Saturday, 30 January 2010

US economy expands at fastest pace in six years

US economic growth jumped in the fourth quarter. Bloomberg reports:

The U.S. economy expanded in the fourth quarter at the fastest pace in six years as factories cranked up assembly lines, indicating the recovery may be strong enough to be weaned from government support.

The 5.7 percent increase in gross domestic product at an annual rate reported by the Commerce Department in Washington today exceeded the 4.8 percent median forecast of economists surveyed by Bloomberg News...

The expansion is carrying into the new year, a report from the Institute for Supply Management-Chicago Inc. indicated today. The group said its business barometer climbed to 61.5, the highest level since November 2005, from 58.7 last month. Readings greater than 50 signal expansion.

A gauge of consumer confidence climbed in January to the highest level in two years. The Reuters/University of Michigan final index of consumer sentiment rose to 74.4 from December’s 72.5.

Earlier on Friday, reports showed that the Japanese economy also probably expanded in the fourth quarter. AFP/CNA reports:

Japan's economy showed fresh signs of recovery Friday as factory output picked up and unemployment fell slightly, but a drop in consumer prices highlighted that deflation remains a key threat...

As overseas demand has picked up, Japan's industrial output rose 2.2 per cent month-on-month in December, the 10th straight monthly rise, new data showed...

Japan's jobless rate fell to 5.1 per cent in December, improving by 0.1 percentage point from the previous month, against market expectations of a rise to 5.3 per cent, government data showed...

Core consumer prices fell 1.3 per cent in December from a year earlier, the 10th straight month of drops, government data showed.

Meanwhile, Friday's data on the euro area showed no sign of deflation although unemployment continued to creep up in December. From Bloomberg:

European inflation accelerated in January to the fastest in almost a year after cold weather pushed oil prices to a 15-month high.

Consumer prices in the 16-nation euro region rose 1 percent from a year earlier after increasing 0.9 percent in December, the European Union statistics office in Luxembourg said today. That’s the highest since February 2009. The region’s unemployment rate rose to 10 percent in December from a revised 9.9 percent in the previous month, it said in a separate report.

On the whole, the global economic environment has improved to an extent that central banks are confident enough to reverse monetary policies, the latest being India. From AFP/CNA:

India's central bank kept interest rates on hold Friday but moved to drain liquidity from the banking system in a bid to tame surging inflation without hurting economic recovery.

The Reserve Bank of India (RBI) boosted its cash reserve ratio -- the sum commercial banks keep on deposit -- by a higher-than-expected 75 basis points to 5.75 percent in what it said was a bid to tame "inflationary expectations."

Friday, 29 January 2010

US durable goods orders, eurozone confidence rise

In his first State of the Union address, President Barack Obama pledged to make jobs a priority. He's likely to get help from a recovering economy. From Bloomberg on Thursday:

Bookings for durable goods excluding transportation equipment climbed 0.9 percent last month, exceeding the median forecast of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. Initial jobless applications fell to 470,000 in the week ended Jan. 23 from 478,000 the prior week, the Labor Department said.

Fed chairman Ben Bernanke will also be around to help.

Ben S. Bernanke, head of the central bank, was confirmed by the Senate today to a second term as chairman.

Meanwhile, in the euro area, confidence continues to improve. Bloomberg reports:

European confidence in the economic outlook improved for a 10th month in January as reviving global demand helped stoke exports and bolstered earnings across the 16-nation euro region.

An index of executive and consumer sentiment increased to 95.7 from a revised 94.1 in December, the European Commission in Brussels said today. Economists expected confidence to rise to 92.3 from a previously reported December reading of 91.3, the median of 29 forecasts in a Bloomberg News survey showed.

Thursday, 28 January 2010

Fed to keep rates low

Bloomberg reports the Federal Reserve's monetary policy decision.

The Federal Reserve restated its intention to cease buying $1.25 trillion of mortgage-backed securities in March and maintained its pledge to keep interest rates near zero for an “extended period,” opening a rift among policy makers for the first time in a year.

Kansas City Fed President Thomas Hoenig dissented, saying the time had come to change the promise to keep rates low. The economy “has continued to strengthen,” the Fed said in a statement today in Washington, “although the pace of economic recovery is likely to be moderate for a time.”

Data on new home sales in the US show that the economic recovery remains fragile. From Bloomberg:

Sales of new homes in the U.S. unexpectedly dropped in December, capping the worst year on record and signaling the government’s tax-credit extension has yet to shore up demand.

Purchases declined 7.6 percent to an annual pace of 342,000, marking the fourth decrease in the past five months, the Commerce Department said today in Washington. For all of 2009, sales declined 23 percent to 374,000, the lowest level since records began in 1963.

Nevertheless, trade data from Japan show that the global economic recovery has been substantial. Again from Bloomberg:

Japan’s exports rose for the first time since Lehman Brothers Holdings Inc. collapsed 15 months ago, adding to signs that the world’s second-largest economy is recovering from the global recession.

Shipments abroad climbed 12.1 percent in December from a year earlier, the Finance Ministry said today in Tokyo. The result beat the median estimate of a 7.6 percent gain in a Bloomberg News survey...

Imports slid 5.5 percent in December from a year earlier, the smallest drop in 14 months, today’s report showed. Japan posted a trade surplus for an 11th straight month, totaling 545.3 billion yen ($6.1 billion).

Wednesday, 27 January 2010

UK economy returns to growth, IMF raises forecast

The UK economy has returned to growth, albeit barely. Reuters reports:

Britain only just crept out of an 18-month recession at the end of 2009, suggesting any monetary tightening remains a long way off and raising fears about the prospects for recovery ahead of an election due by June.

The Office for National Statistics said on Tuesday gross domestic product rose by 0.1 percent between October and December, well below analysts' forecasts for growth of 0.4 percent and lower than all the predictions in a Reuters poll.

Other economic reports on Tuesday were also positive.

In the US, home prices and consumer confidence are up. Bloomberg reports:

The S&P/Case-Shiller home-price index increased 0.2 percent in November, the sixth consecutive gain, the group said today in New York...

The Conference Board’s confidence index increased to 55.9, higher than the median estimate of economists surveyed, from a revised 53.6 in December, the New York-based private research group said...

German business confidence is also up. Again from Bloomberg:

German business confidence rose more than economists forecast to an 18-month high in January as the global economic recovery boosted exports.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 95.8 from 94.6 in December. That’s the highest since July 2008 and the tenth straight increase...

With all the positive data flow, the IMF has also become more confident about the global economy. From Reuters:

The International Monetary Fund sharply raised its global economic growth forecast, casting developing countries in a leading role while rich nations struggle with high unemployment and government debt.

In an update of its World Economic Outlook, the IMF said on Tuesday the world economy will expand by 3.9 percent in 2010, much higher than the 3.1 percent it projected in October, and the pace will pick up to 4.3 percent next year.

