Strong economic data from the US and Europe

The run of negative US data appears to have been broken recently. Reuters reports the US data released yesterday.

Personal income rose 0.6 percent in February, below the unrevised 1.0 percent gain for January but double the 0.3 percent increase forecast by analysts in a Reuters poll.

February consumer spending also rose 0.6 percent, outpacing forecasts for a 0.3 percent gain after an unrevised 0.5 percent increase in January, according to Commerce Department data...

The National Association of Purchasing Management-Chicago, a barometer of Midwest manufacturing, jumped to 61.7 in March from 47.9 in February, its highest level since early 2005. The index showed new orders soared...

Consumer confidence data, however, showed Americans had some concerns with the economy.

The Reuters/University of Michigan Surveys of Consumers' final March sentiment index fell to its lowest in six months as worries about rising prices and slowing income gains weighed. The index slid to 88.4, its lowest since September, from 91.3 in February...

Core consumer prices, which exclude volatile energy and food costs, rose 0.3 percent in February, outpacing forecasts for a 0.2 percent rise, following a downwardly revised 0.2 percent gain in January.

The core prices were up 2.4 percent compared with a year earlier after a downwardly revised 2.2 percent gain in January...

U.S. construction spending in February rose 0.3 percent, its biggest jump since a 1.0 percent gain in March 2006, even as private residential spending staged its 11th straight monthly drop, the Commerce Department said. The total spending of $1.171 trillion was driven higher by nonresidential building, made up of commercial construction and local government building.

The economic data from Europe had been strong for some time. That did not change yesterday, going by Bloomberg's report.

An index of sentiment among executives and consumers in the euro area increased to 111.2 in March, the highest since early 2001, from 109.7 in February, the European Commission in Brussels said today. Economists expected the index to fall to 109.5, according to a Bloomberg News survey of economists. The jobless rate fell to 7.3 percent in February and inflation accelerated to 1.9 percent in March, separate reports showed.

Meanwhile, retail sales rebounded in Germany in February.

Sales, adjusted for inflation and seasonal swings, gained 0.9 percent from January, when they slumped 4.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.9 percent increase, the median of 18 estimates in a Bloomberg News survey showed. From a year earlier, sales fell 1.6 percent.

And consumer confidence in Britain held steady in March.

The GfK NOP consumer confidence barometer remained at -8 this month, the same level as in February and as predicted by analysts.

Japanese consumer prices fall

As expected by economists, Japan's inflation rate is back in negative territory. From AFP/CNA:

Core consumer prices, which exclude volatile prices of fresh food, fell by 0.1 percent in February from a year earlier, the Ministry of Internal Affairs and Communications said.

Overall consumer prices declined by 0.2 percent in February from a year earlier.

Both were down for the first time since April last year...

The core consumer price index (CPI) for Tokyo alone - the leading indicator for national price trends - pointed to a continued easing of consumer prices, dropping by 0.1 percent in March from a year earlier.

Other data released today:

Meanwhile, Japan's industrial output fell 0.2 percent in February from the previous month, beating market expectations for a 0.6 percent decline, the government reported.

On a brighter note, average monthly household spending rose 1.3 percent in February from a year earlier, while the unemployment rate remained unchanged at 4.0 percent.

And from Reuters:

The NTC Research/Nomura/JMMA Purchasing Managers Index, which gives an early snapshot of the health of manufacturing, fell to a seasonally adjusted 52.5 from 53.0 in February, making it the lowest reading since February 2005 when it was at 52.1...

The PMI's new orders index, a barometer of future demand that combines goods orders placed with Japanese manufacturers from both home and overseas, slipped to 51.2 from 52.6 in February.

It marked the weakest growth since January 2005 when the index was at 50.6.

UK data strong, US GDP growth revised up

The UK housing market keeps surprising with its resilience. Reuters reports:

The Bank of England said on Thursday that mortgage lending rose by 10.256 billion pounds in February, up from 9.520 billion the month before and stronger than forecasts for a 9.4 billion pound increase.

Mortgage approvals -- a leading indicator of house prices -- were also higher than expected at 119,000 last month. This was unchanged from January and above forecasts that they would drop to 117,000...

Consumer credit, however, rose less than expected and was up 919 million pounds -- the smallest increase since September 2006 -- suggesting consumers were a little more cautious about taking on unsecured debt.

It looks like more rate hikes from the Bank of England, especially with M4 growing 0.9 percent in February or at a 12.7-percent annual rate.

The UK consumer is not doing too badly either. From Reuters:

The Confederation of British Industry said its distributive trades survey's reported sales balance came in at +32 in March, up from +19 in February, posting the highest reading since December 2004. Analysts had forecast a reading of +15.

Meanwhile, US fourth quarter GDP growth has been revised higher. MarketWatch reports:

The nation's economy grew at a 2.5% annual pace in the final three months of 2006, slightly faster than the previous estimate of 2.2%, the Commerce Department reported Thursday.

The upward revision to gross domestic product mainly reflected higher prices for trucks that boosted vehicle inventories. Investments in software were revised slightly lower. Exports were revised higher...

The personal consumption expenditure price index fell at a 1% annual rate, revised from 0.9% reported earlier. In addition, the core PCE price index, which excludes food and energy, rose 1.8%, revised from 1.9%...

Meanwhile, corporate profits declined for the first time in five quarters, falling by $4.9 billion, or at a 0.3% quarterly rate, after rising $61.5 billion, or 3.9%, in the third quarter.

After-tax profits grew $9.6 billion, or 0.8%. Before-tax profits were up 18.3% from the fourth quarter of 2005 to the fourth quarter of 2006.

US durable goods orders disappoint, eurozone money supply growth accelerates

The US economy showed more signs of slowing yesterday. Reuters reports:

New orders for U.S.-made durable goods rose 2.5 percent...

The Commerce Department reported that excluding transportation orders, which are heavily skewed by aircraft, durable goods orders fell 0.1 percent...

The Commerce Department revised down its figures for January, reporting a 9.3 percent decline in overall durable orders in January, first recorded as a 7.8 percent decrease...

In a further sign of weak demand, orders for nondefense capital goods excluding aircraft, viewed as a proxy for business spending, fell 1.2 percent last month after declining 7.4 percent in January. Economists were expecting a 2.3 percent gain.

Reuters also reports that Federal Reserve Chairman Ben Bernanke yesterday acknowledged downside risks for the economy but remains concerned about inflation.

Federal Reserve Chairman Ben Bernanke said on Wednesday that housing market turmoil has clouded the outlook for the U.S. economy but that the central bank remains focused on ensuring core inflation moves lower.

In testimony to the congressional Joint Economic Committee, Bernanke said inflation, outside of volatile food and energy prices, was likely to moderate gradually but that it was higher than the Fed would like and might not move down as hoped.

While that left the direction of US interest rates looking uncertain, there was less uncertainty in the euro area after the latest money supply data. From FT:

Annual growth in M3, the broad money supply indicator, reached a fresh high in February, according to European Central Bank figures. At 10.0 per cent, compared with an upwardly-revised 9.9 per cent in January, the rate of expansion was fastest since the launch of the euro in 1999...

Meanwhile, the ECB figures showed eurozone lending for house purchases remained strong... At 9.4 per cent in February, the annual rate of growth in lending for house purchases was unchanged from January and still high by recent standards, although it was lower than the peak of more than 12 per cent seen last year.

Data from Germany yesterday also pointed to more rate hikes, with Bloomberg reporting that inflation accelerated more than expected to 2.1 percent in March, the highest since July, after a 1.9 percent gain in February, and consumer confidence rose for the first time in five months, GfK AG's confidence index for April rising to 4.4 from a revised 4.3 in March.

The UK economy, though, looks a little cooler after yesterday's data. From Reuters:

The Office for National Statistics said on Wednesday GDP grew by 0.7 percent in the final three months of last year, unexpectedly down from the 0.8 percent rate published last month.

That still left the annual growth rate unchanged at 3.0 percent and growth for 2006 as a whole was revised higher a tenth of a point to 2.8 percent...

Figures from the Nationwide building society earlier on Wednesday showed...[t]he price of an average home rose 0.4 percent in March, bringing the annual rate of house price inflation to 9.3 percent from 10.2 percent in February.

Confidence falls in the US, better in Europe

US consumer confidence weakened in March, Reuters reports:

The Conference Board said its consumer confidence index fell to 107.2 in March, from a downwardly revised 111.2 the prior month, with rising gasoline prices and falling stock prices contributing to the slightly more pessimistic mood.

