US economy grows, eurozone inflation and unemployment rise

The US economy continued its slow recovery in the third quarter. Bloomberg reports:

The U.S. economy expanded at a 2 percent annual rate in the third quarter and inflation cooled, underscoring the views of Federal Reserve policy makers who say more stimulus will be needed to spur growth.

The increase in gross domestic product matched the median forecast of economists surveyed by Bloomberg News and followed a 1.7 percent second-quarter gain, Commerce Department figures showed today in Washington...

The Institute for Supply Management-Chicago Inc. said its business barometer rose to 60.6 this month from 60.4 in September. Figures greater than 50 signal expansion. The Thomson Reuters/University of Michigan final index of consumer sentiment fell to 67.7 from 68.2 last month.

In the euro area, both inflation and unemployment have risen. Again from Bloomberg:

European inflation unexpectedly accelerated to the fastest in almost two years and unemployment was at a 12-year high as the recovery showed signs of losing momentum.

Euro-area consumer prices rose 1.9 percent in October from a year earlier after increasing 1.8 percent in September, the European Union statistics office in Luxembourg said today. That’s the fastest since November 2008 and above the 1.8 percent forecast by economists in a Bloomberg survey. The jobless rate was 10.1 percent in September, the highest since July 1998, a separate report showed.

BoJ cuts growth forecast as Japanese industrial production falls again

The Bank of Japan took no additional monetary policy action on Thursday. Reuters reports:

The Bank of Japan held fire on policy on Thursday, but brought forward its next review to right after the Fed meets, sending a signal to markets it was ready to ease policy further if more yen strength threatened the economy.

The central bank said it moved its meeting to Nov. 4-5 from mid-November date to speed up the roll-out of a 5-trillion-yen ($61 billion) asset buying plan, which the BOJ unveiled early this month and detailed at this week's meeting...

In its twice-yearly economic report, the BOJ cut its growth forecast for the fiscal year to March 2012 to 1.8 percent from the 1.9 percent predicted three months ago, less than markets had expected.

It also gave its first forecasts for the following year, projecting a pick-up in growth to 2.1 percent and predicting consumer prices would rise 0.6 percent after creeping up by 0.1 percent in 2011/2012.

Data on Friday suggest that the BoJ may not want to stay idle for too long. From AFP/CNA:

Japan's export-led recovery showed further signs of losing steam Friday, as data showed industrial production falling for the fourth consecutive month in September as consumer prices continued to slide...

Output slid 1.9 per cent in September from the previous month, data showed Friday, in the fourth consecutive monthly fall and missing expectations of a 0.6 per cent drop.

Production of automobiles, electronics and other manufacturing were hardest hit, the Trade Ministry said, giving a bleak forecast for a 3.6 per cent fall in October before an increase of 1.7 per cent in November...

Separate data Friday showed that consumer prices fell 1.1 per cent in September from a year earlier, marking the 19th straight month of decline and illustrating entrenched deflation...

In other data Friday, Japan's unemployment rate fell to 5.0 per cent in September, dropping by 0.1 percentage points from the previous month.

In another sign of Japan's weakening economy, the Nomura/JMMA manufacturing PMI fell to 47.2 in October from 49.5 in September.

In contrast, the eurozone economy has proven surprisingly resilient. From Reuters on Thursday:

Euro zone economic sentiment improved in October against market expectations of a flat reading, pointing to continued economic growth in the second half of the year, even if slower than the second quarter peak.

The European Commission's monthly sentiment survey showed sentiment in the 16 countries using the euro rose to 104.1 points this month from 103.2 in September, the highest reading in almost three years.

Mixed economic data, negative real interest rates

Reuters reports that US economic data on Wednesday were mixed.

Orders for durable goods excluding transportation fell 0.8 percent after rising 1.9 percent in August as bookings for communications equipment tumbled sharply. Economists, who track this core figure closely, had expected a 0.5 percent gain.

Overall orders, however, jumped by 3.3 percent -- the largest increase since January -- lifted by a surge in demand for aircraft. Orders had dropped 1 percent in August and economists had looked for a 2 percent increase in September.

The second report showed new home sales rose 6.6 percent last month to a still-weak 307,000 unit annual rate.

European economic data were also mixed.

Bloomberg reports that French consumer spending rose in September.

French consumer spending climbed more than economists forecast in September as expectations of better job prospects and higher wages boosted confidence.

Spending rose 1.5 percent from August, when it declined 1.6 percent, national statistics office Insee said in a statement from Paris today. Economists predicted a gain of 0.4 percent, the median of nine forecasts gathered by Bloomberg News showed. Spending increased 1.1 percent from a year earlier.

Bloomberg also reports that Italian business confidence has risen to a 29-month high.

Italian business confidence rose in October to the highest in almost two and half years as executives grew more optimistic that an export-led economic recovery is gaining momentum.

The Isae institute’s manufacturing-sentiment index climbed to 99.8, the highest since May 2008, from a revised 98.6 in September, the Rome-based research center said in a statement today. Economists had predicted a reading of 98.5, according to the median of 18 forecasts in a Bloomberg survey.

But loan growth in the euro area as a whole remains sluggish, reports Reuters.

Growth rates in money supply and private sector loans in the euro zone were sluggish in September, supporting the European Central Bank's careful approach to winding down measures designed to boost lending activity.

Underlining the still fragile nature of the single currency zone's economic recovery, loans to the private sector rose 1.2 percent year-on-year, ECB data showed on Wednesday, missing a Reuters forecast for 1.4 percent growth.

M3 money supply, a measure of cash readily available to spend which the European Central Bank sees as a leading indicator for inflation, rose 1.0 percent on an annual basis, versus expectations for a 1.3 percent rise.

And sovereign debt issues continue to dog European financial markets. From Bloomberg:

Portuguese and Greek bonds led so- called peripheral European markets lower after the failure of Portugal’s budget talks and tax-revenue shortfalls in Greece reignited concerns countries may struggle to cut their deficits...

The yield on Portugal’s 10-year bond increased 24 basis points, the most since Sept. 20, based on closing prices, to 5.93 percent as of 3:39 p.m. in London. That left the extra yield, or spread, investors demand to hold the bonds instead of similar German bunds at 328 basis points.

