US economy completes recovery from recession

The United States economy finally recovered its pre-recession gross domestic product in the fourth quarter of 2010.

The advance estimate of US GDP released by the Commerce Department on Friday showed that real GDP grew at an annual rate of 3.2 percent in the fourth quarter of last year. This was faster than the rate of 2.6 percent seen in the third quarter.

The growth in the fourth quarter brought the annual real GDP to $13.38 trillion. This is higher than the peak of $13.36 trillion seen at the peak of the previous economic cycle in the fourth quarter of 2007.

Among the components of GDP, personal consumption expenditures also surpassed their precession high in the fourth quarter while government expenditures and investment never fell below the level achieved in the fourth quarter of 2007.

Net exports have also contributed substantially to the US recovery with exports hitting a record level in the fourth quarter as it surpassed its previous peak achieved in the second quarter of 2008.

The component that has lagged so far is private investment. In the fourth quarter, fixed residential and non-residential investment -- both structures and equipment and software -- were still below their pre-recession peaks.

The other thing that has lagged the recovery in GDP is, of course, employment. As of December, the unemployment rate was still at 9.4 percent.

Corresponding with the lack of recovery in employment, real personal income excluding current transfer receipts in the fourth quarter was still 4.4 percent below the peak reached in the first quarter of 2008. The good news here is that the latter indicator rose at an annual rate of 2.6 percent in the fourth quarter and has now grown for four consecutive quarters, so the trend is positive.

Of course, Friday's report on GDP is just an advance estimate. Revisions later on could still change the picture somewhat.

Nevertheless, we can at least tentatively say that the US economy has fully recovered from its worst recession since the Great Depression.

US economy accelerates, Japanese unemployment falls

Bloomberg reports that the US economy accelerated in the fourth quarter.

The U.S. economy accelerated in the fourth quarter of 2010 as consumer spending climbed by the most in more than four years.

Gross domestic product grew at a 3.2 percent annual rate, Commerce Department figures showed today in Washington, falling short of the 3.5 percent median forecast of 85 economists surveyed by Bloomberg News because of a slowdown in inventories. Excluding stockpiles, the economy rose at a 7.1 percent pace, the most since 1984...

Household purchases, about 70 percent of the economy, rose at a 4.4 percent pace last quarter, the most since the first three months of 2006. The increase added 3 percentage points to growth.

Consumer spending could yet continue to drive economic growth.

A separate report today showed consumer confidence fell less than expected in January, a signal the biggest part of the economy may extend the gains in spending.

The Thomson Reuters/University of Michigan final index of consumer sentiment decreased to 74.2 from 74.5 in December. The median forecast in a Bloomberg News survey called for a reading of 73.3, up from a preliminary figure of 72.7 issued earlier this month.

Earlier on Friday, Japan had released some mixed data on its economy. AFP/CNA reports:

Japan's consumer prices slid in December with the economy mired in deflation, but signs of a stronger job market gave some respite to a government under fire following the nation's credit downgrade.

The unemployment rate fell below 5.0 per cent for the first time in 10 months in December to 4.9 per cent, improving from 5.1 per cent the previous month and supporting the Bank of Japan's view that the nation is on a recovery path...

However, the country's reliance on exports to fuel growth was underlined by a 3.3 per cent plunge in household spending against forecasts of a 0.6 per cent drop, and a 2.0 per cent drop in retail sales, signalling weak domestic demand...

December's 0.4 per cent slide in consumer prices marked the 22nd straight monthly fall but also illustrated that the pace of decline was easing, lending support to the Bank of Japan's view that prices will rise next fiscal year.

The monthly figure was slightly better than market expectations of a 0.5 per cent fall according to a Dow Jones Newswires poll of analysts. Prices fell 0.5 per cent in November.

Even as these important economic reports were being released, however, investors were keeping an eye on developments in the Middle East. From Bloomberg:

Stocks worldwide plunged the most since November, crude oil posted the biggest jump since 2009 and the dollar rose versus the euro after protesters posed the biggest challenge to Egyptian President Hosni Mubarak’s 30-year rule. Egypt’s dollar bonds sank, pushing yields to a record.

The MSCI World All-Country World Index of stocks in 45 countries lost 1.4 percent at 4:59 p.m. New York time. The Dow Jones Industrial Average fell 1.4 percent to 11,823.70, preventing its longest weekly winning streak since 1995. Oil futures increased 4.3 percent to $89.34. The dollar appreciated 0.9 percent to $1.3611. Yields on Egypt bonds due in 2020 surged 22 basis points to 6.51 percent. Gold futures jumped 1.7 percent, the most in 12 weeks.

Egyptian protesters clashed with police throughout the country and into the night, defying a curfew and setting fire to buildings. Mubarak imposed the curfew after tens of thousands of marchers chanted “liberty” and “change.” After U.S. markets closed, Mubarak said he asked the government to resign. The demonstrations offset data showing that growth in U.S. gross domestic product accelerated in the fourth quarter.

Japan's trade surplus doubles but debt downgraded

There was good news on Japan on Thursday. From AFP/CNA:

Japan's trade surplus more than doubled in 2010 and exports to key trade partner China hit a record high, data showed Thursday, as robust overseas demand indicated gathering momentum for a fragile recovery.

Analysts said that the second consecutive monthly acceleration in Japan's exports in December, which grew 13 percent year-on-year, also showed that the country's economy was starting to move forward after a lull.

