US and Japanese consumer spending weaken on higher inflation, European confidence falls

There were lots of economic data yesterday but little to cheer about.

Bloomberg reports that US consumer spending and income fell in July after adjusting for inflation.

U.S. consumer spending grew at a slower pace in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power.

Purchases rose 0.2 percent, one-third the pace in June, the Commerce Department said today in Washington, while prices surged the most in 17 years...

Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates, after a 0.1 percent gain the prior month. The median projection was a decline of 0.2 percent...

The Commerce Department report's price gauge tied to spending patterns jumped 4.5 percent from July 2007, the biggest 12-month gain since 1991.

The Federal Reserve's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent for a second month. The so-called core price measure was up 2.4 percent from a year before, the most since February 2007...

Adjusted for inflation, spending plunged 0.4 percent, the biggest drop in four years...

Disposable income, or the money left over after taxes, decreased 1.1 percent. Adjusted for inflation, it fell 1.7 percent after declining 2.6 percent in June.

However, consumer sentiment and a measure of business activity improved in August.

The Reuters/University of Michigan final index of consumer sentiment was at 63 this month, from 61.2 in July...

A separate private report indicated business activity advanced in August as commodity prices retreated from record levels. The National Association of Purchasing Management-Chicago said its business index increased to 57.9 from 50.8.

The outlook for the economy remains negative though. From Reuters:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 125.5 in the week to Aug. 22 from 125.8 in the previous period, revised from 125.9.

Its annualized growth fell to negative 11.8 percent to match its lowest mark since the week to June 13, 1980. The previous week this gauge was at minus 11.5 percent, revised from minus 11.4 percent.

Japanese data yesterday also looked somewhat gloomy yesterday. While housing starts rebounded in July, other data provided little reason for optimism. From Bloomberg:

Japan's inflation rate exceeded 2 percent for the first time in a decade as prices of food and gasoline surged, sapping household budgets in an economy that may already be in a recession.

Core prices, which exclude fresh food, climbed 2.4 percent in July from a year earlier after rising 1.9 percent in June, the statistics bureau said today in Tokyo. Household spending fell 0.5 percent from a year earlier, a fifth monthly decline...

The ratio of jobs available to applicants slid for a sixth month to 0.89, the lowest since October 2004, the Labor Ministry said. The jobless rate fell to 4 percent from 4.1 percent.

The Japanese government feels compelled to intervene.

The government announced it will spend 2 trillion yen ($18 billion) to help businesses and individuals cope with rising energy and material costs...

Today's economic package included reductions in highway tolls, projects to help temporary workers find permanent jobs, and financial support for transport companies. The government also said it plans to cut taxes for low-income earners.

A positive number on July industrial production doesn't seem to have carried much weight.

Industrial production unexpectedly rose 0.9 percent from June, when it fell 2.2 percent, the trade ministry said. The increase wasn't enough to revise the government's assessment that output is weakening as export growth slows.

Perhaps understandably so in the light of the latest manufacturing PMI reported by Reuters.

The Nomura/JMMA Japan Purchasing Managers Index, which gives an early snapshot of the health of manufacturing, edged down to a seasonally adjusted 46.9 in August from 47.0 in July. In June the index hit the lowest in more than six years at 46.5.

European economic data yesterday also pointed to a softening economy. Bloomberg reports:

Europeans' confidence fell more than forecast this month as the economy teetered on the brink of a recession.

An index of executive and consumer sentiment in the economic outlook dropped to 88.8 from 89.5 in July, the European Commission in Brussels said today. That is below the 89.3 median estimate of 26 economists surveyed by Bloomberg News...

Inflation eased to 3.8 percent from 4 percent, according to a separate report today...

Confidence among euro-area manufacturers fell more than economists forecast to minus 10 this month from minus 8 in July, while sentiment among retailers also declined, according to today's report from the commission. Consumer confidence rose 1 point from July's minus 20, staying close to a 5 1/2-year low. Spanish retail sales fell for an eighth month in July, while in the U.K., consumer confidence stayed near a record low in August, GfK NOP said today.

In the euro area, unemployment remained at 7.3 percent in July, another report showed.

US stocks jump on GDP surprise

Another day of positive economic data on Thursday brought another day of gains for US stocks. Bloomberg reports:

U.S. stocks climbed the most in three weeks, led by manufacturers and financial companies, after growth in exports helped the economy expand faster than estimated in the second quarter...

The S&P 500 gained 19.02 points, or 1.5 percent, to 1,300.68, capping its biggest three-day advance in a month. The Dow Jones Industrial Average increased 212.67, or 1.9 percent, to 11,715.18. The Nasdaq Composite Index added 29.18 to 2,411.64. More than five stocks rose for each that fell on the New York Stock Exchange.

However, economists were less enthused over the GDP report. Again from Bloomberg:

Gross domestic product increased at a 3.3 percent annual pace, compared with the initial estimate of 1.9 percent, the Commerce Department said today in Washington. Trade contributed the most to U.S. growth in almost three decades...

"Outside of trade, the economy is considerably weaker," said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. "When you look at the spending, it looks terrible for the second half of the year."...

Today's GDP report is "kind of the last hurrah" for the U.S. economy, Martin Regalia, chief economist for the U.S. Chamber of Commerce, said at a press conference today. "We've begun the process of slipping into a good old-fashioned recession."

There may be good reasons for the pessimism.

The Labor Department said initial jobless claims dropped to 425,000 last week, matching economists' forecasts, from 435,000 the previous week. The level remains well above the 321,000 average of last year. The number of people staying on unemployment rolls rose to 3.423 million, the highest since November 2003...

