Tuesday, 31 December 2013

Stocks in US and Japan see best gains in decades but workers' fortunes lag

The Dow Jones Industrial Average rose 0.2 percent on Monday to close at another all-time high. It has now risen 26 percent this year, which would be its biggest gain since 1996.

The S&P 500 has risen 29 percent this year, which would be its biggest gain since 1997.

The gains in the US stock market, however, are eclipsed by those in Japan. The Nikkei 225 rose 0.7 percent to close the year with a 57 percent gain, the most since 1972.

The rise in Japanese stocks have been fuelled by a fall in the yen, which has lost 21 percent against the US dollar this year, its biggest drop since 1979.

The fall in the yen is helping to push up inflation in Japan. Unfortunately, wages are not expected to keep up with consumer prices. A poll of 16 economists by Bloomberg showed that labor cash earnings are expected to increase 0.6 percent in the year starting 1 April while another Bloomberg survey showed that consumer prices are forecast to climb five times faster at 3 percent.

The US worker may not be much better off. A Bloomberg report on Monday said that rising income inequality is starting to hit home for many American households.

As the gap between the rich and poor widened over the last three decades, families at the bottom found ways to deal with the squeeze on earnings. Housewives joined the workforce. Husbands took second jobs and labored longer hours. Homeowners tapped into the rising value of their properties to borrow money to spend.

Those strategies finally may have run their course as women’s participation in the labor force has peaked and the bursting of the house-price bubble has left many Americans underwater on their mortgages.

“We’ve exhausted our coping mechanisms,” said Alan Krueger, an economics professor at Princeton University in New Jersey and former chairman of President Barack Obama’s Council of Economic Advisers. “They weren’t sustainable.”

Still, the US housing market may be steadying after some recent weakness. The National Association of Realtors reported on Monday that pending home sales in the US rose 0.2 percent in November, the first gain in six months and after having fallen 1.2 percent in October.

“We may have reached a cyclical low because the positive fundamentals of job creation and household formation are likely to foster a fairly stable level of contract activity in 2014,” NAR chief economist Lawrence Yun said in a statement.

The outlook for housing in the UK also appears positive. A report from Hometrack on Monday showed that house prices in England and Wales rose 0.5 percent in December. The mismatch between supply and demand that helped to drive prices higher this year will persist in 2014, according to Hometrack.

While rising stock and house prices have raised fears of bubbles, it is ballooning government debt that may be the real threat to economies, not least in China.

The National Audit Office reported on Monday that the results of a debt audit showed that liabilities carried by local governments in China surged to 17.9 trillion yuan as at the end of June, up 67 percent from the end of 2010.

Friday, 27 December 2013

Japanese inflation at 5-year high, factory output and retail sales rise

Japanese economic data on Friday were generally positive.

Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest rate of increase since October 2008.

Factory production rose 0.1 percent in November, and manufacturers surveyed by the government expect production to rise further in December and January.

Indeed, the manufacturing PMI from Nomura and JMMA rose to 55.2 in December, the highest since July 2006, from 55.1 in November.

Retail sales rose 4.0 percent in November from a year earlier even as household spending rose just 0.2 percent.

The unemployment rate for November was 4.0 percent, unchanged from the previous month.

Thursday, 26 December 2013

US durable goods orders jump, new home sales near 5-year high

There were no major economic data on Wednesday but on Tuesday, US economic data had brought some cheer for the festive season.

Durable goods orders jumped 3.5 percent in November. Non-defense capital goods orders excluding aircraft surged 4.5 percent, the largest increase since January, and snapped two consecutive months of declines.

Another report on Tuesday showed that new home sales fell 2.1 percent in November. However, October's sales were revised to show a 17.6 percent surge to the highest level since July 2008.

Tuesday, 24 December 2013

US stocks hit record as growth rises above trend

Global stocks rose to the highest level in almost six years on Monday. The MSCI All-Country World Index rose 0.6 percent while the S&P 500 rose 0.5 percent to close at another record high.

US economic data on Monday were positive.

The Chicago Federal Reserve's national activity index rose to +0.60 in November from -0.07 in October. The three-month moving average rose to +0.25 in November, the highest reading since February 2012, from +0.12 in October. According to the Chicago Fed, the three-month average showed that economic growth was above historical trend.

US economic growth in November was helped by increased consumer spending. Consumer spending rose 0.5 percent in November as income rose 0.2 percent. With the price index based on consumer spending unchanged last month, growth in real consumer spending was the highest since February 2012.

In another sign of an improving consumer outlook, the Thomson Reuters/University of Michigan's index of consumer sentiment jumped to 82.5 this month, unchanged from the preliminary reading and the highest since July, from 75.1 in November.

The improving US economy has been acknowledged by the International Monetary Fund. Speaking on NBC's “Meet the Press”, IMF Managing Director Christine Lagarde said that with more certainty for 2014 on the budget and monetary policy, and good numbers showing that growth is picking up and employing going down, she sees “a much stronger outlook for 2014, which brings us to raising our forecast”.

Saturday, 21 December 2013

US and UK growth revised up, eurozone consumer confidence improves, BoJ policy unchanged

Economic data on Friday were positive.

In the US, third quarter growth was revised up to a 4.1 percent annualised rate from a previous estimate of 3.6 percent. The latest estimate is the strongest growth rate since the last three months of 2011.

In the UK, third quarter growth was confirmed at 0.8 percent but growth in earlier quarters was revised up, resulting in year-on-year growth being raised to 1.9 percent from an earlier estimate of 1.5 percent.

In the euro area, the European Commission's consumer confidence index improved to -13.6 in December from -15.4 in November.

In Germany, consumer confidence hit its highest level in nearly 6-1/2 years. GfK's consumer confidence index for January came in at 7.6, rising from 7.4 the previous month.

And in Japan, the Bank of Japan introduced no fresh measures to stimulate the economy at its monetary policy meeting on Friday, saying that the economy was “recovering moderately” while efforts to stoke inflation were taking hold.

Friday, 20 December 2013

US leading index rises, existing home sales fall

The Federal Reserve's decision to taper its bond purchases on Wednesday gained further support from data from the Conference Board on Thursday showing that the latter's index of US leading economic indicators rose 0.8 percent in November, indicating that the US economy is likely to continue growing.

However, other data from the US on Thursday showed that existing home sales fell 4.3 percent in November and initial claims for unemployment benefits rose 10,000 to 379,000 last week, the most since the end of March.

US stocks were little changed on Thursday. The S&P 500 fell 0.1 percent but the Dow Jones Industrial Average rose 0.1 percent.

Elsewhere, a report on Thursday showed that UK retail sales rose 0.3 percent in November after having fallen 0.9 percent in October. However, a survey from GfK showed that its UK consumer confidence index fell to -13 in December from -12 in November.

Thursday, 19 December 2013

Fed trims QE, stocks jump

The Federal Reserve decided to trim the pace of its bond purchases at its monetary policy meeting on Wednesday. Bloomberg reports:

The Federal Reserve is trimming its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding the unprecedented stimulus that Chairman Ben S. Bernanke put in place to help the economy recover from the worst recession since the 1930s.

“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,” Bernanke said at a press conference in Washington today after a meeting of the Federal Open Market Committee.

The decision had apparently been more than priced into markets. Stocks rose, with the S&P 500 rising by 1.7 percent on Wednesday.

The Fed decision was supported by US economic data on Wednesday. Housing starts jumped 22.7 percent in November to the most since February 2008.

There were also positive data from Europe. In Germany, the Ifo business climate index rose to 109.5 in December from 109.3 in November. In the UK, the unemployment rate fell to 7.4 percent in the three months to October from 7.6 percent a month earlier.

However, earlier in the day, Japan reported a record November trade deficit. Exports rose 18.4 percent from a year earlier while imports rose 21.1 percent, resulting in a 35.1 percent increase in the trade deficit.

