Tuesday, 31 January 2012

US consumer spending flat, Europe agree on fiscal pact but not Greek rescue

US economic data on Monday were mixed.

US consumer spending was flat in December but income rose 0.5 percent. Adjusted for inflation, spending dipped 0.1 percent last month.

Meanwhile, however, demand for business loans increased for the fourth quarter as a whole, according to a Federal Reserve survey of senior loan officers at banks.

And the economy continues to improve at the start of 2012, at least in Texas, where the Texas Manufacturing Outlook Survey showed that the production index rose to 5.8 in January from 0.2 in December and the general business activity index jumped to 15.3 from minus 0.3.

There are also signs of improvement in the eurozone economy, where an index of executive and consumer sentiment rose to 93.4 in January from 92.8 in December, the first increase since February 2011.

However, Europe's economy is still threatened by the debt crisis.

There were some positive development on this front for the medium to long term as 25 out of 27 EU states agreed to sign a fiscal compact to ensure budgetary discipline on Monday, with only Britain and the Czech Republic opting out, and leaders agreed that the European Stability Mechanism will enter into force in July, a year earlier than planned.

For the near term, though, there was practically no progress as Greece remains in confrontation with the rest of Europe over its debt relief package while yields on Portuguese debt continued to rise.

Monday, 30 January 2012

US economy maintains growth while eurozone economy stabilises

Last week's economic data should further ease concerns of a global economic recession.

The United States economy showed good growth at the end of last year. The Commerce Department reported last week that real gross domestic product increased at an annual rate of 2.8 percent in the fourth quarter, faster than the 1.8 percent rate in the prior quarter.

The acceleration in growth, however, was exaggerated by an increase in inventories. The GDP report showed that private inventories added 1.94 percentage points to the fourth-quarter growth rate after having subtracted 1.35 percentage points from the third-quarter growth rate.

The underlying momentum in the economy is probably better reflected by personal consumption expenditures, which increased 2.0 percent in the fourth quarter compared with an increase of 1.7 percent in the third.

Perhaps more encouraging was the solid 10.9 percent growth in residential investment. Growth in residential investment usually leads growth in the economy as a whole.

Another indicator that pointed to a positive outlook for the US economy was the Conference Board's leading economic index. This index increased 0.4 percent in December to 94.3 after having increased 0.2 percent in November and 0.6 percent in October.

The eurozone economy has not fared as well as the US, being widely expected to have contracted in the fourth quarter. However, economic data on the euro area last week showed that things may have improved since then.

The flash reading of a composite output index for the euro area compiled by Markit Economics rose to 50.4 in January from 48.3 in December. It was the third consecutive increase in the index and the first time the index has been in positive territory in five months.

Among the sector indices, the services PMI rose to 50.5 in January from 48.8 in December while the manufacturing PMI rose to 48.7 from 46.9.

In his comments on the data, Markit's chief economist Chris Williamson said that the eurozone economy appears to have stabilised in January and that “a slide back into recession may be avoided”.

Also pointing to a better start to the year was the Ifo index of German business confidence, which rose to 108.3 in January, a five-month high, from 107.3 in December.

Saturday, 28 January 2012

US economy accelerates, Fitch downgrades five European countries

The Commerce Department reported on Friday that the US economy grew at a 2.8 percent annual rate in the fourth quarter, accelerating from the 1.8 percent rate in the prior quarter. Growth was boosted by a large increase in inventories.

An improvement in consumer sentiment in January provides hope that the economic momentum can be maintained in the current quarter. The final reading of the Thomson Reuters/University of Michigan's consumer sentiment index rose to 75.0, the highest since February 2011, from 69.9 the month before.

Earlier on Friday, there was also positive news from Japan, where retail sales rose 2.5 percent in December from a year earlier.

Another report from Japan on Friday showed that consumer prices excluding fresh food fell 0.1 percent in December from a year earlier.

Meanwhile, Europe got hit by another wave of credit rating downgrades on Friday. Fitch Ratings cut the credit ratings of Italy, Spain, Belgium, Slovenia and Cyprus.

However, investors have become less pessimistic about Europe's debt problem. Italy successfully sold 11 billion euros of Treasury bills on Friday after having sold 5 billion euros of inflation-linked and zero-coupon bonds the previous day.

But Europe's problems are far from over. Even as talks on Greece's bailout and debt restructuring remain on-going, analysts are now seeing an increasing probability that Portugal will also need another bailout.

Friday, 27 January 2012

US economic data on Thursday mostly positive

Thursday's economic data indicated that the US economy maintained growth at the end of 2012 and is likely to continue to do so in early 2012.

The Chicago Fed National Activity Index rose to 0.17 in December from minus 0.46 in November. The three-month moving average rose to minus 0.08, the highest value since March 2011, from minus 0.19.