Today's report also included a first look at corporate profits for the second quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, decreased 2.4 percent to an annual rate of $1.56 trillion. Earnings were down 7 percent from the same time last year, the biggest decrease since the 2001 recession.

US durable goods orders unexpectedly strong

US manufacturing is proving to be surprisingly resilient. From Bloomberg:

Orders for U.S. durable goods unexpectedly increased in July, indicating that growing demand from abroad is still helping companies weather a slump in domestic spending.

The 1.3 percent gain in bookings of goods meant to last several years matched the previous month's rise, the Commerce Department said today in Washington. The gains may have been aided by foreign demand for automobiles, aircraft and telecommunications gear as exports climbed to a record...

Economists projected orders would be unchanged after a previously reported 0.8 percent increase in June, according to the median of 76 forecasts in a Bloomberg News survey.

Excluding transportation equipment, orders rose 0.7 percent after a 2.4 percent increase. Those bookings were projected to fall 0.7 percent, after an originally reported 2 percent gain in June...

Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, increased 2.6 percent, the most since April...

But the resilience may not last.

The boost from exports, which kept the U.S. expanding last quarter, may wane because the European and Japanese economies are now contracting, while the dollar is rallying. Federal Reserve officials anticipate trade gains will fade, minutes of their Aug. 5 meeting showed yesterday...

Capital spending incentives included in the $168 billion economic stimulus package enacted in February have probably also lifted orders, Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York, wrote in a note today. That effect will fade, he predicted.

Also, don't forget that producer prices have been surging lately. That would have inflated the orders numbers.

US economic indicators improve but Europe's show deterioration

There were some hopeful signs for the US economy yesterday. Bloomberg reports:

Confidence among American consumers improved in August for a second month as the surge in gasoline prices and the slide in home values abated.

The Conference Board's confidence index rose to 56.9, higher than economists had forecast. House prices in 20 major cities declined at a slower pace for the fourth straight month in June, the S&P/Case-Shiller index showed...

The S&P/Case-Shiller's measure of prices in 20 metropolitan areas fell 0.5 percent from the previous month, with nine areas reporting a gain compared with seven in May. Prices were down 15.9 percent from the previous year, less than economists had projected...

The Commerce Department said sales of new homes rose to an annual pace of 515,000 in July, from 503,000 in June.

And the Richmond Fed's latest manufacturing survey shows that while manufacturing activity in the central Atlantic region continued to drift lower in August, optimism about future business prospects edged higher.

While these provide some tentative signs that the US economy may be approaching a bottom, other reports yesterday show that Europe is clearly suffering.

In Germany, Bloomberg reports that a recession looms.

German business and consumer confidence fell more than economists forecast, heightening concern that Europe's largest economy may be slipping into a recession.

The Munich-based Ifo institute's business climate index, based on a survey of 7,000 executives, dropped to a three-year low of 94.8 from 97.5 in July. Consumer sentiment slumped to the lowest level in five years, according to Nuremberg-based market research company GfK AG...

The economy contracted 0.5 percent in the three months through June as construction slumped and companies and households reduced spending, the Federal Statistics Office confirmed today. Exports also fell.

The UK economy is also facing difficulties. Reuters reports:

Approvals for new home loans fell 65 percent on a year ago in July to hold near a record low and the British Bankers' Association said on Tuesday it was not expecting a housing market recovery soon...

The Confederation of British Industry added to the downbeat outlook on Tuesday, with its quarterly services sector survey showing a sharp decline in profitability and confidence.

Trouble in the housing sector appears to be a common theme. The French economy is no exception, according to a Bloomberg report.

France's stock of new, unsold homes reached a record in the second quarter, when the euro region's second-largest economy shrank.

The difference between the number of new homes put on the market and those purchased reached 110,500 in the three months through June, the Environment Ministry said in an e-mailed statement sent late yesterday. Sales dropped 34 percent in the quarter from a year earlier, it said...

Other figures released today add to signs that the slowdown is deepening. Housing starts dropped 12 percent in the three months through July from a year earlier and home permits fell 17 percent in the period, the ministry said today.

US stocks fall on light volume, housing and economy remain weak

After three days of gains, the US stock market gave them all back yesterday. From Bloomberg:

U.S. stocks fell the most in a month as a Kansas bank's failure and speculation American International Group Inc. will post a loss heightened concern that credit writedowns will keep rattling the financial system...

The S&P 500 dropped 25.36, or 2 percent, to 1,266.84, ending a three-day advance. The Dow Jones Industrial Average slid 241.81, or 2.1 percent, to 11,386.25, with all 30 of its companies lower. The Nasdaq Composite Index decreased 49.12 to 2,365.59. About 865 million shares changed hands on the New York Stock Exchange, the slowest trading day of the year. Volume last week was 35 percent less than the year-to-date average.

A reported rise in US home resales didn't help the stock market much. From another Bloomberg report:

Sales of previously owned homes in the U.S. rose 3.1 percent in July, a gain that masked further housing weakness as inventories of unsold properties increased.

Resales advanced more than forecast to an annual rate of 5 million, with at least one-third of the purchases coming from foreclosed properties, the National Association of Realtors said today in Washington. At the same time, the median price dropped 7.1 percent from July 2007, and the number of homes for sale jumped to a record.

A true recovery in the US housing market may still be some way off. Again from Bloomberg:

A recovery in the U.S. housing market from the worst slump since the Depression is unlikely until "well into 2009," Housing and Urban Development Secretary Steve Preston said today.

