Saturday, 31 May 2008

US consumer spending slows, Canadian economy shrinks

The US consumer wasn't in great shape in April, and may have gotten worse in May. Bloomberg reports:

Confidence among U.S. consumers fell in May to the lowest level in 28 years, pointing to slower spending as gasoline prices reach record levels and job losses mount.

The Reuters/University of Michigan final index of consumer sentiment decreased to 59.8, the weakest reading since June 1980, from 62.6 in April. The measure averaged 85.6 in 2007...

Earlier today, the Commerce Department in Washington reported that consumer spending rose 0.2 percent in April after a 0.4 percent increase in March. Incomes grew 0.2 percent, bolstered in part by the government's tax rebates, and the Federal Reserve's preferred measure of inflation moderated, the report showed.

But if there is a silver lining in yesterday's data, it is that the downturn is not accelerating.

Also today, the National Association of Purchasing Management-Chicago said its measure of U.S. business activity in May showed contraction for a fourth straight month as production decreased and costs rose. The NAPM-Chicago index rose to 49.1 this month, higher than forecast, from 48.3 in April. Figures lower than 50 signal contraction.

There was a similarly hopeful sign from the ECRI. Reuters reports:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 132.8 in the week to May 23 from 133.0 in the prior period, revised down from 133.1...

The index's annualized growth rate improved to negative 6.0 percent, its highest since the week to December 21, from minus 6.6 percent.

But data out from other economies yesterday mostly took a turn for the worse.

Bloomberg reports that Canada's economy unexpectedly shrank in the first quarter as the impact of the US slowdown becomes apparent.

Gross domestic product contracted at a 0.3 percent annualized rate in the first quarter to C$1.33 trillion ($1.34 trillion), the first drop in almost five years, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg said the growth rate would slow to 0.4 percent from 0.8 percent in the fourth quarter, according to the median of 22 estimates...

Falling automobile production caused a 3 percent drop in manufacturing in the first quarter and a 1.1 percent decline in exports, Statistics Canada said. Almost all of Canada's automobile production is shipped to the U.S., and excluding car and truck production and related industries the economy would have grown in the first quarter, the statistics agency said.

Japan's economy is also at risk of a contraction. From Reuters.

Unemployment in Japan hit a seven-month high while household spending, industrial output and housing starts fell last month in further signs of a troubled economy where inflation is seen heading for another decade high...

Overall household spending in April fell 2.7 percent from a year earlier, a much bigger decline than the 0.9 percent fall that the market had expected...

The employment outlook is also weak. The jobs-to-applicants ratio for March was 0.93, meaning 93 jobs were available per 100 applicants, a three-year low.

Seasonally adjusted unemployment rose to a seven-month high of 4.0 percent, with a record decline in the number of workers in the construction sector compared with a year earlier...

Japan's industrial output dipped 0.3 percent in April, although manufacturers forecast a 4.7 percent jump in May...

Housing starts in April fell 8.7 percent from the same month last year, due partly to the lingering impact of tighter building regulations implemented last June, marking the 10th straight month of decline.

Inflation receded in April, but the respite is likely to prove temporary.

Annual inflation slowed to 0.9 percent in April, thanks to a short-lived cut in gasoline tax, but economists warned it was likely to bounce back to around 1.4 percent in May figures, raising the prospect of stagflation as Japan's economy slows.

A bounce back up in inflation was exactly what the euro area got in May. From Bloomberg yesterday:

The inflation rate in the euro area rose to 3.6 percent, matching a 16-year high, from 3.3 percent in April, the European Union statistics office in Luxembourg said in a statement today. Economists had forecast a 3.5 percent rate, according to the median of 36 estimates in a Bloomberg survey...

Separate figures published by the statistics office today show that unemployment in the euro area remained at a record low of 7.1 percent in April...

Retail sales in Germany, Europe's largest economy, unexpectedly dropped for a second consecutive month in April, according to figures published today, as faster inflation left consumers with less money.

Friday, 30 May 2008

US GDP growth revised up, eurozone confidence steady

The economic reports yesterday were not too bad.

US first quarter GDP growth was revised up. Bloomberg reports:

The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record.

The 0.9 percent gain at an annual pace in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent. Separate figures today showed the number of Americans continuing to receive jobless benefits rose to a four-year high this month...

The figures today also included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, increased 0.3 percent to an annual rate of $1.57 trillion.

Confidence in the euro area held up in May. AFP reports:

The European Commission's eurozone economic sentiment indicator remained unchanged in May from April at 97.1 points, the lowest point since August 2005, but higher than economists' forecast for 96.6 points.

However, confidence in the economy of the broader 27-nation European Union fell in May to 96.7 points from 98.0 points in April, the survey said.

Thursday, 29 May 2008

US durable goods orders hold up, German inflation rises, monetary policies too easy

The US economy may not be doing too badly after all. Bloomberg reports the latest numbers on durable goods orders.

Orders for U.S. durable goods excluding cars and planes unexpectedly rose in April, signaling that international customers are helping factories ride out the economic slowdown.

Excluding transportation orders that tend to be volatile, bookings for goods meant to last several years rose 2.5 percent, the most since July, the Commerce Department said today in Washington. Total orders fell a less-than-forecast 0.5 percent...

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, climbed 4.2 percent, the most this year. Shipments of those items, a number used in calculating gross domestic product, increased 0.5 percent...

The report will be welcome news to Federal Reserve officials, who have said they were concerned about the prospects for business investment. Policy makers lowered their 2008 economic growth projection by about a full percentage point to 0.3 percent to 1.2 percent, according to the minutes of their April 30 policy meeting released last week.

"The outlook for business spending remained decidedly downbeat," the minutes said.

So maybe the Federal Reserve needs to review its forecast. Or even the way it handles monetary policy generally. From the Institutional Risk Analyst's interview with Richard Alford (via Naked Capitalism):

... In the minds of many policy makers, the US is the focus and the rest of world economy is just a stable background... [But] the trade deficit has moved to a level that is clearly unsustainable. The US economic model is yet to catch up with reality.

... [G]ross domestic US consumers, businesses, and government...are above potential output... One of the things we need to consider is that that US may need to see consumption drop significantly before we can achieve a sustainable position...

The Fed is living in a Taylor rule world... It is important to note that the Taylor rule framework implicitly attaches zero cost to growing external imbalances or financial instability... Higher levels of debt and asset bubbles have been the result of policy responses to external imbalances.

... The policies that we followed since 1996 explain how we got to the present juncture, including keeping Fed Funds at 1% for almost a year and then the Fed taking its sweet time raising rates, and doing so in quarter point increments! The Fed's actions provided an incentive for economic agents to lever up and run maturity mismatches...