But there was also bad news. Again from AFP/CNA:

Japan's currency tumbled on Thursday after credit ratings agency Standard & Poor's downgraded Tokyo's public debt for the first time since 2002.

The dollar rose to 82.86 yen compared with 82.16 yen a day earlier...

S&P cut Japan's sovereign debt rating to "AA minus" from "AA", accusing the government of lacking a "coherent strategy" in efforts to ease a mountain of debt.

Elsewhere, the economic reports were mixed.

Reuters reports the US data:

U.S. housing and factory data on Thursday showed the economy still gaining strength in December but at a pace unlikely to cause the Federal Reserve to rethink its stimulus program...

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in December, rose 2 percent to 93.7. The increase, which was above economists' expectations for a 1.0 percent gain, pointed to another rise in sales of previously owned homes this month.

A separate report from the Commerce Department showed orders for a range of domestically manufactured goods gained 0.5 percent last month. But a nearly 100 percent drop in civilian aircraft pulled overall orders down 2.5 percent.

Economists shrugged off a surprise jump in new claims for unemployment benefit as a result of bad weather rather than a sudden setback for the labor market.

Meanwhile, there has been a dip in confidence in the euro area. Bloomberg reports:

European confidence in the economic outlook held close to the highest in more than three years in January as manufacturers became more optimistic.

An index of executive and consumer sentiment in the euro area slipped to 106.5 from a revised 106.6 in December, the European Commission in Brussels said today. The December reading was the highest since September 2007. Economists had forecast a gain to 106.7, the median of 25 estimates in a Bloomberg News survey showed.

Fed maintains policy stance as new home sales jump

There was no change in the Federal Reserve's monetary policy stance on Wednesday. Reuters reports:

The Federal Reserve showed on Wednesday it was in no rush to cut short its rescue of the U.S. economy, saying high unemployment still justified its $600 billion bond-buying plan even though the economy has shown some signs of improvement.

In a statement that was a bit more upbeat than after its meeting in December, the Fed acknowledged for the first time a rise in commodity prices that has fueled global inflation, but signaled it would not throw the U.S. central bank off course.

While the Fed remains cautious on the economy, data continue to show that it is improving. Reuters reports that new home sales hit an 8-month high in December.

Sales of U.S. new homes raced to their highest level in eight months in December, but gains were driven by a surge in the West that economists were reluctant to call a sign of the market's recovery.

Single-family home sales jumped 17.5 percent to a seasonally adjusted 329,000-unit annual rate, the Commerce Department said on Wednesday. Economists had expected an increase to only a 300,000-unit pace...

With the spike in sales nationally, the supply of new homes on the market fell to 6.9 months' worth, the lowest since April, from 8.4 months' worth in November.

The latest housing data from the UK, though, were not as positive. Figures from the British Bankers' Association on Wednesday showed that mortgage approvals fell to their lowest level in nearly two years in December while property data firm Hometrack reported on Thursday that house prices in England and Wales fell for a seventh month in a row in January.

While the US and UK are hoping for a recovery in their housing markets, China is trying to slow its own down. AFP/CNA reports the latest action by Chinese authorities.

China on Wednesday raised the minimum down payment for second homes and ordered authorities to rein in property prices in its latest move aimed at quelling public angst about high real estate costs.

A meeting of the State Council, China's cabinet, presided over by Premier Wen Jiabao ordered that the minimum second-home down payment be hiked to 60 percent of the property's value.

India raises rates, UK economy contracts

The Bank of Japan left interest rates unchanged on Tuesday but the Reserve Bank of India took action. From AFP/CNA:

India's central bank on Tuesday hiked interest rates by 25 basis points, its seventh increase in less than 12 months in a bid to tame rising inflation as the country's economy booms.

The Reserve Bank of India has been one of the most aggressive central banks in raising the cost of borrowing as the nation has powered out of the global downturn with economic growth of nearly nine per cent.

The expected rise pushed the repo -- the rate on loans the central bank makes to commercial banks -- to 6.5 per cent, and the reverse repo -- the rate it pays to banks for deposits -- to 5.5 per cent.

The Central Bank of Nigeria also raised interest rates on Tuesday while the central banks of Hungary and Israel raised rates on Monday.

The Federal Reserve will almost certainly not raise interest rates when it concludes its monetary policy meeting today although US growth appears likely to be sustained. Bloomberg reports the latest US economic data:

Confidence among U.S. consumers rose more than forecast in January, reaching an eight-month high, as the outlook for jobs brightened.

The Conference Board’s sentiment index increased to 60.6 from 53.3 the prior month, figures from the New York-based private research group showed today...

The uncertainty in the housing recovery remains a risk for the economy though.

The S&P/Case Shiller index of home values in 20 cities dropped 1.6 percent in November from a year earlier, the biggest 12-month decrease since December 2009. The group also said prices dropped 0.5 percent from October.

Despite persistently high inflation, a rate increase from the Bank of England also looks unlikely after the UK economy unexpectedly shrank in the fourth quarter. From Bloomberg:

Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest December in a century hampered services and retailing.

Gross domestic product fell 0.5 percent after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Growth would have been “flattish” without the impact of the weather, it said. The median forecast in a Bloomberg News survey of 33 economists was for an increase of 0.5 percent.

Eurozone economy shows signs of acceleration

Even as Europe grapples with sovereign debt issues and austerity, the economy has continued to perform quite well.

Bloomberg reported on Monday that the eurozone economy accelerated at the beginning of 2011.

Europe’s services and manufacturing industries expanded at the fastest pace in six months in January, boosted by growth in Germany.