Economic growth is likely to be sustained in early 2012. The Conference Board's Leading Economic Index increased 0.4 percent in December following a 0.2 percent increase in November.

Boosting the outlook for the economy was a 3.0 percent increase in durable goods orders in December. An 18.9 percent jump in orders for civilian aircraft drove the increase but even excluding transportation equipment, orders were up 2.1 percent. Orders for nondefense capital equipment goods excluding aircraft rose 2.9 percent.

Not all the US data on Thursday were positive though.

New home sales fell 2.2 percent in December. That left new home sales for the whole of 2012 at a record-low level of 302,000.

New claims for unemployment benefits rose 21,000 to 377,000 in the week ended 21 January. However, the four-week average fell 2,500 to 377,500.

Thursday, 26 January 2012

Fed to keep monetary policy accommodative

The Federal Reserve looks set to keep monetary policy highly accommodative for a few more years. Bloomberg reports on the outcome of the Fed's monetary policy meeting on Wednesday:

Chairman Ben S. Bernanke said the Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Bernanke said at a news conference today after a Federal Open Market Committee meeting in Washington. Bond buying is “an option that’s certainly on the table.”

The extension of the duration of low rates comes as the Fed lowered its forecast for growth this year to 2.2 percent to 2.7 percent from 2.5 percent to 2.9 percent in November. The projection for next year's growth has been lowered to 2.8 percent to 3.2 percent from 3.0 percent to 3.5 percent.

The Fed also revealed on Wednesday that it has set a 2 percent target for inflation.

While recent economic data have mostly indicated that the US economy continues to grow, Wednesday did bring a negative report in the form of a 3.5 percent decline in pending home sales in December, which nevertheless left it near a 19-month high.

Meanwhile, the data from Europe has gotten better in recent days. Wednesday continued that trend with a report that the Ifo index of German business confidence rose to 108.3 in January, a five-month high, from 107.3 in December.

Somewhat less positive was the news on Wednesday that the UK economy shrank by 0.2 percent in the fourth quarter. Further declines in the UK economy looks likely to be limited though after the Confederation of British Industry reported that its total order book balance rose to -16 in January from -23 in December.

Wednesday, 25 January 2012

IMF cuts global growth forecast, euro area moves back into expansion but Japan shrinks

The IMF has cut its global growth forecast for this year to 3.3 percent from a September forecast of 4 percent. Olivier Blanchard, the IMF’s chief economist, told a news conference on Tuesday that the “epicenter of the danger is Europe but the rest of the world is increasingly affected”.

Ironically, this comes on the day when the eurozone economy is looking better. While eurozone industrial orders fell 1.3 percent in November, Markit's flash eurozone composite PMI jumped to 50.4 in January from 48.3 in December, with the manufacturing PMI rising to 48.7 in January from 46.9 in December and the services PMI rising to 50.5 from 48.8.

There was also positive news from the US on Tuesday, where the Richmond Fed's manufacturing index rose to 12 in January from 3 in December.

The news from Japan, though, has been negative.

While many fear that Europe's debt crisis may make it the next Japan, it may well be Japan that becomes the next Europe. The government said on Tuesday that it will miss its deficit reduction target. The ratio of its primary budget deficit to gross domestic product will be halved one year later than planned after it pushed back the timing of a sales tax increase. And by fiscal year 2020/21, the primary deficit is projected to be 3.0 percent of GDP, well short of its target to return to a primary budget surplus.

Japan's debt problem is being exacerbated by slow economic growth. On Tuesday, the Bank of Japan reported lowered growth estimates for the economy as it left its key interest rate unchanged at between zero and 0.1 percent. It now sees the economy shrinking 0.4 percent in fiscal year 2011, down from its previous projection of 0.3 percent growth. The BoJ also said it expected growth of 2.0 percent in fiscal year 2012, down from its previous forecast of 2.2 percent growth.

It does not help that Japan's trade surplus has vanished. A report on Wednesday showed that exports fell 8.0 percent in December from a year earlier, resulting in an annual trade deficit of 2.49 trillion yen, the first annual deficit in 31 years.

Tuesday, 24 January 2012

Mixed data from euro area, economy remains in dangerous state

There was mixed news from Europe on Monday.

The initial estimate of the consumer confidence index in the euro area rose to minus 20.6 in January from minus 21.3 in December.

However, an indicator of French business confidence fell to 91 in January from 94 in December.

Meanwhile, the talks on Greek debt restructuring have not produced a resolution, with eurozone finance ministers rejecting the latest offer from private bondholders on Monday.

However, Simon Johnson thinks that Italy remains the biggest problem and, in a paper with Peter Boone, says that “we expect several more sovereign defaults and multiple further crises to plague Europe in the next several years” and that Europe's economy remains “in a dangerous state”.

