Japanese manufacturing contracts

A report from Japan on Wednesday showed that industrial production rose 0.4 percent in February but a report from Bloomberg today shows a much different picture for March.

Japan’s manufacturing deteriorated at the fastest pace in at least nine years in March, underscoring forecasts for the economy to shrink in the aftermath of the March 11 earthquake.

The index of purchasing managers fell to 46.4 from 52.9, the Japan Materials Management Association and Markit Economics said in a joint release today, the biggest drop since the survey began in October 2001. A number below 50 indicates a contraction.

Elsewhere, the economic data on Wednesday had been somewhat better.

In the US, it looks like the economy continued to add jobs in March. Bloomberg reports:

Companies in the U.S. added more workers in March, a sign the labor market may be strengthening, data from a private report based on payrolls showed today.

Employment increased by 201,000 workers in March after a revised 208,000 gain in February, according to figures from ADP Employer Services. The median estimate in the Bloomberg News survey called for a 208,000 gain...

Another report today showed employers announced fewer job cuts in March than the same month last year, even as government payroll cutbacks climbed to the highest level in a year. Planned firings decreased 39 percent to 41,528 this month from March 2010, according to Chicago-based Challenger, Gray & Christmas Inc. Public employees accounted for almost half of all job cuts.

Meanwhile, economic sentiment in the euro region has pulled back from recent highs. Bloomberg reports:

European confidence in the economic outlook worsened in March, after surging energy costs and Japan’s earthquake clouded global growth prospects.

An index of executive and consumer sentiment in the 17- nation euro region slipped to 107.3 from a revised 107.9 in February, which was the highest since August 2007, the European Commission in Brussels said today. It had previously reported a February reading of 107.8. Economists forecast a drop to 107.5, the median of 25 estimates in a Bloomberg News survey showed.

Japan's unemployment down in February

Just a reminder that the Japanese economy was recovering before the earthquake struck. From Bloomberg on Tuesday:

Japan’s unemployment rate fell in February and retail sales beat analysts’ forecasts, signs that the economy was picking up before the March 11 earthquake and tsunami that devastated northeastern regions.

The jobless rate unexpectedly slid to 4.6 percent from the previous month’s 4.9 percent, the statistics bureau said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for the rate to be unchanged. Retail sales rose 0.1 percent from a year earlier, beating forecasts for a 0.5 percent drop, the Trade Ministry said in a separate report...

Household spending fell 0.2 percent after a 1 percent decline in January, the statistics bureau said. The job-to- applicant ratio rose to 0.62, indicating there were 62 positions for every 100 candidates in February, the highest since January 2009, the Labor Ministry said.

Tuesday also brought some evidence that the UK economy is recovering from a fourth quarter contraction. From Bloomberg:

U.K. mortgage approvals rose to 46,967 in February, the highest level since November and more than economists forecast, suggesting the property market is stabilizing.

The figure compares with an upwardly revised 46,152 in January, the Bank of England said today in London. Economists forecast 46,000, based on the median forecast of 15 economists in Bloomberg News survey...

Separate figures showed the economy shrank 0.5 percent in the fourth quarter, less than previously estimated, as services and factory output was revised higher. Excluding the impact of the coldest December in a century, growth was “broadly flat,” the Office for National Statistics said today in London.

However, US economic data continued on its recent weak trend. Again from Bloomberg:

Confidence among U.S. consumers dropped more than forecast in March as fuel costs surged to the highest level in more than two years.

The Conference Board’s confidence index fell to a three- month low of 63.4 from a revised 72 reading in February, figures from the New York-based private research group showed today...

Another report today showed home prices fell in January by the most in a year, raising the risk that home sales will keep slowing. The S&P/Case-Shiller index of property values in 20 cities dropped 3.1 percent from January 2010, the biggest year- over-year decrease since December 2009.

Home prices fell 0.2 percent in January from the prior month after adjusting for seasonal variations, following a 0.4 percent December decrease.

Continuing a somewhat longer trend are yet more sovereign credit rating downgrades. Bloomberg reports:

Portugal and Greece were downgraded by Standard & Poor’s, which said the European Union’s new bailout rules may mean that both nations eventually renege on their debt obligations.

S&P cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-, three steps below Ireland. Greece’s rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries may be forced to restructure debt after seeking European aid and that governments will be paid back before other creditors...

The gap between Portuguese and German borrowing costs surged to 467 basis points today, the highest intraday level since Nov. 11. The Greek spread widened to 938 basis points from 934 basis points yesterday.

US consumer spending, inflation rise

Inflation ate up much of the increase in consumer spending in February. Bloomberg reports:

Americans increased spending more than forecast in February as incomes climbed, easing concern that rising food and fuel costs might derail the consumer demand that makes up 70 percent of the U.S. economy.

Purchases increased 0.7 percent, the most since October, after advancing 0.3 percent the prior month, Commerce Department figures showed today in Washington...

The report also showed incomes increased 0.3 percent, less than projected...

The price gauge tied to spending patterns increased 1.6 percent from February 2010, compared with a 1.2 percent gain in the 12 months ended in January, today’s report showed.

The Fed’s preferred price measure, which excludes food and fuel, rose 0.2 percent for a second month, and was up 0.9 percent from a year earlier, the most since October.

Adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending rose 0.3 percent after little change in January. Increasing demand for durable goods, such as autos, led the gain.

Disposable incomes, or the money left over after taxes, dropped 0.1 percent after adjusting for inflation, the first decrease since September and a reminder of the challenge represented by rising food and energy costs. Real disposable income climbed 0.5 percent in the prior month.

Meanwhile, the housing market had positive news for a change.

An index of pending home sales increased 2.1 percent in February after a 2.8 percent drop the prior month, figures from the National Association of Realtors showed today. The data indicates the U.S. housing market is having trouble recovering as foreclosures mount.

US stocks fell anyway on Monday.

The Standard & Poor’s 500 Index fell, erasing earlier gains in the final 20 minutes of trading, as concern grew that Japan is failing to contain hazardous materials at its damaged nuclear plant. The gauge dropped 0.3 percent to 1,310.19 at the 4 p.m. close in New York after climbing as much as 0.5 percent.

Reuters reports the latest findings from the Japanese nuclear crisis:

Plutonium found in soil at the crippled Fukushima nuclear complex heightened alarm on Tuesday over Japan's protracted battle to contain the world's worst atomic crisis in 25 years.

Tokyo Electric Power Co (TEPCO) said the radioactive material -- a by-product of atomic reactions and also used in nuclear bombs -- had been found in soil in five places at the plant, hit by an earthquake and tsunami on March 11.

Japan earthquake: a supply shock and another aftershock

Last week, Caroline Baum said that the earthquake in Japan represents a supply shock that could raise inflation pressures around the world.

There’s one economic aspect of Japan’s earthquake, tsunami and nuclear disaster that seems to be getting lost in the rubble, and that’s the effect on prices.

Yes, prices. Remember them? You’d never know it from the analysis of what Japan’s triple-whammy means for the domestic and global economy.

A natural disaster qualifies as a supply shock. For the graphically inclined, this is represented by an inward shift, to the left, of the supply curve. It describes what happens when producers provide fewer goods at any given price than they did before. The result is lower output and higher prices.

Baum said that there is little that central banks can do to mitigate the impact on output.

The problem isn’t weak demand; it’s reduced supply. Central banks manufacture one thing: money. They can’t produce computer chips, electronic components or automobiles.

In other words, they can’t make up for the lost supply. All they can do is print money so that more money chases fewer goods and services, which is the definition of inflation.

And if the initial earthquake did not do enough damage to Japan, there are the aftershocks, of which another came on Monday, to add to the ongoing nuclear crisis that just refuses to go away. Reuters reports some the latest developments:

Japan appeared resigned on Monday to a long fight to contain the world's most dangerous atomic crisis in 25 years after high radiation levels complicated work at its crippled nuclear plant.

Engineers have been battling to control the six-reactor Fukushima complex since it was damaged by a March 11 earthquake and tsunami that also left more than 27,000 people dead or missing across Japan's devastated northeast.

A magnitude 6.5 earthquake rocked the region on Monday, the latest in a series of aftershocks, and officials warned it would trigger a 50-cm (two feet) tsunami wave.

Radiation at the nuclear plant has soared in recent days. Latest readings on Sunday showed contamination 100,000 times normal in water at reactor No. 2 and 1,850 times normal in the nearby sea.