Greece’s 10-year yield rose 79 basis points, the most since June 15. The spread with bunds widened to 779 basis points, the most since Oct. 1. Ireland’s 10-year bonds yielded 408 basis points more than similar bunds, up from 393 yesterday.

Uncertainty in the global economy and financial systems means that most central banks will keep monetary policy accommodative. From Bloomberg:

Central banks in Sweden and Norway are bowing to pressure to delay interest-rate increases next year as the prospect of a global recovery dwindles and borrowing costs in the U.S. and Europe remain low.

The Stockholm-based Riksbank on Oct. 26 said faltering recoveries in the U.S. and Europe will prevent it from raising interest rates next year as fast as it signaled in September. Oslo-based Norges Bank yesterday said it won’t raise its rate from 2 percent until the middle of 2011, compared with a June forecast for tightening to resume at the “turn of the year.”

And the Federal Reserve, of course, is widely expected to launch another round of quantitative easing next week. In his latest investment outlook, Bill Gross says that QE

... is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates...

James Hamilton points out that negative real interest rates means that

... there's an incentive to buy and hold those goods that are storable. And in terms of the historical experience, episodes of negative real interest rates have usually been associated with rapidly rising commodity prices.

Commodities are storable. So are homes, as investors in Hong Kong are no doubt aware. From AFP/CNA:

Hong Kong's luxury home prices have topped their pre-Asian crisis peak, data showed Wednesday, frustrating government efforts to cool one of the world's most expensive real estate markets.

Average prices for homes of at least 100 square metres (1,100 square feet) are now 14 percent above what they fetched before the 1997 downturn, the Hong Kong Monetary Authority (HKMA) said.

UK growth surprises, US consumer confidence improves, Sweden raises rate

The UK economy provided a positive surprise for the third quarter. From Reuters:

Britain's economy grew twice as fast as expected in the third quarter of this year, easing fears the recovery is faltering and dimming the chance of more quantitative easing from the Bank of England...

The Office for National Statistics said the economy grew 0.8 percent between July and September, down from a nine-year high of 1.2 percent in the second quarter but at the very top end of economists' forecasts.

In another piece of positive news on Tuesday, Bloomberg reports that US consumer confidence has improved.

Confidence among U.S. consumers rose in October from a seven-month low as households turned less pessimistic on the outlook for the economic recovery.

The Conference Board’s sentiment index climbed to 50.2, exceeding the median forecast in a Bloomberg News survey, from a revised 48.6 in September, according to figures from the New York-based research group today...

But home prices appear to be weakening again recently.

... Another report showed home- price gains receded in August after a tax credit lapsed...

The S&P/Case-Shiller index of property values covering 20 cities increased 1.7 percent from August 2009, the smallest year-over-year gain since February, the group said in New York...

The gauge fell 0.3 percent in August from the prior month after adjusting for seasonal variations, the second consecutive decrease and the biggest drop since April 2009. Prices reflect a three-month average, indicating the August readings are still being influenced by the earlier drop in sales.

A report today from the Federal Housing Finance Agency showed home prices fell 2.4 percent in August from a year earlier. Measured from July, prices rose 0.4 percent, according to FHFA.

Uncertainty on the US economy is likely to keep central banks in other countries from tightening monetary policy aggressively. Bloomberg reports the latest action from the Riksbank:

Sweden’s central bank raised its benchmark repo rate for a third time since July while policy makers said the prospect of a sluggish global recovery suggests further tightening plans should be scaled back.

The Stockholm-based Riksbank raised the seven-day repo rate by a quarter of a percentage point to 1 percent, it said today on its website. The decision was expected by all 20 economists surveyed by Bloomberg.

“The Swedish economy is growing rapidly,” the bank said in its statement. “However, due to the weak developments overseas, it is not deemed that the repo rate needs to be raised so much in the coming years.”

US economy slows in September but deflation fears vanishing

The US economy slowed in September, according to the Chicago Fed National Activity Index.

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.58 in September from –0.49 in August. Three of the four broad categories of indicators that make up the index slightly improved from August, but only the sales, orders, and inventories category made a positive contribution to the index in September.

The index’s three-month moving average, CFNAI-MA3, ticked down to –0.33 in September from –0.32 in August. September’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

However, US existing home sales rose in September. From Bloomberg:

Sales of U.S. existing homes rose in September by the most on record, a sign cheaper borrowing costs are helping stabilize an industry that’s battling the headwinds of foreclosures and joblessness.

Purchases increased 10 percent to a 4.53 million annual rate from 4.12 million in August, the National Association of Realtors said today in Washington. Economists forecast sales would rise to a 4.3 million pace, according to the median projection in a Bloomberg News survey. The median price fell 2.4 percent from a year earlier.

And investors don't seem worried about deflation in the US over the long term. From Bloomberg:

Expectations for rising consumer prices have increased faster in the U.S. than any other bond market this month as central bankers made the case for monetary easing through additional asset purchases. Yields on 30-year Treasuries climbed as much as half a percentage point since September to 2.61 percentage points more than similar maturity inflation-indexed debt, the widest gap since May and an indication for anticipated gains in consumer prices.

Bloomberg also reports that the yield on 5-year TIPS has even gone negative.

The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in halting deflation.

The securities drew a yield of negative 0.55 percent, the same as the average forecast in a Bloomberg News survey of 7 of the Federal Reserve’s 18 primary dealers...

Meanwhile, there was positive news from Europe on Monday. Again from Bloomberg:

European industrial orders increased more than twice as much as economists forecast in August, led by demand for capital goods such as machinery.

Orders in the 16-nation euro area jumped 5.3 percent from July, when they fell 1.8 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 2.2 percent, the median of 14 estimates in a Bloomberg News survey showed. In the year, industrial orders rose 24 percent after rising 12 percent in July.

Japanese exports slip

Japan's economy is clearly slowing. Bloomberg reports the latest trade data today.