Wednesday, 18 December 2013

Consumer prices unchanged in US, fall in euro area, housing markets show strength

A report on Tuesday showed that US consumer prices were flat in November after having fallen 0.1 percent in October. That helped push the annual inflation rate to 1.2 percent last month from 1.0 percent in the previous month, which had been the smallest increase since October 2009.

Another report from the US on Tuesday showed that the NAHB/Wells Fargo housing market index rose to 58 from 54 in November.

A report from the euro area on Tuesday showed that consumer prices there fell 0.1 in November. That kept the annual inflation rate at 0.9 percent after it had fallen below 1 percent to 0.7 percent for the first time since February 2010 in October.

In the UK, inflation fell to 2.1 percent in November, the lowest since November 2009, from 2.2 percent in October.

Even as UK consumer price inflation slowed, house price inflation has proven more persistent. House prices across Britain rose by 5.5 percent in the 12 months to October, the fastest increase since September 2010.

Apparently, maintaining moderate consumer price inflation is more important than restraining asset prices in the minds of central banks.

Sweden's Riksbank cut its repo rate by 25 basis points to 0.75 percent on Tuesday as it said that inflation was likely to be much lower in the year ahead than it had anticipated in recent forecasts even as it now expected bigger increases in house prices and debt than it had forecast in October.

Tuesday, 17 December 2013

Global manufacturing grows, Japanese business confidence hits 6-year high

Growth in China's manufacturing activity slowed in December, according to a report on Monday. HSBC's preliminary manufacturing PMI for China came in at 50.5 for the month, down from 50.8 in November but still indicating expansion.

Other economic data on Monday were more positive.

In the euro area, Markit's flash composite PMI rose to 52.1 in December from 51.7 last month. The manufacturing PMI rose to 52.7 from 51.6 but the services PMI dipped to 51.0 from 51.2.

In the US, industrial production jumped 1.1 percent in November as manufacturing production rose 0.6 percent. US manufacturing probably continued to expand in December, with Markit's preliminary manufacturing PMI coming in at 54.4 after hitting a 10-month high of 54.7 in November.

In Japan, the Bank of Japan's quarterly Tankan survey showed that its index for large manufacturers rose to plus 16 in December, the highest since December 2007, from plus 12 in September. The non-manufacturers' index jumped to plus 20 from plus 14, the best reading in more than six years.

Monday, 16 December 2013

Stocks: Maybe no bubble, but corporate earnings could fall

Dean Baker is among those who had warned of a potential stock market crash back in 1999. However, he thinks that there is no bubble in stocks at the moment.

If we go...back to the bubble days of 2000, we had a peak S&P of roughly 1500... [T]he S&P would be a bit over 2430 if it were as high relative to potential GDP today as it was at the peak of the 1990s stock bubble.

Another way to put this is that, relative to the potential of the economy, the stock market is about 68 percent of its bubble peak. Would this mean we have a bubble now? By my assessment the answer is no. The PEs at the peak in 2000 were above 30 to 1 (using trend earnings, defined as the average share of profits in GDP). That was more than double the historical average. The current ratio would put the PEs around 20. This is still well above the historical average, but not obviously in bubble territory.

However, John Hussman says that, based on historical episodes of mean reversion, corporate earnings are likely to fall.

At present, the extreme profit/GDP ratio we observe here is consistent with expectations of a 22% annual contraction in profits over the coming 4-year period – which would imply a roughly 63% cumulative contraction in profits from present levels. My impression is that’s probably too aggressive an expectation except as a temporary trough. A more reasonable expectation, in my view, would put corporate profits down about 10% annually over the next few years.

A fall in earnings would put pressure on stock valuations and future stock returns.

The problem is not simply that earnings are likely to retreat deeply over the next few years. Rather, the problem is that investors have embedded the assumption of permanently elevated profit margins into stock prices, leaving the market about 80-100% above levels that would provide investors with historically adequate long-term returns. An equivalent way to say this is that stocks are currently at levels that we estimate will provide roughly zero nominal total returns over the next 7-10 years, with historically adequate long-term returns thereafter.

Friday, 13 December 2013

Stocks fall on mixed economic data and conflicting valuation indicators

US stocks fell for a third day on Thursday, sending the S&P 500 down 0.4 percent to a one-month low.

Stocks fell as a report on Thursday showed that US retail sales rose 0.7 percent in November, raising the probability of the Federal Reserve reducing monetary stimulus soon.

European stocks also fell for a third day. The STOXX Europe 600 fell 1.0 percent on Thursday to a two-month low.

Unlike the US, the declines in stocks in Europe were accompanied by negative economic data. Industrial production in the euro area fell 1.1 percent in October, the steepest monthly decline in more than a year.

Apparently, the prospect of a reduction in monetary stimulus from the Fed outweighed the prospect for further easing from the European Central Bank.

Or perhaps stocks are just overvalued. Zero Hedge notes that at the moment, “Tobin's Q (a valuation indicator based on market 'price' versus 'asset value' for non-financial companies) has only been higher at the peak of bubble exuberance”.

On the other hand, Joshua Brown notes that according to Savita Subramanian at Bank of America Merrill Lynch, out of 15 valuation metrics that they looked at, “12 of the 15 metrics suggest the S&P 500 is trading below historical average levels... Only the Shiller P/E...suggests the market looks very stretched”.

Thursday, 12 December 2013

Stocks fall, China loans rise

Stocks lost further momentum on Wednesday.

In the US, the S&P 500 fell 1.1 percent, its second consecutive decline. The STOXX Europe 600 also declined for the second consecutive day, falling 0.5 percent on Wednesday.

The MSCI Asia Pacific Index fell 0.6 percent on Wednesday with China’s Shanghai Composite Index in particular falling 1.5 percent.

Chinese stocks fell despite data on Wednesday showing that credit growth in China accelerated in November.

The People's Bank of China reported that banks made 624.6 billion yuan of new local-currency loans in November, well above the previous month's 506.1 billion yuan.

Total social financing aggregate, a broad measure of liquidity in the economy, jumped to 1.23 trillion yuan in November from 856.4 billion yuan in October.

M2 money supply rose 14.2 percent last month from a year earlier.

Wednesday, 11 December 2013

Japanese machinery orders rebound, Chinese industrial production slows

Data on Wednesday showed that Japan's core machinery orders rebounded slightly in October, rising 0.6 percent after having fallen 2.1 percent in September.

Data on Tuesday had shown that Japanese consumer confidence also rebounded slightly in November, with the Cabinet Office's index rising 1.3 points to 42.5 after having fallen 4.2 points in October.

However, another report on Tuesday showed that confidence among Japan's large companies weakened in the fourth quarter. A survey conducted by the Ministry of Finance and the Cabinet Office showed that the sentiment index for large firms fell to 8.3 points from 12 points in the third quarter.

There were also mixed data from China on Tuesday. Industrial production rose 10.0 percent in November from a year ago, down from the 10.3 percent increase in October. Fixed asset investment increased 19.9 percent year-on-year in the first 11 months of this year, down from an increase of 20.1 percent for the first 10 months.

However, retail sales rose 13.7 percent in November from a year ago, better than the 13.3 percent increase in October.

In Europe, data on Tuesday showed that the UK economy maintained momentum in October. Industrial production rose 0.4 percent in October while the trade deficit narrowed.

Tuesday, 10 December 2013

Stocks rise, global economic outlook improves

Stocks rose on Monday. The S&P 500 rose 0.2 percent to a new record high. The STOXX Europe 600 also rose 0.2 percent while the MSCI Asia Pacific Index gained 0.8 percent.

Stocks rose as the Organisation for Economic Cooperation and Development said on Monday that the outlook for most major economies has improved. Its composite leading indicator rose to 100.7 in October from 100.6 in September.

The OECD noted that growth in the euro area has returned to its long-term trend rate, with the region's composite leading indicator rising to 100.9 in October from 100.7 in September. The reading for the US was unchanged at 100.8 while the reading for Japan rose to 101.3 from 101.1.