A composite index based on a survey of euro-area purchasing managers in both industries rose to 56.3 from 55.5 in December, London-based Markit Economics said in an initial estimate today. A figure above 50 indicates growth. Economists forecast a reading of 55.6, the median of 13 estimates in a Bloomberg News survey showed...

The euro-area manufacturing gauge declined to 56.9 in January from 57.1 the previous month, while the services indicator rose to 55.2 from 54.2, Markit said...

Eurozone industrial orders data reported by Bloomberg on the same day also point to acceleration in the economy.

European industrial orders increased more than economists forecast in November as Germany, the region’s largest economy, continued to fuel economic growth.

Orders in the euro area rose 2.1 percent from October, when they increased 1.4 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 1.9 percent, the median of 14 estimates in a Bloomberg News survey showed. November orders jumped 20 percent from the year- earlier month, the data showed.

China's growth to moderate

China's economy grew 10.3 percent in 2010. 2011 could see another good year of growth. AFP/CNA reports:

A Chinese government think tank has forecast the nation's economy will grow around 9.8 per cent this year, with inflation likely to come in at 3.7 per cent, state media reported Sunday.

Experts at the Chinese Academy of Sciences also predicted that gross domestic product would rev up in the latter part of the year, and would be driven largely by domestic consumption, the official China News Service said.

The findings of a Reuters poll released last week showed that most Asian economies are expected to continue to grow briskly this year but so will inflation.

Asia's rapid economic growth will moderate slightly in 2011 even as policymakers combat rising prices with higher interest rates and try to keep local currencies from appreciating too sharply, a Reuters quarterly poll showed...

China's economy is expected to expand by 9.3 percent this year, throttling back from double-digit growth in 2010, but inflation is now tipped to quicken to 4.3 percent, a much faster build-up of price pressures than economists had expected in a similar Reuters poll in October.

Likewise, inflation in India is now seen at 8.8 percent, up from 8.3 percent expected in the October poll...

India, Asia's third-biggest economy, is set to grow at the same robust pace seen over the last fiscal year, averaging at 8.7 percent in the year-ending March 2011, before slowing slightly to 8.5 percent in the following year, the poll showed.

Apart from consumer price inflation, asset price inflation is also a concern. AFP/CNA reports the latest action taken to cool China's property market:

China is to expand its limits on property purchases to second and third-tier cities, a report said Sunday, as it steps up efforts to cool its real estate market.

Authorities have drawn up a list of cities that will have to implement the limits, the Chongqing Evening News quoted an unnamed high-level official at the Ministry of Housing and Urban-Rural Development as saying.

Qingdao and Jinan in the nation's east are among cities set to put the rules into effect, the report said.

Confidence improves

Friday reports show improving confidence in several major economies.

In Japan, the government has raised its economic assessment. Bloomberg reports:

Japan’s government raised its assessment of the economy for the first time since June, as global demand encourages companies to step up output.

The economy is beginning to show signs of a rebound, the Cabinet Office said in a monthly report in Tokyo today. It upgraded its evaluation of industrial production, which rose for the first time in six months in November, saying it was beginning to bottom out.

In Germany, Bloomberg reports that business confidence rose in January.

German business confidence unexpectedly rose to a record high in January as booming exports to Asia and stronger household spending bolstered growth in Europe’s largest economy.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, increased to 110.3 from 109.8 in December. That’s the highest since records for a reunified Germany began in 1991...

Bloomberg also reports a jump in French business confidence.

French business confidence jumped to its highest in almost three years in January as signs a global economic expansion is accelerating lifted the outlook for exports this year.

An index of sentiment among factory executives increased more than expected to 108 from a revised 102 in December, national statistics office Insee said today. Economists expected a reading of 104, according to the median of 3 forecasts gathered in a Bloomberg News survey.

Not so positive were the reports from the UK.

Reuters reports that business lending rose slightly in November but mortgage lending and approvals fell.

The BoE's Trends in Lending report showed the net monthly flow of lending to businesses by British banks picked up to 1.3 billion pounds in November after a decline of 2.8 billion pounds in October...

The number of loans approved for home purchase, meanwhile, fell to 40,000 in December from 45,000 in November, the lowest since March 2009 and suggesting a further weakening in house prices is on the cards.

Net mortgage lending slowed to 0.8 billion pounds from 1.4 billion in November, the lowest since the current series began in January 2009.

Reuters also reports that retail sales fell in December.

Harsh weather and higher inflation combined to give retailers their worst December on record, data showed on Friday, reinforcing signs that growth slowed sharply in the last three months of 2010...

The Office for National Statistics said December retail sales were flat on the year after 1.0 percent volume growth in November, the weakest change since January 2010 and the worst annual performance for any December since records began in 1988. Economists had forecast a 0.9 percent rise on the year.

Overall retail sales fell 0.8 percent on the month after a 0.4 percent rise in November, again weaker than forecast. But stripping out the drop in fuel sales due to disrupted travel, the decline was less steep than economists had predicted.

US existing home sales and leading index rise

A day after a report that showed that US housing starts fell 4.3 percent in December, we revert to the positive data trend of recent months.

From Bloomberg on Thursday:

Sales of previously owned U.S. homes and the index of leading indicators exceeded forecasts, signs the expansion is gaining momentum at the start of 2011.

Purchases of existing houses jumped 12 percent in December to a 5.28 million annual rate, the National Association of Realtors said today in Washington. The New York-based Conference Board’s gauge of the economic outlook for the next three to six months rose 1 percent. Claims for unemployment benefits fell by 37,000 last week, according to the Labor Department...