Monday, 23 January 2012

ECB and Fed policies gain traction

Today, the Chinese celebrate the start of a new lunar year, the Year of the Dragon. The ancient Chinese calendar associates this year with water, so this year is also called the Year of the Water Dragon.

Investors, though, may be more inclined to celebrate another kind of liquidity: that provided by central banks.

In December last year, the European Central Bank introduced three-year loans to banks with loosened collateral rules under the Long Term Refinancing Operation to boost liquidity in the euro area. This appears to have succeeded in lowering borrowing costs in the euro area.

Last week saw significant amounts of money raised in Europe, with the European Financial Stability Facility and the governments of France, Spain and several other countries selling debt at mostly lower yields than previous auctions.

Since lower sovereign bond yields also lower the probability of governments defaulting on their debt or being forced into harsher austerity programmes, last week's development, if sustained, will help to stave off a more pronounced downturn in the eurozone economy.

Equities have also benefitted from the improved liquidity and investor sentiment. The STOXX Europe 600 Index rose 2.7 percent to 255.85 last week, its fifth consecutive weekly gain. The index has risen 4.6 percent since the start of 2012, its best start to a year since 1997.

The liquidity injections of the ECB reinforce those from the Federal Reserve in the United States, which has been even more active in helping prop up bond markets over the last few years by directly buying up government securities as part of what many analysts call quantitative easing.

In the case of the US economy, despite doubts raised by many analysts over the efficacy of the Fed's securities purchase programmes, especially the one started in late 2010, economic data released last week indicate that the Fed's ultra-easy monetary policy may be gaining traction.

With the Fed now buying longer-term government securities, together with many foreign central banks who have been doing it for many years, the yield curve has lost much of its historical reliability as an indicator of monetary conditions.

The housing industry, however, has always been sensitive to monetary conditions and last week's mostly positive housing data suggest that monetary policy is helping the US economy to recover.

Housing starts, a leading indicator of the economy, hit an annual rate of 657,000 in December. Although this was down 4.1 percent from November, this rate of starts has, apart from November, been exceeded only once since the end of the last recession.

Indeed, housing starts in the fourth quarter was the highest since the fourth quarter of 2008 in the middle of the last recession.

In addition, the National Association of Home Builders/Wells Fargo housing market index, which usually correlates well with housing starts, jumped from 21 in December to 25 in January. This is the highest level in the index since June 2007 before the last recession.

Finally, existing home sales rose 5.0 percent in December, hitting an 11-month high.

So thanks to the ECB and the Fed, there is hope that the Year of the Water Dragon may not turn out as bad as some economists had feared.

Saturday, 21 January 2012

Chinese manufacturing stays weak but US existing home sales jump

HSBC's manufacturing PMI for China shows that activity in the sector remained weak in January. The preliminary PMI rose marginally to 48.8 from 48.7 in December.

There was mixed news from Japan. The all industry activity index fell 1.1 percent in November but the leading index rose to 93.2, up from an initial estimate of 92.9, from 92.0 in October.

In the UK, the Office for National Statistics reported on Friday that retail sales volume grew by 0.6 percent in December after having fallen 0.5 percent in November.

There was also positive news in the US, where the National Association of Realtors reported on Friday that existing home sales increased 5.0 percent to an 11-month high in December.

Friday, 20 January 2012

Fitch warns of downgrades but Europe's borrowing costs fall again

Fitch Ratings warned on Thursday that it is likely to cut the credit ratings for Spain, Italy, Ireland, Cyprus, Belgium and Slovenia by one or two levels by the end of this month.

However, in the meantime, eurozone governments continued to sell debt at lower yields, France and Spain selling 14.6 billion euros of bonds on Thursday.

Meanwhile, US economic data on Thursday were mixed. Initial claims for state unemployment benefits fell 50,000 to 352,000 last week, the lowest level since April 2008, and the Philadelphia Federal Reserve Bank's business activity index rose to 7.3 from 6.8 in December. However, housing starts fell 4.1 percent in December.

The consumer price index was unchanged in December for a second straight month, held down by gasoline prices, which fell for a third month in a row. Excluding food and energy, consumer prices rose 0.1 percent in December after rising 0.2 percent in November.

However, inflation in the US could prove more stubborn than some expect in coming years as deflationary pressure from China declines with its working-age population. China's National Bureau of Statistics has reported that the proportion of people aged between 15 and 64 dropped 0.10 percentage point to 74.4 percent last year while the proportion of people aged over 65 rose by 0.25 percentage point to 9.1 percent.

Thursday, 19 January 2012

Positive news for euro area

The reports on the euro area on Wednesday were relatively positive.

The International Monetary Fund is proposing to raise its lending capacity by as much as $500 billion to cope with the European debt crisis.

