US and UK fourth quarter GDP revised up

The economic data on Friday were mostly positive.

US fourth quarter GDP was revised up. MarketWatch reports:

U.S. real gross domestic product increased at a 5.9% seasonally adjusted annualized pace in the final three months of 2009, revised up from 5.7% estimated last month. The revision was exactly in line with expectations of economists surveyed by MarketWatch...

Although GDP grew at the fastest pace in six years, final demand in the economy was tepid, rising 1.9% annualized, revised down from 2.2% earlier. Excluding exports, final sales to U.S. purchasers rose at a 1.6% annual rate.

Other US economic data were mixed. From Bloomberg:

Sales of previously owned U.S. homes unexpectedly dropped 7.2 percent in January to a seven-month low, indicating a lack of job growth is undermining government incentives to bolster the housing market...

The Institute for Supply Management-Chicago Inc. said its business barometer climbed to 62.6 this month from 61.5 in January. Readings greater than 50 signal expansion.

The Reuters/University of Michigan final index of consumer sentiment for February dropped to 73.6 from 74.4 in January.

The UK also reported an upward revision to fourth quarter GDP. From Reuters:

The economy grew faster than previously estimated in the last three months of 2009 but the 18-month recession from which it emerged turned out to be deeper, revised official figures showed Friday.

Chancellor Alistair Darling welcomed the upward revision of fourth quarter GDP growth to 0.3 percent from an originally reported 0.1 percent but said there were still big risks and that support for the economy could not be withdrawn yet.

Meanwhile, Japan looks set to continue growing at the start of 2010. From AFP/CNA:

As overseas demand for Japan's cars, electronics and other goods has picked up, the country's industrial output rose 2.5 per cent in January from December, marking the 11th straight monthly gain, new figures showed...

However, deflation was still burdening the economy, as core consumer prices fell 1.3 per cent in January from a year earlier, marking the 11th straight month of decline, separate data showed Friday. The figure was in line with expectations.

Deflation is less of a concern in the euro area, where the inflation rate for January has been confirmed at 1 percent.

Mixed data from the US, economic sentiment falls in the euro area

Thursday's economic data from the US were mixed. Bloomberg reports:

Companies scaled back orders for equipment in January and filings for jobless benefits rose, the latest figures in a series of reports this week that show the U.S. economy is recovering in fits and starts.

Orders for durable goods excluding transportation unexpectedly fell 0.6 percent, the most since August, while a measure of bookings for business equipment showed its biggest decrease in nine months, the Commerce Department in Washington said...

Bookings for all goods meant to last several years rose 3 percent, more than anticipated and reflecting a jump in commercial aircraft. They were forecast to rise 1.5 percent, according to the survey.

The number of Americans filing first-time claims for jobless benefits rose 22,000 in the week ended Feb. 20 to 496,000, Labor Department figures in Washington showed. Economists forecast claims would fall to 460,000, according the median in a Bloomberg survey...

The Federal Housing Finance Agency said in a separate report today that home prices fell 1.6 percent in December after a 0.4 percent gain a month earlier. Prices dropped 1.2 percent in the fourth quarter from a year earlier, the smallest decline in two years, as a tax credit for homebuyers boosted demand.

Meanwhile, the economic recovery in Europe appears to be stalling. Again from Bloomberg:

European confidence in the economic outlook unexpectedly worsened in February after the euro region’s recovery almost stalled in the fourth quarter.

An index of executive and consumer sentiment in the 16 nations using the euro slipped to 95.9 from a revised 96 in January, the European Commission in Brussels said today. The economic recovery may fail to gather strength for most of 2010, the commission said in a separate report.

US new home sales fall, eurozone industrial orders rise, Japanese exports accelerate

The prospects for recovery in the US housing market became doubtful again on Wednesday. From Bloomberg:

Sales of new homes in the U.S. unexpectedly fell in January to the lowest level on record, a sign that an extension of a government tax credit may not be enough to rekindle demand.

Purchases declined 11 percent to an annual pace of 309,000, below the lowest forecast in a Bloomberg News survey of economists, figures from the Commerce Department showed today in Washington. The median sales price dropped 2.4 percent from January 2009 and the supply of unsold homes increased.

The report underscores Federal Reserve Chairman Ben S. Bernanke’s comments today that the economy is in a “nascent” recovery still in need of low interest rates. Homebuilders face competition from foreclosed properties that have driven down prices at the same time companies are reluctant to create jobs.

In contrast, industrial orders in the euro area provided a positive surprise. Bloomberg reports:

European industrial orders unexpectedly rose for a second month in December led by a surge in demand for capital goods such as machinery and equipment.

Orders to industrial companies in the 16-nation euro area rose 0.8 percent from November, when they gained 2.7 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast a drop of 1 percent, according to the median of 18 estimates in a Bloomberg News survey. From the year-earlier month, industrial orders increased 9.5 percent, the first annual gain since July 2008.

And in Japan, export growth accelerated in January. Bloomberg reports:

Japan’s exports climbed at the fastest pace in almost 30 years in January, supporting the nation’s economic recovery as falling wages damp demand at home.

Shipments abroad advanced 40.9 percent from a year earlier, the biggest increase since February 1980, the Finance Ministry said today in Tokyo. The median estimate of 22 economists surveyed by Bloomberg was for exports to rise 39.5 percent...

Imports rose 8.6 percent, the first increase since October 2008, today’s report showed. That was less than the median estimate for a 12.1 percent gain.

Confidence falls in US and Germany

Consumer confidence took a big fall in the US in February. Bloomberg reports:

Confidence among U.S. consumers fell in February to the lowest level in 10 months, a sign that concern about job prospects may hold back the spending needed to sustain the recovery.

