Monday, 31 March 2008

Japanese industrial output falls for second month

It turns out that Japan still has a chance at beating the United States in the race to recession.

The Ministry of Economy, Trade and Industry reported today that Japan's industrial output fell 1.2 percent in February. This was the second consecutive month of decline in industrial production following a decline of 2.2 percent in January.

The weak trend in industrial production was corroborated by other data released today. The NTC Research/Nomura/JMMA Purchasing Managers Index declined to a seasonally-adjusted 49.5 in March from 50.8 in February, indicating that Japanese manufacturing contracted in March. The output index declined to 48.5 in March from 50.9 in the previous month while the new orders index fell to 47.2 from 50.4.

On the other hand, after being a drag on the Japanese economy with the introduction of tighter building rules in the middle of last year, housing starts appear to be stabilising. Data today from the Ministry of Land, Infrastructure and Transport showed that 82,962 units were started in February. This was down just 5.0 percent from the previous year and an improvement from the decline of 5.7 percent in January.

Prospects for an improvement in consumer spending also got a small boost today. The Ministry of Health, Labour and Welfare reported today that Japanese wage earners' total cash earnings rose 1.3 percent in February from a year earlier. Overtime pay grew 2.6 percent, the second consecutive month of increase and the fastest rise since November 2006

One of the best available leading economic indicators, however, is telling us that the negatives outweigh the positives. The Nikkei 225 Stock Average fell 294.93, or 2.3 percent, to close at 12,525.54 today, completing a loss of 18 percent for the first three months of the year, the worst performance in the first quarter since 1990.

Saturday, 29 March 2008

US and European stocks fall amid signs of deteriorating economies

US stocks lost ground for a third day. Bloomberg reports:

U.S. stocks fell, extending the worst quarterly slump since 2002, as J.C. Penney Co. forecast weaker sales and concern grew that further writedowns may jeopardize banks' access to capital...

The Standard & Poor's 500 Index, which swung between gains and losses at least 10 times, ended down 10.54 points, or 0.8 percent, at 1,315.22 and lost 1.1 percent in the week. The Dow Jones Industrial Average declined 86.06, or 0.7 percent, to 12,216.4. The Nasdaq Composite Index decreased 19.65, or 0.9 percent, to 2,261.18. Five stocks fell for every two that rose on the New York Stock Exchange...

Shares also slumped after the Commerce Department said spending by U.S. consumers rose at the slowest pace in more than a year in February, a sign the economy may be in recession. The 0.1 percent advance in spending followed a 0.4 percent gain in January.

The Reuters/University of Michigan index of consumer sentiment decreased to 69.5 from 70.8 in February. The measure is the lowest reading since February 1992 and compares with a preliminary report of 70.5 released March 14.

European stocks also fell yesterday, the FTSEurofirst 300 index losing 0.5 percent to close at 1,265.47, although it was up 3.2 percent for the week.

In the meantime, the ECB isn't relaxing. Bloomberg reports the latest ECB initiative.

The European Central Bank, struggling to ease gridlock in credit markets, will lend six-month money for the first time even as policy makers warned higher interest rates may be needed to combat inflation.

The ECB said it will auction 50 billion euros ($79 billion) in emergency six-month funds to support "the normalization of the functioning of the euro money market." At the same time, council members Axel Weber and Juergen Stark said Europe's economy is coping with the jump in global credit costs and the central bank may need to raise its benchmark interest rate to fight inflation.

Yesterday's data illustrate the ECB's dilemma.

German inflation accelerated more than economists forecast in March, climbing to 3.2 percent from 2.9 percent in February, the country's statistics office said today...

European retail sales fell in March and French consumer confidence dropped to a record low, separate reports showed today.

The BoE has not quite shown the same degree of hawkishness, perhaps understandable from yesterday's reports. From Bloomberg:

U.K. house prices rose at the slowest pace in more than a decade in March and consumer confidence was the lowest since 1993, adding to evidence the economy is on course for its weakest performance since the end of the last recession...

The economy expanded 2.8 percent in the fourth quarter from a year earlier, slower than a previously estimated 2.9 percent, as consumer spending growth was revised lower and government expenditure fell, the Office for National Statistics said in London today. The economy grew 0.6 percent on the quarter.

Friday, 28 March 2008

Japanese stocks rise, as do unemployment and inflation

Japan's stock market decoupled today from yesterday's poor US market performance. Bloomberg reports:

Japanese stocks rose, capping the biggest weekly gain in more than a month, carried by a rally in property and commodity-related companies...

The Nikkei 225 Stock Average rose 215.89, or 1.7 percent, to close at 12,820.47, bringing this week's gain to 2.7 percent, the most since Feb. 15. The broader Topix climbed 17.37, or 1.4 percent, to 1,243.81 after falling as much as 0.9 percent in the morning session. The index remains 27 percent lower for the business year that started April 1, 2007.

The gain occurred despite economic reports today that were generally disappointing. From AFP/CNA:

The jobless rate rose by 0.1 percentage points to 3.9 percent in February from the previous month, the government reported, missing market forecasts for a steady rate of 3.8 percent.

Japan's core inflation rate meanwhile accelerated to a year-on-year rate of 1.0 percent in February, the quickest pace since March 1998, as rising energy and food costs drove up consumer prices, a separate report showed.

Core inflation, which excludes volatile fresh food prices, picked up from a pace of 0.8 percent in January...

Japanese household spending was flat in February as average incomes dipped 0.1 percent, the government said...

Retail sales rose 3.1 percent in February from a year ago, but that was at least partly due to the effect of higher gasoline prices, the government said.

Not so much decoupling there, unfortunately.

US stocks fall again, economy already in recession?

Yesterday was another down day for US stocks. MarketWatch reports:

U.S. stocks on Thursday extended losses into a second day, with technology shares under pressure as a result of disappointing numbers from Oracle Corp. and Google Inc...

The Dow Jones Industrial Average was down 120.40 points, or nearly 1%, to 12,302.46, with all but two of its 30 components posting losses...

The S&P 500 index eased 15.37 points, or 1.2%, to 1,325.76, while the Nasdaq Composite slumped 43.53 points, almost 2%, to 2,280.83.

The economic reports yesterday had not looked too bad.

Easing recent concerns about the extent of the slumping U.S. economy, the Commerce Department said its 0.6% estimate for growth in gross domestic product was unrevised from the previous two estimates. See full story.

Meanwhile, first-time claims for state unemployment benefits for the week ended March 22 fell 9,000 to stand at 366,000, the Labor Department reported. See Economic Report.

On the other hand, Brian Blackstone points out that while gross domestic product had been up in the fourth quarter, gross domestic income had posted its largest decline -- at a one percent annualised rate -- since the 2001 recession, possibly suggesting that "the debate may not be whether the U.S. is slipping into recession in 2008, but whether it’s already been in one for months".

