Friday, 30 November 2007

Mervyn King warns of risks, Japanese consumer prices rise

Mervyn King didn't seem to have many positive things to say yesterday. From Bloomberg:

Bank of England Governor Mervyn King said there's a risk a further drop in asset prices will lead to more deterioration of credit conditions.

"Market fears about the possibility of further movements in asset prices might impair the balance sheets of the banking system in the U.S., which would lead to a classic credit squeeze," King told U.K. lawmakers today. "This is a risk rather than something that's actually happened yet."

And this came as King and other policy-makers keep one eye on inflation.

... King said today that "the near- term outlook for inflation and growth has become less benign" and policy maker Timothy Besley said there's still "a fair amount of inflationary pressure out there."

Yesterday's UK economic data appear to bear this out. From Reuters:

British house prices fell in November at their steepest rate for 12 years and home loan approvals dropped to their lowest in nearly three years, boosting bets the central bank may cut interest rates next week...

Prices on the high street are soaring at their fastest rate in almost a decade, according to a report from the Confederation of British Industry which also showed retail sales growth picking up as the run-in to Christmas begins in earnest.

Meanwhile, today we have some rather mixed news from Japan, with core consumer prices finally seeing a rise in October -- by 0.1 percent from a year earlier -- but other data indicate that the outlook for domestic demand remains weak.

At least Japan's industrial production appears to be holding up. October industrial production rose 1.6 percent from a month earlier, an improvement that was also seen in the NTC Research/Nomura/JMMA Purchasing Managers Index rising to 50.8 in November from 49.5 in October.

Strong US 3Q growth, now for the Bernanke put

US third quarter economic growth has been revised a whole percentage point higher to 4.9 percent but the pace is unlikely to hold up in the fourth quarter. Bloomberg reports the latest data.

The U.S. economy is faltering after a third-quarter expansion as new-home prices dropped the most since 1970 and jobless claims rose to a nine-month high...

The median price of a new house dropped 13 percent to $217,800 in October from a year earlier, the Commerce Department said today in Washington. Homes sold at an annual rate of 728,000 in October, less than the median forecast of 750,000 among economists surveyed by Bloomberg News.

The number of Americans filing first-time claims for unemployment benefits rose to 352,000, the Labor Department reported.

The figures overshadowed the revision in third-quarter economic growth by the Commerce Department. The new rate is a percentage point higher than the 3.9 percent initially reported. The expansion may slow to about 1 percent this quarter, some economists predict.

President George W. Bush's economic advisers today reduced their outlook for economic growth in 2008 to 2.7 percent from a 3.1 percent rate projected in June. The unemployment rate will rise to 4.9 percent, compared with 4.7 percent previously estimated, according to the Council of Economic Advisers' semi- annual forecast.

New home sales increased 1.7 percent from the previous month because September's purchases were revised lower. In a another report, the Office of Federal Housing Enterprise Oversight said today in Washington that prices for previously owned single- family houses fell 0.4 percent last quarter, the first decline since 1994.

No need for investors to worry though. The Fed will come to the rescue again with rate cuts, as MarketWatch reports.

U.S. stocks rose for a third day on Thursday, ending mildly higher after the stock market's biggest two-day jump up in five years, as mostly bearish economic news competed with thoughts of another interest-rate cut ahead.

"Bad news is good news as it pertains to the Fed, so there is some solace to be gained," said Art Hogan, chief market strategist at Jefferies & Co.

Up and down throughout the day, the Dow Jones Industrial Average rose 22.3 points, or nearly 0.2%, to close at 13,311.7, with 17 of its blue-chip components finishing higher...

Treasury prices rallied, with the benchmark 10-year note up 26/32 to 102 17/32, its yield falling to 3.939%.

Certainly, the latest speech by Chairman Ben Bernanke suggests that he is mindful of the impact of the financial turbulence. From Bloomberg:

"The outlook has also been importantly affected over the past month by renewed turbulence in financial markets," Bernanke said in a speech in Charlotte, North Carolina. "The committee will have to judge whether the outlook for the economy or the balance of risks has shifted materially."

Having said that, Nouriel Roubini isn't convinced that the stock market will be able to shrug off the hard landing in the economy that he predicts. The "Bernanke Put" notwithstanding, he says that if the economy falls into a recession, the stock market is likely to "fall sharply by about 28% from peak to the trough" before it starts to recover in the late stages of the recession.

Thursday, 29 November 2007

Fed rate cut hopes fuel stock market rally, ECB not likely to contribute

For a second consecutive day, US stocks rose sharply despite lacklustre economic data. From Bloomberg:

U.S. stocks staged the biggest two-day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut...

The Standard & Poor's 500 Index added 40.79, or 2.9 percent, to 1,469.02, bringing its two-day gain to 4.4 percent, the most since October 2002. The Dow Jones Industrial Average increased 331.01, or 2.6 percent, to 13,289.45, its best daily advance since April 2003. The Nasdaq Composite gained 82.11 to 2,662.91. More than 13 stocks rose for every one that fell on the New York Stock Exchange.

European shares also climbed, with the Dow Jones Stoxx 600 gaining 2.8 percent to 364.09, the most since 2003. U.S. Treasury and European government bonds fell as the stock-market gains reduced the appeal of fixed-rate investments.

Mark Hulbert points out that yesterday was a "9-to-1 Up Day", meaning that the volume of NYSE-listed shares that rose in price was more than 90 percent of the total volume of all shares that either rose or fell. This, according to Hulbert -- citing research from Martin Zweig -- "is a significant sign of positive momentum".

While the prospect for rate cuts boosted stock prices, it did not help Treasury note prices. Bloomberg reports:

The yield on the current two-year note rose 10 basis points, or 0.10 percentage point, to 3.18 percent at 4:18 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It touched 2.87 percent on Nov. 26, the lowest since December 2004. Yields have since advanced 29 basis points, the most since increasing 29.5 basis points over two days in May 2004.

Stock prices and Treasury yields rose despite bleak economic data released yesterday. From Bloomberg:

Purchases of existing homes dropped 1.2 percent to an annual rate of 4.97 million, the fewest since the National Association of Realtors began keeping the records in 1999. Orders for items made to last several years fell 0.4 percent, the Commerce Department said today in Washington...