"I think we're right in the middle of it, and I think we have a ways to go before we start seeing a turnaround," Preston said today in an interview at the agency's Washington headquarters. "We'll be well into 2009 before we see some real energy in this market."

That could mean that housing remains a drag on the US economy, already weak as it is according to the Chicago Fed National Activity Index.

The Chicago Fed National Activity Index was –0.67 in July, down from –0.59 in June. Three of the four broad categories of indicators—employment; consumption and housing; and sales, orders, and inventories—made negative contributions to the index in July.

The three-month moving average, CFNAI-MA3, increased to –0.80 in July from –0.94 in the previous month. This negative value suggests that growth in national economic activity was below its historical trend. In addition, July marked the eighth consecutive month that the CFNAI-MA3 was near or below the –0.70 threshold, which following a period of economic expansion indicates an increasing likelihood that a recession has begun. With regard to inflation, July’s three-month moving average indicates low inflationary pressure from economic activity over the coming year.

Who's afraid of inflation?

Apparently, not government bond investors.

The chart below shows that yields on 10-year government bonds in the major economies are either below or barely above the respective inflation rates.
Why are investors willing to ignore the persistently high inflation around the world? One reason is the distress in credit markets that refuses to go away. From Bloomberg:

Most of the bond strategists and salesmen that Resolution Investment Management Ltd.'s Stuart Thomson talked to last August expected the credit crunch to be long over by now. Instead, money markets show there's no end in sight, and it may even worsen...

Banks are charging each other a premium of 77 basis points over what traders predict the Federal Reserve's daily effective federal funds rate will average over the next three months to lend cash. The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show.

US leading index and eurozone industrial orders fall, UK economy flattens

The US economic outlook remains poor. From Reuters:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 125.9 in the week to Aug. 15 from 126.4 in the previous period.

Its annualized growth fell to negative 11.4 percent from minus 10.7 percent, revised up from minus 10.8 percent. It hit its lowest mark since the week to June 13, 1980, when it was negative 11.8 percent.

Yesterday's data from Europe were little better. While the National Bank of Belgium's business survey index rose to minus 5.9 in August from minus 7.6 in July, other reports from Europe were more downbeat.

Industrial orders in the euro area fell sharply in June. Bloomberg reports:

Industrial orders in the 15-nation euro area declined 7.4 percent from a year earlier, the most since December 2001, the European Union statistics office in Luxembourg said today. Excluding transport, orders fell an annual 1.5 percent...

Euro-area orders fell 0.3 percent in June from the previous month, according to today's report. Excluding transport, which declined 3.7 percent, industrial orders rose 0.6 percent.

Meanwhile, the UK economy looks like it is on the cusp of a recession. From Reuters:

The Office for National Statistics revised down its GDP reading to show it was unchanged on the quarter in the three months to June from an initial estimate of 0.2 percent growth and down from 0.3 percent growth in the first quarter.

That larger than expected revision was the lowest reading since the second quarter of 1992 when the economy was in the throes of its last recession. On the year, GDP was just 1.4 percent higher, the weakest since the final quarter of 1992.

UK retail sales rise but outlook for euro area and US remain weak

UK retail sales saw a surprise 0.8 percent rise in July.

Most other economic data released yesterday were not so positive, although there were hints of improvement.

Bloomberg reports that manufacturing and services industries continue to contact in the euro area.

Europe's manufacturing and service industries contracted for a third month in August as consumers and businesses reeled from July's record oil prices.

Royal Bank of Scotland Group Plc's composite index was at 48 after 47.8 in July, Reuters Plc reported...

Markit's manufacturing index was at 47.5 after 47.4 in July while the services index declined to 48.2 from 48.3.

The US economy faces a similar negative outlook. Again from Bloomberg:

The Conference Board's index of leading indicators fell 0.7 percent in July, more than triple the drop forecast by economists surveyed by Bloomberg News...

Five of the 10 indicators in today's leading indicators report subtracted from the index, led by declines in building permits and stock prices.

Other reports on the US economy were perhaps a little more hopeful.

For the first time since January 2007, Americans who said the economy will improve in the next six months outnumbered those who said it will get worse, according to results of the latest Bloomberg/Los Angeles Times poll issued today. Still, about three of every four people surveyed said the U.S. is on the wrong track...

Sagging orders and falling sales hurt factories in the Philadelphia region this month, a report from the Fed Bank of Philadelphia showed. Its general economic index rose to minus 12.7 from minus 16.3 in July...

Earlier today, a Labor Department report showed initial jobless claims fell to 432,000, a level that still indicates the labor market is deteriorating.

Japanese economy sluggish

The Bank of Japan yesterday confirmed that it had downgraded its outlook for the economy. From Bloomberg yesterday:

"Japan's economic growth has been sluggish," the central bank said in its monthly economic report in Tokyo today, downgrading its evaluation for the second month. In July, policy makers said that the expansion was "slowing further."

But Japanese exports did pick up in July. Bloomberg reports:

Shipments overseas rose 8.1 percent from a year earlier, after declining for the first time since 2003 in June, the Finance Ministry said today in Tokyo. Shipments to China climbed 16.8 percent to a record, with the value surpassing those sent to the U.S. for the first time...

Imports climbed at the fastest pace in two years, surging 18.2 percent from a year earlier, as oil prices soared to a record. That caused the trade surplus to narrow 87 percent to 91.1 billion yen ($830 million), the ministry said.

China is fast becoming an important market for Japan, but there is increasing nervousness about the former's economic outlook as well, yesterday's surge in the Chinese stock market notwithstanding.