Economic data from Japan on Monday were mixed though.

Japan's third quarter growth was revised down to 0.3 percent from 0.5 percent after second quarter growth of 0.9 percent and the current account fell back into deficit in October.

However, the Cabinet Office's economy watchers survey showed that its current conditions index rose to 53.5 in November from 51.8 in October. The future conditions index rose to 54.8 from 54.5.

Data from Germany on Monday were also mixed. Industrial production fell 1.2 percent in October after having fallen 0.7 percent in September. However, exports rose 0.2 percent in October while imports rose 2.9 percent.

Meanwhile, China's inflation continued to cool in November. The inflation rate fell to 3.0 percent in November from 3.2 percent in October.

Monday, 9 December 2013

Acceleration in US growth pulls up global economy

The global economy accelerated in November, thanks to the United States.

A report published by Markit Economics last week based on surveys of purchasing managers around the world showed that the JPMorgan global all-industry output index rose to 54.3 in November from 52.1 in October.

According to Markit, the main driving factors behind the rise in the output index were strong rebounds in the rates of expansion in the US services and manufacturing sectors, which sent Markit's US composite output index to 56.2 in November from 49.6 in October after a sharp decline in October.

Corroborating the signals from the purchasing managers surveys, a report from the Labor Department on Friday showed that US nonfarm payrolls increased by 203,000 in November, the biggest rise in three months. The gains in employment brought the unemployment rate down to 7.0 percent from 7.3 percent in October.

Also on Friday, the preliminary reading of the Thomson Reuters/University of Michigan consumer sentiment index for December came out at 82.5, well up from 75.1 in November.

Elsewhere, growth also accelerated in China. Markit reported last week that the HSBC composite output index for China rose to 52.3 in November from 51.8 in October.

And on Sunday, China's General Administration of Customs reported that exports rose 12.7 percent in November from a year earlier, well up from a 5.6 percent increase in October. Growth in imports slowed though to 5.3 percent from 7.6 percent.

Growth was more subdued in November in the other major developed economies though. In the euro area, Markit's composite output index fell to 51.7 in November from 51.9 in October, while in Japan, Markit's composite output index fell to 54.0 from 56.0.

Saturday, 7 December 2013

US stocks rise as unemployment falls

US stocks jumped on Friday to end a five-day losing streak. The S&P 500 rose 1.1 percent to end the week flat.

Stocks rose despite a strong employment report on Friday that raised the probability of the Federal Reserve reducing monetary stimulus. The Labor Department reported that the unemployment rate fell to a five-year low of 7.0 percent in November from 7.3 percent in October as nonfarm payrolls increased by 203,000.

Adding to the positive data on Friday, the preliminary reading of the Thomson Reuters/University of Michigan consumer sentiment index for December came in at 82.5, well up from 75.1 in November, after consumer spending had risen by 0.3 percent in October.

However, not all data on Friday pointed to a likelihood of a reduction of monetary stimulus. Personal income fell 0.1 percent in October, the first decline since January, after rising 0.5 percent in September, while consumer prices were unchanged.

Elsewhere in the world, Japan's economic recovery looks like it is maintaining momentum after a report on Friday showed that its index of coincident economic indicators rose 1.2 points in October and its index of leading economic indicators rose 0.7 point.

However, in Germany, a report on Friday showed that factory orders fell 2.2 percent in October after rising 3.1 percent in September.

Friday, 6 December 2013

US growth revised up, Europe leaves monetary policies unchanged, Japan raises fiscal stimulus

A report on Thursday showed that the US economy grew significantly stronger than initially estimated in the third quarter. Gross domestic product rose at a 3.6 percent annual rate, up from an initial estimate of 2.8 percent and the strongest since the first quarter of 2012.

However, almost half of the increase in the growth rate came from an increase in the estimate of inventory accumulation, which could result in lower growth in the fourth quarter.

Also, another report on Thursday showed that US factory orders fell 0.9 percent in October after rising 1.8 percent in September.

In any case, US stocks fell on Thursday, the S&P 500 falling 0.4 percent.

European stocks also fell. The STOXX Europe 600 declined 0.9 percent as both the European Central Bank and the Bank of England left their monetary policies unchanged on Thursday.

Meanwhile, though, the Japanese government did approve a stimulus package worth 5.5 trillion yen on Thursday in a bid to offset the impact of a tax hike that comes into effect next year.

Thursday, 5 December 2013

US economy drives global output up

Economic data on Wednesday were mostly positive.

JPMorgan's global all-industry output index rose to 54.3 in November from 52.1 in October. According to JPMorgan, the US was the brightest spot in the global economy.

Indeed, the Federal Reserve reported in its Beige Book that the economy grew at a “modest to moderate pace” in October and early November and US economic data on Wednesday were mostly positive.

While the Institute for Supply Management's non-manufacturing index fell to 53.9 in November from 55.4 in October, ADP reported that private employers added 215,000 new jobs last month. New home sales jumped 25.4 percent in October after falling 6.6 percent in September and the trade deficit shrank in October after exports hit an all-time high.

In the euro area, third quarter growth was confirmed at 0.1 percent, which was down from 0.3 percent in the previous quarter.

The fourth quarter may also have started weakly as another report showed that eurozone retail sales fell 0.2 percent in October. Also, Markit's eurozone composite PMI fell to 51.7 in November from 51.9 in October as the services index fell to 51.2 from 51.6.

The UK services sector also slowed in November. However, at 60.0, it remained near its 16-year high of 62.5 in October.

China's services sector growth also maintained momentum in November. The HSBC/Markit services PMI fell slightly to 52.5 from 52.6 in October.

Wednesday, 4 December 2013

China services and UK construction expand, stocks fall again

China's economy showed further signs of resilience on Tuesday. Data from the National Bureau of Statistics showed that the official PMI for the non-manufacturing sector fell to 56.0 in November from 56.3 in October, indicating continued expansion.

It is the UK, though, that has been providing some really hot economic numbers recently. That trend continued on Tuesday as the Markit/CIPS construction PMI jumped to 62.6 in November from 59.4 in October.

However, positive economic data have not been able to boost markets recently. That trend also continued on Tuesday. From Reuters:

Fear that the Federal Reserve will scale back its stimulus as the U.S. economy recovers hit world stock markets on Tuesday, with European equities falling the most since August, while safe havens such as the yen and Treasuries rose...

On Wall Street, stocks ended lower for a third straight session.

Tuesday, 3 December 2013

Global manufacturing expands, stocks fall

Economic data on Monday were positive.

In the US, Markit's manufacturing PMI jumped to 54.7 in November from 51.8 in October while the Institute for Supply Management's manufacturing PMI rose to 57.3 from 56.4. In addition, construction spending rose 0.8 percent in October after falling 0.3 percent in September.

In Europe, Markit's eurozone manufacturing PMI rose to 51.6 in November from 51.3 in October while the Markit/CIPS UK manufacturing PMI jumped to 58.4 from 56.5.

In China, HSBC's manufacturing PMI slipped to 50.8 in November from 50.9 in October. Nevertheless, this was better than the preliminary reading of 50.4 and was still the second-highest reading in eight months.

Despite the positive economic data, stocks fell on Monday. The S&P 500 fell 0.3 percent. The STOXX Europe 600 also fell 0.3 percent. The MSCI Asia Pacific Index slipped 0.1 percent.

Monday, 2 December 2013

Weak US employment drives bull market

From Bloomberg today:

The weakest employment recovery in seven decades is proving a boon to equity markets.

Five years into a rally that has restored $14 trillion to share prices, U.S. payrolls remain 1.5 million below the level in 2008, according to data compiled by Bloomberg...

While American workers struggle, investors are benefiting as expense reductions and record low borrowing costs drive profits and underpin a 167 percent advance in the S&P 500 over the past 57 months. To bulls like Michael Holland at Holland & Co., equities will keep rallying as long as the Fed remains more concerned about employment than inflation.