Thursday, 27 March 2008

US durable goods orders, new home sales fall

While a global economic slowdown has been widely expected, only US economic data have looked recessionary recently. Yesterday's economic reports were no exception.

Bloomberg reports the US data:

Orders for U.S. durable goods unexpectedly fell in February, led by a slump in demand for machinery, as the housing downturn and the prospect of a recession made companies hesitant to invest.

The 1.7 percent drop in demand for products made to last at least three years followed a 4.7 percent decrease in the prior month, the Commerce Department said today in Washington. The department also reported that sales of new homes dropped 1.8 percent last month to a 13-year low.

But Europe generally surprised on the positive side, with business confidence unexpectedly rising in March in Germany and France. That should help keep the ECB in relatively hawkish mood after yesterday's speech by President Jean Claude Trichet, reported by Bloomberg yesterday:

"The current monetary-policy stance will contribute to achieving our price-stability objective," Trichet said in Brussels today...

Trichet said Europe's economy is still "sound," suggesting he sees no immediate need for rate cuts...

The Italians might argue with the latter though. Italian business confidence declined to its lowest level in 2½ years in March.

But Japan continues to weather the economic storm in relatively good shape, its export growth accelerating in February to an 8.7 percent rate from a year earlier from 7.6 percent in January.

Wednesday, 26 March 2008

Stock markets rally, bottom seen?

Yesterday was a day of strong performances for many stock markets. The gains started in Asia, as Bloomberg reports.

Asian stocks gained the most in five weeks...

The MSCI Asia Pacific Index added 3.1 percent to 140.21 as of 7:41 p.m. in Tokyo, its largest increase since Feb. 14 and a third day of gains. All 10 industry groups rose, with a measure of financial shares advancing 3.7 percent to a three-week high.

Japan's Nikkei 225 Stock Average climbed 2.1 percent to 12,745.22. The S&P/ASX 200 Index surged 3.7 percent in Australia, while Hong Kong's Hang Seng Index added 6.4 percent. Both markets were closed for Easter holidays, during which the Standard & Poor's 500 Index rallied 4 percent in the U.S.

Reuters reports that stock markets in Europe followed.

The FTSEurofirst 300 index of top European shares closed 3.2 percent higher at 1,266.03 points, narrowing its losses so far this year to 16 percent...

The DJ Stoxx technology index was the best sectoral performer with a rise of 6.4 percent as Nokia's leap late in the session gave a boost that helped offset an earlier Morgan Stanley downgrade of the sector to "underweight" from "neutral"...

Around Europe, Britain's FTSE 100 index and the French CAC 40 both rose 3.5 percent while Germany's DAX and Switzerland's SMI both gained 3.2 percent.

But the US market, which had triggered the latest rally, took a breather. Bloomberg reports:

The S&P 500 added 3.11 points, or 0.2 percent, to 1,352.99 and climbed 4.2 percent over the past three days. The Dow lost 16.04, or 0.1 percent, to 12,532.6. The Nasdaq Composite Index rose 14.3, or 0.6 percent, to 2,341.05. Two stocks gained for every one that fell on the New York Stock Exchange.

Weak economic data released yesterday didn't help the mood in the US stock market. Bloomberg reports:

The Conference Board's confidence index fell to 64.5, a five-year low, from a revised 76.4 in February, the New York- based research group said today...

The Conference Board's gauge of expectations for the next six months slumped to 47.9, the lowest since December 1973, when the Watergate scandal rocked the Nixon administration and an embargo by a group of Arab oil exporters was in effect, the report showed...

Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey also showed today. The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent decrease in December. The gauge has fallen for 13 consecutive months.

But Mark Hulbert uses poor sentiment to argue for a bottom in the stock market.

... Though the Dow Jones Industrial Average is now more than 800 points higher than it was at that low, the mood among stock market timing investment newsletters remains almost as pessimistic now as it was then.

That suggests a stubbornly held bearishness among the editors of stock market timing newsletters. That in turns means that there is precisely the kind of wall of worry that strong rallies like to climb.

Tuesday, 25 March 2008

US existing home sales rise

Those looking for a bottom in housing in the US probably had their hopes raised yesterday. From Reuters:

The National Association of Realtors on Monday said sales of previously owned homes rose 2.9 percent in February to a 5.03 million-unit annual rate, bucking expectations on Wall Street for a decrease.

But falling prices probably had something to do with the improvement.

While the rise broke a six-month streak of declining sales, prices continued to slip. The trade group said median prices fell 8.2 percent from their year-ago level to $195,900. It was the biggest year-on-year drop on record dating to 1968.

And inventory remains high.

The pick-up in existing home sales helped cut into the bloated inventory of unsold homes on the market. NAR said the inventory fell 3 percent to 4.03 million units at the end of February. At February's sales pace that represented a 9.6 months' supply, the slimmest inventory since August but still high by historical standards.

Meanwhile, we continue to get more recession calls.

In a separate report, the Chicago Federal Reserve Bank said its index of U.S. economic activity slipped to -1.04 in February, the lowest since April 2003. The drop pushed a three-month average of the index deeper into territory that can signal recession.

"There is an increasing likelihood that a recession has begun," the Chicago Fed said.

Across the Atlantic, the housing market in the UK is also weakening. House prices are decelerating rapidly as the number of house-buyers fall to a record low according to the National Association of Estate Agents.

However, way to the east in the Land of the Rising Sun come signs of rising land prices. From AFP/CNA:

Residential land prices rose 1.3 percent over the year to January 1 on average, following a 0.1 percent gain through 2006, which was the first rise in 16 years, an annual survey by the land ministry showed.

Commercial land prices rose 3.8 percent on average in 2007, extending a 2.3 percent increase seen the year before.

But the overall Japanese economy is looking shaky. From Reuters:

The business survey index of sentiment at large manufacturers slumped to minus 12.9 for January-March from plus 5.2 in October-December in a joint survey by the Ministry of Finance and the Economic and Social Research Institute, an arm of the Cabinet Office...

The survey's index reading at large non-manufacturers fell to minus 7.2 from minus 2.2 last quarter, while that at big firms overall was down at minus 9.3 against plus 0.5 in October-December.

Friday, 21 March 2008

Commodities fall, US economy "unambiguously recessionary"

Commodities fell again yesterday but stocks recovered the previous day's losses on Wall Street. Reuters reports:

Gold and oil fell sharply on Thursday as investors dumped commodities and lifted U.S. stocks to big gains on the view that inflation could moderate if the selling pressure in futures markets continues.

The dollar jumped to a week-high against the euro as investors fleeing commodities repatriated their cash into the beleaguered U.S. currency. A sagging dollar this year has given a major lift to commodities denominated in the U.S. currency.

Treasury debt prices mostly slipped but the shortest-dated government instruments rallied again amid a powerful safe-haven bid on the exodus out of commodities.