Tuesday, 26 January 2010

Interest rates unchanged in Japan, China's 7-day repo rate jumps

The Bank of Japan left interest rates unchanged today. Bloomberg reports:

The Bank of Japan held interest rates near zero and said it remains committed to fighting deflation as gains in the yen risk stunting the recovery from the country’s worst postwar recession.

Governor Masaaki Shirakawa and his colleagues kept the benchmark overnight lending rate at 0.1 percent by a unanimous vote, the central bank said in a statement today in Tokyo. All 17 economists surveyed by Bloomberg News predicted the decision.

While the BoJ is likely to maintain its easy monetary policy over the coming months, policy in China is expected to tighten. From Channel NewsAsia:

An interest rate hike is now expected as early as the second quarter, as regulators clamp down on aggressive lending. There is speculation in China that the government will officially change its fiscal and monetary policy stance at the party congress in March.

According to DBS, it is expecting to see a series of three hikes this year - for a total move of 27 basis points...

Market watchers are now pricing in a 3 to 5 per cent appreciation of the currency, starting as early as March or April.

Meanwhile, the yield on China's one-year bills were unchanged today but the seven-day repo rate jumped. From Bloomberg:

The cost of borrowing money in China’s interbank market jumped the most in a month after a report said some of the nation’s lenders will have to set aside more money as reserves from today.

The seven-day repurchase rate, which gauges the supply of funds in the market, climbed 30 basis points to 1.64 percent as of 1:15 p.m. in Shanghai, poised for its biggest increase since Dec. 25. It earlier touched this year’s high of 1.7 percent.

Monday, 25 January 2010

Stock markets dip into the red for the year

Stock markets around the world fell last week fell as concerns increased that China will try to cool its economy and the president of the United States proposed steps to limit risk-taking by banks.

Over the past week, China added to signs that it was throttling back stimulative measures initiated during the financial crisis.

After raising the reserve requirement of banks by 50 basis points the previous week, the People's Bank of China guided up yields on its bills again last week. It raised the auction yield on its one-year bills by 8 bps to 1.9264 percent on Tuesday and its three-month bills by about 4 basis points to 1.4088 percent on Thursday.

On Wednesday, chairman of the China Banking Regulatory Commission Liu Mingkang said in an interview that some lenders had been asked to rein in credit because they had failed to meet regulatory requirements.

Expectation of further tightening by Chinese policy makers were also raised on Thursday when China reported that its economy accelerated to 10.7 percent growth in the fourth quarter. Concern was exacerbated by the fact that inflation also accelerated, hitting 1.9 percent in December.

However, while events in China almost certainly influenced global markets, they would not have been enough to make such a large impact if not for coincident market-unfriendly developments in the US.

On Thursday, President Barack Obama presented a proposal that would limit the size of banks and prohibit them from owning, investing in, or sponsoring hedge funds, private equity funds, or proprietary trading operations for their own profit. Coming on the back of another proposal on 14 January to tax large financial firms, Wall Street is understandably becoming increasingly nervous about the political and regulatory climate in the US.

And to make matters worse, there is a risk that Wall Street may lose an important ally of sorts.

While the Federal Reserve had uncharacteristically taken a back seat in the midst of these market-moving events, it became a centre of attention again on Friday when some US Democratic Party senators voiced reservations about Ben Bernanke’s re-appointment as chairman. The uncertainty this engendered weighed on markets on Friday. The possibility of the market losing one perceived source of support -- the so-called Bernanke put, whereby the Fed allows asset bubbles to run but steps in to stop market crashes -- also did not help.

In the face of these developments, some investors decided to dump stocks.

In the US, the S&P 500 fell 3.9 percent to 1,091.76 last week, its biggest drop since October. Over the last three trading days of the week, the S&P 500 lost 5.1 percent.

Over the week, the Dow Jones Industrial Average fell 436.67 points, or 4.1 percent, to 10,172.98. The Nasdaq Composite Index decreased 3.6 percent to 2,205.29.

In Europe, the Dow Jones Stoxx 600 Index fell 2.6 percent to 249.91 last week, also the sharpest weekly drop since October. National benchmark indices fell in all 18 western European markets. The FTSE 100 fell by 2.8 percent, the DAX by 3.1 percent and the CAC 40 by 3.4 percent.

In Asia, the MSCI Asia Pacific Index fell 3.5 percent to 122.39 last week. The Nikkei 225 Stock Average declined 3.6 percent, the Hang Seng Index lost 4.3 percent and the Shanghai Composite Index dropped 3.0 percent.

Most of the above indices are now in the red for the year.

Stock market performances year-to-date
 End 2009Close on
22 January
S&P 5001,115.101,091.76-2.1
FTSE 1005,412.95,303.0-2.0
CAC 403,936.333,820.78-2.9
Nikkei 22510,546.4410,590.550.4
Hang Seng21,872.520,726.18-5.2
Shanghai Composite3,277.143,128.59-4.5

Markets have clearly lost their bullish momentum. Less clear is what the latest bout of market weakness means for stocks in the next few months.

While it is quite obvious that the tightening trend in China is negative for stocks, it is not clear that it will be enough to derail the bull run in stocks. Bull markets usually survive early central bank tightening. Meanwhile, other major central banks like the Federal Reserve and the European Central Bank are very unlikely to raise interest rates anytime soon.

On the US political front, President Obama's plan to place restrictions on banks still lacks details and there are doubts as to whether it will be passed by Congress. Meanwhile, Bernanke's re-appointment as Fed chairman has become a little more secure after expressions of support for him from several senators over the weekend.

Still, the events of the past week remind us that with the global economic recovery still fragile, stock markets are vulnerable to shifts in policy around the world.

Saturday, 23 January 2010

Markets fall

Markets closed the week with another tumble. Bloomberg reports:

Equities and commodities tumbled for a third day on concern President Barack Obama’s proposal to rein in banks and a possible interest-rate increase in China will stifle the economic recovery. Oil and gold retreated more than 1 percent and Treasuries posted for a third weekly gain.

The Standard & Poor’s 500 Index lost 2.2 percent at 4:20 p.m. in New York to cap a 5.1 percent three-day plunge, its biggest since reaching a 12-year low in March. In Europe, the Dow Jones Stoxx 600 Banks Index sank 1.9 percent to an almost six-month low. The MSCI Emerging Markets Index declined 1.8 percent and fell 4.7 percent over the past five days, its biggest weekly loss since October. The yield on the 10-year Treasury note added 0.01 percentage point to 3.6 percent, trimming its weekly drop.

Obama’s plan to stem risk-taking at banks spurred concern that a recovery in S&P 500 earnings from a record nine-quarter slump will be threatened. U.S. financial shares extended losses in afternoon trading on uncertainty over whether Federal Reserve Chairman Ben S. Bernanke will be confirmed for a second term.