“The weakness in jobs is continuing fodder for the Fed to fulfill its most recent and steadfast comments about the support of the economy,” Holland, who oversees more than $4 billion in New York, said in a Nov. 26 phone interview. “Until the labor market gets better, the two parts of dual mandate have to be served,” he said. “I’m still pretty set in my position and prepared to see the market go higher.”

It is not just stocks that are benefitting from easy monetary policy. Housing markets have also seen prices surge, especially outside the US. From Nouriel Roubini last week:

[S]igns of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.

Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices.

Indeed, a report on Sunday from the China Index Academy showed that home prices in China continued to rise in November. The average price of a new home in 100 major cities rose 10.99 percent year-on-year last month, faster than the 10.69 percent increase in October.

At least China's manufacturing sector also continued to expand in November. Another report on Sunday from the National Bureau of Statistics showed that the official manufacturing PMI for China was unchanged from October at 51.4.

Saturday, 30 November 2013

Eurozone unemployment falls, inflation rises

There were mixed economic data from Europe on Friday.

The unemployment rate in the euro area fell to 12.1 percent in October from 12.2 percent in September, a sign that the region's recovery is helping the labour market.

The recovery, however, may also be keeping inflation up. Inflation in the euro area rose to 0.9 in November from 0.7 percent in October.

Also, the euro area's largest economy, Germany, saw retail sales fall 0.8 percent in October, the second consecutive monthly decline.

Outside the euro area, UK economic data on Friday were also mixed.

GfK reported that its consumer confidence index for the UK fell to -12 in November from -11 in October, the second consecutive monthly decline.

Indeed, data from the Bank of England on Friday showed that consumer credit growth slowed to an annualised rate of 6.0 percent in the three months to October. Business lending also fell.

However, mortgage approvals for house purchases rose to 67,701 in October, the most since February 2008, from 66,891 in September.

Corroborating the strong picture for the property market, Nationwide reported on Friday that UK house prices rose 6.5 percent in November from a year earlier, the biggest increase since July 2010.

Also on Friday, the euro area's credit rating received a mixed report from Standard & Poor's. The latter lowered the credit rating for Netherlands to AA+ from AAA but raised the outlook for Spanish debt to stable from negative.

Friday, 29 November 2013

Eurozone economic confidence improves, Japanese consumer prices and manufacturing output rise

The euro area's economic recovery appears to have been maintained in November. A report from the European Commission on Thursday showed that its economic sentiment indicator rose to 98.5 this month from 97.7 in October.

However, the recovery in the euro area did not prevent German unemployment from rising in November for the fourth consecutive month.

Friday brought some positive economic data on Japan.

The economy moved out of deflation in October as consumer prices excluding food and energy rose 0.3 percent from the previous year, the fastest pace in 15 years. Consumer prices excluding fresh food rose 0.9 percent in October, the fastest pace in five years.

Japan's unemployment rate was unchanged at 4.0 percent last month while household spending rose 0.9 per cent from the previous year.

Also, factory output rose 0.5 percent in October and the Markit/JMMA Japan manufacturing PMI rose to 55.1 in November, the highest level since July 2006, from 54.2 in October.

Thursday, 28 November 2013

US durable goods orders fall but index of leading indicators rise

Economic data on Wednesday were mixed.

In the US, the Chicago Federal Reserve's national activity index fell to -0.18 in October from +0.18 in September. However, the index's three-month moving average rose to +0.06 from -0.02, its first positive reading in eight months.

Among other reports from the US, durable goods orders fell 2.0 percent in October after having risen 4.1 percent in September but other economic indicators were mostly positive.

The number of jobless claims last week fell by 10,000 to 316,000. The final reading of the Thomson Reuters/University of Michigan index of consumer sentiment in November was 75.1, up from 73.2 a month earlier and better than the preliminary reading of 72.0. The MNI-Chicago business barometer stayed well in expansion territory in November, falling to 63.0 from 65.9 in October. The Conference Board’s index of leading economic indicators increased 0.2 percent in October.

Economic data from Europe on Wednesday were also mostly positive.

In the UK, third quarter economic growth was confirmed at 0.8 percent. However, retail sales slowed in November, with the sales balance in the Confederation of British Industry monthly distributive trades survey falling to +1 from +2 in October.

In Germany, GfK's consumer sentiment indicator rose to 7.4 for December from 7.1 in November.

Wednesday, 27 November 2013

US stocks flat as housing shows further signs of recovery

US stocks were flat on Tuesday, with the S&P 500 pulling back after touching an intraday record earlier in the trading session to close largely unchanged.

Stocks were flat despite data on Tuesday showing that the US housing market has continued to recover. Building permits rose 6.2 in October to the highest level in more than five years while the S&P/Case-Shiller index of home prices in 20 cities rose 13.3 percent in September from a year earlier.

However, consumers have become less confident. The Conference Board’s consumer confidence index fell to 70.4 in November from 72.4 in October.

Still, economists surveyed by Thomson Reuters see US auto sales finishing the year at a fast pace and analytics firm ComScore Inc on Tuesday predicted that US e-commerce sales will grow 16 percent this holiday season.

Tuesday, 26 November 2013

US credit growth may be sustained but pending home sales fall

Paul Kasriel thinks that credit growth will continue to boost demand in the US.

[C]hanges in the sum of Fed and depository institution credit, advanced by one quarter, has a correlation coefficient of 0.65 (out of a possible maximum of 1.00) with changes in the sum of nominal Gross Domestic Purchases...

Alright, so why am I bullish on nominal transactions for 2014? Because I am expecting the key “mover” of nominal transactions, the sum of Fed and depository institution credit, to average year-over-year growth from now through the end of 2014 slightly above its long-term median growth of 7.6% . Sustained growth in total thin-air credit of this magnitude has not occurred since the mid 2000s.

In the meantime though, demand for housing in the US is weakening. A report on Monday showed that pending home sales fell 0.6 percent in October, the fifth consecutive month of decline.

Meanwhile, in the UK, the number of mortgage approvals fell to 74,743 in October from 75,077 in September. However, approvals were still 33 percent more in October than a year ago.

Monday, 25 November 2013

As some bulls turn to bears, others see more gains for stocks

While a number of bears have capitulated and now see stocks rising further, some bulls have flipped to the bear side. From Bloomberg today:

... BlackRock Inc.’s Laurence Fink and Doug Kass at Seabreeze Partners Management Inc. said this month that stocks were headed for losses after an almost uninterrupted rally that lifted the S&P 500 in one of its broadest advances on record...

“Traders and investors, strategists and pundits are now almost historically complacent,” Kass...said in a Nov. 12 Bloomberg Radio interview with Tom Keene and Michael McKee. “They’re glib.”

Kass has grown more bearish on the S&P 500 since he said a year ago that fears were overblown and called for the S&P 500 to rise to a record. “I have more than one foot out the door and I’m looking for short opportunities,” he said this month.

Stocks may decline as much as 15 percent because of political risks in China, Japan, France and the U.S., according to Fink, whose New York-based BlackRock is the world’s largest money manager with $4.1 trillion in assets. Last year Fink said he would invest all of his personal wealth in equities.

However, many other investment managers remain positive on stocks.

Craig Hodges, who runs one of the best-performing U.S. mutual funds, is preparing for the next leg of America’s almost five-year-old bull market...

“We’ve got another two or three years of a good stock market,” said Hodges, whose Dallas-based Hodges Fund is beating 99 percent of its peers with an increase of 55 percent...

To James Paulsen at Wells Capital Management Inc., the prospect of a tumble remains a longshot.

“Confidence is still barely average by historic standards,” the Minneapolis-based chief investment strategist at Wells Capital, which oversees about $340 billion, said in a phone interview...