Economic growth slowed from October through mid-November in seven of 12 U.S. regions, the Fed said today in its regional business survey known as the Beige Book. Residential real estate markets "remained quite depressed" with only a few signs of "stabilization amidst the ongoing slowdown."

And it is no longer just residential property that is at risk. Bloomberg reports that commercial property may also be facing problems.

The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd. Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.

While the Fed is entertaining hopes for rate cuts, the ECB is unlikely to do the same any time soon. From Bloomberg:

Inflation in the euro area may accelerate to a six-year high of 3 percent this month, increasing pressure on the European Central Bank to raise interest rates, economists said after prices jumped in Germany.

Banks including Barclays Capital and Dekabank today revised up their November inflation forecasts for the euro region to as high as 3 percent after soaring oil and food prices pushed the rate to 3.3 percent in Germany, Europe's largest economy. Before the German figures, economists were forecasting a euro-region rate of 2.7 percent after 2.6 percent in October.

An acceleration in M3 money supply growth in the euro area to 12.3 percent in October, the highest growth rate since July 1979, from 11.3 percent in September would not have helped raise hopes for a rate cut by the ECB.

Wednesday, 28 November 2007

US stocks gain despite fall in consumer confidence and house prices

US stocks rebounded sharply yesterday with the S&P gaining 1.5 percent.

Other US economic indicators, however, pointed in the opposite direction. Bloomberg reports:

Consumer confidence fell more than forecast in November as Americans struggled with surging fuel costs and falling home prices.

The Conference Board's confidence index decreased to 87.3, the lowest since the aftermath of Hurricane Katrina in October 2005, from a revised 95.2 the prior month, the New York-based group said today. The index averaged 105.9 last year...

The Conference Board report comes after S&P/Case-Shiller's index showed home prices fell 4.5 percent in the third quarter form the same time last year, the most since record keeping started in 1988...

The housing recession will drive down property values by $1.2 trillion next year and slash tax revenue by more than $6.6 billion, according to a report issued today by the U.S. Conference of Mayors. The 361 largest U.S. cities will experience a combined loss of $166 billion in economic growth, led by $10.4 billion in the New York-Northern New Jersey area, according to the study.

An expected rate cut by the Fed, however, may help keep markets supported in the meantime.

A rate cut is much less likely in the euro area, especially with yesterday's economic indicators out of Europe. From Bloomberg:

Business confidence in Germany and France unexpectedly rose in November, suggesting European companies are coping with record oil prices and the euro's gain.

The Ifo research institute in Munich said its index of German sentiment, based on a survey of 7,000 executives, increased for the first time in seven months, to 104.2 from 103.9 in October. In France, a gauge of confidence among 4,000 manufacturers rose to 110 from 108, Paris-based national statistics office Insee said...

Italian business optimism slipped to the lowest in almost two years, the Rome-based Isae Institute said today...

German inflation accelerated in November to the fastest pace since records began in January 1996 with consumer prices rising 3.3 percent from a year earlier, using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today.

Tuesday, 27 November 2007

Stocks fall again but monetary policy could stay tight in UK

The recent rally in stock markets has proven short-lived. From MarketWatch:

U.S. stocks fell sharply after a volatile session Monday, as credit worries and continuing woes in the financial sector offset early upbeat signs about holiday shopping...

The Dow Jones Industrial Average slid 237 points to 12,743, as 28 of its 30 components retreated...

Government bonds rallied as investors sought safety, with the benchmark 10-year Treasury bond jumping 1 17/32 to 103 18/32, yielding 3.816%.

The weakness in the US housing market has so far driven much of the global financial market turmoil. But weakness in housing could be spreading worldwide.

Reuters reports that the UK housing market is also cooling.

Annual house price inflation in England and Wales slipped to its lowest in more than a year in November, a survey showed on Monday, as prices fell during the month.

Property consultant Hometrack said house prices were 3.6 percent higher than a year ago, down from an annual rate of inflation of 4.4 percent in October and the lowest since July 2006.

Prices fell 0.2 percent during the month, compounding a 0.1 percent fall in October, although the figures are not adjusted to take seasonal factors into account.

But don't be too quick to assume that the Bank of England will be coming to the rescue soon. From another Reuters report:

British monetary policy may have to remain tight for some time given rising inflation pressures even though financial market turmoil could spread, Bank of England chief economist Charles Bean said...

"The backdrop to our attempts to keep inflation in line with target is less favourable than it has been," Bean was quoted on Monday as saying in the Liverpool Daily Post newspaper.

"What it will mean is if the imported component of inflation is somewhat higher the domestically generated component needs to be somewhat lower to compensate and that may mean we have to run a tighter monetary policy for a while to get that domestic inflation down."

But Bean said the repercussions from this year's financial market turmoil could linger for some time and spread to stock markets and commercial property, suggesting policymakers are increasingly worried about a prolonged economic slowdown.

"It will be quite a long time before things come back to a full state of normality," Bean was quoted as saying.

Saturday, 24 November 2007

Europe slows

The UK economy slowed slightly in the third quarter. From the Office for National Statistics:

GDP rose by 0.7 per cent in the third quarter of 2007, down from 0.8 per cent in the second quarter and revised down by 0.1 per cent compared with the preliminary estimate. The level of GDP is now 3.2 per cent higher than the third quarter of 2006.

Growth in the euro area also appears to be slowing. From Bloomberg:

European service industries from airlines to banks expanded at the slowest pace in two years in November after the U.S. housing slump increased the cost of credit and oil prices approached $100 a barrel.

Royal Bank of Scotland Group Plc's services index fell to 53.7 from 55.8 in October, according to a preliminary estimate...

A composite measure of services and manufacturing fell to 53.8 from 54.7. The manufacturing index rose to 52.6 from 51.5, according to the report, which is based on a survey of purchasing managers by NTC Economics Ltd...

French consumer spending on manufactured goods fell by the most in 13 months in October, Insee, the Paris-based national statistics office, said today.

Friday, 23 November 2007

Inflation accelerates in Singapore and Hong Kong

Asian economies have remained resilient lately, but accelerating inflation is the price they are paying.

