Stocks in Japan rise but growth in manufacturing slows

Japanese stocks rebounded strongly today.

Japanese stocks rose, driving the Topix index up by the most in almost seven months, on speculation the impact from Dubai World’s request to delay debt payments will be limited...

The Topix index rallied 3.6 percent to 839.94 at the close in Tokyo, the sharpest advance since May 7. The Nikkei 225 Stock Average added 2.9 percent to 9,345.55, the steepest climb since Aug. 24.

However, the Japanese stock market has been on a declining trend since August and now a report indicates that Japan's economic recovery has also lost a bit of momentum. From AFP/CNA today:

Japan's factory output last month rose slightly but short of market expectations, data showed Monday as the government announced stimulus spending to boost a recovery threatened by the strong yen.

Industrial output in the world's second largest economy edged up 0.5 per cent from September, an eighth straight monthly gain but well below an average market forecast of a 2.5 per cent rise, data from the industry ministry showed...

Industrial production is expected to rise 3.3 per cent month-on-month in November and by a further 1.0 per cent in December, according to the manufacturers' own forecasts, the ministry said.

Further evidence of some slowing in Japanese manufacturing came from another report showing that the Nomura/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to 52.3 in November from 54.3 in October.

Asian and US stocks fall but European stocks recover partially

Asian stocks continued to fall on Friday in reaction to the debt problem at Dubai World. AFP/CNA reports:

Hong Kong shares tumbled almost five percent on Friday, leading falls in Asian stock markets as investors were spooked after Dubai asked for a debt repayment delay for a key state-owned firm.

The benchmark Hang Seng Index dived 1,075.91 points or 4.84 percent - its biggest single-day drop in eight months - to end at 21,134.50 points.

Elsewhere, Tokyo plunged 3.22 percent, Seoul slumped 4.69 percent and Sydney closed 2.90 percent lower on global investor alarm about the potential for a widespread default following Dubai's shock demand.

Shanghai was 1.05 percent down with Chinese banks also down on concerns Beijing may tighten monetary policy.

Some important economic indicators out of Japan on Friday were almost ignored. Bloomberg reports more deflation worries for Japan.

Japan’s consumer prices fell at a near record pace in October, reinforcing the government’s concern that deflation will hamper the economy’s recovery from its worst postwar recession.

Prices excluding fresh food slid 2.2 percent from a year earlier after dropping a 2.3 percent in September, the statistics bureau said today in Tokyo. That matched the median estimate of 26 economists surveyed by Bloomberg News.

However, Japan's unemployment rate fell in October. Again from Bloomberg:

Japan’s unemployment rate in October unexpectedly fell for a third month, a sign that the worst may be over for the labor market.

The jobless rate declined to 5.1 percent, the statistics bureau said today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was 5.4 percent. The rate has been declining since reaching a postwar high of 5.7 percent in July...

Household spending rose 1.6 percent from a year ago, a separate report showed.

Stocks managed to recover some of their Thursday losses in Europe, the Dow Jones STOXX 600 rising 1.2 percent on Friday.

And there was further good news for Europe on the economic front. From Bloomberg:

European confidence in the economic outlook improved in November to the highest since the collapse of Lehman Brothers Holdings Inc., suggesting the recovery in the 16-nation euro region is gathering strength.

An index of executive and consumer sentiment rose for an eighth straight month to 88.8 from 86.1 in October, the European Commission in Brussels said today. That was the highest since September 2008, when Lehman filed the biggest bankruptcy in U.S. history, compounding the financial crisis.

US stocks suffered a relatively mild fall on Friday after being closed on Thursday. The S&P 500 fell 1.7 percent to close at 1,091.49.

Markets rocked by Dubai World's debt problem

On Wednesday, Dubai World announced that it was trying to delay its debt payments. From Reuters:

Dubai will ask creditors of two of its flagship firms for a standstill on debt worth billions of dollars as a first step towards restructuring Dubai World, the conglomerate which spearheaded the emirate's breakneck growth.

The government's announcement on Wednesday, which also said consultants Deloitte had been appointed to help with the restructuring, sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling.

Most of the reaction in global markets came on Thursday. From Bloomberg:

European stocks fell the most in seven months and bonds jumped as Dubai’s attempt to reschedule its debt rattled investors seeking higher returns in emerging markets. The dollar slid to a 14-year low against the yen.

Europe’s Dow Jones Stoxx 600 Index retreated 3.3 percent at 5 p.m. in New York as a gauge of volatility posted its steepest surge in a year. The Shanghai Composite Index slumped 3.6 percent, the largest drop since August, and Brazil’s Bovespa Index slipped 2 percent. Credit-default swaps tied to debt sold by Dubai rose as much as 135 basis points to 575 according to CMA DataVision. U.S. markets are closed today for the Thanksgiving holiday...

Bonds rose as investors fled to the relative safety of government debt. The yield on the 10-year U.K. gilt dropped 10 basis points to 3.52 percent. The 10-year German bund yield declined 10 basis points to 3.16 percent...

The yen climbed as high as 86.30 per dollar, the strongest since July 1995...

Crude oil for January delivery fell 2.2 percent to $76.23 a barrel in electronic trading on the New York Mercantile Exchange after a government report yesterday showed rising inventories. Gold for immediate delivery declined 0.3 percent to $1,188.38 an ounce in London, after touching an all-time high earlier today.

US consumer spending and new home sales rise

The economic data from the US on Wednesday were mostly positive. Bloomberg reports:

Consumer spending and sales of new homes climbed more than forecast while claims for jobless benefits dropped to the lowest level in a year, putting the U.S. economy on stronger footing heading into 2010.