... The regulatory system helped shape the crisis, but isn't a sufficient explanation for the crisis arising... No amount of regulation could prevent market participants from taking advantage of the incentives created by the Fed from 2001 through 2005 via extreme easy money policy...

Alford may have criticised the Taylor rule but even Taylor himself thinks monetary policies around the world -- not just by the Fed -- are too easy. From Reuters:

Inflation is rising globally because of an easy monetary policy, especially in the United States, leading economist and former U.S. Under Secretary of Treasury for International Affairs John Taylor said on Wednesday...

The creator of the so-called "Taylor rule" of monetary policy...said U.S. interest rates are now below appropriate levels indicated by the rule.

Indeed, rising inflation has now become evident even in countries in the euro zone despite the supposedly hawkish stance of the ECB. From Bloomberg:

Inflation in Germany, Europe's largest economy, accelerated more than economists forecast in May as the cost of oil surged.

Consumer prices rose 3 percent from a year earlier after increasing 2.6 percent in April, when measured using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. Economists expected inflation to quicken to 2.9 percent, according to the median of 25 forecasts in a Bloomberg News survey. In the month, prices increased 0.6 percent...

Adding to the ECB's inflation concerns, German import prices rose more than economists expected in April, gaining 0.9 percent from March, the statistics office said today. Economists forecast a 0.7 percent increase.

Wednesday, 28 May 2008

US consumer confidence and home prices fall

US consumer confidence fell in May. Bloomberg reports:

Confidence among American consumers fell in May to the lowest level since 1992 as the two-year housing slump showed no sign of bottoming.

The Conference Board's confidence index declined more than forecast to 57.2, the New York-based research group said today. The S&P/Case-Shiller home-price index dropped 14.4 percent in March from a year earlier, the most since the figures were first published in 2001. Separate figures from the Commerce Department showed sales of new homes were the second-lowest since 1991 in April.

Actually, there were some positive data on home sales.

Sales of new homes increased 3.3 percent in April after readings for the prior month were revised lower, the Commerce Department's report showed. The April sales pace was an annual 526,000 homes, compared with a 509,000 rate in March that was the lowest in 17 years.

Economists forecast new home sales would drop to a 520,000 annual pace from an originally reported 526,000 rate the month earlier, according to the median estimate.

One bright spot is that inventories decreased. The supply of homes at the current sales rate dropped to 10.6 months' worth from 11.1 months in March. The number of homes completed and waiting to be sold decreased to 181,000, the fewest since July.

Calculated Risk thinks that with "existing home inventory at record levels, prices will probably continue to decline over the next few years - perhaps another 20% in real terms on a national basis".

Economists generally seem to agree.

Saturday, 24 May 2008

Euro area PMI falls in May

There was more evidence yesterday that a slowdown is hitting Europe. From Bloomberg:

Europe's service and manufacturing industries expanded at the slowest pace in five years in May after oil prices surged, the euro appreciated to a record and banks became more reluctant to lend.

A preliminary estimate of Royal Bank of Scotland Group Plc's composite index fell to 51.1 from April's 51.9, NTC Economics Ltd, which carries out the survey, reported today...

Today's decline was led by services. RBS's gauge of growth in services industries such as banking and telecommunications slumped to 50.6 from 52.0, matching a 4 1/2-year low reached in January. A measure of business expectations fell to 56.1 from 58.7, the lowest since November 2001...

RBS's index of manufacturing activity declined to 50.5, the lowest since August 2005, from April's 50.7. French consumer spending on manufactured goods unexpectedly fell for a second month in April as shoppers curbed purchases of cars and clothes, a report by France's statistics office showed today...

Italy avoided the fourth recession in a decade, even as a slump in consumer spending clouds the outlook for the rest of the year. Europe's fourth-biggest economy expanded 0.4 percent after contracting the same amount in the fourth quarter, Rome-based statistics office Istat said today.

The UK economy is already slowing. Bloomberg reports:

The U.K. economy grew at the slowest pace since 2005 in the first quarter after higher credit costs hurt construction and business services slowed.

Gross domestic product rose 0.4 percent in the three months through March, the Office for National Statistics said in London today. The result matched the agency's original estimate and the median forecast of 31 economists in a Bloomberg News survey. Business services including accountancy and advertising expanded at the weakest pace since 2003...

GDP growth slowed from 0.6 percent in the fourth quarter, and expanded 2.5 percent from a year earlier.

Friday, 23 May 2008

European industrial orders fall in March

In another sign that the European economy is slowing, Bloomberg reports that industrial orders in the euro area fell in March.

European industrial orders fell twice as fast as economists forecast in March, hurt by the euro's gains, higher oil prices and a cooling U.S. economy.

Industrial orders in the euro area fell 1 percent from February, the first decline in three months, after increasing a revised 0.2 percent the previous month, the European Union statistics office in Luxembourg said today. Economists had forecast a decline of 0.5 percent, according to the median of 15 estimates in a Bloomberg survey.

German confidence, on the other hand, was up in May. From Bloomberg:

German business confidence unexpectedly increased in May as companies coped with record oil prices and the stronger euro, reducing the likelihood the European Central Bank will cut interest rates.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, rose to 103.5 from 102.4 in April...

German investor confidence unexpectedly fell for a second month in May, the ZEW Center for European Economic Research in Mannheim said yesterday...

The latest data on the UK economy, though, are quite negative. From Bloomberg:

U.K. retail sales fell for a second month in April as slumping house prices, faster inflation and the dearth of credit discouraged spending.

Sales declined 0.2 percent from March, when they dropped by the same amount, the Office for National Statistics said today in London. Economists forecast a 0.5 percent drop, the median of 30 estimates in a Bloomberg News survey showed. Sales increased 4.2 percent from a year earlier...

Business investment fell 1.4 percent in the first quarter from the previous three months, the statistics office said in a separate report today. On the year, it rose 3.7 percent.

And UK industry is looking at higher prices and fewer orders. Reuters reports:

British manufacturers expect to raise prices at the fastest rate in more than a decade despite a second consecutive monthly fall in their order books, a survey showed on Thursday...

The price expectations balance of the Confederation of British Industry's monthly industrial trends survey rose to +30 this month from +25 in April. That was the strongest reading since February 1995...

The total order books balance was -10, broadly in line with expectations and the second consecutive negative reading. The balance was -13 in April, the weakest rate since October 2006.

Outside Europe, Japan's exports picked up in April but the trade balance is deteriorating. AFP/CNA reports:

Japan's trade surplus tumbled by a worse than expected 46.3 percent in April due to the rising cost of energy imports and falling exports to the US economy, the government said Thursday...

Exports rose 4.0 percent to 6.90 trillion yen, after an increase of just 2.3 percent in March. Imports rose 11.9 percent in April to 6.41 trillion yen.

