure for underlying new mortgage lending reported last week to 6.7 billion pounds ($13.13 billion) from what was already a record high of 6.5 billion...

The Bank of England said mortgage equity withdrawal rose to 11.8 billion pounds in the third quarter as Britons capitalised on rising house prices to refinance home loans for other spending.

And there could be more rate hikes from the European Central Bank as well. Reuters reports:

The case for more euro zone rate hikes got a boost from stronger than expected November money supply data on Friday and from comments on Thursday by ECB Governing Council member Yves Mersch, who said rates remain low in historical terms...

Annual euro zone M3 growth rate jumped to 9.3 percent in November from 8.5 percent the previous month and above a consensus forecast of 8.6 percent.

One of the main concerns in Europe, however, remains German consumer spending. Bloomberg has the latest reading on German consumer confidence.

Consumer confidence in Germany, Europe's largest economy, fell for a second month on concern increases in sales taxes and health-insurance costs will reduce household incomes.

GfK AG's confidence index for January, based on a survey of about 2,000 people, fell to 8.7 from a revised 9.2 in December, the Nuremberg-based market research company said today. The index reached a five-year high of 9.3 in November.

Friday, 29 December 2006

Hang Seng hits 20,000

The Hong Kong stock market hit a milestone yesterday. AP reports:

Hong Kong shares rallied to a record high for the third consecutive session, on the back of strong fund inflow and rotational buying in blue-chips.

The blue-chip Hang Seng Index rose 276.18 points, or 1.4 percent, to 20,001.91 - the first time the index has risen above the 20,000 point.

Perhaps it is getting a bit too much for some.

"You only experience this kind of market craziness perhaps every five or six years," says Alex Wong, a fund manager of Shenyin Wanguo Asset Management.

A peak perhaps? But Peak prices are also rising. AFP/CNA reports:

Confidence in Hong Kong's property market, a key barometer of the territory's financial well-being, is at an all-time high after bidders paid a record price for a luxury site, appropriately located on 'The Peak'.

Analysts said developers were ready to pay more after one of the top local companies put up 231 million US dollars to develop a top end luxury complex...

"The auction reflects the Hong Kong economy is getting better. It also shows investors are positive about the prospects for the property market," said Wong Leung-sing, associate research director for Centaline Property Agency.

"Even the stock market has broken records; it's about time that the property market breaks records, too," he said.

Meanwhile though, US stocks were not able to continue their recent record-breaking run. Reuters reports:

U.S. stocks finished slightly lower on Thursday as investors sold off recent outperformers to secure profits before the year-end. Concerns about stock options grants at Apple Computer Inc. dragged on the Nasdaq...

The Dow Jones industrial average slipped 9.05 points, or 0.07 percent, to end at 12,501.52. The Standard & Poor's 500 Index dipped 2.11 points, or 0.15 percent, to finish at 1,424.73. The Nasdaq Composite Index declined 5.65 points, or 0.23 percent, to close at 2,425.57.

This was despite a good day on the economic news front. Again from Reuters:

The National Association of Realtors said the pace of existing home sales rose 0.6 percent in November to a 6.28 million-unit annual rate, defying Wall Street forecasts for sales to ease slightly and providing the latest suggestion that housing activity was stabilizing after a steep drop.

Separately, the Conference Board said its index of consumer sentiment climbed to 109.0 in December -- the highest since April -- from an upwardly revised 105.3 in November as consumers' views on the labor market improved.

In addition, the National Association of Purchasing Management-Chicago said its gauge of U.S. Midwest business activity rose to 52.4 from 49.9 in November, moving back above the 50 line in a sign activity was expanding...

Earlier on Thursday, the U.S. Labor Department said the number of workers applying for first-time jobless benefits rose 1,000 to 317,000 last week, suggesting stable labor-market conditions. Wall Street economists had expected claims to rise to 320,000.

Thursday, 28 December 2006

Uncertainty over rate hike in Japan continues

Two days after my last post on Japan and an imminent rate hike by the BoJ looks as uncertain as ever.

Consumer spending remains weak.

Japan's retail sales shrank 0.1 percent in November from a year earlier to 10.64 trillion yen for the first decline in four months, the government said Wednesday.

The fall stemmed from slumping sales of winter clothes and heating equipment due to the mild winter, the Ministry of Economy, Trade and Industry said in a preliminary report. Lower vegetable prices also contributed to the contraction.

Falling wages aren't helping.

Japan's wages unexpectedly fell in November, adding to concern consumers won't have enough spending power to drive growth in the world's second-largest economy.

Monthly wages, including overtime and bonuses, slipped 0.2 percent to 291,392 yen ($2,450) from a year earlier, the labor ministry said today in Tokyo. The median estimate of seven economist surveyed by Bloomberg News was for wages to gain 0.2 percent. Pay for the year so far has risen less than 10,000 yen.

Industrial production has been better.

Japan's industrial production grew a seasonally adjusted 0.7 percent in November from the previous month, lifting its index to a record high, the government said Thursday.

The index of output at mines and factories came to 108.6 against the base of 100 for the year 2000, the Ministry of Economy, Trade and Industry said in a preliminary report.

The 0.7 percent increase reflects a brisk output of automobiles and mobile phone parts propelled by solid demand at home and abroad, according to METI.

The latest reading, however, fell short of an average market forecast of a 1.2 percent expansion. It followed a 1.6 percent rise in October...

Looking ahead, the ministry said manufacturers forecast a 0.7 percent rise in industrial production in December but a 0.8 percent fall in January.

Housing starts have also been good.

Housing starts in Japan rose 4.0 percent in November from a year earlier to 115,392 units for the fourth straight month of increase, the Ministry of Land, Infrastructure and Transport said Wednesday.

Speaking of housing, yesterday's numbers on US new home sales for November were also relatively encouraging. Calculated Risk looks at the numbers and discusses the outlook and the impact on GDP from mortgage equity withdrawal.

Tuesday, 26 December 2006

Japanese manufacturing sentiment slips, consumer prices edge up

It's the season for giving, but the latest data from Japan are not giving too many new clues about when the next BoJ rate hike will come.

Manufacturing sentiment appears to be deteriorating gradually in Japan, according to this Reuters report.

The business survey index (BSI) on sentiment at large manufacturers in the October-December quarter was plus 7.1, compared with plus 12.7 in July-September...

The business sentiment survey also showed firms see capital spending rising 8.6 percent in the financial year ending next March 31 and recurring profits growing 3.6 percent.

But companies are more cautious about the outlook for the coming months amid concerns that a U.S. economic slowdown could hurt Japan's economy.

The BSI for big manufacturers was seen at plus 5.8 for January-March and plus 3.3 for April-June...

[Bank of Japan Governor Toshihiko] Fukui said on Monday that the BOJ would carefully examine new information on economic and price developments in determining the timing of the next rate hike.

Another Reuters report shows that inflation remains low, although the consumer sector may be improving.

Japan's core consumer price index (CPI), excluding volatile fresh food prices, rose 0.2 percent in November from a year earlier, government data showed on Tuesday, matching economists' consensus forecast.

Core CPI in the Tokyo area rose 0.2 percent in December from a year earlier, lower than the consensus forecast of a 0.3 percent rise.

