DPJ wins election in Japan

Japan has a new government. AFP/CNA reports:

Japanese voters swept to power an untested centre-left party Sunday in an electoral avalanche that ended more than half a century of almost unbroken conservative rule, according to media projections.

The opposition Democratic Party of Japan (DPJ), led by Yukio Hatoyama, stormed home with more than 300 seats in the 480-seat lower house of parliament.

This comes at a time when the Japanese economy is returning to growth. Bloomberg reports today that Japan’s industrial output advanced for a fifth month in July.

Japanese manufacturers increased output in July at the slowest pace in four months as effects of the global stimulus and inventory restocking began to fade.

Production climbed 1.9 percent from June, when it rose 2.3 percent, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg News expected a 1.4 percent gain.

Despite the slower pace of growth, manufacturing is likely to continue expanding as the Nomura/JMMA Japan manufacturing purchasing managers index rose again to 53.6 in August from 50.4 in July.

Japanese unemployment at record high

The end of the week did not start on a positive note as far as economic data were concerned. AFP/CNA reports the latest data on the Japanese economy.

Japan's unemployment rate is at a record high, data showed Friday, raising doubts about an economic recovery and piling pressure on embattled Prime Minister Taro Aso two days ahead of an election.

The jobless rate rose to a worse than expected 5.7 per cent in July, up from 5.4 per cent in June, the government said...

Consumer spending remains weak in Japan, leaving the economy highly dependent on exports. Household spending fell 2.0 per cent in July from a year earlier, sharply reversing a 0.2 per cent rise in June, data showed...

Deflation also deepened last month with core consumer prices dropping 2.2 per cent a year earlier - the fastest pace on record.

Core prices, which exclude those of volatile fresh food, fell for a fifth straight month after a 1.7 per cent decline in June, the government said.

However, the data out of Europe were a bit better.

Reuters reports a positive revision to UK GDP.

The economy shrank by a smaller-than-expected 0.7 percent in the second quarter of this year after official statisticians upgraded their estimates of industrial output, keeping alive hopes of a near-term recovery.

The Office for National Statistics said on Friday that the revisions reduced the annual drop in economic output to 5.5 percent from 5.6 percent -- though this is still the sharpest year-on-year fall since records began in 1955...

Economists had not expected a revision to the second-quarter GDP data, instead predicting that the ONS would stick with its 0.8 percent initial estimate for second-quarter contraction.

In the euro area, confidence about the economy is rising. Bloomberg reports:

European confidence in the economic outlook increased twice as much as economists forecast in August, adding to signs the region is emerging from the deepest recession in more than six decades.

An index of executive and consumer sentiment in the 16 nations that use the euro rose to 80.6, the highest since October, from 76 in July, the European Commission in Brussels said today. Economists had predicted a two-point increase to 78, according to the median of 29 estimates in a Bloomberg survey.

Still, much depends on what happens in the US, where the economic indicators came out mixed on Friday. From Bloomberg:

Consumer spending in the U.S. rose in July as Americans jammed auto showrooms to take advantage of the “cash for clunkers” program while avoiding other purchases.

The 0.2 percent gain in spending was in line with forecasts and followed a 0.6 percent increase in June, the Commerce Department said today in Washington. Excluding cars, purchases were flat...

The Reuters/University of Michigan final index of consumer sentiment dipped to 65.7, better than forecast, from 66 in July. A preliminary reading for August was 63.2.

More signs of economic recovery

Contrary to expectations, there was no downward revision to US GDP growth in the second quarter. Bloomberg reports:

The U.S. economy took a first step toward recovering from the worst recession since the 1930s in the second quarter as companies reduced inventories, spending started to climb and profits grew.

Gross domestic product shrank at a 1 percent annual rate from April to June, less than the 1.5 percent decline projected by economists in a Bloomberg News survey, a Commerce Department report showed today in Washington...

Corporate profits, not included in the advance GDP estimate released in July, rose 5.7 percent from the first three months of the year, the biggest increase since the first quarter of 2005.

Growth may have turned positive since, with jobless claims falling, albeit slowly.

A separate report today showed 570,000 workers filed claims for unemployment benefits last week, down from 580,000 the previous week, the Labor Department said in Washington. While off the peak of 674,000 applications reached in the end of March, the figures compare with an average of 350,000 applications filed during the expansion that ended in December 2007.

As economic recovery gathers steam worldwide, the threat of deflation has been receding.

In Germany, consumers prices are no longer falling. Bloomberg reports:

Germany’s inflation rate unexpectedly rose to zero in August as higher clothing and holiday travel prices offset cheaper energy and food.

Consumer prices, calculated using a harmonized European Union method, were unchanged from a year earlier after dropping an annual 0.7 percent in July, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.4 percent decline, a Bloomberg News survey showed. On a non-harmonized basis, prices were also unchanged after falling 0.5 percent in July, the first annual decline in more than 22 years.

... In the month, consumer prices rose 0.4 percent, driven by rising fuel and heating costs.

This comes as German consumer confidence rises to a 15-month high, the GfK sentiment index increasing to 3.7 for September from 3.4 in August.