Those were the most alarming levels since the crisis began.

Japanese deflation moderates, US GDP growth revised up

The earthquake may accelerate Japan's exit from consumer price deflation. From Bloomberg on Friday:

Japan’s deflation moderated in February even before the country’s worst earthquake on record and an ensuing tsunami and nuclear crisis this month push up energy and food costs.

Consumer prices excluding fresh food declined 0.3 percent from a year earlier, the statistics bureau said today in Tokyo, matching the median estimate of 23 economists surveyed by Bloomberg News.

The March 11 disaster may cause Japan’s gross domestic product to shrink by as much 12 percent on an annualized basis in the second quarter, Morgan Stanley MUFG Securities Co. predicted. The shortage of daily necessities caused by the magnitude-9.0 quake may push up prices, while the weakening economy may dampen consumption and slump price gains, said economist Yoshiki Shinke.

Meanwhile, the US reported mixed economic data on Friday. From Reuters:

The U.S. economy grew more quickly than previously thought in the fourth quarter, the government said on Friday, but signs of softer consumer and business spending may slow its momentum in early 2011.

Another report showed consumers in March were their most downbeat in over a year as food and gasoline prices jumped.

Gross domestic product rose at an annualized rate of 3.1 percent, the Commerce Department said in its final estimate, revised up from 2.8 percent...

The Thomson Reuters/University of Michigan index on consumer sentiment fell to 67.5 this month, the lowest since November 2009, from 68.2 in early March and 77.5 in February.

Also falling this month was German business confidence. Bloomberg reports:

German business confidence fell less than economists forecast in March, suggesting Japan’s earthquake and higher borrowing costs may not damp growth in Europe’s largest economy.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, declined to 111.1 from 111.3 in February, which was the highest reading since records for a reunified Germany began in 1991. Economists expected a drop to 110.5, according to the median of 39 forecasts in a Bloomberg News survey.

Euro area slows, UK retail sales and US durable goods orders fall

The economic data released on Thursday were a bit weaker than usual.

Flash estimates of service and manufacturing activity in the euro area showed slowing growth. Bloomberg reports:

Growth in Europe’s services and manufacturing industries slowed more than economists forecast in March after surging energy costs and Japan’s earthquake clouded the global growth outlook.

A composite index based on a survey of purchasing managers in the 17-nation euro region in both industries fell to 57.5 from 58.2 in February, London-based Markit Economics said today. Economists forecast a drop to 57.8, the median of 16 estimates in a Bloomberg News survey showed. That’s still the second highest level since July 2007. A reading above 50 indicates expansion...

An indicator measuring euro-region manufacturing growth fell to 57.7 in March from 59 in the previous month, Markit said. A gauge of service industries rose to 56.9 from 56.8 in February. That’s the highest since August 2007.

Reuters reports that UK retail sales fell in February.

Retail sales fell more than expected in February, reversing half of January's rebound with volumes hit by the biggest jump in prices in 17 years which was only partly due to the rise in VAT, official data showed on Thursday.

The ONS said sales volumes including automotive fuel fell 0.8 percent last month after a downwardly revised increase of 1.5 percent in January. That was bigger than the 0.6 percent decline forecast by analysts and took sales up 1.3 percent on the year.

Moreover, prices including fuel leapt at their fastest monthly pace since 1994, up 2.5 percent. Excluding fuel, prices were 2.4 percent higher on the month -- the biggest rise since the series began in 1988.

And in the US, Bloomberg reports that durable goods orders fell in February.

Orders for long-lasting goods unexpectedly fell in February, raising concern over the sustainability of the rebound in U.S. business investment.

Bookings for goods meant to last at least three years dropped 0.9 percent after a 3.6 percent gain the prior month that was larger than initially reported, the Commerce Department said today in Washington...

The number of workers filing claims for jobless benefits declined by 5,000 to 382,000 in the week ended March 19, Labor Department figures showed, in line with the median forecast of economists surveyed by Bloomberg. The total sum of those receiving government payments dropped to the lowest level in almost three years.

The Bloomberg Consumer Comfort Index dropped to minus 48.9 in the period to March 20 from minus 48.5 the prior week, another report today showed. The measure of the current state of the economy slumped to a 15-month low.

There were some positive data on China, though. Again from Bloomberg:

China’s manufacturing growth is accelerating, according to preliminary data from a survey of purchasing managers, signaling the economy may withstand increased interest rates.

The index may rise to 52.5 from 51.7 in February, HSBC Holdings Plc and Markit Economics said in an e-mailed statement today. This is the second time advance data has been released.

Japanese stocks fall, Portugal on brink of bailout

Japan's problems are far from over. From AFP/CNA on Wednesday:

Japanese shares fell sharply after Tokyo authorities said levels of radioactive iodine exceeded safe limits for infants for two consecutive days amid a deepening food radiation scare...

The Nikkei 225 index lost 158.85 points to 9,449.47. The Topix index slipped 7.03 points, or 0.81 percent, to 861.10...

The impact of the quake and tsunami on production facilities exposed to power blackouts and a fractured supply chain weighed on automakers scrambling to restart factories.

Nissan Motor fell 2.90 percent at 703 yen and Toyota, which will not carry out auto assembly until at least Saturday, was down 1.19 percent at 3,305 yen.

The recovery in the Japanese economy now looks seriously threatened, notwithstanding February's export numbers reported by Bloomberg today:

Japan’s export growth accelerated in February, before the nation’s strongest earthquake killed thousands, shut factories and caused power shortages, in a disaster that may disrupt trade for months.

Overseas shipments rose 9 percent in February from a year earlier, from January’s 1.4 percent gain, the Finance Ministry said in Tokyo today. The median estimate of 16 economists surveyed by Bloomberg News was for a 9.1 percent gain.

But even before concerns over Japan fade, concerns over European sovereign debt are returning, this time focused on Portugal. From Bloomberg:

Portuguese Prime Minister Jose Socrates tendered his resignation after plans to cut the budget were rejected by parliament, pushing the country closer to an international bailout.

President Anibal Cavaco Silva said late yesterday he will meet the main parties on March 25 and the government will retain its powers until he accepts Socrates’s resignation. The vote came hours before European Union leaders meet in Brussels to sign off on measures aimed at drawing a line under the region’s sovereign debt crisis.

Earlier on Wednesday, the euro area had reported a small increase in industrial orders in January. Again from Bloomberg:

European industrial orders increased for a fourth month in January, led by demand for intermediate goods such as car engines and steel, adding to signs the economy is gathering strength.

Orders in the euro area rose 0.1 percent from December, when they increased 2.7 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 1 percent, the median of 15 estimates in a Bloomberg News survey showed. Orders jumped 21 percent from a year earlier.

But for the US housing sector, there was more grim news on Wednesday. Bloomberg reports:

Purchases of new U.S. homes unexpectedly declined in February to the slowest pace on record and prices dropped to the lowest level since December 2003, adding to evidence the industry is floundering.

Sales decreased 16.9 percent to a 250,000 annual pace, figures from the Commerce Department showed today in Washington. Economists surveyed by Bloomberg News projected a gain to a 290,000 rate, according to the median estimate. The median price fell 8.9 percent from the same month in 2010.

US real estate prices fall in January, UK inflation hits 4.4 percent

Bloomberg reports that home prices in the US declined in January.

U.S. home prices fell 3.9 percent in January from a year earlier as the housing market struggled to recover from the worst crash in seven decades, according to the Federal Housing Finance Agency.

The drop was led by an 8.6 percent slump in the region that includes Arizona and Nevada, followed by a 5.6 percent retreat in the area that includes Florida, the agency said in a report today. Prices nationwide fell 0.3 percent from December, compared with the 0.2 percent decline that was the average estimate of 17 economists in a Bloomberg survey.

So did commercial property prices.

U.S. commercial property prices slipped for the second straight month in January, as distressed real estate sales weighed on values, according to Moody’s Investors Service.

The Moody’s/REAL Commercial Property Price Index slumped 1.2 percent from the previous month and 4.3 percent from a year earlier. It’s up 4.2 percent from an eight-year low in August, Moody’s said in a statement today.

Fortunately, there is further evidence that US manufacturing continues to grow. The Richmond Fed reported on Tuesday that manufacturing activity continued to advance in March.