The Conference Board’s confidence index slumped to 46, below the lowest forecast in a Bloomberg News survey of economists, from 56.5 in January, a report from the New York- based private research group showed today...

On a more positive note, home prices rose again in December.

The S&P/Case-Shiller home-price index of 20 U.S. cities increased 0.3 percent. Compared with December 2008, prices fell 3.1 percent, the smallest year-over-year decline since May 2007.

Meanwhile, confidence has also fallen among business executives in Germany. Bloomberg reports:

German business confidence unexpectedly fell for the first time in 11 months in February as the coldest winter in 14 years damped retail sales and construction.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, fell to 95.2 from 95.8 in January. Economists expected a gain to 96.1, according to the median of 37 forecasts in a Bloomberg News survey. The index reached a 26-year low of 82.2 in March last year.

The news was not much better elsewhere in Europe.

Italian consumer confidence unexpectedly declined for a second month in February as job losses fueled concern about the economic outlook. In France, consumer spending dropped in January after the government trimmed a program to encourage new car sales.

Chicago Fed index up

There was mixed news on the US economy on Monday. Reuters reports:

Economic activity rose sharply in January, further evidence the recovery is gaining ground, but manufacturing in Texas slipped in February.

The Federal Reserve Bank of Chicago on Monday said its gauge of the national economy rose to +0.02 from -0.58 in December, the second time in three months it was positive.

Also on Monday, however, the Federal Reserve Bank of Dallas said its Texas monthly manufacturing index slumped to -0.1 in February from 8.3 in January.

The Fed appears likely to keep interest rates low anyway.

On Monday ... San Francisco Fed President Janet Yellen, speaking in San Diego, said the U.S. economy still needs ultra-low interest rates since inflation is "undesirably low," and growth is expected to be sluggish for several years.

Fed still likely to take its time in tightening

The Federal Reserve raised the discount rate last week. However, a hike in the federal funds rate is not likely to follow soon.

On 18 February, the Federal Reserve announced that it was raising the discount rate charged to banks for direct loans from 0.50 percent to 0.75 percent with effect from the following day. In addition, with effect from 18 March, the term of loans at the discount window reverts to being primarily overnight as compared to the maximum maturity of 90 days allowed during the financial crisis.

Although the discount rate was raised, the Fed said in a statement accompanying the move that it did not represent a tightening of monetary policy. Rather, it was a step towards "further normalization of the Federal Reserve's lending facilities" and does not signal any change in the outlook for the economy or for monetary policy.

Following the move, Fed officials at separate events said much the same thing.

In a speech to the Economics Club of Hampton Roads in Norfolk, Virginia, Federal Reserve Board Governor Elizabeth Duke pointed out that the discount rate "is not the rate we target for monetary policy purposes" and the rate hike is "not expected to lead to tighter financial conditions for households and businesses".

In a speech at the Augusta Metro Chamber of Commerce annual meeting, Federal Reserve Bank of Atlanta President Dennis Lockhart said that he "would not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent" but rather as "a normalization step".

Federal Reserve Bank of St Louis President James Bullard told reporters after speaking to the Economic Club of Memphis that the move is "part of a normalization process" and "does not indicate anything one way or the other about what we might eventually do with the federal funds rate."

Indeed, last week's economic data indicate that the Fed is unlikely to take actual tightening action soon.

A Labor Department report on Friday showed that inflation is unlikely to be a near-term concern for the Fed. While the headline consumer price index rose 0.2 percent in January and 2.6 percent in the preceding 12 months, the CPI excluding food and energy fell 0.1 percent and was up only 1.6 percent from a year ago.

And with the unemployment rate at 9.7 percent in January, just slightly lower than the peak of 10.1 percent in October last year, the Fed's expectation that substantial resource slack will restrain inflation is likely to be maintained in the near future.

Nevertheless, other data last week indicate that the economic recovery remains on track and that it is not too early to prepare for an eventual exit from the ultra-loose monetary policy initiated at the height of the financial crisis.

Reports last week show that the housing market may be stabilising. Housing starts rose 2.8 percent in January and the National Association of Home Builders/Wells Fargo index of builder confidence increased to 17 in February, the highest in three months, from 15 in January.

And while the unemployment rate remains near its peak in the cycle, the industry capacity utilisation rate increased to 72.6 percent in January from 71.9 percent in December, its seventh consecutive month of increase after the utilisation rate had fallen to a low of 68.3 in June last year.

Historically, the unemployment rate peaks soon after the industry capacity utilisation rate troughs, and is eventually followed by a series of increases in the federal funds rate.

Still, the Fed is likely to take its time in tightening monetary policy this time. It has made clear in the last few monetary policy meetings that even as it sees the economy improving, exceptionally low levels of the federal funds rate are likely to be warranted for an extended period.

Therefore, last week's data and the move on the discount rate are unlikely to lead to a hike in the federal funds rate soon.

US inflation remains subdued

Thursday's discount rate increase notwithstanding, the Fed is unlikely to feel rushed into tightening monetary policy after Friday's US inflation numbers. From Bloomberg:

The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is generating little inflation.

The consumer-price index increased 0.2 percent for a fifth straight month, led by higher fuel costs, Labor Department figures showed today in Washington. Excluding energy and food, the so-called core index unexpectedly fell 0.1 percent, reflecting a drop in new-car prices, clothing and shelter.

Furthermore, the US economic expansion is likely to slow in coming months. From Reuters:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 128.4 for the week ended Feb. 12 from 130.0 the prior week.

It was the lowest reading since November 13, 2009, when it stood at 127.5.