But in an encouraging sign for the BOJ, overall household spending in Japan fell 0.7 percent in November from a year earlier, a smaller pace of decline than a median market forecast of a 1.3 percent drop...

Separate data showed that Japan's seasonally adjusted unemployment rate fell to 4.0 percent in November from 4.1 percent in October, while the jobs-to-applicants ratio for November was 1.06, meaning 106 jobs were available per 100 applicants.

The inflation figure, while positive, did not impress some economists.

"It's hard to say anything positive about price conditions. The rate of price rises will likely stay at a super-low levels," said Yoshiki Shinke, an economist at Dai-ichi Life Research Institute.

Bloomberg provides more views from economists.

Core prices accelerated last month because the effect of mobile phone fee reductions made in November 2005 disappeared, said Azusa Kato, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. The fee cuts dragged the level of the consumer price index lower on a year-on-year basis.

She said inflation may remain moderate in the first half of 2007 because the effect of falling oil prices will linger.

"Core consumer prices will continue to hover around 0.2 percent in the first half of 2007, partly due to oil, though we don't expect them to slip into negative territory," Kato said.

Some economists are still betting on a rate hike early next year.

"Consumer price numbers are clearly on a rising trend," said Yasuhiro Onakado, chief economist at Daiwa SB Investment Ltd. in Tokyo. "There's a high chance the BOJ will raise rates in January or February if we continue to see less weak data."...

"In the medium to long term we expect price gains to pick up because the economy's output gap is becoming positive," said Mamoru Yamazaki, chief economist at RBS Securities Japan Ltd., who predicts a January increase...

Saturday, 23 December 2006

More growth concerns despite robust consumer spending

Reuters reports the economic data yesterday from the US.

The University of Michigan said the final December reading of its consumer sentiment index slipped to 91.7 from 92.1 in November.

However, the index was slightly above economists' median forecast of a 90.2 reading, causing government bond prices to deepen losses...

The University of Michigan's price expectations over a one-year period, an important guidepost for interest rate policy, dipped to 2.9 percent, its lowest since February 2005, from 3.0 percent in November.

The Commerce Department reported its core November personal spending price index, which excludes volatile food and energy costs, was unchanged from October -- the first time since October 2002...

The Commerce Department report also showed that personal income rose 0.3 percent in November after a 0.3 percent gain in October, while spending climbed 0.5 percent after increasing 0.3 percent a month earlier...

Separately, new orders for U.S.-made durable goods rose a larger-than-expected 1.9 percent in November on aircraft sales, but fell when airplane orders were stripped from the data, a second Commerce Department report showed on Friday.

Excluding volatile transportation orders, which are heavily skewed by aircraft, durable goods orders fell surprisingly by 1.1 percent. It was the second consecutive monthly drop in durables orders excluding transportation and the fourth decline in the last five months...

Excluding defense, orders rose 0.6 percent, slightly weaker than analysts' expectations of a 0.7 percent gain.

Nondefense capital goods orders excluding aircraft, a proxy for business spending, dipped unexpectedly by 1.4 percent. Analysts had expected a rise of 0.9 percent.

MarketWatch reports positive reactions from economists on the consumer spending data.

With revisions, "the report turned out to be stronger than expected," wrote David Greenlaw, an economist for Morgan Stanley, in an email. Greenlaw now sees consumption rising at a 4% annual pace in the fourth quarter. "In our view, the drop in gasoline prices has been the main catalyst for the rebound in consumer demand."

Fourth-quarter growth "looks to be far from the disaster that many were forecasting not very long ago," MFR chief economist Joshua Shapiro wrote to clients.

But another MarketWatch report says the reaction to the durable goods data was not so positive.

"Business investment spending, which had been supporting much of manufacturing's expansion, is slowing," wrote Marisa DiNatale, an economist for Moody's, in a note to clients...

"The ISM signaled weakness, and here it is," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics.

The data from Europe yesterday painted a somewhat similar picture on the economy.

Bloomberg reports that French business confidence unexpectedly fell in December even as household spending on manufactured goods rose a greater-than-expected 0.9 percent in November, while business confidence in Italy was unchanged in December.

AFX/Forbes reports that new industrial orders in the euro zone fell 0.6 pct in October from September.

Meanwhile, Germany's inflation rate held steady at 1.5 percent in December, unchanged from November, reports Bloomberg.

Friday, 22 December 2006

US growth rate down, UK steady, Japanese trade surplus jumps

US GDP growth has been revised back down. Reuters reports this and other economic news from the US.

The U.S. economy grew at a tepid 2 percent annual rate in the third quarter, hurt by the sharpest housing slump in 15 years...

Another report from the Philadelphia Federal Reserve Bank implied persistent economic softening. Its business activity index for the mid-Atlantic region fell to -4.3 percent in December from 5.1 in November -- the third month in the past four it has been negative...

The GDP report said so-called core prices, which exclude food and energy items, slowed to 2.2 percent in the third quarter from 2.7 percent in the second quarter...

A midmorning report from the New York-based Conference Board, a private research group, underlined the uncertainty in the economic outlook.

Its U.S. Index of Leading Economic Indicators rose 0.1 percent to 138.2 in November, the same as in October but down from a 0.4 percent pickup in September, pointing to a likely slow start next year but not necessarily a downturn...

Separately, the Labor Department said 9,000 more workers applied for first-time jobless benefits last week -- a total 315,000 and roughly the number that analysts had forecast...

A monthly index of national activity compiled by the Chicago Federal Reserve Bank, also issued on Thursday, showed a slight improvement in November but still pointed toward growth that is likely to stay below historical trends.

There was also a GDP report out from the UK. Again from Reuters:

The Office for National Statistics said GDP rose by 0.7 percent in July-Sept period, unrevised from the previous estimate and the same rate as in the second quarter.

But it lifted its estimate of annual growth to 2.9 percent from 2.7 percent -- the fastest pace since the third quarter of 2004 -- and making it almost certain that British finance minister Gordon Brown's new full-year forecast of 2.75 percent will be met...

Separately, the ONS released data on the balance of payments. The current account recorded a deficit of 9.429 billion pound after a 8.264 billion pounds gap in the second quarter. This was equivalent to 2.9 percent of GDP.

Japan also released trade data. From AFP/CNA:

Japan's trade surplus jumped to 915.9 billion yen (US$7.73 billion) in November, up 54.1 percent from a year earlier on strong exports of cars and steel products, the government said Thursday.

Exports gained 12.1 percent from a year earlier to 6.63 trillion yen while imports climbed 7.5 percent to 5.72 trillion yen, the finance ministry said in a statement.

Meanwhile, Reuters reports that Japan's all-industries index rose 1.7 percent in October from the previous month.

Thursday, 21 December 2006

BoE minutes, data could mean higher rates to come

The Bank of England yesterday released the minutes of its latest rate-setting meeting. Reuters reports:

All nine members of the Bank of England's Monetary Policy Committee voted to keep interest rates at 5.0 percent this month but they were split over the balance of risks to the inflation outlook.