The Fed Bank of Philadelphia said its general economic index slipped to 19.3 from last month’s 20.8. Readings greater than zero indicate expansion. Orders placed with area factories grew the most since September 2004, while a gauge of employment was the strongest since April 2006.

China grows 10.3 percent in 2010

China's economy accelerated in 2010. AFP/CNA reports:

China said Thursday that its economy grew 10.3 per cent in 2010, marking the fastest annual pace since the onset of the financial crisis and underlining the country's growing might.

Gross domestic product in China rose by 9.8 per cent in the fourth quarter, exceeding analyst expectations, while consumer inflation lost a bit of steam in December as Beijing moved to rein in soaring prices.

Unfortunately, so did inflation.

The country's consumer price index, the main guage of inflation, rose by 4.6 per cent year-on-year in December compared with 5.1 per cent in November, which was the fastest pace in more than two years.

The index rose 3.3 per cent for all of 2010 -- exceeding the government's full-year target of three per cent as food costs soared.

Investors in Asia certainly showed some nervousness on Thursday. From Bloomberg:

Asian stocks fell, with the regional benchmark index sliding the most in almost two months, as Chinese economic reports prompted speculation the country will do more to fight inflation and U.S. earnings disappointed...

The MSCI Asia Pacific Index fell 1.4 percent to 138.61 as of 4:04 p.m. in Tokyo, with about seven stocks declining for each two that rose...

Hong Kong’s Hang Seng Index dropped 1.6 percent, its biggest intraday decline in a month, and the Shanghai Composite Index fell 2.9 percent. Japan’s Nikkei 225 Stock Average retreated 1.1 percent. South Korea’s Kospi Index slipped 0.4 percent, while Australia’s S&P/ASX 200 Index dropped 1.1 percent.

UK inflation hits 8-month high

Inflation continued to rise in the UK in December. Reuters reports:

A record monthly jump in prices drove inflation to an 8-month high in December, piling pressure on the Bank of England to raise interest rates and show it is not letting inflation get out of control...

The Office for National Statistics said on Tuesday the annual rate of consumer price inflation rose to 3.7 percent last month from 3.3 in November after prices rose a record 1.0 percent between November and December.

Inflation is not quite at that level yet in the US but at least deflation has become unlikely in the near term with continuing signs of economic growth. From Bloomberg on Tuesday:

Orders and sales at factories in the New York region picked up in January, signaling manufacturing will keep contributing to the expansion.

The Federal Reserve Bank of New York’s general economic index rose to 11.9 from a revised 9.9 in December. Economists projected an increase to 12.5, based on the median forecast in a Bloomberg News survey. Readings greater than zero signal expansion in the so-called Empire State Index, which covers New York, northern New Jersey, and southern Connecticut...

The National Association of Home Builders/Wells Fargo sentiment index registered a reading of 16 in January, the same as the past two months and less than the median forecast of economists surveyed by Bloomberg News. Readings below 50 mean more respondents said conditions were poor.

China's property prices rise, stocks plunge

China's property prices continued to creep up in December. AFP/CNA reports:

Property prices in China's major cities posted their fourth straight month-on-month rise in December and sales picked up pace, data showed Monday, despite official efforts to cool the market.

Prices in 70 major cities were up 0.3 percent last month from November and were 6.4 percent higher than a year ago, the National Bureau of Statistics said in a statement.

The month-on-month gain in November was also 0.3 percent. The annualised surge peaked in April, when prices soared 12.8 percent, but growth has slowed since then...

Sales in terms of floor space rose 10.1 percent to 1.04 billion square metres (11.23 billion square feet) in 2010, the statement said, without specifying the monthly figure for December.

Chinese stocks haven't enjoyed the same degree of buoyancy recently, and certainly not on Monday. Bloomberg reports:

China’s stocks plunged, driving the benchmark index down the most in two months, as the central bank ordered banks to set aside more reserves and rising property prices signaled policy tightening measures may be expanded...

The Shanghai Composite Index tumbled 84.7, or 3 percent, to 2,706.66 at the 3 p.m. close, the most since Nov. 16. The CSI 300 Index slid 3.8 percent to 2,974.35, the lowest since Sept. 30. The Shanghai measure has fallen 3.6 percent in 2011. It extended last year’s 14 percent plunge, the most among the world’s 10 biggest stock markets, after Premier Wen Jiabao’s government ordered six increases in reserve requirements and boosted interest rates twice in 2010 to curb asset bubbles after record gains in lending and property prices.

Some analysts think things could change.

China’s bank reserve-ratio increase doesn’t change the “quite positive” outlook for the nation’s stocks, which will be boosted by the expanding economy and improving earnings, said Royal Bank of Scotland Group Plc.

“Rising rates are more illustrative of a more robust growth outlook while rising inflation spurs nominal earnings,” said Emil Wolter, Singapore-based head of Asian regional equity at RBS. “The market will likely take this move in its stride.”

The CSI 300 Index may advance 28 percent this year, as investors shift to equities from banking deposits because of accelerating inflation and earnings growth prospects, according to Goldman Sachs Group Inc.

The CSI 300 will likely rise to 4,000 by the end of 2011, compared with the close of 3,128.26 last year, analysts led by Hanfeng Wang wrote in a report dated today.

More signs of global economy accelerating

The outlook for the global economy continues to be positive.