Weakness in housing is not helping.

The Standard & Poor's/Case-Shiller's home price index for 10 metropolitan areas released Tuesday fell 0.7 percent in the year to January. That was the first year-over-year drop in home values since January 1994...

Also Tuesday, No. 3 U.S. home builder Lennar Corp said declining home prices and the subprime lending crisis contributed to a 70 percent plunge in quarterly earnings.

Consumer spending, however, continues to hold up relatively well.

The International Council of Shopping Centers and UBS Securities reported chain store sales rose 0.2 percent last week from the previous week and were up 4.6 percent compared to the same week last year.

Meanwhile, Redbook Research said in its report that chain store sales were up 4.3 percent last week compared with a year earlier.

Meanwhile, Europe remains relatively optimistic. Bloomberg reports:

German business confidence unexpectedly rose this month, a sign Europe's largest economy has overcome a sales-tax increase and can withstand a U.S. slowdown.

The Munich-based Ifo institute said its sentiment index, based on responses from 7,000 executives, rose to 107.7 from 107 in February...

Italian business confidence fell in March as manufacturers anticipated a decline in demand for exports caused by the weakening U.S. economy, according to a survey released today by the Isae institute in Rome...

European consumer confidence may have risen to the highest level in six years in March, indicating domestic spending will buoy the region's expansion this year, a survey of economists showed. That report will be released on March 30. French business confidence rose in March to the highest in 11 months, a government report showed yesterday.

The Chinese must be feeling optimistic too. Retail sales rose 16.9 percent in February from the same month a year ago, according to a National Bureau of Statistics report yesterday. Also yesterday, the Shanghai Composite Index hit 3,138.826, setting a record high for the second straight day.

US new home sales fall, UK home prices rise, BoJ wary of reliance on cheap credit

US new homes sales fell in February. Bloomberg reports:

New-home sales in the U.S. unexpectedly fell in February to the lowest level in almost seven years, dimming prospects for a quick revival in housing.

The supply of unsold homes climbed to the highest in 16 years, the Commerce Department said today in Washington. Purchases dropped 3.9 percent to an annual pace of 848,000 last month. Economists had forecast they would rise to a 985,000 rate, based on the median forecast in a Bloomberg News survey...

The median price of a new home fell 0.3 percent in February to $250,000 from $250,800 a year earlier, today's report showed.

The number of homes for sale at the end of the month rose to 546,000 from 538,000 in January. That left the supply of homes at the current sales rate at 8.1 months' worth, compared with 7.3 months in January. The number of homes completed and awaiting a buyer rose to 179,000 last month.

In the UK, however, house prices continue to rise in March. Reuters reports:

Housing researchers Hometrack said average prices rose 6.7 percent in March on a year ago, accelerating from a 6.4 percent increase in February to its fastest pace since June 2003. Prices rose 0.8 percent on the month, although the figures are not adjusted to factor in seasonal conditions in the market.

Rapid house price inflation in London and the south east of England continue to distort the overall national picture, Hometrack said, while three interest rate hikes since August seem to be squeezing affordability in other regions.

No doubt, the BoJ must be watching all these developments. From AFP/CNA:

Bank of Japan governor Toshihiko Fukui warned Monday that very low interest rates could store up trouble for the economy in the future if people get over reliant on cheap credit.

"We need to gradually adjust the level of interest rates to reflect changes in the economy and prices," Fukui said in parliament.

"Even if the economy expands at a moderate rate, there are concerns that we may see various adverse effects resulting from the market's belief that the extremely easy interest rates will last for a long time," he said.

The focus on the longer term was also evident in the minutes of the February meeting released yesterday. Bloomberg reports:

Most Bank of Japan board members said the central bank needed to explain that it raised interest rates in February based on the outlook for the economy and prices over one to two years, meeting minutes show.

"The bank had made the decision from a longer-term perspective," taking into account the possibility that consumer prices may fall in the short term, most members said, according to minutes of the Feb. 20-21 meeting released today in Tokyo.

Fed relaxes, investors should not

After weeks of turmoil, stock markets around the world appear to be steadying, helped to no small extent by hopes of lower interest rates. This is despite indications that the United States economy, the growth engine for the global economy, is possibly headed for a serious slowdown.

Last week saw most stock markets in the world putting up strong performances. In the US, the Standard & Poor's 500 Index gained 3.5 percent. In Europe, the Dow Jones Stoxx 600 Index rose 4.7 percent. In Asia, the Morgan Stanley Capital International Asia-Pacific Index rose 3.5 percent.

It was not economic data that pushed stock markets higher. Rather it was monetary policy. Or more specifically, monetary policy bias as perceived by investors.

Last week, two central banks, the Bank of Japan and the Federal Reserve, had policy-setting meetings on 20 and 21 March respectively. Both kept interest rates unchanged, as were widely expected. What traders were interested in, though, were the statements accompanying the decisions.

The BoJ's nine board members voted unanimously to keep the overnight call rate target unchanged at 0.5 percent. At the news conference after the meeting, BoJ Governor Toshihiko Fukui gave few clues about the pace of future rate increases but on 22 March he told a parliamentary committee in Tokyo that the central bank would keep rates low for some time and adjustments would be gradual.

The Federal Reserve's decision elicited a more excited response from markets. Why? Because unlike on previous occasions, its accompanying statement this time omitted mention of "any additional firming". Instead, it only mentioned "future policy adjustments".

The US dollar fell and stock and bond prices rose after the statement was released as markets saw it as paving the way for a possible rate cut.

That was despite the Federal Reserve also saying that inflation has been "somewhat elevated" and that "the high level of resource utilization has the potential to sustain" inflation pressures. That incidentally is in line with what I had also written (see "Stocks, hit by subprime turmoil, not getting relief on inflation front").

However, slower economic growth could bring down resource utilisation, and slower growth is exactly what seems to be materialising. Fourth quarter GDP growth was just 2.2 percent and fears that the fallout from the ongoing problems in the subprime mortgage market could drag the rest of the economy further down were not alleviated by last week's housing data, which were mixed at best. Falls in the NAHB/Wells Fargo Housing Market index and building permits in particular raised further doubts that the housing market is stabilising.

Last week also saw the Conference Board report that its index of leading economic indicators fell 0.5 percent in February. In fact, the leading index has been fluctuating between 137 and 138 for most of the past year or so. Such stagnation has in the past more often than not preceded an outright downturn in the index and a recession in the economy.

However, many analysts appear less concerned with the signal that is coming from the leading index than with that from the yield curve.

There are several ways to look at the yield curve. One way is to look at the spread between the yield on the 10-year US Treasury note and the federal funds rate. Another is to look at the spread between the yield on the 10-year Treasury note and the 2-year Treasury note. The accompanying chart shows these spreads and compares them with real US GDP year-on-year growth from 1986 to 2006.


Note that today, the US spreads are negative and, indeed, have been negative for quite some time. This means that the yield curve is inverted, which is often a precursor of a recession.

But perhaps this time is different. The chart also shows the spread between the 10-year Japanese government bond yield and the overnight call rate. This has been much higher than the equivalent US spread, reflecting the easy monetary policy of the BoJ. It means that there is cheap Japanese money available to invest in the US. This keeps US long rates relatively depressed.

Now if US long-term rates have been depressed by an injection of Japanese-funded money, the implication of the negative spread in the US may not be as bad as in previous cycles when the negative spread was the result of a combination of Federal Reserve tightening and a lack of demand for funds.

Having said that, if the US yield curve continues to stay inverted, the message for the economy could be a little more ominous. Over the past year or so, the BoJ has raised its overnight call rate by 50 basis rates. The Japanese spread has narrowed accordingly. The availability of cheap Japanese money is diminishing, so its influence on the US yield curve should also be diminishing.

As it is, the chart shows that the trends and levels of the respective spreads today are close to where they were back in 2000, not long before the US economy went into recession in 2001. That is not a comforting thought.

Possibly Federal Reserve officials feel uncomfortable too. Uncomfortable enough to contemplate "future policy adjustments" last week.

Investors probably should not get too comfortable either. A relaxation in the Federal Reserve's tightening bias does not necessarily translate into an imminent rate cut.

And even if it does, today's parallel with 2000-01 provides another uncomfortable thought. Back then, the Federal Reserve began cutting interest rates at the start of 2001, about nine months into a bear market; the stock market did not bottom until almost two years later.

Good gains for stocks this week

Equity investors have left much of the previous weeks' concerns behind if this week's stock market gains are anything to go by. Reuters reports:

U.S. blue chips inched up on Friday, capping a rally in which the S&P 500 logged its biggest weekly gain since 2003 on speculation that the Federal Reserve's next move will be an interest rate cut...