Japan’s exports grew at the slowest pace this year in September, a sign the country is losing its chief engine for growth as demand abroad tempers. Overseas shipments increased 14.4 percent from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 21 economists surveyed by Bloomberg News was for a 9.6 percent gain. From a month earlier, shipments fell a seasonally adjusted 0.1 percent...

Imports climbed 9.9 percent from a year earlier and the trade surplus rose to 797 billion yen ($9.8 billion), today’s report showed.

The Japanese economy is likely to stay weak. Last week, the Cabinet Office had released data showing that the composite leading index had fallen to 99.5 in August from 100.0 in July, its second consecutive decline.

US leading index rises, euro area sees slower growth

Thursday's data on the US economy were fairly positive. Bloomberg reports:

The gauge of the U.S. economy’s prospects rose in September for a third month, signaling the recovery will extend into 2011.

The New York-based Conference Board’s index of leading economic indicators climbed 0.3 percent, matching the median forecast of 57 economists surveyed by Bloomberg News. The number of claims for jobless benefits last week was consistent with little progress in the labor market, another report showed...

Another showed manufacturing in the region covered by the Philadelphia Fed expanded this month for the first time since July as factory payrolls grew. Its general economic index rose to 1 from minus 0.7 in September, the branch of the central bank said. Figures greater than zero signal growth.

Claims for unemployment insurance benefits declined by 23,000 to 452,000 in the week ended Oct. 15, Labor Department figures showed today. The prior week’s figures were revised up by 13,000, to the highest level since late August.

The euro area also continued to grow in October, albeit at a slower rate. From Bloomberg:

Europe’s services and manufacturing industries expanded at the weakest pace in a year in October, suggesting a global slowdown and the rising euro are starting to undermine the region’s recovery.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 53.4 from 54.1 in September, London-based Markit Economics said today. Economists forecast a drop to 53.7, the median of 12 estimates in a Bloomberg survey shows. A reading above 50 indicates expansion...

The region’s services index fell to 53.2 in October from 54.1 the previous month, Markit said. That’s the lowest in eight months. The manufacturing gauge rose to 54.1 from 53.7, while an indicator of manufacturing output slipped to a 13-month low.

Meanwhile, consumer confidence in the euro area remained unchanged. Again from Bloomberg:

European consumer confidence remained unchanged in October as the region’s economic recovery showed signs of losing momentum.

An index of consumer sentiment in the 16-nation euro area held at minus 11, the same as in September, the Brussels-based European Commission said today in an initial estimate. That’s in line with the median forecast of 18 estimates in a Bloomberg News survey and the highest since December 2007.

Retail sales, though, declined in the UK in September. Reuters reports:

Retail sales fell for the second month in a row in September, reinforcing evidence of an economic slowdown as consumers steel themselves for savage cuts in government spending and tax rises...

The Office for National Statistics said retail sales volumes fell 0.2 percent in September, confounding expectations for a rise of 0.4 percent. Clothing sales suffered from the sharpest sector inflation since 1994 and petrol sales were also weak.

In contrast, Asia remains on track for strong economic growth, according to the IMF. From Channel NewsAsia:

The International Monetary Fund (IMF) has said strong growth in Asia continues to lead the global economic recovery.

In its latest Regional Economic Outlook for Asia and The Pacific, the IMF revised upwards its 2010 growth forecast for the region to 8 per cent - nearly 1 percentage point higher than its April estimate.

Weak growth in Japanese and US economies, China's remains robust

On Tuesday, Japan's Cabinet Office had lowered its assessment of the Japanese economy. From AFP/CNA:

Japan downgraded its monthly economic assessment on Tuesday for the first time in 20 months, citing the rapid rise of the yen and a slowdown of exports and production...

Prime Minister Naoto Kan's Cabinet Office in its October report said that "the economic movements appear to be pausing recently," a turnaround from last month when it said the economy "continues picking up".

The Federal Reserve's Beige Book assessment of the US economy released on Wednesday was not much brighter. From Reuters:

The economy grew sluggishly in recent weeks, with businesses struggling to raise prices and reluctant to hire and invest, the Federal Reserve said on Wednesday...

"National economic activity continued to rise, albeit at a modest pace," the Fed said in the report, which was prepared its next policy-setting session on November 2-3.

But China reported yet another strong economic performance in the third quarter. From AFP/CNA:

China said Thursday its economy posted robust, albeit slightly slower, growth in the third quarter after a crackdown on soaring property prices and bank lending had less impact than expected...

Gross domestic product expanded by 9.6 per cent year-on-year in the third quarter, beating analyst forecasts for 9.5 per cent growth, according to the NBS data.

The figure marked a decline from the 10.3 per cent growth in the second quarter and the blistering 11.9 per cent in the first three months of 2010, but could ease concerns that Asia's top economy was heading for a sharp slowdown.

The closely watched consumer price index, a key measure of inflation, rose 3.6 per cent in September from a year earlier, the fastest pace since October 2008 and was 0.6 per cent higher than the previous month.

China raises interest rates, US stocks fall

China has raised interest rates. Reuters reports:

China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects concern about resurgent asset prices and could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.

The People's Bank of China said it was raising benchmark rates by 25 basis points, taking one-year deposit rates to 2.5 percent and one-year lending rates to 5.56 percent.

If there was ever any doubt about China's role in driving the stuttering global economic recovery, the impact was felt by markets across the board. Oil and gold prices tumbled, stocks turned negative in Europe and the dollar jumped.

US stock investors had more than just the rate hikes to worry about. From Reuters:

U.S. stocks posted their biggest loss in two months on Tuesday on fears banks might be on the hook for billions of dollars in souring mortgage bonds.

The afternoon selloff hit investors already reeling from an unexpected credit tightening by China and disappointing financial results from Apple and IBM.

The biggest scare came on news that Bank of America and possibly others may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds...

The Dow Jones industrial average dropped 165.07 points, or 1.48 percent, to 10,978.62. The Standard & Poor's 500 Index lost 18.81 points, or 1.59 percent, to 1,165.90. The Nasdaq Composite Index fell 43.71 points, or 1.76 percent, to 2,436.95.