That safety should have taken priority perhaps isn't surprising after yesterday's weak US economic data. From Bloomberg:

The Conference Board's leading-indicator measure declined 0.3 percent in February, the fifth straight drop, the New York- based research group said today. The last two times the index dropped for as many months correlated with a shrinking economy. Meanwhile, the Philadelphia Federal Reserve said its factory index was at minus 17.4 in March, compared with minus 24 the previous month...

Separately, the Labor Department said the number of Americans filing first-time claims for unemployment insurance rose 22,000 in the week ended March 15, more than economists anticipated. The number of people on benefit rolls reached the highest since August 2004.

And Reuters reports another pessimistic signal.

[The Economic Cycle Research Institute's] Weekly Leading Index fell to 130.8 in the week of March 14 from 132.1 in the prior week, revised down from 132.2.

"It is exhibiting a pronounced, pervasive and persistent decline that is unambiguously recessionary," said Lakshman Achuthan, managing director at ECRI.

The OECD appears less certain of a US recession. From Bloomberg:

The U.S. economy will fail to grow for the first time in more than six years in the second quarter, the Organization for Economic Cooperation and Development said.

The stagnation will follow an expansion of 0.1 percent in the current period from the last three months of 2007, the Paris-based agency forecast today. That last time the U.S. economy failed to expand was in the third quarter of 2001.

"The U.S. economy is now essentially moving sideways, if not contracting outright," Jorgen Elmeskov, acting head of the OECD's economics department, said in a note today. "It may be premature to declare a recession, but with the pace of activity so far below potential, economic slack is widening rapidly."

Growth in Europe is expected to slow too.

Expansion in the 15-nation euro region should be 0.5 percent in the first quarter, spurred by exports and industrial production, before slowing to 0.4 percent in the April-to-June period, the OECD forecast...

Growth in Europe's service and manufacturing industries slowed more than economists forecast this month, according to a preliminary estimate of Royal Bank of Scotland Group Plc's composite index today. The gauge fell to 51.9 in March from 52.8 in February. Economists expected a decline to 52.4, according to the median of 14 forecasts in a Bloomberg News survey.

Thursday, 20 March 2008

Investors seek safety, rally on the cards?

The exuberance of the previous day didn't last. Bloomberg reports the stock market action yesterday:

U.S. stocks retreated, erasing half of yesterday's rally, after plunging commodity prices sent oil and mining companies lower and an insurer tried to cancel $3.1 billion in protection on Merrill Lynch & Co. mortgage bonds...

The Standard & Poor's 500 Index, which surged the most in five years yesterday after the Fed cut its benchmark interest rate by 75 basis points, lost 32.32 points, or 2.4 percent, to 1,298.42, its biggest tumble this month. The Dow Jones Industrial Average dropped 293, or 2.4 percent, to 12,099.66. The Nasdaq Composite Index decreased 58.3, or 2.6 percent, to 2,209.96. Nine stocks declined for every two that rose on the New York Stock Exchange.

The reversal extended to commodities as well yesterday. From MarketWatch:

Prices in oil, gold, wheat and other commodities took a dive Wednesday, one day after the Federal Reserve highlighted its inflation concerns as it cut rates and indirectly took away some of the fizz from the recent commodity rally...

Oil futures lost 4.5% to end at $104.48 a barrel on the New York Mercantile Exchange, its biggest daily loss since 1991. See more on oil.

Gold for April delivery, which hit a record high of $1,034 an ounce Monday, plunged $59, or 5.9%, to finish at $945.30 an ounce, its biggest one-day drop since June 2006. Read Metal Futures.

Wheat futures lost 7.7% to end at $10.74 a bushel.

The flight to safety pushed Treasuries up. Bloomberg reports:

Treasuries rose and three-month bill rates plunged to the lowest level in almost 50 years on speculation credit market losses will widen, prompting investors to seek the relative safety of government debt...

The rate on the three-month bill, viewed by investors as a haven in times of trouble, dropped 32 basis points, or 0.32 percentage point, to 0.56 percent at 5:30 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It's the lowest level since May 1958.

The yield on the 10-year note fell 16 basis points to 3.34 percent, after rising the most in four years yesterday. The price of the 3 1/2 percent security due in February 2018 rose 1 11/32, or $13.44 per $1,000 face amount, to 101 10/32. The two- year note's yield dropped 16 basis points to 1.47 percent...

The three-month London interbank offered rate, or Libor, for dollars rose for the first time in three weeks, indicating the Fed is struggling to instill confidence in money markets. The difference between what the government and companies pay for three-months loans, known as the TED spread, increased 32 basis points to 1.98 percentage points, the biggest gain since Jan. 22, when the Fed made an emergency cut in borrowing costs.

And the yen carry trade unwinded further. Again from Bloomberg:

The yen rose for a second day against the euro on speculation investors will reduce holdings of commodities financed with loans from Japan...

Japan's currency climbed to 154.28 per euro as of 10:26 a.m. in Tokyo from 154.80 in New York, bringing its gains this year to 5.7 percent. The yen advanced to 98.93 per dollar from 99.03...

The yen advanced the most against the South African rand, rising 0.5 percent to 12.1823 yen. It climbed to 90.30 yen per Australia's currency from 90.53 yesterday in New York...

But while investors fled to safety yesterday, some are thinking that we could be ready for a bear market rally in stocks. At least John Authers thinks so.

It has been a terrible week. Can the stock market now indulge in a brief bear market rally?

Wednesday’s Merrill Lynch survey of fund managers made clear that the preconditions are in place.

More global fund managers are overweight in cash, compared to their benchmarks, than at any time since the survey started in 1998. Fund managers also believe that equities are undervalued by the biggest margin since the bear market bottomed in 2003, and that bonds are overvalued.

And Mark Hulbert points to a possible technical signal for a rally.

... [A] "Double Nine-to-One" triggered on Tuesday: March 11, one week ago, was a Nine-to-One Up Day, and so was Tuesday, when up volume constituted more than 95% of the combined volume of both rising and falling stocks.

How bullish is a "Double Nine-to-One" signal? One answer is provided by David Aronson, an adjunct professor of finance at Baruch College...

"... [I]n the 60-trading-day period following a ... double Nine-to-One signal...the S&P 500 index produced an average annualized return of over 22%...

"In the non-signal periods," Aronson continued, "in contrast, the return averaged 4.5% annualized. The difference between these two average returns is statistically significant."

Wednesday, 19 March 2008

Fed disappoints markets, markets celebrate

The Federal Reserve finally decided not to give markets exactly what they wanted. Reuters reports:

The Federal Reserve slashed U.S. interest rates on Tuesday, boosting Wall Street, which was already higher on stronger-than-expected investment bank earnings.

Tuesday's three-quarters of a percentage point rate cut was less than the full percentage point many in the market had expected, but the Fed left the door open to an additional reduction. However, it noted its future action would take inflation concerns into consideration.

Stock market investors were unfazed.