Meanwhile, asset prices are rising again in the UK. From Reuters:

British house prices rose for the fourth month running and at their fastest monthly rate in 2-1/2 years in August, the Nationwide Building Society said on Thursday, in a further sign the housing market is picking up.

The mortgage lender said house prices rose 1.6 percent this month after a 1.4 percent rise in July, taking the annual rate of decline down to 2.7 percent -- its smallest since April 2008 -- from 6.2 percent.

Another rush of positive economic data

Wednesday's economic reports support the view of an ongoing global economic recovery.

Bloomberg reports the latest data from the US.

Purchases of new homes in the U.S. jumped more than forecast and demand for long-lasting goods such as autos and computers climbed, reinforcing signs the economy is rebounding from the worst recession since the 1930s.

Home sales increased 9.6 percent in July, the most in four years, to a 433,000 annual pace, figures from the Commerce Department showed today in Washington. Another report from the department indicated bookings for durable goods climbed 4.9 percent, also exceeding forecasts and the most since July 2007.

The economic picture is also brightening in Germany. From Bloomberg:

German business confidence rose for a fifth month in August, suggesting Europe’s largest economy will gather strength after shaking off its worst recession since World War II.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 90.5 from 87.4 in July. That was the highest since September last year. Economists expected a gain to 89, the median of 41 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Among the major economies, Japan provided the exception to the generally positive economic picture. Again from Bloomberg:

Japan’s exports fell for a tenth straight month in July as demand from all of the nation’s major markets deteriorated.

Shipments abroad tumbled 36.5 percent from a year earlier, steeper than June’s 35.7 percent drop, the Finance Ministry said today in Tokyo. The median estimate of 23 economists surveyed by Bloomberg News was for a 38.4 percent decrease.

But even this news isn't that bad.

By volume, exports rose 2.4 percent in July from June, a fifth monthly increase, the Bank of Japan said today. The data correlate closely with the export component of GDP, according to London-based Capital Economics Ltd.

Other, smaller economies provided clearer evidence that Asia's economy is recovering, with Malaysia posting a smaller 3.9 percent year-on-year GDP contraction in the second quarter and Singapore's manufacturing output soaring 12.4 percent in July.

US consumer confidence, home prices rise

US economic indicators on Tuesday came out good. Bloomberg reports:

U.S. consumer confidence climbed more than forecast and national home prices increased for the first time in three years, signaling government efforts to right the world’s biggest economy are starting to pay off.

The Conference Board’s confidence index rose to 54.1 in August, the first gain since May, as consumers became less concerned about the outlook for jobs, the New York research group said today. The S&P/Case-Shiller home-price index advanced 2.9 percent in the second quarter from the previous three months, the first increase since 2006 and the biggest in almost four years.

But the US government gave out mixed signals.

The reports underscore why President Barack Obama gave Ben S. Bernanke a vote of confidence today by nominating the head of the Federal Reserve to a second term as chairman. Indications the housing crisis that triggered the worst recession since the 1930s is dissipating boosted stocks even as the White House downgraded growth and deficit forecasts...

The White House Office of Management and Budget today forecast the economy will grow 2 percent in 2010, less than the 3.2 percent expected in May, and the contraction this year will be more than twice as deep as previously anticipated. Unemployment will surge to 10 percent this year and the budget deficit will be $1.5 trillion next year, both higher than the prior estimates, according to the mid-year review.

As the economy returns to growth, will Treasury yields rise?

Although the evidence is now quite strong that the global economy is slowly returning to growth, Treasury yields are unlikely to rise much as long as central banks maintain their current accommodative monetary policies.

Monday brought further evidence that economic activity in the euro area is rebounding. Eurostat reported that industrial new orders in the euro area rose 3.1 percent in June. Excluding ships, railway and aerospace equipment, which tend to be more volatile, industrial new orders grew by 1.9 percent.

Monday also provided further evidence that the United States economy is improving. The Chicago Fed National Activity Index rose to -0.74 in July from -1.82 in June. The three-month moving average rose to -1.69 from -2.18.

Despite the better data on the economy, US stocks were flat on Monday. The Standard & Poor's 500 Index fell 0.05 percent to 1,025.57.

Also downplaying the better economic data were US Treasuries, which rose on Monday. Two-year note yields fell eight basis points to 1.02 percent while 10-year note yields fell nine basis points to 3.48 percent.

Indeed, Macro Man noted in a blog post yesterday that bond yields have stayed subdued recently and are closer to their three-month lows than their three month highs. In contrast, the S&P 500 "is now at its highest level in ten months". Macro Man noted that since the onset of the crisis a couple of years ago, there had been "a pretty strong positive correlation between stock prices and bond yields", so the recent divergence represents a break from the previous pattern.

Macro Man acknowledged that one mitigating factor for the valuation of Treasuries has been the ongoing decline of LIBOR but still thinks that fair value for US 10-year yields is "well north of current levels".

However, I would be hesitant about making the same conclusion.

Today, we are witnessing an incipient economic recovery while monetary policy remains highly accommodative. Both of these conditions tend to drive stock prices up, which explains the strong performance of the S&P 500 recently. However, while an economic recovery also tends to drive bond yields up, easy monetary policy tends to keep yields down.