Minutes of their Dec 6 and 7 meeting published on Wednesday showed the MPC agreed inflation was still likely to ease in 2007 as the effect of high energy prices faded but were still worried the near-term rise could boost wage deals in the new year.

Yesterday also provided other reasons for more rate hikes. Again from Reuters:

Underlying British net mortgage lending scored its strongest monthly increase on record in November, rising 6.5 billion pounds ($12.8 billion), the British Bankers' Association said on Wednesday...

Figures from the Building Societies Association for November were also strong. Approvals -- loans agreed but not yet made -- for November totalled 4,852 million pounds, up from 4,310 million in October.

November's figure was the highest on record, the BSA said, while net loans were 1,314 million pounds -- the strongest November reading for three years...

Meanwhile, credit card lending rose 66 million pounds, according to the BBA, compared with an average monthly fall of 248 million over the last six months, suggesting Britons' appetite for spending on the high street through borrowing may be picking up.

Indeed, the Confederation of British Industry's retail sales balance rose to +25 in December from -9 in November, the highest level since Christmas 2004.

The UK yield curve may be inverted, but monetary policy doesn't look particularly restrictive at the moment.

Wednesday, 20 December 2006

US PPI jumps, BoJ holds rates

So maybe the Fed is right to remain worried about inflation in the US. From Reuters:

A spike in energy prices sent the producer price index up 2 percent, the largest increase since a matching rise in November 1974, the Labor Department said on Tuesday.

At the same time, prices excluding volatile food and energy costs climbed 1.3 percent, the biggest gain since July 1980, as car and light truck prices bounced back from an October drop.

However, stripping out vehicle prices, core producer prices were up just 0.2 percent and analysts said the report did not signal a sudden resurgence of inflationary pressures.

"If you take the core PPI changes over the past two reports, they average a monthly 0.2 percent gain," said Michael Gregory, senior economist at BMO Capital Markets in Toronto. "As such, there is nothing alarming in the underlying trend."

Meanwhile, there were conflicting indications from housing.

Meanwhile, housing starts increased 6.7 percent in November after a sharp decline in October. But permits for future construction, an indicator of builder confidence, fell 3 percent, the Commerce Department said.

So perhaps the inflation concern isn't clear-cut in the US. But in Europe, central bankers have been even more concerned. Yesterday provided more justification for the concern.

In Germany, industrial producer prices rose 4.7 percent in November 2006 from the corresponding month of the preceding year. Prices are likely to remain supported by a relatively robust economy as the Ifo institute’s business climate index increased from 106.8 in November to 108.7 this month.

Meanwhile, British house price inflation stayed high as the Royal Institution of Chartered Surveyors' house price balance eased to 47.4 in November from a revised 47.7 in October but the sales-to-stock ratio rose to 42.5 percent from 41.0 percent in October, the highest in over two years.

However, inflation in Canada was relatively muted at a 1.4 percent annual rate in November, though it was up from 0.9 percent in October. Prices were up 0.2 percent from October. Year-on-year core inflation moderated to 2.2 percent from 2.3 percent in October.

In Japan, inflation has been too muted. But that could end soon. From FT:

Koji Omi, finance minister, said the gross domestic product deflator, a broad measure of prices, would turn positive in the year to March 2008 for the first time in a decade. “The GDP deflator for the current fiscal year was minus 0.4 per cent, and that will become plus 0.2 per cent in fiscal 2007/08,” he said. “That shows the economy will become normal.”

In its annual economic projections, the government predicted real growth of 2.0 per cent next fiscal year, with nominal growth of 2.2 per cent. That would be the sixth straight year of economic growth, prolonging a recovery that is already the longest in since the war.

In the meantime, the Bank of Japan is watching and waiting.

As expected, the Bank of Japan’s policy board voted on Tuesday to leave the overnight call rate unchanged at 0.25 per cent in an unanimous vote that suggests it may be in less of a hurry than some thought to raise rates.

Toshihiko Fukui, bank governor, said on Tuesday in answering a question about the possibility of a January rate increase: “We will carefully analyse data that comes out until the next policy meeting and reach a decision, but we have no preconception.”

Tuesday, 19 December 2006

Thailand again?

Excerpt from FT:

Thai stocks on Tuesday suffered their biggest drop since Asia’s 1997 financial crisis after the central bank imposed draconian capital controls aimed at stemming rapid appreciation of the baht.

Thailand’s benchmark SET stock index plunged as much as 18 per cent, before recovering slightly to end 15 per cent down at 622.14. The sharp sell-off, amid investors’ concerns over possible lack of future foreign buyers, forced the stock exchange to suspend trading for 30 minutes earlier in the day, and prompted calls for the central bank to review the policies.

The measures, which force offshore investors to keep their money in the country for at least a year or face stiff penalties for early withdrawal, are aimed at dampening speculation that has sent the currency 17 per cent higher against the dollar this year.

The baht dropped dropped 1.5 per cent on Tuesday from the nine-year high point of Baht35.06 reached earlier Monday before the central bank’s announcement.

Elsewhere in Asia, stocks also fell in India, Malaysia, Indonesia and the Philippines amid heightened concerns over investing in stock markets of developing countries. Thailand in 1997 triggered the Asian financial crisis when its currency collapsed.

Brad Setser compares today's conditions with those in 1998.

US current account deficit hits record in third quarter

Not that too many people were surprised with this piece of news. Reuters reports:

The huge U.S. current account deficit widened in the third quarter to a record $225.6 billion, as gushing oil prices and strong demand for Chinese and other foreign goods pushed imports higher, a U.S. Commerce Department report showed on Monday...

The U.S. deficit on income earned from investments increased to $3.8 billion in the third quarter, from $2.2 billion in the second, in what Ian Shepherdson, chief U.S. economist at High Frequency Economics, called an "ominous sign of what happens when you run big deficits for long periods."

The other significant news yesterday provided another indication that the housing market could be stabilising.

The National Association of Home Builders/Wells Fargo Housing Market index fell 1 point to 32, but held above the 15-year low of 30 reached in September. Any reading below 50 means most builders view market conditions as poor.

Eurostat also reported trade data for the EU.

The first estimate for the euro area trade balance with the rest of the world in October 2006 gave a 2.4 bn euro surplus compared with +0.1 bn in October 2005. The September 2006 balance was +2.1 bn, compared with +1.1 bn in September 2005. In October 2006 compared with September 2006, exports, seasonally adjusted, remained stable, while imports rose by 0.6%.

The first estimate for October 2006 extra-EU25 trade was a deficit of 13.2 bn euro, compared with -11.0 bn in October 2005. In September 2006, the balance was also -13.2 bn, compared with -9.6 bn in September 2005. In October 2006 compared with September 2006, exports, seasonally adjusted, fell by 1.2% and imports by 0.4%.

Edward Hugh has been writing about European trade recently:

German Output and Exports

Europe's Trade Deficit With China

Monday, 18 December 2006

It's late in the game

Last week was a good one for stock markets, as were the past few years. Maybe it is time for investors to pay the bill. Here are a couple of Bills to worry about.

Bill Cara thinks that the party is almost over.

Little by little the signs are noticeable that this party is almost over and the guests are inching their way to the exit. All that’s left is to crown The Greatest Fool.