Global stock markets were up early in the day in anticipation of the Fed's move and on stronger-than-expected earnings news from Goldman Sachs Group Inc and Lehman Brothers Holdings Inc. By the end of U.S. trading, the Dow Jones industrial average jumped 420 points, or 3.5 percent, while the Nasdaq and S&P 500 indices rose more than 4 percent.

The dollar soared to its largest single-day gain against the yen in nine years and rallied against the euro as traders responded to the less-than-expected rate cut. But U.S. Treasuries fell as investors poured into stocks.

The Fed's action, taken on an 8-2 vote of its policy committee, was part of an intense effort by the central bank to avert a deep recession and financial market meltdown. The move took benchmark overnight rates down to 2.25 percent, the lowest since February 2005.

While further interest rate cuts appear likely in the face of continued weakness in the economy -- reflected for example in yesterday's data on housing starts -- the Fed's concern about inflation cannot be entirely dismissed after US February core producer prices surprised on the upside. Bloomberg reports:

Prices paid to U.S. producers rose less than forecast in February, while wholesale costs excluding food and energy jumped by the most since November 2006.

The 0.3 percent increase followed a 1 percent gain in January, the Labor Department said today in Washington. Leaving aside food and fuel, so-called core expenses climbed 0.5 percent, more than double the gain economists anticipated.

At least the Fed has the luxury of flat consumer prices in February, a luxury that the Bank of England won't have when it next considers monetary policy. From Reuters:

Rocketing utility bills pushed inflation further above target in February, highlighting the dilemma facing the Bank of England as it grapples with slowing growth and rising price pressures.

The Office for National Statistics said consumer prices rose 0.7 percent last month, taking the annual rate to 2.5 percent, its highest since last May.

Indeed, some central banks are still in tightening mode, for example, China's. From Bloomberg yesterday:

China imposed price curbs on meat, eggs and cooking oil and ordered banks to set aside larger reserves to try to reduce inflation from an 11-year high.

The top planning agency said it will vet price increases after soybean oil climbed 58 percent and lamb rose 51 percent this month from a year earlier. The central bank ordered lenders to set aside 15 percent of deposits, the highest ratio in at least 20 years. The announcements were on their Web sites.

Tuesday, 18 March 2008

Dow survives latest financial turbulence

At the end of a turbulent day in markets, US stocks didn't fare too badly under the circumstances. MarketWatch reports:

U.S. stocks shook off the bulk of their steep losses on Monday, with J.P. Morgan Chase fronting a blue-chip rise just one day after its heavily discounted bid for Bear Stearns Cos. and the Federal Reserve's extraordinary discount rate cut, its first weekend move in nearly 30 years...

The Dow Jones Industrial Average picked up steam in the final hour of trade, gaining more than 100 points before dropping back to end 21.16 points higher, to 11,972.25, with 22 of its 30 components posting gains. Dow industrials were down nearly 200 points at the open...

Broader indexes remained in negative turf, with the S&P 500 off 11.54 points to 1,276.60, while the Nasdaq Composite shed 35.48 points to 2,177.01...

On the New York Mercantile Exchange, crude for immediate delivery closed at $105.68 a barrel, down $4.53, after rising to a new high of $111.80 a barrel. See full story.

Elsewhere on the Nymex, gold futures for April delivery finished up $3.10 at $1,002.60 an ounce, after reaching a high of $1,033.90 overnight. Read more.

In currencies, the greenback remained under pressure but came off record lows hit earlier, with the dollar index at 71.45, up from an overnight low of 70.698.

The market's now anticipating a 1% point cut in the federal funds rate at or before the central bank's policy meeting Tuesday.

Despite the crisis being centred in the US, stock markets elsewhere were the ones more badly hit yesterday. In Asia, the Nikkei 225 fell 3.7 percent and the Hang Seng lost 5.2 percent. In Europe, the Dow Jones Stoxx 600 fell 4.6 percent.

Meanwhile, the news on the real economy in the US yesterday weren't very upbeat either, with industrial production falling 0.5 percent in February, manufacturing activity in the New York area falling to a record low level in March while home builder sentiment remains in the doldrums.

Monday, 17 March 2008

US dollar sinks to record lows as Fed fights credit market turmoil

The Federal Reserve made a surprise cut in its discount rate yesterday and introduced a new lending facility. However, despite determined efforts by the Federal Reserve to contain the impact of the credit crunch, markets had not been able to avoid further turmoil last week, with the greenback bearing the brunt of the fallout. It remains to be seen whether the latest moves will help.

Yesterday, the Federal Reserve announced that it was lowering the discount rate by 25 basis points to 3.25 percent. It also announced the creation of a new lending facility to allow credit to be extended to primary dealers in government securities at the discount rate against eligible collateral.

These moves were the latest in a series of initiatives by the Federal Reserve over the past week or so to tame the persistent turmoil in credit markets that is threatening a financial meltdown in the United States.

On 7 March, the Federal Reserve had announced an increase in the size of its auctions under the Term Auction Facility, its programme for providing funds to markets to boost liquidity.

It followed up the following Tuesday by announcing the introduction of a new programme called the Term Securities Lending Facility. This facility is designed to provide primary dealers with liquid securities in exchange for collateral, which may include mortgage-backed securities. Again aimed at boosting market liquidity, this move sparked a 3.7 percent rally in the Standard & Poor's Index on the same day.

Then on Friday, it provided Bear Stearns with emergency financing through JPMorgan Chase. This was to help Bear Stearns prop up its operations after the investment bank reported that its liquidity position had deteriorated sharply.

Unfortunately, the crisis at Bear Stearns undid most of the Fed's earlier efforts to boost the market. The S&P 500 fell 2.1 percent on Friday on fears that the credit market turmoil will pull down more victims in its wake. The fall on Friday left the S&P 500 down 0.4 percent for the week.

European stock markets also fell on Friday, dragging key indices into the red for the week. The FTSE 100 slumped 1.2 percent, the DAX dropped 1.0 percent and the CAC 40 lost 0.6 percent.

The worst-hit among the world's largest stock markets last week was Japan's, where the Nikkei 225 lost 4.2 percent. And it had not even had time to react to the news on Bear Stearns yet.

I think it is fair to say that markets have generally been unimpressed by the Federal Reserve's efforts to ease the credit crunch. The latest initiatives announced yesterday are likely to meet with similar reception.

Meanwhile, further aggressive rate cuts by the Federal Reserve are now widely expected. Interest-rate futures on the Chicago Board of Trade show that traders are now betting that the Federal Reserve will cut interest rates at its rate-setting meeting on 18 March by either 75 basis points or a full percentage point.

US economic data last week supported such aggressive rate-cut expectations. US retail sales fell 0.6 percent in February while consumer prices were unchanged from January.

The expectation for more rate-slashing by the Federal Reserve is making itself felt in foreign exchange markets. The past week has seen the fall in the US dollar accelerate.