Therefore, considering the current economic conditions, it is probably too much to expect a tight correlation between stock prices and bond yields to be maintained throughout.

In fact, once you factor in the low federal funds rate set by the Federal Reserve, Treasury yields already look pretty high.

The accompanying chart shows how, over each of the years from 1955 to 2008, the change in the 10-year Treasury yield (shown on the vertical axis) has varied with the difference between the change in the federal funds rate and the spread between the 10-year yield and the federal funds rate at the beginning of each year (shown on the horizontal axis). The 12-month rise in the 10-year yield up to July 2009 is represented by the red square.

As can be seen from the chart, the 10-year yield has actually declined less over the past 12 months than would usually be the case based on changes in the federal funds rate and spreads alone. In other words, the market is apparently demanding a higher yield than it usually would, suggesting that it is already discounting other factors, including possibly an economic recovery or an increase in the supply of Treasuries. Whether these other factors are fully discounted is, of course, another matter.

The historical data represented in the chart show that the spread between the 10-year yield and the federal funds rate has a significant bearing on the future course of the former. Currently, the spread is over 300 basis points. Historically, such a high spread puts downward pressure on the 10-year yield.

The downward pressure on the yield would be mitigated if the market expects the federal funds rate to be raised, as it usually would in the face of an economic recovery. However, Federal Reserve officials, including Chairman Ben Bernanke, have remained cautious about the prospects of an economic recovery and mostly reiterated the view that the federal funds rate will remain low for some time to come.

This means that the federal funds rate is likely to continue to weigh on Treasury yields and limit the scope for the latter to rise in the coming months.

Having said that, Monday also saw another development -- one that could potentially be significant in determining the course of government bond yields over the coming quarters. The Bank of Israel announced that it is raising its interest rate for September by 0.25 percentage points to 0.75 percent. It is the first central bank to raise its interest rate since the global economic recession started showing signs of easing.

As long as the big central banks like the Federal Reserve and the European Central Bank maintain their current accommodative monetary stances, the BOI's action will have no significant impact on the rest of the world and global interest rates will remain low.

Still, the BOI's rate hike is the clearest sign yet that the trend of ever-falling central bank rates may have finally come to an end.

US existing home sales jump, eurozone PMI hits 50

Friday's economic reports show that the global economy remains on track for recovery.

In the US, Bloomberg reports that existing home sales jumped to a two-year high in July.

Purchases climbed 7.2 percent to a 5.24 million annual rate, the most since August 2007, the National Association of Realtors said today in Washington. The gain was the biggest since records began in 1999. The median price fell 15 percent.

In the euro region, Bloomberg reports that several purchasing managers' indices have crossed the 50 mark.

German services and French manufacturing unexpectedly expanded in August, signaling a pick- up in domestic demand in Europe’s largest economies is helping lift the region out of the worst recession in six decades.

An index of the German services industry rose to 54.1 this month from 48.1 in July, Markit Economics said today, citing its purchasing managers’ survey. The French manufacturing index increased to 50.2 in August from 48.1 in the prior month. A reading above 50 indicates expansion. Economists forecast both indexes would remain below 50, the median estimates in Bloomberg surveys showed. A composite index of both industries for the 16 nations sharing the euro increased to 50 from 47 in July.

Despite the consistently positive data flow recently, officials at the central bankers’ symposium in Jackson Hole maintained a cautious tone. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet said the world economy is pulling out of its deepest slump since the 1930s while cautioning that threats to a recovery remain.

“Prospects for a return to growth in the near term appear good,” while “critical challenges remain,” including possible further losses for financial firms, Bernanke said today. Trichet said the presence of “green shoots” isn’t enough for him to declare the recovery sustainable and that policy makers “have an enormous amount of work to do.”

Chinese, US stock markets rise

Chinese stocks rebounded strongly on Thursday. Bloomberg reports:

China’s stocks rose the most since March, erasing losses from yesterday’s rout, after better-than- estimated earnings at Bank of Communications Co. revived confidence that the economy is recovering...

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, climbed 126, or 4.5 percent, to 2,911.58 at the close, the most since March 4. The gauge fell 4.3 percent yesterday, briefly dipping more than 20 percent below its Aug. 4 high, the threshold for a bear market.

In the absence of nervousness from across the Pacific, US markets also had a good day. Bloomberg reports:

U.S. stocks rose for a third day as American International Group Inc. said it expects to repay the government and data on manufacturing and economic indicators added to evidence the recession may be ending. Treasuries gained as the dollar and oil fell...

The S&P 500 rose 1.1 percent to 1,007.37 at 4:05 p.m. in New York. The Dow Jones Industrial Average jumped 70.89 points, or 0.8 percent, to 9,350.05. Four stocks advanced for each that fell on the New York Stock Exchange.

Better data on the US economy also helped markets. Again from Bloomberg:

Manufacturing in the Philadelphia region unexpectedly expanded in August for the first time in almost a year as factories help pull the economy out of its worst recession in seven decades.

The Federal Reserve Bank of Philadelphia’s general economic index climbed to 4.2 from minus 7.5 in July, the bank said today. Positive readings signal an expansion...