Household purchases increased 0.7 percent in October and new homes sold at the fastest pace since September 2008, data from the Commerce Department showed today in Washington. The number of Americans applying for unemployment insurance dropped by 35,000 last week, the Labor Department said...

A separate report from the Commerce Department showed the economic recovery will be uneven and slow to gain speed. Orders for durable goods unexpectedly declined 0.6 percent in October. Slowing demand for machinery, computers and communications equipment indicates companies are still wary about being stuck with unsold goods...

A separate report showed confidence among U.S. consumers fell in November. The Reuters/University of Michigan’s final index of consumer sentiment decreased to 67.4 from 70.6 in October.

Earlier on Wednesday, Japan had also good news on its trade data. AFP/CNA reports:

Japan posted a trade surplus for a ninth straight month in October as the world's number two economy slowly emerges from its deep slump thanks to recovery in the rest of Asia, data showed on Wednesday...

Japanese exports fell at their slowest rate in a year in October, down 23.2 per cent from a year ago at 5.31 trillion yen, with sharp declines seen in vehicles and steel products.

The figure was an improvement on September's 30.6 per cent decline...

Imports were 35.6 per cent below their level of October 2008 at 4.50 trillion yen, in part due to lower energy prices from last year, such as crude oil and liquid natural gas, the ministry said.

And the UK has revised its third quarter GDP to show a 0.3 percent contraction, less than the 0.4 percent fall reported last month.

US third quarter growth revised down

The US economy grew less in the third quarter than previously estimated. Reuters reports:

In its second estimate of third quarter gross domestic product published on Tuesday, the Commerce Department said the economy expanded at a 2.8 percent annual rate, probably ending the most painful U.S. recession in 70 years.

It was slower than the previous estimate of 3.5 percent but still the fastest pace since the third quarter of 2007, reflecting government fiscal stimulus. The new estimate was slightly below expectations for a growth rate of 2.9 percent...

Output was constrained by consumer spending that was not as robust as first thought. Strong imports and weak investment in commercial buildings also held back growth.

But corporate profits surged as businesses raised output even as they were cutting payrolls.

Other reports mostly support the view that the economy remains on a gradual path to recovery.

Minutes of the Federal Reserve's policy meeting early this month released on Tuesday showed officials at the U.S. central bank viewed the recovery as durable, although they expected unemployment to rise further...

In another sign of stability in a sector that was at the heart of the recession, the Standard & Poor's/Case-Shiller index of home prices in 20 metropolitan areas rose 0.3 percent in September. Analysts said a tax credit for first time homebuyers helped support the market.

An index published by the U.S. Federal Housing Finance Agency found prices unchanged in September.

Separately, the Conference Board's index of consumer attitudes increased slightly to 49.5 in November from 48.7 in October. That compared to market expectations of 53.1.

Recovery also looks likely to continue in the euro area. From Bloomberg:

European industrial orders advanced for a sixth month in September, led by capital goods such as machines, as the euro-region economy pulled out of its worst slump in more than six decades.

Orders to industrial companies in the 16-nation region rose 1.5 percent from August, when they increased 0.6 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast a gain of 1 percent, according to the median of 19 estimates in a Bloomberg survey. In the year, new orders dropped 16.5 percent after declining 23.2 percent in August.

Meanwhile, German business confidence continues to improve. Bloomberg reports:

German business confidence increased more than economists forecast to a 15-month high in November, suggesting the economic recovery may gather pace next year.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, rose to 93.9 from 92 in October, the highest reading since August last year. Economists expected a gain to 92.5, according to the median of 37 forecasts in a Bloomberg survey. The index reached a 26-year low of 82.2 in March.

Stocks rise on Monday

Investors showed on Monday that their appetites for risk remain undiminished. From Bloomberg:

Stocks rose around the world and the dollar and the yen fell as sales of U.S. homes increased more than forecast and speculation grew that central banks will keep interest rates near record lows.

The Standard & Poor’s 500 Index rallied 1.4 percent to 1,106.24 at 4:07 p.m. in New York and the Dow Jones Industrial Average climbed to a 13-month high. Europe’s Dow Jones Stoxx 600 Index jumped 2 percent, its best gain in six weeks. Copper surged to a 14-month high and gold reached a record as the Dollar Index fell for the first time in three days.

Positive economic data helped. Reuters reports a jump in US existing home sales.

Sales of existing home sales surged a record 10.1 percent month-over-month in October, the National Association of Realtors (NAR) said on Monday, as buyers rushed to take advantage of a popular tax credit for first-time buyers that had been scheduled to end this month...

U.S. stocks snapped a three-day losing streak on the housing data, which eclipsed the report from the Federal Reserve Bank of Chicago showing its National Activity Index, a measure of the economy, slid to -1.08 from -1.01 in September.

Bloomberg reports that Europe also had positive news on Monday.

Europe’s services and manufacturing industries expanded at the fastest pace in two years in November after a reviving global economy helped the euro region emerge from the worst recession in more than 60 years.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area rose to 53.7 from 53 in October, London-based Markit Economics said today in a statement. That was the highest since November 2007. A reading above 50 indicates expansion.

Rise in inflation won't move Fed to change rate stance yet

Inflation in the United States and other major economies appear to be accelerating again. However, for the time being, central banks are unlikely to get too alarmed.

In a speech to the Economic Club of New York last week, Federal Reserve chairman Ben Bernanke reiterated the Fed's view that the federal funds rate is likely to stay at exceptionally low levels for an extended period. This is based on the low rates of resource utilisation, subdued inflation trends and stable inflation expectations in the US.

This is despite the fact that last week provided hints that disinflationary conditions prevailing since the start of the financial crisis last year may be coming to an end.