Friday, 22 January 2010

US and eurozone economies continue expansion, China accelerates

The Conference Board's US leading index suggests that the economic recovery is maintaining its momentum. From Bloomberg:

The index of U.S. leading indicators rose more than anticipated in December, a sign the economy will keep growing through the first half of the year.

The New York-based Conference Board’s gauge of the outlook for the next three to six months climbed 1.1 percent, the most in three months, after increasing 1 percent in November. The gain exceeded the median forecast in a Bloomberg News survey for a 0.7 percent rise...

Other indicators out on Thursday suggest a possible slowing though.

Manufacturing in the Philadelphia area grew in January, corroborating figures last week showing expansion at factories in the New York region. The Fed Bank of Philadelphia’s general economic index of manufacturing in the area fell to 15.2 this month from 22.5 in December...

Labor Department figures today showed jobless claims unexpectedly increased to 482,000 last week from 446,000 a week earlier, reflecting a backlog of applications from the year-end holidays.

Indicators out from Europe also suggest a possible slowing of the economy. Again from Bloomberg:

Expansion in Europe’s service and manufacturing industries unexpectedly slowed in January, adding to signs the pace of the economy’s recovery may weaken.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro region fell to 53.6 from 54.2 in December, London-based Markit Economics said today in an initial estimate. Economists expected an increase to 54.4, according to the median of 15 estimates in a Bloomberg survey. A reading above 50 indicates expansion...

An index of services dropped to 52.3 in January from 53.6 in the previous month, Markit said. A gauge of manufacturing increased to 52 from 51.6 in December.

There are no worries of slower growth in China. In fact, quite the opposite. From AFP/CNA:

China's red-hot economy expanded by 8.7 percent in 2009 but inflation surged towards the end of the year, according to government data released Thursday that laid bare the risks of overheating.

Gross domestic product in the world's third-largest economy returned to double-digit growth in the fourth quarter of 2009 at 10.7 percent, and surpassed the government's target of eight percent for the year...

China's consumer price index, the main gauge of inflation, rose 1.9 percent year-on-year in December. Authorities are already clamping down on bank lending and hiking borrowing costs to keep a lid on price pressures...

China's urban fixed asset investment, a measure of government spending on infrastructure and a key driver of the economy, rose 30.5 percent in 2009 while overall fixed asset investment rose 30.1 percent, Thursday's data showed.

Thursday, 21 January 2010

China limits lending

The tightening trend in China is becoming more apparent by the day. From Bloomberg on Wednesday:

China has told some banks to limit lending and will restrict overall credit growth in the nation to 7.5 trillion yuan ($1.1 trillion) this year, banking regulator Liu Mingkang said.

Some lenders were asked to rein in credit because they failed to meet regulatory requirements including those for capital, Liu, chairman of the China Banking Regulatory Commission, said in an interview today in Hong Kong. New loans in the first 10 days of this year were “relatively high,” he told the Asian Financial Forum.

The news hit stocks in China and the rest of Asia.

Chinese stocks slid, dragging the region’s benchmark to its third straight decline, after regulators told some of the nation’s banks to limit lending. The dollar gained against 14 of 16 of the most-traded currencies.

The Shanghai Composite Index lost 2.9 percent and Hang Seng Index slipped 1.9 percent, leading declines in Asia. The Morgan Stanley Asia Pacific Index fell 0.7 percent to 124.44 at 5 p.m. in Tokyo...

Stocks in Europe weren't spared.

European shares fell the most in six weeks, retreating from a 15-month high for the Dow Jones Stoxx 600 Index, on concern that China, the driver of the global recovery, may rein in stimulus measures...

The Stoxx 600 slid 1.5 percent to 256.3, the biggest decrease since Dec. 8. The measure has surged 62 percent since March as record-low interest rates and about $12 trillion committed by governments worldwide to revive economic growth boosted equities.

Nor were those in the US.

U.S. stocks slid, with the Standard & Poor’s 500 Index retreating from a 15-month high, as results at companies from International Business Machines Corp. to Morgan Stanley disappointed investors and China curbed lending...

The Standard & Poor’s 500 Index sank 1.1 percent to 1,138.04 at 4:05 p.m. in New York and earlier lost as much as 1.8 percent for its biggest intraday drop since November. The Dow Jones Industrial Average tumbled 122.28 points, or 1.1 percent, to 10,603.15. The Nasdaq Composite lost 1.3 percent to 2,291.25, trimming its gain for 2010 to less than 1 percent.

Wednesday, 20 January 2010

PBC raises rates, BoC holds

Bloomberg reports that China has raised interest rates again.

China’s central bank guided its benchmark one-year bill yield to the highest level in 14 months to curb record loan growth and prevent bubbles in the nation’s property and stock markets.

The People’s Bank of China sold the bills at a rate of 1.9264 percent in open-market operations, according to data compiled by Bloomberg. The yield increased eight basis points, the same as last week, after five months during which the benchmark was left unchanged.

However, despite Canada's index of leading indicators posting its biggest gain in almost 27 years, the Bank of Canada did not change its stance on interest rates on Tuesday.

The Bank of Canada left its benchmark interest rate at a record low and repeated a pledge to leave it unchanged through June as a strong currency and weak U.S. demand slow an economic recovery.

The target rate for overnight loans between commercial banks remained 0.25 percent, where it’s been since April, as expected by all 26 economists surveyed by Bloomberg.

With most of Tuesday's economic reports from the major economies somewhat negative, the BoC's caution may be warranted.

US homebuilder confidence unexpectedly fell in January.

Confidence among U.S. homebuilders unexpectedly dropped in January to the lowest level since June, a sign the housing recovery may stall in coming months.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 15 from 16 the prior month, the Washington-based group said today. Readings below 50 mean most respondents view conditions as poor.

Japanese consumer confidence slumped to a six-month low in December.

Japan’s household sentiment fell to a six-month low in December, indicating the need for measures to stimulate consumer spending and sustain a recovery from the country’s worst postwar recession.

The confidence index dropped to 37.6 last month from 39.5 in November, the Cabinet Office said today in Tokyo. The government lowered its assessment of the report, describing sentiment as “weak.”

Also down is German investor confidence.

German investor confidence declined more than economists estimated in January as the economic recovery showed signs of losing momentum.

The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict developments six months ahead, fell to 47.2 from 50.4 in December, its fourth straight drop. Economists expected it would ease to 50, according to the median of 37 forecasts in a Bloomberg News survey.

About the only thing up was UK inflation.

The U.K. inflation rate jumped in December by the most since records began in 1997, posing a challenge to policy makers as they consider when to start raising interest rates.