In the meantime, Eurozone countries have been tapping private investors relatively successfully in recent days. That pattern continued on Wednesday, with Portugal selling the maximum target of 2.5 billion euros of securities at a sale of three-, six- and 11-month treasury bills at mostly lower yields than in previous sales while Germany sold two-year notes at a record-low yield of 0.17 percent.

Construction output in the euro area rose 0.8 percent in November after three months of contraction.

China, though, showed more signs of cooling on Wednesday. A report from the National Bureau of Statistics showed that home prices in 52 out of 70 major cities fell in December from November, with only two cities seeing price increases. Meanwhile, foreign direct investment in China fell for a second straight month in December, declining 12.7 percent year on year to $12.2 billion.

In the UK, the jobless rate rose to 8.4 percent in November, no doubt contributing to the Nationwide's consumer confidence index dropping to 38 in December, the second lowest since the survey started in 2004, from 40 in November.

In contrast, US economic data maintained their positive trend on Wednesday. Industrial production rose 0.4 percent in December, the NAHB/Wells Fargo Housing Market index rose to 25 in January from 21 in December while producer prices fell 0.1 percent in December.

Still, central bankers seem to be taking no chances. Brazil’s central bank cut its benchmark interest rate by half a point for a fourth straight policy meeting to 10.5 percent on Wednesday.

Wednesday, 18 January 2012

China's economy slows less than expected

China's economy slowed at the end of 2011.

It grew by 8.9 percent in the fourth quarter from a year earlier, the slowest growth rate in ten quarters. However, the fourth quarter growth rate was higher than the 8.7 percent expected by economists.

Compared to the previous quarter, the economy grew 2 percent in the fourth quarter, lower than the 2.3 percent increase in the previous quarter.

However, industrial production increased 12.8 percent in December from a year earlier, more than the 12.4 percent increase in November.

The fourth quarter economic report helped push the Shanghai Composite Index up 4.2 percent on Tuesday, the best gain since October 2009.

There was also better-than-expected economic news from the US on Tuesday. The Federal Reserve Bank of New York’s general economic index rose to 13.5 in January, the highest level since April, from 8.2 in December.

Continuing the better-than-expected pattern on Tuesday was a surprisingly large rise in the ZEW index to minus 21.6 in January from minus 53.8 in December. It was the largest single monthly increase in the index of German investor confidence since the survey started in 1991.

In another piece of positive news for the euro area, investor confidence in the European Financial Stability Facility appears to have been little affected by S&P's downgrade of its credit rating on Monday. The EFSF sold 1.501 billion euros of six-month bills on Tuesday with a bid-to-cover ratio of 3.1 and an average yield of 0.2664 percent.

Spain also managed to sell a total of 4.88 billion euros of 12- and 18-month bills on Tuesday. Yields were lower than in similar sales in December. Belgium and Greece also managed to sell bills at lower yields on Tuesday.

A report on Tuesday showing a fall in eurozone inflation in December means that the European Central Bank will probably continue to support financial markets in its monetary policy. The inflation rate in the euro area fell to 2.7 percent, the lowest since August and below an initial estimate of 2.8 percent, from 3 percent in November.

Also seeing a fall in inflation in December was the UK. The inflation rate fell to 4.2 percent in December from 4.8 percent in November.

Tuesday, 17 January 2012

S&P downgrades EFSF but French yields fall

Following its downgrade of the credit ratings for several eurozone countries last Friday, Standard's & Poor's cut the rating for the European Financial Stability Facility on Monday to AA+ from AAA.

While France was among the countries downgraded by S&P last week, Moody's announced on Monday that it was still assessing the country's credit rating.

Perhaps more importantly, investors appear confident enough in the country's finances. France sold 1.895 billion euros of one-year notes at a yield of 0.406 percent on Monday, down from 0.454 percent on 9 January. It also sold a total of 8.59 billion euros in bills at lower yields.

Elsewhere on Monday, there was some good news from Japan, which saw a 14.8 percent jump in core machinery orders.

However, the Bank of Japan cut its assessment for seven of nine regions from three months before in a quarterly report on Monday, saying that the pace of pickup in their economies was moderating or pausing.

Monday, 16 January 2012

Euro area still weakest among major developed economies

Last week's economic reports again showed weakness in the euro area while data from Japan were mixed and those from the United States remained somewhat positive.

The Organisation for Economic Co-operation and Development reported on Thursday last week that its composite leading indicators for November pointed to a slowdown in activity among member countries, with the indicator for the OECD area as a whole falling 0.1 point in November to 100.1. The euro area has the weakest outlook among the major OECD economies while the OECD reported that Japan and the US showed “stronger signs of a positive change in momentum”.