Singapore's inflation rate is at the highest since 1991. From Bloomberg today:

Singapore's inflation accelerated in October to the highest since 1991, suggesting the central bank will allow the currency to strengthen further to curb consumer price gains.

The consumer price index jumped 3.6 percent from a year earlier, after gaining 2.7 percent in September, the Department of Statistics said today. The figure exceeded all estimates by economists surveyed by Bloomberg News, where the median forecast was a 2.8 percent gain. Prices rose 1.3 percent from September.

Yesterday, Bloomberg had reported that inflation in Hong Kong accelerated in October to the highest since July 1998.

Hong Kong's inflation accelerated in October to a nine-year high after rents rose because the government resumed charging a property tax.

Consumer prices rose 3.2 percent from a year earlier, the Census and Statistics Department said today on its Web site. That was double September's pace and more than the 2.7 percent median estimate of 12 economists surveyed by Bloomberg News.

India managed to buck the trend, at least as far as the official numbers are concerned. Bloomberg reports today:

India's inflation held near a five- year low as the government subsidized fuel to protect consumers from record crude oil prices ahead of elections.

Wholesale prices rose 3.01 percent in the week ended Nov. 10 from a year earlier, slower than a 3.11 percent gain in the previous week, the Ministry of Commerce and Industry said today in New Delhi. Analysts had forecast inflation at 3.20 percent.

Eurozone industrial orders fall

The German economy grew 0.7 percent in the third quarter, but there were further signs yesterday that the eurozone economy is slowing.

From Reuters:

The European Union statistics office said on Thursday that orders in the 13 countries using the euro fell 1.6 percent month-on-month and rose 2.0 percent year-on-year...

Eurostat revised its August data upwards to increases of 0.8 percent from the previous month and 5.3 percent versus a year earlier, versus the previously reported rises of 0.3 percent monthly and 5.1 percent year-on-year.

Slower growth ahead for the euro zone appears to be the consensus among economists now.

"We have all the ingredients coming together for a very sharp slowdown in euro zone growth next year," said David Brown, an economist at Bear Stearns International...

"September's marked fall in industrial orders adds to the evidence that the euro zone manufacturing sector is being increasingly pressurised by the very strong euro, elevated oil prices, higher interest rates and the credit crunch," said Howard Archer, chief European economist at Global Insight...

"If you look at the longer run you see that the momentum is decelerating in orders, and this is in line with what we are seeing in Germany," said Christoph Weil, European economist at Commerzbank.

Thursday, 22 November 2007

US economic indicators deteriorate, Dow Theory triggers sell signal

Reuters reports yesterday's market action:

Global stocks and the dollar fell sharply on Wednesday while the yen and government bonds soared as concerns for the health of the U.S. economy stirred another massive wave of risk averse investing.

Near-record oil prices also fanned fears that energy costs could crimp consumer spending.

There are good reasons to be concerned about the US economy. From Bloomberg yesterday:

The Conference Board's index of leading economic indicators fell 0.5 percent in October after a 0.1 percent increase that was smaller than previously estimated, the New York-based group said today...

Rising fuel costs and the housing slump spurred a drop in the Reuters/University of Michigan final sentiment index to 76.1 in November, the lowest level since October 2005, following Hurricane Katrina. The index was at 80.9 in October.

And from Reuters:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 139.2 in the week ended November 16 from a downwardly revised 139.9 in the prior week, initially reported as 140.0...

The growth rate fell to minus 1.2 percent from minus 0.9 percent. This marks a 63-week low for the growth rate.

All is not lost for the stock market. Mark Hulbert suggested in an article recently that diminished corporate insiders' selling could provide some support.

And yet, after yesterday's market close just a few hours later, Hulbert had another article up pointing out that the Dow Theory has now triggered a sell signal.

Wednesday, 21 November 2007

US housing data mixed, Fed sees slower growth

Perhaps the US housing market is stabilising after all. From MarketWatch:

New construction of U.S. houses and apartments rose 3.0% in October to a seasonally adjusted annual rate of 1.23 million in October, following three months of decline, the Commerce Department said.

Then again, perhaps not.

Building permits, a leading indicator of housing construction, fell 6.6% to a seasonally adjusted annual rate of 1.18 million in October from 1.26 million in September. It's the lowest level for permits since July 1993.

In any case, the minutes of the October FOMC meeting indicate that the Fed continues to see slower growth ahead. Again from MarketWatch:

Expanded economic forecasts released for the first time by the Federal Reserve on Tuesday projected slower growth in the U.S. economy next year, a tick-up in the unemployment rate and tame inflation.

Even with the forecast of a slowdown, the rate cut in October was a "close call," according to a summary of the meeting released with the new forecasts.

Close call it might have been, but some economists are seeing more rate cuts ahead.

"It is clear they'd rather not ease again on December 11, but it is equally clear that fine, considered speeches count for naught when the sky is falling," said Ian Shepherdson, chief U.S. economist at High Frequency Economics...

"The rhetoric at that time [in the statement] and the rhetoric in these minutes don't square up to me. These guys are biased to ease," said Paul McCulley, managing director of Pacific Investment Management Company in a television interview.

Recent market action shows that investors have already discounted further rate cuts, though, so perhaps the more important question is how many more cuts there will be.

Tuesday, 20 November 2007

Markets battered, housing stays weak

Yesterday's market action is described by Reuters:

U.S. stocks tumbled on Monday, falling in sync with their counterparts around the world as credit market jitters intensified, driving investors into less volatile government bonds and safer-haven currencies such as the Japanese yen.

Worsening sentiment in the banking sector and escalating stress in short-term lending markets were at the center of the turbulence...

The Dow Jones industrial average was down 206.23 points, or 1.57 percent, at 12,970.56. The Standard & Poor's 500 Index was down 23.37 points, or 1.60 percent, at 1,435.37. The Nasdaq Composite Index was down 34.95 points, or 1.33 percent, at 2,602.29...

Three-month London interbank offered rates rose for the fourth session, hitting 4.98188 percent, their highest since before the Federal Reserve delivered its latest interest-rate cut at the end of October...