The mortgage concerns come amid continuing mixed signals on the US housing market. From Bloomberg:

Builders in the U.S. unexpectedly began work on more homes in September, a sign the real estate market was stabilizing at depressed levels heading into the recent upheaval in the foreclosure crisis.

Housing starts rose to a 610,000 annual rate, the most since April and up 0.3 percent from a revised 608,000 rate in August that was higher than previously estimated, Commerce Department figures showed today in Washington. Building permits dropped to the lowest level in more than a year as a plunge in the volatile multifamily area overshadowed a gain in single- family applications.

US industrial production falls, stocks rise

Monday saw the Federal Reserve provide its own data to justify more monetary stimulus. Reuters reports:

U.S. industrial output shrank last month for the first time in more than a year, a sign the economy was in a slow growth rut that appears certain to lead to more monetary stimulus from the Federal Reserve...

Industrial production fell 0.2 percent in September, the first decline since June 2009, the Fed said. Economists had expected industrial production to rise 0.2 percent, the same as in August...

Capacity utilization, a measure of slack in the economy, edged down to 74.7 percent, 4.2 percentage points above the year-ago level but still 5.9 points below the 1972-to-2009 average.

However, there was further evidence that the housing market may be stabilising.

Separately, the National Association of Home Builders/Wells Fargo Housing Market Index rose three points to 16 in October, beating economists' expectations for a 1-point rise to 14.

Mark Thoma thinks that the drop in capacity utilisation is not encouraging for employment. Investors, though, were able to shrug it off, according to Bloomberg.

U.S. stocks rose to a five-month high, led by financial shares, after Citigroup Inc.’s earnings topped estimates and an unexpected drop in industrial production added to signs the Federal Reserve will help fuel the recovery...

The S&P 500 climbed 0.7 percent to 1,184.71 at 4 p.m. in New York, the highest level since May 3... The Dow Jones Industrial Average rose 80.91 points, or 0.7 percent, to 11,143.69.

European stocks have also done well recently. Again from Bloomberg:

European stocks rose to the highest level since April as Royal Bank of Canada’s offer for BlueBay Asset Management Plc boosted financial-services companies, outweighing losses in BHP Billiton Ltd. and Rio Tinto Group...

The Stoxx Europe 600 Index advanced 0.3 percent to 266.64 at the 4:30 p.m. close in London, the highest level since April 26. The benchmark measure for European equities has climbed 2.7 percent this month amid speculation that the Federal Reserve will announce further plans to stimulate economic growth at its November meeting.

This comes as Europe's sovereign debt concerns have eased.

Euro-region interbank borrowing costs rose to the same level as the European Central Bank’s main interest rate for the first time in 15 months today, signaling greater willingness by financial institutions to lend to one another. The increase in Euribor suggests more banks are weaning themselves off ECB liquidity programs that were started to fight the global recession and then extended as the Greek debt crisis fueled concern some nations in the region could default.

Providing more direct evidence of decreasing worries over European sovereign debt, FT Alphaville notes that there was no ECB bond-buying last week while yield spreads have declined.

Meanwhile, the UK property market showed some signs of recovery on Monday. From Reuters:

Property asking prices in England and Wales rose for the first time in four months in October, with sellers responding to seasonal pressures instead of market fundamentals, a survey showed Monday.

Property website Rightmove, which says it captures 90 percent of all homes for sale, said asking prices jumped 3.1 percent this month, following drops of 1.1 percent in September and 1.7 percent in August.

The annual rate of growth in prices rose 2.9 percent from 2.6 percent in September.

Reckless easing

While the Federal Reserve prepares to launch QE2, John Hussman, in his latest article, "The Recklessness of Quantitative Easing", says that such a move will bring few benefits.

On the demand side, it is apparent that the U.S. is presently in something of a liquidity trap. Interest rates are already low enough that variations in their level are not the primary drivers of loan demand...

On the supply side, the objective of quantitative easing is to increase the amount of lendable reserves in the banking system. Again, however, this is not a constraint that is binding. The liquidity to make new loans is already present. U.S. Commercial banks already hold $1.066 trillion of reserves with the Fed, and another $1.626 trillion in Treasury and agency securities...

Despite the probable lack of measureable benefits, however, further QE poses significant risks. Specifically, it has triggered a steep decline in the exchange value of the U.S. dollar, and threatens a destabilization of international economic activity, a loss of confidence, and the creation of a "boom-bust" cycle threatening to choke off any economic recovery that does emerge.

For investors, he says:

My impression is that much or all of the potential upside of quantitative easing is already fully reflected in stock, bond and commodities markets. Investors now rely not only on QE itself, but also on its success. This is a dangerous place to be...

US retail sales rise, Bernanke sees case for further action

US retail sales continued to recover in September. Bloomberg reports:

Retail sales in the U.S. climbed more than forecast in September, easing concern that unemployment stuck near a 26-year high will bring the recovery to a halt.

Purchases rose 0.6 percent following a 0.7 percent gain in August that was larger than previously estimated, according to Commerce Department data issued today in Washington...

Consumer prices rose 0.1 percent in September, less than forecast, figures from the Labor Department showed. Core prices, which exclude food and fuel costs, were little changed to cap a 0.8 percent increase in the past 12 months, the smallest year- over-year gain since 1961...

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment reported today decreased to 67.9, the lowest since July, from 68.2 in September...

A report from the Fed Bank of New York showed manufacturing in the region accelerated. Its general economic index rose to 15.7 in October, the highest level in four months and more than twice the median forecast of economists surveyed by Bloomberg...

The somewhat positive tone of Friday's data notwithstanding, the Fed looks set for further monetary action soon. From Reuters:

Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further, but provided no details on how aggressively it might act.

Bernanke warned a prolonged period of high unemployment could choke off the U.S. recovery and that the low level of inflation presented an uncomfortable risk of deflation, a dangerous downward slide in prices.

"There would appear -- all else being equal -- to be a case for further action," Bernanke said at a conference sponsored by the Boston Federal Reserve Bank.

Friday's economic data from the euro area were also relatively positive. Bloomberg reports:

European exports increased in August, suggesting the euro-region economy is weathering a global slowdown and a stronger euro.