The US dollar fell below 100 yen last week, touching 98.90 yen on Friday and closing for the week at 99.09 yen for a loss of 3.5 percent.

Against the euro, the US dollar fell 2 percent last week to US$1.5674 per euro after touching US$1.5688 on Friday, its weakest ever level against the euro.

The US dollar fell below parity against the Swiss franc last week, falling to an all-time low of 0.9988 francs on Friday.

The US dollar also fell to a record low against the Singapore dollar. The Singapore currency gained 0.3 percent from a week ago and one US dollar now buys S$1.3827.

The Dollar Index, which tracks the currency against six major counterparts, fell to 71.58 on Friday, also an all-time low.

As the US dollar fell, commodities priced in the currency rose. Gold surged to a record US$1,009 an ounce while crude oil touched a record high of US$111 a barrel. This rise in commodity prices could boost inflation in the US.

However, there is a silver lining to all this for the US economy. The weaker US dollar makes US goods and services cheaper for foreigners, making the economy more competitive in global markets.

And unlike most economies, where a weaker currency can increase the foreign debt burden -- as happened to many Asian economies ten years ago -- for the US, most of whose liabilities are denominated in US dollars, a fall in the currency value reduces real US liabilities.

Then again, maybe the US dollar will not fall for much longer. If US economic weakness spreads globally, as many economists now expect, the US currency would no longer look so bad in comparison to others.

Saturday, 15 March 2008

US consumer prices flat, Bear Stearns flattened

Bloomberg reports that consumer prices in the US -- both overall and core prices -- were unchanged in February, making it easier for the Federal Reserve to make a big cut in interest rates next week.

That would have been expected to boost markets, were it not for yesterday's revelations on Bear Stearns. From Bloomberg:

Bear Stearns Cos., teetering on the brink of collapse from a lack of cash, got emergency funding from the Federal Reserve and JPMorgan Chase & Co. in the largest government bailout of a U.S. securities firm.

After denying earlier this week that access to capital was at risk, Bear Stearns Chief Executive Officer Alan Schwartz said today that the 85-year-old company's cash position had "significantly deteriorated" in the past 24 hours. The central bank agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.

That is making a big rate cut from the Fed look a necessity rather than a plus for markets. Bloomberg reports the action in markets yesterday.

Treasuries gained as Bear Stearns Cos. turned to JPMorgan Chase & Co. and the Federal Reserve for a financial rescue, heightening concern global credit market losses will deepen.

Shorter-term notes led the rally, pushing the yield on the two-year note to 1.37 percent, the lowest since July 2003. Traders increased bets that the central bank will cut borrowing costs by as much as 1 percentage point next week...

U.S. stocks plunged for a third day, the dollar sank to the weakest level ever against the euro and to a 12-year low versus the yen, and gold surged to a record $1,009 an ounce. Crude oil for April delivery fell after touching $111 a barrel yesterday, the highest since trading began in 1983.

In contrast, expectations for a rate cut by the European Central Bank receded further yesterday. Again from Bloomberg:

European consumer prices and wages rose more than economists forecast, leaving the European Central Bank with little room to lower interest rates as economic growth slows.

Consumer-price inflation in the euro area accelerated to 3.3 percent in February, the highest in 14 years, the European Union's statistics office in Luxembourg said today. That is faster than a Feb. 29 estimate and the median forecast in Bloomberg News survey of economists. Labor-cost growth quickened in the fourth quarter to the highest since 2006.

Friday, 14 March 2008

US dollar falls again

The US dollar's fall is bringing a lot of nice round numbers into view.

First it was crude oil breaking through US$100 a barrel. Yesterday, it was US$1000 gold and the US dollar going below 100 yen. Parity with the Swiss franc and Australian dollar look like the next targets. From Bloomberg:

The dollar traded near a record low against the euro and close to the weakest level in 12 years versus the yen on concern widening losses in credit markets will further crimp U.S. economic growth...

The dollar traded at $1.5619 per euro as of 8:45 a.m. in Tokyo, after touching $1.5645 per euro yesterday, the weakest since the European currency's debut in 1999. The dollar traded at 100.73 yen, after touching 99.77 yen, the weakest level since October 1995. It traded at 1.0108 versus the Swiss franc from 1.0093 yesterday, when it slid to a record low of 1.0045 Swiss francs. The yen traded at 157.30 per euro from 157.35...

The Dollar Index traded on ICE Futures in New York, which compares the currency to those of six trading partners, fell to 71.914 from 72.072 yesterday, when it reached as low as 71.795. The dollar fetched $2.0328 per pound, after touching the weakest since December.

The decline in the world's reserve currency pushed gold above $1,000 an ounce for the first time yesterday as investors sought shelter in the metal.

Weak US retail sales reported yesterday won't help the US currency. From Bloomberg:

Retail sales in the U.S. unexpectedly fell in February, indicating that declines in payrolls and home values and a surge in energy costs have pushed the economy into a recession.

Sales dropped 0.6 percent, led by auto dealers and restaurants, after a 0.4 percent gain in January, the Commerce Department said. Meanwhile, the Labor Department said jobless benefits rolls climbed to a 2 1/2-year high, and import prices soared 13.6 percent from a year ago, reflecting higher energy costs.

But economic growth is also weakening elsewhere. Although Japan's GDP grew at a better-than-expected annualised rate of 3.5 percent in the fourth quarter, industrial output fell a revised 2.2 percent in January from December.

And even China's industrial output has slowed, expanding by 15.4 percent in the first two months of 2008 from the same period a year ago compared to 18.5 percent for all of last year.

Thursday, 13 March 2008

China's economy still looking too hot

China's money-supply growth slowed in February, M2 rising 17.5 percent from a year earlier compared to 18.9 percent in January. A shrinking trade surplus -- exports were up 6.5 percent in February, the slowest pace in almost six years -- would help sustain the downtrend.

On the other hand, money is continuing to flow into China in the form of foreign direct investment, which rose 38 percent in February from a year earlier.

And other economic data continue to show few signs of cooling. From Bloomberg:

China's retail sales climbed 20.2 percent, matching the fastest pace in at least nine years, a sign that consumer spending may sustain the world's fastest- growing major economy as export demand weakens.

The increase for January and February was the same as December's and more than the 19 percent median forecast of 18 economists in a Bloomberg News survey...

Consumer-price inflation accelerated to 8.7 percent in February, underscoring the risk the world's fourth-largest economy will overheat after expanding 11.2 percent in the fourth quarter. Producer prices, the cost of goods as they leave the factory, rose 6.6 percent, the fastest pace in three years.

February inflation would have been affected by snow storms and the Lunar New Year, but even adjusting for these factors, Michael Pettis estimates that "normalized February inflation would have still come in at 7.1%". That would be too high, and could put more attention on the possibility of faster renminbi appreciation.