Manufacturing activity in the central Atlantic region expanded for the sixth straight month, according to the Richmond Fed's latest survey. Looking at the main components of activity, shipments and new orders grew more slowly, while employment growth held steady. Other indicators varied slightly but suggested continued solid activity...

Looking forward, manufacturers' optimism remained in place in March...

UK manufacturing also appears to be growing. Reuters reports:

Factory orders growth picked up more than expected in March to its highest pace in three years and firms expected to ramp up prices at the fastest rate in over two-and-a-half years, a survey showed on Tuesday.

The Confederation of British Industry survey's total order book balance jumped to +5 this month from -8 in February, well above expectations of a reading of -6.

The gauge for domestic price expectations rose to +33 in March from +32 in the previous month, hitting its highest level since July 2008, the survey showed.

Indeed, the problem for the UK economy seems to be inflation. Again from Guardian:

UK inflation rose to 4.4% last month, its highest level since October 2008, as rising fuel, domestic heating and clothing prices continued to drive up the cost of living.

February's consumer prices index (CPI) reading, which was higher than the City had expected, pushed the pound to a new 14-month high of $1.6377. The retail prices index, which includes housing costs, hit an annual rate of 5.5% - its highest level since July 1991.

Markets recover

As fears over Japan's difficulties with the Fukushima nuclear plant gradually recede, investors moved back into risk mode on Monday. Bloomberg reports:

Stocks climbed, sending benchmark gauges to their biggest three-day gains of the year, and the yen weakened as Japan made progress in cooling nuclear reactors at a crippled plant. Oil jumped after the U.S., U.K. and France attacked military targets in Libya.

The Standard & Poor’s 500 Index rose 1.5 percent at 4 p.m. in New York and the Stoxx Europe 600 Index closed up 1.8 percent. Telephone shares rallied as Deutsche Telekom AG agreed to sell T-Mobile USA to AT&T Inc. for about $39 billion. The yen fell versus all 16 major peers, while 10-year U.S. Treasury yields gained 6 basis points to 3.33 percent. Oil rose 1.2 percent as the S&P GSCI commodity index climbed a fourth day.

The S&P 500 recouped most of last week’s 1.9 percent loss as Japanese Prime Minister Naoto Kan said progress is being made in restoring power to two nuclear reactors damaged by the March 11 temblor and tsunami. In Libya, allied officials said air and missile strikes have effectively grounded Muammar Qaddafi’s air force. The Stoxx 600 Telecommunications Index had its biggest gain since May, jumping 3.7 percent as 20 of 21 shares advanced.

Ironically, US economic data on Monday were negative.

The Chicago Fed's National Activity Index fell in February.

The Chicago Fed National Activity Index ticked down to –0.04 in February from –0.01 in January. Three of the four broad categories of indicators that make up the index made positive contributions in February, but for the second consecutive month they were offset by continued weakness in the consumption and housing category.

The index’s three-month moving average, CFNAI-MA3, increased to +0.11 in February from +0.05 in January, coming in positive for two consecutive months for the first time since April and May of 2010. February’s CFNAI-MA3 suggests that growth in national economic activity was slightly above its historical trend. With regard to inflation, the CFNAI-MA3 indicates limited inflationary pressure from economic activity over the coming year.

And the US housing market continues to look weak. Bloomberg reports:

Sales of previously owned U.S. homes dropped more than forecast in February, sending prices to the lowest level since 2002 and indicating the market is struggling to recover.

Purchases decreased 9.6 percent to a 4.88 million annual rate, less than the 5.13 million median forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. The median price fell 5.2 percent from a year earlier.

There was somewhat better news on the UK property market. From Reuters:

Asking prices for houses in England and Wales are 0.9 percent higher than a year earlier, a monthly survey by property website Rightmove showed on Monday.

March's annual rate of growth in asking prices picked up from a reading of 0.3 percent in February. The month-on-month rate of growth, which is subject to seasonal volatility, slowed to 0.8 percent from February's four-month high of 3.1 percent.

Markets turbulent as OECD indicator reaches prior peaks

Last week turned out to be a highly turbulent one as investors reacted to events in Japan and the Arab world.

In Japan, the earthquake that struck on 11 March created a nuclear crisis after cooling systems at a nuclear plant failed after being hit by a tsunami while in the Arab world, the political turmoil escalated as protests flared up in countries like Yemen and Bahrain even as Libyan leader Muammar Gaddafi continued to attack rebels fighting to topple his regime.

Stock markets around the world fell last week. The Standard & Poor's 500 Index fell 1.9 percent to 1,279.20 last week, its second consecutive week of decline. The Stoxx Europe 600 Index fell 2.8 percent to 267.63 last week, its biggest weekly drop since July last year.

Not surprisingly, Japan saw the biggest fall, with the Nikkei 225 Stock Average plunging 10.2 percent to 9,206.75 last week. The MSCI Asia Pacific ex Japan Index fell 1.6 percent to 452.76.

The yen rose early in the week on speculation Japanese investors would repatriate funds following the earthquake. However, intervention by the Group of Seven near the end of the week helped stem the rise. The yen finished the week at 80.58 per dollar last week, up 1.54 percent, but was down 0.5 percent against the euro.

After fluctuating throughout the week as investors took into account both the expected drop in demand for oil in Japan following the earthquake and the potential supply disruptions in Libya and the Middle East because of political violence, crude oil finished little changed. US light sweet crude for April delivery closed at $101.07 on Friday to finish down 0.1 percent for the week.

Gold suffered a similar fate. Gold for April delivery closed in the US at $1,416.10 on Friday, down 0.4 percent for the week.

While investors mostly reacted to the news from Japan and the Arab world, economic data released last week were relatively positive.

In the United States, the Conference Board's index of leading economic indicators rose 0.8 percent in February. And although the Economic Cycle Research Institute's weekly leading index fell to 130.4 in the week ended 11 March from 130.9 in the previous week, the index's annualised growth rate rose to 7.1 percent, the highest since May 2010, from 6.8 percent a week earlier.

Leading indicators for the global economy published last week were also positive. The Organisation for Economic Co-operation and Development's composite leading indicator for member countries as a whole rose to 103.1 in January from 102.8 in December. This is the highest level since June 2007.

In fact, the OECD composite leading indicator is essentially around the level where it had peaked in the previous two economic cycles. In 2000, the CLI had peaked at 102.9. In 2007, it had peaked at 103.2.

Obviously, if the current level turns out to be another peak, then the outlook for the global economy beyond the next few months would not be that good.

We will know in a few months' time whether this is indeed the case.

China raises reserve requirement

China has tightened monetary policy again. AFP/CNA reports:

China's central bank said Friday it will raise the amount of money banks must keep in reserve, in the latest move to rein in lending and bring inflation under control.

The reserve requirement ratio will be raised by 50 basis points, the People's Bank of China said in a brief statement -- the third time this year it has announced such a measure.

The move -- effective from March 25 -- follows three interest rate hikes since late last year as China battles to control soaring prices, which top leaders fear could lead to social unrest.

This action comes even as China's real estate market showed some signs of cooling. Again from AFP/CNA:

China's efforts to cool its red-hot real estate market showed signs of working in February, as government data Friday showed more cities seeing a fall in house prices from the previous month...

The cost of a newly built home in eight of the 70 major cities tracked fell in February from January, the National Bureau of Statistics said. Just three cities had shown a decline in January...

Fifty-six cities saw prices rise in February from the previous month, compared with 60 cities in January, according to the statement.

Prices in Beijing rose 0.4 percent in February from January, slower than the 0.8 percent month-on-month increase in January. Shanghai recorded a 0.9 percent increase for the second straight month.

In contrast to the People's Bank of China, with Japan's nuclear crisis still very grave, the Bank of Japan is maintaining its ultra-easy monetary policy. Reuters reports:

Bank of Japan Governor Masaaki Shirakawa reiterated the central bank's resolve to maintain its ultra-easy monetary policy following Friday's Group of Seven agreement to join in a rare coordinated intervention to restrain soaring yen...

"The Bank of Japan will promote powerful monetary easing and continue providing ample liquidity to ensure market stability," Shirakawa told reporters after Friday's G7 announcement.

In any case, on the whole, events on Friday proved somewhat supportive of financial markets. From Bloomberg:

Stocks rose, sending the MSCI World Index to its best two-day rally of the year, as the Federal Reserve allowed some U.S. banks to boost dividends and Libya called a cease-fire. The yen slid as central banks weakened the currency to help Japan recover from its worst earthquake.