Exports from the economy of the 16 nations that use the single currency rose a seasonally adjusted 1 percent from July, when they slipped 0.2 percent, the European Union’s statistics office in Luxembourg said today. Inflation accelerated to 1.8 percent in September from 1.6 percent in the previous month, it said in a separate statement. That’s the highest since November 2008 and in line with an initial estimate on Sept. 30.

US producer prices and imports rise

Analysts think that fear of deflation will push the Fed to launch QE2. However, Thursday's data show few signs of deflation. From MarketWatch:

U.S. wholesale prices jumped 0.4% in September, mainly because of higher meat and natural gas costs, the government reported Thursday.

Core producer prices, which exclude the volatile food and energy categories, rose 0.1%. The core number tends to draw the most attention of economists.

Meanwhile, US imports rose sharply in August, pushing up the trade deficit. MarketWatch reports:

The U.S. trade deficit widened sharply in August as imports from China flooded into the country at a record pace, according to data released Thursday...

The deficit with Japan was the highest since the financial crisis in October 2008. Imports from Mexico were also a record...

In August, exports rose slightly to their highest level since August 2008 while imports increased sharply.

Imports rose 2.1% to $200.2 billion, reversing a 2.1% decline in July.

While the sharp growth in imports suggests that demand remains resilient, lacklustre growth in employment means that the Fed is likely to act on QE2 anyway. Again from MarketWatch:

The number of people who signed up for state unemployment benefits jumped 13,000 to 462,000 in the latest week, the federal government reported, signaling no improvement in a weak U.S. jobs market.

Chinese forex reserves hit record, Singapore's economy shrinks

China's foreign exchange reserves has hit a record even as its trade surplus shrank in September. Bloomberg reports:

China’s foreign-exchange reserves, the world’s largest, surged by a record to $2.65 trillion at the end of September, adding fuel to complaints that the nation’s curbs on gains in the yuan are undermining the global recovery.

Currency holdings rose about $194 billion in the third quarter, today’s statement from the People’s Bank of China showed...

The median forecast in the survey of eight economists was for an increase to $2.5 trillion. Exports rose a less-than- forecast 25.1 percent from a year earlier in September and imports climbed 24.1 percent, leaving a trade surplus of $16.9 billion...

Chinese banks extended a more-than-estimated 595.5 billion yuan ($89 billion) in new local-currency loans last month, the People’s Bank of China said in today’s statement. The median forecast in a Bloomberg News survey of 18 economists was 500 billion yuan.

The foreign exchange reserves data helped keep the renminbi exchange rate in the spotlight on Wednesday.

Non-deliverable yuan forwards rose 0.1 percent to 6.4529 per dollar as of 5:30 p.m. in Hong Kong, suggesting appreciation of more than 3 percent in the next year. The yuan was at 6.6641...

The yuan is strengthening at the fastest pace in five years, advancing 1.7 percent last month against the dollar after the end of an almost two-year peg in June.

Another currency that could be set to rise is the Singapore dollar. Channel NewsAsia reports today:

Singapore's central bank will keep its monetary policy of a modest and gradual appreciation of the local currency.

In its twice-yearly policy statement, the Monetary Authority of Singapore said it will increase the slope of its policy band slightly.

However here will be no change to the level at which the band is centred.

Interestingly, the latest policy announcement comes as the Singapore government reported a contraction in third quarter GDP. Again from Channel NewsAsia:

Singapore's GDP expanded by 10.3 percent on a year-on-year basis in the third quarter of 2010.

On a quarter-on-quarter basis the economy contracted by 19.8 percent, a reversal from the growth of 27.3 percent in the previous quarter.

The advance estimates released by the Ministry of Trade and Industry (MTI) on Thursday said that the Singapore economy remains on track to achieve the overall growth forecast of 13 to 15 percent for the whole of 2010.

Stocks rise on hopes of Fed easing

US stocks rose again on Tuesday on further evidence that the Fed will begin another round of quantitative easing. Bloomberg reports:

U.S. stocks rose, erasing earlier losses and sending benchmark indexes to five-month highs, as Federal Reserve policy makers indicated they are ready to pump more cash into the economy to protect the recovery.

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. helped lead a recovery by the Standard & Poor’s 500 Index after minutes of the Fed’s Sept. 21 meeting showed the central bank was ready to ease monetary policy “before long.” King Pharmaceuticals Inc. jumped 39 percent, the most in 11 years, after agreeing to be bought by Pfizer Inc.

The S&P 500 climbed 0.4 percent to 1,169.77 at 4 p.m. in New York after sliding 0.8 percent earlier. The Dow Jones Industrial Average rose 10.06 points, or 0.1 percent, to 11,020.40 after earlier tumbling as much as 97 points. Both gauges closed at the highest levels since May.

However, Doug Kass thinks that the risk to the downside is growing for stocks even with another round of Fed easing.

QE 2 (quantitative wheezing?) will not meaningfully move the needle of domestic economic growth and will only have a limited impact on:

• the jobs market, which is plagued by structural unemployment;
• housing, which that is haunted by a large shadow inventory of unsold homes and in which mortgage credit will likely be further reduced by the moratorium on foreclosures; and
• confidence, which is still mired in uncertainty regarding regulatory and tax policy (and that is undermined by high unemployment)...

While the immediate response to the likelihood of QE 2 has been to buoy asset prices, the domestic economy is stalling at around 1.5% to 2.0% GDP growth, and little improvement in the jobs market has been made. This hesitancy makes the slope of the recovery vulnerable to the unforeseen -- trade wars, policy errors and/or numerous tail risks from the last credit cycle (e.g., mortgage-gate).

China tightens temporarily

It is an indication of how fragile the global economy is perceived to be that while the Fed and BoJ have announced monetary accommodation for extended periods, the PBC is tightening for a temporary period. From Reuters on Monday:

China has raised reserve requirements for six large commercial banks on a temporary basis, a surprise move to drain cash from the economy but avoid over-tightening, four sources told Reuters on Monday.

The 50-basis-point increase, which takes required reserve ratios to 17.5 percent for the country's biggest lenders, is the first since May this year. The rise will be in place for two months before ratios are returned to their original levels, the sources said.