The US consumer price index rose in October by 0.3 percent after having risen by 0.2 percent in the previous month. Although the index has fallen 0.2 percent over the past 12 months, the decline essentially occurred at the end of 2008. Since the beginning of 2009, the index has been rising at an annualised rate of 3.0 percent. Over the past three months, the rate of increase accelerated to 3.6 percent.

Core inflation, as measured by the consumer price index excluding food and energy, also showed an increase in October. Core prices rose 0.2 percent in last month, the same rate as in September, and the 12-month rate went up to 1.7 percent in October from 1.5 percent in the previous month.

Meanwhile, one measure of resource utilisation, industry capacity utilisation, rose in October for the fourth consecutive month. Diminishing slack in resource utilisation is a potential source of inflationary pressure. The utilisation rate, at 70.7 percent, remains much lower than the 1972-2008 average of 80.9 percent though.

Other economies are also showing a return of inflation. In the euro area, the 12-month consumer price inflation rate rose to -0.1 percent in October, up from -0.3 percent in September after prices rose 0.2 percent in October alone. In the UK, the inflation rate rose to 1.5 percent in October from 1.1 percent in September. In Canada, the inflation rate read 0.1 percent October, a sharp turnaround from -0.9 percent in September.

The return of inflation in most of the major economies has mostly been the result of higher energy prices. Most economists expect that the less-than-robust recovery in most of these economies will keep further gains in inflation in check.

For example, the Organisation for Economic Co-operation and Development expects inflation to level off again next year.

In its report on the economic outlook released last week, it said that although growth has resumed in the OECD economy, "the continued need to strengthen financial institutions, on-going private sector balance sheet adjustment and waning macroeconomic policy support are likely to imply a moderate recovery". With recovery expected to be moderate, unemployment is projected to continue to rise until the end of next year.

The resulting slack in the economy is expected to push down underlying inflation. The inflation rate for the OECD economy is projected to rise from -0.1 percent in the third quarter of 2009 and 0.7 percent in the fourth quarter to 1.4 percent in the first and second quarters of 2010 before moderating again thereafter.

With regard to monetary policy, the OECD report said that "[l]ow inflation and large negative output gaps call for waiting until the recovery is well underway before starting to normalise policy interest rates in the United States, the euro area, the United Kingdom and Canada".

So if Bernanke sees no need to adjust monetary policy soon to fight inflation, he is not alone.

BoJ keeps rates unchanged amid deflation concerns

Bloomberg reports the Bank of Japan’s monetary policy decision on Friday.

The Bank of Japan kept interest rates near zero and raised its economic assessment even as government pressure for it to fight deflation intensified.

Governor Masaaki Shirakawa and his colleagues held the overnight lending rate at 0.1 percent, the central bank said in a statement today in Tokyo. The release came hours after Deputy Prime Minister Naoto Kan warned about the danger that falling prices pose to Japan’s recovery from its worst postwar slump…

“Japan’s economy is picking up mainly due to various policy measures taken at home and abroad, although the momentum of a self-sustaining recovery in domestic private demand remains weak,” the central bank said…

The government said today that the economy “is in a mild deflationary phase,” referring to declining prices in its evaluation for the first time since June 2006...

Kan said the government will tell the central bank that monetary policy “plays a significant role” in tackling falling prices. His concern was echoed by other ministers.

It looks like Japan’s interest rates will stay low for an extended period of time, but that’s not exactly a new phenomenon.

OECD raises growth forecast

The OECD has raised its economic growth forecast for its members. From Bloomberg on Thursday:

The Organization for Economic Cooperation and Development doubled its growth forecast for the leading developed economies next year and predicted a further acceleration in 2011 as China powers a global recovery.

The economy of the group’s 30 member countries will expand 1.9 percent next year and 2.5 percent in 2011, the Paris-based organization said in a report today. Output will contract 3.5 percent this year. The OECD, which advises members on economic policy, forecast 2010 growth of 0.7 percent in June...

The U.S. economy will grow 2.5 percent in 2010 instead of the 0.9 percent predicted in June and the euro region will advance 0.9 percent instead of a projection it would stagnate, the OECD said. Japan will post growth of 1.8 percent instead of 0.7 percent. The forecast for China was raised to 10.2 percent.

US economic data on Thursday were also quite positive. Bloomberg reports:

The U.S. economic recovery will extend into next year as manufacturing expands and the pace of firings abates, reports today indicated.

The Conference Board’s index of leading indicators, a gauge of the outlook for the next three to six months, rose 0.3 percent in October, preserving a string of gains that began in April...

The number of Americans filing claims for unemployment benefits held at 505,000 in the week ended Nov. 14, matching the prior week’s reading as the lowest since January. The number of people collecting unemployment insurance dropped in the prior week, while those getting extended payments jumped...

Manufacturing in the Philadelphia region expanded in November at the fastest pace in more than two years, reflecting gains in orders and sales, figures from the Fed Bank of Philadelphia also showed today.

The bank’s general economic index rose to 16.7 this month, exceeding the median forecast of economists surveyed and the highest level since June 2007, from 11.5 in October. Readings greater than zero signal growth.

However, the positive economic reports were not matched by the stock market's performance.

Stocks extended a global drop as concern grew that the rally outpaced the prospects for economic growth and Bank of America Corp. downgraded chipmakers. The Standard & Poor’s 500 Index fell 1.3 percent to close at 1,094.9, with Intel Corp. and Texas Instruments Inc. losing ground.

US inflation accelerates, housing starts fall

As the economic recovery gets underway, inflation is also making a comeback.

MarketWatch reports that US consumer prices accelerated in October.

The consumer price index increased a seasonally adjusted 0.3% in October as energy prices increased for the fifth time in six months to offset another rare decline in rents, the Labor Department said.