The MSCI gauge of stocks in developed markets gained 0.7 percent as of 4 p.m. in New York and climbed 2.3 percent in the last two days. The Standard & Poor’s 500 Index advanced 0.4 percent after Japan’s Nikkei 225 Stock Average closed up 2.7 percent. Crude slipped 0.4 percent to $101.07 a barrel, erasing a 2.2 percent gain. The yen weakened against all 16 most-traded peers, depreciating 2.2 percent to 80.69 versus the dollar. Ten- year Treasury yields increased 1 basis point to 3.27 percent.

US leading index, factory output and inflation rise, India raises rates

With no significant worsening of the nuclear crisis in Japan, markets had a chance to recover on Thursday. Bloomberg reports:

Stocks rose, halting the biggest three-day drop in the Standard & Poor’s 500 Index since August, as Japan moved closer to restoring power at a nuclear plant and FedEx Corp. (FDX) forecast more profit than analysts estimated. Oil jumped as commodities rallied the most since September 2009.

The S&P 500 rose 1.3 percent to 1,273.72 at 4 p.m. in New York and the Stoxx Europe 600 Index gained 1.9 percent. Oil advanced 3.5 percent to $101.42 a barrel in New York and the S&P/GSCI Index of 24 raw materials surged 3.4 percent, the most in 17 months. The yen touched a post-World War II peak of 76.36 per U.S. dollar. Yields on 10-year Treasuries increased eight basis points to 3.25 percent, ending a three-day slide.

Positive economic data helped boost markets on Thursday. Bloomberg reports a rise in the US leading economic index in February.

The Conference Board’s gauge of the outlook for the next three to six months increased 0.8 percent after rising 0.1 percent in January, the New York-based group said today. Economists forecast a 0.9 percent gain, according to the median estimate in a Bloomberg News survey.

Other US data released on Thursday were mostly also positive. Again from Bloomberg:

Production at U.S. factories increased for a sixth month in February, indicating manufacturing will keep stoking the economy and underscoring the Federal Reserve’s view of a stronger expansion.

The 0.4 percent rise in manufacturing output, which makes up 75 percent of all industrial production, followed a 0.9 percent January gain that was three times as large as initially estimated, Fed figures showed today...

The Fed’s report showed that industrial production, which includes factories, mines and utilities, unexpectedly fell 0.1 percent in February after a 0.3 percent gain. Utility output slumped 4.5 percent during the month on milder weather...

A gauge of manufacturing in the Philadelphia area jumped to 43.4 in March, the highest since January 1984, from 35.9 in February. Readings greater than zero signal expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware...

Another report from the Labor Department showed first-time filings for jobless benefits dropped by 16,000 in the week ended March 12 to 385,000. The four-week average of claims dropped to the lowest level since July 2008, indicating improvement in the labor market.

But consumer sentiment has fallen while inflation is rising.

The Bloomberg Consumer Comfort Index dropped to minus 48.5 in the week ended March 13, the lowest level since August, from minus 44.5 in the prior period. Sentiment fell across most income and age groups and worsened for all education levels...

Consumer prices rose 0.5 percent in February, led by the biggest rise in food costs since 2008. Excluding food and fuel, the so-called core gauge of consumer inflation climbed 0.2 percent for a second month.

Thursday also saw more action being taken to curb inflation, this time, from India. AFP/CNA reports:

India on Thursday hiked interest rates for the eighth time in a year as concern about high domestic inflation overpowered fears that the global recovery could be increasingly fragile.

The central bank raised its repo, the rate at which it lends to commercial banks, by 25 basis points to 6.75 percent. The reverse repo, the rate it pays to banks for deposits, was also hiked by a quarter point to 5.75 percent.

US housing starts plunge, stocks sink

There was bad news for the US economy on Wednesday. Bloomberg reports:

Housing starts in the U.S. plunged to the lowest level in almost a year in February and wholesale prices rose more than forecast, hurdles for a recovery that the Federal Reserve said yesterday is on a “firmer footing.”

Home construction dropped 23 percent to a 479,000 annual rate, while building permits slumped last month to a record low, Commerce Department figures showed today in Washington. The producer-price index jumped 1.6 percent in February, the most since June 2009, the Labor Department said. The gain exceeded the highest forecast in a Bloomberg News survey.

But markets remain fixated on the situation in Japan. Again from Bloomberg:

U.S. stocks sank, erasing the 2011 gain for the Standard & Poor’s 500 Index, and Treasuries rallied as Japan’s nuclear crisis worsened. The yen rose to a post-World War II high versus the dollar on speculation investors will buy the currency to fund rebuilding projects.

The S&P 500 lost 2 percent to 1,256.88 at 4 p.m. in New York, leaving it down 0.1 percent on the year. Futures on the index slumped 0.9 percent at 6:02 p.m., and contracts on the Nikkei 225 Stock Average traded for 8,205, or 8.3 percent less than the closing level of 8,950 in Singapore. Ten-year Treasury yields fell 10 basis points to 3.20 percent, the lowest since December. The yen appreciated against all 16 major peers, rising to as strong as 79.24 per dollar...

The Nikkei 225 rebounded 5.7 percent in today’s trading in Tokyo after plunging 16 percent on March 14 and 15, the worst two-day drop since 1987...

The Stoxx Europe 600 Index slid 1.6 percent, erasing an earlier gain, as banks and auto companies declined...

But while much of the world's attention has been on Japan's nuclear crisis, rescue of people directly hit by the earthquake and tsunami also took an unfortunate turn on Wednesday. From Reuters:

Heavy snow blanketed Japan's devastated northeast on Wednesday, hindering rescue workers and adding to the woes of the few, mainly elderly, residents who remained in the area worst hit by last week's massive earthquake and tsunami.

In some parts of Sendai city, firefighters and relief teams sifted through mounds of rubble, hoping to find any sign of life in water-logged wastelands where homes and factories once stood.

But, as they did in most other towns, rescuers just pulled out body after body, which they wrapped in brightly colored blankets and lined up neatly against the grey, grim landscape.

Japanese crisis hits markets further but Fed sees firmer recovery

Asian stock markets were mauled on Tuesday. AFP/CNA reports:

Asian stocks slumped Tuesday with Tokyo shedding more than 10 percent as Japan's nuclear crisis deepened after two more blasts and a fire at an atomic power plant...

The Nikkei index ended down 10.55 percent, or 1,015.34 points, at 8,605.15, its heaviest loss since the fall of Lehman Brothers in late 2008, and followed Monday's loss of 6.18 percent.

Hong Kong fell 2.86 percent, or 667.63 points, to close at 22,678.25 while Shanghai lost 1.41 percent, or 41.37 points, to end at 2,896.26.

Sydney plunged 2.11 percent, or 97.7 points, to 4,528.7 and Seoul shed 2.40 percent, or 47.31 points, to 1,932.92.

By the US close, though, investors had calmed somewhat. From Reuters:

U.S. stocks fell 1 percent but ended far from session lows on Tuesday on the Federal Reserve's more upbeat economic view and growing sentiment that Japan's nuclear crisis would only temporarily depress shares...

Equities nearly halved their losses after the Fed stuck with its ultra-loose monetary policy and said the economy was gaining traction...

The Dow Jones industrial average was down 137.74 points, or 1.15 percent, at 11,855.42. The Standard & Poor's 500 Index was down 14.52 points, or 1.12 percent, at 1,281.87. The Nasdaq Composite Index was down 33.64 points, or 1.25 percent, at 2,667.33.

Bloomberg reports the Fed's decision on Tuesday:

Federal Reserve policy makers said U.S. growth is becoming more durable and higher energy prices will have a temporary effect on inflation as they affirmed plans to buy $600 billion of Treasuries through June.

“The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Federal Open Market Committee said today in a statement after a one-day meeting in Washington. The inflation effects of increased commodity costs will be “transitory,” and officials “will pay close attention to the evolution of inflation and inflation expectations,” the Fed said.

US data had also pointed to improvements in the economy. Bloomberg reports:

Strength in U.S. manufacturing from earlier this year continued into March, a Fed report showed. The Fed Bank of New York’s general economic index rose to a nine-month high of 17.5 from 15.4 in February. Readings greater than zero signal expansion in the so-called Empire State Index, which covers New York, northern New Jersey, and southern Connecticut...