The index's annualized growth rate declined for the tenth straight week to 17.1 percent, from 19.6 percent in the prior report, which was revised down from an original 19.7 percent.

It was the lowest rate since Aug. 7, 2009 when it read 14.6 percent.

Meanwhile, the economic recovery remains on track in the euro area. From Bloomberg:

Europe’s service and manufacturing industries expanded for a seventh month in February, as rising export orders helped to counter sluggish domestic demand.

A composite index based on a survey of euro-area purchasing managers in both industries remained at 53.7 in February, London-based Markit Economics said today. Economists forecast a drop to 53.5, according to the median of 16 estimates in a Bloomberg News survey. A reading above 50 indicates expansion...

An index of services dropped to 52 in February from 52.5 in the previous month, Markit said today. A gauge of manufacturing rose to 54.1 from 52.4.

Fed raises discount rate, BoJ holds

The Fed's exit from ultra-loose monetary policy took another step forward on Thursday. Bloomberg reports:

The Federal Reserve Board raised the discount rate charged to banks for direct loans to 0.75 percent from 0.50 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.

“These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the Federal Reserve Board said today in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”

The discount rate action is effective on Feb. 19. The Board also said that effective March 18 “the typical maximum maturity for primary credit loans will be shortened to overnight.”

While the timing was unexpected, economic reports earlier in the day were already suggesting that tighter monetary policy was not inappropriate. From Bloomberg:

Manufacturing will remain at the forefront of a U.S. economic recovery that’s likely to extend at least through the middle of the year as companies invest in new equipment, reports today indicated.

The New York-based Conference Board’s measure of the outlook for the next three to six months increased 0.3 percent in January. The Federal Reserve Bank of Philadelphia’s general economic index rose to 17.6 in February from 15.2 as a measure of orders surged to the highest level in more than five years. Readings greater than zero signal growth...

The number of Americans filing first-time claims for unemployment insurance unexpectedly rose last week, indicating improvement in the labor market will be uneven. Initial jobless claims rose by 31,000 to 473,000 in the week ended Feb. 13, the Labor Department in Washington said today...

Prices paid to factories, farmers and other producers accelerated more than anticipated in January, Labor Department figures showed. The 1.4 percent rise in the producer price index followed a 0.4 percent increase in December and reflected in part higher energy costs.

In contrast, a scheduled policy meeting by the Bank of Japan on Thursday saw interest rates being left unchanged. AFP/CNA reports:

Japan's central bank announced Thursday that it was leaving its benchmark interest rate unchanged at 0.1 percent as it fights stubborn deflation in the world's second-largest economy.

This is even as economic indicators show continuing economic recovery in Japan, the coincident index for December rising to 97.4 from 96 in November and the leading index to 94.3 from 91.

Industrial production and housing starts rise in the US

Wednesday's data show that the US economy continues to recover. From Bloomberg:

Industrial production in the U.S. rose more than anticipated in January as factories churned out more consumer goods and business equipment, leading the recovery of the world’s biggest economy.

The 0.9 percent increase in production at factories, mines and utilities followed a 0.7 percent gain the prior month, according to the Federal Reserve in Washington. Figures from the Commerce Department today showed housing starts climbed to a 591,000 annual pace, exceeding the median forecast in a Bloomberg News survey...

The Commerce Department said housing starts increased 2.8 percent in January after dropping 0.7 percent. The annual rate was faster than the median forecast in a Bloomberg survey for a 580,000 pace. Construction of single-family houses rose 1.5 percent, while work on multifamily homes such as townhouses and apartment buildings jumped 9.2 percent...

A separate report from the Labor Department showed prices of goods imported into the U.S. rose 1.4 percent in January, reflecting in part a jump in the cost of petroleum.

There were also positive data from the euro area. Again from Bloomberg:

European exports increased in December as a strengthening global economy and a weaker euro boosted demand for goods from the region.

Exports from the euro area rose a seasonally adjusted 3.1 percent from November, when they remained unchanged, the European Union’s statistics office in Luxembourg said today. European construction output gained 0.5 percent from November, when it fell 0.8 percent, a separate report showed.

UK inflation hits 3.5 percent in January

The UK economy just returned to growth in the fourth quarter but already, inflation is surging. From Reuters:

Inflation surged further above the Bank of England's target in January, forcing Bank of England Governor Mervyn King to write a public letter where he said inflation should still get back on track later this year.

Official data showed consumer price inflation rose to 3.5 percent in January from December's 2.9 percent -- in line with economists' expectations, after a rise in value-added tax on January 1, as well as falls in oil and food prices a year ago coming out of the annual comparison.

At least the recovery has not faltered, not in the US anyway. From Bloomberg:

Confidence among U.S. homebuilders rose in February to a three-month high, a sign that the housing market is stabilizing amid government support.

The National Association of Home Builders/Wells Fargo index of builder confidence increased to 17, higher than anticipated, from 15 the prior month, the Washington-based group said today. Readings below 50 mean most respondents view conditions as poor...

The Federal Reserve Bank of New York’s general economic index rose to 24.9 this month from 15.9 in January. Readings above zero in the so-called Empire State Index signal growth in the area covering New York and parts of New Jersey and Connecticut.

Japanese economy grows 1.1 percent in fourth quarter

Japan's economic recovery remained intact at the end of 2009. BBC reports:

Japan's economy grew by a better-than-expected 1.1% in the final quarter of last year, according to official figures...

Consumer spending, which accounts for about 60% of the Japanese economy, rose 0.7% from the previous quarter as shoppers took advantage of government incentives on cars and home appliances. However, consumer spending remains weak in general.

Corporate capital spending rose by 1% in the quarter, seeing the first expansion since the three months to March 2008.