Consumer prices climbed 2.9 percent from a year earlier, 1 percentage point more than in November, the Office for National Statistics said today in London. The rate rose after oil prices jumped and 2008 cuts in sales tax and retail prices weren’t repeated. The pound extended gains after the release.

Tuesday, 19 January 2010

Strong near term growth for US economy

New Deal Democrat at the Bondad Blog sees strong near term growth for the US economy.

The LEI's will probably be reported later this week [as] having had another good month in December...

Bottom line: the first 3-6 months of 2010 are going to show growth, probably strong growth...

Beyond six months, NDD looks at the yield curve to forecast the economy.

... If you look at only one indicator and nothing else, this is the one to observe. Needless to say, the strongly positive yield curve now foretells strong economic growth throughout the entirety of next year - provided there is no deflation...

A double-dip is unlikely.

[T]he double-dip after the 1980 recession has a very simple and straightforward explanation: Paul Volker of the Fed raised the Federal Funds rate from 9% [to] 19% in 6 months...

... Unless the Fed does the same sort of thing in the next couple of months, a repeat performance is very unlikely...

However, he sees a joker in the deck.

It is disconcerting to say the least that only 2 quarters into an economic expansion following the most serious destruction of consumer demand in over half a century, Oil is already over $80/barrel...

... If there is a dramatic overshooting a la 2007, there will be a double-dip...

Over the longer term, NDD is somewhat pessimistic.

[I]n the last twenty years our economy seems to have lived off of one asset bubble after another, each one requiring lower and lower interest rates, and each one requiring more and more pump priming by the Treasury, as the middle class has gradually been hollowed out and gone deeper and deeper into debt...

... Like a drug user, the US economy requires more and more financial narcotic to achieve the same effect, and as a result expansions and recoveries will become shallower and shorter, and recessions deeper, more frequent, and /or longer, until those issues are addressed.

Monday, 18 January 2010

BoJ raises economic assessment but Japanese recovery still at risk

The Bank of Japan has raised its economic assessment for four of the country’s nine regions but some of the recent economic data show that the Japanese economic recovery may still be a difficult one.

Today, the Bank of Japan released its regional economic report for January. The report noted that "the economy had picked up in all regions", with four regions reporting an improvement in the economic trend and five maintaining their assessments compared with October 2009.

Also today, the Ministry of Economy, Trade and Industry released final industrial production data showing that output increased 2.2 percent in November after having increased 0.5 percent the previous month. The increase is less than the preliminary estimate of 2.6 percent.

While the Bank of Japan's latest report and the industrial production data indicate that the economy remains on a recovery path and is likely to expand again in the fourth quarter, reports last week indicate that the outlook for the Japanese economy is far from robust.

Data from the Cabinet Office's economy watchers survey indicate that the recovery may have lost some momentum.

In the survey report released on Tuesday, the diffusion index for current conditions rose to 35.4 in December from 33.9 in November. However, this was after two consecutive months of declines, including a record seven-point decline in November.

The diffusion index for future conditions also rose in December to 36.3 from 34.5 in November after two consecutive months of declines.

Machinery orders data released by the Cabinet Office on Thursday also indicate that the economy faces headwinds with respect to business investment.

Core private sector machinery orders declined 11.3 percent in November to 625.3 billion yen. This was the lowest monthly reading since this report was first compiled in April 1987. The weakness in machinery orders is in sharp contrast to the recovery in industrial production so far.

The decline in machinery orders, however, is consistent with the Bank of Japan's report today which noted that business fixed investment "either continued to decline substantially or remained at a low level in all regions".

Newly-appointed Japanese Finance Minister Naoto Kan noted the fragility of the economic recovery in his first speech to the lower house of parliament today.

"Japan's economy is picking up but it lacks self-sustaining strength, and the situation remains severe," Kan said. "Looking ahead, there are risks such as a further worsening of the employment situation and deflation, and the foundations for the economy to return to a strong private demand-led growth path remain fragile."

So while the Japanese economy probably maintained its expansion in the fourth quarter, doubts about the strength of the economic recovery will continue.

Saturday, 16 January 2010

US industrial production and consumer confidence rise

US economic data on Friday were mostly positive. Bloomberg reports:

Production in the U.S. rose for a sixth consecutive month, consumers gained confidence and price increases slowed, indicating the economic recovery is being sustained into 2010 without generating inflation.

Output climbed 0.6 percent in December for a second month, according to figures from the Federal Reserve issued today in Washington. The cost of living increased 0.1 percent last month, less than the median forecast of economists surveyed by Bloomberg News...

Another report today showed manufacturing accelerated in the New York Fed region this month. The Fed Bank of New York’s general economic index rose to 15.9 from 4.5 in December. Readings above zero in the so-called Empire State Index signal manufacturing expansion in the state and parts of New Jersey and Connecticut...

The Reuters/University of Michigan preliminary index of consumer sentiment for January increased to 72.8, less than anticipated, from 72.5 in December. The gauge averaged 66.3 last year after reaching a record 28-year low of 55.3 in November 2008.

Meanwhile, inflation remains relatively low in the euro area. Reuters reports:

More expensive fuel drove euro zone consumer prices higher in December as expected but core inflation remained flat, indicating that any headline price rises will be subdued over the coming months.

The European Union's statistics office on Friday confirmed its earlier estimate that consumer prices in the 16 countries using the euro rose 0.9 percent year-on-year in December after a 0.5 percent gain in November...

Consumer prices rose 0.3 percent month-on-month, Eurostat said, and here fuel prices had a downward impact, along with cheaper clothes, lower rents and less expensive phone calls...

Separately, Eurostat said the euro zone recorded a 4.8 billion euro ($6.9 billion) trade surplus in November.

Exports fell only 6 percent year-on-year while imports dropped 15 percent, pointing to a pick-up in external demand for euro zone goods.

But things are heating up in China. From Bloomberg:

China’s retail sales grew at the fastest pace in more than two decades in 2009 as government stimulus spurred demand for home appliances, cars and electronics in the world’s most populous nation.

Retail sales in real terms, which are adjusted for inflation, posted their biggest gain since 1986, Commerce Ministry spokesman Yao Jian said at a press briefing in Beijing today, without disclosing the growth rate. Rural consumption expanded around 15.5 percent from a year earlier, outpacing urban spending for the first time, Yao added.

And China's foreign exchange reserves has risen to another record. Again from Bloomberg:

China’s foreign-exchange reserves surged to a record level in December and new loans exceeded forecasts, raising the stakes in Premier Wen Jiabao’s campaign to avert asset-price bubbles.

Reserves rose 23 percent to $2.4 trillion, the world’s largest, according to a People’s Bank of China statement on its Web site yesterday. Banks extended 379.8 billion yuan ($55.6 billion) of new loans, taking the annual total to an unprecedented 9.59 trillion yuan, the PBOC reported...