Money Flow indicators are showing technical divergence with rising prices in most (but not all) equity markets. Money flows out of markets when there is higher volume on down ticks and down days...

I expect the equity price correction simply because there was no reason, other than excess money chasing fewer stocks (via buy-backs), for the market value of stocks to grow so excessively since mid-July. By fundamental measures, the enterprise value of corporations has grown moderately during this period. So the price increases have not been supported by value increases, leading to an over-bought condition...

I believe that once the selling starts in the U.S. equity market, the result will look like a combination of 2001-2 and October 1987. It’s coming.

More dramatically, Bill Bonner at The Daily Reckoning issues a crash alert.

Everywhere we go…everywhere we look…we see towers of money, property, derivatives, debt and credit. Towers in the stock market. Towers in the housing market. Towers stacked upon towers.

So today, we take the unprecedented step of issuing a “Crash Alert.” Not that we have any special information or insight on the subject. We are just looking out the window.

And what does he see?

Right now stocks and property are at record levels all over the world. An investor has to take stock of himself. Should he buy more…or sell? The pundits, commentators, the Cramers and Kudlows, are all positive. In the face of such jolly sentiment, it’s hard for an investor to keep his wits about him. If he can’t count on his natural gloominess to pull him through, he’ll have to think.

And of course, no investor wants to do that.

But if he were to think, he might want to think of Yogi Berra’s comment on a restaurant: “Oh, nobody goes there any more; it’s too crowded.” Right now, everyone is crowding into these towering eateries. The food and service - that is, the yield an investor might reasonably expect - have already slumped to near-record lows.

Just wait until someone yells ‘fire!’

Of course, this bull market has surprised many investors by its strength. Even the May sell-off failed to scare off investors for long. Why should this time be different?

Citing W D Gann, The Bonddad Blog suggests that it is because the market has possibly moved into "The Third Zone, or the highest above normal marks", based on the observed "length of the rally and the large increase in volume".

Earlier, citing Dow Theory followers, John Hussman had said that the market is currently "engaged in a speculative blowoff ".

... investment advisory bullishness is running near 60%, which Investors Intelligence notes is about the level where historical bull markets have ended. As for the “smart money,” corporate insiders are aggressively liquidating stock, at a rate of about 7 shares sold for each share purchased, according to recent figures from Vickers. Meanwhile, the new issues market is booming, and low-quality stocks (on the basis of S&P's quality rankings) have for months dominated an otherwise dwindling group of market leaders...

Overall, it's late in the game.

Saturday, 16 December 2006

Looking a little more like Goldilocks

Reuters reports the latest data from the US.

U.S. consumer prices held steady in November, confounding expectations of a small rise, as energy and vehicle costs dropped, according to a government report on Friday that eased inflation worries...

Consumer prices and core consumer prices were also lower than expected over 12 months. Consumer prices rose a less-than-expected 2 percent over 12 months while core consumer prices rose 2.6 percent from November a year ago...

Industrial production rose 0.2 percent in November on gains in manufacturing, but that was after a revision showing output had been weaker in October than originally reported. Industrial capacity use was unchanged last month, the Federal Reserve said.

To add to the positive mood, Reuters also reports that the Economic Cycle Research Institute's Weekly Leading Index rose to 140.8 -- a record high -- last week, with annualised growth rising to 2.8 percent from 1.8 percent.

But before we get carried away with the benign inflation data, note that the Federal Reserve Bank of Cleveland reports that the median consumer price index, its measure of core inflation, rose 0.2 percent in November and 3.0 percent annualised. And even with the conventional measure of inflation, James Picerno at the Capital Spectator reminds us that a similar decline in inflation in the spring of 2005 proved "fleeting".

Nevertheless, inflation has indeed been low worldwide. Eurozone inflation was also zero in November, although annual inflation accelerated to 1.9 percent from 1.6 percent in October.

And to add to the euro zone's dilemma, industrial production in the area decreased 0.1 percent in October, although it was up 3.6 percent from the previous year.

Friday, 15 December 2006

Not so slow

Maybe the global economy isn't slowing down as much as initially thought.

After the somewhat upbeat data from the US over the past few days (see here and here), we have the following yesterday from Reuters:

The number of U.S. workers seeking initial jobless benefits fell 20,000 last week, while import prices rose last month despite an oil price drop, suggesting a resilient economy still facing inflation risks.

Adding to the picture of moderate but steady output, a snapshot of manufacturing in the Northeast, the New York Federal Reserve's "Empire State" general factory conditions index, slipped in December, but was higher than expected and showed gains in new orders and future business conditions measures.

And the picture of resilience appears to be corroborated by the recent news from the rest of the world.

On Tuesday, the ZEW reported that its index of German investor sentiment rose by 9.5 points in December -- the first rise since January -- to minus 19.0, the highest since August.

Yesterday, the Office for National Statistics said that the volume of retail sales in the UK rose by 0.3 per cent between October and November. The figure for October was revised higher to show an increase of 1 per cent.

Japan has had its share of good news too, including a 5.2 percent rise in its current account surplus to 1.51 trillion yen in October compared to the same month a year ago. And today we have news on the Tankan survey reported by Bloomberg.

The quarterly Tankan survey, Japan's most closely watched gauge of business sentiment, showed confidence among large manufacturers climbed to 25 points from 24 in September, the Bank of Japan said today in Tokyo. Companies plan to increase spending 12.4 percent in the year ended March 31, higher than the 11.5 percent increase they forecast in September.

Meanwhile, China, which on Tuesday reported that retail sales surged 14.1 percent in November from a year earlier and on Wednesday reported that industrial production rebounded to a growth rate of 14.9 percent in November from a year earlier after hitting a low of 14.7 percent in October, yesterday gave yet another indication of a possible stabilisation in the economy. From AFP/CNA:

Urban fixed-asset investment, a broad measure of spending on major infrastructure projects, rose 26.6 percent in the first 11 months to total 7.9 trillion yuan (one trillion dollars), the National Bureau of Statistics said.

While no official figure for the month of November alone was immediately available, analysts said the published data implied a rather abrupt acceleration from October.

Goldman Sachs said its calculations showed urban fixed-asset investment growth rebounded to 25 percent year-on-year in November, up from 16.8 percent in October. Other economists had similar conclusions.

Thursday, 14 December 2006

Higher US retail sales, mortgage applications, UK labour market improves

US retail sales were up in November. MarketWatch reports:

Seasonally adjusted U.S. retail sales increased by 1% in November, the first gain since July, the Commerce Department reported Wednesday.

Excluding the 0.9% gain in motor vehicle sales, retail sales rose 1.1%, the largest gain since January... Excluding gasoline, retail sales rose 0.9%.

Mortgage applications are also rising. Again from MarketWatch:

The volume of applications for mortgages from major U.S. banks climbed to the highest level in more than a year last week, the Mortgage Bankers Association reported Wednesday.

Applications, encompassing both those for loans to purchase homes and for refinancings of existing mortgages, increased 11.4% last week to the highest level since October 2005. Total applications are up 22.2% compared with the same week a year ago. Application volumes had been down by double-digit percentages for most of the year.