Certainly, the continued decline in the US dollar yesterday, despite the introduction of the Term Securities Lending Facility on Tuesday, suggests that the current rate of renminbi appreciation against that currency is poor defence against inflation. From Bloomberg today:

The dollar fell to the lowest since 1995 against the yen after U.S. President George W. Bush said the dollar is "adjusting."

The U.S. currency also slid to a record low against the euro as Bush said its decline was not "good tidings" for proponents of a strong dollar. It traded near an all-time low versus the Swiss franc...

Wednesday, 12 March 2008

Term Securities Lending Facility

If financial innovation got the financial system into trouble, then financial innovation should be able to pull it out of trouble. The latest Fed innovation.

The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.

Real Time Economics compiles some reactions of economists to the Fed move and sums them up as calling it the "'smartest' Fed move".

Markets apparently agree. From Bloomberg:

U.S. stocks rallied the most in five years on optimism the initiative will help avert a wider credit crunch. Treasuries fell and the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae retreated from close to a 22-year high...

But fears from the underlying problem in the housing market remains.

"This will assist some of the big banks," said Walter Gerasimowicz, head of Meditron Asset Management, which manages $1 billion. "But it won't bring the light at the end of the tunnel. The housing-market problems will take at least all of this year to settle, and until that happens, the banks aren't going to be relieved fully."

Indeed, Calculated Risk notes comments from Paul Krugman and Steve Waldman and writes:

As Waldman notes, the Fed has used up a significant portion of their available resources already. So, this "slap in the face" better work. If we start talking about a 4th wave of the liquidity crisis, watch out!

But if what Willem Buiter says is true, maybe we should ask whether all this obsession with the problems in the financial sector is really appropriate in the first place.

The sky must surely be falling on the financial sector... What has not been reported is the...subprime-related gains...

Things are tough enough without us exaggerating the problems through egregious double, triple, quadruple & higher multiple counting. Economic prospects for the US are poor, but nowhere near as bad as the growing crescendo of the moans emitted by the losers in the inside asset revaluation game would have us believe.

Tuesday, 11 March 2008

Investors ignore positive Japanese data, Malaysian stocks dive

Amid a generally negative day for markets, the data on the real economy in Japan were quite positive. Reuters reports:

Core private-sector machinery orders, a highly volatile series seen as an indicator of capital spending in the coming six to nine months, jumped 19.6 percent in January, almost seven times as much as expected...

In another positive sign, however, a government survey showed on Monday that sentiment among service sector workers, called "economy watchers" for their proximity to consumer and retail trends, improved for the first time in 11 months in February.

The improvement was partly due to firm demand for home-grown fresh food, reflecting public concern about the safety of imported food, the survey showed...

BOJ data showed on Monday that the balance of outstanding loans held by most Japanese banks rose 0.8 percent in February from a year earlier, the highest annual increase since last May.

But Japan's stock market did not benefit from the positive data, the Nikkei 225 falling 2 percent to close at its lowest level in 2½ years.

The big fall in stock markets yesterday, however, took place in Malaysia. From Bloomberg:

Malaysian stocks fell the most in a decade after the ruling coalition's worst election result in fifty years raised doubt over Prime Minister Abdullah Ahmad Badawi and his public spending program.

The Kuala Lumpur Composite Index tumbled 9.5 percent as opposition parties took control of almost half the states contested in March 8 elections. The ringgit posted its biggest drop since June and bonds slumped the most in four months. The risk of Malaysia's government defaulting on debt rose to a record.

Monday, 10 March 2008

US recession: Doubts vanishing with jobs

The deceleration in the United States economy has now brought it into negative territory, at least in terms of job growth. Continued turmoil in credit markets could keep it there for a while more.

According to the Friday report from the Labor Department on non-farm payrolls, the US economy lost 63,000 jobs in February. This is the second consecutive month that the economy has lost jobs based on the establishment survey. For January, the survey showed a loss of 22,000 jobs. The household survey showed an even sharper deterioration in employment, with 255,000 jobs lost in February.

The unemployment rate did fall to 4.8 percent in February from 4.9 percent in January. However, the fall was due to the labor force declining by 450,000, not to a pickup in employment.

With the latest decline, employment in the US has regressed to the extent that, based on both the establishment and household surveys, the number of jobs in February was barely higher than a year ago. It has historically been rare for the US economy to show such weakness in employment growth without a recession.

Some economists no longer have any doubt that the economy is falling into a recession. Nigel Gault of Global Insight wrote about the employment report on Friday: "The debate should no longer be about whether there is or is not a recession, only about how deep it will be."

Earlier in March, surveys from the Institute for Supply Management (ISM) had also pointed towards a recession. The ISM's manufacturing PMI dipped below 50 again in February to 48.3 from 50.7 in January. Its non-manufacturing index did bounce up to 49.3 in February from 44.6 in January. Nevertheless, with both indices below 50, both the manufacturing and non-manufacturing sectors in the US are now contracting, according to the ISM surveys.

Meanwhile in the beleaguered housing industry, the bad news continues. The Mortgage Bankers Association reported last week that US mortgage foreclosures rose to their highest levels ever in the fourth quarter of 2007.

To make things worse, credit markets are continuing to deteriorate. The spread between the 3-month US dollar LIBOR and 3-month Treasury yield, which had improved in recent months after the introduction of the Federal Reserve's Term Auction Facility (TAF) in December, has widened again recently, inducing the Federal Reserve to announce on Friday that it was injecting more liquidity into the financial system through the TAF as well as through weekly 28-day repurchase agreements.

The persistence of the financial turmoil means that stress is now making itself felt in important parts of the credit market. The spread between corporate bond yields and 10-year Treasury yields and the spread between 30-year mortgage rates and 10-year Treasury yields have both widened dramatically over the past few months to levels that in the past have often been associated with recessions.

Under such circumstances, it was no surprise that last week, we had reports that mortgage lender Thornburg Mortgage and mortgage-bond fund Carlyle Capital Corporation both failed to meet margin calls.

If the US economy is falling into recession, as Gault and many other economists now think, then announcements of losses and failures among firms will become routine in coming months.

Saturday, 8 March 2008

US economy loses jobs again

It is getting hard to deny that the US economy is falling into a recession. From MarketWatch:

In the clearest suggestion yet of a recession, U.S. nonfarm payrolls fell by 63,000 in February, the second straight decline, the Labor Department reported Friday...

In addition to February's dismal result, payrolls for December and January were revised down by 46,000. Read the full report...

The unemployment rate fell unexpectedly to 4.8% in February from 4.9%, but the decline didn't reflect strength in the jobs market, but rather was due to a 450,000 decline in the labor force, the largest drop in nearly five years.

Predictably, stocks did not do well yesterday. MarketWatch reports:

U.S. stocks were hammered Friday, pushing the Dow industrials to their lowest close since Oct. 11, 2006, after February's unemployment report cemented thinking of a recession, and central bank moves to stem the credit crunch failed to offset the damage...