The Conference Board’s gauge of the economic outlook for the next three to six months rose 0.6 percent after a revised 0.8 percent increase in June, the New York-based group said. The July gain marks the longest series of increases since 2004.

New applications for unemployment benefits rose to 576,000 in the week ended Aug. 15 from a revised 561,000 the week before, the Labor Department said. The number of people collecting unemployment benefits the week earlier was little changed at 6.24 million.

Chinese stocks fall again

Chinese stocks tumbled again on Wednesday. AFP/CNA reports:

Chinese shares tumbled 4.30 percent on Wednesday as resources companies plunged amid concerns over declining international commodity prices, dealers said.

The Shanghai Composite Index, which covers A and B shares, was down 125.30 points at 2,785.58 on turnover of 122.3 billion yuan (17.9 billion US dollars)...

The index is now 20 percent off this year's highest intraday level of 3,478.01, which it hit on August 4, but has nevertheless gained about 53 percent since the start of 2009.

This time, however, stock markets in Europe and the US managed to hold out well, the latter even managing a gain. From Bloomberg:

U.S. stocks rose for a second day as energy shares climbed on a rebound in oil and Merck & Co. led drugmakers higher after a judge upheld a patent, helping the market erase an early drop triggered by a slide in China shares...

The Standard & Poor’s 500 Index increased 0.7 percent to 996.46 at 4:10 p.m. in New York. The Dow jumped 61.22 points, or 0.7 percent, to 9,279.16. Two stocks rose for each that fell on the New York Stock Exchange. Some 7.9 billion shares changed hands on all U.S. exchanges, 16 percent below the three-month daily average...

The Dow Jones Stoxx 600 Index of European shares retreated 0.3 percent today. A 43 percent rebound since March 9 has driven the regional measure’s valuation to about 40 times the profits of its companies, near the most expensive level since 2003, data compiled by Bloomberg show.

Merrill Lynch thinks that the China stock market will also rebound. Again from Bloomberg:

China’s stocks are set to rebound from this month’s plunge on prospects earnings will beat estimates and policy makers will maintain bank lending, Bank of America Corp.’s Merrill Lynch unit said...

“I don’t think this is a turning point,” David Cui, China strategist at Merrill Lynch, said in a phone interview yesterday. “My sense is that earnings will surprise on the upside and we’ll see a round of earnings upgrades. The government’s monetary policy also hasn’t changed.”

Cui’s view is shared by U.S. fund managers Uri Landesman of ING Investment Management Inc. and Sentinel Asset Management’s Kate Schapiro, who say the stock selloff won’t prompt them to cut their investments in the world’s third-largest economy.

IMF says recovery has started

The IMF thinks the global economy has begun to recover. Bloomberg reports:

The global economy is beginning to recover from the worst recession since World War II, one that has left “deep scars” likely to affect consumers and businesses for years, said Olivier Blanchard, the chief economist of the International Monetary Fund.

“The recovery has started,” Blanchard said in a paper the Washington-based lender released today. “The crisis has left deep scars, which will affect both supply and demand for many years to come.”

German investors probably agree that a recovery has started. From Bloomberg:

German investor confidence jumped to its highest level in more than three years in August after government stimulus and rising exports pulled Europe’s largest economy out of recession.

The ZEW Center for European Economic Research said its index of investor and analyst expectations rose to 56.1 from 39.5 in July. Economists predicted a gain to 45, according to the median of 35 forecasts in a Bloomberg News survey. That’s the highest since April 2006. The survey aims to predict economic developments six months in advance.

However, as if to emphasise the IMF's caveats about the recovery, US economic data on Tuesday were mixed. From Bloomberg:

American builders broke ground on more single-family homes in July for a fifth straight month as the real-estate industry stabilized further.

Work began on single-family dwellings at a 490,000 annual pace last month, up 1.7 percent from June and the most since October, the Commerce Department reported today in Washington. Total housing starts unexpectedly fell, depressed by a 13 percent decrease in multifamily units, including condominiums and apartment buildings...

Total housing starts declined 1 percent in July to an annual rate of 581,000, the first drop in three months, from a 587,000 pace a month earlier, the Commerce Department report showed...

Building permits, a sign of future construction, fell 1.8 percent in July to a 560,000 annual pace from 570,000. Permits for single-family houses climbed 5.8 percent last month, while those for multifamily units dropped 26 percent.

Separately, a Labor Department report today showed wholesale prices fell 0.9 percent, exceeding the median forecast of economists surveyed by Bloomberg, as energy costs receded. Compared with a year earlier, producer prices were down 6.8 percent, the most since records began in 1948.

As US producer price data show, deflation remains a concern despite the incipient recovery, and despite the fact that in the UK, the inflation rate remains barely below the central bank's target. From Reuters:

Inflation unexpectedly held steady in July, official data showed Tuesday, but economists still expect big falls in the annual rate this year and monetary policy to stay loose for some time to come.

The Office for National Statistics said consumer prices were unchanged on the month in July, keeping the annual rate at 1.8 percent. Analysts had predicted a further easing below the Bank of England's 2 percent target to 1.5 percent.