US housing starts plunge but worst of financial crisis may lie ahead

We had further confirmation yesterday that US housing isn't turning around yet. From Bloomberg:

Housing starts fell 11 percent in July to an annual rate of 965,000, the Commerce Department said today in Washington. The Labor Department reported the producer price index jumped 9.8 percent from a year before...

Compared with July 2007, work began on 30 percent fewer homes. Building permits, a sign of future construction, also fell in July, the Commerce Department reported. They were down 18 percent to a 937,000 annual pace...

Construction of single-family homes fell 2.9 percent to a 641,000 rate, the fewest since January 1991, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 24 percent from the prior month to an annual rate of 324,000.

Meanwhile, Japan isn't looking too hot either. From AFP/CNA:

Japan's central bank downgraded its assessment of Asia's largest economy Tuesday, warning growth will remain "sluggish" as it left its super-low interest rates unchanged amid growing fears of a recession.

However, Germany provided some hopeful news yesterday. From Bloomberg:

German investor confidence increased more in August than economists forecast after the euro declined and oil prices retreated from a record.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to minus 55.5 from minus 63.9 in July, the lowest since the survey began in 1991. Economists expected a gain to minus 62, the median of 43 forecasts in a Bloomberg News survey shows.

Nevertheless, it is too soon to turn optimistic. In fact, despite the jump in producer prices in the US and elsewhere, deflationary forces are building.

The Telegraph reports that US money supply may already be shrinking rapidly.

The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

And things could get worse. From Reuters.

The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.

US, UK housing markets weak, Chinese stocks plunge

Monday brought out the blues, as economic and market news were mostly gloomy.

The US housing market remains in the doldrums. From Reuters:

Home builder sentiment was stuck at a record low in August, as stringent lending and a flood of foreclosed homes dragged on the real estate market, according to data from the National Association of Home Builders released on Monday.

The NAHB/Wells Fargo Housing Market index held at 16 in August for a second straight month, the group said in a statement.

The UK housing market is fast following in the same footsteps. Reuters reports:

House prices fell 4.8 percent year-on-year in August, a survey by property Web site Rightmove showed on Monday, the fastest fall since the series began six years ago.

Rightmove said property prices fell by 2.3 percent, or 5,403 pounds on the month in August, bringing the average asking price down to 229,816.

The pessimism appears to have infected stock investors yesterday. From Bloomberg:

U.S. stocks declined the most in more than a week, led by banking and real estate shares, as growing speculation the government will bail out Fannie Mae and Freddie Mac rattled the mortgage market...

The Standard & Poor's 500 Index lost 19.60 points, or 1.5 percent, to 1,278.60 as 23 of 24 industry groups declined. The Dow Jones Industrial Average retreated 180.51, or 1.6 percent, to 11,479.39 as all 30 companies fell. The Nasdaq Composite Index slumped 35.54, or 1.5 percent, to 2,416.98. Seven stocks dropped for every two that advanced on the New York Stock Exchange.

However, it was the Chinese stock market that saw the more dramatic fall yesterday. Bloomberg reports:

China's stocks plunged, extending an 18-month low, on concern the government will avoid introducing measures to boost the world's worst-performing market this year...

The CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, declined 134.21, or 5.5 percent, to 2,313.40 at the close, the lowest since Feb. 5, 2007. About 60 of the gauge's 300 companies fell by the maximum daily limit.

US economic data show improvement but recovery unlikely soon

Friday's US economic data were quite decent. Bloomberg reports:

Confidence among American consumers gained in August and manufacturing in New York grew the most since January as a slide in gasoline, oil, metals and grain prices eased cost pressures on households and companies.

The Reuters/University of Michigan preliminary index of consumer sentiment rose to 61.7, from 61.2 in July. The Federal Reserve Bank of New York's general economic index climbed to 2.8, from minus 4.9 a month earlier...

Output at factories, mines and utilities rose 0.2 percent last month after a 0.4 percent gain in June, the Fed reported today in Washington. Capacity utilization, which measures the proportion of plants in use, increased to 79.9 percent from 79.8 percent.

However, the outlook remains weak. The Economic Cycle Research Institute's Weekly Leading Index fell to 126.4 in the week to 8 August, its lowest level since July 2003, from 126.9 in the previous week. The annualised growth rate of the index fell to minus 10.8 percent, an 18-week low, from minus 9.6 percent.

"With the WLI plunging over the last five weeks to a new five-year low, the likelihood of a near-term business cycle recovery has dwindled markedly," [Lakshman Achuthan, managing director at ECRI] wrote.

Global inflation remains high but economic growth falling

Inflation accelerated in the US in July. Bloomberg reports:

U.S. consumer prices rose at the fastest pace in 17 years in July, limiting the ability of the Federal Reserve to lower interest rates as economic growth slows.

The cost of living climbed 5.6 percent in the year ended in July, the Labor Department said today in Washington. It was up 0.8 percent from the previous month, twice as much as anticipated...

Costs excluding food and energy increased 0.3 percent for a second month, exceeding the 0.2 percent median forecast of economists surveyed.

The core rate increased 2.5 percent from July 2007, the most since January, after a 2.4 percent year-over-year increase the prior month.

However, financial markets appear to be looking past the inflation data.

Treasuries rose, with benchmark 10-year note yields falling to 3.89 percent at 4:35 p.m. in New York, from 3.94 percent late yesterday. The Standard & Poor's 500 Stock Index advanced 0.6 percent to close at 1,292.93.

Separate reports today reinforced evidence of a weakening job market and continued slump in housing.

The Labor Department reported that 450,000 Americans, more than anticipated, filed first-time claims for jobless benefits last week. Claims averaged 321,400 last year.