Indeed, data on the fourth quarter last week already show shrinking economic activity in the euro area. Eurostat reported that industrial production in the euro area fell 0.1 percent in November, the third consecutive month of decline. Germany's Federal Statistical Office said last week that Europe's largest economy probably shrank in the fourth quarter.

This weakness is likely to persist as the OECD's composite leading indicator for the euro area fell 0.4 point in November to 98.3, its tenth consecutive month of decline.

In Japan, data from the Cabinet Office last week also suggested that the economy was weak in the fourth quarter. A report on Wednesday showed that the composite index of coincident economic indicators fell from 91.4 in October to 90.3 in November. The following day, data from the economy watchers survey showed that the diffusion index for current conditions rose to 47.0 in December from 45.0 in November but the index for future conditions fell to 44.4 from 44.7.

Leading indicators of the Japanese economy, though, gave somewhat more encouraging signals. The Cabinet Office's composite index of leading economic indicators rose 0.9 point to 92.9 in November, its first increase in four months. The OECD's composite leading indicator for Japan was unchanged at 101.5 in November after having fallen in the previous seven months.

In the US, data last week also provided some indications of a slowdown towards the end of last year. Retail sales rose just 0.1 percent in December after a 0.4 percent increase in November. Exports fell 0.9 percent in November, the second consecutive monthly drop.

Nevertheless, the Federal Reserve's beige book reported last week that the economy “expanded at a modest to moderate pace” from late November through the end of December.

Data last week also showed that the US economy is likely to continue to grow in early 2012. Consumer confidence improved in January, with the Thomson Reuters/University of Michigan consumer sentiment index reaching 74, the highest level since May. The OECD's composite leading indicator for the US rose 0.2 point to 101.2 in November.

There was one negative among the major forward-looking data for the US economy last week though. The Economic Cycle Research Institute's weekly leading index rose 1.0 point to 121.2 for the week ending 6 January but the growth rate fell 0.2 percentage point to minus 8.4 percent.

Saturday, 14 January 2012

S&P slashes ratings in Europe

Italy managed to sell debt relatively successfully on Friday. The government sold the maximum planned amount of 4.75 billion euros of debt, with the November 2014 bond being sold at an average yield of 4.83 percent, down sharply from a yield of 5.62 percent for similar bonds sold at an auction just two weeks ago.

However, the big news on Friday was the rating downgrades by Standard & Poor's. The ratings agency cut the credit ratings of France, Austria, Malta, Slovakia and Slovenia by one notch each and those of Italy, Spain, Portugal and Cyprus by two notches. The downgrade leaves Italy with a rating of BBB+ while Portugal is pushed down to junk status.

Or maybe the news wasn't so big. Despite becoming aware of the impending downgrades during the trading day, markets were only moderately down on Friday. The S&P 500 fell 0.5 percent while the STOXX Europe 600 fell 0.1 percent.

Still, the rating downgrades were not the only negative piece of news on Friday. Negotiations on a debt swap by Greece's creditors broke up without agreement, raising the risk of a Greek default.

US economic data on Friday were mixed.

The Thomson Reuters/University of Michigan consumer sentiment index reached a preliminary reading of 74 in January. This is up from 69.9 in December and is the highest level since May.

However, the trade deficit widened in November. Exports fell 0.9 percent, the second consecutive drop, while imports rose 1.3 percent.

Friday, 13 January 2012

ECB sees stabilisation in region but demographics may yet turn Europe into Japan

The European Central Bank left interest rates unchanged on Thursday, President Mario Draghi saying that the ECB's “non-standard policy measures are providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence”.

Investors seem to agree. The euro strengthened on Thursday and Spanish and Italian yields fell sharply after successful debt auctions by the governments in both countries.

There were also no new measures from the Bank of England after its monetary policy meeting on Thursday.

Economic data on Thursday point to possible further easing measures from both central banks later though.

In the euro area, industrial production fell 0.1 percent in November, the third month of decline. Inflation in Germany slowed to 2.3 percent in December from 2.8 percent in November. However, inflation in France was unchanged in December from the previous month at 2.7 percent.

In the UK, industrial production fell 0.6 percent in November as oil and gas extraction and electricity production were scaled back sharply. Manufacturing output fell 0.2 percent.

A Thursday report showing a fall in China's inflation to 4.1 percent in December, the slowest rate since September 2010, from 4.2 percent in November means that monetary policy there could also become easier in coming months.

Thursday's economic reports from the US also failed to provide the kind of positive data that we have become used to in recent months. Retail sales increased just 0.1 percent in December after an upwardly-revised 0.4 percent increase in November while initial unemployment claims rose to a six-week high of 399,000 last week.

Data from Japan on Thursday were mixed. The economy watchers survey showed that the current conditions index rose to 47.0 in December from 45.0 in November but the outlook index fell to 44.4 from 44.7. Meanwhile, the current account surplus fell 85.5 percent in November from a year earlier as a fall in exports pushed the trade balance into deficit.