In December, direct investment from abroad more than doubled from a year earlier to $12.1 billion. The value of China’s euro and yen assets also affects the total.

Friday, 15 January 2010

ECB holds rates, US retail sales fall

Europe had some good news to report on Thursday in the form of higher industrial production. From Bloomberg:

European industrial output rose at twice the pace economists forecast in November as companies stepped up production of goods from car parts to machinery.

Output in the economy of the 16 nations using the euro increased 1 percent from October, when it fell 0.3 percent, the European Union’s statistics office in Luxembourg said today. Economists had projected production would rise 0.5 percent, according to the median of 30 estimates in a Bloomberg News survey. From a year earlier, November output declined 7.1 percent after falling 10.9 percent in October.

But the ECB is unlikely to raise interest rates soon. Again from Bloomberg:

The European Central Bank kept its benchmark interest rate at a record low as it unwinds some of its emergency stimulus measures and monitors an economic recovery that may be losing steam.

ECB policy makers meeting in Frankfurt left the main rate at 1 percent, as predicted by all 51 economists in a Bloomberg News survey. The bank will not raise rates until the fourth quarter, a separate survey forecasts.

The Fed is also unlikely to raise rates soon and Thursday brought some justification. From Bloomberg:

Sales at U.S. retailers unexpectedly fell in December following a bigger gain than previously estimated the prior month, highlighting the risk that the largest part of the economy will be slow to recover.

The 0.3 percent decrease came after a 1.8 percent jump the prior month, Commerce Department figures showed today in Washington. Other reports showed inventories rose more than forecast in November and jobless claims climbed last week.

Thursday, 14 January 2010

US recovery broadens, Japanese machinery orders plunge

The US economic recovery appears to be broadening. From Bloomberg on Wednesday:

The U.S. economy improved in 10 of the Federal Reserve’s 12 districts last month, marking a broadening of the recovery, the central bank said today.

“While economic activity remains at a low level, conditions have improved modestly further,” the Fed said in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. The Philadelphia and Richmond Fed districts were the exceptions, reporting “mixed conditions.”

But data today show that Japan's recovery remains fragile. Again from Bloomberg:

Japan’s reliance on exports deepened after machinery orders from service companies plunged the most in more than two decades in November.

Orders from non-manufactures dropped 10.6 percent to 380.7 billion yen ($4.15 billion), the lowest since May 1987, the Cabinet Office said today in Tokyo...

Core orders, which exclude shipbuilding and utilities, slid 11.3 percent in November to 625.3 billion yen, the lowest monthly booking since comparable data were first compiled in April 1987, today’s report showed. The drop was the sharpest in a year and worse than all 25 estimates of economists surveyed by Bloomberg...

Other data released today indicate though that the deflationary pressure in Japan may be easing. From Reuters:

Japanese wholesale prices fell 3.9 percent in the year to December, matching a median estimate from analysts, in a sign of persistent deflation due to weak domestic demand.

But the pace of annual decline in the corporate goods price index (CGPI) slowed for the fourth straight month after peaking at 8.5 percent in July and August, Bank of Japan data showed on Thursday, reflecting the waning effect of oil price drops.

Speaking of deflation, Richard Alford has a post at naked capitalism claiming that "the US did not experience deflation at any point between 1996 and 2006, nor were there imminent bouts of deflation" and that therefore, in "so far as the interest rate reductions in 2001-2003 and the painfully slow tightening cycle that ended in 2006 reflected fear of a domestic demand induced deflation, monetary policy was inappropriate".

Wednesday, 13 January 2010

China tightens amid signs of recovery in Japan and the US

Chinese authorities are no longer waiting to tighten policy. Bloomberg reports:

An unexpected shift by China’s central bank to restrain lending may foreshadow higher interest rates and a relaxation in the nation’s currency peg against the dollar.

The People’s Bank of China yesterday raised the proportion of deposits that banks must set aside as reserves by 50 basis points starting Jan. 18. Economists hadn’t anticipated the move until at least April, the median of 11 forecasts in a Bloomberg News survey showed last week.

That was not the only signal for higher interest rates in China on Tuesday. From AFP/CNA:

China's central bank on Tuesday raised the interest rate on its one-year treasury bills, which analysts said was an attempt to rein in continued aggressive lending by the nation's banks...

The central bank on Tuesday sold 20 billion yuan worth of one-year bills at a yield of 1.8434, a rise of eight basis points and the first hike since August.

A global economy that is clearly on a recovery path has apparently reduced Chinese policy-makers' concerns about policy tightening. Bloomberg reports improved confidence and a bigger current account surplus in Japan.

Confidence among Japanese merchants rose for the first time in three months in December, rebounding from the previous month’s record drop.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 35.4 from 33.9 in November, the Cabinet Office said today in Tokyo...

Other reports today added to evidence that the recovery is relying on demand from abroad as spending slumps at home. Exports fell the least in 14 months in November, helping the current-account surplus expand to 1.1 trillion yen, the Finance Ministry said. Meanwhile bank lending declined for the first time in four years in December as companies pared expenditure, Bank of Japan figures showed.

Unlike Japan, US economic recovery is often accompanied by a bigger trade deficit and this time is proving no exception. From Bloomberg on Tuesday:

The trade deficit in the U.S. widened in November more than anticipated as imports climbed faster than exports, pointing to a rebound in global demand that is fueling growth.

The gap expanded 9.7 percent to $36.4 billion, the highest level since January, from a revised $33.2 billion in October, Commerce Department data showed today in Washington. Imports increased 2.6 percent, reflecting a jump in oil prices, while exports rose to the highest level in a year.

Tuesday, 12 January 2010

Chinese and Indian exports surge

China appears to be well on its way to a full recovery. From Bloomberg:

China’s exports surged in December and imports rose to a record in a stronger-than-forecast trade rebound that may lessen the case for governments to sustain stimulus programs this year.

Exports climbed 17.7 percent from a year earlier, the first increase in 14 months, and imports jumped 55.9 percent, the customs bureau said on its Web site yesterday. Year-on-year comparisons are affected by the tumble that began in late 2008, when the global credit crisis deepened.

In fact, concerns are rising that the Chinese economy may be overheating with bank lending surging in the first week of 2010.

Meanwhile, the other emerging Asian giant also reported strong trade data on Monday. From Bloomberg:

India’s exports increased to a 15- month high in December as recovery in the global economy boosted demand for the South Asian nation’s products.

Overseas shipments surged to $14.6 billion after rising 18.2 percent from a year earlier in the previous month, the first increase in 14 months, Trade Minister Anand Sharma told reporters in Mumbai today. Exports are rebounding after an average 17.4 percent decline in the past year.

Monday, 11 January 2010

Global economy still on recovery path

Some negative data notwithstanding, last week's economic reports mostly show that the global economic recovery remains intact.