Japan's Nikkei average slid 0.7 percent to end at 15,042.56, giving up earlier gains and extending its losing streak to the third straight session on Monday as the yen's strength cooled investors' enthusiasm for stocks.

The pan-European FTSEurofirst 300 index lost 2.1 percent to close at 1,462.76, its lowest close since Aug. 16.

Meanwhile, the US housing market, the trigger for all the turbulence, remains in the doldrums. From MarketWatch:

The seasonally adjusted housing market index held steady at a record low of 19 in November from the previous month, the National Association of Home Builders reported Monday. It matches the lowest reading in the index since it was started in 1985.

Little wonder that more economists are forecasting a recession for the US economy. Bloomberg reports the findings of a survey by the National Association for Business Economics.

Nine of 50 economists pegged the odds of a contraction over the next 12 months at 50 percent or higher, according to a poll taken from Oct. 22 to Nov. 6. Just five of 46 held a similar view in September.

And the UK economy could follow in the US footsteps if its housing market is any indication. From Reuters:

House price inflation in England and Wales dropped to 7.9 percent year-on-year in the month to November 10 from 10.4 percent the previous month, a survey by property website Rightmove shows.

The survey showed house prices fell on the month in all regions bar London where demand continues to outstrip supply, pushing prices up 2.3 percent on the month.

Monday, 19 November 2007

Singapore economy slows but inflationary pressures rising

William Pesek says that "Asia Is Getting a Bit Too Hot for Its Own Good".

If you strip out the most volatile items, such as food and energy, the rationale goes, Asian inflation looks pretty tame. Oh, it's only high pork prices, China bulls say. It's only because crude oil keeps rising, Asia-market enthusiasts retort.

Yet such arguments are taking on shades of denial as 2008 approaches and inflation accelerates...

The data may be masking the inflation already coursing through economies such as Bangladesh, China, Indonesia, Pakistan, Sri Lanka, Taiwan and Vietnam. For example, Singapore's consumer prices could accelerate from 2.7 percent now to as much as 5 percent in the first quarter of next year, says Chua Hak Bin, Singapore-based economist at Citigroup Inc.

It's probably misleading to cite Singapore's inflation rate because it includes a one-off GST increase. Furthermore, the economy moderated in the third quarter, Bloomberg reports today.

The $132 billion [Singapore] economy grew an annualized 4.3 percent in the third quarter after adjusting for inflation, following a revised 14.5 percent gain in the second quarter. Economists were expecting a 6.4 percent gain.

From a year earlier, the economy expanded 8.9 percent after gaining 8.7 percent in the previous three months. That was lower than initial estimates.

The government forecast for next year does not see much further cooling.

The Southeast Asian economy will expand as much as 6.5 percent next year, higher than an earlier estimate of 6 percent, the trade ministry said in a statement today. Inflation is expected to accelerate to as much as 4.5 percent in 2008 from an average 2 percent this year.

That expected increase in inflation is not triggering any immediate change in monetary policy.

Singapore's inflationary pressures are rising as the economy expands, prompting the central bank last month to say it will allow a faster appreciation in its currency. It said today its currency band, which will be reviewed in April, remains "appropriate." The Singapore dollar has gained 5.8 percent this year against its U.S. counterpart.

It remains to be seen how much longer the current stance on the exchange rate will be seen as appropriate. One-off price effects notwithstanding, it is quite obvious from the third quarter GDP data that the current rate of resource utilisation is not sustainable.

Saturday, 17 November 2007

Slump in credit markets to impact lending, more signs of slowing

While analysts debate the extent that mortgage-related losses will impact bank profits, it is useful to remember that the ultimate impact of the credit market turmoil on the general economy is through reduced lending. Bloomberg reports some estimates from Goldman Sachs.

The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a "substantial recession" in the U.S., according to Goldman Sachs Group Inc.

Losses related to record home foreclosures using a "back-of-the-envelope" calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief U.S. economist at Goldman in New York wrote in a report dated yesterday. The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.

"The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," Hatzius wrote. "It is easy to see how such a shock could produce a substantial recession" or "a long period of very sluggish growth," he wrote.

The full effects of the credit crunch have certainly not filtered through to the real economy, but already, some signs of slowing are evident. The Federal Reserve reported yesterday that US industrial production fell 0.5 percent in October. The Economic Cycle Research Institute reported that its Weekly Leading Index fell to 140.0 in the week ended 9 November from 140.3 in the prior week while the growth rate fell to minus 0.9 percent, a 60-week low, from minus 0.7 percent.

US stock investors don't seem overly perturbed by the negative news, though, the stock market finishing up yesterday. In fact, the Dow Jones Industrial Average gained one percent over the week.

Slowing in industrial production hasn't been limited to the US. Even China seems affected, reporting an increase in industrial production by 17.9 percent in October from a year ago compared to 18.9 percent in September. Nevertheless, more tightening is expected from China after fixed-asset investment in urban areas was reported yesterday to have risen by 26.9 percent in the first 10 months of 2007.

Friday, 16 November 2007

Inflation soars in US and euro zone, more calls for RMB revaluation

Inflation in the US accelerated in October. Reuters reports:

The Consumer Price Index, the most broadly used gauge of inflation, rose 0.3 percent in October for a second straight month as energy prices posted their biggest rise since May.

But core prices, which strip out volatile energy and food costs, rose a more modest 0.2 percent in October. Both the overall and core reading were in line with financial market expectations.

The muted increased in core prices should keep Fed inflation worries at bay for the time being, especially with other data showing more signs of a slowing economy.

After the data, markets were betting the likelihood of a Fed rate cut at the group's December meeting was 90 percent, up from 72 percent late on Wednesday...

A separate Labor Department report showed new applications for U.S. jobless aid rose more than expected to a seasonally adjusted 339,000 last week, and the more-reliable four-week moving average held steady at a 6-month high.

Initial claims for state unemployment insurance benefits rose by 20,000 from an upwardly adjusted 319,000 the prior week.

Reports from the New York and Philadelphia Federal Reserve banks also suggested the economy was softening.

In contrast, the ECB does not have the luxury of focusing on the core, so yesterday's report that consumer prices rose at an annual rate of 2.6 percent in the euro area will be a concern.