Japanese demographics means that it can no longer consistently produce a trade surplus to drive growth. Other countries may be facing the same prospects as Japan. Alan Wheatley at Reuters says Japan's plight over the past 20 years may turn out to be the template for other mature economies, especially in Europe.

Economists have generally played down the implications of Japan's prolonged stagnation for Western economies that are now wrestling with apparently similar balance sheet recessions. These occur when firms and households are forced to reduce their excess debt by cutting consumption and investment.

But [Ajay Kapur, a strategist for Deutsche Bank in Hong Kong] said it would be a crucial error to dismiss Japan's malaise since 1990 as somehow reflecting specific national 'cultural' traits. Many other countries were displaying similar features.

In the next five years, all of the 18 developed countries for which Deutsche has property market data going back more than half a century will see a decline in their working age population ratios.

Sixty percent of them will show an absolute decline in the number of citizens of working age, something that Kapur said was unprecedented...

Karen Ward, an economist with HSBC in London, agreed that Japan's demographic profile was probably at least as much to blame as aggressive deleveraging for its economic stagnation. Growth in the labor force began falling steadily in the mid-1980s and numbers started falling outright a decade later.

Thursday, 12 January 2012

Germany's economy shrinks, US economy expands

Germany may be on the brink of recession, reports Bloomberg:

Germany may be on the brink of recession after the sovereign debt crisis caused the economy to contract in the final quarter of 2011.

Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate. Economists such as Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter. A recession is defined as two consecutive quarters of declining GDP.

While the euro area's largest economy may be on the brink of recession, the world's largest economy appears to be still growing. According to the Federal Reserve's beige book released on Wednesday, the US economy “expanded at a modest to moderate pace” from late November through the end of December.

Earlier on Wednesday, a report from Japan showed that its economy may have slowed towards the end of 2011. The Cabinet Office's index of coincident economic indicators fell 1.1 points in November. Encouragingly, however, the index of leading economic indicators rose 0.9 point in November.

Wednesday, 11 January 2012

Chinese stocks jump as exports slow

Markets were up strongly on Tuesday, with the Shanghai Composite Index jumping 2.7 percent to extend its biggest three-day advance in 15 months.

Ironically, Chinese data on Tuesday had suggested economic weakness. Exports rose 13.4 percent from a year earlier in December, down from a 13.8 percent increase in November. Imports increased 11.8 percent compared with a 22.1 percent rise in the previous month.

For 2011 as a whole, exports rose 20.3 percent, down from an increase of 31.3 percent in the previous year. Imports rose 24.9 percent, much less than the 38.8 percent increase in 2010. The trade surplus narrowed to $155.14 billion from $181.51 billion in 2010.

However, economic data from Europe on Tuesday were positive.

The British Retail Consortium said on Tuesday that retail sales on a like-for-like basis rose 2.2 percent in December from a year earlier after having fallen 1.6 percent in November. Total sales grew 4.1 percent, up from a 0.7 percent increase in November.

The Bank of France’s business sentiment indicator for industry rose to 96 from a two-year low of 95 in November. Industrial production rose 1.1 percent in November.

To add to the good news for France, Fitch Ratings said that the country's credit rating would likely avoid a downgrade this year but other countries in the euro area, including Italy, may not be so lucky.

Tuesday, 10 January 2012

German industrial production falls, bills sell at negative yield

There were mixed data from Germany on Monday.

Industrial production fell 0.6 percent in November.

However, exports rebounded by 2.5 percent in November after having fallen by 2.9 percent in October. With imports falling 0.4 percent in November, the trade surplus rose to 16.2 billion euros from 11.5 billion euros in October.

No doubt, Germany's ability to maintain a surplus is a key factor in establishing its status as a safe haven among investors. Monday saw Germany sell 3.9 billion euros of six-month treasury bills at an average yield of minus 0.0122 percent, the first time these securities have been sold at a negative yield.

The other major surplus economy, China, may have debt problems of its own but data on Sunday showed that new loans rose to 640.5 billion yuan in December from 562.2 billion yuan in November.

Monday, 9 January 2012

Global economic acceleration still leaves eurozone economy shrinking

Last week's data showed that the global economy probably picked up pace at the end of 2011 but the eurozone economy is likely to have contracted nevertheless.

The JPMorgan global all-industry output index derived from surveys of purchasing managers around the world rose to 53.0 in December, a nine-month high, from 52.0 in November.

JPMorgan Global All-Industry Indices
New orders50.751.2
Input prices55.855.9

Global economic growth in December appears to have been pushed up by the United States, where the purchasing managers indices for both manufacturing and services came in comfortably above the 50 mark that separates expansion from contraction. The Institute for Supply Management's manufacturing PMI rose to 53.9 in December from 52.7 in November while the non-manufacturing index rose to 52.6 from 52.0.