The core CPI rate, which excludes food and energy prices in order to get a better look at underlying inflation in the economy, rose 0.2% last month, led by higher prices for cars and trucks, due in part to the unwinding of the government's "cash-for-clunkers" incentives program...

The consumer price index has fallen 0.2% in the past year. The core CPI is up 1.7% in the past year. In September, the CPI and the core CPI were up 0.2%.

However, for the near term, sustainability of the economic recovery is likely to remain a greater concern than inflation. MarketWatch reports that US housing starts fell back to the lowest level in six months in October.

In a blow to the optimism that had surrounded the U.S. housing sector in recent months, housing starts fell a sharp 10.6% in October, the Commerce Department reported Wednesday.

New construction on housing units dropped to a seasonally adjusted annual rate of 529,000, the lowest level since April. The 10.6% drop was the biggest percentage decline for starts since January...

Meanwhile, building permits fell 4% to a seasonally adjusted annual rate of 552,000 in October.

Still, the return of rising inflation is a global phenomenon. On Wednesday, Canada reported its first annual increase in consumer prices in five months with the CPI rising 0.1 percent in October from a year ago.

US industrial production and producer prices rise less than forecast

Tuesday's US economic data were weaker than expected. From Bloomberg:

Industrial production and wholesale prices in the U.S. rose less than forecast in October, giving the Federal Reserve more reason to keep interest rates near a record low for an “extended period.”

Total output rose 0.1 percent, restrained by the first decrease in manufacturing in four months, a report from the Fed showed today in Washington. Prices paid to factories, farmers and other producers rose 0.3 percent after dropping 0.6 percent in September, the Labor Department reported...

Production at factories, mines and utilities was forecast to increase 0.4 percent, according to the median estimate of 75 economists surveyed by Bloomberg News. Projections ranged from a gain of 1.2 percent to a drop of 0.3 percent. The Fed revised September’s gain down to 0.6 percent from a previously reported 0.7 percent increase...

The Labor Department’s report on producer prices was forecast to show a 0.5 percent increase, according to the median estimate of economists surveyed. Wholesale prices were down 1.9 percent from a year earlier.

Costs excluding food and fuel, known as the core index, unexpectedly fell 0.6 percent, the biggest drop since July 2006. Over the past 12 months core costs were up 0.7 percent, the smallest gain since 2004.

Another report today showed homebuilder confidence in November was lower than anticipated as companies fretted over the possible expiration of a government tax credit. The National Association of Home Builders/Wells Fargo sentiment index held at 17 for a second month. A reading below 50 means most respondents view conditions as poor.

Despite the weaker-than-expected producer price inflation in the US in October, other data show that global deflationary pressure has eased. For example, Reuters reports that consumer price inflation accelerated in the UK in October.

The Office for National Statistics said consumer price inflation rose to 1.5 percent year-on-year last month, in line with the consensus forecast, from a five-year low of 1.1 percent in September...

The ONS said October's pick-up was due to the statistical impact of a record fall in fuel prices in October 2008 not being repeated this year.

US retail sales rebound in October

US retail sales are holding up. From Bloomberg:

Retail sales in the U.S. rebounded more than forecast as demand for autos climbed, and a regional gauge of manufacturing showed expansion for a fourth month, easing concern the recovery will cool after government incentives end.

Purchases increased 1.4 percent in October after a 2.3 percent drop in September that was larger than the previously estimated, Commerce Department figures showed today in Washington. The Federal Reserve Bank of New York’s general economic index, where positive readings signal growth, fell to 23.5 this month from a five-year high of 34.6 in October...

A Commerce Department report today also showed inventories at U.S. businesses fell in September to the lowest level in almost four years, signaling orders will rise in coming months as spending picks up.

However, the data will not be enough to remove doubts about the strength of the recovery.

“Significant economic challenges remain,” [Fed Chairman Ben] Bernanke said in a speech to the Economic Club of New York. “The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.”

Certainly, it hasn't removed doubts from Meredith Whitney. From CNBC:

Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC...

The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point"...

The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.

Still, the economic recovery so far means that global deflationary pressure has eased. Again from Bloomberg:

European consumer prices declined for a fifth month in October as rising unemployment discouraged household spending.

Prices in the 16-nation euro region declined 0.1 percent from a year earlier after falling 0.3 percent in September, the European Union statistics office in Luxembourg said today. That matched an initial estimate published on Oct. 30 and the median forecast of 35 economists in a Bloomberg survey. In the month, consumer prices rose 0.2 percent.

Japanese economy grows for a second consecutive quarter

Japan's economy managed to expand again in the third quarter.

The Cabinet Office reported today that Japan's gross domestic product increased 1.2 percent in the third quarter. This was the second consecutive quarter of expansion after the economy had grown 0.7 percent in the second quarter.

Exports made an important contribution to third quarter growth, jumping 6.4 percent for the quarter, but capital spending also made a positive contribution, increasing 1.6 percent from the previous quarter, its first increase in six quarters.

The third quarter growth rate was the fastest since the first quarter of 2007 but the acceleration in the economy is unlikely to be maintained in subsequent quarters. Fiscal stimulus has so far helped boost economic growth but as the stimulus effects start to wane, growth may slow. Indeed, reports last week showed that some indicators have stopped improving.

On Friday, the Cabinet Office reported that the consumer confidence index for households in October was 40.5, unchanged from September. Prior to last month, the index had risen every month since hitting a low in December last year.

Earlier last week, the Cabinet Office had reported that its economy watchers index, based on a survey of workers in economically-sensitive jobs, fell to 40.9 in October. This was the lowest reading in five months and the biggest decline in 10 months.