The contrast in monetary policy was the focus of yesterday's post by Macro Man. He says that the Federal Reserve's dual mandate balancing growth and inflation tends to make its policy more "dilutive" than policy in most other developed economies that focus on stable prices.

The implication for US dollar-peggers is that they will tend to import inflation from US monetary policy. A probable solution is to break the peg, and that "could actually see currencies like the euro and sterling decline against the buck, with dollar weakness manifesting itself most against erstwhile peggers".

FT Alphaville tells us that George Magnus, senior economic adviser at UBS, also thinks a revaluation is increasingly likely, at least for China. He points to historical precedents where a "rising power colludes to prevent proper exchange rate adjustment; internal price and asset dislocations sooner or later lead to financial excess and stress; and finally, exchange rate revaluation or faster appreciation occurs".

Thursday, 15 November 2007

Economic growth to slow

It does look like interest rates are set to be cut in the UK even though inflation is expected to remain stubbornly high for some time. Reuters reports:

Interest rates will need to fall in the next few months, the Bank of England signalled on Wednesday, as it predicted a worsening outlook for both economic growth and inflation.

In the quarterly Inflation Report, the central bank's first formal look at the economic impact of the credit crunch, it said growth would slow sharply to just over 2 percent next year even if its main rate fell from the current 5.75 percent.

Price pressures were stronger because of soaring energy prices and a falling pound against the euro, putting inflation above the 2 percent target for most of next year before settling back in the middle of 2009.

The eurozone economy could slow too, although apparently not in the third quarter. From Bloomberg:

Economic growth in Europe accelerated more than economists forecast in the third quarter as company investment in factories and equipment rebounded.

The economy of the 13 nations that share the euro expanded 0.7 percent from the second quarter, when it grew 0.3 percent, the European Union's statistics office in Luxembourg said today...

The pickup in growth may prove short-lived as Europe's economy contends with higher credit costs stemming from the U.S. housing slump, the euro's increase to a record against the dollar and oil prices above $90 a barrel. The European Commission last week cut its forecast for euro-area growth next year to 2.2 percent from 2.5 percent...

Signs of weakening growth emerged toward the end of the third quarter. Industrial production in the euro area fell 0.7 percent in September, while manufacturing grew at the slowest pace in more than two years in October. In Germany, investor confidence fell to a 15-year low this month.

Yesterday's data on the US economy also pointed to some slowing. Retail sales rose 0.2 percent in October. Producer prices edged up 0.1 percent in October while prices excluding food and energy were unchanged.

Wednesday, 14 November 2007

Time to cut interest rates in the UK?

Many economists think that the next move in UK interest rates is down. There are some good reasons for thinking so.

A survey from the Royal Institution of Chartered Surveyors showed yesterday that British house prices are falling at their fastest pace since mid-2005.

A UBS report on Monday said that risk aversion among investors is at a high level, and among equity investors in particular has turned "extreme".

On the other hand, equity markets recovered yesterday. In fact, equity markets rallied strongly in the US yesterday while the US housing market received some positive news in the form of an increase in pending home sales in September.

But perhaps more ominously, UK inflation accelerated in October. The Office for National Statistics reported yesterday that consumer prices rose 0.5 percent in October, taking the annual rate up to 2.1 percent, the highest level since June, from 1.8 in September. On Monday it had reported that annual factory gate inflation jumped to 3.8 percent in October, its highest level since December 1995, from 2.8 percent in September.

Inflation may not be dead yet in the UK. But we'll know more later today after the Bank of England releases its quarterly inflation report.

Tuesday, 13 November 2007

BoJ holds rates, China's inflation may force revaluation

The Japanese economy grew faster than expected in the third quarter, but it wasn't enough to move the Bank of Japan to raise interest rates today. Bloomberg reports:

The world's second-largest economy expanded an annualized 2.6 percent in the three months ended Sept. 30 after a revised 1.6 percent contraction in the previous period, the Cabinet Office said in Tokyo today. The median estimate of 41 economists surveyed by Bloomberg News was for a 1.8 percent increase.

The Bank of Japan kept its benchmark interest rate at 0.5 percent today as the biggest drop in housing investment in a decade and slowing shipments overseas threaten the expansion. Bond yields fell to the lowest since January 2006 on speculation that a cooling global economy will reduce demand for exports, the main driver of growth.

Tightening is more obviously required in China after inflation reportedly accelerated in October. AFP/CNA reports:

China's inflation lingered at 10-year highs in October, the government said Tuesday, as major state newspapers carried a vow by Premier Wen Jiabao to stabilise prices.

The consumer price index was up 6.5 per cent last month from a year earlier, compared with 6.2 per cent in September and 6.5 per cent in August, according to the National Bureau of Statistics.

Michael Pettis at China financial markets thinks that this means that "China will be forced into a maxi-revaluation (or at least a significant speeding up of the daily appreciation)" of its currency.

Monday, 12 November 2007

Topix falls to two-year low

While stock markets around the world have weakened recently, most are still not too far from multi-year highs, if not all-time highs. Japan's has been a conspicuous exception, and today's performance exacerbates its underperformance. Bloomberg reports:

Japanese stocks dropped, driving the Topix index to the lowest in more than two years, after reports of subprime losses at U.S. banks sent the dollar tumbling, clouding the profit outlook for companies including Canon Inc...

The Nikkei 225 Stock Average lost 386.33, or 2.5 percent, to 15,197.09 at the close of trading in Tokyo, a level not seen since July 2006. The broader Topix declined 37.95, or 2.5 percent, to 1,456.40, the lowest since Oct. 31, 2005. All 33 industry groups included in the gauge fell.

Economic data out of Japan today wouldn't have encouraged investors. An index of consumer confidence fell to 42.8 in October from 44.1 in September while wholesale inflation accelerated to 2.4 percent in October from 1.7 percent in September.

China's Shanghai Composite Index fell sharply today as well, closing 2.4 percent down at 5,187.7. Over the weekend, the central bank had announced another half percentage point increase in the bank reserve ratio requirement to 13.5 percent. But China still faces a flood of liquidity because of its huge trade surplus, which hit another record in October.