Last week, the Organisation for Economic Co-operation and Development reported that its composite leading indicator for members as a whole rose to 102.8 in November from 102.6 in October, indicating an increasing pace of economic expansion. It noted that the United States and Japan were among those showing clear signs of accelerating economic activity.

OECD composite leading indicators
	Ratio to trend, amplitude adjusted					Change from previous month
	2010					2010
	Jul	Aug	Sep	Oct	Nov	Jul	Aug	Sep	Oct	Nov
OECD area	102.3	102.3	102.4	102.6	102.8	-0.1	0.0	0.1	0.2	0.3
United States	101.6	101.6	101.8	102.2	102.7	-0.1	0.0	0.2	0.4	0.5
Euro area	103.3	103.2	103.2	103.2	103.3	0.0	0.0	0.0	0.0	0.1
Japan	102.1	102.4	102.6	103.0	103.4	0.2	0.2	0.3	0.4	0.4

Reports from Japan last week also showed that the economy may be accelerating again. Japan's index of coincident economic indicators rose to 102.1 in November from 100.7 in October while the index of leading economic indicators rose to 101.0 from 97.7. The economy watchers survey's current conditions index rose to 45.1 in December from 43.6 in November while the future conditions index rose to 43.9 from 41.4.

In the US, reports last week showed that retail sales and industrial production both rose in December. Retail sales rose 0.6 percent and industrial production rose 0.8 percent. US retail sales are now above the pre-recession peak in nominal terms.

The euro area reported a 1.2 percent rise in industrial production in November last week but probably more significant for the economy going forward were the sales of bonds by the governments of Portugal, Spain and Italy. Together, these three countries sold almost 10 billion euros of bonds last week, easing fears that demand for bonds from peripheral eurozone countries is drying up.

China raises reserve requirement, US retail sales and industrial production rise

China tightened monetary policy again on Friday. AFP/CNA reports:

China's central bank said Friday it would raise the amount of money that banks are required to keep in reserve, the latest in a series of such hikes aimed at reining in high inflation.

The bank reserve requirement ratio would be raised by 50 basis points beginning on January 20, the People's Bank of China said in a statement.

The Fed won't be following anytime soon, Friday's economic reports notwithstanding. From Bloomberg:

Retail sales and industrial production both rose in December, indicating that the U.S. economic recovery is picking up as the new year begins.

Purchases climbed 0.6 percent, capping the biggest annual increase in more than a decade, Commerce Department figures showed today in Washington. Output at factories, mines and utilities increased 0.8 percent, the most in five months, according to data from the Federal Reserve.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for this month dropped to 72.7, the lowest since November, from 74.5 in December. Economists surveyed by Bloomberg News projected a gain to 75.5, according to the median forecast...

The cost of living climbed 0.5 percent in December, led by higher fuel and food prices, figures from the Labor Department also showed today. For all of 2010 the consumer-price index rose 1.5 percent compared with a 2.7 percent increase the prior year.

The so-called core rate of inflation, which excludes volatile food and fuel costs, rose 0.1 percent for a second month. That held last year’s increase to 0.8 percent, the smallest annual gain since records began in 1958.

Spain clears hurdle too

European sovereign debt concerns eased further on Thursday after more successful bond sales. Reuters reports:

Investors showed appetite for Spain's debt Thursday, pushing borrowing costs up less than expected at its debut debt auction for 2011 and alleviating some concerns about the euro zone's more vulnerable debtor nations.

Spain sold 3 billion euros of its five-year bonds, at the top end of the Treasury's target range but less than the 3.4 billion euros sold at the previous auction on November 4, which had a higher target. Bids of over 6 billion euros were taken.

The Treasury paid nearly a full percentage point more to sell the debt than last time, but much less than a 150 basis point premium priced in at the start of the week had suggested.

Minutes later, Italy also sold 6 billion euros of debt, again at the top end of its target range.

The successful bond sales boosted the euro, as did hawkish words from the ECB. From Bloomberg:

European Central Bank President Jean-Claude Trichet signaled he’s prepared to raise interest rates if needed to fight inflation even as leaders struggle to contain the region’s sovereign-debt crisis.

“We are permanently alert, we are never pre-committed not to move interest rates and our level of interest rates is designed to deliver price stability,” Trichet said at a press conference in Frankfurt today. At the same time, the benchmark rate, which the ECB left at 1 percent, is still “appropriate.”

The Bank of England also left interest rates unchanged on Thursday amid a report of a weaker-than-expected 0.4 percent rebound in industrial production in November.

Rate hikes, though, are already the trend in Asia. On Wednesday, the Bank of Thailand raised interest rates and on Thursday, it was the Bank of Korea's turn.

One Asian country that is unlikely to raise interest rates soon, though, is Japan, where machinery orders fell again in November. AFP/CNA reports:

Japan's core private-sector machinery orders, an indicator of corporate capital spending, fell for the third consecutive month in November in another dreary sign for the economy, data showed Thursday.

The 3.0 per cent fall on-month missed the median forecast of a Dow Jones Newswires and Nikkei poll for a 1.8 per cent rise, with the government warning of weakness in the non-manufacturing sector.

Looking in better shape recently is the US economy. Bloomberg reports the latest US economic data:

The U.S. trade deficit unexpectedly shrank in November as growing global demand and a weaker dollar help boost overseas sales of everything from aircraft to cotton.

The gap shrank 0.3 percent to $38.3 billion, the smallest in 10 months, as exports climbed to the highest level in more than two years, according to data today from the Commerce Department in Washington. Other reports showed increases in claims for jobless benefits and wholesale prices.