Japan saw both manufacturing and services move from contraction to expansion in December, albeit barely. The Markit/JMMA manufacturing PMI rose to 50.2 in December from 49.1 in November while the Markit services business activity index rose to 50.4 from 49.5.

As has been the case in recent months, the euro area held down global growth in December. However, even this troubled region saw improvement in the purchasing managers indices. Markit's eurozone composite output index rose to 48.3 in December from 47.0 in November. The manufacturing PMI rose to 46.9 in December from 46.4 in November while the services index rose to 48.8 from 47.5.

Despite the improvement in December, Chris Williamson, the chief economist at Markit, said in the December PMI report that “the fourth quarter saw the steepest contraction since the spring of 2009, and forward-looking indicators suggest that a further decline is on the cards for the first quarter of 2012.”

Other economic reports last week supported the view that the US economy ended 2011 on a relatively strong note while the eurozone economy deteriorated.

The US Labor Department's report on employment on Friday showed that the economy added 200,000 jobs in December. This pushed the unemployment rate down to 8.5 percent from 8.7 percent in November.

In the euro area, the European Commission's economic sentiment indicator fell to 93.3 in December from 93.8 in November. This was the tenth consecutive monthly decline in the indicator and brought it down to the lowest level since November 2009.

So there is a good chance that the euro area entered a recession at the end of last year. However, the improvement in global economic indicators discernible from last week's data indicate that there was probably no global recession in 2011.

Saturday, 7 January 2012

US employment increases but eurozone economic indicators deteriorate

We got another positive economic report from the US on Friday. US nonfarm payrolls increased by 200,000 in December, pushing the unemployment rate down to 8.5 percent from 8.7 percent in November.

Nevertheless, US stocks dropped on Friday as investors appear focused on the problems in Europe. The euro touched a 15-month low against the US dollar while Spanish and Italian yields rose.

Negative European data on Friday provided reasons for investors to remain concerned. An indicator of economic sentiment in the euro area fell to 93.3 in December from 93.8 in November. Eurozone retail sales fell 0.8 percent in November while unemployment remained at a 13-year high of 10.3 percent. Factory orders in Germany plunged 4.8 percent in November, the most in almost three years.

And to add to the negativity in Europe, Fitch Ratings cut Hungary’s credit rating to junk on Friday.

Friday, 6 January 2012

Economic data positive but Europe's debt concerns weigh on markets

US economic data on Thursday were quite positive. The Institute for Supply Management’s non-manufacturing index rose to 52.6 in December from 52.0 in November. The private sector added 325,000 jobs in December, the most since record-keeping began in 2001, according to ADP Employer Services. Initial claims for unemployment benefits declined 15,000 last week to 372,000, according to the Labor Department.

In the UK, the Markit/CIPS services PMI jumped to 54.0 in December from 52.1 in November.

Even the euro area had positive data to report. Industrial orders in the euro area rose 1.8 percent in October.

Despite the positive economic data, US stocks made only small gains on Thursday. The S&P 500 closed up 0.3 percent after having fallen earlier in the day on worries over Europe, where the STOXX Europe 600 fell 0.9 percent.

The fall in stocks in the euro area reflected continued concerns over the region's debt problems. Other than bunds, yields for eurozone sovereigns were mostly up on Thursday despite France managing to sell 7.96 billion euros of bonds.

Not so successful in selling debt was Hungary, who on Thursday again failed to sell its target amount.

Thursday, 5 January 2012

Euro falls as economy contracts and inflation slows, China faces demographic tsunami

The euro area remained the centre of investors' concerns on Wednesday. Bloomberg reports:

The euro fell from almost a one-week high versus the dollar as European inflation slowed and Italy’s biggest bank said it needs to raise more capital, fueling bets Europe’s debt crisis is worsening.

The 17-nation currency dropped toward an 11-year low against the yen as a 7.5 billion-euro ($9.7 billion) share offer from UniCredit SpA spurred concern European banks may struggle to raise more capital. The euro slid versus most major peers after El Pais newspaper said the Spanish government helped the Valencia region make an overdue payment to Deutsche Bank AG. The pound climbed to a 15-month high versus the shared currency.

Eurozone economic data, though, were relatively positive. The euro-area composite index rose to 48.3 in December from 47.0 in November, according to a report from Markit Economics on Wednesday, above an initial estimate of 47.9.

While the composite index does indicate that the economy is contracting, inflation in the euro area is finally easing. Another report on Wednesday showed that the inflation rate in the euro area fell to 2.8 percent in December from 3.0 percent in November.

Economic data from the UK on Wednesday were mixed. The Markit/CIPS construction PMI rose to 53.2 in December from 52.3 in November and mortgage approvals rose to their highest level in almost two years in November but net lending sank to its lowest since June.