Saturday, 10 November 2007

More mortgage-related losses, economic outlook weakens

Yesterday, markets reacted to more warnings of mortgage-related losses among financial firms. US stocks fell to a two-month low. Treasury yields fell too.

There were some important economic data released yesterday.

Among the more positive for the US economy was the reported fall in the US trade deficit in September. A 1.1 percent increase in exports outstripped a 0.6 percent increase in imports. However, signs of imported inflation continued to accumulate in October with import prices rising 1.8 percent, the biggest gain in a year and a half.

More forward-looking indicators were tilted to the negative side.

Consumer sentiment in the US continued to deteriorate in November. The University of Michigan's sentiment index fell to 75.0 from 80.9 in October.

The Economic Cycle Research Institute's Weekly Leading Index edged up to 140.1 in the week ended Nov. 2 from 139.4 in the prior week. However, the growth rate fell to minus 0.9 percent from minus 0.7 percent to reach its lowest level since 15 September 2006.

The OECD's composite leading indicator for the United States shows a weakening outlook, decreasing by 0.6 point in September. In fact, the September 2007 data indicate a weakening outlook for all the major seven economies except Canada.

Friday, 9 November 2007

Central banks face monetary policy dilemma

Both the European Central Bank and the Bank of England left interest rates unchanged yesterday. From Bloomberg:

European Central Bank President Jean- Claude Trichet indicated interest rates may be unchanged for months, saying that both inflation and the euro's advance against the dollar are cause for concern.

Speaking after the ECB left its benchmark interest rate at 4 percent today, Trichet said "brutal" currency moves are "never welcome," while the bank is "ready to counter upside risks to price stability." The European currency has risen almost 10 percent against the dollar since mid-August.

Trichet's stronger rhetoric, which he last used when the euro rallied in 2004, suggests the ECB is growing concerned that the currency's appreciation may undermine Europe's economic expansion. At the same time, surging oil prices are pushing up energy bills, adding to the ECB's inflation concerns. The Bank of England also left its benchmark rate unchanged today at 5.75 percent.

"Trichet is pretty much trapped," said Hans-Guenter Redeker, head of currency strategy in London at BNP Paribas SA. "You can have verbal intervention, but it has no effect if rates remain unchanged and the U.S. is cutting rates."

Trichet is not the only one who may be feeling trapped.

Fed Chairman Ben S. Bernanke said today the U.S. economy, the world's largest, is likely to "slow noticeably" this quarter while high commodity prices and a weaker dollar may stoke inflation "for a time."

If former Fed chief Alan Greenspan is right, "a time" may last for a quarter of a century.

Japan isn't facing high inflation but the Bank of Japan must feel trapped anyway, with yesterday's data likely delaying further interest rate normalisation. Again from Bloomberg:

The Economy Watchers index, a survey of barbers, shopkeepers and others who deal directly with consumers, declined for a seventh month to 41.5 from 42.9 in September, the Cabinet Office said today in Tokyo...

Merchants' views on prospects for business over the next two to three months also deteriorated. The outlook index slid to 43.1 last month from 46 in September, a sixth monthly drop.

Machinery orders, an indicator of corporate investment in the next three to six months, fell 7.6 percent in September from a month earlier, the Cabinet Office said today. That was five times more than the median estimate of economists.

Thursday, 8 November 2007

US stocks erase gains from Fed rate cuts

Markets got hit again yesterday. Bloomberg reports:

U.S. stocks fell, erasing their gains since the Federal Reserve's Sept. 18 interest-rate cut, after New York expanded its probe of the mortgage industry, General Motors Corp. posted a record loss and the dollar tumbled.

Washington Mutual Inc., the largest U.S. savings and loan, declined the most in 20 years after New York Attorney General Andrew Cuomo said there's a "pattern of collusion" in the bank's home-loan appraisals. Fannie Mae posted its steepest drop since 2005 and Freddie Mac sank to a seven-year low after Cuomo subpoenaed the two biggest U.S. providers of mortgage financing. GM slid after writing down $39 billion in tax benefits.

Credit fears are increasing.

Capital One Financial Corp...said its cost for bad debts tied to mortgages and credit cards will be worse than predicted...

American Express Co. and other U.S. credit-card issuers may be forced to revise their loss estimates after Capital One boosted its forecast, Morgan Stanley analyst Kenneth Posner said...

Citigroup Inc...and HSBC Holdings Plc received warnings of possible downgrades to their structured investment vehicles as Moody's Investors Service reviewed its ratings on $33 billion of debt...

U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc...

The dollar fell to a record versus the euro and the lowest since 1981 against the pound. The New York Board of Trade's dollar index dropped to 75.077, the lowest since the gauge started in March 1973.

Wednesday, 7 November 2007

Australia's central bank raises interest rate to 11-year high

Yet another central bank decides not to wait out the credit crunch. Bloomberg reports:

Reserve Bank policy makers boosted the benchmark rate a quarter-point to 6.75 percent in Sydney today, the second adjustment in three months. Twenty-two of 27 economists surveyed by Bloomberg News forecast another increase by March. The nation's currency climbed close to a 23-year high.

[Governor Glenn] Stevens said fallout from the global credit crunch has been "less pronounced" in Australia, as Asia's appetite for commodities drives economic growth. He became the first governor to raise borrowing costs during an election campaign, a move that may curb consumer confidence and dent Prime Minister John Howard's chance of winning a fifth term on Nov. 24...

"By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 percent," Stevens said in a statement. "Reports of high capacity usage and shortages of suitable labor persist. Growth in aggregate demand will need to moderate."

In contrast, the next rate hike from the Bank of Japan seems to be taking forever to come, and yesterday's reports that the Cabinet Office's leading index fell to zero percent in September while the Conference Board's leading index for Japan decreased 1.3 percent aren't likely to hasten it.

The news from the euro area yesterday was a little better, the Royal Bank of Scotland Group Plc's services index rising to 55.8 in October from 54.2 in September. Nevertheless, no rate hike is expected from the European Central Bank's monetary policy meeting tomorrow.