Still, a second consecutive quarter of expansion for the Japanese economy rounds out a relatively positive third quarter for the global economy as some of the other major economies also returned to growth. On Friday, the euro area reported that GDP in the region grew 0.4 percent in the third quarter after contracting 0.2 percent in the second quarter. Last month, the United States reported that its economy grew 0.9 percent, or 3.5 percent annualised, after having contracted at an annualised rate of 0.7 percent in the previous quarter.

So Japan's GDP report today confirms that, at least in the third quarter, the global economy remained on a path to recovery.

Eurozone economy returns to growth

From Bloomberg:

The euro-area economy emerged from its worst recession since World War II in the third quarter as exports from Germany and France helped compensate for households’ reluctance to increase spending.

Gross domestic product in the economy of the 16 nations using the euro rose 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to grow 0.5 percent, according to the median of 34 estimates in a Bloomberg survey...

In the year, euro-area GDP declined a seasonally adjusted 4.1 percent in the July-September period after dropping 4.8 percent in the second quarter. In the 27-nation EU, GDP rose 0.2 percent from the previous three-month period, when it dropped 0.3 percent. The statistics office is scheduled to publish a breakdown of third-quarter GDP on Dec. 3.

We know from an earlier report that the US economy also returned to growth in the third quarter. A jump in the US trade deficit corroborates the economy's expansion, but a fall in consumer confidence could undermine growth in coming months. Again from Bloomberg:

Confidence among U.S. consumers unexpectedly dropped in November as the loss of jobs threatened to undermine the biggest part of the economy.

The Reuters/University of Michigan preliminary sentiment index decreased to a three-month low of 66 from 70.6 in October...

The U.S. trade gap widened 18 percent to the highest level since January, the Commerce Department said. Imports rose 5.8 percent, the most since March 1993, as the cost of a barrel of crude climbed to the highest level since October 2008 and volumes also rose. Exports increased 2.9 percent, propelled by sales of aircraft and industrial machines.

Renminbi peg draws criticism

It is not just the US that has a problem with the renminbi's peg to the US dollar. From Bloomberg:

President Barack Obama may find on his Asian visit that began today that discontent about China’s currency peg to the dollar isn’t confined to Washington’s lawmakers and business lobbyists.

From Mumbai-based Alok Industries Ltd., which supplies Wal- Mart Stores Inc. with textiles, to Bangkok-based semiconductor packager Hana Microelectronics Pcl, Asian companies say Chinese rivals have an unfair advantage because of the yuan-dollar link. The dollar has declined 14 percent in the past year against the currencies of six major trading partners...

“It’s just outrageous, the impact on their neighbors and on relatively poor countries,” said Simon Johnson, chief economist at the International Monetary Fund in 2007 and 2008 and now a senior fellow at the Peterson Institute for International Economics in Washington.

As Obama seeks to push the Group of 20 goal of rebalancing the world economy from excessive U.S. consumer spending and Asian exports, South Korea’s won gained 8 percent against the yuan in the past six months. Japan’s yen has risen 6 percent, while India’s rupee gained 6 percent and the Thai baht 4 percent. The yuan is a denomination of China’s currency, the renminbi.

But the renminbi's peg to the US dollar also creates a problem for China. Again from Bloomberg:

China is facing the biggest challenge to its currency policy since the start of the global recession as economists warn the peg to the dollar risks causing an asset bubble.

As recently as Nov. 9, People’s Bank of China Governor Zhou Xiaochuan said he didn’t feel much pressure to let the yuan rise, deflecting calls for an increase as exports start to recover and President Barack Obama prepares to discuss the issue in Beijing next week. China’s stance risks adding to liquidity after credit surged by $1.3 trillion this year, according to Fred Hu at Goldman Sachs Group Inc.

China’s sales of yuan to keep it fixed to the dollar contributed to a 29 percent jump in money supply, and the peg helped spur more than $150 billion in speculative funds from overseas in the past six months, China International Capital Corp. says. Record apartment prices and a 74 percent climb in the benchmark stock index this year are prompting warnings that the policy is inflating asset prices excessively.

Sometimes, though, it may be more convenient to blame the usual suspects for asset bubbles. From Bloomberg:

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out and watch out,” said Donald Tsang, chief executive of the Chinese city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that the Bank of Japan’s zero interest rate policy contributed to the Asian financial crisis and U.S. mortgage meltdown...

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

To be fair, most central banks are keeping interest rates very low and are contributing to some extent or other to global asset price appreciation. The US, China and Japan tend to be blamed more simply because they are big.

Strong data from China, currency may rise

China reported a strong set of economic numbers on Wednesday. From AFP/CNA:

China said Wednesday that massive government spending was paying off as a new wave of data showed the world's third-largest economy continued to strengthen, following the worst global crisis in decades.

Industrial production and retail sales picked up pace in October, while demand for Chinese exports improved, official data showed, putting the government's growth target of eight per cent well within reach for 2009...

China's industrial output, which shows activity in the millions of factories and workshops around the country, expanded by 16.1 per cent in October from a year ago.

Exports fell 13.8 per cent to US$110.76 billion on-year in October - the best result since exports dropped by 2.8 per cent in December 2008 as the worldwide crisis began to set in.

Retail sales - the main measure of consumer spending, which the government sees as a key factor in boosting the economy - rose 16.2 per cent in October from a year ago, up from 15.5 per cent in September...

Fixed-asset investment in urban areas rose 33.1 per cent in the January to October period, the statistics bureau said, after growing 33.3 per cent in the first three quarters of 2009.

The nation's consumer price index, the main gauge of inflation, fell 0.5 per cent in October compared with the same month a year earlier, after falling 1.1 per cent in the first nine months of the year.

New Chinese bank loans dropped to 253.0 billion yuan (US$37.1 billion) in October, the lowest monthly level since the beginning of the year, the central bank said.