Portugal clears hurdle

Europe breathes again after Portugal successfully sold bonds on Wednesday. Bloomberg reports:

Portugal’s borrowing costs fell and demand rose at a sale of 10-year bonds after European Central Bank debt purchases this week helped push down yields, sending the securities higher in the secondary market.

The nation sold 599 million euros ($778 million) of bonds due in 2020 at a yield of 6.716 percent, the Portuguese debt management agency said today. That compares with 6.806 percent at the previous auction on Nov. 10.

In another positive news for Europe, Bloomberg reports that industrial production rose more than forecast in November.

European industrial production advanced more than economists forecast in November, led by output of intermediate goods such as car engines and steel.

Production in the euro area rose 1.2 percent from October, when it increased 0.7 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 0.5 percent, the median of 31 estimates in a Bloomberg survey showed. Production increased 7.4 percent in the year.

The news from the US on Wednesday was also positive. Again from Bloomberg:

The Federal Reserve said holiday- season spending and increased manufacturing drove an economic expansion across the U.S. in November and December, with businesses cautiously optimistic about their 2011 outlooks.

Six Fed regions including Atlanta and Chicago showed economies growing “modestly to moderately,” and four areas including New York and Boston had “improving” conditions, the Fed said today in its anecdotal Beige Book report. The Minneapolis region “continued its moderate recovery,” and San Francisco “firmed further,” the central bank said.

Even Japan has been showing signs that its recovery is resuming. Although Japan's current account shrank in November, the economy watchers survey for December showed improvements for both current and future conditions, as did the coincident and leading indices for November.

China's forex reserves hit record, trade surplus shrinks

China's foreign exchange reserves hit a record at the end of last year. AFP/CNA reports:

China said Tuesday its foreign exchange reserves hit a record high at the end of 2010, which is likely to fuel calls for a stronger yuan when President Hu Jintao visits Washington next week.

The increase in the forex holdings, already the world's largest, highlighted imbalances in global trade and the challenge Beijing faces in stemming a flood of liquidity into the country.

China's foreign exchange reserves expanded 18.7 percent from a year earlier to US$2.847 trillion at the end of December, the central bank said in a statement, amid strong demand for Chinese exports.

A report on Monday had shown that China's trade surplus shrank in December. From Bloomberg:

China reported a less-than-forecast $13.1 billion trade surplus for December, bolstering the nation’s bargaining position ahead of a Jan. 19 meeting where U.S. President Barack Obama may press for more gains in the yuan.

The gap compared with the $20.8 billion median estimate of 20 economists surveyed by Bloomberg News and November’s $22.9 billion. Exports rose 17.9 percent to $154.2 billion from a year earlier and imports climbed 25.6 percent to $141.1 billion, the customs bureau said on its website today...

The surplus was the smallest since April. The increase in exports was less than economists’ 23.3 percent median estimate and compares with a 35 percent gain in November.

Import growth compared with a forecast of 24.9 percent and the 38 percent increase in the previous month. A higher comparative base a year earlier may have pared gains in both imports and exports.

Global economy may have accelerated at end of last year

The global economy continued to grow in December, supported by growth in the United States and the euro area.

In fact, surveys of purchasing managers around the world showed that industry activity as a whole accelerated in December. Most of the indices compiled by JPMorgan and Markit showed increases last month.

JPMorgan Global All-Industry Indices
	November	December
Output	54.5	57.1
New orders	54.6	57.0
Input prices	60.2	63.2
Employment	52.0	51.1

The December reading of 57.1 for the JPMorgan global all-industry output index was its highest level since April.

The purchasing managers' reports from the Institute for Supply Management showed that the economy accelerated in the United States in December. The ISM's manufacturing PMI rose to 57.0 in December from 56.6 in November while the non-manufacturing index rose to 57.1 from 55.0.

Despite the acceleration in economic growth indicated by the ISM data, the Labor Department's employment report released on Friday showed that the US economy continued to add jobs at a relatively slow rate at the end of 2010. Based on the establishment survey, the US economy gained 103,000 jobs in December.

Nevertheless, there were some positives in the report. Job gains in November and October were revised up by a total of 70,000 to 71,000 and 210,000 respectively. In addition, the household survey showed that the economy gained 297,000 jobs in December, and together with a fall in the labour force participation rate, helped drive the unemployment rate down to 9.4 percent, the lowest rate since May 2009.

In the euro area, the purchasing managers' reports showed that the economy continued to grow in December. The Markit eurozone composite output index held at 55.5 in December, the same as in the previous month. The manufacturing PMI rose to 57.1 in December from 55.3 in November but the services PMI fell to 54.2 from 55.4.

Adding to evidence of continuing growth in the eurozone economy, the European Commission reported last week that its economic sentiment indicator for the euro area rose to 106.2 in December from 105.1 in November. This was its seventh consecutive month of increase.

US employment and eurozone GDP reports disappoint

The first week of the year ended on a rather disappointing note as far as economic reports are concerned.

In the US, Bloomberg reports that the economy added fewer jobs than expected in December.

Employers in the U.S. added fewer jobs than forecast in December, confirming Federal Reserve Chairman Ben S. Bernanke’s view that it will take years for the labor market to heal.

Payrolls increased 103,000, compared with the median forecast of 150,000 in a Bloomberg News survey, Labor Department figures showed today in Washington. Employment the prior two months rose more than initially estimated. The jobless rate fell to 9.4 percent, partly reflecting a shrinking workforce...