No doubt, the Japanese would be relieved that oil prices pulled back yesterday.

Thursday, 22 May 2008

US stocks fall on Fed minutes, record oil

Bloomberg reports the action in the stock market yesterday.

U.S. stocks tumbled, sending the Standard & Poor's 500 Index to its biggest two-day drop since March, as the Federal Reserve signaled it is done cutting interest rates and record oil prices threatened to reduce profits at consumer companies...

The S&P 500 lost 22.69 points, or 1.6 percent, to 1,390.71. The Dow Jones Industrial Average slid 227.49, or 1.8 percent, to 12,601.19. The Nasdaq Composite Index fell 43.99, or 1.8 percent, to 2,448.27. Four stocks retreated for every one that rose on the New York Stock Exchange...

All 10 industries in the S&P 500 slid after the minutes from the Fed's April meeting suggested record energy costs and rising public expectations for inflation threatened their ability to continue cutting rates. Policymakers also reduced their projections for economic growth this year by almost a full percentage point and raised their forecasts for inflation amid curtailed bank lending and a record rise in the prices for oil...

Crude for July delivery climbed $4.19, or 3.3 percent, $133.17 a barrel after U.S. stockpiles unexpectedly dropped, spurring concern that rising fuel bills will leave consumers with less money to spend elsewhere.

With the latest drop, the recent rally in stock markets is in real danger of breaking down. Remember that in the last bear market, stocks fell even while the Fed was cutting rates. This time around, without the support of additional rate cuts, the market may be even more vulnerable.

Wednesday, 21 May 2008

US April producer prices higher, economic activity slower

Stock markets around the world took a beating yesterday and the US economic data didn't help. Reuters reports the latter.

The Labor Department said the Producer Price Index rose 0.2 percent last month as food prices took a respite from their march upward and as gasoline costs, which usually climb sharply in April, fell after adjustment for seasonal swings.

However, core producer prices, which strip out volatile energy and food costs, increased by 0.4 percent -- twice the rate forecast on Wall Street.

Over the past 12 months, core prices have risen 3 percent, the largest gain since December 1991. Overall producer prices were up an even stiffer 6.5 percent.

U.S. stock prices fell as investors, already alarmed by a fresh record oil price notched on Tuesday near $130 per barrel, took further fright over the high core price gauge.

The Dow Jones Industrial Average closed down almost 200 points or more than 1.5 percent in New York...

The report suggested price pressures further back in the chain of production, with core crude goods up 7.9 percent...

A report from the Chicago Federal Reserve Bank showed weaker economic activity in April across a range of sectors. Its National Activity Index, compiled from an array of economic data, moved down to -1.17 from -0.98 in March.

However, Monday had provided some hopeful signs for the US economy. From Bloomberg:

The index of leading U.S. economic indicators rose in April for a second month, the first back-to- back gain since October 2006, signaling that the current slowdown will be short-lived.

The Conference Board's gauge increased 0.1 percent, better than forecast and matching the gain in March, the New York-based research group said today. The measure points to the direction of the economy over the next three to six months.

Tuesday, 20 May 2008

Japan's interest rates left unchanged, leading index revised down

There was no change in interest rates from the Bank of Japan today. Bloomberg reports:

The Bank of Japan kept interest rates on hold at the first meeting after slashing its growth estimate and shelving a two-year policy of seeking higher borrowing costs.

Governor Masaaki Shirakawa and his six colleagues unanimously voted to leave the overnight lending rate at 0.5 percent in the quickest decision in three years, the central bank said in Tokyo. The rate is the lowest among major economies.

The world's second-largest economy is slowing, the central bank said in its monthly report released after the meeting...

Among economic data released today, there was good news in the form of a 0.3-percent increase in the tertiary index in March.

The bad news, however, is that Japan's index of leading economic indicators for March has been revised down from 20.0 to 18.2.

Monday, 19 May 2008

Fall in US industrial production raises recession probability

While employment in the US has been declining, leading many economists to declare that the economy has tipped into recession, industrial production had been one of those indicators that had merely stagnated but not shown a clear decline. This changed in April.

On 15 May, the Federal Reserve released data showing that industrial production fell 0.7 percent in April. Industrial output in April was also the lowest since May last year. The decline in industrial production raises the probability of a US recession.

The fall in industrial production was not surprising. The Institute for Supply Management's manufacturing PMI has been below the 50 mark for the past few months.

Retail sales is the other indicator that has been weak for some time and the latest report proved no exception. On 13 May, the Commerce Department reported that retail sales fell another 0.2 percent in April.

Elsewhere in the world, though, economies have been somewhat more resilient.

On 15 May, Eurostat reported that gross domestic product in the euro area grew by 0.7 percent in the first quarter, accelerating from 0.4 percent growth in the fourth quarter of 2007.

On 16 May, Japan's Cabinet Office reported that the economy grew 0.8 percent in the first quarter, also accelerating from the downwardly-revised fourth-quarter growth of 0.6 percent.

However, the composite leading indicators released by the Organisation for Economic Co-operation and Development last week showed that the major economies remain headed for a slowdown.

A consolation for the global economy perhaps is that the expected slowdown is likely to cool inflation around the world.

There are already signs that inflation has peaked in the US. Last week, the Labor Department reported that headline CPI in the US increased 0.2 percent in April, less than the 0.3 percent gain in March. Consumer prices excluding food and energy climbed 0.1 percent, down from a 0.2 percent gain a month earlier.

The declines helped bring the 12-month rate of increase in headline CPI to 3.9 percent in April, slightly down from 4.0 percent in the previous two months. Excluding food and energy, the index was 2.3 percent higher than a year ago, down from 2.4 percent in March although only back to the rate in February.

In the euro area, Eurostat last week confirmed consumer price inflation at 3.3 percent in April, down from 3.6 percent in March.

However, other data released last week show that inflation is still accelerating in many parts of the world.

In China, consumer price inflation rose from an annual rate of 8.3 percent in March to 8.5 percent in April, inducing the People's Bank of China to increase the reserve requirement ratio for commercial banks by half a percentage point to 16.5 percent.

In the UK, the inflation rate rose from 2.5 percent in March to 3.0 percent April. The Bank of England's latest inflation forecast is that it is likely to stay above 3 percent for several quarters.

Moderation in global inflation, especially towards the respective central banks' target or comfort ranges, will probably have to wait until after the slowdown becomes more evident globally.

With yet another US economic indicator moving into recession territory last month though, clear evidence of such a global slowdown may not take too long to come.

Saturday, 17 May 2008

US consumer confidence down, other data mixed

US consumer confidence fell in May. Reuters reports:

The Reuters/University of Michigan index of consumer confidence certainly highlighted the threat to economic growth, dropping to 59.5 in May -- the lowest level since June 1980...