The Dow Jones industrial average closed up 19.87 points, or 0.16 percent, at 12,481.01. The Standard & Poor's 500 Index finished up 1.57 points, or 0.11 percent, at 1,436.11. The Nasdaq Composite Index finished down 2.81 points, or 0.11 percent, at 2,448.93...

The Dow finished the week up 3.1 percent and the Nasdaq gained 3.2 percent. The S&P added 3.5 percent, its biggest rise since March 2003...

Stocks briefly jumped on a report showing an unexpected rise in existing-home sales last month but pared those gains after investors noted that prices have stagnated and the inventory of unsold homes has increased.

The National Association of Realtors reported that existing-home sales increased by a stronger-than-expected 3.9 percent to a 6.69 million-unit annual rate as mild weather spurred home buying. Inventories of unsold homes on the market rose 5.9 percent to 3.748 million units.

Big gains were not limited to US stocks. European stocks did well too, as Bloomberg reports:

European stocks rose, posting the biggest weekly gain in four years, as takeover speculation intensified in the auto, utility and media industries...

The Dow Jones Stoxx 600 Index rose 0.5 percent to 375.98 at the close in London. It gained 4.7 percent this week, the largest advance since March 2003. The Auto & Parts Index climbed 3.9 percent today to its highest since December 1991.

And so did Asian stocks. Again from Bloomberg:

The Morgan Stanley Capital International Asia-Pacific Index climbed 0.4 percent to 146.23 at 7:47 p.m. in Tokyo, set for its highest since Feb. 27. The gauge has risen 3.5 percent in the past five days, the most since the week ended Aug. 18. It's the first weekly gain in four, since a sell-off that began on Feb. 27 wiped out about $3.3 trillion of share values worldwide.

US leading index falls but data relatively positive elsewhere

Yesterday provided further justification for the relaxation in the Fed's tightening bias. From Reuters:

... [T]he private Conference Board said its Composite Index of Leading Economic Indicators fell 0.5 percent in February following a 0.3 percent drop in January and 0.7 percent rise in December.

However, the labour market remains healthy.

Initial filings for state unemployment insurance aid fell for the third straight week and to the lowest in six weeks, dropping to 316,000 in the week ended March 17 from an upwardly revised 320,000 for the prior week, the Labor Department said.

In Europe, industrial new orders were down in January by 0.2 percent and 1.5 percent in the euro zone and the EU27 respectively, but year-on-year, they were up 12.0 percent and 10.1 percent respectively.

Yesterday's UK data were even better. Factory orders hit a 12-year high in March while retail sales volumes rose 1.4 percent in February, the biggest monthly increase since January 2005.

However, in Japan, sentiment among large manufacturers showed a deterioration in the first quarter. Reuters reports:

The business survey index on sentiment at large manufacturers in the January-March quarter fell to plus 0.1 from plus 7.1 in October-December, according to a joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office.

Responses on the outlook for the coming months showed the BSI for big manufacturers at plus 4.1 for April-June and plus 11.8 for July-September...

The MOF survey also showed that firms see capital spending falling 5.3 percent in the next fiscal year starting on April 1, but recurring profit growing 6.2 percent.

But Japan's exports did not disappoint in February.

Separate data released by the MOF showed that Japan's trade surplus rose 7.7 percent in February from a year earlier to 979.6 billion yen ($8.34 billion)...

Exports rose 9.7 percent from a year earlier, against a market forecast of a 6.2 percent increase, while imports were up 10.1 percent.

Fed holds rates steady, relaxes tightening bias

The Fed yesterday gave markets more or less what they wanted short of actually cutting interest rates. Reuters reports:

The U.S. Federal Reserve held interest rates steady on Wednesday and said it remained concerned about inflation, but dropped its reference to the possibility of pushing rates higher, leaving its options open.

The decision by the central bank's Federal Open Market Committee to keep benchmark overnight rates at 5.25 percent, the level they hit in June after 17 straight quarter-percentage point increases, was widely expected.

However, in a shift that markets saw as evidence that the Fed is no longer leaning toward higher rates, officials said that "future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth."

That marked a change from January, when the Fed had said "the extent and timing of any additional firming that may be needed" would depend on the outlook...

Financial markets took the new language as opening the door to lower interest rates.

U.S. stock prices jumped higher and the blue chip Dow Jones industrial average closed up 159 points. At the same time, the dollar hit a two-year low against the euro, and bond prices rallied, with yields on short-dated maturities dropping below yields on longer-dated issues for the first time since August.

As usual, Mark Thoma at Economist's View looks at other differences between the previous statement and the latest one. As for the market reaction, The Bonddad Blog disagrees with the response to the Fed statement, pointing out that the Fed is still concerned about inflation and is "not lowering rates anytime soon".

But then investor exuberance isn't unique to the US. Remember the Chinese stock market, the one that triggered the global market turmoil a few weeks back? Well, it's back at a record high. Bloomberg reports:

Shanghai stocks, whose drop in February sparked a global sell-off, climbed to a record.

The Shanghai Composite Index, which tracks the bigger of China's two stock exchanges, rose 0.8 percent to 3057.38, its highest-ever close. An 8.8 percent decline in the index on Feb. 27 set off a rout that erased $3.3 trillion of stock value in markets worldwide.

And remember that this is despite China having raised interest rates over the weekend.

Meanwhile, in another development that could be positive for markets, the Bank of England raised doubts that it would raise rates further. From Reuters:

Bank of England policymakers unexpectedly voted 8-1 for steady interest rates in March, with David Blanchflower wanting a 25 basis point cut, minutes showed on Wednesday, calming some fears that rates will soon rise...

Interest rate futures rallied after the surprise vote, while sterling fell and the FTSE 100 index of leading shares extended gains...

The minutes of the March 7-8 meeting showed the committee was content to leave rates unchanged this month, but said the short-term outlook for inflation was now slightly lower than in the February inflation report.

Rate change: Not in Japan, probably not in US, maybe in UK

As expected, the Bank of Japan left interest rates unchanged yesterday. AFP/CNA reports:

The Bank of Japan on Tuesday played down concerns about the health of world markets and the US housing sector as it left its benchmark interest rate on hold at 0.5 percent as expected.

BoJ governor Toshihiko Fukui said the central bank would closely monitor global equity markets but suggested that the recent worldwide sell-off had been a necessary adjustment after earlier sharp rises.

According to Reuters, economists expect a similar decision from the Federal Reserve later today. The mixed housing data yesterday is unlikely to affect the decision.

The pace of U.S. home construction rose a sharp 9 percent in February but permits for future building slid, according to data on Tuesday that shed little light on whether the housing market was stabilizing...

Building permits, which signal future construction plans, fell 2.5 percent...

Instead, the next rate hike could come from the Bank of England. From FT:

Stronger-than-expected inflation and consumer borrowing data released on Tuesday have increased the chances of another hike in the cost of borrowing...

The Office for National Statistics said its index of consumer prices rose by 0.4 per cent between January and February, primarily nudged higher by an increase in air fares, much of which came from the chancellor’s hike in passenger duty announced in December.

This took the annual inflation rate to 2.8 per cent, slightly higher than the 2.7 recorded in January and the tenth consecutive month that CPI has been above the Bank’s 2 per cent target...

The Building Societies Association said that mortgage approvals climbed from £4.2bn in January to £4.92bn last month. Gross lending rose from £4.06bn to ££4.21bn over the same period.

BSA director general Adrian Coles said: “Yet again building societies saw record lending in February, with gross lending the highest ever recorded for that month. Approvals - loans agreed but not yet made - were also the highest February on record.”

Housing market weak in US, strong in UK

Recovery in the US housing market won't come so soon. From Reuters:

Confidence among U.S. homebuilders sank in March in data reported on Monday, while shares of subprime lender Accredited Home Lenders Holding Co. plunged 12 percent for the day after the company said it was in talks about possible financing...

The NAHB/Wells Fargo Housing Market index fell more than expected to 36 from a downwardly revised 39 a month earlier. Economists polled by Reuters had forecast the index would drop to drop to 38 from an originally reported 40 in February.

But it's a different story in the UK. Reuters reports:

Asking prices for homes in England and Wales rose an annual 12.2 percent in March, a survey showed on Monday, in a sign the housing market has remained robust in the face of rising interest rates.

Property Web site Rightmove said March's rate compared with a 11.5 percent increase in February and took the average asking price for a home to 228,183 pounds.