The median price for a single-family home in the U.S. dropped 7.6 percent in the second quarter as bank sales of foreclosed homes caused values to tumble in three-quarters of U.S. cities, the National Association of Realtors said.

Sales of single-family houses and condominiums fell 16 percent to 4.913 million at an annualized pace, a 10-year low, the realtors group also said...

Today's figures also showed wages decreased 0.8 percent after adjusting for inflation following a 0.9 percent drop in June. They were down 3.1 percent over the last 12 months, the biggest year-over-year decline since 1990. The drop in buying power is one reason economists forecast consumer spending will slow.

Weakness in the European economy is a little more apparent. From Bloomberg:

Europe's economy contracted for the first time since the introduction of the euro almost a decade ago as faltering sales undermined investment by companies and soaring costs eroded consumer spending power.

Gross domestic product fell 0.2 percent in the second quarter from the first, when it increased 0.7 percent, the European Union statistics office in Luxembourg said today. The year-on-year growth rate slowed for a third straight quarter, to 1.5 percent. Separate figures showed inflation held at 4 percent in July, less than initially estimated.

Even the fast-growing emerging economies may not be able to escape a slowdown. While India's inflation rate hit a 13-year high recently, China produced yet more evidence yesterday that its economy is slowing, as AFP/CNA reports.

China's industrial output growth slowed to a 17-month low in July as weakening exports hit factory production across the nation, official figures showed on Thursday...

Industrial production expanded by 14.7 percent in July from the same month a year ago, down from 16.0 percent in June and 18.0 percent in July last year, the National Bureau of Statistics said.

Japanese economy shrinks, more could follow

The Japanese economy may have entered a recession. From AFP/CNA:

Japan's economy contracted by 0.6 per cent in the three months to June from the previous quarter, official figures showed Wednesday amid growing fears of a recession in Asia's biggest economy.

Household spending fell 0.5 percent, and business investment was unable to compensate, falling by 0.2 percent.

Exports were also disappointing, falling by 2.3 percent. And for June, exports were even down on a year-on-year basis by 1.5 percent.

The euro economy may be next to slip into negative territory. From Bloomberg yesterday:

European industrial production stagnated in June after falling the most in almost 16 years in May as the region's economy capped its worst performance since the launch of the euro in 1999.

Output in the 15 nations that share the currency was unchanged from the previous month, when it dropped 1.8 percent, the European Union's statistics office in Luxembourg said today. From a year earlier, production fell 0.5 percent, the biggest decline since September 2003...

A separate survey of economists shows they estimate the euro-area economy shrank by 0.2 percent in the three months through June. The statistics office is due to publish that data tomorrow.

Advance data show that the US economy continued to grow in the second quarter, but the third quarter has started on a weak note. From Bloomberg yesterday:

Sales at U.S. retailers dropped in July for the first time in five months as record gasoline prices and tighter credit reduced automobile purchases.

Spending dropped 0.1 percent from June, the Commerce Department said today in Washington. Excluding cars, sales rose 0.4 percent, less than anticipated...

Retail sales excluding gasoline decreased 0.2 percent, the Commerce Department said...

Separate Commerce Department figures today showed inventories at U.S. businesses rose half as fast as sales in June as companies prepared for weaker spending. The 0.7 percent gain in the value of unsold goods at factories, retailers and wholesalers was larger than forecast.

But import prices continued to rise sharply in July.

The Labor Department said prices of imported goods soared 21.6 percent in the year to July, the most since at least 1982...

Import prices rose 1.7 percent in July from the previous month, more than economists had projected, after a 2.9 percent increase in June, Labor figures showed.

In contrast to the US, retail sales in China still appear buoyant, rising by 23.3 per cent in July from a year ago.

But economic slowdown appears to be the prevailing trend worldwide now. At least the Bank of England thinks so for the UK economy. From Reuters:

The Bank of England raised hopes of an interest rate cut before year-end on Wednesday as it forecast the current record-breaking spike in inflation would reverse sharply as the economy grinds to a halt...

The central bank's new quarterly forecasts showed inflation -- already running at more than double the 2 percent target and the highest since the series began in 1997 -- would leap to around 5 percent this year.

But thereafter, it would fall dramatically as the effect of rising food and fuel prices wane and economic growth dried up...

Figures out on Wednesday showed the number of people on jobless benefit rose by 20,100 in July, the biggest jump since 1992, and wages rose by the weakest rate in five years in June.

Inflation falls in China but not elsewhere

It does look like the Chinese economy is beginning to cool. From Bloomberg:

China's inflation cooled to the slowest pace in 10 months, giving the government more room to restrain the yuan's advance and bolster economic growth.

Consumer prices rose 6.3 percent in July from a year earlier as food costs eased, the statistics bureau said today, after a 7.1 percent gain in June. That was below the 6.5 percent median estimate of 17 economists surveyed by Bloomberg News.

It was a similar story for house prices in China, which rose just 7.0 percent in July, the sixth consecutive month of lower growth rate.

Elsewhere, though, slower growth has not dented inflation.

In Japan, industrial output for June has been revised to a 2.2 percent fall from the initial reading of a 2.0 percent fall and the consumer sentiment index in July fell to the lowest since the government began compiling the figure. However, Japan's wholesale inflation rate accelerated to 7.1 percent in July, a 27-year high.

Inflation accelerated in the UK too in July. Reuters reports:

Inflation shot up in July to more than twice the central bank's target, dousing expectations of interest rate cuts any time soon despite new evidence of sliding house prices and waning consumer demand.