Another report today showed confidence among U.S. homebuilders rose in March to the highest level since May 2010. The National Association of Home Builders/Wells Fargo sentiment index climbed to 17 from a February reading of 16 as more firms anticipated stronger sales in the next six months. Measures less than 50 mean more respondents said conditions were poor.

But with the economy improving, inflation is making a return.

The cost of goods imported into the U.S. rose more than forecast in February, led by further gains in commodities that companies are struggling to pass along to their customers.

The 1.4 percent increase in the import-price index exceeded the 0.9 percent median estimate in a Bloomberg News survey and followed a 1.3 percent rise in January, Labor Department figures showed today in Washington. A measure of prices paid by factories in the New York region jumped this month to the highest level since August 2008, according to another report that also showed manufacturing picked up.

Europe, though, was hit by another sovereign credit rating downgrade. Bloomberg reports:

Portugal’s long-term debt rating was cut two steps by Moody’s Investors Service, which cited a “subdued” growth outlook, risks to implementing the government’s deficit-reduction plans, and a possible need to recapitalize its banks.

The rating was downgraded to A3 from A1, the company said today in an e-mailed statement, adding that the outlook is “negative.” The euro weakened against the dollar after Moody’s announcement, to $1.3978 per euro from $1.3998.

More bad news from Japan

The news from Japan keeps getting worse.

In the aftermath of Friday's earthquake, Japanese stocks plunged on Monday, with the Nikkei 225 down 6.18 percent, and early on Tuesday, an explosion was heard at another nuclear reactor.

Economic reports have also not been as positive as in recent weeks.

Reuters reports that Japan's industrial production in January has been revised down.

Japan's industrial output rose 1.3 percent in January, revised data showed on Monday.

The figure compared with an initial reading of a 2.4 percent rise and a 3.3 percent increase in December.

And consumer confidence fell in February. Nikkei reports:

Japan's consumer confidence index fell 0.5 point on the month to 40.6 in February, for the first drop in two months, the Cabinet Office said Monday.

The Bank of Japan did agree to pump in more funds at its meeting on Monday though. From AFP/CNA:

The Bank of Japan said it would pump a record 15 trillion yen (US$184 billion) to help stabilise the short term-money market, making good on its pledge Sunday that it would unleash "massive" funds following the quake.

An additional 3 trillion yen will be deployed Wednesday. The BoJ will double a five trillion yen asset purchase scheme to buffer the economy from Japan's strongest ever quake, and left its key rate left at between zero and 0.1 percent.

There was some good news from Europe on Monday though. From Bloomberg:

European industrial production increased in January for a fourth month as companies in Germany, the region’s largest economy, boosted output to meet surging export orders.

Production in the euro area rose 0.3 percent from December, when it also increased 0.3 percent, the European Union’s statistics office in Luxembourg said today. That matched the median forecast of 23 economists in a Bloomberg News survey. Production rose 6.6 percent in the year...

European leaders agreed over the weekend to broaden the size and scope of their 440 billion-euro ($614 billion) bailout fund to defuse the region’s debt crisis. They also eased the terms of rescue loans to Greece.

Japan quake death toll to rise but impact on global markets may be limited

The estimated death toll from the earthquake in Japan has risen dramatically. AFP/CNA reports:

Japan raced to avert a meltdown of two reactors at a quake-hit nuclear plant on Monday as the death toll from the disaster on the ravaged northeast coast was forecast to exceed 10,000.

An explosion at the ageing Fukushima No. 1 atomic plant blew apart the building housing one of its reactors on Saturday, a day after the biggest quake ever recorded in Japan unleashed a monster tsunami.

The atomic emergency escalated as crews struggled to prevent overheating at a second reactor where the cooling system has also failed, and the government warned that it too could suffer a blast...

The colossal 8.9-magnitude tremor sent waves of churning mud and debris racing over towns and farmland in Japan's northeast, destroying everything in its path and reducing swathes of countryside to a swampy wasteland...

In the small port town of Minamisanriku alone some 10,000 people were unaccounted for - more than half the population of the town, which was practically erased, public broadcaster NHK reported...

The national police agency said the confirmed death toll now stood at 1,597.

Reuters has a look at how Japanese markets and the economy performed following the Kobe earthquake in 1995. For the stock market in particular:

The Nikkei average fell on the day of the quake by 0.5 percent and then on the four days that followed. It continued to fall, losing more than 16 percent by the end of the quarter. However, one reason for the fall was concern over the rise in the yen and how that could undermine export earnings. By the end of the year, the Nikkei recovered all of its losses.

Tomi Kilgore notes that markets are usually able to shrug off major earthquakes and other natural disasters.

From the quake that struck Kobe, Japan in 1995 to the 2004 Indonesia tsunami, stock investors have quickly looked past the images of devastation to get back to business...

"These types of events, they're very sad and they're very alarming, but they don't have a huge impact on economic activity and momentum," said Christian Thwaites, president and chief executive of Sentinel Investments. "They kind of distract people from their terminals but I don't think people see them as big buying or big selling opportunities. Ultimately, they don't stop an economy in its tracks."

Bloomberg notes similar views even as it reports a plunge in stock prices at the Tokyo opening today.

Stocks in Japan extended losses as trading resumed though the worst earthquake on record in the third-biggest economy is unlikely to dent the two-year bull market in global equities.

The Nikkei 225 Stock Average dropped 5.1 percent to 9,736.55 at 9:13 a.m. Tokyo time today as more than 100 stocks remained unchanged as the exchange struggled to open trading. Standard & Poor’s 500 Index futures retreated 0.6 percent. Lost production from the Tohoku region where the quake struck might not be enough to spur a recession, Bank of America Corp. said. Bank of Japan Governor Masaaki Shirakawa told reporters he’s ready to unleash “massive” liquidity starting this morning in Tokyo to assure financial stability.

“The purely economic consequences will be modest: some reconstruction, some more government spending,” said Charles de Vaulx, a manager at New York-based International Value Advisers LLC, where he co-manages the $1.8 billion IVA International Fund including Japanese stock. “No major international consequences, either, except maybe helping drive long-term rates higher. We do not expect to make any significant changes to our portfolio as a result of this tragedy.”

Japan quake shakes markets

Disaster struck Japan on Friday. AFP/CNA reports:

The strongest quake ever recorded in Japan Friday unleashed a monster tsunami that claimed hundreds of lives, and a minister warned there could be a discharge of radiation from a nuclear plant...

At least 337 people were killed in the earthquake and subsequent tsunamis, police and press reports said.

Market reaction to the quake itself was mostly negative but US stocks actually managed to rise on the day. Bloomberg reports:

Oil fell, helping reverse a slide in global stocks, as crude demand weakened after Japan’s worst earthquake on record forced refineries to close. The yen gained as investors bought the domestic currency as a haven.

Oil slumped 1.5 percent to $101.16 a barrel at 4 p.m. in New York and earlier fell 3.6 percent for its biggest drop since November. The MSCI World Index erased a loss of as much as 0.5 percent and the Standard & Poor’s 500 Index gained 0.7 percent to 1,304.28 as higher-than-estimated profit forecasts from Steel Dynamics Inc. and Pall Corp. lifted commodity and industrial shares. Japan’s Nikkei 225 Stock Average slid 1.7 percent. The yen rose 1.3 percent versus the dollar, the most since August.

Even as new concerns arise, old ones aren't going away.

Portugal’s 10-year benchmark bond dropped for the fifth day, with the yield 10 basis points higher at 7.60 percent. The extra yield, or spread, investors demand to hold the debt instead of bunds rose 14 basis points to 439 basis points, while the Greek 10-year spread over German debt widened 9.5 basis points to 960 basis points.

The positive performance of US stock markets was helped by some positive economic data on Friday. From Bloomberg:

U.S. retail sales increased in February by the most in four months as Americans took advantage of more seasonable weather to buy cars, clothes and electronics.

Purchases climbed 1 percent after a revised 0.7 percent rise in January that was more than double the previous estimate, Commerce Department figures showed today in Washington. February sales matched the median forecast in a Bloomberg News survey...

Sales excluding autos increased 0.7 percent, matching the median forecast in the Bloomberg survey, today’s report showed...

Purchases excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, increased 0.6 percent for a second month in February.

Less encouraging though was a sharp fall in consumer confidence.