And speaking of shrugging off rising interest rates, stocks rose in China yesterday despite the weekend rate hike, but other markets in the country reacted more conventionally. Bloomberg reports:

The currency gained as much as 0.04 percent to 7.7331 against the dollar and traded at 7.7360 at 5:29 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The yield on the government bond maturing in April 2008 rose 3 basis points to 2.63 percent in Shanghai, according to the city's exchange... China's benchmark index, the Shanghai and Shenzhen 300 Index, gained 2.1 percent to 2659.41.

Stocks, hit by subprime turmoil, not getting relief on inflation front

Last week, stock prices plunged on Tuesday when fears over problems in the United States subprime mortgage industry led to worries for the rest of the economy. However, equity investors may have as much to fear from persistent inflation as from a weaker economy.

On 13 March, the Mortgage Bankers Association reported that in the fourth quarter of 2006, the delinquency rate for mortgage loans rose and the proportion of mortgages entering the foreclosure process rose to a record high. Subprime mortgages were especially hard hit, 13.33 percent of subprime loan payments being delinquent in the fourth quarter, the highest level since the third quarter of 2002 and up 77 basis points from the third quarter.

While subprime mortgage lenders like New Century Financial Corporation are understandably reeling from the difficulties in this particular segment of the industry and could face bankruptcy, some analysts fear that the turmoil could spread into a generalised credit crunch, with adverse effects on the overall economy.

As a result, the stock market fell sharply on 13 March, the Standard & Poor's 500 Index falling 2.0 percent. Investors fled to safer assets; the benchmark 10-year US Treasury note was up 17/32, with the yield at 4.495 percent.

The sentiment in markets was exacerbated by a report from the Commerce Department on the same day that retail sales excluding automobiles unexpectedly slipped 0.1 percent in February. Overall retail sales for the month also disappointed economists, rising just 0.1 percent.

Not that everybody would have been surprised by the weakness in retail sales though. Many had actually warned that the weak housing market over the past year or so would eventually lead to declining mortgage equity withdrawal and housing-related employment and thus negatively affect retail sales.

However, compared to the stock market turmoil about two weeks earlier (see "China sends investors scurrying out of risky assets"), this time the damage appears to be limited. After the plunge on 13 March, the stock market recovered some of its losses over the next two days before dipping again on Friday. The total loss for the S&P 500 in the four-day period from 13-16 March was 1.4 percent, much less than the 4.3-percent loss from 27 February to 2 March.

Apparently, that earlier loss had already shaken out many of the more nervous investors from the stock market.

Nevertheless, many investors remain uneasy, with some hoping for an interest rate cut from the Federal Reserve within the next few months to save markets. Is such a cut likely?

Ironically, probably not, for while markets reacted highly negatively to the weak mortgage and retail data last week, other data in the past week or so are indicating that inflation remains higher than what the Federal Reserve would be comfortable with while the economy may still be growing too fast for inflation to decelerate at anything better than a very gradual rate.

On 16 March, the Labor Department reported that the consumer price index rose 0.4 percent in February. Core prices, excluding food and energy, rose 0.2 percent. On a 12-month basis, the respective increases were 2.4 percent and 2.7 percent. In the absence of a full-blown recession, the Federal Reserve is not going to cut interest rates with such numbers.

There was also considerable inflation at the wholesale level. The day before, the Labor Department had reported that producer prices increased 1.3 percent in February, or 0.4 percent excluding food and energy.

Industrial production picked up steam in February. On 16 March, the Federal Reserve reported that industrial production rose 1.0 percent. While cold weather in February and a surge in utility output contributed to the sharp rise in total industrial output, manufacturing production in the month was also good, rising 0.4 percent.

Slack in production capacity has built up somewhat over the past few months, which should help moderate inflation. However the rate of increase has been very gradual. In fact, total industry capacity utilisation rose to 82.0 percent in February, the highest level since September and still close to its cycle peak of 82.4 percent. Manufacturing capacity utilisation, at 80.1 percent in February, was down from a peak of 81.1 percent attained in August last year but is still around the average level in the fourth quarter.

Similarly, the labour market remains tight. On 9 March, the Labor Department reported that nonfarm payrolls increased by 97,000. While that was low compared to previous months, recent history suggests that the number is likely to be revised higher later. Furthermore, average hourly earnings increased 0.4 percent and the unemployment rate fell to 4.5 percent from 4.6 percent. The unemployment rate has stayed stubbornly low between 4.4-4.6 percent for the past six months.

So while inflation may be contained, it does not exactly look like it is about to be subdued just yet. This means that the Federal Reserve is unlikely to cut interest rates for some time to come.

Investors looking for the stock market to recover had better hope that the subprime mortgage turmoil itself is contained.

China raises interest rates

I guess you could see this coming. Yesterday from Bloomberg:

China raised interest rates for the third time in 11 months to curb inflation and reduce asset bubbles in the world's fastest-growing major economy.

The one-year benchmark lending rate will be raised to 6.39 percent -- its highest in almost eight years -- from 6.12 percent, starting tomorrow, the Beijing-based People's Bank of China said today on its Web site. The one-year deposit rate will be increased to 2.79 percent from 2.52 percent. A central bank spokesman confirmed the increases.

Let's see whether the currency is allowed to appreciate more following this though.

The currency rose to 7.7360 against the dollar in Shanghai in the week ended March 16 from 7.7445 on March 9, according to the China Foreign Exchange Trade System. It has risen 6.7 percent from the fixed rate of 8.30 to the dollar that was scrapped on July 21, 2005.

Inflation data likely to keep Fed on hold

Fed officials have been saying for some time that they remain wary of inflation. Yesterday's data show why. From MarketWatch:

Keeping the pressure on the Federal Reserve, U.S. consumer prices increased 0.4% last month, led by higher prices for food, energy, shelter and tobacco, the Labor Department reported Friday.

Core prices, excluding food and energy, increased 0.2% in February...

In the past year, consumer prices are up 2.4%, while core prices are up 2.7%, unchanged from last month's 12-month increase. Core prices have risen at an annual rate of 2.6% in the past three months, well above Fed policymakers' implied target zone of about 2.25% for the core CPI.

Adding to indications that the Fed will be hesitant about cutting rates, industrial production was strong in February. MarketWatch reports:

U.S. industrial output rebounded in February, led by higher utility output because of colder-than-average temperatures.

Industrial output rose 1.0% last month, marking the biggest gain since November 2005. Capacity utilization rose to 82.0%, the highest level since September, the Federal Reserve reported Friday...

Industrial production is up 2.3% in the past 12 months...

Manufacturing output increased 0.4%...

But consumer sentiment fell in March. Reuters reports:

U.S. consumer sentiment slipped to its lowest in six months in March, as worries about declining stock prices and the health of the housing market shook consumer's confidence in the economy, a report showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its preliminary March reading on the consumer sentiment index slipped to 88.8, down from 91.3 in the previous month.

If the Fed keeps interest rates on hold, don't expect relief from central banks elsewhere either.

In Japan, the outlook for the economy is positive. From Bloomberg:

The tertiary index, a gauge of money spent on consumer and business services, advanced a seasonally adjusted 1.6 percent to 110.7 from December, the first increase in three months, the trade ministry said today in Tokyo. The median estimate in a Bloomberg News survey of 34 economists was 1.1 percent.

Meanwhile, AFP/CNA reports a warning from Chinese Premier Wen Jiabao:

"Now we have an excessively high investment ratio and we have excessively large extension of credit and excessive liquidity in the market," Wen told a press briefing at the end of parliament's annual full session.

He said China's current economic growth relied too heavily on investment. "This is not sustainable," he said.

Shortly before Wen spoke, China announced investment in urban infrastructure rose 23.4 per cent in the first two months of the year from the same period in 2006, when the rise was 26.6 per cent.

Switzerland and Norway raise rates, US producer prices rise sharply

The global tightening cycle continued yesterday with interest rate hikes by Switzerland:

The Swiss National Bank (SNB) is raising the target range for the three-month Libor with immediate effect by 0.25 percentage points to 1.75–2.75%. The SNB intends to hold the rate in the middle of the target range for the time being.

...and Norway.

Norges Bank’s Executive Board decided today to raise its key policy rate by 0.25 percentage point to 4.00 per cent with effect from 16 March 2007.

No interest rate hike is likely in the US in the near future, but inflation fears returned somewhat yesterday. Reuters reports:

The Labor Department said the Producer Price Index, a gauge of prices received by farms, factories and refineries, rose 1.3 percent last month as energy costs climbed 3.5 percent and food prices moved up 1.9 percent.