With the economy apparently returning to strong growth, China may be about to let its currency appreciate. From Reuters:

China sent its clearest signal yet that it was ready to allow yuan appreciation after an 18-month hiatus, saying on Wednesday it would consider major currencies, not just the dollar, in guiding the exchange rate.

In its third-quarter monetary policy report, the People's Bank of China departed from well-worn language on keeping the yuan "basically stable at a reasonable and balanced level." It hinted instead at a shift from an effective dollar peg that has been in place since the middle of last year.

"Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism," the central bank said in a 46-page monetary policy report.

Japanese machinery orders rise

Bloomberg reports some good news for the Japanese economy today in the form of higher machinery orders.

Orders for Japanese machinery rose more than economists estimated in September, signaling that a recovery in corporate profits may be encouraging firms to start spending on plant and equipment.

Orders, an indicator of business investment in three to six months, climbed 10.5 percent from a month earlier, the Cabinet Office said today in Tokyo. The median estimate of 25 economists surveyed by Bloomberg was for a 4.1 percent gain.

Yesterday, Japan reported an unexpected widening of its current account surplus in September.

The surplus rose 0.2 percent to 1.57 trillion yen ($17.5 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg was for the gap to narrow to 1.51 trillion yen...

Exports slid 32.1 percent in September from a year earlier, less than August’s 37.1 percent drop. Imports fell 37.7 percent, compared with a 42.8 percent decline a month earlier...

On a seasonally adjusted basis, the current-account surplus widened to 1.34 trillion yen in September. Exports rose 2.5 percent from August, and imports climbed 5.9 percent.

However, yesterday's economy watchers survey data showed that the Japanese economic recovery may be slowing.

Confidence among Japanese merchants slid to a five-month low in October, a sign that the country’s export-led recovery isn’t spreading to consumers.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, fell to 40.9, the Cabinet Office said today in Tokyo. It was the biggest decline in 10 months.

Markets rally amid bubble concerns

Markets rallied strongly on Monday. Bloomberg reports:

U.S. stocks extended a global rally, sending the Dow Jones Industrial Average to a 13-month high, and the dollar slid after the Group of 20 nations agreed to maintain economic stimulus efforts. Commodities climbed, with gold reaching a record above $1,100 an ounce.

Adding fuel to markets, economic data continued their positive trend.

In Germany, industrial output rose more than forecast. Bloomberg reports:

German industrial output rose more than economists forecast in September as factories ramped up production of investment goods to meet export demand.

Output increased 2.7 percent from August, when it advanced 1.8 percent, the Economy Ministry in Berlin said today. Economists had forecast a 1 percent gain, according to the median of 37 forecasts in a Bloomberg survey. From a year earlier, production declined 12.9 percent when adjusted for the number of work days.

So did exports. Again from Bloomberg.

German exports rose more than economists forecast in September as a global recovery stoked demand for goods made in Europe’s largest economy.

Sales abroad, adjusted for working days and seasonal changes, increased 3.8 percent from August, when they fell 2.8 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a gain of 2.5 percent, the median of 13 forecasts in a Bloomberg News survey showed. Exports still declined 18.8 percent from a year earlier.

And in Canada, housing starts rose to the highest this year in October.

However, a renewed boom in housing poses its own risk, something that Asian policymakers recognise, at least in Singapore. From CNA:

The rise in risk appetite and sharp rebound in financial markets since the start of the year may have outpaced economic fundamentals, according to the Monetary Authority of Singapore (MAS) in its annual Financial Stability Review on Monday...

Despite such uncertainties in the global outlook, Singapore's property market has taken on its own dynamics. Private home prices rose almost 16 per cent in the third quarter – the highest quarterly increase in almost three decades.

This has led MAS to warn that a speculative bubble could form...

There are similar concerns in China. From Bloomberg:

China’s central bank and banking regulator may “soon” issue measures to limit the use of debt in real-estate purchases after asset prices climbed, a Shanghai official said.

Regulators may reduce “leverage ratios,” Fang Xinghai, the director-general of Shanghai’s financial services office, said at a forum in Beijing today. “I would think that soon you will see these measures coming out of the central bank and banking regulatory commission.”

Certainly, policymakers in Asia and elsewhere won't want to repeat the experience of the US. While the Fed's report on Monday that fewer banks tightened lending standards in the third quarter indicates that the credit crisis may be abating, John Hussman warns in his latest commentary that the second wave of mortgage foreclosures is beginning.

Leading indicators still point to recovery

The global economic recovery is likely to continue over the next few months although employment in the United States is continuing to contract.

On Friday, most economists focused their attention on the US employment report. This report was somewhat of a disappointment, with employment reportedly falling 190,000 in October and the unemployment rate rising to 10.2 percent.

Nevertheless, there were some positives in the report. The total number of jobs in August and September were revised up by 91,000. Also, the number of temporary workers rose by 34,000 in October. The latter may be significant because the trend for temporary employment often leads that for overall employment.

However, a better indication of where economies are headed can be obtained from several composite leading indices that were also released on Friday.

The Organisation for Economic Co-operation and Development published its composite leading indicators (CLI) for September on Friday. According to its report, the CLI for the OECD area increased by 1.3 points in September 2009, with recovery "clearly visible" in the United States, Japan and all other OECD economies and major non-OECD economies.

Also out on Friday was the Economic Cycle Research Institute's weekly leading index for the US economy. This rose to 128.8 in the week to 30 October from 128.3 the previous week. The index's growth rate, however, fell to 26.3 percent from 26.9 percent last week, although it remains close to a record high of 27.8 seen in the week to 9 October.

In Japan, the Cabinet Office published its preliminary indexes of business conditions for September on Friday. The index of coincident economic indicators rose 1.3 points in September, its sixth consecutive increase. The index of leading economic indicators rose 3.2 points, its seventh consecutive month of increase.