Lower mortgage rates have spurred a rebound in loan applications, said Mark Fratantoni, senior economist for the mortgage bankers group, in a press statement. Average rates have fallen about 80 basis points, or 0.8 of a percentage point, since early summer, he noted.

The upturns in retail sales and mortgage applications mean that the US could yet be following the path taken earlier by the UK, which incidentally had upbeat news on employment yesterday. Bloomberg reports:

The number of Britons claiming jobless benefits fell by 5,700 to 950,800, the biggest drop since January 2005, the Office for National Statistics said in London today. Economists expected claims to rise by 4,000, according to the median estimate in a Bloomberg survey of 30 economists. The jobless rate was unchanged for a ninth month at 3 percent...

Wages growth excluding bonuses rebounded to an annual 3.8 percent from August through October from the 3.5 percent gain in the previous period, which was the slowest since July 2003.

Higher energy bills pushed consumer prices up an annual 2.7 percent in November, the most since the index was introduced in January 1997, the statistics office said yesterday...

The number of employed in the economy rose 41,000 to 29 million in the three months ended October, the second highest on record. Employment reached a record 29,015,000 in the three months ended August...

Unemployment measured by International Labor Organization standards fell 7,000 to 1.7 million in the three months ended October and the rate dropped 0.1 percentage point to 5.5 percent.

On hindsight, the BoE had apparently stopped its rate hike cycle too soon. The Fed had been more persistent in its rate hikes, but it had started from a lower rate.

Wednesday, 13 December 2006

Fed leaves rates unchanged, US trade deficit falls

As widely expected, the Federal Reserve left the federal funds rate unchanged at 5.25 percent yesterday.

Less expected was a sharp drop in the US trade deficit. MarketWatch reports:

The nation's trade deficit shrank 8.4% in October to $58.9 billion from $64.3 billion in September, the Commerce Department said...

This is the smallest trade gap since August 2005. The one-month improvement in the deficit is the biggest since December 2001...

Exports rose 0.2% to $123.6 billion in October. Imports fell 2.7% to $182.5 billion. This is the largest monthly decline in imports since December 2001.

Imports of goods alone fell 3.4% to $153.6 billion. The largest drop came from imports of industrial supplies, principally crude oil. The United States imported a record amount of food and consumer goods in October.

Meanwhile, exports of goods alone slipped 0.2% to $88.5 billion. However, the United States exported a record amount of capital goods and consumer goods in the month. Exports of civilian aircraft declined in October.

Brad Setser has more analysis, of which the key points (in my opinion) are:

... [T]he October data suggests that the rise in non-oil imports in the third quarter seem to have ended, if not reversed itself – on the back, one assumes, of a slowing US economy...

... US export growth has been strong enough to offset the growing US non-oil import bill for the last couple of years. The increase in the overall trade deficit has been driven by rising oil prices...

... [O]f the future...the most likely outcome is that the US trade deficit stays roughly stable so long as oil prices stay stable. I suspect the US trade balance with Europe will start to improve in 2007 if European growth remains strong, while the US trade balance with Asia will continue to deteriorate. Both import and export growth are likely to slow.

Menzie Chinn at Econbrowser covers similar ground.

Tuesday, 12 December 2006

KOSPI falls 1 percent as LCD makers face price-fixing probe

As if falling panel prices are not enough, Korea's LCD makers are now facing a probe on price-fixing. Bloomberg reports:

Samsung Electronics Co. and LG.Philips LCD Co., the world's largest makers of liquid-crystal displays, are being probed by regulators in the U.S., South Korea and Japan for alleged price fixing in the $69 billion industry.

LG.Philips shares fell to a record after the Seoul-based company said late yesterday it's being questioned because of "possible anticompetitive conduct in the LCD industry." Samsung and Japan's Sharp Corp. said today they're under investigation...

Shares of LG.Philips fell 4.3 percent to close at 25,850 won in Seoul. Taiwan's AU Optronics Corp., the world's third-biggest LCD maker, declined 1.8 percent to the lowest in almost six months, Chi Mei Optoelectronics Corp. dropped 5.8 percent and Chunghwa Picture Tubes Ltd. slid 3.3 percent. Suwon, South Korea- based Samsung fell 0.7 percent, approaching a five-month low.

The KOSPI fell 1.0 percent to close at 1,376.98 today and is now down year-to-date. The Taiwan Weighted Index fell 2.0 percent to 153.56 today but remains in positive territory year-to-date.

Monday, 11 December 2006

Chinese exports and inflation accelerate, Japanese consumer sentiment improves

The Chinese economy is supposed to be slowing, but sometimes it is hard to tell. Bloomberg reports the latest trade numbers:

China had its second-largest trade surplus ever in November after the pace of exports growth unexpectedly accelerated.

The gap narrowed to $22.9 billion from a record $23.8 billion in October, the Beijing-based customs bureau said today on its Web site, bringing the surplus for the first 11 months to $156.5 billion. The government indicated Dec. 7 that the gap may swell by almost two-thirds to a record $168 billion this year...

Exports surged 32.8 percent in November from a year earlier, the biggest increase in three months, to a record $95.9 billion, while imports gained 18.3 percent to $72.9 billion, today's statement said.

And China's inflation rate accelerated in November. Again from Bloomberg:

Inflation in China, the world's fastest-growing major economy, accelerated more than expected in November as food costs increased at the quickest pace in almost two years.

Consumer prices rose 1.9 percent from a year earlier, the National Bureau of Statistics said today. That was the biggest gain in 20 months, adjusted for distortions caused by the Lunar New Year holiday, and topped all estimates among 21 economists surveyed by Bloomberg News.

Chinese stocks and bonds rose as non-food inflation held at 1 percent, damping expectations that the central bank will respond by raising interest rates. The acceleration is "temporary" and the bank won't act unless inflation stays at this level for several months, Tang Xu, research head of the People's Bank of China, said in Beijing today.

Neighbouring Japan would probably be happy with such inflation rates, but at least consumer sentiment there improved in November. Kyodo/Yahoo! News reports:

Japanese consumer confidence rose in November from the previous month for the second consecutive month, prompting the government to upgrade its assessment on consumer sentiment for the first time in 11 months, the Cabinet Office said Monday.

The index of confidence among households with two or more people came to an unadjusted 48.7, up 0.5 point from October. The index also rose 0.5 point on a year-on-year basis.

But it was a weaker yen that pushed Japanese stocks up today. From Bloomberg:

Japanese stocks climbed to their highest in more than six weeks after the yen weakened against the dollar, boosting the value of exports. Toyota Motor Corp. and Komatsu Ltd. paced advances...

The Nikkei 225 Stock Average added 110.17, or 0.7 percent, to 16,527.99 in Tokyo. The broader Topix index rose 11.63 or 0.7 percent, to 1627.97. Both gauges closed at the highest since Oct. 27. Advancing stocks outnumbered declines by about three to one on the first section of the Tokyo Stock Exchange.

Saturday, 9 December 2006

Strong hiring in the US, weak GDP growth in Japan

The slowing US economy is not yet very apparent in the labour market. From Reuters:

A stronger-than-forecast 132,000 jobs were created in November, according to a government report on Friday that implied the U.S. economy had more underlying resilience than previously thought.