The 4.4 percent annual inflation rate was a record for the 11-year-old series, as was the 0.6 percentage point jump in the price measure from June which took financial markets by surprise. Economists had forecast a rise to 4.1 percent.

However, don't expect a rate hike from the BoE to restrain inflation.

Figures out earlier on Tuesday from the Royal Institution of Chartered Surveyors showed house prices falling sharply and the average number of sales per respondent falling to its lowest level in at least 30 years.

A separate report from the British Retail Consortium showed sales falling 0.9 percent on a year ago in July when measured on a like-for-like basis as consumers cut back on non-essentials.

Inflation in France in July, though, came in at 4.0 percent, unchanged from June.

While a slowing global economy should eventually pull inflation down, it may take a while. Certainly, there was little evidence of slower global growth in the US trade deficit for June, which narrowed on the back of a 4 percent surge in exports.

Chinese stocks dive

Chinese divers and other sportsmen may be seeing gold at the Olympics but Chinese investors are mostly seeing red in the stock market as stocks performed their own form of diving. From Bloomberg yesterday:

China's benchmark stock index plunged to an 18-month low, overtaking Vietnam as the world's worst performer this year, as producer prices rose and Goldman Sachs Group Inc. said the Olympic Games will slow the economy...

The CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, tumbled 134.65, or 5.2 percent, to 2,456.81 at the close, the lowest since Feb. 9, 2007. The drop was the biggest since June 27. About one-third of the companies on the 300-member gauge slumped by the 10 percent daily limit.

The measure has lost 54 percent this year, the worst performer among the world's 88 major benchmark indexes, on concern rising fuel prices and central bank measures to curb inflation will hurt earnings.

Chinese economic data released yesterday were mixed. Bloomberg reports:

China's trade surplus unexpectedly widened in July and producer prices rose at the fastest pace in 12 years, adding pressure on the government to let the yuan resume its appreciation.

The surplus climbed 4 percent to $25.3 billion from a year earlier, the first gain in four months, customs bureau figures showed. Factory-gate prices increased 10 percent, the statistics bureau said earlier today...

The trade surplus and the 26.9 percent increase in exports to $136.7 billion topped the estimates of all 16 economists in a Bloomberg News survey. Overseas shipments grew a revised 17.2 percent in June. Imports increased 33.7 percent in July to $111.4 billion, up from 31 percent.

Chinese stocks slump, US stocks jump

The Olympic Games opened in Beijing yesterday but investors in China must have been in no mood to celebrate. Bloomberg reports:

China's stocks tumbled the most in six weeks on disappointment the government refrained from announcing measures to boost the market ahead of the Olympic Games, opening in Beijing today.

China's CSI 300 Index extended its decline this year to 51 percent amid speculation the opening ceremony may be disrupted by security threats. Citic Securities Co., the brokerage unit of the country's biggest investment company, declined after the value of shares traded on China's two principal exchanges slumped yesterday to the lowest level since December 2006...

The CSI 300 Index dropped 128.98, or 4.7 percent, to 2,591.46 at the close, the biggest slump since June 27. The gauge closed at its lowest level since March 7, 2007.

The index fell 6.8 percent this week, the worst drop since the five days to June 13. Central bank efforts to cool inflation have deflated a stocks boom that drove the gauge up sevenfold in the two years through 2007 and drew record investors.

However, stocks in the US went sharply in the opposite direction. From Bloomberg:

U.S. stocks rose, sending the Standard & Poor's 500 Index to the largest weekly gain since April, as retailers, manufacturers and transportation companies rallied on speculation lower commodity prices will boost profits...

The S&P 500 added 30.25 points, or 2.4 percent, to 1,296.32, posting the first back-to-back weekly advance since May. The Dow Jones Industrial Average rose 302.89, or 2.7 percent, to 11,734.32. The Nasdaq Composite Index climbed 58.37, or 2.5 percent, to 2,414.10. Almost four stocks gained for each that fell on the New York Stock Exchange.

A fall in oil prices helped.

Crude oil dropped 4 percent to $115.20 a barrel in New York, completing the fourth decline in five weeks. The national average pump price of regular gasoline, which hit a record $4.114 a gallon on July 17, fell to $3.836 yesterday, the lowest since May 21, according to the American Automobile Association.

The US dollar also saw a nice rally. Reuters reports:

The dollar rallied on Friday, posting its biggest one-day gain versus the euro in 7-1/2 years as the market repriced interest rate views amid signs the U.S. slowdown was spilling over to the global economy.

The greenback traded below $1.50 for the first time since February, with oil prices tumbling below $115 per barrel, adding to the euphoria.

The OECD's composite leading indicators for June suggest that the economic slowdown is indeed spreading.

The US economy has at least managed to sustain productivity growth into the second quarter. Bloomberg reports:

Worker productivity in the U.S. grew in the second quarter as employers trimmed payrolls to weather the economic slump.

Productivity, a measure of employee output per hour, rose at a 2.2 percent annual rate, the Labor Department said today in Washington. The gain, which follows a 2.6 percent increase in the previous three months, was less than anticipated. Labor costs climbed at a 1.3 percent pace, also less than forecast.

ECB and BoE leave rates unchanged

The ECB left interest rates unchanged yesterday. Reuters reports:

The European Central Bank left interest rates unchanged on Thursday and insisted inflation was still its key fear even though risks to growth were taking hold, prompting markets to scrap bets on rates rising again this year.

ECB President Jean-Claude Trichet said growth in mid-2008 would be substantially weaker than at the start of the year and the central bank had only partially anticipated the scope of the slowdown.