Meanwhile, the Michigan report's gauge of one-year inflation expectations surged to 5.2 percent -- the highest since February 1982 -- from 4.8 percent in April.

Also worrying for policy-makers at the Federal Reserve, five-year inflation expectations were the highest since August 1996, edging up to 3.3 percent from April's 3.2 percent.

But housing data released yesterday were mixed.

... [S]tarts on new U.S. homes rose by a surprisingly strong 8.2 percent in April, the biggest monthly increase in more than two years. The bounce, however, came entirely from multiple-unit dwellings such as apartments and condominiums.

Applications for new building permits also turned up for the first time in five months, presenting another rare bit of good news for the beleaguered U.S. housing market, the original source of the economy's current troubles.

In a sign that housing's woes were not yet over, groundbreaking on single-family homes in the United States dropped to the slowest pace since 1991.

Still, the ECRI's leading index continues to give hopeful signs. Reuters reports:

The Economic Cycle Research Institute...said its Weekly Leading Index slipped to 133.5 in the week to May 9 from 133.6 in the prior period, revised from 133.5...

The index's annualized growth rate improved to negative 7.2 percent from minus 8.0 percent, its highest since the week to March 28, according to ECRI data.

Friday, 16 May 2008

US economy looking weak but other economies holding up better

The US economic data released yesterday were negative. Reuters reports:

... [N]ationwide industrial production tumbled a bigger-than-expected 0.7 percent in April due to the most severe contraction in the manufacturing sector in nearly three years, the Federal Reserve said...

The Philadelphia Federal Reserve Bank said its business activity index was at minus 15.6 this month, improving from minus 24.9 in April...

On the labor market front, a government report showed the number of people who remained on jobless benefit rolls after drawing an initial week of aid increased 28,000 to 3.06 million in the week ended May 3...

The New York Fed's "Empire State" general business conditions index fell to minus 3.23 in May from positive 0.63 in April...

The National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index fell to 19 from 20, within one point of the record low of 18 set in December 2007...

However, the data were not weak enough to disturb investors and stocks easily shrugged them off. From Bloomberg:

U.S. stocks climbed, sending the Standard & Poor's 500 Index to a four-month high, as analysts said chipmakers will benefit from rising global demand and energy shares are cheap relative to crude prices...

The S&P 500 added 14.91, or 1.1 percent, to 1,423.57. The Dow Jones Industrial Average increased 94.28, or 0.7 percent, to 12,992.66. The Nasdaq Composite Index gained 37.03, or 1.5 percent, to 2,533.73... More than five stocks rose for every two that fell on the New York Stock Exchange.

Other data out yesterday showed the eurozone economy doing well in the first quarter, but the strength may not last. Reuters reports:

... [T]he European Union's statistics office said growth for the euro zone as a whole beat forecasts, up 0.7 percent from the last quarter of 2007...

European Central Bank President Jean-Claude Trichet said the European news, while positive, merely confirmed what he had been saying for some time, namely that the first quarter would be good and the ensuing period slower...

European Statistics office Eurostat confirmed that annual inflation in the euro zone was 3.3 percent in April, below the record 3.6 percent of March but well above the ECB's goal of just below two percent...

British growth slowed in the first quarter to 0.4 percent from 0.6 percent...

Data out from Japan today also showed strong growth in the first quarter. Bloomberg reports:

Gross domestic product expanded an annualized 3.3 percent in the three months ended March 31, better than the 2.5 percent median estimate of 32 economists surveyed by Bloomberg News, the Cabinet office said today in Tokyo. Japan's fourth-quarter GDP growth was revised to 2.6 percent from 3.5 percent.

Thursday, 15 May 2008

UK faces stagflation threat, US gets better inflation news

As if the previous day's UK inflation number was not bad enough, yesterday saw the Bank of England's inflation report providing a gloomy set of forecasts. Reuters reports:

The economy could shrink for a quarter or two and inflation may near 4 percent this year, the Bank of England said on Wednesday in its bleakest forecasts since the Labour government took power in 1997.

Economists said the expected spike in inflation even further above the central bank's 2 percent target meant that interest rates won't come down quickly, even with news on the housing market downturn getting nastier by the day...

The Bank report shows inflation could hit 3.7 percent this year and still be clearly above its 2 percent target if interest rates come down by half a percentage point over the next year, as many analysts had previously expected...

Economic growth was expected to slow to around 1 percent at the end of this year before picking up to around 2.3 percent in two years -- still below the long-term trend rate.

If the forecasts look worrying, Mervyn King made little effort to ameliorate their impact.

"The Monetary Policy Committee is facing its most difficult challenge yet," said Bank Governor Mervyn King. "We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot, and should not try to, prevent that adjustment."

"Inflation will return to the target and growth will eventually recover to a sustainable rate. But we will need to be patient."

The diverging inflation and growth trends appear to be making themselves felt in the labour market simultaneously. From another Reuters report:

The number of Britons claiming jobless benefits rose for the third successive month in April, official data showed on Wednesday, suggesting a slowing economy is starting to hit the job market.

Figures from the Office for National Statistics showed the claimant count rose 7,200 in April to 806,300. That was the biggest increase since April 2006 and the first time it has risen in three consecutive months for almost two years...

Average earnings in the three months to March rose 4.0 percent, above forecasts and the highest since last November. In March alone, wages rose 4.7 percent, the highest single monthly rise since January 2007.

There was some good news, however, on the inflation front in the US. Bloomberg reports:

U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs that offset the biggest jump in food expenses in 18 years.

The consumer price index increased 0.2 percent after a 0.3 percent gain in March, the Labor Department said today in Washington. So-called core prices, which exclude food and energy costs, climbed 0.1 percent, compared with a 0.2 percent advance a month earlier...

Prices rose 3.9 percent in the 12 months ended in April, down from a 4 percent year-over-year gain in March. The core rate increased 2.3 percent from April 2007, after increasing 2.4 percent in the 12 months ended in March.

Even as inflation slowed though, it continues to weigh on real spending. From Asha Bangalore:

... The good news is that the April report showed a moderation in inflation. At the same time, inflation adjusted retail sales fell 0.3% in April, following a string of declines... [I]nflation adjusted retail sales have dropped for four consecutive quarters at mostly an accelerating pace. The weakness seen in April and forecasts of consumer spending should translate into another quarterly decline in inflation adjusted retail sales...

But the deceleration in inflation should take a bit of sting out of Willem Buiter's post yesterday, which criticised the Fed for having "let inflation get away from it even more than the ECB and the Bank of England".

Nevertheless, Buiter's overall point appears valid. He wrote that inflation "is rising just about everywhere", and that ultimately, central banks are responsible. Notwithstanding the deceleration in April, headline inflation in the US is already "way above what should be the Fed’s comfort zone" while core inflation, though lower, has ceased to be a superior predictor of future headline inflation (see also my take on the latter).