The Labor Department, however, said the unemployment rate edged up to 4.5 percent from the 5-1/2-year low of 4.4 percent it reached in October, and a separate report pointed to waning U.S. consumer confidence in December...

The department revised down the number of jobs created in October to 79,000 from a previously reported 92,000 but it said that, in September, a robust 203,000 jobs were created instead of 148,000 as it had reported previously.

Average weekly hours worked were unchanged in November at 33.9. Average hourly earnings rose 0.2 percent, slightly less than the 0.3 percent that had been forecast.

Consumer confidence did fall.

Consumers remain wary, according to the University of Michigan survey. Its consumer sentiment index slipped to 90.2 in December from 92.1 in November, raising questions whether shoppers will spend as much during the holiday shopping season leading up to Christmas.

James Hamilton at Econbrowser says that employment remains solid.

I've argued for combining the BLS and ADP payroll with the BLS household survey data, giving the BLS payroll figure 8 times the weight of either ADP or the household. That weighted average suggests an initial estimate of November employment growth of around 150,000, or the sort of level you'd expect if economic growth was chugging along solidly.

Not so solid is the economic growth in Japan. From AFP/CNA:

Gross domestic product (GDP) grew by just 0.2 percent in the three months to September from the previous quarter, down from an initial estimate of 0.5 percent and the second quarter's 0.3 percent gain, the Cabinet Office said...

Weak domestic demand left exports as the main driver of growth, making the economy vulnerable to a slowdown in the United States and Japan's other major trading partners, analysts noted.

Firms also ploughed less money than initially thought into new factories and equipment, a major driver for the economy, the figures showed.

Japanese private-sector core machinery orders, a key gauge of corporate capital spending, rose by a smaller-than-expected 2.8 percent in October from September, a separate cabinet office report showed.

But Japanese companies are probably not complaining. From Reuters:

Japanese companies are likely to post their fifth straight year of record profits in the business year starting next April, propelled by flat TVs, semiconductors and cars, a Japanese brokerage said on Friday.

Recurring profits at the nation's 400 biggest firms excluding financial institutions are expected to climb 13.9 percent to 32.1 trillion yen ($278.6 billion), according to Nomura Securities Co...

For the year to the end of March, recurring profits were seen rising 7.5 percent, in line with Nomura's previous estimate of a 7.4 percent increase, with trading, chemical, electronics, machinery and auto sectors leading the way.

Friday, 8 December 2006

ECB raises rates, BoE keeps rates, Fed expected to cut next year

As expected, the European Central Bank raised its main interest rate by a quarter percentage point to 3.5 percent yesterday but the Bank of England left interest rates unchanged at 5 percent.

Meanwhile, in the US, the expectation has been tilted towards a rate cut. Reuters reports the latest on this.

The U.S. economy will expand at a weak pace next year, setting the stage for lower interest rates, according to a UCLA Anderson Forecast report released on Thursday.

The forecasting unit's latest report projected quarterly real gross domestic product growth no higher than 2.7 percent next year, reflecting the weak housing market.

And yesterday the Federal Reserve itself provided another reason for a rate cut. Reuters reports:

U.S. consumer credit fell $1.2 billion in October, the fastest rate of decline in 14 years, pulled down by a big drop in nonrevolving credit, the Federal Reserve reported on Thursday...

Consumer credit fell at a 0.6 percent annual rate in October, the biggest decline since a 0.96-percent drop in October 1992, the Fed said.

Thursday, 7 December 2006

Slowdown takes a back seat

Apart for some disappointing data coming out of the UK, yesterday's economic data were relatively optimistic.

In the US, ADP's data yesterday provide a preview of Friday's jobs report. From Reuters:

The jobs report from ADP Employer Services, a private employment service, on Wednesday showed U.S. private employers added 158,000 jobs in November and boosted some analysts' expectations for the government's reading on November nonfarm payrolls, to be released on Friday.

Hopes for a stabilisation of the housing market also got a boost yesterday.

Also on Wednesday, the Mortgage Bankers Association said U.S. mortgage applications rose sharply last week, fueled by a surge in home refinancing loans as interest rates sunk to their lowest levels in more than a year.

The MBA said its seasonally adjusted index of mortgage application activity for the week ended December 1 increased 8.1 percent to 647.6 from the previous week's 599.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.98 percent, down 0.15 percentage point from the previous week, the lowest since the week ended October 7, 2005, when it stood at the same level. Interest rates were also below year-earlier levels of 6.32 percent.

Meanwhile in the UK, industrial production in October was disappointing. Reuters reports:

Wednesday's data from the Office for National Statistics showed industrial output fell 0.8 percent on the month, confounding expectations of a 0.1 percent rise...

Manufacturing output fell 0.4 percent, its biggest contraction in a year and wrongfooting analysts who had expected a 0.2 percent increase.

And this as the Nationwide Consumer Confidence Index fell 9 points in November even as the BRC Shop Price Index for November rose 1.81 percent from November 2005, the fifth consecutive month of year-on-year increase and the largest rise since April 2004.

Manufacturing may be getting wobbly in Germany too. From Bloomberg:

German factory orders unexpectedly dropped for a second month in October, led by a slump in domestic demand for cars and trucks.

Orders fell 1.1 percent from September when they declined 3 percent, the Economy and Technology Ministry in Berlin said today. Economists expected an increase of 1.1 percent, the median of 39 estimates in a Bloomberg News survey showed. From a year earlier, orders advanced 10 percent.

But at least retail-sales growth accelerated in the euro zone, according to the Bloomberg retail PMI.

An index of retail sales in the economy of the dozen nations sharing the euro rose to a seasonally adjusted 53.7, the highest in four months, from 52.8 in October, 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.

There was also good news in Japan. From Bloomberg:

Japan's broadest index of future economic activity rose to a four-month high in October, underscoring the central bank's view that Asia's largest economy will keep expanding. Stocks gained.

The leading index, which comprises measures such as machinery orders, climbed to 50 percent, the Cabinet Office said today in Tokyo. A number at 50 or higher indicates the economy will grow in three to six months.

But the growth outlook for Japan obviously cannot compare with that of Asia's second largest economy, even after a planned slowdown. From AFP/CNA:

China has set an official economic growth target for next year of about eight percent despite expectations the expansion will be much faster, a senior government economist said.

"The central government set the annual target at about eight percent," said Zheng Xinli, vice director of the economic policy research office under China's top political body, the politburo...

But Zheng said he believed Gross Domestic Product (GDP) growth in 2007 would again be much higher.

"I personally think GDP growth next year will be about 10 percent," he told reporters outside a business forum in Beijing.

At least China's trade surplus did drop in November. Xinhua Online reports:

China's monthly trade surplus stood at 23.37 billion U.S. dollars in November, slightly dropping from October's 23.83 billion U.S. dollars, this year's fifth monthly record high, according to the latest Customs figures on Wednesday.

Wednesday, 6 December 2006

Services accelerate

In contrast to manufacturing, the services sector in the US remained resilient in November. Reuters reports:

Growth in the U.S. services sector accelerated unexpectedly in November...

The Institute for Supply Management's services index rose to 58.9 in November from 57.1 in October. The median forecast of Wall Street economists was for a decline to 56.0...