Yesterday's European economic data weren't too bad, though, with both German and Italian industrial production rebounding somewhat in June and German exports that month rising by the most since September 2006.

Elsewhere in Europe, the BoE also left interest rates unchanged yesterday.

In the US, the economic data were mixed. Reuters reports:

Initial claims for state unemployment benefits rose 7,000 last week to 455,000, the highest in six years, the Labor Department said. But it said a new federal program to extend benefits was partly to blame for the elevated level...

Wal-Mart said sales at U.S. stores open at least a year rose 3 percent, shy of Wall Street expectations of a 3.4 percent gain. Other retailers also reported disappointing sales...

The 5.3 percent rise in the [pending home sales] index brought it to 89.0, its highest since October.

But it's getting difficult to deny the weakening trend in Japan. From Bloomberg:

Japan's government said the world's second-largest economy is "weakening" for the first time since May 2001, when the country was in a recession.

"The economy has been weakening recently," the Cabinet Office said in a statement in Tokyo today, downgrading its monthly assessment for August...

Machinery orders, an indicator of capital spending in three to six months, fell 2.6 percent in June from May, the Cabinet Office said today. Orders rose 0.6 percent in the second quarter.

Japanese, UK economies deteriorating

Japan may have entered a recession. From Reuters:

Japan's longest post-war economic expansion may be over, government figures showed on Wednesday, as an index of indicators including industrial output and corporate profits sank in June...

The Cabinet Office said the economy was "deteriorating", adding that this was a provisional judgment that the economy is likely in a recession...

The index of coincident economic indicators fell 1.6 points to a preliminary 101.7 in June, the government said...

The index of leading economic indicators fell 1.7 points to a preliminary 91.2 in June from 92.9 in May.

Reuters reported yesterday that it is not much better in the UK.

The economy grew at its weakest pace in more than three years in the three months to July -- just 0.1 percent, the National Institute of Economic and Social Research said...

The consumer mood soured last month at its sharpest rate on record to a series low, according to the Nationwide building society which has been tracking consumer confidence since 2004.

Car registrations slumped 13 percent on the year last month, the biggest fall since late-2006, according to industry data.

And the number of Britons finding permanent jobs fell at its fastest rate since the aftermath of the 9/11 attacks in 2001, the Recruitment and Employment Confederation/KPMG said...

The British Retail Consortium said on Wednesday food prices in July were up some 9.5 percent on the year.

And we learnt from Bloomberg yesterday that German factory orders fell for a seventh month in June.

Orders, adjusted for seasonal swings and inflation, declined 2.9 percent from May, the Economy Ministry in Berlin said today. That's the biggest drop since July 2007. Economists expected a gain of 0.4 percent, the median of 39 forecasts in a Bloomberg News survey showed. Orders fell 6.1 percent from a year earlier.

Fed keeps rates unchanged amid weak economic data

The Federal Reserve left its benchmark interest rate at 2 percent yesterday, hardly surprising in view of continuing weak economic data. From Bloomberg:

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 49.5, from 48.2 in June, the Tempe, Arizona- based group said today. The reading was higher than forecast, though still less than 50, the dividing line between growth and contraction.

But if anything, the economy looks gloomier in Europe. From Reuters/Guardian:

The euro zone PMI for services companies, which range from banks to cafes, fell to 48.3 in July from 49.1 in June, unrevised from the flash estimate and well below the 50.0 mark that separates growth from contraction...

European Union statistics office Eurostat meanwhile said that the euro zone's retail sales declined 3.1 percent yearly, the biggest annual fall since measurements started in 1996 and worse than expected. The figure fell 0.6 percent month-on-month.

It is a similar story in the UK, as reported by Reuters:

The closely-watched Chartered Institute of Purchasing and Supply/Markit PMI index for the services sector, which makes up about three quarters of the economy, ticked higher to 47.4 last month from a seven-year low of 47.1 in June.

But that was the third consecutive reading below the 50 mark that divides expansion from contraction. Business confidence fell to its lowest since the CIPS survey began and employers made hefty cuts to their workforce...

The Office for National Statistics said factory output unexpectedly fell 0.5 percent on the month, the fourth month of declines and the first time it has fallen consistently for that length of time since 2001.

The economy expanded 0.2 percent in the second quarter of this year, according to preliminary ONS data, but statisticians said June's industrial output figures were "a downward drag" and would shave about 0.06 percentage point off the initial reading.

Equity investors were unperturbed, though, with US stocks rallying the most since April and European stocks rising the most in two weeks yesterday.

Inflation bites the US consumer

It looks like the US consumer is struggling in the face of inflation. From Bloomberg:

The biggest increase in prices in almost three years eroded consumers' buying power, reinforcing speculation the Federal Reserve won't raise interest rates in the face of faster inflation and slow growth.

Consumer inflation in June climbed 0.8 percent, the most since September 2005, the Commerce Department said today in Washington. Spending increased 0.6 percent, more than forecast, compared with a gain of 0.8 percent the prior month...

The Fed's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent, more than economists forecast...

Adjusted for inflation, spending decreased 0.2 percent after rising 0.3 percent in May.

Inflation also made itself felt in the factory orders data.

A separate Commerce Department showed factory orders in the U.S. increased more than forecast in June, propelled by gains in petroleum and chemicals that reflected soaring prices. The 1.7 percent gain in bookings to $457.6 billion was the biggest jump this year, the report showed.

And inflation also showed up in eurozone producer prices. Bloomberg reports:

European producer prices rose the most in at least 18 years in June on soaring energy costs, sharpening the European Central Bank's dilemma over how to balance faster inflation and slowing economic growth.