November employment rose 71,000, more than an initially reported gain of 39,000. Payrolls in November and October combined were 70,000 more than previously estimated.

In Europe, Bloomberg reports that the eurozone economy expanded less than previously estimated in the third quarter.

Gross domestic product in the euro region rose 0.3 percent from the second quarter instead of 0.4 percent reported on Dec. 2, the European Union’s statistics office in Luxembourg said today. Investment was revised from being unchanged to a 0.3 percent decline. A separate report showed the jobless rate held at 10.1 percent in November when adjusted for seasonal swings, the highest in more than 12 years.

Even the euro area's strongest economy, Germany, failed to keep up with expectations. German industrial production fell 0.7 percent in November while retail sales fell 2.4 percent. Exports did manage to grow 0.5 percent in November, but this was less than the 1 percent expected by economists.

Eurozone confidence rises to highest since October 2007

Economic reports from the euro area on Thursday were, on the whole, quite positive. From Bloomberg:

European confidence in the economic outlook improved more than economists forecast in December, led by increasing optimism among German manufacturers.

An index of executive and consumer sentiment in the euro region jumped to 106.2 from 105.1 in November, the European Commission in Brussels said today. That’s the highest since October 2007. Economists forecast a gain to 105.8, the median of 14 estimates in a Bloomberg News survey showed. Euro-area retail sales fell 0.8 percent in November from the previous month, a separate report showed.

Confirmation of the strength in the German economy comes from another report from Bloomberg.

German factory orders rose five times more than economists forecast in November, driven by demand from outside the euro region.

Orders, adjusted for seasonal swings and inflation, surged 5.2 percent from October, when they gained 1.6 percent, the Economy Ministry in Berlin said today. That’s the biggest gain since January last year. Economists expected a 1 percent increase, according to the median of 24 estimates in a Bloomberg News survey. From a year earlier, orders climbed 20.6 percent when adjusted for working days.

Just outside the euro area, however, the UK provided disappointing data. From Reuters:

Large swathes of the service sector suffered their first fall in output since April 2009 last month, a major survey showed on Thursday, pointing to a sharp slowdown in economic growth at the end of 2010.

GDP probably grew by just 0.4 percent in the last three months of 2010, lower than many economists have forecast and barely half the 0.7 percent recorded in the third quarter of the year, survey compilers Markit said.

The Markit/CIPS services purchasing managers' index dropped to 49.7 in a December marked by unusually snowy weather, in contrast to economists' forecasts that it would hold steady at November's reading of 53.0. Readings below 50 indicate contraction.

Services expand in US and euro area

Economic reports on Wednesday again show the economic recovery continuing.

Bloomberg reports the data from the US.

Service industries expanded in December at the fastest pace since May 2006, showing the U.S. economic recovery is picking up and broadening beyond manufacturing.

The Institute for Supply Management’s non-factory index, which covers about 90 percent of the economy, rose to 57.1, exceeding the median forecast of economists surveyed by Bloomberg News, from 55 in November. A reading greater than 50 signals growth. Another report today showed hiring accelerated...

A report today from ADP Employer Services showed companies boosted payrolls in December by the most since records began in 2001. Employment increased by 297,000, almost three times the 100,000 median estimate of economists surveyed.

Employers last month also announced plans to cut 32,004 jobs, the fewest since June 2000, according to data today from Challenger, Gray & Christmas Inc. The Chicago-based outplacement company said firings were down 29 percent from December 2009.

Data from the euro area also suggest continuing economic growth. Again from Bloomberg:

Europe’s services and manufacturing industries expanded faster than initially estimated in December led by the fastest growth in more than four years in Germany.

A composite index based on a survey of euro-area purchasing managers in both industries held at 55.5 from November, London- based Markit Economics said today. That compares with Dec. 16 reading of 55. A figure above 50 indicates expansion. In Germany, the region’s largest economy, a services gauge was also revised higher...

Euro-area industrial orders rose 1.4 percent in October from the previous month, when they dropped 4.2 percent, the European Union’s statistics office in Luxembourg said today...

The euro-area services indicator fell to 54.2 in December from 55.4, Markit said today. While the German services gauge held at 59.2, above an initial reading of 58.3, the French and Italian service indicators declined. Germany’s composite index of manufacturing and services rose to the highest since June 2006.

More signs of stronger manufacturing growth

Adding to the positive data on Monday, Bloomberg reports that US factory orders rose in November.

American factories unexpectedly received more orders in November, signaling that gains in consumer spending, business investment and exports will sustain the manufacturing recovery.

The 0.7 percent increase in bookings topped the median forecast of economists surveyed by Bloomberg News which called for a 0.1 percent drop, figures from the Commerce Department showed today in Washington. Orders for capital goods like computers rebounded after falling in October.

Meanwhile, manufacturing activity has hit a 16-year high in the UK. Reuters reports:

The Markit/CIPS manufacturing Purchasing Managers' Index (PMI) rose to 58.3 in December, its highest since September 1994. The headline figure was above the consensus forecast of 57.0 and November's downwardly revised reading of 57.5.

There was also positive news on the UK housing front on Tuesday. Again from Reuters:

Mortgage approvals for house purchases rose to 48,019 in November from 47,315 in October, in contrast to economists' expectations for a slight fall...

Net consumer credit weakened with an unexpected drop of 121 million pounds versus rises in the previous two months.

Among data on Tuesday that beat expectations on the upside, unfortunately, was eurozone inflation. From Bloomberg:

European inflation accelerated more than economists estimated in December on surging energy prices, exceeding the European Central Bank’s limit for the first time in more than two years.