The ISM report helped offset the impact of a 4.7 percent slump in new orders at U.S. factories in October, the biggest drop in more than six years.

Another report yesterday showed that third-quarter productivity and labor costs grew more slowly than forecast.

... U.S. worker productivity rose 0.2 percent in the third quarter... Nonfarm business productivity was forecast by analysts polled by Reuters to rise at a 0.4 percent annual rate. While it fell short of that mark, it was revised up from the flat reading initially reported by the Labor Department.

Productivity grew just 1.4 percent from the same quarter last year, the weakest year-on-year performance since the second quarter of 1997, when it expanded 1.3 percent.

Compensation per hour increased 2.6 percent, versus a 3.7 percent rise initially reported in the third quarter.

Europe also saw acceleration in the services sector. Bloomberg reports:

Growth in European services industries, the biggest part of the economy, unexpectedly accelerated in November, prompting speculation the European Central Bank will keep raising interest rates next year.

Royal Bank of Scotland Group Plc said today its services index, which accounts for about a third of the economy and covers industries such as telecommunications and banking, rose to 57.6, a four-month high, from 56.5 in October. Economists expected an unchanged reading, the median of 32 estimates in a Bloomberg News survey showed. A level above 50 indicates growth.

And eurozone retail sales were up in October. From AFX/Forbes:

Euro zone retail sales rebounded slightly in October after a sharp drop the month before, with a strong increase in French sales contributing to the recovery.

Retail sales rose 0.3 pct in October from September, EU statistics office Eurostat said.

It was a somewhat similar story in the UK. From Reuters:

The Chartered Institute of Purchasing and Supply/Royal Bank of Scotland's services business index jumped to 59.8 last month, its highest since January 2004 and one of the strongest readings in the survey's 10-year history.

That was up from 59.3 in October and well above analysts' forecasts of a modest pullback to 58.8.

On the other hand, November also saw UK retail sales grew at their slowest annual rate in eight months while annual growth in take-home pay slowed sharply.

Just as well that having fun in the UK is becoming cheaper.

Tuesday, 5 December 2006

Japanese capital spending slows

Yesterday's data from Japan raised more doubts over whether the BoJ will raise rates soon. From Reuters:

Growth in Japanese firms' capital spending slowed in the July-September quarter, data showed on Monday, pointing to a downward revision in gross domestic product figures due later in the week...

Spending on plant and equipment was up 12.0 percent in the three months to September compared with the same quarter last year, the corporate survey by the Ministry of Finance survey showed...

On a seasonally adjusted basis and excluding software investment, capital spending rose just 0.1 percent in July-September from the preceding quarter, when it grew 5.2 percent...

The MOF's latest survey also showed recurring profits rose 15.5 percent in July-September from the same quarter a year earlier to 13.39 trillion yen ($116 billion).

The pace of rise picked up from the 10.1 percent increase logged in April-June.

Separate data showed Japanese wage earners' total cash earnings were flat in October from a year earlier.

Overtime pay, seen as a barometer of the strength in economic activity, rose 1.1 percent.

In the meantime, though, Japan's monetary base continues to fall. From Kyodo/Yahoo! News:

Japan's monetary base posted its biggest fall on record -- 22.3 percent -- in November from a year earlier, as the balance of current account deposits held by financial institutions at the Bank of Japan dropped sharply, the central bank said Monday.

But perhaps it is already too late to tighten. There may already be a global inventory glut.

Just-in-time inventories are turning into just-too-much at companies around the world.

From Dodge Ram pickup trucks to Sanyo mobile telephones, unsold goods are piling up around the world. That may become a drag on global economic growth as companies idle workers and production lines to clear out the excess.

Factory inventories worldwide rose faster than sales last quarter for the first time since 2001, according to economists at UBS AG in London. Behind the build-up: an unexpected slowdown in demand, especially in the U.S., brought on by the mid-year surge in energy prices and a housing slump.

Apart from Japan, the news flow elsewhere yesterday also generally pointed to slower economic growth.

U.S. Oct pending home sales index falls 1.7 pct

Industrial producer prices stable in euro area

UK construction activity slows in Nov-CIPS

UK Q4 factory orders robust, outlook less rosy-EEF

Monday, 4 December 2006

ISM's PMI confirms US slowdown

Last week was a big week for data on the US economy with reports out on the overall economy, the housing market, consumer spending and manufacturing. Financial markets generally saw the data, especially those on manufacturing, as negative on the economy. However, at the end of it all, the data largely confirmed that there is a slowdown in the US economy, but not necessarily anything more.

On 29 November, the Commerce Department released a revised report on US gross domestic product that showed that the economy grew at a 2.2 percent annual rate in the third quarter, higher than the advance estimate of 1.6 percent. However, because much of the upward revision was due to inventory growth, reactions from economists to the report were mostly ambivalent.

Perhaps of greater significance were data for the fourth quarter.

The housing market continued to show weakness, but the data were contradictory. According to the National Association of Realtors, existing home sales were up in October but prices were down. On the other hand, according to the Commerce Department, new homes sales were down in October but prices were up. The Commerce Department also reported that construction spending in October fell 1.0 percent.

Meanwhile, consumer spending appears to be holding up relatively well. On 30 November, the Commerce Department reported that personal consumption expenditures rose 0.2 percent in October. This was particularly impressive as the personal consumption expenditures price index fell 0.2 percent that month. Having said that, the Conference Board did report last week that its index of consumer confidence fell to 102.9 in November from 105.1 in October.

However, it was manufacturing that saw most of the bad news. On 28 November, the Commerce Department had reported that new orders for durable goods fell 8.3 percent in October, the biggest drop since July 2000. Despite the hopes of many economists, business spending did not help much as orders for non-defense capital goods excluding aircraft fell 5.1 percent.

30 November then saw the National Association of Purchasing Management-Chicago report that its business barometer fell to 49.9 in November -- the lowest since April 2003 -- from 53.5 in October, marking its first contraction in more than three years.

And confirming the contraction at the national level, the next day saw the Institute for Supply Management (ISM) report that the PMI, its composite index measuring manufacturing activity, dropped to 49.5 in November from 51.2 in October.

Treasury yields fell over the week, especially on Thursday and Friday, the days when the Chicago and ISM manufacturing reports were released respectively. Stocks were flat on Thursday but fell on Friday.

So how bad a shape is the US economy in based on the ISM data? Actually, probably no worse than what many economists already think.

According to the ISM release, a reading above 50 indicates that the manufacturing economy is generally expanding while a reading below 50 indicates that it is generally contracting.

The threshold for the overall economy, however, is slightly different. To quote from the ISM release:

A PMI in excess of 42 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the November PMI indicates that the overall economy is continuing to grow while the manufacturing sector has now entered a period of contraction. "The past relationship between the PMI and the overall economy indicates that the average PMI for January through November (54.1 percent) corresponds to a 4.1 percent increase in real gross domestic product (GDP). In addition, if the PMI for November (49.5 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually."

In other words, the PMI is saying that the US economy is likely to grow at about the same rate as it did in the third quarter, not exactly an earth-shaking revelation.