Excluding volatile food and energy costs, the so-called core index advanced 0.4 percent, reflecting steep increases in tobacco and light truck prices...

First-time claims fell by a larger than expected 12,000 to 318,000 last week. A more reliable four-week moving average of initial claims dropped by 10,250 to 329,250.

But there were also more signs of an economic slowdown.

The Philadelphia Federal Reserve Bank said its business activity index, which covers the mid-Atlantic region, dipped to 0.2 percent from 0.6 in February. Separately, the New York Fed said its gauge of New York state factory activity fell to its lowest since May 2005.

Meanwhile, in the euro zone, industrial production was down by 0.2 in January compared to December, but annual inflation was stable at 1.8 percent in February.

China's economy stays buoyant

The latest fall in stock markets was clearly made in America and had nothing to do with China, unlike the case two weeks ago. But keep a watch on the latter nonetheless.

Lehman Brothers is expecting further tightening measures from China. AFX/Forbes reports:

China is expected to adopt tighter monetary policies and restrict exports in the coming months, Lehman Brothers said.

The investment bank said 'unwelcome' February economic data would push Beijing towards action on the monetary and trade fronts.

I mentioned the trade data on Monday. What are some of the other data?

China's money supply growth in February, for one. Xinhua Online reports:

By the end of February, the broad measure of the money supply, M2, which covers cash in circulation and all deposits, went up 17.8 percent year-on-year to 35.9 trillion yuan...

By the end of February, the narrow measure of the money supply, or M1, was 12.6 trillion yuan, up 21 percent...

The outstanding renminbi-dominated loans amounted to 23.5 trillion yuan in February, a rise of 17.2 percent.

Then there is inflation. Although inflation in producer prices slowed in February, Reuters reports that consumer price inflation continued to rise.

The consumer price index (CPI) was up 2.7 percent from a year earlier, the National Bureau of Statistics said on Tuesday.

That was more than January's 2.2 percent increase but fell short of market forecasts of a 2.9 percent rise.

Combining January and February to iron out calendar quirks caused by the timing of the Lunar New Year holidays, prices were up 2.4 percent from a year earlier. In the same two months of 2006, the CPI was up 1.4 percent...

Higher food prices, which make up a third of the consumer price basket, have been largely responsible for the rising inflationary trend over the past year. They were up again in February, by 6.0 percent over the same month last year.

Meanwhile, economic conditions in China remain buoyant. Certainly in retail, as Reuters reports.

China's retail sales in the first two months rose a strong 14.7 percent from a year earlier, reinforcing a trend of sturdy spending buoyed by rising incomes and government steps to spur consumption.

The figure, released on Wednesday by the National Bureau of Statistics, was a bit higher than market expectations of a 14.5 percent rise and December's 14.6 percent increase.

And in industrial production, as Bloomberg reports:

China's industrial output grew at the fastest pace in eight months as surging exports and retail sales encouraged companies in the world's fastest-growing major economy to produce more steel, cars and clothes.

Production rose 18.5 percent in January and February, the National Bureau of Statistics said today, after gaining 14.7 percent in December. That beat the 15 percent median estimate of 20 economists surveyed by Bloomberg News.

And foreign direct investment continues to grow. From China Daily:

China received some $9.7 billion in FDI from January to February, up 13.04 percent from the previous year, the Ministry of Commerce said yesterday.

Thai baht hits nine-year high

Rather ironical, I thought, in the midst of the current market turmoil, especially for those who remember 10 years ago. From AFP/CNA:

The Thai baht hit a new nine-year high against the dollar on Wednesday amid growing speculation that the army-backed government will soon lift controversial currency controls, dealers said.

The Thai currency reached 35.07 to the dollar in early morning trade, up from Tuesday's finish at 35.14-15.

This time really is different.

But Thailand is facing a disaster anyway. Again from AFP/CNA:

Thailand's northern Chiang Rai province has been declared a disaster zone after haze hit the region, while the air quality in nearby tourist hotspot Chiang Mai reached dangerous levels Wednesday.

Eight provinces in northern Thailand have been blanketed in smoke and dust for two weeks after forest fires and agricultural burning in northern Thailand and neighbouring Myanmar and Laos.

Just when you thought it was safe

Stock markets tumbled again yesterday. Reuters reports:

U.S. stocks plunged on Tuesday in their second-worst sell-off of the year as the impact of losses in the subprime mortgage group cascaded across the financial sector, knocking down shares of investment banks and traditional lenders.

The Mortgage Bankers Association reported the proportion of mortgages in the initial stages of foreclosure rose to the highest rate on record, while the chief executive of the largest U.S. home lender said the subprime mortgage industry is now in a "liquidity crisis." The subprime sector caters to borrowers with weak credit...

The Dow Jones industrial average dropped 242.66 points, or 1.97 percent, to end at 12,075.96. The Standard & Poor's 500 Index slid 28.65 points, or 2.04 percent, to 1,377.95. The Nasdaq Composite Index tumbled 51.72 points, or 2.15 percent, to 2,350.57...

U.S. Treasury debt prices climbed on Tuesday as investors sought a safe harbor. Concerns about risky investments also propelled the yen higher against the dollar.

The benchmark 10-year U.S. Treasury note was up 17/32, with the yield at 4.495 percent...

Wall Street got some discouraging news before Tuesday's opening bell when Commerce Department said retail sales, excluding automobiles, unexpectedly slipped 0.1 percent in February, raising worries about economic growth. The month's overall retail sales, though, rose 0.1 percent, below forecasts for a gain of 0.3 percent.

In Europe, the ZEW index of German investor and analyst expectations for economic growth in six months rose to 5.8 in March, the highest level in eight months, from 2.9 in February. You would not have guessed so from the performance of European stocks yesterday. Bloomberg reports:

European stocks fell for a second day after a report showed U.S. subprime mortgage delinquencies rose to a four-year high, deepening concern credit markets are deteriorating in the world's biggest economy...

The Stoxx 600 fell 1.1 percent to 361.56 at the close in London. The Stoxx 50 lost 1.2 percent, while the Euro Stoxx 50, a measure for the 13 nations sharing the euro, slid 1.2 percent...

National benchmarks dropped in all 18 western European markets. France's CAC 40 sank 1.2 percent, while Germany's DAX slid 1.4 percent. The U.K.'s FTSE 100 slipped 1.2 percent.

Earlier in the day, Asia had started the ball rolling downhill. Again from Bloomberg:

The Morgan Stanley Capital International Asia-Pacific Index lost 0.4 percent to 143.81 at 8:02 p.m. in Tokyo. It had gained 4.4 percent in the past week. Japan's Nikkei 225 Stock Average dropped 0.7 percent to 17,178.84. Markets also fell in Australia, South Korea, Singapore, Malaysia, Hong Kong, Pakistan and Sri Lanka.

Case for rate hike by the BoE continues to build

While the data on UK industrial and manufacturing production was unexpectedly weak, rising only 0.1 percent and falling 0.2 percent respectively in January, recent price data pointed to enduring inflationary pressures in the economy.

Reuters reports that UK house prices rose at the fastest pace in nearly 2 years in January based on Department for Communities and Local Government data.

February data have been ambiguous, with the Royal Institution of Chartered Surveyors reporting that its house price balance fell to 24.0 in the three months to February, the slowest rate of house price inflation since May 2006, from 28.0 in the three months to January. This contradicts surveys from the Halifax and Nationwide building societies which showed strong price growth last month.

At least commercial property development was strong in February, property agency Savills reporting that its Total Commercial Activity index rose to a three-month high of 61.2 after falling to 51.4 in January.

Finally, producer prices rose sharply in February. From Reuters:

Core factory gate inflation picked up last month on higher scrap metal prices and raw material costs also rose more than expected, boosting forecasts that borrowing costs will rise further this year.

The Office for National Statistics said on Monday output prices excluding food, drink, tobacco and petroleum rose 0.5 percent on the month, the biggest gain since April last year and more than double the consensus forecast.

That took the annual rate up to 2.7 percent, the strongest since June...

Overall factory gate inflation also came in above expectations, remaining steady at an annual 2.2 percent. Analysts had predicted a 2.1 percent rate.

Input prices rose more than expected by 1.3 percent on the month, compared with forecasts for a 0.6 percent gain. That still left them 1.0 percent lower on a year ago.