Indeed, the global nature of rising inflation has become apparent in recent months. Even Japan could be facing rising inflation as wholesale prices rose in April at close to the fastest pace in almost three decades.

Fund managers also think that global inflation is rising. From MarketWatch:

A rising number of fund managers say inflation is set to accelerate over the next 12 months, according to Merrill Lynch's monthly survey for May.

According to the report, a net 25% of fund managers believe that global core inflation will be higher in a year's time, up from 7% who held this position in April and 17% in March...

The number of asset allocators who believe bond markets are currently overvalued nudged up to 48% in May, up from 47% in April, while the number of managers that think global equity markets are undervalued fell to 15% in May, down from 26% in April.

Wednesday, 14 May 2008

Slower growth and higher inflation in the US and UK, malaise for risky assets

Signs of a slowing US economy continue to show up. From Reuters:

The Commerce Department said retail sales declined 0.2 percent, but excluding cars, sales rose 0.5 percent...

Separately, the National Association of Realtors said median values of previously owned single-family homes in metropolitan areas fell 7.7 percent from year-ago levels.

But the expectation for a pause in the Federal Reserve's rate cutting remains, to a large extent because inflation remains a concern.

The Labor Department said U.S. import prices climbed 1.8 percent in April as prices for petroleum and non-petroleum products climbed, feeding worries about the potential for inflation...

Analysts said the retail sales numbers might increase chances that Fed policy-makers will pause their rate-cutting campaign and focus more closely on controlling inflation.

A survey by the Philadelphia Federal Reserve sees economists acknowledging both slower growth and higher inflation in the US. Reuters reports:

The U.S. economy will barely expand in the second quarter and the chances of it shrinking have risen, following sluggish growth early in the year, said a Philadelphia Federal Reserve survey released on Tuesday.

The 50 economists surveyed by the regional Fed also forecast a sizable pickup in overall inflation in the next several months as a result of surging oil and food prices...

They forecast U.S. gross domestic product in the current quarter would expand at an annualized rate of 0.2 percent, sharply below their prior forecast of 1.3 percent...

Forecasters revised upward the prospects of a contraction in the second quarter to 49.1 percent from their earlier projection of a 42.9 percent risk...

Core inflation will likely stay just above the top end of the Fed's perceived comfort zone of 2 percent in coming months. Forecasters raised their second-quarter estimate for the Consumer Price Index, the government's broadest inflation measure, to a 3.5 percent increase from their previous estimate of 2.4 percent.

Unlike the Federal Reserve, the Bank of England is early in its interest rate cutting cycle but it might already have to consider a pause.

There is little doubt that the UK economy is decelerating. From Reuters:

House prices suffered their most widespread decline across Britain for 30 years and retail sales fell for a second consecutive month in April, surveys showed on Tuesday, in a sign the economic slowdown is worsening...

The Royal Institution of Chartered Surveyors said its house price balance fell to -95.1 in the three months to April from -79.4 in March -- the weakest since the series began in January 1978 and well below forecasts for a reading of -80.0.

The balance fell in every region compared with March...

The British Retail Consortium said the value of like-for-like retail sales fell by an annual 1.5 percent last month.

Total sales, which include new floor-space, rose by 1.0 percent, the weakest annual rise in three years.

And from another Reuters report:

Property services firm Savills said its Total Commercial Development Activity Index showed a net balance of minus 20.8 percent last month -- the lowest level recorded in the monthly survey's five-year history and evidence that the country's property downturn has further to run.

But inflation is still headed in the wrong direction. Again from Reuters:

Soaring food and fuel bills pushed up the inflation rate by its biggest amount in nearly six years, further denting expectations of interest rate cuts despite a slowing economy.

The Office for National Statistics said consumer prices leapt 0.8 percent last month from March, pushing the annual rate up by half a percentage point to 3.0 percent. Analysts had expected a rate of only 2.6 percent.

The pound jumped more than half a cent and interest rate futures tumbled as dealers ratcheted down the probability of further interest rate cuts soon.

Morgan Stanley's Richard Berner sees slower growth and higher inflation as a global phenomenon with economic recoupling, and the impact on risky assets is not positive.

Global growth is slowing, reflecting spillovers from the US slowdown, tighter financial conditions, and the response to rising inflation in EM economies...

Ironically, the slowing in global growth could be the coup de grace for the US, just as it was the saving grace a year ago, and the evidence for such fading support is starting to appear in US exports...

Still-strong growth in much of the world and soaring commodity prices threaten higher global inflation...

Unfortunately, supply factors seem to be the dominant cause behind the rise in commodity prices lately...

Investors hoping for the ideal scenario of a mild global slowdown, a stronger dollar, cooling inflation, and lower interest rates abroad seem likely to be disappointed. The baseline I see will involve an unappetizing combination of slower growth, high inflation, and little decline in interest rates, which spells malaise for risky assets. In contrast, if overseas growth were to slow enough to bring down inflation and interest rates and boost the dollar, overseas earnings and credit quality would suffer significantly. Neither outcome seems positive for equities or other risky assets.

Tuesday, 13 May 2008

China raises reserve requirement

China's fight against inflation continues. China View reports:

China's central bank announced on Monday that it would raise the reserve requirement ratio for commercial banks by half a percentage point to curb excess liquidity and ease inflation.

This is the fourth such move this year, and it will lift the country's reserve requirement ratio to a new high of 16.5 percent as of May 20.

This comes on the same day that China reported a rebound in inflation.

China's consumer price index (CPI),the main gauge of inflation, rose 8.5 percent year-on-year in April, the National Bureau of Statistics (NBS) said on Monday.

The figure, compared with 8.3 percent in March and a nearly 12-year-high of 8.7 percent in February...

Food prices soared 22.1 percent in April, 0.7 percentage points higher than in March...

Non-food prices in April were up 1.8 percent year-on-year, compared with 1.4 percent in November.

The producer price index (PPI), which measures the value of finished products when they leave the factory, rose 8.1 percent in April year-on- year, setting three-year highs for a fourth consecutive month.

Meanwhile, foreign direct investment is surging.

China saw 35.02 billion U.S. dollars worth of foreign direct investment (FDI) utilized in the first four months, up 59.32 percent from the same period last year, the Ministry of Commerce (MOC) said on Monday.

The number of newly approved foreign-funded enterprises, however, shrank 23.15 percent to 9,490 in the January-April period.

But there are signs that China's trade surplus has peaked.

China's trade surplus reached 16.68billion U.S. dollars in April, the General Administration of Customs said on Monday.