Public investment fell 1.6%, while exports jumped 5%.

Fed policy to support US Treasuries

The prices of United States Treasuries fell last week as a fresh supply of government notes and bonds hit markets. However, the Federal Reserve's commitment to keep short-term interest rates low for an extended period is likely to limit further downside.

At its last monetary policy meeting last month, the Fed reiterated its expectation that the federal funds rate will stay at exceptionally low levels for an "extended period". However, its emergency programmes implemented at the height of the financial crisis will be gradually wound down, including those for the purchase of securities.

A commitment by the Fed to keep the federal funds rate low would, in most times in the past, have been enough to keep yields on longer-term Treasuries low.

The accompanying chart shows how, over each of the years from 1955 to 2009, the change in the 10-year Treasury yield (shown on the vertical axis) has varied with the difference between the change in the federal funds rate and the spread between the 10-year yield and the federal funds rate at the beginning of each year (shown on the horizontal axis).

Assuming that the Fed keeps the federal funds rate unchanged for the rest of the year, the expected change in the 10-year yield in 2010 -- represented by the red square -- is negative.

Still, these are not normal times.

Fiscal stimulus to maintain the current economic recovery on top of on-going budget deficits is forcing the US government to sharply increase the sale of government securities. The US government has projected that the US budget deficit will rise from US$1.4 trillion in 2009 to a record US$1.6 trillion this year and the public debt will rise from US$7.5 trillion at the end of 2009 to US$9.3 trillion in 2010.

The past week perhaps provided a foretaste of things to come.

US Treasuries fell last week as the government sold US$81 billion in notes and bonds. The yield on the 10-year Treasury note rose 13 basis points to 3.69 percent. The 30-year bond yield also increased 13 basis points to 4.65 percent.

The sale of US government securities fetched yields that were higher than expected as the increase in supply pushed down the prices of Treasuries. The sale of US$40 billion of three-year notes, US$25 billion of 10-year notes and US$16 billion of 30-year bonds drew yields of 1.377 percent, 3.692 percent and 4.720 percent respectively, all of which were higher than forecasts in Bloomberg surveys of bond-trading firms.

A flight to safety probably mitigated the rise in US Treasury yields last week as the euro area remained rocked by uncertainties created by the debt problems in Greece and other eurozone countries.

Still, not all recent events in other countries are helping to keep interest rates in the US down.

Yesterday, China celebrated the start of the Year of the Tiger but investors received no presents from Chinese policy-makers to start the new year with. Quite the opposite, in fact.

Last Friday, the People's Bank of China announced that the reserve requirement for financial institutions will be raised by 50 basis points on 25 February. The increase will bring the rate for large banks to 16.5 percent.

This was the second time in about a month that the PBC has raised the reserve requirement. It had also raised the requirement by 50 basis points on 18 January.

The Reserve Bank of Australia has been even more aggressive in monetary tightening, raising interest rates three times last year. It left its overnight cash rate target unchanged at 3.75 percent after its latest monetary policy meeting in February but indicated that interest rates would be "adjusted further" to keep inflation within the central bank’s target range of 2 to 3 percent.

As central banks around the world unwind emergency levels of monetary stimulus initiated during the financial crisis, global interest rates are likely to rise.

Having said all that, the federal funds rate at near zero provides a powerful anchor for US Treasuries and the recent increase in yields for the latter are unlikely to be sustained for very long.

China tightens again

China has taken yet another step to rein in lending. From AFP/CNA:

China's central bank on Friday ordered financial institutions to increase the amount of money they keep in reserve, as authorities seek to rein in rampant lending amid fears of asset bubbles.

The People's Bank of China said the deposit reserve ratio would be raised by 50 basis points as of February 25, the second reported increase since the start of the year...

The increase will bring the rate for large banks to 16.5 percent, according to Dow Jones Newswires.

Economic data on Friday were mostly positive.

The US reported a rise in retail sales in January. From Bloomberg:

January sales at U.S. retailers climbed more than anticipated, while consumer confidence unexpectedly fell this month from a two-year high, showing a recovery in household spending may be gradual.

Retail purchases increased 0.5 percent, the third gain in the past four months, Commerce Department figures showed today in Washington. The Reuters/University of Michigan’s consumer sentiment gauge dropped to 73.7 from 74.4 the prior month.

There were also positive signals on Japanese consumption. Bloomberg reports:

Japan’s household sentiment rose for the first time in four months as concerns the economy will slip into another recession receded.

The confidence index climbed to 39 last month from 37.6 in December, the Cabinet Office said today in Tokyo. The median estimate of seven economists surveyed by Bloomberg News was for sentiment to rise to 38.

Not so positive, however, was fourth quarter GDP growth in Europe. Bloomberg reports:

Europe’s recovery almost stalled in the fourth quarter as waning spending and investment in Germany unexpectedly brought growth in the region’s largest economy to a halt.

Gross domestic product in the 16-nation euro region rose 0.1 percent from the third quarter, when it gained 0.4 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast expansion of 0.3 percent, the median of 34 estimates in a Bloomberg survey showed. The recession in Greece deepened, with GDP falling 0.8 percent in the fourth quarter after a 0.5 percent slump in the previous three months.

China warns of financial risks even as inflation slows

Inflation in China turned out lower than feared in January but authorities there still appear concerned about credit growth. AFP/CNA reports:

New lending surged to 1.39 trillion yuan (203.5 billion dollars) last month, and property prices rocketed at the fastest rate since April 2008, figures from the National Bureau of Statistics said...

Following the release of the data, the central bank called for vigilance against "possible hidden systemic financial risks" and controls on credit in a report that otherwise announced no new major policies.