Japan's growth rate hits 5.5 percent, China's trade surplus hits $23.8 billion

Japan's fourth quarter economic growth was even better than previously estimated. Bloomberg reports:

The world's second-largest economy grew at an annual 5.5 percent pace in the three months ended Dec. 31, the Cabinet Office said today in Tokyo. The growth was more than the 5.1 percent median forecast of 23 economists surveyed by Bloomberg News and above the February estimate of 4.8 percent...

Capital spending rose 3.1 percent, up from the 2.2 percent preliminary estimate and higher than the 2.8 percent expected by economists, today's figures showed. Inventories shaved 0.1 percent from growth, unchanged from the preliminary estimate...

Consumer spending increased 1 percent, less than the government's initial 1.1 percent forecast...

Unusually in recent years, this leaves Japan's economy as the fastest-growing among the major industrialised economies.

Japan's growth compares with 2.2 percent annualized growth in the U.S. and the 0.9 percent quarter-on-quarter expansion of the 12 nations that share the euro.

In spite of this, another rate hike by the BoJ may not be forthcoming.

An inflation rate that threatens to turn negative is [an] obstacle to a rate increase. Producer prices climbed 1.8 in February, down from 2.2 percent in January, as oil costs fell.

Meanwhile, exports continue to boost Japan's economy in the current quarter.

Japan's current account surplus in January widened 50 percent to 1.19 trillion yen ($10.1 billion) from a year earlier as exports increased, a separate report showed today.

Exports in January climbed 18.2 percent, the fastest pace in eight months, led by sales of automobiles, electronics and steel, the finance ministry said.

But even Japan's surplus now pales in comparison with China's. From Bloomberg:

China's trade surplus...in February...widened to $23.76 billion, the second-highest monthly surplus ever, from $2.5 billion, the customs bureau said today on its Web site. The median estimate of economists in a Bloomberg News survey was $7.3 billion...

Exports gained 52 percent in February. Imports climbed 13 percent. The surplus for the first two months was $39.6 billion, more than triple the same period last year.

The number looks unbelievably large to some.

"This number has some water in it and may not all be genuine merchandise trade," said Paul Tang, an economist at Bank of East Asia in Hong Kong. "There is some hot money flowing into China undercover with trading companies."

Possibly so, but it still suggests that some additional action by the authorities is likely.

"This clearly highlights that measures taken so far by China haven't borne fruit," said Tim Condon, an economist at ING Bank NV in Singapore.

US labour market holds, trade deficit falls

The much-awaited US jobs report for February was out yesterday. MarketWatch reports:

Nonfarm payrolls increased by 97,000, trivially lower than the 100,000 expected by economists surveyed by MarketWatch and the lowest since January 2005, but traders may have been expecting a much weaker number...

Payroll growth in the previous two months was revised higher by a total of 55,000. January's payrolls were revised up to 146,000 from 111,000...

The jobless rate fell to 4.5% from 4.6% because people dropped out of the labor force...

Average hourly earnings increased a larger-than-expected 6 cents, or 0.4%, bringing the year-over-year gain to 4.1%. Higher wages could fuel inflation, Fed officials fear.

A blast of cold and wet weather in February after two months of relatively balmy conditions "likely contributed" to job losses in construction, said Philip Rones, deputy commissioner of the Bureau of Labor Statistics, in a statement...

The weather may have also contributed to a six-minute decline in the average workweek to 33.7 hours. Total hours worked in the economy fell by 0.3%.

As Morgan Stanley economists David Greenlaw and Ted Wieseman wrote, "the report suggests that the labor market is holding together reasonably well at this point". As usual though, watch for the revisions in subsequent months.

Yesterday also saw the Commerce Department release data on wholesale inventories. From MarketWatch:

Wholesale inventories rose by 0.7%, the Commerce Department reported Friday, following an unrevised drop of 0.5% in December.

In the past 12 months, wholesale inventories are up 9.2%.

However, the more anticipated report from the Commerce Department yesterday was on the trade deficit. Again from MarketWatch:

The nation's trade deficit narrowed by 3.8% to $59.1 billion, the Commerce Department said. This is the fourth narrowing of the deficit in the past five months...

December's trade deficit was revised slightly to $61.5 billion from the initial estimate of $61.2 billion...

Exports increased 1.1% to $126.7 billion, while imports declined 0.5% to $185.8 billion.

Markets largely reacted as expected. From Bloomberg:

An unexpected drop in unemployment helped U.S. stocks post their first back-to-back gains in almost a month and provide investors with a week's worth of profits.

Treasuries declined the most this year and the dollar touched the highest in more than a week against the yen as the jobs report reduced bets the Federal Reserve will cut interest rates by midyear.

The stock market's positive reaction to the jobs report, despite its implication for inflation, shows how much the market is preoccupied with growth concerns.

Amid mixed economic data, Japanese stocks rise, carry trade resumes

The recent Japanese economic data have been mixed, which is not unusual.

Wednesday saw the leading index fall. AFX/FXstreet.com reports:

The index of leading economic indicators fell to 35.0 in January from a revised 37.5 in December, below market expectations, preliminary data from the Cabinet Office showed.

Yesterday, the Conference Board reported a similar story for Japan.

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

Yesterday also saw data showing that Japanese bank lending growth slowed in February. Reuters reports:

Outstanding loans held by Japan's four main categories of banks rose 1.3 percent in February from a year earlier, increasing for the 13th straight month since February last year, when it turned around from a steady string of falls since 2001.

The pace of growth ebbed from 1.7 percent in the two previous months, largely because growth in lending by city banks slowed to 0.4 percent from 1.2 percent in January, a BOJ official said...

Separate BOJ data showed the most widely watched measure of money supply -- M2 plus certificates of deposit (CDs) -- rose 1.1 percent in February from a year earlier, matching economists' consensus forecast...

Quasi-money grew 2.3 percent in February, the highest year-on-year growth since February 1999 when it hit 2.9 percent, while investment trusts rose 24.4 percent, the highest ever...

A separate government survey of Japanese service sector workers, called "economy watchers" for their proximity to consumer and retail trends, issued later on Thursday produced a diffusion index of 49.2 in February, up from 47.2 in January.

But today, we have news that machinery orders rose the most in five months in January. Bloomberg reports:

Non-government machinery orders, excluding shipping and utilities, rose a seasonally adjusted 3.9 percent to 1.09 trillion yen ($9.4 billion) from December, when they fell 0.7 percent, according to a Cabinet Office report released in Tokyo today. The median estimate of 40 economists surveyed by Bloomberg News was for a 1.4 percent gain.

That, and a weaker yen, was enough for the Japanese stock market today to continue its recovery from last week's falls. Bloomberg reports:

Japanese stocks gained, led by exporters such as Matsushita Electric Industrial Co., after the yen weakened against the dollar and the euro, easing concern its value would hurt exporters' earnings.

"The yen will continue to weaken this year so there's nothing to stop investors buying exporter stocks," said Masaru Hamasaki, senior strategist at Toyota Asset Management Co., which oversees $3.3 billion in Tokyo. "The machinery orders figures confirmed that Japan's capital spending is strong."

The Nikkei 225 Stock Average added 73.73, or 0.4 percent, to 17,164.04 in Tokyo. The broader Topix index gained 9.35, or 0.5 percent, to 1730.31. The Nikkei slipped 0.3 percent this week while the Topix rose 0.5 percent.

Weaker yen, rising stock market. Looks like markets are returning to normal. Or at least that's what some people think. From Bloomberg:

"Risk appetite is back to normal," said Benedikt Germanier, a currency strategist in Zurich at UBS AG, the second-largest foreign-exchange dealer. "Dollar-yen looks firmer. It's a signal the carry trade won't perform badly in weeks ahead."

But beware the repatriation story.

Losses in the yen may be limited by speculation Japanese investors will repatriate funds before this month's fiscal year-end. They sold 669.5 billion yen ($5.7 billion) in bonds and notes during the week ended March 3, the most since September, figures released by the Ministry of Finance showed yesterday.

"The yen might see some continued support, at least until the end of March," said Sharada Selvanathan, currency strategist at BNP Paribas SA in Singapore. "We know there are repatriation flows that are usually yen positive."

Oh well, there is always the Swiss franc.

The Swiss franc slid the most against the dollar this week. The franc is used as a funding currency for carry trades because Switzerland's 2 percent rate is the second-lowest among major economies after Japan. The currency also weakened as a government report showed inflation at a three-year low, limiting scope for the central bank to raise borrowing costs.

RNZ and ECB raise rates

Central banks were in focus yesterday.