So although the US economy is continuing to lose jobs, the global economic recovery appears intact for now.

US unemployment rate hits 10.2 percent

US unemployment continued to rise in October. Bloomberg reports:

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983, casting a pall over the prospects for a sustained recovery and risking further erosion of President Barack Obama’s popularity.

Payrolls fell by 190,000 last month, more than forecast by economists, a Labor Department report showed today in Washington. The jobless rate rose from 9.8 percent in September. Factory payrolls dropped by the most in four months, and the average workweek held at a record low...

Today’s report contained some bright spots. Revisions added 91,000 to payroll figures previously reported for September and August, and the number of temporary workers rose by 34,000, the third consecutive gain.

Unemployment also rose in Canada in October. From Bloomberg:

Canadian employers unexpectedly fired workers in October and the unemployment rate rose more than forecast, suggesting the U.S.’s largest trading partner hasn’t fully recovered from the recession that began last year.

Employment fell by 43,200 last month, Statistics Canada said today in Ottawa, and the jobless rate rose to 8.6 percent from September’s 8.4 percent. The median forecast of economists surveyed by Bloomberg was for a 10,000 gain in jobs and an unemployment rate of 8.5 percent.

There was some positive economic data from Europe though. Bloomberg reports that German factory orders rose for a seventh month in September.

Orders, adjusted for seasonal swings and inflation, advanced 0.9 percent from August, when they gained a revised 2.1 percent, the Economy Ministry in Berlin said today. Export orders jumped 3.7 percent in September. Overall orders were still 13.1 percent lower than a year earlier.

ECB, BoE prepare exit from emergency measures, US stocks jump

The ECB is preparing to unwind its emergency programmes. Bloomberg reports:

The European Central Bank took its first step toward removing emergency stimulus measures designed to haul its economy out of recession, saying it won’t offer commercial banks 12-month loans next year.

“Not all our liquidity measures will be needed to the same extent as in the past” as the economy recovers, ECB President Jean-Claude Trichet said at a press conference in Frankfurt today after the bank kept its benchmark interest rate at a record low of 1 percent. Markets don’t expect the ECB to prolong its offer of 12-month money beyond December and Trichet said he would “say nothing to dispel this present sentiment.”

The BoE may be doing the same. From Reuters:

The Bank of England expanded its asset-purchase programme by 25 billion pounds on Thursday, halving the pace at which it buys bonds and suggesting the scheme to revive Britain's recession-hit economy may be coming to an end...

The Bank, which also left interest rates unchanged at a record low of 0.5 percent as expected, said the bond purchases would take three months to complete as it has halved the pace at which the buying would be conducted.

Economic data out of Europe were mixed on Thursday. Retail sales in the euro area fell 0.7 percent in September but UK factory output rose 1.7 percent in September.

US economic data were mostly positive. Bloomberg reports:

Worker productivity surged at the fastest pace in six years, labor costs fell and unemployment claims were lower than forecast, signaling companies may be preparing to start hiring again after cutting costs to the bone.

Productivity, a measure of employee output per hour, jumped at a 9.5 percent annual rate in the third quarter, exceeding the highest economist forecast, according to Labor Department figures released today in Washington. Initial jobless claims dropped by 20,000 to 512,000 in the week ended Oct. 31, the fewest since January...

Labor costs fell at a 5.2 percent rate, capping the biggest 12-month drop since records began in 1948 and exceeding the median forecast for a 4.2 percent decline projected by economists. Costs in the prior quarter fell 6.1 percent, more than previously estimated.

That seemed to be enough to propel stocks up on Thursday. From Bloomberg:

The Dow Jones Industrial Average rose the most since July after U.S. jobless claims and productivity beat economists’ estimates. Gold rallied for a fourth day, while the dollar and Treasuries were little changed...

The Dow increased 203.82 points, or 2.1 percent, to 10,005.96 at 4:01 p.m. in New York for the biggest advance since July 23. The Standard & Poor’s 500 Index rose for a fourth day, adding 20.13 points, or 1.9 percent, to 1,066.63. More than nine stocks gained for each that fell on the New York Stock Exchange.

Fed to keep rates low as services slow

There was not much change in the Fed's stance after the latest FOMC meeting. Bloomberg reports:

The Federal Reserve repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

“Businesses are still cutting back on fixed investment and staffing, though at a slower pace,” the Federal Open Market Committee said in a statement today. “Household spending appears to be expanding, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit,” the FOMC said after meeting in Washington...

Officials kept their benchmark overnight lending rate at between zero and 0.25 percent, where it has been since December. The conditions they cited to keep it there are “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.”

Economic data somewhat justified the cautious Fed stance. From Bloomberg:

Service industries in the U.S. expanded more slowly than forecast in October, indicating that consumers spooked by mounting job losses are making a limited contribution to the recovery entering the fourth quarter.

The Institute for Supply Management’s index of non- manufacturing businesses which make up the largest part of the economy fell to 50.6 in October from 50.9 in September, according to the Tempe, Arizona-based group...

A separate report from ADP Employer Services today signaled unemployment will keep climbing. Companies cut an estimated 203,000 jobs in October. The figures, which don’t include hiring by government agencies, were forecast to show a decline of 198,000 jobs, according to the median estimate of 34 economists in a Bloomberg survey.

European service sectors provided a somewhat brighter picture. The eurozone service sector PMI rose to 53.0 in October from 51.1 in September while the UK service sector PMI rose to 56.9 from 55.3.

RBA hikes again

The Reserve Bank of Australia raised its official interest rate again on Tuesday, as most economists expected. Bloomberg reports:

Australia raised its benchmark interest rate by a quarter percentage point for the second straight month, becoming the only nation to increase borrowing costs twice this year as the global economy recovers.