"Credit funds will support projects under way, and loans for new projects are to be strictly controlled," it said without elaborating...

Meanwhile, inflation in January was lower than expected, with the consumer price index rising just 1.5 percent year-on-year.

The increase was mainly driven by food prices, which rose 3.7 percent during the first month of the year. But inflation slowed from December, when prices rose 1.9 percent...

Property prices in 70 medium and large cities meanwhile rose 9.5 percent in January from the same month a year ago, the fastest pace since April 2008...

The prices increased by 1.3 percent last month from December, according to a statement on the National Bureau of Statistics website.

Chinese and US trade up, Japanese machinery orders jump

A report on Wednesday showed that Chinese trade surged in January. From Bloomberg:

China’s imports climbed for a third straight month in January, signaling increasing strength in domestic demand that’s aiding the global economic rebound.

Imports climbed a record 85.5 percent from a year before, a jump that was influenced by a shift in the lunar new year holiday to February this year from January 2009, customs bureau figures showed in Beijing today. Exports rose 21 percent in a second monthly advance after 13 declines that may reinforce overseas calls for China to allow a stronger currency.

But the seasonally-adjusted month-on-month rate was weaker.

Seasonally adjusted, exports fell 5.5 percent from December and imports dropped 0.9 percent, the customs bureau said.

In the US, trade maintained its momentum in December.

The U.S. trade deficit unexpectedly widened in December as imports rose faster than exports, gains that signaled a pickup in global economic growth.

The gap grew to $40.2 billion, the biggest in a year, from $36.4 billion in November, according to Commerce Department data released today in Washington. Imports increased 4.8 percent and exports climbed 3.3 percent to the highest level since October 2008.

The trade data reflect the global economic recovery. And there was evidence on Wednesday that the recovery will continue.

In Japan, machinery orders rebounded in December.

Japanese machinery orders rose the most in nine years from a record low, supporting a recovery from the country’s deepest postwar recession.

Domestic orders, a sign of business investment in three to six months, climbed 20.1 percent in December from a month earlier, the Cabinet Office said today in Tokyo. That was faster than the median 8 percent gain estimated by economists.

In the UK, industrial production rose in December.

U.K. manufacturers increased production in December at triple the pace economists forecast as the economy emerged from its worst recession on record.

Output rose 0.9 percent from November, the Office for National Statistics said today in London. Economists predicted a 0.3 percent increase, according to the median of 26 forecasts in a Bloomberg News survey...

Overall industrial production, which includes utilities and mining and quarrying and accounts for 17 percent of the economy, rose 0.5 percent on the month. Economists predicted a 0.2 percent gain, the median of 30 forecasts in a Bloomberg survey showed.

However, continental Europe reverted to being the bearer of negative news, with both France and Italy reporting declines in industrial production in December.

Industrial production in France and Italy unexpectedly declined in December as demand for factory goods remained weak after the worst recession in six decades.

French industrial production fell 0.1 percent from November, when it increased a revised 0.6 percent, Paris-based statistics office Insee said today. Italian output fell 0.7 percent from November, when it rose a revised 0.4 percent, statistics office Istat said in Rome. Economists expected increases of 0.5 percent in France and 0.1 percent in Italy, according to their median forecasts in Bloomberg News surveys.

Europe provides good news for markets

Bloomberg reports some good economic news from Germany on Tuesday.

German exports unexpectedly jumped in December, notching their fourth successive monthly gain, as the global recovery bolstered demand for goods from Europe’s largest economy.

Sales abroad, adjusted for working days and seasonal changes, increased 3 percent from November, when they gained 1.1 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.1 percent decline, the median of 10 estimates in a Bloomberg News survey showed. From a year earlier, exports rose 3.4 percent, the first annual increase since October 2008...

Imports rose 4.5 percent in December from the previous month, the statistics office said. The trade surplus narrowed to 13.5 billion euros ($18.5 billion) from a revised 17.2 billion euros in November.

However, it was another piece of news from Europe that was the main focus of investors' attention.

European officials said they are considering assistance for Greece as its struggle to contain the European Union’s highest budget deficit threatens to erode confidence in the euro.

“We are talking about support in the broad sense,” Olli Rehn, the EU’s new economic affairs commissioner, said in an interview in Strasbourg, France today. Michael Meister, financial affairs spokesman for German Chancellor Angela Merkel’s Christian Democratic Union, said in an interview in Berlin that aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.”

Investors reacted positively to the turn of events.

Stocks rallied, with emerging-market equities recovering from the worst three-day slide in a year, and the euro and commodities gained as European officials said they were considering financial assistance for Greece. Treasuries tumbled, while Greek bonds surged.

The Standard & Poor’s 500 Index rose 1.3 percent at 4:10 p.m. in New York. The MSCI Emerging Markets Index increased 1.9 percent after falling 6.1 percent in the past three sessions. Greece’s ASE Index climbed 5 percent, rebounding from four days of losses. The euro strengthened the most in more than five months against the dollar, snapping four days of declines, and ended a three-day drop against the yen. Oil, copper and aluminum surged at least 2.2 percent to help lead gains in commodities.

Japanese exports recover, leading indicators rise

Japan's exports appear to have made a substantial recovery. From Bloomberg on Monday:

Japan’s current-account surplus widened for a fifth month in December as demand from Asia helped exports advance for the first time in more than a year.

The surplus rose to 901 billion yen ($10 billion) from a year earlier, the Ministry of Finance said in Tokyo today. Exports rose 11.7 percent, the first advance in 15 months, while weak demand at home caused imports to fall 6 percent.

The export recovery took a small step back in December though.