The Reserve Bank of New Zealand kicked off the day on a hawkish note. Radio New Zealand reports:

[Reserve Bank Governor] Alan Bollard raised the Official Cash Rate by a quarter of a percentage point to 7.5% on Thursday, saying a pickup in the economy had raised the inflation threat.

Dr Bollard says the bank is also examining other ways to get at house price inflation, including tighter tax rules relating to property investment.

He says he is looking at changes to the amount of capital banks must hold in reserve.

Dr Bollard says if the Official Cash Rate had not been put up on Thursday banks may have cut interest rates.

The European Central Bank sounded barely less hawkish as it raised rates later. Bloomberg reports:

European Central Bank President Jean-Claude Trichet said interest rates are still fueling economic growth, signaling the bank may raise borrowing costs further after today's increase.

"Given the favorable economic environment, our monetary policy continues to be on the accommodative side, with the key ECB interest rates moderate," Trichet said at a briefing in Frankfurt today after the ECB increased the key refinancing rate by a quarter point to 3.75 percent. The bank also raised its growth and inflation forecasts for 2008...

The ECB increased its economic growth forecasts for 2007 and 2008 to about 2.5 percent and 2.4 percent, from 2.2 percent and 2.3 percent. In 2006, the economy grew 2.6 percent.

This was despite mixed data on the German economy for January, industrial production posting a surprisingly strong 1.9 percent growth but manufacturing orders falling by 1 percent.

The Bank of England, however, chose to hold rates for the time being. Bloomberg reports:

The nine-member Monetary Policy Committee, chaired by Governor Mervyn King, held the Bank Rate at 5.25 percent today, as predicted by all except nine of the 67 economists surveyed by Bloomberg News. The remainder expected a quarter-point increase...

Higher borrowing costs have yet to cool the U.K.'s housing market, which has helped power growth by encouraging consumers to borrow and spend more. House prices rose for a second month in February, gaining 1.8 percent from January to an average of 192,233 pounds, HBOS Plc, Britain's biggest mortgage lender, said today.

A slowing in British shop price inflation in February though would have helped ease inflation worries.

In Denmark, where industrial production in January was down but so was unemployment, the Danmarks Nationalbank took its cue from the ECB. AP/Forbes reports:

Denmark's central bank raised its key lending rate Thursday by a quarter-point to 4 percent, mirroring a move by the European Central Bank.

The increase would take effect on Friday, Danmarks Nationalbank said.

US stocks slip despite rise in mortgage applications

The US housing market continues to show signs of stabilisation. From MarketWatch:

With interest rates falling, the number of mortgage applications as tracked by the Mortgage Bankers Association rose by 7.3% on a seasonally adjusted basis last week compared to the prior week, marking the highest in two months.

But investors remain worried. Reuters explains why:

Stocks gave up gains in the last hour of trading after the chief executive of D.R. Horton Inc. delivered an unusually blunt evaluation of the residential real estate market...

The Dow Jones industrial average declined 15.14 points, or 0.12 percent, to end at 12,192.45. The Standard & Poor's 500 Index shed 3.44 points, or 0.25 percent, to finish at 1,391.97. The Nasdaq Composite Index dropped 10.50 points, or 0.44 percent, to close at 2,374.64...

The chief executive of home builder D.R. Horton said at an analysts' conference that the current year for his company was "going to suck," spurring worries about weakness in housing...

Crude oil for April delivery rose $1.13, or 1.9 percent, to settle at $61.82 a barrel on Wednesday after a government report showed a surprising drop in U.S. crude supplies.

Reuters also summarises the rest of the US economic news released yesterday:

The U.S. Federal Reserve said that while the housing market may have turned the corner and inflation risks had not increased, output in some regions was cooling.

"Most Federal Reserve districts reported modest expansion in economic activity since the last report, but several districts noted some slowing," the Fed said in its Beige Book summary of economic conditions...

A separate consumer credit report from the Fed showed that demand for big-ticket items like cars and holidays had remained strong in January, despite slacker credit card spending.

Consumer credit rose at a 3.2 percent annual rate in January to $2.411 trillion versus December's increase of 2.51 percent, or $5.01 billion, the Fed said.

U.S. chief executives were also more upbeat, according to a Business Roundtable quarterly survey. This calculates an index of CEO optimism for the economy over the next six months and it rose solidly to 84.9 in March from 81.9 in December, which had been the lowest reading since 2003.

But regarding job conditions, another key gauge of economic health, a survey by private employment service ADP added to the mixed picture with its finding that U.S. firms probably added just 57,000 jobs last month, barely half the 100,000 forecast.

Stocks rise, central bank rates don't

In line with the rest of the world, the US stock market had a strong rebound yesterday, but the economic data yesterday were not exactly market-friendly. Reuters reports:

The Commerce Department said U.S. factory orders fell 5.6 percent last month and that durable goods orders were revised to an even steeper 8.7 percent decline, compared with the 7.8 percent retreat announced last week...

Pending sales of existing homes fell a steeper-than-expected 4.1 percent last month, according to the National Association of Realtors, though some analysts thought this might be related to cold weather in some U.S. regions...

The Labor Department said nonfarm business productivity slowed sharply to a 1.6 percent annualized pace in the fourth quarter from the 3.0 percent previously reported. This trimmed productivity gains for 2006 as a whole to 1.6 percent, the weakest rise since a matching pace set in 1997.

The slippage also sent unit labor costs, a gauge of inflation and profit pressure watched closely by the Fed, up by a hefty 6.6 percent annualized rate in the fourth quarter.

For the year as a whole, unit labor costs rose 3.2 percent, the largest gain since 2000.

Meanwhile, in Europe, eurozone GDP growth in the fourth quarter has been confirmed at 0.9 percent but retail sales were down 1.0 percent in January, while in the UK, the latest survey from the British Retail Consortium showed that retail sales remained robust in February with a 5.6 percent growth over the same month last year.

If economic data have not been particularly helpful to markets, central banks appear to be compensating. From Bloomberg:

The Bank of Canada kept its main interest rate unchanged for a sixth meeting, and repeated language signaling policy makers aren't leaning toward a rate cut or increase soon.

The target rate for overnight loans between banks remains 4.25 percent, the highest since August 2001 and 1 percentage point less than the U.S. Federal Reserve's target. All 32 economists in a Bloomberg News survey had predicted no change...

Building permits jumped 11 percent to a record high in January, Statistics Canada said today, suggesting the housing sector still poses an inflation risk.

And today, Bloomberg reports no change in interest rates in Australia even as economic growth accelerated in the fourth quarter.

Australia's economic expansion accelerated twice as much as expected in the fourth quarter as consumers and companies spent more.

Gross domestic product rose 1 percent from the third quarter, when it expanded a 0.3 percent, the Bureau of Statistics said in Sydney today. The median estimate in a Bloomberg News survey of 25 economists was a 0.5 percent increase...

The Reserve Bank today left its overnight cash rate target unchanged for March, at a six-year-high 6.25 percent.

Australian Stocks Jump the Most in 4 Years

Now that's a change. From Bloomberg:

Australian stocks jumped the most in four years, snapping a five-day slump. BHP Billiton and Rio Tinto Group led the rebound after both companies lost about a tenth of their market values amid a global slide in equities...

The S&P/ASX 200 Index jumped 118.20, or 2.1 percent, to 5771.80 at the close in Sydney, the biggest one-day gain since March 18, 2003. It earlier dropped as much as 0.2 percent. About four times as many stocks rose as fell.

The benchmark plunged 6.5 percent in the past five days, its worst drop since the period ended Sept. 19, 2001, after a rout in Chinese shares triggered a global slump in equities.

The economic data from Australia today were mixed. From The Australian:

The Australian Bureau of Statistics said today the trade balance of goods and services in January was a seasonally adjusted $876 million deficit after an upwardly revised $1.379 billion shortfall in December. Economists had expected a $1.1 billion trade gap.

Imports fell 1 per cent in the month, while total exports rose 2 per cent. However, rural exports remained undermined by the drought, falling 1 per cent...

Building approvals fell by a seasonally adjusted 0.9 per cent to 12,252 units in January, from a downwardly revised 12,359 units in December.

Economists expect approvals to rise 1.5 per cent.

The Reserve Bank of Australia holds its monthly board meeting today, but is not expected to lift interest rates any further at this stage.

Markets continue to fall

The sell-down in stock markets continued yesterday.

	5 March close	Points change	Percent change
S&P 500	1,374.12	-13.05	-0.9
Nikkei 225	16,642.25	-575.68	-3.3
FTSE 100	6,058.70	-57.50	-0.9

And the yen strengthened to nearly 115 yen to a US dollar as the yen carry trade continued to unwound.