“It’s still a buy-on-the-dips equity market,” Terry Sandven, chief equity strategist at U.S. Bank Wealth Management, said in a phone interview from Minneapolis...

“Retail investors are shifting into equities,” Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees $367 billion, said by phone. “It certainly bolsters the chance for stocks to continue to rise. It is a source of demand for shares”...

“There’s clearly a lot of suspicion and doubt in this bull market, and that in and of itself gives it further fuel,” Rich Weiss, the Mountain View, California-based senior portfolio manager for American Century Investment who helps oversee $130 billion, said by phone Nov. 21. “Not everybody is in. The level of exuberance can clearly grow.”

Saturday, 23 November 2013

US stocks hit new highs as another bear capitulates

US stocks rose on Friday to complete their seventh consecutive week of gains. The Dow Jones Industrial Average rose 0.34 percent and the S&P 500 Index rose 0.50 percent, both ending at record highs.

With the continuing bull run in stocks, Eclectica hedge fund manager Hugh Hendry has become the latest bear to capitulate. At a conference on Friday, Hendry said that the currency war between the US and China has boosted risk assets. “I can no longer say I am bearish,” he said. “We are in this virtuous loop where the market is trending.”

Sam Ro at Business Insider says that Hendry joins several other long-time bears who have recently talked about stocks going higher, including John Hussman, Jeremy Grantham, Richard Russell and Bob Janjuah.

Meanwhile, economic data on Friday were mostly positive.

In Germany, the Ifo Institute’s business climate index rose to 109.3 in November, the highest level in more than 1½ years, from 107.4 in October. Another report confirmed that Germany's GDP grew 0.3 percent in the third quarter.

In Japan, the government kept its evaluation of the overall economy unchanged in November but downgraded its assessment of exports for the third straight month.

Friday, 22 November 2013

Global economic data mixed, BoJ maintains monetary policy as inflation seen rising

The euro area's recovery appears to have lost momentum.

Reports on Tuesday showed that the European Commission's consumer confidence index for the region fell to minus 15.4 in November from minus 14.5 in October and Markit's composite PMI for the region fell to 51.5 this month from 51.9 the previous month.

The fall in the composite index was driven by a decline in the services index, which fell to 50.9 from 51.6. The manufacturing PMI rose to 51.5 from 51.3.

Also seeing an improvement in manufacturing in November is the US, where Markit's manufacturing PMI rose to 54.3 from 51.8 in October.

However, HSBC's manufacturing PMI for China fell to 50.4 in November from 50.9 in October.

Meanwhile, the Bank of Japan did not announce any fresh measures to stimulate the economy after its monetary policy meeting on Thursday. It said in a statement that the economy was “recovering moderately” and that inflation “is likely to rise gradually”.

However, if inflation does rise in Japan, it may not necessarily be the BoJ's doing. From a post by Matt Busigin:

Policymaking, fiscal or monetary, really just shapes what trends deliver at the margin. It is less important and less statistically affecting than either supply or demand...

... The dependency ratio in the United States is possibly the best in the Western world, but it is still projected to nearly double in the next four decades. At the same time, dependency ratios in the rest of the world are projected to spike faster and further. This is the biggest story for the supply curve and, consequently, for inflation. The global depletion of peak-aged labor clearly necessitates one of two things: higher prices or higher rates of investment to form new capital...

After being overinvested and hence oversupplied (evaluated with respect to the declining pace of inflation) for a decade, the Great Recession has seen a sharp decline in investment and an even larger decline in per capita investment. The great force that drove down inflation has not only paused but also reversed. In fact, the level of investment at the time of writing is still below replacement.

See again this CNBC report on the evolution of the elderly dependency ratio in Asia, including Japan.

Thursday, 21 November 2013

Markets fall as US retail sales rise, Japanese trade deficit doubles

Markets fell on Wednesday. The S&P 500 fell 0.4 percent, its third consecutive decline. Ten-year Treasury note yields increased nine basis points to 2.80 percent.

Markets fell after the minutes of the last Federal Open Market Committee meeting released on Wednesday showed that Fed officials “generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months”.

Economic data on Wednesday did suggest that US consumer spending started the final quarter of the year positively. Retail sales rose 0.4 percent in October, the most in three months.

Retail sales rose even as the consumer price index fell 0.1 percent in October, the first decline in six months.

US existing home sales did not fare as well, falling 3.2 percent in October, according to a report from the National Association of Realtors on Wednesday.

Elsewhere in the world, Japan had reported earlier on Wednesday that its trade deficit rose to 1.09 trillion yen in October, nearly double the deficit a year ago. It was the 16th straight month of deficit, the longest spell since 1979.

Exports rose 18.6 percent from a year ago. Imports jumped 26.1 percent on higher energy costs.

Wednesday, 20 November 2013

OECD sees moderate global recovery

The Organisation for Economic Cooperation and Development has cut its global growth forecasts for this year and next.

In a report on Tuesday, the OECD said that GDP growth among OECD members is projected to be 1.2 percent this year, 2.3 percent in 2014 and 2.7 percent in 2015. The world economy will grow 2.7 percent year, 3.6 percent in 2014 and 3.9 percent in 2015.

The forecasts for this year and 2014 are just under 1/2 percentage point lower than forecast last May, largely as a result of the worsened outlook for some emerging economies.

Tuesday, 19 November 2013

Dow and S&P hit new highs before falling, stocks could see more gains before serious bust

Stocks started the week positively, with Chinese stocks in particular surging on Monday. The Shanghai Composite Index rose 2.9 percent while the Hang Seng China Enterprises Index jumped 5.7 percent.

Stocks also did well in Europe, with the STOXX Europe 600 rising 0.5 percent on Monday.

The positive momentum was initially carried over to the US. The Dow Jones Industrial Average and the S&P 500 rose above 16,000 and 1,800 respectively for the first time early on Monday.

However, both US indices fell later in the day. The Dow ended up just 0.1 percent while the S&P 500 ended down 0.4 percent.

In the latest GMO quarterly letter, Ben Inker says that US stocks are already overvalued.

Our recent client conference saw the unveiling of our new forecast methodology for the U.S. stock market... On the new model, fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation...

However, in the same letter, Jeremy Grantham says that stocks may see further gains in the coming year or two before falling.

My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed’s relentless pushing of the market... My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999...

Economic data on Monday shared a similar pattern to the stock market.

Reuters calculations from National Bureau of Statistics data on Monday showed that home prices in China rose 9.6 percent in October from a year earlier to hit record highs.

However, confidence among US homebuilders was unchanged in November. The National Association of Home Builders/Wells Fargo housing market index stayed at 54, the same as in the previous month.

Monday, 18 November 2013

Valuation gap narrows as US stock market hits record high

US stocks rose last week to new highs. Reuters reports:

The Dow and the S&P 500 hit new highs on Friday for a sixth straight week of gains, as investors continued to take cues from Federal Reserve Chair nominee Janet Yellen, who told a Senate Committee it was too early to end the central bank's stimulus...

The Dow Jones industrial average was up 85.48 points, or 0.54 percent, at 15,961.70. The Standard & Poor's 500 Index was up 7.56 points, or 0.42 percent, at 1,798.18. The Nasdaq Composite Index was up 13.23 points, or 0.33 percent, at 3,985.97.

However, the market gains have reduced the number of bargains in the stock market. From Bloomberg:

Cheap is converging with expensive in the American equity market, narrowing options for investors looking for bargains after the broadest rally on record lifted almost 90 percent of the Standard & Poor’s 500 Index this year.

The difference in valuations shrank to the smallest since at least 1990 after companies such as Hormel Foods Corp. (HRL) and CenterPoint Energy Inc. rose to levels that match Ralph Lauren Corp. and Citrix Systems Inc., whose five-year average profit growth rate is twice as big. A measure of the dispersion of price-earnings ratios in the S&P 500 compiled by Goldman Sachs Group Inc. narrowed to 41 percent in June, the lowest on record, and held around that level since.