The figure was down 1.14 percent year-on-year but up 24.5 percent from 13.4 billion U.S. dollars in March, and it almost doubled the 8.6 billion U.S. dollars posted in February.

Exports in April rose 21.8 percent over April last year to 118.71 billion U.S. dollars, while imports rose 26.3 percent to 102.03 billion U.S. dollars...

Total trade in the first four months hit 791.1 billion U.S. dollars, up 24.4 percent year-on-year. The four-month trade surplus was 58 billion U.S. dollars, down 5.32 billion U.S. dollars year-on-year.

Exports in the four-month period were 424.6 billion U.S. dollars, up 21.5 percent, or 6 percentage points less than a year earlier. Imports were 366.6 billion U.S. dollars, up 27.9 percent, or 8.8 percentage points more than a year earlier.

However, none of these reports would have rocked China as much as the earthquake in Sichuan.

Saturday, 10 May 2008

Japanese and US leading indices indicate weakness, US trade deficit improves

The rise in Japan's leading index above 50 in February could not be sustained in March. From Bloomberg:

Japan's economy may slow as cooling export growth prompts companies to cut output, the government's broadest outlook indicator showed.

The leading index, derived from 12 statistics including production and stock prices, fell to 20 percent in March from 54.5 the previous month, signaling growth will slow over the next two quarters, the Cabinet Office said today in Tokyo. The index has been below 50 in nine of the past 12 months...

The coincident index fell to 33.3 percent in March from 70 in February, today's report showed.

In the US, the ECRI's leading index improved last week but remained in recession territory. Reuters reports:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index edged up to 133.5 in the week to May 2 from 131.8 in the prior week, revised from 131.9...

The index's annualized growth rate remained negative, but improved to minus 8.0 percent from minus 8.7 percent.

There was also an improvement in the US trade deficit in March. Reuters reports:

The trade gap shrank 5.7 percent in March to $58.2 billion, the Commerce Department reported on Friday, much smaller than expected...

The narrowing trade gap means the U.S. economic growth was somewhat stronger than first estimated. Based on the trade data, Gault said he expected the government to raise its estimate of first quarter U.S. economic growth to 0.9 percent, from an initial reading of 0.6 percent last month.

Ian Shepherdson, chief U.S. economist with High Frequency Economics, pegged first quarter growth at 1.1 percent because of a stronger-than-expected contribution from trade.

But there were negatives in the trade report as well.

... The decline reflected...a record $6.1 billion drop in imports to $206.7 billion, which showed the U.S. slowdown has taken a toll on consumer and business demand for foreign goods...

U.S. exports retreated slightly in March, but were still the second highest on record at $148.5 billion...

In fact, Brad Setser says that:

... there actually wasn’t a lot to like in this month’s trade release.

... [M]uch of the fall in the deficit came from a big fall in the volume of imported petroleum...

The real problem though was on the export side. Export growth looks to be slowing...

The improvement in the nominal trade balance...also has stalled.

It isn’t hard to see why: oil

And with oil prices hitting records on a daily basis recently, it's going to be tough to see further improvement in the trade deficit without significant falls in import volumes.

Friday, 9 May 2008

Interest rates left unchanged in Europe amid negative data

The two most important central banks in Europe left interest rates unchanged yesterday. Bloomberg reports:

The European Central Bank and the Bank of England kept interest rates unchanged today, trying to balance the risk of faster inflation against the danger that higher credit costs will drag down economic growth.

The Frankfurt-based ECB left its benchmark refinancing rate at 4 percent, as predicted by all 53 economists surveyed by Bloomberg News, and President Jean-Claude Trichet signaled it won't cut rates anytime soon. The Bank of England, which has lowered rates three times since early December, left its benchmark at 5 percent, still the highest among the Group of Seven nations.

Economic growth, though, may be faltering in Europe.

Retail sales in the euro area declined 1.6 percent in March from a year earlier, the most since at least 1995. Sales declined 0.4 percent from February.

In Germany, Europe's largest economy, industrial production fell 0.5 percent in March, manufacturing orders fell 0.6 percent and exports fell 0.5 percent.

In the UK, the National Institute of Economic and Social Research estimates that the economy grew by 0.4 percent in the three months to April. This is after data out on Wednesday showed that British manufacturing output fell 0.5 percent in March, its sharpest decline in six months. Also on Wednesday, a survey by the Nationwide building society showed that British consumer morale had fallen to its lowest level since records began four years ago while a report by REC/KPMG showed that permanent job placements fell in April for the second time in three months.

Thursday, 8 May 2008

Oil and US productivity up, US stocks and pending home sales down

Oil was up yesterday and according to this Bloomberg report, it was because of improving US productivity.

Crude oil was little changed near a record $123.93 a barrel in New York after a government report showed that U.S. worker productivity accelerated, signaling stronger economic growth and increased energy demand.

Oil almost doubled in the past year and may rise further if the economy improves in the U.S., the world's biggest energy user. Productivity climbed at a 2.2 percent annual rate in the first quarter after a 1.8 percent gain in the previous three months, the Labor Department said yesterday.

The report "shows that maybe our economy is starting to strengthen here," said Gordon Elliott, risk management specialist at FC Stone LLC in St. Louis Park, Minnesota. "It's hard to believe we could get more demand at these prices, but it could be" the case...

"Better productivity means better demand," said Phil Flynn, a commodities trader for Chicago-based Alaron Trading Corp. "We could be focusing away from the dollar and on improving demand."

Improving demand? Tell that to stock investors. From MarketWatch:

Stock finished broadly lower on Wednesday as crude-oil prices above $123 a barrel alarmed investors already worried about the impact on consumers as well as the overall economy...

The Dow Jones Industrial Average fell 206.48 points to end at 12,814.35, with 24 of its 30 components posting losses.

In truth, the productivity numbers weren't really such a good thing for demand. From another MarketWatch report:

Productivity of the U.S. non-farm business sector rose at a 2.2% annual rate during the first months of the year, the Labor Department estimated Wednesday. Read full government report...

But hours worked in the first quarter fell 1.8%, marking the biggest such decline in five years...

"Without the money to spend, consumers will be pressed, even with rebate checks in the mail, to hold up their share of the economic burden," said Joel Naroff, president of Naroff Economic Advisors, in a note to clients.

Worker compensation, adjusted for inflation, fell 0.7% in the year ended March, the biggest drop since 1995.

Meanwhile, the housing market continues to put downward pressure on the economy. Pending sales of existing homes fell 1 percent in March.

Wednesday, 7 May 2008

Economic data indicate no imminent rush of rate cuts

With the Federal Reserve now apparently on pause, which central bank is the most likely to cut rates next? One candidate is the Bank of England.

Reuters reports the latest purchasing managers' indices from the UK.