Economic data better, markets tumble

Following the news of Japan's economy returning to growth, US economic data were also relatively positive on Monday, as Bloomberg reports:

The Federal Reserve Bank of New York’s general economic index climbed to 12.1, higher than forecast and the first expansion since April 2008, the bank said today. Readings above zero for the Empire State index signal manufacturing is growing...

Other reports today showed foreign investors renewed purchases of U.S. financial assets in June, builder sentiment climbed this month to the highest level in more than a year, and banks tightened lending rules in the second quarter...

The National Association of Home Builders/Wells Fargo confidence index climbed to 18, matching the median forecast by economists and reaching the highest level since June 2008, the Washington-based group said. A reading below 50 means most respondents view conditions as poor.

Banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed today. The report suggests that lenders and borrowers are wary of taking on more risk until the U.S. economy shows clear signs of growth.

However, the generally better economic data did not stop the US stock market from following the rest of the world down. Again from Bloomberg:

Stocks tumbled around the world, led by China, while the yen, dollar and Treasuries rose as investors speculated that a rally in riskier assets has outpaced prospects for economic growth. Energy and commodity prices also slid.

The MSCI World Index of 23 developed nations sank 2.8 percent at 4:12 p.m. in New York, the biggest retreat since April. The Standard & Poor’s 500 Index lost 2.4 percent to 979.3 after China’s Shanghai Composite Index slumped 5.8 percent, the most since November. The yen strengthened against all 16 of the most-traded currencies tracked by Bloomberg, while the dollar advanced against every one except the yen. The yield on the benchmark 10-year Treasury note dropped to its lowest level in almost a month.

Global recession may be coming to an end

The global economy appears to be slowly returning to growth.

Today, Japan's Cabinet Office reported that the country's gross domestic product grew by 0.9 percent in the second quarter, its first quarter of positive growth after four consecutive quarters of decline. The economy had contracted by 3.1 percent in the first quarter.

Reports in the previous few weeks had shown that most of the other major developed economies continued to shrink in the second quarter but the pace of contraction moderated from that in the first quarter.

GDP shrank 0.1 percent in the euro area in the second quarter after contracting by 2.5 percent in the first quarter. Germany, the largest economy in Europe, even managed to expand by 0.3 percent in the first quarter. Although small, this was a sharp turnaround from the previous quarter's 3.5 percent contraction.

In the United States, GDP shrank 0.3 percent in the second quarter after contracting by 1.6 percent in the first quarter.

Apparently, the economies that saw the biggest contraction in prior quarters are now seeing the strongest bounce.


Fortunately, leading indicators show that the major developed economies are likely to continue improving in the coming months.

For example, on 7 August, the Organisation for Economic Co-operation and Development reported that its composite leading indicators for June 2009 showed signs of improvement in the economic outlook of OECD economies, with stronger recovery signs in several economies including Germany and the US.


And on 14 August, a report from the Economic Cycle Research Institute indicated that the US economy is likely to experience a strong recovery. The ECRI's weekly leading index rose to a 47-week high of 123.9 in the week to 7 August from 121.7 the prior week. The index's annualized growth rate jumped to a 26-year high of 13.4 percent from the prior week's 10.4 percent.

So it is looking increasingly likely that the global recession is coming to an end.

Mixed economic data, no inflation

There were more signs on Friday that the Japanese economy is turning around. From Bloomberg:

Japan’s demand for services rose unexpectedly in June as government stimulus measures spurred consumer spending, another sign that the economy is emerging from a recession.

The tertiary index, which captures 63 percent of the economy, climbed 0.1 percent from May, when it slid a revised 0.3 percent, the Trade Ministry said today in Tokyo. The median estimate of surveyed was for a 0.3 percent drop.

However, US economic data were more mixed than usual. From Reuters:

The Reuters/University of Michigan Surveys of Consumers said on Friday its preliminary reading of the index of confidence fell to 63.2 from 66.0 in July, well below market expectations for a reading of 68.5...

Separately, industrial output rose 0.5 percent, beating market expectations for 0.3 percent advance, after a 0.4 percent contraction in June. Aside from a hurricane-related rebound in October 2008, it was the first monthly gain since December 2007, the Fed said...

In another report, the Labor Department said U.S. consumer prices were flat in July and dropped over the past 12 months at the fastest rate since 1950...

Stripping out volatile energy and food prices, the closely watched core measure of consumer inflation rose 0.1 percent in July after increasing 0.2 percent in June.

Meanwhile, consumer prices in the euro area continued to fall in July. Bloomberg reports:

European consumer prices dropped more than initially estimated in July as energy costs decreased and rising unemployment prompted households to cut spending.

Prices in the 16-member euro region fell by a record 0.7 percent from the year-earlier month after declining 0.1 percent in June, the European Union statistics office in Luxembourg said today. The decline exceeded the 0.6 percent estimate published on July 31 and the median forecast of 30 economists surveyed by Bloomberg News. In the month, prices declined 0.7 percent.

Still, with economies gradually moving out of recession -- the latest reported case being Hong Kong -- more central banks are talking about raising interest rates. Bloomberg on the RBA's latest musings:

The Reserve Bank of Australia will have to raise the benchmark interest rate from its “emergency” level at some stage as the economy rebounds from the global recession, bank Governor Glenn Stevens said.