The on-going economic recovery is probably best indicated by the continued rise of purchasing managers indices around the world in December. The JPMorgan global all-industry output index rose to 53.4 in December from 51.7 in November, indicating acceleration in global economic growth.

A report from the Organisation for Economic Co-operation and Development last week indicated that the global expansion is likely to be maintained. The OECD's composite leading indicator for its member countries rose to 102.3 in November from 101.4 in October.

Employment data reported on Friday were among the disappointments for the week. The unemployment rate in the euro area rose to 10.0 percent in November, the highest level since August 1998. In the United States, the economy lost 85,000 jobs in December while the unemployment rate stayed at 10.0 percent.

On the other hand, the US employment report did show that the rate of job losses has abated and the trend is clearly improving. November data were even revised to show a gain of 4,000 jobs.

Reports from the Institute for Supply Management last week support the picture of an improving economy. The ISM's PMI rose to 55.9 in December, the highest since April 2006, from 53.6 in November. The non-manufacturing index read 50.1 in December, rising from 48.7 in November and indicating that the services sector is no longer shrinking.

In the euro area, a survey by the European Commission shows that the outlook continues to brighten despite the sluggish recovery so far. The economic sentiment indicator rose to 91.3 in December from 88.8 in November. This suggests that the economy is likely to maintain positive growth after having pulled out of recession in the third quarter with a 0.4 percent expansion.

Even Japan, still facing deflation after two consecutive quarters of growth, is likely to maintain its economic recovery. The coincident index of Japanese business conditions showed a rise to 95.9 in November from 94.3 in October while the leading index rose to 91.2 from 89.4.

So on the whole, last week's reports show that the global economy is continuing its recovery.

Saturday, 9 January 2010

US, Canada lose jobs, eurozone unemployment rises

Employment data out on Friday were mostly disappointing.

The US economy unexpectedly lost jobs in December. Bloomberg reports:

The U.S. unexpectedly lost 85,000 jobs in December, supporting Federal Reserve forecasts that a labor market recovery will take time and making it more likely interest rates will stay near zero for the next six months.

Payrolls fell last month after a revision showed a gain of 4,000 in November, the first in almost two years. The median estimate of economists surveyed by Bloomberg News projected no change in December. The jobless rate held at 10 percent.

The Canadian economy also unexpectedly lost jobs in December. Bloomberg reports:

Canada unexpectedly lost jobs in December, led by transportation and public administration, keeping the jobless rate close to the highest in more than a decade.

Employment fell by 2,600 last month, after a November gain of 79,100, Statistics Canada said today in Ottawa. The unemployment rate was unchanged at 8.5 percent, close to an 11- 1/2 year high of 8.7 percent set in August. The median forecast of 22 economists surveyed by Bloomberg was for a 20,000 gain in employment and an unchanged jobless rate.

And in the euro area, unemployment was higher than expected in November. Again from Bloomberg:

Europe’s unemployment rate unexpectedly increased to 10 percent, the highest in more than 11 years, as companies cut costs in the wake of the worst recession in more than six decades.

November’s euro area jobless rate rose from a revised 9.9 percent in October, the European Union statistics office in Luxembourg said today. That’s the highest since August 1998. Economists forecast a November rate of 9.9 percent after the 9.8 percent initially reported for October, a Bloomberg survey showed. The euro-area economy expanded 0.4 percent in the third quarter from the previous three months, according to a separate report.

Friday, 8 January 2010

Chinese bill yields higher, UK interest rates unchanged

The People's Bank of China took a small step on Thursday to curb liquidity. Bloomberg reports:

China’s central bank sold three-month bills at a higher interest rate for the first time in 19 weeks after saying its focus for 2010 is controlling the record expansion in lending and curbing price increases.

Stocks fell across Asia and oil declined on concern growth will slow in China, the engine of the world economy’s recovery from its worst recession since World War II. The People’s Bank of China offered 60 billion yuan ($8.8 billion) of bills at a yield of 1.3684 percent, four basis points higher than at last week’s sale, according to a statement.

The Bank of England was also in the news on Thursday. From Reuters:

The Bank of England kept the scale of its asset purchase programme unchanged at 200 billion pounds on Thursday and said it would decide whether or not to extend it next month.

The central bank also left interest rates at a record-low 0.5 percent, a decision which had been unanimously expected by economists polled by Reuters and caused no reaction from sterling or government bonds.

Elsewhere in Europe, the improving economic picture was bolstered by news of a jump in confidence but offset by a fall in retail sales. From Bloomberg:

An index of executive and consumer sentiment in the 16- nation euro region rose for a ninth month to 91.3 from 88.8 in November, the European Commission in Brussels said today. That beat economists’ forecasts and was the highest since June 2008, three months before Lehman’s collapse exacerbated the global financial crisis. Retail sales dropped 1.2 percent in November from the previous month, a separate report showed.

Thursday, 7 January 2010

Mixed economic data

US economic data over the past two days have been mixed.

From Bloomberg on Tuesday:

The index of signed purchase agreements, or pending home sales, dropped 16 percent as Americans waited for a first-time buyer tax credit to be extended, the National Association of Realtors said today in Washington. Factory orders rose 1.1 percent, more than twice as much as projected, according to figures from the Commerce Department.

And from Bloomberg on Wednesday:

The Institute for Supply Management’s index of non- manufacturing businesses that make up almost 90 percent of the economy rose to 50.1 from 48.7 in November, according to the Tempe, Arizona-based group...

Figures from ADP Employer Services showed companies cut an estimated 84,000 jobs in December, the fewest since March 2008. The decline last month was larger than the 75,000 decrease forecast by economists in a Bloomberg survey.

Planned payroll reductions dropped 73 percent in December from a year earlier, according to another report from the job placement firm Challenger, Gray & Christmas Inc.

Reports from the euro area on Wednesday were also mixed. From Bloomberg:

Factory-gate prices in the euro region declined 4.4 percent from a year earlier in November after decreasing 6.6 percent in October, the European Union’s statistics office in Luxembourg said today. Orders to industrial companies fell 2.2 percent in October from September, a separate report showed. That was the biggest drop since January 2009. In the year, new orders fell 14.5 percent.

But other data reported by Bloomberg were more positive.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro region increased to 54.2 from 53.7 in November, London-based Markit Economics said today. That matched an initial estimate published on Dec. 16 and the highest since October 2007. A reading above 50 indicates expansion...

An index of services rose to 53.6 in December from 53 in the previous month, Markit said. That was the highest since November 2007. A gauge of euro-area manufacturing increased to 51.6 from 51.2 in the previous month.

Reuters reports that UK service activity also improved in December.

Service sector activity accelerated slightly in December after the strongest growth in new orders since September 2007, boosting economists' belief that the economy exited recession in the last quarter of 2009...