On a seasonally adjusted basis, the current-account surplus narrowed to 1.101 trillion yen in December. Exports fell 0.2 percent from November, and imports climbed 1.5 percent.

Of greater concern is the continuing fall in bank lending.

The export recovery has yet to spur spending by companies and consumers at home. A Bank of Japan report today showed bank lending fell 1.7 percent in January from a year earlier, the biggest drop in more than four years, in part because of waning corporate demand for loans.

Still, leading indicators show that the recovery is likely to be sustained. From Bloomberg last week:

Japan’s broadest indicator of economic health rose for a ninth month in December as growth in Asia spurred factory output.

The coincident index, a composite of 11 indicators including industrial production and retail sales, gained to 97.6 from 96 a month earlier, the Cabinet Office said today in Tokyo. The median estimate of nine economists surveyed by Bloomberg was for an advance to 97.3...

The leading index, a gauge of economic conditions in three to six months, rose to 94 in December from a revised 91 in November, today’s report showed.

And from Reuters on Monday:

Japan's service sector sentiment index rose to 38.8 in January, a Cabinet Office survey showed on Monday ... from 35.4 in December...

The outlook index, indicating the level of confidence in future conditions, rose to 41.9 from 36.3 in December.

Economic trends remain positive

Reports last week mostly showed that the global economy is expanding and will continue to do so although employment in the United States may not have done so yet.

The global economy entered 2010 on a positive note, according to surveys of purchasing managers worldwide. The JPMorgan global all-industry output index edged up to 53.2 in January from 53.1 in December. Growth was led by manufacturing, with the JPMorgan global manufacturing PMI rising to 56.1 in January, its highest reading in five and a half years, from 54.6 in December. Growth was pulled down by the services sector as the JPMorgan global services business activity index fell to 51.2 in January from 51.8 in December.

Global economic growth is likely to continue, according to the composite leading indicators (CLI) published by the Organisation for Economic Co-operation and Development. A report on Friday by the OECD showed that the CLI for the OECD area as a whole rose 0.9 point in December. The CLIs for the US and the euro area increased by the same amount. The CLI for Japan increased by 1.2 points. According to the report, the CLIs provided "stronger signals of an expansionary economic outlook" in December than in the previous month.

In the US, economic reports last week were mixed but not inconsistent with continuing gradual expansion of the economy.

In line with the global pattern, purchasing managers' data released by the Institute for Supply Management at the beginning of last week were generally positive. Its manufacturing PMI rose to 58.4 in January, the highest since August 2004, indicating that manufacturing activity expanded strongly at the beginning of 2010.

The services sector was somewhat weaker, though. The non-manufacturing index rose to just 50.5 in January from 49.8 in December. The business activity index actually slipped to 52.2 in January from 53.2 the previous month.

Employment has also been slow to return to growth. The employment report released by the US Labor Department on Friday showed that non-farm payrolls fell by 20,000 in January based on the establishment survey.

Set against this, however, was an unexpected drop in the unemployment rate to 9.7 percent from 10.0 percent in December. This was achieved because, in contrast to the establishment survey, the household survey on which the unemployment rate is based showed that employment rose by 541,000.

In any case, a return to job growth is unlikely to be far off as the employment trend has remained generally positive. As long as the economy maintains its recovery, as the OECD CLI for the US suggests it will, it is a matter of time before the data start showing an unambiguous increase in employment.

Unemployment falls in US and Canada, eurozone woes continue

US employment appears to be stabilising. From Bloomberg:

The unemployment rate in the U.S. unexpectedly dropped to 9.7 percent in January, indicating the labor market may be poised to climb out of its deepest slump since World War II.

More than half a million Americans found work, a Labor Department report showed today in Washington, helping push the jobless rate to the lowest since August. A separate survey of employers showed payrolls declined by 20,000 as construction companies and state and local governments cut back...

The survey of households showed employment increased by 541,000 workers last month and the number of people in the labor force rose. The gain brought the participation rate, or the share of the population in the workforce, up to 64.7 percent from 64.6 percent.

Meanwhile, Canadian employment rebounded in January. Bloomberg reports:

Canada gained almost three times as many jobs as expected in January, led by part-time positions for youth, pushing the unemployment rate down to the lowest since September.

Employment rose by 43,000 last month, Statistics Canada said today in Ottawa, and the unemployment rate fell to 8.3 percent. The median forecast of 22 economists surveyed by Bloomberg was for a 15,000 gain in employment and a jobless rate of 8.5 percent.

Europe, however, continued to be a source of bad news as the week drew to a close.

Bloomberg reports that German industrial production unexpectedly declined in December.

German industrial production unexpectedly declined in December, suggesting the recovery in Europe’s largest economy has slowed.

Output fell 2.6 percent from November, when it increased 0.7 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.6 percent gain for December, the median of 32 estimates in a Bloomberg News survey showed. From a year earlier, production declined 7.1 percent when adjusted for the number of work days.

But the big issue in Europe remains that of sovereign debt. From Reuters:

European policymakers scrambled on Friday to reassure markets about the stability of the 16-nation currency bloc as investors shed euro assets for a second day and Portugal backed a law that may push its swollen deficit higher...

Greek Prime Minister George Papandreou, on a visit to India, promised to "credibly apply" an austerity program designed to bring his country's yawning debt and deficit under control.

But worries about Portugal mounted after its opposition-led parliament defied the Socialist government and approved a bill on regional finances that could complicate the country's budget consolidation drive.

ECB and BoE hold rates, markets plunge

The ECB and BoE left interest rates unchanged on Thursday. Reuters reports:

The European Central Bank kept interest rates at a record low of 1.0 percent on Thursday and reaffirmed its view that the euro zone's economic recovery would be modest and uneven this year...