The 8 percent increase from a year ago in factory prices in the 15 nations that use the euro was the biggest since the series began in 1990 and followed a 7.1 percent gain in May, the European Union statistics office in Luxembourg said today. Economists expected a 7.9 percent increase, according to the median of 27 forecasts in a Bloomberg News survey.

However, a peak in inflation may be in sight. From Bloomberg yesterday:

Plunging prices for cocoa, natural gas and sugar sent the Reuters/Jefferies CRB Index of 19 commodities to its biggest one-day decline since March.

The CRB index fell 3.4 percent to 401.98, which marks the largest slide since March 19. The gauge dropped to the lowest level since May 2 today, as did the UBS-Bloomberg Constant Maturity Commodity Index...

Crude oil lost as much as 4.5 percent to $119.50 a barrel on the Nymex, the first drop below $120 since May, amid speculation that Tropical Storm Eduoard won't cause disruption to most offshore oil facilities as it approaches the coast of Texas.

Stock markets hold up but economic slowdown spreading

Last week proved to be a volatile week for stock markets as investors grappled with increasing signs of a spreading global economic slowdown.

In the United States, the Standard & Poor’s 500 ended the week at 1260.31, up 0.2 percent over the week. However, apart from Friday, when the index fell 0.6 percent, every trading day saw the index move by more than one percent.

European markets ended the week down, with the Dow Jones Stoxx 600 losing 0.5 percent to finish at 280.24. On a daily-close basis, though, the index was less volatile than the S&P 500.

Asian stocks performed even less well, the MSCI Asia Pacific Index falling 1.8 percent to 130.63.

On the whole, though, stock markets did not fare too badly despite the disastrous start to the week in the US. On Monday, the S&P 500 had fallen by 1.9 percent. That had left the index just 20 points above its 2008 low. However, the recovery over the rest of the week gave the index back much of the gains it had made in the past two weeks and leaves it still hovering around its 20-day moving average.

Based on its resilience last week, it appears to me that stocks are likely to continue to hold up relatively well over the next few weeks. This, though, may mean nothing more than the S&P moving sideways, as it did in December last year and February this year.

Stock markets in Europe and Asia are likely to continue to take their cues from the US.

Meanwhile, economic data out last week show that the US economy is flirting with recession but may not have fallen into one. Gross domestic product increased at a 1.9 percent annualised rate in the second quarter. Among third quarter data, the Institute for Supply Management’s manufacturing index dipped to 50.0 in July from 50.2 in June; this level is usually associated with continued, albeit low, economic growth.

Nevertheless, the US economy clearly remains weak. It lost another 51,000 jobs in July, the seventh straight month of job losses, and the unemployment rate rose to 5.7 percent, the highest level in more than four years. Furthermore, the Economic Cycle Research Institute’s Weekly Leading Index fell to 128.1 in the week to 25 July from 129.5 in the previous period while its annualised growth rate fell to minus 7.6 percent from minus 6.9 percent, providing no sign of an economic upturn.

Perhaps more ominous is the fact that the rest of the global economy is clearly starting to slow as well.

In Europe, the European Commission’s economic sentiment indicator for the euro area fell 5.3 points to 89.5 in July, its lowest level since March 2003, from 94.8 in June. This was the largest month-on-month decline since October 2001. Also, the eurozone manufacturing purchasing managers’ index (PMI) fell to 47.4 in July from 49.2 in June.

In Asia, Japan’s industrial production fell 2.0 percent in June and has fallen over the past two quarters. Japan’s manufacturing PMI edged up to 47.0 in July from 46.5 in June but remained below 50, indicating continued contraction in manufacturing activity.

Even China’s manufacturing activity may be contracting. The China Federation of Logistics and Purchasing’s PMI fell to 48.4 in July from 52.0 in June. Another PMI released by CLSA, though, registered 53.3, unchanged from June.

In any case, decoupling of economies from the US slowdown is looking increasingly like an unlikely prospect.

US economy weaker than expected, eurozone inflation accelerates

The US economy is performing worse than expected. Bloomberg reports:

Gross domestic product increased at a 1.9 percent annualized rate, the Commerce Department said in Washington, compared with the median projection of 2.3 percent in a Bloomberg News survey...

Annual benchmark revisions showed consumer spending slowed more than previously estimated and the housing slump worsened. The economy shrank 0.2 percent in the fourth quarter last year, compared with a previously reported 0.6 percent gain.

First-quarter figures were also revised down to show a 0.9 pace of growth compared with a prior estimate of 1 percent.

But the latest data still provide room for debate on the direction of the economy.

Exports may have also spurred a gain in the National Association of Purchasing Management-Chicago's business activity index. The group said today its measure increased to 50.8 this month from 49.6 in June. Fifty is the dividing line between growth and contraction...

Initial claims for unemployment insurance jumped by 44,000 to 448,000, the Labor Department said today. The department tomorrow may say payrolls declined by 75,000 in July, bringing total job losses so far this year to over 500,000.

Meanwhile, though, Europe is still struggling with inflation, although unemployment is also starting to tick up. Again from Bloomberg:

Inflation in Europe accelerated to the fastest pace in more than 16 years in July, restricting the European Central Bank's room to bolster the economy even as unemployment starts to increase.

The inflation rate for the 15-nation euro region rose to 4.1 percent from 4 percent in June, the European Union statistics office in Luxembourg said today. The rate, the highest since April 1992, matched the median estimate of 36 economists in a Bloomberg News survey. A separate report showed unemployment was 7.3 percent in June, exceeding the 7.2 percent median forecast.