Tuesday, 6 November 2007

US non-manufacturing sector rebounds but UK slows

The Federal Reserve may have cut interest rates by 75 basis points in the past two months but so far the economy has held up relatively well.

At least the service sector as a whole continues to grow. In fact, yesterday the Institute for Supply Management reported that its index of business activity for the non-manufacturing sector rose to 55.8 in October from 54.8 in September.

Things could yet get worse though as a Federal Reserve survey shows that banks tightened lending standards in the past three months and credit concerns continue to dog the financial sector.

The next major central bank to cut interest rates could be the Bank of England if the recent string of economic data out of the UK is anything to go by.

Yesterday, the Office for National Statistics reported that UK manufacturing output fell 0.6 percent in September while industrial production fell 0.4 percent.

Meanwhile, the British Retail Consortium reported that like-for-like retail sales grew just 1.0 percent year-on-year in October, down from 3.0 percent in September and the slowest rate of growth since November last year. Total sales grew 3.0 percent on the year, down from a 4.9 percent rate in September.

Indeed, the UK service sector appears to be generally slowing. The Chartered Institute of Purchasing and Supply/NTC service activity index slid from 56.7 in September to 53.1 in October, well below forecasts for 56.1 and its lowest level since May 2003.

The National Institute of Economic and Social Research estimates that the UK economy grew by 0.7 percent in the three months to October, down from the 0.8-percent rate in the three months to September.

The BoE is scheduled to announce its interest rate decision on Thursday.

Monday, 5 November 2007

Fed may cut rates again despite strong economic data

The Federal Reserve cut interest rates last week. Despite the relatively strong economic data reported last week, developments in financial markets could yet move the Federal Reserve into cutting rates again in the near future.

Last week's data saw two positive surprises on the US economy.

One was on third quarter real gross domestic product, which, according to the Commerce Department's advance report, grew 3.9 percent. This was the fastest rate of growth since the first quarter of 2006.

The other was on employment, which, according to the Labor Department's non-farm payroll report, increased by 166,000 in October. This was the biggest increase since May.

However, other indicators show that the economy remains in a fragile state.

The Institute for Supply Management's manufacturing PMI fell to 50.9 in October from 52.0 in September, indicating that manufacturing has slowed and is now barely growing.

Even the employment data gave contradictory signals. Although the establishment survey showed strong growth in employment in October, the household survey showed that employment fell by 250,000 in that month. And the initial number from the establishment survey is notoriously unreliable; the August number, originally showing a loss of 4,000 job, now shows a gain of 93,000 jobs.

Despite the conflicting data, Tim Duy opined in his latest commentary on the Fed at Economist's View that the October employment report and the third quarter GDP report showed that the US economy has remained "resilient" to the housing downturn. He thinks that the economy as a whole is "likely growing at somewhere around a 2.75% rate".

Last week's data also showed that inflation in the US was relatively low in the third quarter. The personal consumption expenditures price index excluding food and energy, the Federal Reserve's preferred inflation indicator, rose 0.2 percent in September. In fact, lower inflation helped to push up real GDP growth in the third quarter as the rate of increase of the GDP deflator fell to just 0.8 percent.

Nevertheless, inflation remained at the top end of the Federal Reserve's comfort zone. On a year-on-year basis, the personal consumption expenditures price index less food and energy rose 1.8 percent in September while the overall index rose 2.4 percent.

Indeed, in his commentary, Duy sounded a note of caution on inflation. "I detect something of an upward trend in the past four months, on the order of 50bp," he wrote. "Personally, I wouldn’t break out the champagne on the inflation story just yet."

So it looks like the Federal Reserve is faced with slow growth even as inflation remains barely acceptable to it. No wonder it said in its statement following its meeting last week that "the upside risks to inflation roughly balance the downside risks to growth".

Nevertheless, Duy concluded that the threat of a credit crunch could push the Federal Reserve into making another rate cut in December.

And that is likely to prove the case, what with Citigroup chief executive Charles Prince yesterday being ousted from his position, following in the footsteps of Merrill Lynch's former head Stan O'Neal. The ouster came as Citigroup reported yesterday that it would take an additional $8 billion to $11 billion write-down related to sub-prime mortgages on top of a $6.5 billion write-down last quarter. O'Neal's ouster a few days before had come several days after Merrill Lynch had announced an $8.4 billion write-down for such assets; many analysts think there are yet more write-downs to come for the bank.

As losses become increasingly recognised by banks, expect the credit crunch to tighten. That could lead to fears that the effects of the credit market turmoil on the real economy are only just beginning.

Saturday, 3 November 2007

US economy in good shape for the time being

That seems to be what yesterday's data show.

MarketWatch reports the employment data:

Shaking off fears about weakness in housing and credit, the U.S. economy created 166,000 net jobs in October, the best job growth since May, the Labor Department reported Friday...

The unemployment rate was steady at 4.7% as expected, the government said.

The household survey, however, showed a loss of 250,000 workers, the third decline in the past four months.

And, as usual, watch for the revisions. Note that the revisions on the August data now surpass the magnitude by which the October number exceeded the consensus number.

MarketWatch also reports that factory orders rose 0.2 percent in September.

Friday, 2 November 2007

Stock markets pummelled

And October is supposed to be over. Bloomberg reports:

U.S. stocks tumbled, led by the steepest drop in financial companies in five years, after analysts said Citigroup Inc. may be short of capital and advised investors to sell the shares.

Citigroup, the biggest U.S. bank by assets, slid the most since 2002 after CIBC World Markets said its dividend may be cut and Credit Suisse Group reduced its rating. Bank of America Corp., the second largest bank, had its biggest decline in four years. Retailers fell, led by Target Corp., after consumer spending slowed more than economists forecast.

The Standard & Poor's 500 Index lost 40.94, or 2.6 percent, to 1,508.44, erasing about $369 billion of market value from the benchmark for American equities. Financial shares, this year's worst-performing industry, led the slide with a 4.6 percent retreat, the most since September 2002. The Dow Jones Industrial Average decreased 362.14, or 2.6 percent, to 13,567.87. The Nasdaq Composite Index slipped 64.29, or 2.3 percent, to 2,794.83. More than 13 stocks fell for every one that rose...