“There will come a time when the exceptional monetary stimulus in place at present will no longer be needed,” Stevens said in his half-yearly testimony to parliament’s economics committee in Sydney today. “It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels.”

US retail sales fall, eurozone economy shrinks less than expected

The US economy may be stabilising but retail sales in July suggest that the recovery hasn't gained much steam yet. From Bloomberg:

Sales at U.S. retailers unexpectedly fell in July, raising the risk that a lack of consumer spending will temper a recovery from the worst recession since the 1930s.

Purchases decreased 0.1 percent, the first drop in three months, as shrinking demand at department stores such as Macy’s Inc. and Wal-Mart Stores Inc. overshadowed a boost from the cash-for-clunkers automobile incentive program, Commerce Department figures showed today in Washington...

Excluding automobiles, sales fell 0.6 percent, also worse than anticipated and the biggest drop since March...

Excluding autos, gasoline and building materials ... sales dropped 0.2 percent after no change in June...

And while jobless claims are off their peak, they remain high.

The Labor Department said today that 558,000 people filed first-time claims for jobless benefits last week, up from 554,000 the week before.

While US economic data disappointed, Europe provided better-than-expected data. Again from Bloomberg:

The euro-region economy barely contracted in the second quarter as Germany and France unexpectedly returned to growth, suggesting Europe’s worst recession since World War II is coming to an end.

Gross domestic product fell 0.1 percent from the first quarter, when it plunged 2.5 percent, the most since the euro- area data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today. Economists had estimated GDP declined 0.5 percent in the three months through June, the median of 32 forecasts in a Bloomberg survey showed.

Fed phasing out emergency Treasury purchases

With the US economy stabilising and financial markets getting better, the Federal Reserve is getting ready to move out of emergency mode. Reuters reports:

The Federal Reserve said on Wednesday the U.S. economy was showing signs of leveling out two years after the onset of the deepest financial crisis in decades and it moved to phase out one emergency measure.

The U.S. central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period to guide the way to recovery.

The Fed made its clearest statement to date that it sees the recession nearing an end and that shattered financial markets are healing.

"Information since the Federal Open Market Committee met in June suggests economic activity is leveling out," the Fed said, referring to its policy-setting panel. "Conditions in financial markets have improved in recent weeks."

However, the Fed remains cautious.

Still, the Fed renewed its warning that economic activity is likely to stay soft for "a time." Household spending, while stabilizing, is still weak as a result of the grim labor market and tight credit, the Fed said...

The central bank cautiously moved to pull back some of that help for the economy on Wednesday, signaling it would slowly phase out a program to buy $300 billion in longer-term Treasuries by the end of October.

Trade data released on Wednesday provided further evidence of an improving US economy. From Bloomberg:

The U.S. trade deficit widened less than forecast in June, reflecting a second consecutive gain in exports spurred by a pick-up in economies around the world.

The gap increased 4 percent to $27 billion from $26 billion in May, which was the lowest level in almost a decade, Commerce Department figures showed today in Washington. Exports gained 2 percent, helped by stronger demand for goods such as semiconductors and aircraft engines, while imports rose 2.3 percent, led by a higher cost for oil.

Elsewhere in the world, Japan also appears to be climbing out of recession, with industrial production rising 2.3 percent in June.

However, in the euro area, industrial production unexpectedly fell in June. Bloomberg reports:

Output in the 16-nation euro area dropped 0.6 percent from May, led by a 4.2 percent decline in production of durable consumer goods, the European Union’s statistics office in Luxembourg said today. Economists had predicted a gain of 0.3 percent, according to the median of 30 forecasts in a Bloomberg News survey. From a year earlier, June output fell 17 percent.

Japanese and Chinese economies picking up

The Bank of Japan left interest rates unchanged on Tuesday. AFP/CNA reports:

Japan's central bank on Tuesday held its rock-bottom interest rates steady to give the world's number two economy more time to recover from its worst recession in decades.

The Bank of Japan reiterated its view that Japan's economic conditions "have stopped worsening," but cautioned that much uncertainty remains because of the murky outlook for the global economy.

Also unchanged is the Japanese government's assessment of the economy. From Bloomberg:

The Japanese government said the economy is “picking up,” keeping its assessment unchanged after raising it for three consecutive months.

Meanwhile, Japanese household confidence appears to be picking up too. Bloomberg reports:

Japan’s household sentiment rose for a seventh month in July, adding to signs the world’s second- largest economy is edging closer to a recovery.

The confidence index climbed to 39.4 from 37.6 in June, the Cabinet Office said today in Tokyo. It has improved every month since tumbling to a record low of 26.2 in December. A number below 50 means pessimists outnumber optimists.

China's economy appears to be picking up even faster. From Xinhua:

Urban fixed-asset investment rose 32.9 percent year on year in the first seven months. Retail sales, the main measure of consumer spending, rose 15.2 percent in July, following a 15 percent growth in June...

China's... July exports fell 23 percent from a year earlier, but increased 10.4 percent from June. Imports declined 14.9 percent year on year last month, but rose 8.7 percent month on month...