Growth in Britain's manufacturing sector slowed in April, as expected, but there was no let-up in inflationary pressures as firms ratcheted up prices at the fastest rate on record...

The Chartered Institute of Purchasing and Supply/NTC purchasing managers' index slipped to 51.0 in April from 51.3 in March. Although marginally above the consensus forecast of 50.8, it was the weakest reading since January and the second weakest in the past two years.

The UK service sector decelerated even more sharply.

Growth in Britain's dominant services sector all but dried up in April, sliding to a five year low as companies struggled against the sharpest rate of cost inflation on record, a survey showed on Tuesday...

The Chartered Institute for Purchasing and Supply/NTC purchasing managers' index fell to 50.4 from 52.1 in March, the lowest reading since March 2003 and below analysts' forecasts of 51.6.

Elsewhere, rate cuts don't appear imminent.

The eurozone economy appears to be holding up better on the whole. Reuters reports that manufacturing did weaken in April.

Euro zone manufacturing activity fell to its slowest pace in nearly three years in April as Italy and Spain slipped further into contraction, a survey showed on Friday.

The RBS/NTC Purchasing Managers Index for the manufacturing sector fell to 50.7 in April, just below the 50.8 flash reading and economists' forecasts.

But services improved.

Euro zone services sector growth picked up in April and input price inflation hit an almost eight-year high, quashing any expectations of an imminent interest rate cut, a survey published on Tuesday showed.

The RBS/NTC Eurozone Purchasing Managers index for the dominant services sector rose to 52.0 in April, just up from the flash estimate of 51.8 and the identical 51.8 forecast by 39 economists polled by Reuters...

The euro zone composite index, which combines the services survey with manufacturing sector data published last week, was 51.9 in April, in line with the flash estimate and forecast.

This was up from March's 51.8...

In fact, common to all the euro area and UK surveys is the fact that price indices mostly rose, reflecting continued inflationary pressures.

Meanwhile, China's manufacturing PMIs didn't even show a hint of a slowdown in April. From Bloomberg last week:

The CLSA China Purchasing Managers' Index rose to 55.4 in April from 54.4 in March, the highest level since the survey began in April 2004, CLSA said today in an e-mailed statement...

The purchasing managers' index released by the government yesterday rose to 59.2 in April, the highest level since the survey began in January 2005, from 58.4 in March.

So while the US economy may already be flirting with recession, economic weakness is less of a concern for much of the rest of the world. That leaves many central banks still biased towards raising interest rates, as they did in Indonesia and Romania yesterday.

Tuesday, 6 May 2008

Bernanke urges more action as credit tightens

The US service sector may have rebounded but other reports show that the US economy is not out of the woods. MarketWatch reports that banks in the US have tightened loan standards.

Consumers and businesses found it harder to borrow money over the past three months, the Federal Reserve reported Monday, a sign that the historic credit crunch now hitting the economy is still worsening despite Herculean efforts by the Fed.

More than half of the banks surveyed by the Fed said they had tightened the screws on commercial and industrial loans, commercial real estate loans, residential mortgages, and home-equity lines of credit. Large numbers of banks tightened standards for other types of loans, including consumer credit cards.

Almost no banks eased credit terms for any type of loan, the Fed said in its quarterly senior loan officer survey. Read the full survey results.

Ben Bernanke is no doubt concerned. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke, seeking to end the worst housing slump in 25 years, urged the government and mortgage lenders to intensify their efforts to avoid home foreclosures.

Bernanke, in a speech in New York today, also reiterated his call for lenders to forgive portions of mortgages for some struggling homeowners. He said proposals should be "tightly targeted" at borrowers at greatest risk of losing their properties, and avoid providing an incentive for defaults.

The Fed chief also backed the idea of having the Federal Housing Administration refinance troubled mortgages...

Bernanke did note that accelerating foreclosures may push home prices down further, hurting the broader economy and threatening the financial system. He anticipated the foreclosure rate will increase this year after such proceedings began on 1.5 million properties last year.

Unresolved US imbalance could mean more pain

Greg Ip says: "Economy May Face Prolonged Pain, History Suggests".

The worst of the financial pain may have passed, but the economic pain could be just starting...

The nation's financial markets have rallied since early March...

But history suggests celebration may be premature. It's common in a crisis for markets to hit bottom long before the economy does. That's because markets are forward-looking and because economic weakness is the way the underlying imbalances that produced a crisis are corrected.

Where is the imbalance in the US?

... For several years, U.S. home prices and home construction kept climbing past levels considered sustainable. Homes became collateral for trillions of dollars in borrowing. That depressed savings, inflated consumption, fueled rapid lending and loosened loan standards.

When home prices stopped rising, the diciest mortgages began to default, triggering the crisis. But even now, prices are above most estimates of sustainable levels, and household saving has barely picked up. Even if the Fed's bailout of Bear Stearns Cos. in mid-March proves the apex of the crisis, as some think, the economy could still contract as consumers adjust to lost wealth and reduced access to credit.

Ip draws a parallel with South Korea's financial crisis in the late 1990s.

Korea's economy had been bolstered for years by overinvestment by its chaebols, or industrial conglomerates...

But in early 1997, several chaebols, which had been losing competitiveness, began to experience difficulties...

Ted Truman...says the overexpansion and excessive borrowing of Korea's corporate sector in the run-up to its crisis are analogous to the overexpansion of housing and consumption in the U.S. in its crisis...

Korea's recovery began in 1999. Mr. Kim says that capital investment never fully recovered and that economic growth, while a healthy 4% to 5%, hasn't returned to the precrisis pace... Korea's lesson to the U.S., he says, is that "imbalances must be corrected." A recovery doesn't need a full resolution of those imbalances, he says, only a "convincing sign that change is taking place."

The risk for the U.S. is that weakness goes beyond the correction of housing excesses and begins to feed back into the financial system and then, again, hurts the wider economy.

... Nouriel Roubini...predicts that a wave of defaults on industrial loans, municipal bonds and consumer credit is coming, which will trigger another wave of financial-system distress.

Fed Chairman Ben Bernanke believes such feedback effects are what made the Great Depression great. Mr. Bernanke's awareness of such risks is why he cut rates last week and, despite signaling a pause, is still focused on the risks that the U.S. economy may deteriorate further.

I agree with most of what Ip says.

However, I am not sure exactly why his concluding paragraph bothered mentioning Ben Bernanke's rate cut last week. If a correction of imbalances is required for sustained recovery, and elevated house prices and low household saving reflect the imbalance in the US, then how was the rate cut supposed to help? Based on the gist of the article's argument, Bernanke's concern for the economy last week becomes understandable but not necessarily his action.

See also Ip's blog post.