On the economic data front, the news was mixed.

Bloomberg reports that Japanese capital spending accelerated in the fourth quarter.

Investment surged 16.8 percent in the three months ended Dec. 31, the Ministry of Finance said in a quarterly survey of companies today, the fastest increase since the government started tracking the figure in 2002. Profits rose 8.3 percent from a year earlier.

Spending on factories and equipment by companies including Sharp Corp. contributed to about half of Japan's growth in 2006, offsetting weak consumer spending. The pace of growth means the fourth quarter's gross domestic product figures may be revised higher, helping to validate last month's decision by the Bank of Japan to raise interest rates.

But services slowed in Europe:

Expansion in European service industries from banking to telecommunications, the biggest part of the economy, slowed in February after a sales-tax increase damped consumer spending in Germany.
Royal Bank of Scotland Group Plc's services index fell to 57.5 from 57.9 in January. A reading above 50 in the index, based on a survey of purchasing managers by NTC Economics Ltd., indicates expansion...

Growth in U.K. service industries slowed in February, with an index based on a survey of 700 companies falling to 57.4 from 59.2, another industry report showed today.

...as well as in the US:

Service industries in the U.S. grew last month at the slowest pace in almost four years, suggesting the economic slowdown may be spreading beyond housing and manufacturing.

The Institute for Supply Management's index of non- manufacturing businesses, which make up 90 percent of the economy, fell to a lower-than-forecast 54.3 after a January level of 59, the Tempe, Arizona-based group said. Readings above 50 mean that services are continuing to expand.

For the meantime, though, markets will be primarily driven by sentiment, which remains fragile. Any rebound in markets could be reversed very quickly.

China sends investors scurrying out of risky assets

In a single day, China has reminded everyone that asset markets can be a risky place to be in.

On 27 February, China's Shanghai and Shenzhen 300 Index fell 9.2 percent, the most in 10 years, after the government initiated moves to crack down on illegal stock-trading and rumours circulated about the introduction of a capital gains tax for equities, rumours that were subsequently reportedly denied by a government spokesmen. Although the market recovered somewhat later, the index still ended the week 6.3 percent lower and its fall had a dramatic effect on other markets.

Other Asian markets fell with the Chinese on 27 February, Singapore's Straits Times Index for example falling by 2.3 percent. Once the European markets opened, so did they, the Dow Jones Stoxx 600 falling 3.0 percent that day. Despite its distance in time and space, the US stock market was not spared, the Standard & Poor's 500 Index falling 3.5 percent that day.

By the end of the week, the carnage in global stock markets was quite evident. The Morgan Stanley Capital International Asia-Pacific Index dropped 3.5 percent last week, the biggest weekly fall since last July. Japan's Nikkei 225 fell 5.3 percent, the biggest weekly fall since last June. The Dow Jones Stoxx 600 lost 5.2 percent, the biggest weekly fall since March 2003. The S&P 500 fell 4.4 percent, its worst weekly performance since January 2003.

As stock markets fell, risk aversion rose among investors. The Chicago Board Options Exchange volatility index jumped by 70 percent to an intra-day high of 19.01 on 27 February and largely stayed around those levels over the next few days as investors suddenly realised that market volatility could get higher than what they had expected.

Stock markets were not the only ones that suffered. Prices of commodities also fell last week, including those of base metals like copper as well as gold. Oil bucked the trend, though, as refinery problems and falling inventories in the US offset concerns over a slower economy to keep prices up over the week, although prices did fall on Friday.

Money leaving risky assets went to safer ones as bond prices rose and yields fell over the week. The yield on the 10-year US Treasury note fell 16 basis points last week to 4.5 percent. Significantly also, the yen carry trade unwound as the yen rose to about 116.8 per US dollar from about 121.1 at the end of the previous week.

On the whole, the recent episode appears similar to what happened in May 2006, when a similar rise in risk aversion caused risky assets to sell off. At that time, the threat of concerted action by the major world central banks to tighten monetary policy caused investors to sell risky assets.

This time around, the trigger for the market turbulence was undoubtedly the fall in the Chinese stock market. The latter itself is widely attributed to the fear that the Chinese authorities would be taking action to curb what they considered to be excessive speculation in the stock market. In fact, the stock market plunge occurred just after the latest hike in the required reserve ratio for banks in China to 10 percent took effect.

Market turbulence, especially in the West, was exacerbated by economic news out of the US. On 27 February, the day the market sell-off began, US data showed that orders for durable goods fell 7.8 percent in January. The following day, the US Commerce Department reported that fourth quarter GDP growth was 2.2 percent, much lower than initially reported, while new home sales fell 16.6 percent, the largest decrease since January 1994.

However, other data last week showed that things might not be so bad. US manufacturing recovered somewhat in February with the Institute for Supply Management's index of national factory activity rising to 52.3 from 49.3 in January. In addition, a Commerce Department report on 1 March showed that personal income and spending were strong in January.

So investors need to keep level-headed amid the market turmoil. Fundamental conditions have probably not changed dramatically. The large fall in the Chinese stock market is as much due to an over-extended market as anything else. From the beginning of 2006 until its peak on 26 February, the Shanghai and Shenzhen 300 Index had almost trebled. At its peak, the market had traded at 42 times earnings.

Furthermore, the effect of any action to be taken by the Chinese authorities to restrict stock trading activity is likely to be largely limited to the Chinese stock market. Certainly, the Chinese authorities have over the past few years been reluctant to take one obvious step it could to drain excess liquidity and hence curtail market activity in the rest of the world: revalue the Chinese currency.

The main threat to markets probably remains action by the major central banks to tighten monetary policy. But this threat does not appear overly ominous at the moment. While the Bank of England and the European Central Bank maintain tough stances on inflation -- indeed, the latter is widely expected to raise interest rates later this week -- the Federal Reserve appears to be on hold for an extended period, as is the Bank of Japan after having raised interest rates to 0.5 percent on 21 February.

Having said that, market movements over the next few weeks are likely to be dominated by sentiment, and at the moment, sentiment has clearly turned more risk averse.

BOJ could raise rates in May

So says Mr Yen. From Bloomberg:

Eisuke Sakakibara, former currency-policy chief at Japan's Ministry of Finance, said it's possible the central bank will raise interest rates in May rather than wait until parliamentary elections are held in July.

When the Diet is in session it's easier to raise rates because any criticism of monetary policy by the ruling Liberal Democratic Party will be countered by the opposition, Sakakibara said in a speech at the foreign press club in Tokyo today.

But the yen carry trade could carry on for a while more.

Sakakibara said the yen will remain weak for the time being, predicting the currency to trade in the 115 to 120 range against the dollar and around 150 per euro.

The former Finance Ministry official said he expects the so-called yen carry trade to continue for some time. He said it's necessary that the trade, in which investors borrow in Japan's currency to buy higher-yielding assets overseas, unwinds slowly.

But the carry trade was not much in evidence this week. From another Bloomberg report:

The yen rose to the highest level in almost three months against the dollar, heading for its biggest weekly gain since December 2005, after a slump in emerging-market stocks and bonds discouraged investors from borrowing the Japanese currency to buy higher-yielding assets.

Economic data, however, may keep rate hike expectations in check. Bloomberg reports:

Core consumer prices, which exclude fresh food, were unchanged from a year earlier, the statistics bureau said today in Tokyo, matching the median estimate of 39 economists. It's the first time prices failed to rise since May, and followed a 0.1 percent gain in December...

Wages slumped 1.4 percent in January, the biggest drop since June 2004, the labor ministry said. The jobs-to-applicants ratio, which shows how many positions are available to a job seeker, fell to 1.06 in January from a revised 1.07 a month earlier.

Other reports showed signs of a revival in consumption. Household spending rose for the first time in 13 months and the unemployment rate held at an eight-year low of 4 percent, the statistics bureau said...

Household spending unexpectedly rose 0.6 percent in January. The increase, the first since December 2005, was a rebound from a 2.4 percent decline the previous year that came amid one of the coldest winters on record, said Reiko Kanda, the statistics bureau's director of consumer statistics.

Japan is not the only economy with concerns on consumer spending. Germany yesterday reported that retail sales in January fell 5.1 percent from December. In the US, the Reuters/University of Michigan's final index of consumer sentiment declined to 91.3 in February, a five-month low, from 96.9 in January, contradicting the Conference Board's consumer confidence index released earlier this week which had shown an increase in February to 112.5 from 110.2 in January.