Separately, the Reuters/University of Michigan gauge of consumer sentiment dropped to 68.2 from a final February reading of 77.5. The gauge was forecast to decline to 76.3, according the median estimate in a Bloomberg survey...

The 9.3-point slump in sentiment was the biggest since October 2008, the last time average gasoline prices topped $3.50 a gallon.

There were few signs of cooling in China though from data reported earlier in the day. Again from Bloomberg:

China’s inflation and industrial production exceeded forecasts in February, underscoring the challenge for Premier Wen Jiabao as he seeks to prevent price increases from stirring social unrest.

Consumer prices rose at an annual 4.9 percent pace in February and output increased 14 percent in the first two months of 2011, the statistics bureau said in Beijing. Producer prices jumped 7.2 percent last month, the most since September 2008...

The pace of China’s inflation was unchanged from January and compared with the 4.8 percent median forecast in a Bloomberg News survey of 22 economists. The government aims to limit full- year consumer-price gains to about 4 percent.

Fixed-asset investment grew 25 percent in the first two months of 2011 from a year earlier, the data showed. Retail sales rose a less-than-forecast 16 percent in January and February combined. Industrial output rose 15 percent last month from a year earlier.

US and China report trade deficits, markets sink

Reuters reports that the US trade deficit widened in January.

The U.S. trade deficit widened much more than expected in January as higher oil prices and surging imports of capital goods and cars overpowered record exports in a signal of strengthening domestic demand.

The trade gap grew by 15.1 percent to $46.3 billion from $40.3 billion in December, the Commerce Department said on Thursday. Analysts had expected a deficit of $41.5 billion.

The shortfall in trade with China, a sore point in bilateral relations, grew 12.5 percent to $23.3 billion...

A second report from the Labor Department showed new claims for jobless benefits rose 26,000 last week to 397,000. While economists had looked for a smaller increase, they said the gain was not enough to suggest the labor market recovery was running off the rails.

Some of the increase in the trade deficit with China was probably unwound in February, if the latter's trade data are anything to go by. From AFP/CNA:

China said Thursday it had returned to a trade deficit in February for the first time in nearly a year, in line with efforts to wean the world's number two economy off its reliance on exports...

Customs blamed a sharp slowdown in exports on the Lunar New Year holiday which this year was celebrated at the beginning of February...

Exports rose just 2.4 per cent from a year earlier to $96.74 billion, compared with a rise of 37.7 per cent in January, and imports gained 19.4 per cent to $104.04 billion, compared with a 51 per cent increase in the previous month.

Analysts said exports and imports typically see strong growth ahead of the festive season when factories crank up production to meet demand, and then slow in the following month.

The other export powerhouse, Germany, also saw weaker exports recently. Bloomberg reports:

German exports unexpectedly declined in January after gaining in the previous two months.

Exports, adjusted for work days and seasonal changes, dropped 1 percent from December, when they rose 0.5 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.7 percent increase, according to the median of 13 estimates in a Bloomberg News survey. Imports gained 2.3 percent from December, when they declined 2.6 percent.

On a more positive note, Reuters reports that UK manufacturing bounced back in January.

The Office for National Statistics said manufacturing output rose 1.0 percent in January, more than reversing a 0.1 percent fall in December, and the strongest rate of growth since March 2010. Analysts had expected an increase of 0.8 percent.

Output in the broader industrial sector also rose slightly more than expected, by 0.5 percent on the month, but was tempered by a 6.2 percent fall in utilities output, which reversed a cold-weather boost in December.

Continued growth in the economy could mean that a rate hike might not be too far off. From Reuters:

The Bank of England kept interest rates at a record low Thursday, reluctant to jeopardise a fragile economic recovery and hopeful the recent surge in inflation will prove temporary.

All but one of the 63 economists polled by Reuters last week had predicted rates would stay at 0.5 percent. However, with inflation double the central bank's 2 percent target and still rising, most expect a rate rise later this year.

Money markets show a 70 percent chance the Bank will raise rates by a quarter percentage point in May and are fully pricing such a move by the middle of the year.

Meanwhile, South Korea continued the recent monetary policy trend in Asia on Thursday. From AFP/CNA:

South Korea's central bank on Thursday raised its key interest rate by 25 basis points to 3.0 per cent to control a surge in inflation.

The rise in the benchmark seven-day repo rate was the fourth since July last year, when it stood at a record low of 2 per cent in the aftermath of the global economic downturn.

However, New Zealand went in the opposite direction. AFP/CNA reports:

New Zealand announced an "emergency" interest rate cut in response to the Christchurch earthquake Thursday, warning that the already struggling economy risked nosediving after the disaster.

The Reserve Bank of New Zealand slashed the official cash rate (OCR) 0.5 points to 2.5 per cent in a bid to cushion the quake's economic fallout, equalling a record low set in the midst of the global financial crisis.

New Zealand's central bankers were not the only ones feeling anxious on Thursday. Markets were shaken apparently by the economic data, yet another European sovereign credit rating cut and further expansion of the Middle East turmoil. Reuters reports:

World stocks and commodities sank on Thursday after an unexpected trade deficit in China fueled concerns about the global economy, while the euro fell after a downgrade of Spain's credit rating by Moody's.

Stocks were pushed even lower and oil prices erased part of early losses in the afternoon as police confronted protesters in Saudi Arabia. Witnesses said shots were heard and some people were wounded...

Still, U.S. crude oil prices fell 1.6 percent to $102.70 a barrel as investors fretted about negative economic data from China, the world's second-largest consumer of oil. Brent prices ended 51 cents lower at $115.43...

The Dow Jones industrial average lost 228.48 points, or 1.87 percent, to 11,984.61...

Global stocks measured by MSCI's All-Country World Index slid 1.9 percent.

The euro fell 0.8 percent to $1.3796 after Moody's downgraded Spain to Aa2 from Aa1, warning of further cuts to the country's credit ratings.

Japanese 4th quarter GDP revised lower but machinery orders rise in January

Japan's economy shrank a little more than previously estimated in the fourth quarter. Bloomberg reports today:

Japan’s economy contracted more than the government initially estimated in the fourth quarter, because of a downward revision to capital investment and consumer spending.

Gross domestic product shrank at an annualized 1.3 percent rate in the three months ended Dec. 31, more than the 1.1 percent contraction reported last month, the Cabinet Office said today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 1.2 percent contraction.

Data for recent months have been positive though. For example, Reuters reported on Wednesday that Japan's machinery orders rose in January.

Japan's core machinery orders rose more than expected in January, marking their second straight month of gains as rising exports and robust profits encourage companies to lift spending on plant and equipment...

Core machinery orders, a highly volatile data series regarded as a leading indicator of capital spending, rose 4.2 percent in January from the previous month, Cabinet Office data showed on Wednesday.

There were also positive data out from Germany on Wednesday. Bloomberg reports:

Industrial production in Germany, Europe’s largest economy, rose in January as construction activity rebounded from its winter hiatus.

Output increased 1.8 percent from December, when it slipped a revised 0.6 percent, the Economy Ministry in Berlin said today. Economists had forecast a 1.7 percent gain, the median of 35 estimates in a Bloomberg News survey showed. In the year, production rose 12.5 percent when adjusted for working days.

The almost-continuous flow of positive economic data around the world is pushing central banks into tightening monetary policy, not least in Asia. From Bloomberg on Wednesday:

Asian central banks stepped up their battle against inflation as Thailand and Vietnam raised interest rates, seeking to defuse price pressures before the global jump in oil costs reverberates through the region.

The Bank of Thailand increased the one-day bond repurchase rate by a quarter of a percentage point to 2.50 percent, it said in Bangkok today...

“We still see the need to continue rate normalization,” Bank of Thailand Assistant Governor Paiboon Kittisrikangwan said today, pointing out that deposit rates are still below inflation levels...

The Bank of Thailand’s rate increase was predicted by 17 out of 20 economists surveyed by Bloomberg News, with three seeing no change. Vietnam’s central bank raised the refinancing rate, one of the main policy tools identified by the State Bank of Vietnam last week, to 12 percent yesterday, boosting borrowing costs for the third time in as many weeks. The bank also lifted the discount rate to 12 percent from 7 percent.

European economic reports positive but sovereign debt concerns linger

European economic reports on Tuesday were positive.