Reserve Bank Governor Glenn Stevens lifted the overnight cash rate target to 3.5 percent in Sydney today, as forecast by 18 of 22 economists surveyed by Bloomberg News. The rest expected a half-point move.

Australia’s dollar and bond yields fell as traders reduced bets on an increase in December after Stevens said higher rates would come “gradually.” Rising consumer confidence and Chinese demand for iron ore and coal will stoke economic growth while the currency’s 29 percent gain this year may hurt exporters and curb inflation, he said.

Today's economic reports from Australia tempered expectations of further rate hikes. The Age reports:

Retail sales fell by a surprising 0.2 per cent in September, reducing the chances of another rise next month in official interest rates. Building approvals, though, came in slightly higher than forecast.

The seasonally adjusted drop followed a revised 0.7 per cent increase in August, official data out today show. Analysts had expected a 0.5 per cent increase.

Probably more important for the global economy and investors, though, is the monetary policy decision by the Federal Reserve later today. Despite additional signs of economic recovery in the US on Tuesday in the form of a 0.9 percent rise in factory orders in September, the Fed is expected to keep interest rates unchanged.

Global manufacturing PMI hits 39-month high

The global economic picture brightened considerably on Monday, the US leading the way. From Bloomberg:

Manufacturing in the U.S. expanded faster than anticipated in October, easing concern the economic recovery will be cut short once government aid wanes.

The Institute for Supply Management’s factory index rose to 55.7, a three-year high and exceeding every estimate of the 70 economists surveyed by Bloomberg News, data from the Tempe, Arizona-based group showed today...

The number of contracts to buy previously owned homes unexpectedly rose in September for an eighth straight month as Americans rushed to meet a deadline for a home-buyer tax credit, a report from the National Association of Realtors also showed today. The group’s pending home sales index rose 6.1 percent after a 6.4 percent gain in August, and were up 20 percent from the same time last year.

Figures from the Commerce Department showed spending on all construction unexpectedly rose 0.8 percent in September, the biggest gain in a year, driven by the largest increase in homebuilding since 2003.

Meanwhile, eurozone manufacturing has moved into expansion for the first time in 17 months. Bloomberg reports:

An index of manufacturing in the 16-nation euro area rose to 50.7 from 49.3 in September, London-based Markit Economics said today, confirming an Oct. 23 estimate for the gauge, which is based on a survey of purchasing managers. The last time the index was above 50, indicating expansion, was in May 2008.

UK manufacturing appears to be recovering even more sharply. From Reuters:

Manufacturing activity grew at its fastest rate in two years in October as new orders rose at their fastest in almost 6 years and firms started rebuilding their stocks, a survey showed on Monday. The CIPS/Markit purchasing managers index of manufacturing activity rose to 53.7 in October from an upwardly revised 49.9 in September, signalling the fastest pace of growth since November 2007 and beating forecasts for a rise to 50.0.

Meanwhile, manufacturing activity in China accelerated in October. AFP/CNA reports:

China's manufacturing activity continued to expand in October, as domestic and overseas demand strengthened and employment picked up, an independent survey published on Monday showed.

The HSBC China Manufacturing PMI (Purchasing Managers Index) rose to an 18-month high of 55.4 in October from 55.0 in September...

A separate official PMI compiled by the National Bureau of Statistics showed manufacturing activity rose to 55.2 in October - the highest since May 2008 - from 54.3 in September.

Data last week, however, showed a slight deceleration in manufacturing activity in Japan, the Nomura/JMMA Japan Manufacturing Purchasing Managers Index falling to 54.3 in October from 54.5 in September.

That did not stop the global manufacturing PMI from hitting 54.4 last month, the highest level in 39 months, and up from 53.0 in September.

Most big economies grew in third quarter

Most of the major industrialised economies expanded in the third quarter.

The United Kingdom's is not one of them. On 23 October, the UK reported that its gross domestic product shrank 0.4 percent in the third quarter. This was much worse than economists' expectation of a 0.2 percent increase.

Last week's data, however, show that most of the other major industrialised economies grew in the third quarter.

In contrast to the UK, on 29 October, the United States provided a positive surprise for the third quarter, reporting a 0.9 percent increase, or 3.5 percent annualised. Economists had expected a growth rate of 3.2 percent. In the second quarter, the economy had contracted at an annualised rate of 0.7 percent. The economy's return to growth in the third quarter was marked by higher consumer spending, a slowdown in the reduction of inventories and an increase in residential investment.

It is likely that the euro area will also return to positive economic growth in the third quarter. The eurozone economy shrank by just 0.2 percent in the second quarter and economic indicators suggest that the economy has improved since then. For example, the European Commission's economic sentiment indicator has been rising steadily since hitting bottom in March this year and a report published on 29 October showed that it hit 86.2 in October, up from 82.8 in September.

Japan's economy returned to growth in the second quarter, increasing by 0.6 percent compared with the previous quarter, and the expansion is very likely to have continued in the third quarter. Data released on 29 October showed that industrial production increased by 1.4 percent in September, the seventh consecutive month of increase. Industrial production was 10.8 percent higher in the third quarter than the previous quarter.

While the major industrialised economies are making a gradual return to growth, some other economies have resumed growing at a blistering pace. For example, China had reported on 22 October that its economy grew 8.9 percent in the third quarter from the previous year. On 26 October, South Korea reported that its economy grew 2.9 percent in the third quarter from the previous quarter.

Fiscal stimulus is generally considered to have played an important part in the global economic improvement and there remain questions about how much growth can be sustained in the coming quarters.

Nevertheless, the return of most of the major industrialised nations to economic growth marks a good start to global economic recovery.