Saturday, 2 December 2006

Manufacturing index drops below 50 in the US, stronger elsewhere

Yet more bad news yesterday for the US economy. Reuters reports:

U.S. and European stocks tumbled, benchmark bonds surged and the dollar slid after The Institute for Supply Management said its index of national factory activity unexpectedly dropped to 49.5 from 51.2 in October, below economists' median forecast for a slight rise to 51.5.

It was the first time the index had fallen below 50, which indicates shrinking activity in the sector, since April 2003. The Commerce Department reported U.S. construction spending declined 1 percent in October, more than expected and adding to a growing pile of evidence that the housing market is cooling...

The ISM report also showed that new orders, a gauge of future growth, fell to 48.7 from 52.1 in October, while the employment index slipped to 49.2 from 50.8.

Prices paid, however, climbed to 53.5 in November, from 47.0 in October, pointing to continued inflationary pressures in the manufacturing sector even as growth slows.

Elsewhere in the world, though, things were not as bad. Reuters reports:

Surveys of company purchasing managers showed an unexpected but minor slowdown in the 12-nation euro zone. The PMI index, which measures how the manufacturing sector performs, slipped to 56.6 from 57.0 in October, falling below forecasts but still a healthy pace...

Improvement in the jobs market was illustrated by a separate report from the European Union's statistics office, which said joblessness in the euro zone slipped to 7.7 percent of the workforce in October from 7.8 percent in September...

Britain's manufacturing PMI index showed the slowest pace of growth in six months in November, dropping to 52.6 from 53.5 in October, but Switzerland's rose close to a record high of 67 after 62.3 in October...

India's manufacturing sector eased a little from a peak in October but momentum remained strong. The seasonally adjusted PMI index fell to 58.9 in November from 59.3 a month earlier as the high pace of growth in output and new orders dropped back a notch.

By contrast, Japanese manufacturing activity grew at the slowest pace in a year and a half as cooling demand at home offset a rise in orders from overseas. The NTC Research/Nomura/JMMA Purchasing Managers Index, released on Thursday, slipped to a seasonally adjusted 53.7, the lowest since May 2005. It was 54.1 last month.

Two surveys on Chinese manufacturing released on Friday showed a rebounding in growth, indicating that the underlying foundations of the world's fourth-biggest economy are solid. Brokerage house CLSA's PMI index hit a four-month high of 53.0 in November from 52.1 in October, while an index based on an official survey rose to 55.3 from 54.7.

Not surprisingly, the US dollar continued to fall yesterday. Bloomberg reports:

Futures traders increased bets that the euro will rise against the dollar to near a record as signs of slowing growth pushed the U.S. currency to a 20-month low...

The dollar dropped to $1.3340 per euro at 4:56 p.m. in New York from $1.3243 yesterday. Its record low is $1.3666 in December 2004. Against the British pound, the U.S. currency declined to $1.9848, the lowest in 14 years. The dollar also fell to 115.29 yen from 115.80 yesterday and touched a three-month low of 114.98.

Friday, 1 December 2006

Japanese core consumer prices edge up, jobless rate and household spending fall

Japan remained out of deflation in October, but barely. From AFP/CNA:

Japan has reported a mixed batch of economic data including weaker-than-expected inflation that triggered fresh uncertainty about when interest rates will be raised again.

Japanese core consumer prices rose by just 0.1 percent in October from a year earlier, the Ministry of Internal Affairs and Communications said, as the economy struggles out of its long deflationary torpor...

Excluding energy, core prices were down 0.4 percent...

At the same time, the jobless rate fell to 4.1 percent in October from 4.2 percent in September, approaching May's eight-year low of 4.0 percent, the ministry said.

Spending by households in October dropped 2.4 percent from a year earlier, declining for a 10th straight month although by less than the 3.5 percent expected by the market.

So what do these data mean? An interest rate hike. At least according to some economists.

... Takuji Aida, chief economist at Barclays Capital Japan, said that a January interest rate rise still looked likely, predicting a rebound in core consumer price inflation to 0.2 percent in November...

Morgan Stanley economist Takehiro Sato suggested that core consumer prices were no longer the major factor guiding monetary policy in Japan.

"Rather, the central bank is focusing on the future prospects for the CPI in the mid- to longer-term. Therefore, the outlook for the rate hike wouldn't be affected by today's figures," he wrote.

Jerram at Macquarie Securities took a similar view, predicting: "In the light of recent positive data on the business cycle and comments from various BOJ officials, we think a rate hike in December or January is likely."

Higher US consumer spending, solid European growth and surging Indian economy

Income and spending in the US rose in October. From Bloomberg:

Americans earned 0.4 percent more than in September, the Commerce Department said today in Washington, and purchases climbed 0.2 percent after declining the prior month...

Adjusted for inflation, spending increased by the most in three months... Optimism about the resilience of consumers was partly offset by figures from the International Council of Shopping Centers showing retailers' November sales rose less than analysts estimated.

Other data yesterday were mostly negative.

The number of workers filing first-time applications for jobless benefits jumped by 34,000 to 357,000. The National Association of Purchasing Management-Chicago said its index fell to 49.9 this month, the lowest since April 2003, from 53.5 in October...

Home prices rose an average of 0.86 percent during the third quarter, the smallest gain since 0.79 percent in the second quarter of 1998, the Office of Federal Housing Enterprise said today in Washington.

And core inflation is matching the consumer's resilience.

A gauge of inflation watched by the Fed, the personal consumption expenditure core deflator index, rose 0.2 percent in October for a second month... It was up 2.4 percent from a year ago, matching the increase in September.

Inflation has been relatively low in Europe, but interest rates there are likely to head higher nevertheless, especially after yesterday's reports, summarised by Reuters.

A tumble in unemployment in Germany headed mostly positive news from the euro zone economy on Thursday and forecasts of further healthy growth in early 2007 set the stage for a December interest rate rise.

Germany's unadjusted jobless rate dropped below 4 million for the first time in four years...

The EU statistics office said third-quarter economic growth was 0.5 percent in the 12-nation zone. This was slower than in the first half of 2006 and a touch lower than U.S. growth, but remained solid, according to economists.

The European Commission raised its growth forecast for the first three months of 2007 to a range of 0.3-0.8 percent from 0.0-0.5 percent. It predicted second quarter growth of 0.3 to 0.9 percent.

... [T]he European Commission estimate[d] that inflation accelerated in November as the impact of sliding oil prices lessened. The rate hit 1.8 percent, up from 1.6 in October.

However, consumer confidence in Europe is looking a little shaky, falling in November in France and in the UK. Retail sales were also reportedly down in Germany in October and in the UK in November.

The weak consumer sentiment in the UK contrasts with house prices that refuse to cool, rising another 1.4 percent in November, according to Nationwide.

Indeed, overall economic sentiment in Europe remains strong while the business climate indicator for the euro area hit an all-time high in November.

But in any case, the growth rates in both the European and US economies are not going to match India's. From AFP/CNA:

India's economy grew a faster-than-expected 9.2 percent in the second quarter to September, official data shows, prompting concerns that overheating will require higher interest rates...

The gains were led by services, including real estate and communications, which grew 13.9 percent, followed by manufacturing at 11.9 percent year-on-year.