Meanwhile, the overall valuation of the stock market remains relatively low.

The full S&P 500 trades at about 17.5 times trailing 12-month earnings, in line with the average since the end of World War II, according to S&P data. The multiple stayed low as profits almost doubled from the level in 2008 and the Fed’s accommodative policies kept stocks relatively attractive.

Still, a reason for concern is that in the past, such narrowing in valuations have occurred in the late stages of bull markets.

The last time the dispersion of valuations came close to being this narrow was in October 2006, a year before the last bull market ended, Goldman Sachs data show. Before that, multiples were most compressed in September 1997, 10 months before the biggest bull market on record ended.

Saturday, 16 November 2013

Stocks rise as China announces reforms

Stocks rose again on Friday. Emerging markets led the way, with the MSCI Emerging Markets Index rising 1.4 percent. In the US, the S&P 500 rose 0.4 percent to close at a record high for the third consecutive day.

Stocks rose despite mixed economic data from the US on Friday. US manufacturing production rose 0.3 percent in October but total industrial production fell 0.1 percent and the Federal Reserve Bank of New York’s general economic index fell to minus 2.2 in November from 1.5 in October.

Market gains on Friday were partly attributed to news out of China.

China's ruling party issued a document on Friday detailing economic reforms that include requiring state firms to pay larger dividends to the government and allowing private companies a bigger role in the economy. It also announced an easing of the country's one-child policy.

The latter may have important long-term effects. As it is, China and many other Asian countries are set to see the percentage of the elderly in their populations “grow drastically” in the coming years, according to a CNBC report. This could create headwinds for the region's economies as governments have to spend more on the elderly even as the working age population shrinks.

Friday, 15 November 2013

Euro area ekes out growth in third quarter, Fed stimulus to be maintained under Yellen

The euro area continued to recover in the third quarter, albeit barely. A report on Thursday showed that the eurozone economy grew just 0.1 percent after having grown 0.3 percent in the previous quarter.

Germany's economy grew 0.3 percent in the third quarter, down from 0.7 percent in the second quarter. France's economy lost its recovery momentum and joined Italy in contracting 0.1 percent in the third quarter.

Elsewhere in Europe, UK economic data on Thursday broke the recent positive trend. Retail sales fell 0.7 percent in October, reversing the 0.6 percent increase in September.

In the US, a report on Thursday showed that the trade deficit widened in September as exports fell 0.2 percent while imports rose 1.2 percent.

Nevertheless, markets were positive on Thursday as Federal Reserve chairman nominee Janet Yellen indicated that she is likely to maintain monetary stimulus.

“I consider it imperative that we do what we can to promote a very strong recovery,” she said in response to a question during testimony on Thursday to the Senate Banking Committee in Washington. “It’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero.”

Thursday, 14 November 2013

Japanese economy slows in third quarter

Japan's economy slowed in the third quarter, growing 0.5 percent after having grown 0.9 percent in the second quarter, a report showed on Thursday.

Private consumption grew just 0.1 percent, sharply down from the 0.6 percent growth in the previous quarter. Net exports subtracted 0.5 percentage point from GDP growth after having contributed 0.1 percentage point in the previous quarter.

In contrast, inventories contributed 0.4 percentage point in the third quarter after subtracting 0.1 percentage point in the previous quarter. Capital expenditure grew 0.2 percent in the third quarter.

Indeed, a report on Wednesday had shown that core machinery orders rose 4.3 percent in the third quarter.

Of concern, though, is that orders fell 2.1 percent in September and is forecast to fall 2.1 percent in the fourth quarter.

Wednesday, 13 November 2013

Mixed data for global economy, Indonesia raises interest rate again

The US economy improved in September, according to a report from the Chicago Federal Reserve on Tuesday. The Chicago Fed national activity index rose to +0.14 in September from +0.13 in August. The three-month moving average of the index rose to -0.03 from -0.15.

Economic data from Japan on Tuesday were negative though. The tertiary industry activity index fell 0.2 percent in September while the consumer confidence index fell 4.2 points to 41.2 in October.

Elsewhere in Asia, India reported on Tuesday that industrial output grew 2.0 percent in September from a year earlier, up from 0.4 percent in August, but consumer price inflation also rose to 10.09 percent in October from 9.84 percent in September.

It was Indonesia, though, that raised interest rates on Tuesday. Bank Indonesia raised its key rate by 25 basis points to 7.5 percent, bringing the total increase since June to 175 basis points.

However, the Bank of England is unlikely to raise interest rates soon. A report on Tuesday showed that UK consumer price inflation fell to 2.2 percent in October from 2.7 percent in September.

Tuesday, 12 November 2013

Dow at another record but Fed may be running out of gas

US stocks rose on Monday, the Dow Jones Industrial Average rising 0.14 percent to close at another record high.

“The focus is right again back to the Fed. The thinking is perhaps the taper has been moved forward. Maybe it's not going to be March, maybe December,” said Bucky Hellwig, senior vice president of BB&T Wealth Management, according to Reuters.

“You can't argue with the momentum the market has had thus far, so it looks like we're still in that upward trend,” Hellwig said.

In contrast, Bridgewater's Ray Dalio thinks that Fed stimulus may be losing effectiveness. Via Zero Hedge:

The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed...

In other words, we're not worried about whether the Fed is going to hit or release the gas pedal, we're worried about whether there's much gas left in the tank and what will happen if there isn't.

There were no major economic reports from the US on Monday. Economic data elsewhere in the world were mixed.

In China, a report showed that credit growth slowed in October. Chinese banks made 506.1 billion yuan worth of new local-currency loans in October, less than the 787 billion yuan in September. Total social financing aggregate was 856.4 billion yuan in October, down from 1.4 trillion yuan the month before.

In Japan, the current account surplus rose 14.3 percent in September from a year earlier.

However, service sector sentiment in Japan deteriorated in October. The current conditions index from the economy watchers survey fell to 51.8 last month from 52.8 in September.

The future conditions index, though, rose to 54.5 in October from 54.2 in September.

Monday, 11 November 2013

China joins rest of world with positive start to fourth quarter

There were signs over the weekend that China's economy maintained momentum at the start of the fourth quarter.

Data from the National Bureau of Statistics on Saturday showed that industrial production rose 10.3 percent in October from the previous year, up from the 10.2 percent increase in September.

Retail sales rose 13.3 percent in October from the previous year, the same as in September.

However, fixed asset investment rose 20.1 percent in the first 10 months of the year compared with the same period last year, down from 20.2 percent for the first nine months of the year.

Together with a report on Friday showing that China's exports rose 5.6 percent in October from the previous year after falling 0.3 percent in September, the data on Saturday suggest that China's economy has maintained its growth momentum at the start of the fourth quarter.

As the economy maintained momentum, though, so did inflation.

Another report on Saturday showed that the consumer price index rose 3.2 percent in October from the previous year, higher than the 3.1 percent increase in September.

Nevertheless, consumer price inflation is unlikely to be a major concern for China's policy-makers. Inflation for the first 10 months of the year averaged 2.6 percent, well below the government's full-year target of 3.5 percent, and the producer price index fell 1.5 percent in October from the previous year.

With the positive data from China towards the end of the week, its economy joined the rest of the world in showing a positive start to the fourth quarter.

Earlier in the week, a report from Markit Economics had shown that the JPMorgan global all-industry output index rose to 55.5 in October from 53.6 in September. The improvement was driven largely by an acceleration in growth in the non-manufacturing sector in the United States.

Indeed, other reports last week showed that the US economy also had a positive start to the fourth quarter. Non-farm payrolls increased by 204,000 in October, better than the 163,000 increase in September, and the Conference Board's US leading economic index rose 0.7 percent in September.

Leading economic indicators also rose in Japan. A report last week from the Cabinet Office last week showed that its index of leading indicators jumped to 109.5 in September from 106.8 in August.