In France, the Bank of France's survey on industries and services showed that the business sentiment indicator in industry held at 110 in February, unchanged from January, while the business sentiment indicator in services edged up to 102 from 101.

In Germany, factory orders jumped by 2.9 percent in January from the previous.

However, sovereign debt issues remain a concern for Europe. From Bloomberg:

Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s...

The debt ratings of Portugal and Greece remain at risk of being cut due to concern about how a European Union rescue fund may affect holders of the two nations’ sovereign bonds, S&P said March 1. Ireland retained a negative outlook after S&P cuts its ratings on Feb. 2. Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1, and assigned a negative outlook to the rating...

Greek 10-year bond yields and credit-default swaps surged to a record as borrowing costs increased at a debt sale and before European leaders begin meetings aimed at containing the sovereign debt crisis.

Spanish bonds also slid as the government sold debt through banks. Greek bond losses extended declines to a ninth day after the nation’s credit rating was cut by Moody’s. Portuguese 10- year bonds fell for a second day before a notes auction tomorrow. German 10-year bonds dropped amid speculation the nation’s economic growth will add to pressure on central bankers to increase interest rates.

Japan's economic indicators show improvement

The latest Japanese economic data show that the recovery is resuming.

On Monday, the coincident and leading indicators came out positive. From Nikkei:

The composite index of coincident economic indicators for January climbed 2.5 points on the month to 106.2, rising for a third straight month and logging the third-largest improvement on record, according to preliminary data released Monday by the Cabinet Office...

Meanwhile, the index of leading economic indicators, which predicts economic conditions several months down the road, also rose for a third straight month by inching up 0.9 point to 101.9.

Findings from the economy watchers survey released today also pointed to an improving economy. The Mainichi reports:

Confidence among workers sensitive to Japan's economic trends improved in February for the first time in two months amid signs of recovery in private consumption, the government said Tuesday.

The diffusion index measuring business sentiment among the "economy watchers," such as shop clerks, hotel managers and taxi drivers, rose to 48.4 in the reporting month from 44.3 in January, despite lingering concerns about the recent sharp rise in commodities prices, the Cabinet Office said...

Another index, measuring the watchers' sentiment about two to three months ahead, remained unchanged at 47.2. The components of household spending and employment slightly gained while the corporate activity component dropped.

Other data today showed that Japan's trade balance fell into deficit in January. AFP/CNA reports:

Japan's current account surplus shrank 47.6 per cent from a year earlier in January as the trade balance fell into its first deficit in two years, the finance ministry said on Tuesday...

Exports in January rose a modest 2.9 percent because of weak demand in Asia ahead of China's Lunar New Year holiday.

Imports expanded 15.6 per cent as Japan bought more crude oil and iron ore, resulting in the first deficit in trade balance since January 2009, the official data said.

ECB ready to raise rates but not the Fed

The European Central Bank looks set to raise interest rates soon. Don't expect the same from the Federal Reserve though.

On Thursday, ECB president Jean-Claude Trichet said at press conference following a monetary policy meeting that while it had left interest rates unchanged at the meeting, "[s]trong vigilance is warranted with a view to containing upside risks to price stability". He also told a reporter that "an increase in interest rates at the next meeting is possible".

While an increase in rates is mentioned by Trichet only as a possibility, history shows that once he talks about strong vigilance on inflation, a rate increase at the next meeting is in fact likely.

It may seem strange that, with some governments in the euro area already facing rising yields for the securities they are issuing, the ECB is actually considering a rate hike.

Many people will remember that the last time the ECB raised interest rates was in 2008; that rate hike turned out to be a mistake. Then, as now, oil and other commodity prices were rising rapidly, seemingly threatening a serious bout of inflation. However, the deterioration in credit markets that was ongoing in the United States at that time eventually turned into a full-blown international financial crisis that brought economic growth and inflation to a halt.

Today, we have the ECB contemplating another interest rate hike in the face of rapidly rising commodity prices while the market for European sovereign debt remains in some distress.

Despite the eerie parallel, the euro area's financial markets and economies are likely to be able to withstand a rate hike from the ECB better this time around. Trichet said that monetary policy is currently "very accommodative" which "lends considerable support to economic activity". A rate hike would likely only make monetary policy less accommodative, not outright restrictive.

The ECB's main refinancing rate, currently at 1.0 percent, has been well below the inflation rate since early last year and this is likely to remain the case even with a rate hike next month. The latest estimate of the inflation rate, for February, is 2.4 percent. This is above the ECB's inflation ceiling of 2.0 percent.

In contrast, the rate hike in 2008 came at the end of more than two years of monetary policy tightening. In the couple of years prior to the rate hike in July 2008, the ECB had kept its main refinancing rate constantly above the inflation rate. By the middle of 2007, the ECB rate exceeded the inflation rate by two percentage points even though inflation was still just below 2.0 percent.

The spread between 10-year euro area government bond yields and the ECB main refinancing rate also indicates that monetary policy is very accommodative. Today, the spread is well over 200 basis points. In contrast, at the time the ECB increased rates in 2008, the spread had shrunk to almost zero.

To some extent, the conditions seen in the euro area also apply in the United States, indicating that monetary policy in the latter is also very accommodative.

Like in the euro area, the Federal Reserve's federal funds rate is currently significantly below the rate of inflation based on the personal consumption expenditures price index.

The spread between 10-year Treasuries and the federal funds rate is also wide, about as wide as it was in 2004 when the Fed last began a tightening cycle.

There are two main differences between the euro area and US situations though.

The first is that unlike in the euro area, the inflation rate in the US is still lower than desired by its central bank. The latest available US PCE inflation rate was January's 1.2 percent. The inflation rate of the PCE index excluding food and energy was 0.8 percent. Apart from being only half the measured rate in the euro area, the overall inflation rate in the US is also below the Fed's longer-run target range of 1.6 to 2.0 percent. The Fed expects PCE inflation to stay around or below 2 percent at least until the end of 2013.

Secondly, and probably crucially, the Fed and the ECB do not share exactly the same mandates. The ECB focuses on inflation in setting monetary policy while the Fed has a dual mandate that requires it to maximise employment as well as stabilise prices.

Friday's employment report showed that the first of the Fed's goals has not been achieved. The unemployment rate stood at 8.9 percent in February. Although this is well down from its peak of 10.1 percent in October 2009, it is still well above the range seen for the past few decades before the last recession as well as the longer-run target of around 5-6 percent.

In fact, the Fed currently projects the unemployment rate to fall only gradually over the next few years and still be around 7 percent by the end of 2013.

As Fed chairman Ben Bernanke told the Senate Banking Committee last week: "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."

That suggests that the Fed will be in no hurry to remove monetary stimulus soon.

US unemployment rate falls

The positive economic news flow continues in the US. From Bloomberg on Friday:

The U.S. jobless rate unexpectedly fell to 8.9 percent in February, the lowest in almost two years, and employers added 192,000 jobs in a sign of growing confidence in the recovery.

The increase in payrolls partly reflected a return to more seasonable weather and followed a 63,000 gain in January, Labor Department figures showed today in Washington. The median estimate in a Bloomberg News survey of economists was for an addition of 196,000 jobs last month...

Orders to U.S. factories climbed in January by the most in more than four years as demand for commercial aircraft rebounded after slumping the previous month. Bookings for manufacturers’ goods rose 3.1 percent, the biggest gain since September 2006, after a revised 1.4 percent increase in December, the Commerce Department said today.

However, over in China, there was further evidence that the economy is cooling. From Reuters:

The China Securities Journal cited industry sources who said that new lending last month was less than 600 billion yuan. The median forecast of analysts polled by Reuters forecast was for 650 billion yuan.

It would be the second consecutive month that bank lending fell short of market expectations, suggesting that the government is gaining traction in its campaign to rein in credit growth.

ECB looks set to hike rates, US stocks jump

It looks like a hike in eurozone interest rates is coming soon. Bloomberg reports ECB president Jean-Claude Trichet's comments on Thursday.

European Central Bank President Jean-Claude Trichet said the ECB may raise interest rates next month for the first time in almost three years to fight mounting inflation pressures.

An “increase of interest rates in the next meeting is possible,” Trichet told reporters in Frankfurt today after the central bank set its benchmark rate at a record low of 1 percent for a 23rd month. “Strong vigilance is warranted,” he said, adding that any move would not necessarily be the start of a “series”...

The ECB today raised its inflation and growth forecasts.