Among other statistics released Tuesday, industrial output climbed 10.8 percent in July from a year earlier, quickening from 10.7 percent in June and 8.9 percent in May. Power generation, an important indicator measuring industrial activities, expanded 4.8 percent in July.

But prices are still falling.

The consumer price index (CPI), a main gauge of inflation, dipped 1.8 percent in July from a year earlier. The producer price index (PPI), which measures inflation at the wholesale level, fell 8.2 percent year on year last month.

New lending in July cooled to 355.9 billion yuan, less than a quarter of the June total of more than 1.5 trillion yuan.

Japan's current account surplus and machinery orders rise

AFP/CNA reports good news for the Japanese economy.

Hopes mounted Monday that Japan's economy is on the mend after its worst recession in decades as the current account surplus showed the first rise in 16 months and machinery orders rebounded.

The surplus in the current account, the broadest measure of trade in goods and services, more than doubled in size in June to 1.15 trillion yen (11.8 billion dollars) from 471.6 billion yen a year earlier, the government said...

Exports increased 14.6 per cent in June from the previous month, narrowing their year-on-year decline to 37 per cent, after a fall of 42.2 per cent in May, the data showed...

There was also good news on core machinery orders, a closely watched indicator of corporate capital spending, which rebounded by a stronger-than-expected 9.7 per cent in June from a record low the previous month...

Even so, core orders are expected to decline 8.6 per cent in the three months to September from the previous quarter, following a drop of 4.9 per cent in April-June, according to the manufacturers' own forecasts.

Meanwhile, Bloomberg reports that confidence is rising among Japanese merchants.

Confidence among Japanese merchants rose to a 22-month high in July, adding to signs that the world’s second-largest economy is heading for a recovery.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 42.4 from 42.2 in June, a seventh monthly increase, the Cabinet Office said today in Tokyo.

US unemployment rate falls

Yet another indication on Friday that the US economy is turning around. Bloomberg reports the latest job numbers.

The pace of U.S. job losses slowed more than forecast last month and the unemployment rate dropped for the first time in more than a year, the clearest signs yet the worst slump since the Great Depression may be ending.

Payrolls fell by 247,000, after a 443,000 loss in June, the Labor Department said today in Washington. The jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent...

Today’s report also showed the average work week expanded to 33.1 hours in July from 33 hours in the prior month. Average weekly hours worked by production workers increased to 39.8 hours from 39.5 hours, while overtime held at 2.9 hours for a second month. That brought the average weekly earnings up to $614.34 from $611.49.

The reactions to the report from economists were largely positive.

BoE in surprise move amid improving global economy

Evidence of global economic recovery continued to build on Thursday.

In Japan, the leading index climbed again in June. Bloomberg reports:

Japan’s broadest indicator of economic health rose at the fastest pace in 29 years, signaling the nation’s deepest postwar recession is easing.

The leading index, a composite of 12 indicators including stock prices and consumer confidence, climbed to 79.8 in June from 76.9 in May, the Cabinet Office said today in Tokyo. It the largest advance since comparable data were made available in January 1980...

Coincident index, a measure of the current state of the economy, rose for a third month to 87.8. The three-month moving- average of the index, which the government uses to make its monthly evaluation, rose to 87 in June, the second monthly increase, the report showed.

In Europe, Italy saw industrial production fall 1.2 percent in June but German factory orders jumped 4.5 percent that month, the most in two years and the fourth successive monthly gain.

However, some central bankers are taking no chances with the recovery. Certainly not the Bank of England. From Reuters:

The Bank of England took a far bigger step than expected to boost the recession-hit economy on Thursday, stunning markets by expanding its quantitative easing plan to 175 billion pounds from 125 billion.

The central bank said Britain's downturn appeared to have been deeper than previously thought and, while the trough in output was near and some recovery was on the way, tight credit conditions would remain a considerable drag.

The European Central Bank appears to be taking a more sanguine stance. From Bloomberg:

European Central Bank President Jean- Claude Trichet indicated the economy may recover sooner than previously anticipated and signaled the bank is unlikely to provide any further stimulus.

“The overall mood today is a little bit better than it was before,” Trichet said at a press conference in Frankfurt after the ECB left its benchmark interest rate at a record low of 1 percent. Rates are “appropriate” and policy makers are “satisfied” with their asset-purchase program and measures to improve the flow of credit, he said.

US services continue to shrink, better data from Europe

After Tuesday's positive report showing a strong 3.6 percent rise in pending home sales, Wednesday's data failed to bring much additional cheer for the US economy. From Bloomberg:

Service industries in the U.S. shrank more than forecast in July, and companies cut another 371,000 jobs, indicating rising unemployment will erode spending.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 46.4 from 47 in June, according to the Tempe, Arizona-based group... ADP Employer Services said companies cut staff last month more than economists anticipated...

A report from the Commerce Department today showed orders placed with factories rose 0.4 percent in June, a third consecutive gain, reflecting increases in the value of petroleum bookings and improving demand for goods such as metals and construction equipment.

However, in Europe, the services activity index continued to climb in July, rising to 45.7 from 44.7 in June.

In the UK, services activity is already expanding, the CIPS/Markit Purchasing Managers' Index rising to 53.2 in July, the highest since February 2008, from 51.6 in June.