Saturday, 9 November 2013

Dow hits record after US employment beats forecasts, France's credit rating cut

After falling on Thursday, US stocks bounced back strongly on Friday. The S&P 500 rose 1.3 percent, erasing the previous day's losses. The Dow Jones Industrial Average rose 1.1 percent to a record high of 15,761.78.

Stocks rose despite the 10-year Treasury yield jumping 15 basis points to 2.75 percent after a surprisingly strong US employment report on Friday.

The Labor Department reported that the US economy added 204,000 jobs in October, more than the most optimistic forecast from economists as well as the 163,000 increase in September. The unemployment rate, though, rose to 7.3 percent from 7.2 percent.

The improvement in the employment picture is especially welcome news after another report on Friday showed that US consumer spending has slowed. The Commerce Department reported that consumer spending rose 0.2 percent in September after having risen 0.3 percent in August. Income, though, increased 0.5 percent in September, the same as in August.

Consumer spending could remain weak after another report on Friday showed that the preliminary reading of the Thomson Reuters/University of Michigan consumer sentiment index for November came in at 72.0, down from 73.2 in October and the lowest since December 2011.

Meanwhile, elsewhere in the world, a report earlier on Friday showed that China's exports rose 5.6 percent in October from the previous year. Exports had fallen 0.3 percent in September. Imports rose 7.6 percent in October from the previous year.

In other trade-related news on Friday, Germany's trade surplus widened in September after exports rose 1.7 percent while imports fell 1.9 percent but Britain's trade deficit widened in September after exports fell 4.6 percent over the three months to September while imports rose 1.3 percent.

France was hit by multiple negative news on Friday. Its trade deficit widened in September while industrial production fell 0.5 percent.

To top it off, its credit rating was cut to AA from AA+ by Standard & Poor’s.

Friday, 8 November 2013

ECB cuts rates, US and Japanese economies accelerate

The European Central Bank cut its main refinancing rate by 25 basis points to a record low 0.25 percent on Thursday.

At a news conference following its latest monetary policy meeting, ECB President Mario Draghi said that weakening price pressures justified the rate decision. He warned that the euro area risks a “prolonged period” of low inflation and that borrowing costs will be kept low for an “extended period”.

In response to the rate cut, the euro fell by the most in almost two years against the US dollar and eurozone government bonds rose.

The ECB rate cut came as data on Thursday showed that the euro area's largest economy, Germany, saw industrial production fall 0.9 percent in September.

In contrast to the ECB, the Bank of England left its monetary policy unchanged on Thursday following strong economic data in recent months.

Economic data in the world's two largest developed economies on Thursday also suggested little need for additional monetary stimulus.

The US reported on Thursday that the economy grew at a 2.8 percent annualised rate in the third quarter, up from a 2.5 percent rate in the second. A faster rate of inventory accumulation in the third quarter offset slower consumer and business spending.

In Japan, the index of coincident indicators rose to 108.2 in September, the highest level since July 2008, from 107.6 in August. The index of leading indicators jumped to 109.5 from 106.8.

Thursday, 7 November 2013

Dow hits record high amid positive economic data

US stocks rose on Wednesday. The Dow Jones Industrial Average rose 0.8 percent to close at a record high of 15,746.88.

Stocks rose amid an improving outlook for the US economy. A report from the Conference Board on Wednesday showed that its US leading economic index increased by 0.7 percent in September.

The eurozone economy is also growing. A report from Markit on Wednesday showed that its services index for the region was at 51.6 in October, down from 52.2 in September but still indicating expansion. The composite index for October also fell to 51.9 from 52.2 the previous month.

In another sign that the eurozone economy has lost some momentum though, another report on Wednesday showed that retail sales in the region fell 0.6 percent in September.

However, the region's biggest economy, Germany, saw factory orders jump 3.3 percent in September, according to another report on Wednesday.

Also seeing positive manufacturing data on Wednesday was the UK. Industrial production there rose 0.9 percent in September, rebounding after a 1.1 percent fall in August. Factory production jumped 1.2 percent in September, reversing the 1.2 percent fall in August.

Wednesday, 6 November 2013

US, China and UK services accelerate

The US economy appears to have come out of the budget impasse and partial government shutdown last month relatively unscathed. Activity in the services sector accelerated in October, with the Institute for Supply Management’s non-manufacturing index rising to 55.4 from 54.4 in September, according to a report on Tuesday. This followed another report from the ISM last week showing that the manufacturing PMI also rose last month.

China's services sector activity also accelerated in October. A report on Tuesday showed that the HSBC/Markit services PMI rose to 52.6 from 52.4 in September while a report on Sunday from the National Bureau of Statistics showed that the official non-manufacturing PMI rose to 56.3 from 55.4.

Completing the positive picture for global services activity on Tuesday, a report from Markit showed that its UK services PMI rose to 62.5 in October, the highest since May 1997, from 60.3 in September.

In further positive news for the UK, a report from the British Retail Consortium on Tuesday showed that retail sales rose 2.6 percent year-on-year in October, up from 2.4 percent in September, while like-for-like sales rose 0.8 percent, up from 0.7 percent the previous month.

The eurozone economy, however, is expected to struggle to regain momentum. In its latest forecast released on Tuesday, the European Commission sees the region contracting by 0.4 percent this year, then recovering by 1.1 percent in 2014, less than the 1.2 percent that it forecast in May.

Tuesday, 5 November 2013

Fed in no rush to taper amid mixed economic data, Europe continues to recover

Tapering of the Federal Reserve's asset purchases may be a while in coming. From Reuters on Monday:

The Federal Reserve should scale back its asset purchases only when the U.S. economy shows clearer signs of improvement and even then it should act slowly, one senior central banker said on Monday, while two others stressed there is no need to rush...

Governor Jerome Powell called the timing "necessarily uncertain" because it depends on the strength of the recovery, while Boston Fed President Eric Rosengren pointed to the central bank's balance sheet as a reason to be patient as it heads into a policy meeting next month...

"For me, you don't have to be in a hurry because of low inflation," St. Louis Fed President James Bullard ... told CNBC television.

US economic data on Monday were mixed.

A report on the Federal Reserve's latest quarterly senior loan officers survey showed that US banks have eased lending standards for commercial loans and residential mortgages in the last three months. However, the survey also found that demand had weakened for home mortgages while most banks reported a drop in mortgage refinancing activity.

US factory orders rose 1.7 percent in September after falling 0.1 percent in August. A surge in aircraft orders pushed up the total for September but orders for non-military capital goods other than aircraft fell 1.3 percent.

Elsewhere in the world, manufacturing in the euro area continued its recovery in October. Markit's manufacturing PMI rose to 51.3 last month, in line with its flash reading, from 51.1 in September.

In the UK, construction activity accelerated in October, the Markit/CIPS construction index rising to 59.4, the highest since September 2007, from 58.9 in September.

With the construction data continuing the recent stream of positive economic data for the UK, the outlook for the economy appears to have brightened. On Sunday, the Confederation of British Industry had raised its growth forecasts for the economy to 1.4 percent and 2.4 percent in 2013 and 2014 respectively, up from 1.2 percent and 2.3 percent previously.

Monday, 4 November 2013

Stocks and bonds set for rally

Two articles from Bloomberg suggest that stocks and bonds are likely to see gains ahead.

First, on stocks:

The broadest equity rally on record will pick up speed through year end and lift the Standard & Poor’s 500 Index to the biggest annual increase in 16 years, if history is any guide.

Shares have climbed in the final two months 82 percent of the time since 1928 when the benchmark gauge advanced at least 10 percent through October, data compiled by S&P and Bloomberg show. The mean November and December increase of 6 percent would boost the index to 1,862.79, an all-time high that is about 20 percent above the record 1,565.65 set in 2007...

The benchmark gauge for American equities gained 23 percent from January to October...