The Bank of England also kept rates on hold, at 0.5 percent, and halted its quantitative easing program after 11 months of asset purchases.

There was negative news from Europe in the form of a drop in German factory orders. Bloomberg reports:

German factory orders unexpectedly dropped in December, largely canceling the previous month’s gain, as demand at home and abroad weakened.

Orders, adjusted for seasonal swings and inflation, fell 2.3 percent from November, when they jumped 2.7 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.2 percent increase for December, according to the median of 33 estimates in a Bloomberg News survey. From a year earlier, orders rose 8.4 percent.

The economic data from the US were somewhat better. Bloomberg reports:

Productivity in the U.S. surged in the fourth quarter and factories received more orders in December than anticipated, showing companies are keeping payrolls lean to rebuild profits.

Employee output per hour rose at a 6.2 percent annual rate at the end of 2009, capping the biggest annual gain in six years, the Labor Department said today in Washington. Factory bookings climbed 1 percent for a second month...

Claims for unemployment insurance unexpectedly increased last week, raising concern an improvement in the job market was stalling, other figures from the Labor Department showed. Applications rose to 480,000 in the week ended Jan. 30, the most in seven weeks, from 472,000 the prior week.

Investors apparently focused on the negatives on Thursday. From Bloomberg:

Stocks plunged around the globe, with the MSCI World Index dropping the most in nine months, and commodities tumbled on concern an unexpected increase in U.S. jobless claims and growing sovereign debt will derail the economic recovery. The euro slid to the lowest level since May.

The MSCI World Index of 23 developed markets sank 2.9 percent and the Standard & Poor’s 500 Index fell 3.1 percent at 4:30 p.m. in New York, the biggest declines since April 20. Benchmark equity indexes for Portugal and Spain plummeted the most in 15 months. Oil lost 5 percent, the biggest drop in six months, and gold tumbled the most since 2008 as a stronger dollar curbed demand for commodities. The euro lost 1.1 percent to $1.3738 and sank to an almost one-year low versus the yen.

Economic data show weak recovery

A mixed bag of data on Wednesday show that the US economic recovery remains fragile. Bloomberg reports:

Service industries in the U.S. expanded less than anticipated in January, a sign the recovery will be slow to spread from manufacturing to the rest of the economy.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, climbed to 50.5 from 49.8 in December, figures from the Tempe, Arizona-based group showed today...

Companies cut an estimated 22,000 jobs in January, the smallest drop in two years, data from ADP Employer Services showed today. The report includes only private payrolls and doesn’t take into account government hiring...

Another report showed planned firings fell 70 percent last month to 71,482 from 241,749 in January 2009, according to data collected by the job placement firm Challenger, Gray & Christmas Inc. Announcements increased from a two-year low of 45,094 in December, the Chicago-based firm said today.

It was a similar picture in the euro area. Again from Bloomberg:

Expansion in Europe’s service and manufacturing industries slowed in January, indicating the economic recovery is losing momentum across the region.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro area fell to 53.7 from 54.2 in December, London-based Markit Economics said today. That compares with an initial estimate of 53.6 published on Jan. 21...

An index of services dropped to 52.5 in January from 53.6 in the previous month, Markit said today. A gauge of manufacturing increased to 52.4 from 51.6 in December...

European retail sales failed to grow for a second month in December, a separate report showed today. Sales were unchanged from November, and declined 1.6 percent from the year-earlier month.

Reuters reports a similar story in the UK.

Heavy snow and a rise in sales tax led to an unexpected slowing in Britain's service sector last month, but investors stuck with bets the Bank of England would halt its pro-growth quantitative easing programme this week.

Separate surveys showing signs of revival in consumer confidence and the labour market supported the view that the economy remained on a recovery track, albeit a tough one.

The more than two point fall in the CIPS/Markit services PMI index -- to 54.5 from 56.8 -- contrasted with a sharp rise in the equivalent manufacturing index earlier this week.

RBA leaves interest rates unchanged

Bloomberg reports the highly unexpected decision by the RBA on Tuesday.

Australia’s central bank unexpectedly paused in raising interest rates as Governor Glenn Stevens opted to support the economy’s acceleration and stem inflation later.

The Reserve Bank of Australia kept the overnight cash rate target at 3.75 percent after three increases, it said in Sydney today. The decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point move, and futures contracts that signaled a 74 percent chance of an increase.

However, this is unlikely to signal the end of the rate hike cycle.

As information about the impact of the bank’s previous increases “is still limited, the board judged it appropriate to hold a steady setting of monetary policy for the time being,” Stevens said in a statement today.

Borrowing costs will be “adjusted further” to keep inflation within the central bank’s target range of 2 percent to 3 percent “if economic conditions evolve broadly as expected,” he said. Inflation should remain within the target this year, he said.

Already, though, economic growth may be moderating.

Business confidence fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8.

And the RBA will, no doubt, be keeping one eye on the housing market.

Borrowing for home buying fell to a five-year low last month, according to a report yesterday by Australian Finance Group Ltd., which says it accounts for more than 10 percent of the mortgage market. The group arranged A$1.55 billion of mortgages in January, 19 percent less than a year earlier and the lowest level for any month since 2005.

Reports today add weight to the view that a pause in the tightening cycle is warranted.

Bloomberg reports that Australia's services industry shrank in January.

Australia’s services industry shrank in January for the first time in four months, a sign last quarter’s record central bank interest-rate increases are slowing demand.

The performance of services index fell 2.6 points to 47.4 from December, Commonwealth Bank of Australia and the Australian Industry Group said in Sydney today. A figure below 50 indicates the industry is shrinking.