The S&P 500 lost the most since Aug. 9. Citigroup's downgrades also triggered selling in Europe, where the Dow Jones Stoxx 600 lost 1.5 percent to 382.57. Treasuries rallied, erasing losses spurred by the Federal Reserve's interest-rate cut yesterday, as investors sought the safety of government debt.

Yesterday's economic data weren't helpful to the stock market. From Bloomberg:

The U.S. economy is cooling after a surge in the third quarter, according to the latest reports on manufacturing and consumer spending that back the Federal Reserve's move yesterday to cut interest rates.

The Institute for Supply Management's factory index fell to 50.9 in October, the lowest in seven months, from 52 in September and less than economists anticipated. Americans increased spending 0.3 percent in September, the Commerce Department said today in Washington, also less than forecast...

The spending report showed incomes increased 0.4 percent in September for a second month. The gain matched the median forecast of economists surveyed.

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.2 percent in September after a 0.1 percent gain the previous month. It was up 1.8 percent from September 2006, matching the August increase as the smallest since early 2004...

Adjusted for prices, spending rose 0.1 percent in September, the smallest gain since June, after a 0.6 percent increase the prior month, the report showed.

The UK economy also appears to be slowing. From Reuters:

The manufacturing purchasing managers' index compiled by the Chartered Institute of Purchasing and Supply/NTC showed activity eased to its slowest rate this year in October.

The headline index fell to 52.9, its second consecutive monthly decline and well below forecasts for a reading of 54.4. There were marked falls recorded in output, new orders and employment...

A survey by the Confederation of British Industry also painted a subdued picture, showing retail sales growth slowed in October to its slowest rate since last November.

The CBI attributed the slowdown to higher borrowing costs and uncertainty caused by turmoil on financial markets.

And even China provided a mixed outlook for its manufacturing sector. From Bloomberg:

The Purchasing Managers' Index rose to 55.2, a 31-month high, from 55 in September, CLSA said today in an e-mailed statement...

A government PMI survey, released by the China Federation of Logistics and Purchasing and the National Bureau of Statistics earlier today, showed a lower reading. Its index dropped to 53.2 in October from 56.1 in September.

Thursday, 1 November 2007

Fed cuts rates, BoJ cuts projections

So the Federal Reserve cut interest rates by 25 basis points to 4.5 percent as expected. However, US Treasuries fell after the decision as the FOMC said in its statement that "the upside risks to inflation roughly balance the downside risks to growth", suggesting that the Fed is not looking at a series of a rate cuts in the following months.

Surprisingly strong third quarter GDP growth possibly influenced the Fed's decision and statement. Bloomberg reports the GDP data.

Economic growth in the U.S. unexpectedly accelerated in the third quarter as increases in exports, consumer spending and business investment made up for another plunge in home construction.

Gross domestic product grew at an annual rate of 3.9 percent, the most in more than a year, the Commerce Department said today in Washington...

Mild inflation figures helped too.

The GDP figures are adjusted for inflation and the acceleration in growth came in part because of the smallest gain in overall prices since 1998. The report's price index rose at a 0.8 percent annual rate after a 2.6 percent second-quarter rise.

Other US economic data released yesterday were mixed.

The National Association of Purchasing Management-Chicago said its business-activity index fell to 49.7 in October, from 54.2 the previous month. Readings below 50 signal a contraction. The median forecast among economists surveyed by Bloomberg News was for a drop to 53.

Companies in the U.S. added 106,000 jobs in October, more than economists had forecast, according to a report today from ADP Employer Services. A report from the Labor Department also showed employment costs rose in the third quarter at a slower pace than in the previous three months, suggesting increases in wages and benefits aren't heating up inflation. Additional figures from the Commerce Department showed construction spending increased last month as the building of factories, hotels and schools compensated for a drop in housing.

The European Central Bank is unlikely to cut rates soon, although the economic data yesterday were also pointing in conflicting directions. From Bloomberg:

The inflation rate in the 13-nation euro area rose to a two-year high of 2.6 percent from 2.1 percent in September, the European Union's statistics office in Luxembourg said today. That was above the 2.3 percent expected by economists. An index of executive and consumer sentiment fell to a 19-month low of 105.9 in October, according to a separate report...

Unemployment fell to 7.3 percent in September, the lowest since the data were first collated in 1993, from 7.4 percent in August, according to other data released today. Eurostat, the statistics office, adjusted the August figure from 6.9 percent as part of revisions to the entire series.

Another major central bank that met yesterday was the Bank of Japan. Its decision to leave rates unchanged was expected but more significant is the expectation for future rate increases, which fell after the BoJ cut its growth and inflation projections for the economy. Bloomberg reports:

The Bank of Japan forecast slower economic growth and abandoned a prediction that consumer prices will increase this year, making it harder to raise the world's lowest borrowing costs...

Prices excluding fresh food will be unchanged in the year ending March 31, the central bank said in its semiannual outlook. In April it forecast a 0.1 percent gain. The economy will expand 1.8 percent this year, it said, slower than the 2.1 percent predicted six months ago, in part because of a "swing in housing investment" following the change in regulations...

Policy makers also gave forecasts for the fiscal year starting April 2008. Core prices will probably rise 0.4 percent and economic growth will accelerate to 2.1 percent in the period, the bank said. In April they predicted inflation of 0.5 percent. The growth projection was unchanged from six months ago...

Wages fell 0.5 percent in September, the ninth drop in 10 months, the Labor Ministry said today. Summer bonuses fell for the first time in three years, making it harder for companies to raise prices to pass on higher raw-material costs.

But don't rule out a rate increase from the BoJ.

Keeping rates "very low" for too long could encourage excessive investment and hamper growth over the long term, the board said. The bank will "adjust the level of interest rates gradually in accordance with improvements in the economic and price situation," it said, repeating language used in April.

We'll have to wait for data showing the improvements in the economic and price situation though. They were not very evident in October's manufacturing data reported by Reuters yesterday.

The Purchasing Managers Index (PMI), which gives an early snapshot of the health of manufacturing, slipped to a seasonally adjusted 49.5 in October from 49.8 in September, staying below the crucial 50 level for a fourth consecutive month.