The Dow Jones Industrial Average declined 146.70 points to 11,893.69, giving it a weekly loss of 3%. Since the year began, the blue-chip index has lost more than 1,370 points, declining 10% in value...

The S&P 500 fell 10.97 points to 1,293.37, down 2.8% on the week, while the Nasdaq Composite shed 8.01 points to 2,212.49, off 2.6% on the week.

The Fed tried to help.

Attempting to soften the pre-open employment report blow, the Federal Reserve announced two steps to add cash to the bank system shortly before the data, saying it would bolster the amount of its loans to banks this month. See the Fed.

But the market still thinks a big rate cut is what is needed.

On the Chicago Board of Trade, odds of a 75 basis-point interest rate cut to 2.25% jumped, with the April fed funds futures contract rising to 97.74 from a settlement Thursday of 97.69, with the most recent contract implying about a 96% chance of a 75 basis-point cut.

Friday, 7 March 2008

Nikkei 225 loses 3.3 percent, BoJ leaves interest rates unchanged

The Nikkei 225 dived 3.3 percent today to close at 12,782.80. The fall was largely due to fears of a US recession, but the data on the Japanese economy recently haven't been very good either. From Bloomberg yesterday:

The leading index fell to 30 percent in January, below the threshold of 50 that signals growth will slow in the next three to six months, the Cabinet Office said today in Tokyo...

Consumer confidence at a four-year low suggests household spending is unlikely to make up for a drop in export demand as the U.S. heads for its first recession since 2001. Business investment fell at the fastest pace in five years last quarter, the Finance Ministry said yesterday, signaling the government will have to trim its gross domestic product estimate next week.

Having no impact on the stock market today was the widely-expected Bank of Japan's decision to leave interest rates unchanged.

The latest BoJ monthly report did acknowledge that although the economy is expected to continue expanding moderately, the pace of growth "is likely to slow for the time being". That could set the stage for a rate cut later this year, especially in view of the nominee for the next BoJ governor. From Bloomberg:

Japan's Prime Minister Yasuo Fukuda nominated Toshiro Muto to head the central bank, setting up a confrontation with the main opposition party, which has indicated it may block the appointment.

Bank of Japan Governor Toshihiko Fukui, whose policy board left interest rates at 0.5 percent at his last meeting today, ends his five-year term March 19. The Democratic Party of Japan claims Deputy Governor Muto's background as a Finance Ministry official risks giving the government undue influence over monetary policy...

"Muto is probably less hawkish than Fukui, which means he feels less reticent about a rate cut and more cautious about a rate increase," said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo.

ECB, BoE and RBNZ leave interest rates unchanged

As expected, the European Central Bank kept interest rates unchanged yesterday and continues to sound hawkish. Reuters reports:

The European Central Bank said it left interest rates unchanged at 4 percent on Thursday to help the fight against inflation, though it unveiled higher consumer price forecasts for this year and next.

ECB staff also cut forecasts for euro zone growth but the bank's firm focus on price risks prompted analysts to push back expectations for a speedy cut to interest rates and sent the euro to a new record high against the U.S. dollar.

The Bank of England also left interest rates unchanged yesterday, as did the Reserve Bank of New Zealand, which looks like it will keep rates at a record-high 8.25 percent until late 2009.

In contrast to the stubborn fight against inflation by these central banks, the Federal Reserve is looking positively dovish. From Bloomberg:

Federal Reserve Bank of New York President Timothy Geithner said the central bank may need to keep interest rates low for "some time" if financial markets remain under stress and threaten economic growth.

Thursday, 6 March 2008

US economic growth decelerating

The deterioration in the US economy appears to be broadening. Reuters reports:

The Federal Reserve said that all of its districts reported decelerating economic growth in early 2008, while prices pressed upward almost everywhere in the United States...

A government report showed new orders at U.S. factories fell 2.5 percent in January. That was the first decline since August...

The Institute for Supply Management's non-manufacturing index came in at 49.3, above the record-low 44.6 in January...

A fall of 23,000 private sector jobs in February, reported by ADP Employer Services compares with a downwardly revised 119,000 jobs added in January.

The rebound in the ISM services index was a relative bright spot, one that was mirrored in Europe. Again from Reuters:

For the euro currency zone as a whole, the RBS/NTC Eurozone Purchasing Managers Index (PMI) rebounded in February [to] 52.3, up from 50.6 in January...

The composite PMI index rose to 52.8, from 51.8 in January.

But European retail sales in January was not overly impressive.

Data from the European Union statistics office showed retail sales in the 15 countries using the euro rose 0.4 percent in January after three straight months of shrinkage but dipped 0.1 percent year-on-year, the third decline in a row.

Wednesday, 5 March 2008

RBA hikes, BoC cuts

The Reserve Bank of Australia seems really determined to strike out on its own path. From Bloomberg yesterday:

Australia's central bank increased its benchmark interest rate for the second time in four weeks and said there are signs the highest borrowing costs in 12 years are prompting consumers and companies to temper spending.

Governor Glenn Stevens and his board raised the overnight cash rate target by a quarter point to 7.25 percent in Sydney today to stem the fastest inflation since 1991. Stevens said rates have risen "substantially" since mid-2007...

A report earlier today showed retail-sales growth unexpectedly stalled in January after rising for seven months.

The Bank of Canada, in contrast, appears to be taking its cues from the Federal Reserve. From Bloomberg yesterday:

The Bank of Canada cut its benchmark interest rate by half a point and signaled further reductions are needed to offset a slump in exports to the U.S.

Mark Carney, in his first decision as governor, lowered the target rate for overnight loans between commercial banks to a two-year low of 3.5 percent, the biggest reduction since 2001. Thirteen of 26 economists surveyed by Bloomberg News predicted the size of today's move.

Speaking of the Federal Reserve, we got more signals from officials there yesterday, some mixed. Reuters reports:

Fed Board Governor Frederic Mishkin said the U.S. economy faced grave risks and inflation pressures would abate -- remarks that will reinforce views that he backs further cuts in benchmark rates to buffer the economy.

"I see significant downside risks to this outlook. These risks have been brought into particularly sharp relief by recent readings from a number of household and business surveys that have had a distinctly downbeat cast," Mishkin told the National Association of Business Economics in Arlington, Va...

Dallas Fed President Richard Fisher...said separately on Tuesday that weak growth was a milder threat than inflation.

"Containing inflation is the purpose of the ship I crew for," Fisher told a conference in London.

"If a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient," he told the Society of Business Economists.

Chairman Ben Bernanke also spoke yesterday, but he focused on the foreclosure problem. MarketWatch reports:

The mortgage and financial-services industry will have to use fresh thinking to reduce preventable foreclosures, said Federal Reserve Board Chairman Ben Bernanke on Tuesday...

Bernanke agreed that home prices had further to fall, although he did not quantify by how much...