And Fitch Ratings sees a rise in mortgage defaults this year. Again from Bloomberg:

Rising interest rates will trigger defaults on Australian home loans and commercial mortgages, causing deterioration in the quality of assets underpinning mortgage-backed bonds, according to Fitch Ratings.

Three straight interest rate rises last year and further increases expected in 2010 may cause Fitch’s Dinkum Index, which measures delinquency rates on prime home loans, to climb to as much as 1.5 percent this year from 1.21 percent at Sept. 30, the London-based risk assessor said in a report today.

The RBA will undoubtedly be loath to repeat the experience of the US, where the housing market has yet to recover, notwithstanding a 1.0 percent rise in pending home sales in December.

Manufacturing accelerates in US and Europe

The week has started with another round of positive economic data.

In the US, Bloomberg reports that manufacturing expanded in January at the fastest pace since August 2004.

The Institute for Supply Management’s factory index rose to 58.4, exceeding the highest estimate in a Bloomberg News survey of economists, from December’s 54.9, figures from the Tempe, Arizona-based group showed. Readings greater than 50 signal expansion. A measure of factory employment rose to the highest level in almost four years.

The US consumer also appears to be holding up well.

Another report today showed personal spending rose 0.2 percent in December, the third straight gain, according to the Commerce Department in Washington.

Incomes climbed 0.4 percent, exceeding expectations and propelled in part by government payments, the report said. Wages and salaries rose 0.1 percent after a 0.4 percent gain in November, showing job growth is needed to help drive consumer spending in coming months.

It was not all positive though.

Construction spending declined in December more than anticipated, capping the worst year on record for the industry, separate Commerce Department figures showed. Outlays dropped 1.2 percent last month as homebuilding and commercial construction dropped.

Still, manufacturing strength was not restricted to the US. The euro area also saw manufacturing activity accelerate in January, according to another Bloomberg report.

An index of manufacturing in the 16-nation euro region increased to 52.4 from 51.6 in December, London-based Markit Economics said today. That’s the highest since January 2008 and above an initial estimate of 52 published on Jan. 21. The gauge is based on a survey of purchasing managers and a reading above 50 indicates expansion.

In the UK, the manufacturing PMI hit a 15-year high. Reuters reports:

... The CIPS/Markit manufacturing purchasing managers' index jumped to 56.7 last month from an upwardly revised 54.6 in December, its highest since October 1994 and well above analysts' forecasts for a reading of 54.0.

By one measure, manufacturing activity in China hit a record high in January. AFP/CNA reports:

The HSBC China Manufacturing PMI, or purchasing managers' index, rose to 57.4 last month from 56.1 in December, the highest since data were first collected in April 2004, the survey showed...

A separate official PMI published by the China Federation of Logistics and Purchasing on Monday showed manufacturing activity expanded for the 11th consecutive month to 55.8 in January, slightly slower than 56.6 in December.

However, a report last week showed that Japanese manufacturing slowed in January, the PMI falling to 52.5 from 53.8 in December.

Stocks down despite positive economic data

A series of positive economic reports in the last week of January could not save stock markets around the world from ending the month in negative territory.

Last week provided mostly positive data on the economic front.

In the United States, an advance estimate showed that the economy grew at an annualised rate of 5.7 percent in the fourth quarter of 2009. This was the fastest growth rate in six years.

In the euro area, confidence in the economy improved for a tenth consecutive month in January. The European Commission's Economic Sentiment Index rose to 95.7 in January from 94.1 in December.

In the United Kingdom, the economy returned to growth in the fourth quarter. Real gross domestic product increased 0.1 percent in the fourth quarter after having declined 0.2 percent in the third quarter.

Meanwhile, Japan's economy probably maintained its expansion in the fourth quarter for the third consecutive quarter. Japanese industrial production rose 2.2 percent in December, its tenth consecutive monthly increase.

In spite of the positive tone of the economic data, stock markets around the world fell last week.

In the US, the Standard & Poor's 500 Index fell 1.6 percent to 1,073.87 last week. This was the third consecutive weekly decline, its longest losing streak since July last year.

In Europe, the Dow Jones STOXX 600 Index fell 1.2 percent to 246.96 last week. This was also its third consecutive weekly decline.

In Asia, the Morgan Stanley Capital International Asia Pacific Index fell 4.5 percent to 116.83. This was its biggest decline since the week ended 20 February last year.

The weakness of stocks last week in the face of positive economic data suggests that investors have mostly already discounted the economic data and are now more focused on policy moves that could negatively affect markets such as US President Barack Obama's plan to curb risk-taking by banks and China's measures to cool its economy (see "Stock markets dip into the red for the year"). On-going sovereign debt worries in Greece and a few other European countries also surely contributed to the negative sentiment among investors.

The decline in stock prices last week leaves all the major national stock market indices in negative territory for the year.

Stock market performances year-to-date
	End 2009	Close on 29 January	Percentage change
S&P 500	1,115.10	1,073.87	-3.7
FTSE 100	5,412.88	5,188.52	-4.1
DAX	5,957.43	5,608.79	-5.9
CAC 40	3,936.33	3,739.46	-5.0
Nikkei 225	10,546.44	10,198.04	-3.3
Hang Seng	21,872.5	20,121.99	-8.0

.

The decline in stock prices last month, of course, brings to mind the adage: As January goes, so goes the year. Years in which the market was down in the first month tended to be years in which stocks underperformed.

This does not always hold true though. Stocks performed very poorly in January last year but went on to record big gains for the rest of the year.

Nevertheless, the weak performance of stocks last month does raise the odds that we will see a major market correction this year.