Data on Monday at least suggest that the UK economy is among the fragile ones. Reuters reports that house prices have been falling recently.

House prices in England and Wales suffered their sharpest fall last month since May 2009, a survey from the Royal Institution of Chartered Surveyors indicated on Tuesday.

The RICS house price index dropped to -36 in the three months to September from -32 in the three months to August, a drop the institution blamed on supply pressures as homeowners' rushed to sell before painful public spending cuts kick in next year.

And UK retail sales have weakened. Again from Reuters:

British retail sales growth halved last month, led by a drop in big-ticket items as uncertainty ahead of government spending cuts made consumers nervous, a survey showed on Tuesday.

The British Retail Consortium said retail sales values were 0.5 percent higher than a year ago in September on a like-for-like basis, down from 1.0 percent in August. Total sales, which include new floorspace, were 2.2 percent higher against 2.8 percent in August.

Economic data from the euro area on Monday were mixed.

Bloomberg reports that French industrial output stalled in August.

French industrial production unexpectedly stalled in August, suggesting a recovery in the euro region’s second-largest economy is losing momentum.

The increase in output in July was revised lower to 0.8 percent from the 0.9 percent originally reported, Paris-based national statistics office Insee said today. Economists had forecast a 0.3 percent increase in August, according to the median of 13 estimates in a Bloomberg News survey. Output climbed 3.2 percent from a year earlier.

However, Bloomberg reports that Italian industrial output rose by the most in seven months in August.

Italian industrial production rose the most in seven months in August as gains in exports more than offset weak domestic demand.

Output climbed 1.6 percent from July, when it increased a revised 0.3 percent, Rome-based statistics office Istat said today. Economists had forecast a 0.1 percent gain in August, according to the median of 20 estimates in a Bloomberg survey. Output jumped 9.5 percent from a year earlier.

India as No. 1

Everyone talks about the rise of China and asks when its economy will overtake the US economy.

However, Scott Sumner has gone one step further and asks when India will overtake China and become the biggest economy in the world. His answer:

Year: 2081

Workforce ratio: China will have 60% of India’s workforce.

Productivity ratio: India will have 60% of China’s worker productivity.

GDP ratio: 1:1

Contrary to the expectations of many, democracy has provided no net advantage to India relative to China. Rather, it is demographics that is about to provide India with a decisive advantage over its neighbour.

US employment falls, stocks rise

US employment fell in September. Bloomberg reports:

The U.S. lost more jobs than forecast in September as local governments fired teachers and other workers in response to declining tax revenue.

Payrolls fell by 95,000 workers after a revised 57,000 decrease in August, Labor Department figures in Washington showed today. Private employers added 64,000 jobs, less than forecast. Wages and the workweek stagnated.

Investors heaved a sigh of relief. Again from Bloomberg:

Stocks rallied, sending the Dow Jones Industrial Average above 11,000 for the first time since before the May 6 crash, while shorter-term Treasuries rose and the dollar slipped as a decrease in U.S. jobs fueled speculation the Federal Reserve will buy debt to stimulate the economy. Corn, soybeans and wheat surged on concern that supply is dwindling.

ECB and BoE leave rates unchanged

The ECB and BoE left interest rates and monetary policy generally unchanged on Thursday, refraining from following in the footsteps of the BoJ.

Recent economic data possibly warrant the different actions. Unlike Japan where industrial production fell for the third consecutive month in August, industrial production in Europe maintained growth in August, rising by 0.3 percent in the UK and jumping by 1.7 percent in Germany.

Still, an exit from current levels of monetary policy accommodation may be becoming difficult, at least for the ECB, according to a Bloomberg report.

European Central Bank President Jean- Claude Trichet staked his reputation on propping up banks with cheap cash during the financial crisis. Now credit markets won’t let him take away that support.

Near-record borrowing costs for nations across the euro region’s periphery are making it harder for the ECB to wean commercial banks off the lifeline it introduced two years ago. The extra yield that investors demand to hold Irish and Portuguese debt over Germany’s rose last week to 454 basis points and 441 basis points respectively. Spain’s spread hit a two-month high.

The risk for the ECB is that it gets pulled deeper into helping the banking systems of the most indebted nations in the 16-member euro bloc. Governing Council member Ewald Nowotny said Sept. 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.” Complicating the ECB’s task is that interbank lending rates have risen, tightening credit conditions and making access to market funding more expensive for banks.

Meanwhile, the sovereign debt problems could get worse in coming years. Standard & Poor's thinks that global sovereign borrowing is on an explosive path. Bloomberg reports:

Public debt in some of the world’s largest economies is on an “explosive path” as aging populations and the cost of fighting the financial crisis erode government finances, Standard & Poor’s said.

Based on current fiscal policies, median net debt as a percentage of gross domestic product in 49 economies accounting for more than two-thirds of the world’s population will rise to 245 percent by 2050, the ratings company said in an e-mailed report in London today. That compares with a 2007 forecast of 148 percent.

IMF projects 4.8 percent world growth in 2010

The IMF has released its World Economic Outlook for October. Bloomberg reports:

The world economy will expand 4.2 percent next year, the Washington-based IMF said in a report, down from its forecast of 4.3 percent three months ago. The fund projects growth of 4.8 percent this year, up from 4.6 percent...

Nations such as China and Brazil are powering the return to growth, widening a gap with advanced economies from Europe to the U.S. that are struggling to revive domestic demand, the IMF said. Developing nations will grow 6.4 percent next year, unchanged from the previous forecast, while advanced economies will expand 2.2 percent, down from an earlier 2.4 percent forecast, the IMF said.

Meanwhile, the AFP report on Wednesday shows that the US economy continues to be held back by poor employment growth. From Bloomberg:

Companies in the U.S. unexpectedly cut jobs in September, data from a private report based on payrolls showed today.

Employment decreased by 39,000, the biggest drop since January, after a revised 10,000 rise in August, according to figures from ADP Employer Services. The median estimate of 37 economists surveyed by Bloomberg News called for a 20,000 gain. Forecasts ranged from a decline of 44,000 to a 75,000 increase.