Monday, 5 May 2008

US employment shrinking but not economic output

According to the latest employment report, the United States economy lost jobs in April but not as many as economists had expected. Nevertheless, the recent trend in the monthly employment number has been unusually weak considering that most of the other economic indicators have not provided clear signals that the economy has entered recession.

On Friday, the Labor Department reported that non-farm payroll employment declined by 20,000 in April. This was the fourth consecutive month that employment in the US has contracted based on the establishment survey.

Nevertheless, the report on Friday showed an improvement in the employment situation. The number of jobs lost in April was less than the average monthly rate of 80,000 job losses in the first three months of the year. It was also less than the estimate among economists for a loss of between 75,000 and 80,000 jobs.

The separate household survey provided an even more positive picture. According to this survey, the US economy gained 362,000 jobs in April after having lost 24,000 jobs in March. The unemployment rate fell to 5 percent in April from 5.1 percent the month before.

Earlier in the week, we already had an inkling that the employment situation might have improved in April. On Wednesday, employer services firm Automatic Data Processing reported that non-farm private employment increased 10,000 in April, up from 3,000 in March.

One month's figure does not constitute a trend, but it does corroborate other data last week showing that the US economy is not falling off a cliff.

On Wednesday, the Commerce Department reported that real gross domestic product increased at an annual rate of 0.6 percent in the first quarter. This was the same rate as in the previous quarter and higher than what most economists had expected.

On Thursday, another Labor Department report had shown that initial claims for unemployment insurance rose to 380,000 last week but the four-week moving average fell to 363,750 from 370,250. Continued claims for unemployment insurance rose by 74,000 to 3.019 million, the highest level since April 2004.

Also on Thursday, the Institute for Supply Management (ISM) reported that its manufacturing PMI was at 48.6 in April, unchanged from the previous month. Its employment index though fell to 45.4 from 49.2. According to the ISM, a PMI over 41.1 generally indicates that the overall economy is expanding.

So on the whole, most of the data last week have been consistent with a slowing economy that is on the edge of a recession but not necessarily in one.

In fact, it is the monthly non-farm payroll employment number that appears to be showing unusual weakness. Even though the other indicators are showing that economic output as a whole may be holding up, the past few months' monthly employment reports are already showing job losses.

On a chart showing year-on-year change, monthly employment has plunged at a faster rate than is historically typical at this stage of a downturn compared to the other indicators, including the employment-related ones like unemployment insurance claims and the ISM employment index.

Many economists had expected -- or at least hoped -- that because job creation had been weak during the expansion phase of the current cycle, job loss would also be dampened during the downturn. There are few signs, however, that this is the case.

Nevertheless, there is cause for hope that further deterioration in the economy will be limited and thus further job losses will not be severe. Over the weekend, Warren Buffett, investor extraordinaire and chief executive officer of Berkshire Hathaway, told Bloomberg Television that the worst of the crisis on Wall Street is over. Many others have expressed similar views.

So, with the monetary and fiscal stimulus already in place, there is still a chance that the adverse impact of the credit crisis on the real economy could prove limited.

Saturday, 3 May 2008

Stocks up on better-than-expected US data

Yesterday's US economic data were better than expected. Reuters reports:

The Labor Department said on Friday that 20,000 jobs were shed last month, far fewer than the 80,000 that economists had anticipated. The national unemployment rate, which is compiled from a separate survey, unexpectedly fell to 5 percent from 5.1 percent in March...

A report at mid-morning from the Commerce Department [showed] a stronger-than-expected 1.4 percent rise in March U.S. factory orders...

Just before the employment figures were issued, the Fed announced fresh action to add liquidity to credit markets, increasing the size of some cash auctions for financial institutions as well.

The US stock market could not take full advantage though. Reuters reports:

U.S. stocks made modest gains on Friday after jobs data that offered fresh evidence the economic slowdown is not as severe as feared, but technology shares faded on a surprise loss from Sun Microsystems Inc...

The Dow Jones industrial average was up 48.20 points, or 0.37 percent, at 13,058.20. The Standard & Poor's 500 Index was up 4.56 points, or 0.32 percent, at 1,413.90. The Nasdaq Composite Index was down 3.72 points, or 0.15 percent, at 2,476.99.

For the week, the Dow gained 1.3 percent, the S&P rose 1.2 percent and the Nasdaq advanced 2.2 percent.

Friday, 2 May 2008

US stocks soar despite negative economic data

US economic data yesterday were mostly negative. Bloomberg reports:

Manufacturing in the U.S. shrank for a third month and rising prices eroded consumers' buying power as the six-year economic expansion ground to a halt.

The factory index compiled by the Tempe, Arizona-based Institute for Supply Management was unchanged at 48.6 in April. The Commerce Department said consumer spending rose 0.4 percent in March. Stripping out the effect of inflation, purchases were up 0.1 percent after stagnating the previous month...

The Labor Department reported separately that first-time claims for unemployment insurance rose more than forecast last week, to 380,000. The total number of Americans receiving benefits climbed to 3.019 million, the highest level since April 2004.

The Commerce Department also reported today that spending on U.S. construction projects fell 1.1 percent in March as homebuilding posted the biggest one-month drop on record.

Nevertheless, market sentiment has turned positive. From MarketWatch:

U.S. stocks on Thursday soared higher, propelling the Dow to its first close above the 13,000 mark in four months, as investors offered a delayed but warm reception to a likely pause in the Federal Reserve's recent string of rate cuts.

And you thought that investors preferred more rate cuts.

But maybe more rate cuts are not needed for investors to turn bullish. Bill Luby at Vix and More says that the current yield curve is already "almost identical to the yield curve as it stood on May 2003", which turned out to be "the beginning of the five year bull market".

Thursday, 1 May 2008

Fed cuts rates, may pause

As expected, the Federal Reserve cut the fed funds rate by 25 basis points to 2 percent and moved towards a pause in easing.

Yesterday's US economic data had not been too bad and perhaps suggest that a pause is warranted. GDP increased 0.6 percent. ADP reported 10,000 additional private sector jobs. The National Association of Purchasing Management-Chicago's business activity index edged up to 48.3 this month from 48.2 in March.

An improvement in the US trade deficit contributed to economic growth in the first quarter. That's bad news for other economies.

Canada's economy shrank 0.2 percent in February.

In Europe, sentiment deteriorated in April, with the economic sentiment index for the euro area falling to 97.1 from 99.6 in March. Consumer price inflation in the euro area slowed to 3.3 percent this month while unemployment remained at 7.1 percent in March.

Things are also turning for the worse in the UK. On Tuesday, the BoE had reported that mortgage approvals had fallen to their lowest level on record in March while the CBI had reported that retail sales slumped in April. The gloomy news continued yesterday with house prices reportedly falling for the sixth month running in April according to Nationwide and the GfK/NOP consumer confidence index falling to the lowest since November 1992.