CIPS/Markit said the business activity index rose to 56.8 from November's 56.6, slightly above economists' forecasts and just below October's 27-month high of 56.9.

But UK consumer confidence fell sharply. Again from Reuters:

Consumer confidence suffered its sharpest fall in over a year in December, a survey showed on Wednesday, even as separate figures showed both job placements and wages rose last month.

The Nationwide Building Society's consumer confidence index fell to 69 from an upwardly revised 74 in November, after respondents sharply scaled back their expectations for the coming year...

Separate figures showed permanent job placements in Britain grew at their fastest pace in nearly two and a half years in December while salaries rose for the second month running.

The REC/KPMG index of permanent placements by recruitment agencies rose to 62.8 in December from 61.7 in November - the fifth consecutive month it has been above the 50 level that separates growth from contraction and the highest since July 2007.

Wednesday, 6 January 2010

Bernanke: Not so right, but not so wrong

Federal Reserve chairman Ben Bernanke's speech on Sunday on monetary policy and the housing bubble did not exactly go unnoticed by the public.

In his speech at the annual meeting of the American Economic Association in Atlanta, Georgia, Bernanke tried to explain how the Fed's monetary policy had been conducted in the early to mid 2000s and how it affected the housing market. He essentially concluded that monetary policy was more or less appropriate for the conditions prevailing but that regulation could have been improved to prevent the housing bubble.

In looking at the link between monetary policy and the rapid rise in house prices, Bernanke concluded that the "direct linkages, at least, are weak". He claimed that "the magnitude of house price gains seems too large to be readily explainable by the stance of monetary policy alone".

Instead, Bernanke suggested that "the best response to the housing bubble would have been regulatory, not monetary". He noted that the increased use of more exotic types of mortgages and the associated decline of underwriting standards meant that stronger regulation and supervision of underwriting practices and lenders' risk management would have been a "more effective and surgical approach to constraining the housing bubble".

Many were not convinced by Bernanke's arguments, to say the least.

Barry Ritholtz at The Big Picture rejected Bernanke's absolution of monetary policy. "But in the crisis timeline, the regulatory and supervisory failures came about AFTER the 1% Fed rates had set off a mad scramble for yields," he pointed out. "Had rates stayed within historical norms, the demand for higher yielding products would not have existed — at least not nearly as massively as it did with 1% rates."

And Paul Krugman pointed out in his column in The New York Times that focusing on unconventional mortgages is "awfully 2007". He wrote: "We now know that many perfectly conventional mortgages went bust; we know that commercial real estate was at least as overblown as housing."

On the same point, Stefan Karlsson said that many other countries with housing bubbles did not have exotic mortgages.

Apart from his point that the rise in house prices seemed too large to be accounted for by low interest rates alone, Bernanke's defence of monetary policy rested on the premise that it had conformed with the prescriptions of the Taylor Rule.

To this, Mike Shedlock at Global Economic Trend Analysis pointed out that "there is considerable disagreement over what [the Taylor Rule] says". For example, once the Case-Shiller Housing Index is substituted for owners' equivalent rent in the consumer price index, the inflation rate would have been shown to be much higher than the official rate from 2002 to 2005, making monetary policy appear looser.

To be fair, though, in my opinion, Bernanke was not saying that monetary policy had no role in the housing bubble. At the end of his speech, he actually made a tacit acknowledgement that low interest rates were a factor behind the housing bubble when he said that "if adequate [regulatory] reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks".

Ultimately, Bernanke's main message was probably that regulation is a better tool for dealing with bubbles than monetary policy, which should focus on stabilising macroeconomic conditions. However, this message would probably have been more readily accepted if he had not appeared so eager to exonerate the Fed on its monetary policy.

Instead, he should probably have done what Krugman suggested, which was to be "more forthright about the Fed’s undoubted failures: Greenspan’s rejection of advice about the risks of subprime lending, and the failure of top officials, BB included, to recognize the housing bubble in real time."

One thing that Bernanke only briefly touched on in his speech but might well have been an important factor in the housing bubble is the global savings glut hypothesis. He showed that between the fourth quarter of 2001 and the third quarter of 2006, countries in which capital inflows rose had greater house price appreciation.

In fact, if he had gone back further, he could have shown that the US current account deficit started to expand in a persistent manner around the mid-1990s, roughly the same time that US house prices started to accelerate. In those days, Fed monetary policy had not been extraordinarily loose. In fact, the Fed had tightened monetary policy in 1994.

However, significant events were unfolding elsewhere.

In 1994, China devalued the renminbi. The value of its foreign exchange reserves, which had been growing only slowly before, more than doubled that year and has not looked back since.

In 1995, the Bank of Japan cut interest rates below 1 percent. The yen carry trade is widely considered to have begun that year.

So capital inflows from elsewhere were arguably the main drivers of increased financial liquidity in the 1990s.

And yet, entering the 2000s, the Fed could do little to offset the increased liquidity with tighter monetary policy because the US economy entered a recession in 2001 that was followed by a jobless recovery.

Caught between a rock and a hard place, the Fed chose to lower rates pre-emptively anyway, turning monetary policy in the early 2000s even looser than the 1990s and exacerbating liquidity conditions. This essentially risked long term financial instability for the sake of short-term economic stability.

To make things worse, throughout the early 2000s, the Fed under then-chairman Alan Greenspan resisted attempts to increase regulation of the financial sector, something that Bernanke acknowledged in his speech might have helped mitigate the excesses.

As things went, the fed funds rate hit a low of 1 percent in 2003, which was about when the housing bubble began its blow-off stage.

So if countries like Japan and China planted the seeds of the housing boom, the Fed watered the seeds and ensured that it grew into a bubble.

Today, the US, Japan and China are the three biggest economies in the world. It does not seem unfair to me to suggest that all three share the bulk of the blame for the bubble.

In any case, we probably need to move away from the idea that we can pin all the blame for the bubble on just one factor and one party.

Tuesday, 5 January 2010

Manufacturing expansion accelerates

The US recovery in manufacturing continued in December. Bloomberg reports:

U.S. manufacturing expanded in December at the fastest pace in more than three years, capping a late-2009 global factory rebound that helped pull the world out of the worst slump since the 1930s.

The Institute for Supply Management’s factory index rose to 55.9, the highest level since April 2006, according to the Tempe, Arizona-based group. Readings greater than 50 signal expansion...

There was, however, still no recovery in construction.

The economic recovery may get little relief from construction. Spending on construction projects dropped 0.6 percent in November, to the lowest level in more than six years, the Commerce Department said today in Washington.

At least the recovery in manufacturing is global. Again from Bloomberg:

Europe’s manufacturing industry expanded at the fastest pace in 21 months in December after a pickup in global trade helped the euro region emerge from the worst recession in at least six decades.