In other positive reports from the UK, the Nationwide consumer confidence index rose to 60 in July from an upwardly revised 59 in June while industrial production rose 0.5 percent in June after dropping 0.7 percent in May.

Global manufacturing returning to growth

The outlook for the US economy continues to brighten, with manufacturing activity poised to grow again. Bloomberg reports:

Manufacturing in the U.S. shrank less than forecast as stimulus-induced gains in demand worldwide helped resuscitate factories from the worst slump in three decades.

The Institute for Supply Management’s factory gauge rose to an 11-month high of 48.9 in July, according to the Tempe, Arizona, group. Readings below 50 signal contraction. A report from the Commerce Department showed June building projects climbed 0.3 percent, helped by higher public spending.

The eurozone manufacturing PMI also hit an 11-month high. From Bloomberg:

The European manufacturing industry’s contraction slowed more than initially estimated in July, adding to indications the worst recession in six decades may have bottomed out.

An index of euro-area manufacturing activity rose for a fifth month, increasing to 46.3 from 42.6 in June, Markit Economics said today. The July figure is the highest in 11 months and exceeds the initial estimate of 46 on July 24. The index is based on a survey of purchasing managers by London- based Markit and a reading below 50 indicates a contraction.

Even better, manufacturing has already returned to growth in several major economies.

Reuters reports the latest number from the UK.

Manufacturing activity grew last month for the first time since March 2008, benefiting unexpectedly from the fastest flow of new orders since November 2007, purchasing managers' data showed on Monday.

The headline manufacturing purchasing managers' index rose to 50.8 from an upwardly revised 47.4 in June, the first time the number from the Chartered Institute of Purchasing and Supply and Markit Economics has been above the 50 level that divides contraction from growth since March last year.

Last week, Japan had also reported a return to growth in manufacturing, the Nomura/JMMA Japan manufacturing PMI rising to 50.4 in July from 48.2 in June.

Meanwhile, manufacturing in China has already been growing for a few months. AFP/CNA reports the latest numbers.

The CLSA China Purchasing Managers Index, or PMI, a closely watched indicator in the world's third-largest economy, rose to 52.8 last month, the highest since July 2008, when it stood at 53.3...

Figures published by the China Federation of Logistics and Purchasing on Saturday showed the sector expanded in July for the fifth consecutive month to 53.3, up from 53.2 in June.

The improving national PMIs helped push the global PMI to 50.0 in July, its highest level in 14 months, from 47.0 in June.

Stocks rally, economy could follow

The United States economy may be set to begin recovering soon.

On Friday, the US Commerce Department reported that real gross domestic product shrank at an annualised rate of 1.0 percent in the second quarter, much better than the 6.4 percent rate of contraction in the first quarter. This confirms the view of many economists that the economy has seen the worst of the recession and may be turning around.

The stock market's performance in the past few months supports this view. On Friday, the Standard & Poor's 500 index closed at 987.48. This is 46 percent higher than its closing low of 676.53 on 9 March, suggesting that the stock market has made a cycle low.

The accompanying chart shows that during recessions, a bottom in the stock market is usually followed by a bottom in the economy.

Of course, we cannot be sure yet that a bottom has actually been made in the stock market. There have been some suggestions that the current rally in the stock market is only a bear market rally and that stock prices are likely to resume their downtrend soon.

Nevertheless, it is interesting to note in this respect that during the previous recession in 2001, even the false market bottom made in September that year was followed soon after by an economic recovery, albeit a weak one.

US economy shrinks less than expected

Friday's GDP report shows that the US economy is stabilising. Bloomberg reports:

The worst U.S. economic slump since the Great Depression abated in the second quarter as government spending programs started to kick in, while the deepest retrenchment by consumers since 1980 augured a muted recovery.

Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months, Commerce Department figures showed today in Washington...

There are other signs that the recession is abating.

[T]he Institute for Supply Management-Chicago Inc. today said its business barometer increased to 43.4, the highest level since September, from 39.9 in June. Readings below 50 signal a contraction.

Elsewhere, the Canadian economy shrank 0.5 percent in May while eurozone unemployment rose to 9.4 percent in June, the highest since 1999, as consumer prices dropped 0.6 percent from a year earlier, the most since the data were first compiled in 1996.

Rising unemployment and falling consumer prices are also being seen in Japan. AFP/CNA reports:

Japan's jobless rate hit a six-year high of 5.4 per cent in June...

The number of people out of work in June increased by 830,000, or 31.3 per cent, from a year earlier to 3.48 million, lifting the jobless rate by 0.2 points from May when it stood at 5.2 per cent, the government said.

There were only 43 job offers for every 100 job seekers, a record low and down from 44 the previous month.

Despite the worsening jobs market, Japanese household spending edged up 0.2 per cent in June from a year earlier, adjusted for price changes.

Deflation deepened with core consumer prices falling a record 1.7 per cent in June from a year ago.

Core prices, which exclude those of volatile fresh food, fell for the fourth straight month after a 1.1 per cent drop in May.

In contrast, China's economy appears to have ridden out the global recession well, with 13 of 27 provincial-level regions that have released their first-half economic statistics reporting double-digit growth.