"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.

Tuesday, 4 March 2008

US sees weaker growth, Europe staring at higher inflation

The economic reports from the US yesterday were all negative. Bloomberg reports:

Manufacturing in the U.S. shrank at the fastest pace in almost five years and construction spending fell the most since 1994 as the economy moved closer to a recession.

The Institute for Supply Management's factory index dropped to 48.3 in February from 50.7 the previous month, the Tempe, Arizona-based group said today... At the same time, the Commerce Department reported that spending on building projects slumped 1.7 percent in January, more than anticipated...

Sales at General Motors Corp., Ford Motor Co. and Toyota Motor Corp., the three biggest auto retailers in the U.S., fell in February from a year earlier, according to industry data issued today. General Motors and Ford each announced deeper reductions in production for next quarter.

Data from the euro area looked a little stronger. The manufacturing purchasing managers' index for February was 52.3, in line with the flash estimate released last month and down from January's 52.8.

Inflation, however, remains a concern, with the input price component coming in at 66.1 from January's 64.8. In addition, the initial estimate of February consumer price inflation in the euro area was reported yesterday as 3.2 percent, unchanged from January and the highest since the euro was introduced in 1999.

It was a similar story in the UK, where the manufacturing PMI actually picked up to 51.3 in February from 50.7 in January. However, also rising were input prices, its sub-index jumping to 72.2 from the previous month's 69.7.

There were conflicting reports on China's manufacturing. The China Federation of Logistics and Purchasing's PMI showed an increase to 53.4 in February from 53 in January but CLSA's PMI showed a fall to 52.8 from 53.2.

Monday, 3 March 2008

Inflation not cooling yet

After last week's data, we have a better picture of global inflation, and it looks as hot as -- if not hotter than -- it has been in recent years.

Friday's report from the United States Commerce Department showed that the personal consumption expenditures price index rose by 0.4 percent in January compared to a 0.3-percent rise in December. The rise in prices negated the rise in nominal consumer spending.

Excluding food and energy, prices rose by 0.3 percent in January. This was faster than the 0.2-percent pace of the preceding three months.

The data from the Commerce Department largely corroborated those from the Labor Department's consumer price index that showed that inflation in the US did not abate in January.

In fact, based on the 12-month rates of change, all the main measures of inflation in the US showed acceleration in January compared to December.

All except one. The PCE inflation rate excluding food and energy -- the measure of inflation that the Federal Reserve focuses on -- was unchanged at 2.2 percent. Incidentally, this measure also shows the lowest rate of inflation.

Elsewhere, the same trend in inflation shows up as well from the data reported last week.

In the euro area, Eurostat reported on Friday that the 12-month inflation rate accelerated to 3.2 percent in January from 3.1 percent in December. However, inflation was concentrated in energy and, to a smaller extent, in food. Consumer prices excluding energy, food, alcohol and tobacco rose at a 1.7-percent rate in January, down from the 1.9-percent rate in December.

Also on Friday, the Statistics Bureau of Japan reported an inflation rate of 0.7 percent in January. The core inflation rate excluding prices of fresh food was 0.8 percent. Both rates were unchanged compared with the previous month.

Over the longer term, however, there has clearly been a rising trend. Like elsewhere, energy has been the chief factor behind the rising prices. Excluding energy and food, consumer prices in Japan are in fact still falling, although even those prices are now flattening out.

It is clear from all the inflation reports that inflation around the world has largely been driven by energy. Crude oil hit US$103 in New York trading last week and has risen 69 percent from a year ago. That is likely to keep inflation from moderating in the immediate future.

Nevertheless, as I wrote last week (see "As economic growth weakens, look for inflation to moderate"), inflation is expected to moderate in both the US and Europe later in the year on the back of slower economic growth.

The US economy is already clearly slowing. Last week saw fourth quarter economic growth confirmed at 0.6 percent. With consumer spending flat and consumer sentiment deteriorating, it may be falling into recession next.

If the world's biggest economy stumbles, the rest of the world is likely to follow to some extent or other.

Already, confidence in Europe is waning. The European Commission reported last week that its Economic Sentiment Indicator for the European Union and the euro area fell by 3.1 points and 1.6 points in February to 100.2 and 100.1 respectively.

In Japan, manufacturing data is showing weakness. Industrial production fell 2.0 percent in January from December while the NTC Research/Nomura/JMMA Purchasing Managers Index fell to 50.8 in February from 52.3 in January.

If the trends persist, we may finally see a peak in inflation. At least until the next expansion cycle.

Saturday, 1 March 2008

More grim news

Reuters reports the US data yesterday in pretty grim terms.

The alarm bells of U.S. recession rang louder on Friday as reports showed business activity in the U.S. Midwest plummeted in February and consumer sentiment slumped to a 16-year low.

More grim news poured in from the inflation front, with government data indicating consumers were struggling in January to keep ahead of robust price growth, which remained uncomfortably high by standards normally associated with the Federal Reserve.

The National Association of Purchasing Managers-Chicago said its index of regional business conditions tumbled to 44.5, its lowest since December 2001, from 51.5 in January...

The Reuters/University of Michigan Surveys of Consumers said its main index of consumer sentiment fell to 70.8 in February from 78.4 in January and was the lowest since February 1992...

The Commerce Department said personal spending rose 0.4 percent last month, while personal income increased by 0.3 percent.

When adjusted for inflation, however, spending was unchanged, due largely to rising food and energy costs.

The personal consumption expenditure price index, a key inflation gauge, rose 2.2 percent year-over-year when food and energy items are excluded. This matched the prior month's "core" inflation rate but remained above the Fed's perceived comfort zone, which tops out at about 2 percent.

And it does look like Europe could yet follow the same path. From Bloomberg:

European economic confidence fell more than economists forecast in February on concern soaring food and energy costs will keep inflation at record levels even as the euro's strength threatens to slow economic growth.

An index of executive and consumer sentiment in the euro area declined to 100.1, the lowest since November 2005, from 101.7 in January, the European Commission in Brussels said today...

Overall euro-area inflation accelerated to 3.2 percent from 3.1 percent in December, the highest in 14 years. That matched an initial estimate published on Jan. 31. The core rate of inflation, which excludes energy, food, alcohol and tobacco prices, eased to 1.7 percent from 1.9 percent.

Meanwhile, unemployment in the euro area has held at a relatively low level.

A separate report today showed that euro-area unemployment held at a record low of 7.1 percent in January, which may support consumer spending and help the economy weather the U.S. slowdown. The December reading was revised from an initial 7.2 percent.

That means that the ECB won't be following in the Fed's footsteps in the near future.

"With record-high inflation and record-low unemployment, right now the European Central Bank can't afford to be pre-emptive on rates," said Marco Valli, an economist at Unicredit MIB in Milan. "However, once it will be clear that the downward trend in business sentiment is not temporary, they will be forced to move."