Inflation will average 2.3 percent this year, up from a December forecast of 1.8 percent and in breach of the ECB’s 2 percent limit, before slowing to 1.7 percent in 2012, the projections show. The 17-nation euro-area economy will expand 1.7 percent this year and 1.8 percent next, up from previous forecasts of 1.4 percent and 1.7 percent, according to the ECB.

Thursday's economic data seem to support the ECB's latest stance.

Reports from Eurostat on Thursday were quite positive. From MarketWatch:

Retail sales in the euro zone saw a monthly rise of 0.4% in January and were up 0.7% compared to the same month last year, the European Union statistics agency Eurostat reported Thursday... Separately, Eurostat made no change to its estimate of euro-zone fourth-quarter gross domestic product. GDP expanded by 0.3% compared to the previous quarter and was up 2% compared to the same period in 2009.

And eurozone PMIs increased in February. Bloomberg reports:

A composite index based on a survey of euro-area purchasing managers in the 17-nation euro region in both industries rose to 58.2 from 57 in January, London-based Markit Economics said today. That’s below an initial estimate of 58.4 released on Feb. 21. A reading above 50 indicates expansion...

A gauge of services advanced to 56.8 in February from 55.9 in the previous month, Markit said. An indicator of manufacturing increased to 59 from 57.3 in January, it said on March 1...

Understandably, the euro rose strongly on Thursday, but stocks also performed well, with the Dow Jones Industrial Average rising 1.6 percent, its biggest gain since 1 December, thanks partly to positive US economic data on Thursday. Bloomberg reports the latter.

Service industries expanded in February at the fastest pace since 2005 and fewer Americans unexpectedly filed claims for jobless benefits, adding to evidence the U.S. recovery is gaining strength.

The Institute for Supply Management’s index of non- manufacturing businesses increased to 59.7 last month from 59.4 in January. A reading above 50 signals growth. The number of initial applications for unemployment insurance payments fell by 20,000 to 368,000 last week, the lowest since May 2008 and fewer than the most optimistic forecast in a Bloomberg News survey, figures from the Labor Department showed...

Another report from the Labor Department today showed worker productivity increased in the fourth quarter at a faster pace as companies sought to pare costs to preserve profits.

The measure of employee output per hour rose at an unrevised 2.6 percent annual rate after a third-quarter gain of 2.3 percent. Labor expenses fell for a second straight year.

Data from the UK on Thursday were not as positive, with services slowing in February. From Reuters:

Growth in the dominant service sector slowed sharply in February after January's weather-related bounce and companies recorded job losses for the fifth month running, a survey showed on Thursday.

February's headline services PMI index fell to 52.6 from January's eight-month high of 54.5, a peak that followed a negative reading in December blamed on snow. The index, compiled by Markit/CIPS, had been expected to fall to 53.5.

Another Reuters report said that house prices fell by the most in a year in February.

House prices in England and Wales fell at their fastest annual rate in more than a year in February, although a rebound in new buyers slowed the fall on the month, a survey showed on Thursday...

Indeed, on an annual basis, house prices fell 2.7 percent last month -- the biggest fall since November 2009, after a 2.2 percent annual decline in January, suggesting that underlying conditions on the housing market remain weak.

Brazil raises interest rates, Fed's bond buying questioned

Brazil's central bank raised interest rates on Wednesday. Bloomberg reports:

Brazil’s central bank raised its benchmark overnight rate by a half-point for a second straight meeting to cool inflation that is approaching the upper limit of the government’s target range.

The bank’s policy committee, led by President Alexandre Tombini, today voted unanimously, without a bias, to raise the Selic rate 50 basis points, or 0.5 percentage point, to 11.75 percent, matching the estimates of 44 of 51 analysts surveyed by Bloomberg. Six economists forecast a 0.75-point increase and one predicted a full percentage-point increase.

In contrast, Fed chairman Ben Bernanke has not even ruled out more bond buying. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke didn’t rule out expanding the central bank’s asset purchases aimed at stimulating the economy, saying he doesn’t want to see the U.S. relapse into a recession.

Asked at a House Financial Services Committee hearing today what conditions would warrant a third round of so-called quantitative easing, Bernanke said that “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”

This is despite the Fed's own Beige Book survey finding that businesses are gaining pricing power. From MarketWatch:

Some manufacturers and retailers are finding that they can raise their prices, which is one key pre-condition for inflation to take hold, according to the Federal Reserve’s latest Beige Book survey of economic conditions released Wednesday...

Overall, the economy was improving at a “modest to moderate” pace, the Beige Book report concluded.

Most districts reported that conditions in their regions were improving. Only the Chicago region reported that the pace of growth was not quite as strong as late last year.

Labor markets were seen as improving modestly. Three districts reported that temporary jobs were being converted into permanent hires.

In addition, ADP's employment report showed good job gains in February. Again from MarketWatch:

U.S. private-sector employment jumped in February, and the recent pace of gains has been speeding up, according to Automatic Data Processing Inc.’s employment report released Wednesday.

Private-sector employment rose 217,000 in February, increasing 104,000 at medium businesses, 100,000 at small businesses and 13,000 at large businesses.

But maybe the Fed does need to keep buying bonds. From William Gross in PIMCO's March Investment Outlook:

What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?

Manufacturing accelerates in US and Europe but slows in China

Manufacturing activity accelerated in most countries around the world in February.

Bloomberg reports that manufacturing in the US grew at the fastest pace in almost seven years in February.

The Institute for Supply Management’s factory index increased to 61.4, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level since May 2004, the Tempe, Arizona-based group said...

The ISM’s order gauge climbed to the highest level since January 2004 and its employment measure reached a 38-year high, today’s report showed. Exports accelerated at the fastest pace since December 1988, and the gauge of prices paid increased to a seven-year high.

In contrast, construction activity has remained weak.

Another report today showed construction spending fell more than forecast in January, paced by the biggest slump in commercial projects in 17 years.

The 0.7 percent drop brought the value of all projects down to a $791.8 billion annual rate, the lowest since August, Commerce Department figures showed. Outlays on private non- residential works dropped 6.9 percent, the most since January 1994, which may in part reflect the influence of winter storms.

Meanwhile, manufacturing growth in the euro area accelerated to the fastest pace in more than 10 years in February. Bloomberg reports:

A gauge of manufacturing in the euro region rose to 59 last month from 57.3 in January, London-based Markit Economics said in an e-mailed report today, confirming a Feb. 21 estimate. That’s the highest since June 2000. A reading above 50 indicates expansion.

Other reports on Tuesday showed the widening effects of eurozone recovery. From Bloomberg:

Inflation in the 17-nation euro region quickened to 2.4 percent from 2.3 percent in January, the European Union’s statistics office in Luxembourg said today in a preliminary estimate. That’s the fastest since October 2008 and the third straight month inflation has exceeded the ECB’s 2 percent limit. Economists expected a reading of 2.4 percent, according to the median of 31 estimates in a Bloomberg News survey...

Euro-area unemployment fell to 9.9 percent in January from 10 percent in December, the statistics office said in a separate report today.

The European Commission today raised its growth and inflation estimates for 2011. It expects the economy to expand 1.6 percent this year, up from 1.5 percent previously, and said higher oil and commodity prices will see inflation average 2.2 percent. That’s up from a November projection of 1.8 percent.

Reports from the UK were also positive, with the manufacturing PMI holding at a record high of 61.5 in February, house prices rising in February and mortgage approvals picking up as mortgage lending rose to its highest level in almost a year in January.

China's economy, though, could be slowing. From AFP/CNA:

Manufacturing activity in China fell to a seven-month low in February as overseas orders weakened, but rising cost pressure added to inflationary concerns, an independent survey showed Tuesday.

The HSBC China Manufacturing PMI, or purchasing managers index, fell to 51.7 in February from 54.5 in January, the British banking giant said in a statement.

A government survey also showed factory production fell to a six-month low of 52.2 in February from 52.9 in January, the China Federation of Logistics and Purchasing (CFLP) said in a statement.

Inflation indicators are still rising though.

However, input costs accelerated to a three-month high, HSBC said, with purchasing managers blaming rising raw material and fuel prices, which factories passed on to customers - fanning inflation in the broader economy...

The CFLP said its input price subindex rose to 70.1 per cent in February from 69.3 per cent in the previous month, which curbed production in some industries.