In contrast, the German economy seems to be doing well enough. Again from Bloomberg:

German factory orders increased almost four times the pace economists forecast in August, led by demand for investment goods such as machinery.

Orders, adjusted for seasonal swings and inflation, jumped 3.4 percent from July, when they dropped a revised 1.6 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.9 percent gain, according to the median of 36 estimates in a Bloomberg News survey. From a year earlier, orders climbed 20.3 percent, when adjusted for working days.

RBA holds rates as BoJ goes back to ZIRP

The Reserve Bank of Australia unexpectedly left interest rates unchanged on Tuesday. AFP/CNA reports:

Australia left interest rates on hold at 4.50 per cent Tuesday for the fifth consecutive month, citing moderating inflation and uncertain global conditions.

Reserve Bank of Australia governor Glenn Stevens said rates were close to their average over the past decade, but warned they would be likely to push higher "at some point".

The Bank of Japan went one better. From Reuters:

The Bank of Japan on Tuesday pledged to pump more funds into the struggling economy and keep rates virtually at zero, surprising markets and stealing a march on the Federal Reserve in providing a fresh dose of economic stimulus...

It cut its overnight rate target to a range between zero and 0.1 percent, from 0.1 percent, reinstating the so-called zero-interest policy that the BOJ ended only in July 2006, and it pledged to buy 5 trillion yen ($60 billion) worth of assets.

It said it would keep its benchmark rate effectively at zero until price stability is in sight, adopting a U.S. Federal Reserve-style commitment to ultra-loose policy.

The economic data on Tuesday had been relatively positive, with the services sectors in the US, euro area and the UK all doing better in September than expected.

In the US, the ISM non-manufacturing index rose to 53.2 in September from 51.5 in August.

In the euro area, the Markit services index fell to 54.1 in September -- the preliminary reading had been 53.6 -- from 55.9 in August.

In the UK, the Markit/CIPS services PMI index increased to 52.8 in September from 51.3 in August.

All of these added up to a positive day for markets. Reuters reports:

Stocks rallied to nearly a five-month high on Tuesday on growing conviction that central banks will do even more to bolster struggling economies worldwide...

Crude oil hit a five-month peak near $83 a barrel and gold hit another record high at $1,341.20 an ounce...

The Dow Jones industrial average gained 193.45 points, or 1.80 percent, to 10,944.72...

And there could be more goodies to come for markets as the world's most influential central bank prepares to join the latest QE fray. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said the central bank’s first round of large-scale asset purchases improved the economy and that further buying is likely to help more.

“I do think that the additional purchases -- although we don’t have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions,” Bernanke said in response to questions in Providence, Rhode Island, at a forum with college students. He said the first wave that ended in March was an “effective program”...

Separately, Brian Sack, the New York Fed official in charge of carrying out FOMC decisions, said a further expansion of the central bank’s $2.3 trillion balance sheet would help stimulate a recovery that is forecast to be “relatively tepid.” Smaller steps of purchases may be warranted in contrast to the last round, Sack said in Newport Beach, California...

New York Fed President William Dudley said last week that the outlook for job growth and inflation is “unacceptable” and that the Fed will probably need to take action.

Policy-makers in smaller economies are already taking steps to stem the flood of foreign money. From Bloomberg on Tuesday:

Governments from South Korea to Brazil are stepping up attempts to control their currencies as investors pour a record amount of money into emerging markets.

Regulators in Seoul will start an audit of lenders handling foreign-currency derivatives on Oct. 19 to curb volatility caused by capital flows, the finance ministry said today. Brazil doubled a tax it charges foreigners on investments in fixed- income securities to 4 percent yesterday...

The Bank of Thailand is still studying measures to help manage the appreciation of the baht, which reached a 13-year high of 30.08 per dollar yesterday, Director Wongwatoo Potirat told reporters in Bangkok today. Policy makers in Indonesia, Malaysia and the Philippines have also in the past two months indicated they will intervene to curb volatility.

As US growth slows, global decoupling makes a comeback

US economic data on Monday were mixed. Reuters reports:

Pending sales of previously owned U.S. homes hit a four-month high in August, a sign the housing market was stabilizing at very low levels following its sharp drop after a home-buyer tax credit expired.

Another report on Monday showed new orders received by U.S. factories fell 0.5 percent in August, although they were up 0.9 percent excluding volatile transportation bookings.

With US economic growth looking likely to be anaemic in the near term, the global decoupling theme has made a comeback. Bloomberg reports:

Wall Street economists are reviving a bet that the global economy will withstand the U.S. slowdown.

Just three years since America began dragging the world into its deepest recession in seven decades, Goldman Sachs Group Inc., Credit Suisse Holdings USA Inc. and BofA Merrill Lynch Global Research are forecasting that this time will be different. Goldman Sachs predicts worldwide growth will slow 0.2 percentage point to 4.6 percent in 2011, even as expansion in the U.S. falls to 1.8 percent from 2.6 percent.

Underpinning their analysis is the view that international reliance on U.S. trade has diminished and is too small to spread the lingering effects of America’s housing bust. Providing the U.S. pain doesn’t roil financial markets as it did in the credit crisis, Goldman Sachs expects a weakening dollar, higher bond yields outside the U.S. and stronger emerging-market equities.

Japanese industrial production falling

Manufacturing generally been slowing in most economies in recent months but one of the worst-performing countries has been Japan.

Surveys of purchasing managers around the world showed that manufacturing activity continued to increase in September but at a slower rate. The JPMorgan Global Manufacturing PMI fell to a 14-month low of 52.5 in September from 53.7 in August.

Japanese manufacturing, though, is already contracting. The Nomura/JMMA Manufacturing Purchasing Managers Index fell below the 50 mark to 49.5 in September from 50.1 in August.

Indeed, data from the Ministry of Economy, Trade and Industry also show that Japanese manufacturing and industrial output have been declining in recent months. In August, Japanese industrial output fell by 0.3 percent after having fallen by 1.1 percent in June and 0.2 percent in July.

The ministry's survey of production forecasts shows that production is expected to fall 0.1 percent in September and 2.9 percent in October.