The US continued to provide positive data on Wednesday, this time in the form of a 1.8 percent increase in factory orders in November. However, orders for non-defense capital goods excluding aircraft fell 1.2 percent.

In China, the property market continued to cool in December, with residential prices dropping 0.25 percent last month from November according to SouFun, the nation’s biggest real estate website owner.

However, China may soon have to deal with a bigger long-term problem. Bloomberg notes that China faces “a demographic tsunami”.

... The latest government census shows 178 million Chinese were over 60 in 2009. That figure could reach 437 million -- one third of the population -- by 2050, the United Nations forecasts. While the elderly were looked after in the past by their children, urbanization and the nation’s one-child policy have eroded the tradition of family care...

China’s challenge is similar to that faced by Japan in the 1990s, with one essential difference: China will grow old before it gets rich. With tens of millions of parents left to fend for themselves, the government set up a National Committee on Aging to try to devise a comprehensive strategy (CHGE7) to ensure their health and comfort.

China's shifting demographics will eventually result in a reduction in its trade surplus as workers will increasingly demand higher wages and thus erode its low-cost advantage. Reuters reports the latest example:

Shenzhen, a major manufacturing hub in southern China, will increase its minimum wage by 13.6 percent in February despite warnings from factory owners the move could deal another blow to exporters already reeling from a sharp drop in Western orders.

Wednesday, 4 January 2012

Markets jump, manufacturing improves in UK and US

Markets have started 2012 on a positive note. Bloomberg reports on Tuesday:

Stocks surged, driving the Dow Jones Industrial Average to the highest level since July, and commodities rallied on signs of increasing manufacturing output around the world. The dollar weakened and U.S. Treasuries fell.

The Dow increased 179.82 points, or 1.5 percent, to 12,397.38 and the S&P 500 jumped 1.6 percent to 1,277.06, the highest close since Oct. 28, at 4 p.m. in New York. The Stoxx Europe 600 Index added 1.6 percent and closed at a five-month high. The dollar slipped versus all 16 major peers, while 10- year Treasury yields increased seven basis points to 1.95 percent. Oil settled at an almost eight-month high near $103 a barrel as 23 of 24 commodities in the S&P GSCI Index rose.

More reports on Tuesday indicating improvements in manufacturing activity around the world helped fuel the rally in markets.

In the UK, the Markit/CIPS manufacturing PMI rose to 49.6 in December from 47.7 in November.

In the US, the ISM manufacturing PMI rose to 53.9 in December from 52.7 in November. In another encouraging sign for the US economy, a report from the Commerce Department showed that construction spending increased 1.2 percent in November, its third increase in four months.

There was also positive data on Tuesday outside of manufacturing and, for a change, inside the euro area. German unemployment fell by 22,000 in December, pushing the jobless rate down to 6.8 percent from 6.9 percent in November.

Tuesday, 3 January 2012

Manufacturing shrinks in Europe, grows in Asia

Manufacturing PMIs for December confirm that activity in the euro area is shrinking but Asia is doing somewhat better.

Markit's manufacturing PMI for the euro area rose to 46.9 in December from 46.4 in November, remaining below the 50 mark that indicates contraction.

However, the China Federation of Logistics and Purchasing's manufacturing PMI rebounded to 50.3 in December from 49.0 in November.

India did even better, with the HSBC manufacturing PMI jumping to 54.2 in December from 51.0 in November.

Monday, 2 January 2012

Risk assets shunned in 2011

2011 was a year that saw investors lose some of their risk appetite as a result of worries over sovereign debt in Europe and a slowing global economy.

Stocks were down last year. The MSCI All Country World Index fell 9.4 percent.

The STOXX Europe 600 Index fell 11.3 percent in 2011. During the course of the year, it entered a bear market. At its low in September, the index was down 26.2 percent from the year's peak. A rebound in the final quarter saw it cut its loss.

Despite the supposedly better financial health of its economies, Asian stock markets suffered even bigger losses than their European counterparts over the year. The MSCI All Country Asia Pacific Index fell 17.3 percent in 2011.

In contrast, the stock market in the United States finished little changed. The Standard & Poor's 500 Index was practically unchanged for the year while the Dow Jones Industrial Average even managed to gain 5.5 percent.

Commodity prices also mostly fell last year. The Thomson Reuters-Jefferies CRB index declined 8.3 percent in 2011, its first annual loss in three years.

However, crude oil bucked the trend in commodities. US crude oil rose 8.2 percent as political instability in oil-producing countries in North Africa and the Middle East more than offset economic growth concerns.

Gold also gained in 2011, rising 10.2 percent. Political and financial turmoil throughout the year helped the safe haven achieve its eleventh consecutive year of gains.