Euro-area consumer prices rose 2.2 percent in December from a year earlier after increasing 1.9 percent in November, the European Union statistics office in Luxembourg said today. That’s the highest rate since October 2008 and above the 2 percent median forecast of 21 economists in a Bloomberg survey.

Markets rise as manufacturing accelerates in US and euro area

Stocks and commodities started the year on a positive note. From Bloomberg:

Stocks rallied, sending the Standard & Poor’s 500 Index to its best gain in a month, and oil rose as growth in U.S. and European manufacturing bolstered speculation the economic recovery will strengthen. Treasuries slid.

The S&P 500 increased 1.1 percent to 1,271.87 at 4 p.m. in New York, its biggest gain since Dec. 2, and the Stoxx Europe 600 Index rose 0.8 percent for its largest advance since Dec. 21. Oil climbed to a 27-month high and copper touched a record near $4.50 a pound. The 10-year Treasury note fell, sending the yield five basis points higher.

Bloomberg reports the US economic data on Monday:

Manufacturing in the U.S. expanded in December at the fastest pace in seven months, reinforcing signs the expansion is gaining momentum.

The Institute for Supply Management’s index climbed to 57 last month from 56.6 in November, the Tempe, Arizona-based group said today. A reading greater than 50 points to expansion, and the figure matched the median forecast of economists surveyed by Bloomberg News...

Another report today showed construction spending rose in November for a third month, helped in part by federal government projects. A 0.4 percent gain followed a 0.7 percent increase in October, the Commerce Department said.

Bloomberg also reports an acceleration in manufacturing in the euro area.

Europe’s manufacturing industry grew more than initially estimated in December, powered by Germany’s export-led expansion.

A gauge of manufacturing in the euro area rose to 57.1 from 55.3 the previous month, London-based Markit Economics said today. That’s above the 56.8 reported earlier for December. A reading of more than 50 indicates expansion.

In China, the China Federation of Logistics and Purchasing reported on Monday that the non-manufacturing sector accelerated in December as its non-manufacturing purchasing managers' index rose to 56.5 from 53.2 in November. However, on Saturday, it had reported that its manufacturing PMI fell to 53.9 in December from 55.2 in November.

Another report last week had also shown that China's manufacturing sector is slowing, with HSBC's manufacturing PMI falling to a three-month low of 54.4 in December from 55.3 in November.

Also last week, another report showed that the Markit/JMMA Japan manufacturing PMI rose to 48.3 in December from 47.3 in November.

Markets extend rally in 2010

2010 turned out to be another good year for markets.

While stock markets around the world did not put in the spectacular gains seen in 2009, gains in 2010 were still mostly quite respectable, with the Morgan Stanley Capital International World Index rising 9.6 percent in 2010.

Still, stocks were outperformed by commodities in 2010. The Thomson Reuters/Jefferies CRB Index of 19 commodities rose 17.4 percent last year.

A sustained recovery in the global economy as well as the announcement of additional monetary easing in November by the Federal Reserve through the purchase of longer-term Treasury securities -- more popularly called quantitative easing 2 -- were the catalysts for the positive performances of markets in 2010.

Markets were held back though by Europe's sovereign debt crisis. The euro fell 6.5 percent against the US dollar in 2010, negating most of the STOXX Europe 600 Index's gain of 8.6 percent for the year.

In 2011, markets are likely to be dominated by the same forces as last year.

The rate of economic growth will obviously be an important factor for markets. The global economy is generally expected to continue growing, albeit at a slower rate. In its October World Economic Outlook, the International Monetary Fund projected that the global economy will grow by 4.2 percent in 2011, with a slowdown in the second half of 2010 continuing into the first half of 2011. For developed economies, the Organisation for Economic Co-operation and Development sees growth slowing to 2.3 percent in 2011 from 2.8 percent in 2010 but rebounding to the latter rate in 2012.

While continued global growth is likely to support markets, the European sovereign debt crisis may continue to weigh on markets. Apart from the drag on the economy resulting from the fiscal austerity being adopted in the debtor nations in efforts to service their debts, many economists consider at least some of the crisis countries to be insolvent anyway, so some form of default is likely eventually. Whatever the form, bond markets and, ultimately, markets in general are unlikely to emerge totally unscathed, although political action -- or inaction as the case may be -- may keep the path of crisis resolution uncertain over the course of 2011.

While monetary policy on the whole -- but particularly that of the Federal Reserve -- was supportive of markets in 2010, things could change in 2011. Just last Thursday, Taiwan's central bank raised interest rates for the third time this year while its larger cross-strait neighbour China raised interest rates on Christmas Day and is expected to raise rates further in 2011 to fight off inflation.

However, stock markets are unlikely to be seriously threatened by tighter monetary policy for the first half of the year. The Federal Reserve's monetary policy stance is still the most important for global markets, and for the first half of the year, it is likely to remain accommodative as it is expected to continue to buy Treasuries until June.

This could change in the second half of the year though. The Fed's Treasury purchases are unlikely to be extended beyond June as the United States economy is expected to re-accelerate over the year. The cessation of Fed buying of Treasuries would obviously affect bond prices but probably those for other assets as well. In addition, by the second half of the year, investors may start focusing on the possibility of an interest rate hike by the Fed.

So while the global economy is likely to continue growing in 2011, investors would do well to continue monitoring developments on Europe's sovereign debts and the exit of central banks from ultra-loose monetary policies.