With output in each of the first two months of the third quarter already lower than every month in the second quarter, it now looks likely that overall third quarter production will be lower than that in the second quarter.

Manufacturing slows in US and Europe

US manufacturing slowed in September but consumer spending appears to be have held up relatively well. Bloomberg reports:

U.S. manufacturing expanded at a slower pace, while consumer spending increased, underlining the Federal Reserve’s forecast for a “modest” pace of economic growth in coming months.

The Institute for Supply Management’s factory index dropped to 54.4 in September from 56.3 the prior month, the Tempe, Arizona-based group said today. Readings greater than 50 signal growth. Consumer purchases increased 0.4 percent in August for a second month, more than forecast by economists...

The gain in personal spending exceeded the 0.3 percent increase projected by the median forecast of economists surveyed by Bloomberg News. Incomes were up 0.5 percent, the biggest advance this year, propelled by the resumption of extended and emergency unemployment benefits.

A 0.2 percent increase in inflation-adjusted spending was driven by a 0.8 percent rise in nondurable goods such as food and clothing. The gain was the biggest since February. The figures bolster the view that the extended benefits may have helped unemployed Americans make ends meet...

Construction outlays rose 0.4 percent in August as an increase in government stimulus spending for public works overcame a drop in homebuilding, according to figures from the Commerce Department.

The Thomson Reuters/University of Michigan final index of consumer sentiment fell to 68.2 in September from 68.9 the previous month. The gauge was projected to decline to 67, according to the median forecast in a Bloomberg survey, and compares with a preliminary reading of 66.6 issued last month.

Manufacturing also cooled in the euro area in September. Bloomber reports:

Growth in Europe’s manufacturing industry slowed and unemployment held at a 12-year high as a cooling global recovery restrained demand.

A gauge of manufacturing in the 16-nation euro region declined to 53.7 in September from 55.1 the previous month, London-based Markit Economics said today. A separate report showed that the region’s jobless rate stayed at 10.1 percent in August, the highest since June 1998.

It was a similar story for UK manufacturing. Reuters reports:

Activity in Britain's manufacturing sector slowed to a 10-month low in September after export orders fell for the first time in a year, a survey showed on Friday, suggesting growth may have peaked.

The Markit/Chartered Institute of Purchasing and Supply manufacturing PMI index fell to 53.4 in September from a downwardly revised 53.7 in August. That was the lowest since November 2009 and below forecasts for a reading of 53.8.

But China provided additional evidence on Friday that its manufacturing sector accelerated in September. From Bloomberg:

China’s manufacturing expanded at the fastest pace in four months in September, adding to signs that economic growth is stabilizing even as the government curbs energy use and tries to cool the property market.

The purchasing managers’ index rose to 53.8 from 51.7 in August, China’s logistics federation and statistics bureau said in an e-mail. The median forecast of 15 economists surveyed by Bloomberg News was 52.5, with none forecasting such a large gain. Readings above 50 indicate expansions.

US stocks fall on better economic data

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

Business activity in the U.S. unexpectedly accelerated and fewer workers filed claims for jobless benefits, easing concern the world’s largest economy is retrenching further.

The Institute for Supply Management-Chicago Inc. said today its business barometer climbed to 60.4 in September, exceeding the highest estimate of economists surveyed by Bloomberg News...

Today’s report was at odds with other measures of manufacturing that showed a slowdown. Another report today showed factories in the Milwaukee region stagnated...

The number of applications for jobless benefits dropped by 16,000 to 453,000 in the week ended Sept. 25, Labor Department figures showed. The total number of people on benefit rolls and those getting extended payments also fell in the prior week, the report showed...

The economy grew at a 1.7 percent annual rate in the second quarter, revised figures from the Commerce Department also showed today. The increase in gross domestic product compares with a 1.6 percent estimate issued last month. GDP grew 3.7 percent in the first three months of the year and 5 percent at the end of 2009.

However, according to Bloomberg, US stocks fell on the better data.

U.S. stocks fell, trimming the biggest September gain since 1939 for the Standard & Poor’s 500 Index, as investors sold some of the month’s best-performing shares amid speculation that improving economic data will reduce the need for the Federal Reserve to stimulate growth...

The S&P 500 slipped 0.3 percent to 1,141.20 at 4 p.m. in New York, paring its monthly advance to 8.8 percent and its third-quarter gain to 11 percent. The Dow slid 47.23 points, or 0.4 percent, to 10,788.05.

No doubt, investors will keep a close eye on the action of central banks. On Thursday, rate action came from Taiwan. Bloomberg reports:

Taiwan increased its benchmark interest rate for the second time this year and said it will try to prevent real-estate speculation after a jump in home prices fueled concern the economic recovery may stoke a property bubble.

Central bank Governor Perng Fai-nan and his board raised the rate by 0.125 percentage point to 1.5 percent. Eleven of 14 economists in a Bloomberg News survey predicted yesterday’s decision. The rest forecast no change following a similar advance in June from a record-low 1.25 percent.

No rate hike is likely from the ECB soon, although eurozone inflation did accelerate in September. Again from Bloomberg:

European inflation accelerated to the fastest in almost two years in September, led by higher energy costs.

Euro-area consumer prices rose 1.8 percent from a year earlier after increasing 1.6 percent in August, the European Union statistics office in Luxembourg said today. That’s the fastest pace since November 2008 and in line with the median forecast of 33 economists surveyed by Bloomberg News.

Japan, though, remains in deflation, although data on Friday mostly showed improvements. AFP/CNA reports:

Japan's consumer prices continued to slide while the unemployment rate edged lower in August, as mixed data Friday illustrated the fragility of an economic recovery.

Japan's core consumer price index fell 1.0 per cent in August from a year earlier, the 18th straight month of decline with the economy still stuck in damaging cycle of deflation, government data showed Friday.

Prices slid 1.1 per cent in July and 1.0 per cent in June...

However, separate data Friday showed that the unemployment rate fell to 5.1 per cent in August, edging down by 0.1 per cent from the previous month, in line with market expectations.

Household spending was up 1.7 per cent on-year in August, beating market expectations of a 1.4 per cent rise.