An index of manufacturing, based on a survey of purchasing managers in the 16-nation euro area, rose to 51.6 from 51.2 in November, London-based Markit Economics said today. That was in line with an initial estimate released on Dec. 16 and was the highest since March 2008. A reading above 50 indicates expansion.

And in the UK, it was not just manufacturing that provided positive data. From Reuters:

A sharp rise in manufacturing activity, mortgage approvals and a key measure of money supply boosted hopes on Monday that the economy is gaining traction after an 18-month recession...

British manufacturing activity expanded at its fastest pace in more than two years in December, according to the CIPS/Markit purchasing managers' index which rose to 54.1 last month, after a surprise fall to 51.8 in November...

The recovery in Britain's housing market ... continued to maintain momentum.

Approvals for mortgages for house purchase, a lead indicator of demand, rose by almost 3,000 in November to 60,518. This was the highest level since March 2008, and more than double the record low hit in November 2008...

Net mortgage lending rose by a surprisingly large 1.459 billion pounds in November, its highest since February. And while consumers repaid unsecured debt for a fifth consecutive month, the 376 million pound repayment was well below the 591 million pounds repaid in October.

There was also a marked rise in the Bank's preferred money supply measure, which attempts to strip out distortions from the financial sector and measure flows through the real economy.

The gauge, M4 excluding intermediate other financial corporations, rose by 0.9 percent in November, its fastest monthly pace since April. The three-month annualised rate picked up to -2.2 percent from October's -5.2 percent.

However, for manufacturing alone, few countries could beat the growth rate exhibited in China. From AFP/CNA:

Manufacturing in China continued to expand in December as new orders received by factories rose for the ninth month in a row on booming demand from home and abroad, a survey showed Monday.

The HSBC China Manufacturing PMI, or purchasing managers' index, rose to 56.1 in December from 55.7 in November, the survey showed...

A separate official PMI published by the China Federation of Logistics and Purchasing showed manufacturing activity rose to 56.6 per cent in December -- the highest reading in 20 months.

Even deflation-prone Japan is maintaining its manufacturing recovery. Last week, Japan reported that its manufacturing PMI rose to 53.8 in December from 52.3 in November.

Monday, 4 January 2010

Markets shine in 2009

What a difference a year makes.

At the beginning of last year, I had written about investors having endured severe losses during the previous year in the wake of the collapse of the housing and credit bubble in the United States, losses that I said they will not forget for a long time (see "Markets suffer painful 2008").

Well, investors may not have forgotten but they seemed to have forgiven as they poured back into markets in 2009, giving rise to spectacular gains for the year.

The following table shows the gains made by major stock markets according to the Morgan Stanley Capital International indices.

 Percentage gain
Local currency
US dollars

Some smaller developed stock markets made even bigger gains.

 Percentage gain
Local currency
US dollars
Hong Kong55.2855.20

However, the most spectacular gains came among emerging markets.

 Percentage gain
Local currency
US dollars

Commodity markets, which had also suffered in 2008, made a similar turnaround last year. The Reuters/Jefferies CRB index jumped 23.5 percent in 2009. Copper in particular had a spectacular year, surging about 140 percent. Crude oil rose 77.9 percent.

Gold rose about 24 percent in 2009. It had actually risen 5.5 percent in 2008 as a safe haven play. Last year it rose again, this time as an inflation hedge.

The rush back into risky assets by investors meant that carry trade currencies weakened. The low-yielding US dollar fell 4.2 percent in 2009 based on the Dollar Index but gained 2.6 percent against the even-lower-yielding Japanese yen.

While low interest rates hurt currencies like the US dollar and the yen, it was precisely the fuel that drove asset and commodity markets up in 2009. The financial crisis that enveloped the world in 2007 and 2008 and sent economies into recession had induced central banks to lower interest rates. Low rates in turn drove investors back into markets that had the potential to provide better returns or hedge against inflation.

Easy monetary policy was not the only factor in driving up markets; governments also helped by providing various forms of guarantees to support their financial systems and restore confidence while spending heavily to reflate their economies.

Stimulative monetary and fiscal policies eventually helped economies and markets to recover in 2009.

As we enter 2010, the question many are asking is whether the rally in markets will continue, stall or even reverse.

The obvious risk for markets is a tightening of macroeconomic policy. With most economies now out of recession, an unwinding of policy stimuli in 2010 is a possibility and could threaten markets. In fact, some central banks, notably Australia's, have already begun a series of interest rate increases.

Some investors may draw comfort from the fact that the most important central bank in the world, the Federal Reserve, has verbally committed to keeping interest rates low for an extended period of time.

It would be small comfort though. The Fed also did not raise interest rates in the latter half of 2006 and in 2007. Fed hesitancy in raising rates encouraged investors to rush into stocks and commodities in 2007 and early 2008, only for the financial crisis to erupt and cause markets to tank in 2008.

The Fed is reluctant to raise interest rates this time around because it recognises that credit conditions remain tight. The latter means that the economic recovery is still fragile.

Meanwhile, commercial real estate in the US and many other parts of the world is still in recession. Dubai World's announcement of a debt standstill in November last year reminded us of this.

And the US housing market is far from fully recovered. Many fear that a second wave of foreclosures is imminent as rates for an increasing number of mortgages are scheduled to be reset in 2010.

So there is no room for investors to be complacent. Despite the recent economic recovery and on-going macroeconomic stimuli, conditions now may not be all that different from those in early 2008.

Still, the market gains of 2009 provided welcome relief to investors licking their wounds from the year before.

Friday, 1 January 2010

US jobless claims fall, UK house prices rise

The US economy appears poised to start adding jobs soon. From Bloomberg:

Fewer Americans than anticipated filed claims for unemployment benefits last week, pointing to an improvement in the labor market that will help sustain economic growth next year.

Initial jobless claims fell by 22,000 to 432,000 in the week ended Dec. 26, the lowest level since July 2008, Labor Department figures showed today in Washington. The number of people collecting unemployment insurance fell in the prior week to 4.98 million, and those receiving extended benefits jumped.

There was also good news from the UK, with Reuters reporting that house prices are rising.

House prices rose for an eighth consecutive month in December to end the year nearly 6 percent higher than they started it, mortgage lender Nationwide said on Thursday.

However, the monthly rise of 0.4 percent was the smallest since April and the lender cautioned that the outlook for 2010 remained uncertain.

And credit conditions in the UK are expected to ease. Again from Reuters:

Lenders expect to make credit more easily available to households and businesses in the first quarter of 2010, a survey by the Bank of England showed on Thursday.

The central bank's quarterly credit conditions survey also showed that lenders expect to narrow spreads on both corporate and mortgage lending in the coming months.

On that positive note, I'd like to wish all readers a Happy New Year.