And on bonds:

Deutsche Bank AG was one of the few firms surveyed by Bloomberg in January to correctly predict the worst rout in the U.S. Treasury market since 2009. Now, Germany’s largest lender says it’s time to buy.

“The economy isn’t growing as strongly as we’d hoped,” Dominic Konstam, the New York-based global head of interest-rate research at Deutsche Bank, said in a telephone interview on Oct. 28, one day before a measure of U.S. consumer confidence plunged by the most in more than two years...

Konstam isn’t alone. Firms from ING Groep NV to SEI Investments Co. have boosted their holdings of Treasuries since September as growth prospects diminished, while a weekly survey by Stone & McCarthy Research Associates showed the proportion of U.S. government debt held by money managers increased in the week ended Oct. 29 from the lowest since June 2012.

However, there is no consensus on where yields are headed.

The four other firms that joined Deutsche Bank in correctly predicting at the start of 2013 that Treasury yields would rise, including Jefferies Group LLC and Credit Agricole SA, are all forecasting higher U.S. borrowing costs by year-end.

Saturday, 2 November 2013

Stocks and Treasury yields rise as manufacturing grows in October

US stocks rose on Friday, with the S&P rising 0.3 percent, halting a two-day fall.

However, US Treasuries fell on Friday, the 10-year yield rising seven basis points to 2.62 percent on signs that the government shutdown in October failed to halt growth in US manufacturing activity.

The Institute for Supply Management’s manufacturing PMI rose to 56.4 last month, the highest since April 2011, from 56.2 in September. Markit's US manufacturing PMI for October also showed growth at 51.8, albeit falling from 52.8 in September.

Elsewhere in the world, Markit's UK manufacturing PMI fell slightly to 56.0 in October from 56.3 in September. However, it remained close to August's two-year peak of 57.1.

In Asia, manufacturing activity picked up pace in October. For China in particular, the official PMI rose to 51.4 from 51.1 in September while HSBC's PMI rose to 50.9 from 50.2.

Friday, 1 November 2013

BoJ keeps monetary policy unchanged, eurozone inflation falls

The Bank of Japan announced no new easing measures after its monetary policy meeting on Thursday.

The European Central Bank, though, could yet do so after reports on Thursday showed that inflation in the euro area fell to 0.7 percent in October, the lowest since November 2009, and unemployment stayed unchanged at a record high of 12.2 percent in September.

Also, data from the eurozone's largest economy, Germany, on Thursday were negative. Retail sales fell 0.4 percent in September while GfK's forward-looking consumer confidence index fell to 7.0 in November from 7.1 in October.

In the UK, GfK also reported that its consumer confidence index fell to -11 in October from -10 in September. However, Nationwide reported that house prices rose 5.8 percent in October from a year earlier, the biggest annual increase since July 2010.

In the US, the MNI Chicago Report business barometer jumped to 65.9 in October from 55.7 in September, the biggest monthly increase since July 1983.

Thursday, 31 October 2013

Fed maintains stimulus, stocks fall

There was no change to the Federal Reserve's monetary policy after its meeting on Wednesday. Bloomberg reports:

The Federal Reserve decided to press on with $85 billion in monthly bond purchases, saying it needs to see more evidence that the economy will continue to improve.

“The recovery in the housing sector slowed somewhat in recent months,” the Federal Open Market Committee (FDTR) said today at the end of a two-day meeting in Washington. “Fiscal policy is restraining economic growth.”

US stocks fell anyway, the S&P 500 declining 0.5 percent to end its four-day winning streak.

The Fed's hesitance in removing monetary stimulus appears consistent with US economic data on Wednesday. A report from ADP showed that private sector employers added 130,000 jobs in October, the fewest since April. A report from the Labor Department showed that the consumer price index rose 0.2 percent in September, leaving the 12-month increase at 1.2 percent, the smallest since April.

Signs of slowing were also apparent in data from Germany on Wednesday. German inflation slowed to 1.2 percent in October from 1.4 percent in September while unemployment rose for a third month in October by 2,000.

Other reports on Wednesday, however, showed that Europe as a whole is reflating. Spain's economy grew 0.1 percent in the third quarter, bringing its two-year recession to an end. The European Commission's economic sentiment index rose to 97.8 in October from 96.9 in September.

Japan's recovery also appears to be maintaining momentum. A report on Wednesday showed that industrial production there rebounded 1.5 percent in September after having fallen 0.9 percent in August. And on Thursday, Markit reported that its manufacturing PMI for Japan rose to 54.2 in October, the highest level since May 2010, from 52.5 in September.

Wednesday, 30 October 2013

Economic data mixed, India raises interest rate again

Economic data on Tuesday were mixed.

In the US, retail sales fell 0.1 percent in September, dragged down by a 2.2 percent decline in sales at auto dealers. However, excluding automobiles, gasoline and building materials, retail sales increased 0.5 percent.

Still, the Conference Board did report that its index of consumer confidence for the US fell to a six-month low of 71.2 in October from 80.2 in September.

Meanwhile, US producer prices fell 0.1 percent in September, pushing the 12-month increase down to 0.3 percent, the smallest since October 2009.

However, home prices continued to increase in August. The S&P/Case Shiller composite index of home prices in 20 metropolitan areas rose 0.9 percent. Compared to a year ago, prices rose 12.8 percent, the strongest increase since February 2006.

The housing market has also been strong in the UK, with mortgage approvals for house purchases rising to almost 67,000 in September, the highest level since February 2008.

Earlier in the day, Japan had reported that household spending rose 3.7 percent in September from a year ago while the jobless rate fell to 4.0 percent last month from 4.1 percent in August.

Even as global economic data have been coming out mixed, India's central bank remains focused on fighting inflation. On Tuesday, the Reserve Bank of India decided to raise its benchmark repo rate by 25 basis points to 7.75 percent. It was the second consecutive month that the RBI had raised its benchmark rate.

Tuesday, 29 October 2013

S&P 500 touches new record amid mixed US economic data

The S&P 500 eked out another record high on Monday, rising 0.13 percent to 1,762.11.

The small gain in stocks came amid mixed US economic reports on Monday.

Industrial production rose 0.6 percent in September but manufacturing production rose just 0.1 percent.

Pending home sales plunged 5.6 percent in September, the largest decline since May 2010.

Manufacturing activity held up better in Texas this month. The Dallas Federal Reserve's Texas Manufacturing Outlook Survey for October showed that the production index rose to 13.3 this month from 11.5 in September. However, the general business activity index fell to 3.6 in October from 12.8 in September.

Monday, 28 October 2013

With US stocks at fresh highs, will faith in Fed be tested?

Stocks in the United States rose last week, with the Standard & Poor’s 500 Index climbing 0.9 percent to close the week at a record high of 1,759.77. However, as the bull market continues, valuations for stocks have become stretched, leaving some analysts nervous.

Last week, Lance Roberts asked in a post at the Daily X-Change: Is a major correction coming?

He noted that currently, both the S&P 500 Index and the broad Wilshire 5000 Index have deviated from their long-term moving averages to extremes that have been seen only four times previously.

“The current deviation from the long term average, fueled by Federal Reserve interventions, is approaching extremes in both deviation and duration,” he wrote.

Roberts also cited a post by Cullen Roche at Pragmatic Capitalism last week. Roche wrote that “the market is just driving higher on what looks like sheer optimism of continued QE and little else”.

Roche cited two indicators of this optimism. One is stock market capitalisation as a percentage of gross national production, which is now at 110 percent, a reading that has “only been surpassed by the Nasdaq bubble”. The other indicator is margin debt at the New York Stock Exchange, which is now at an all-time high.

An article by Walter Hamilton and Andrew Tangel at the Los Angeles Times last week also mentioned the record level of margin debt.

The article also said that “optimism is everywhere”. It cited the latest weekly poll by the American Association of Individual Investors, where 49.2 percent of people responded by saying that they were bullish, up from 29 percent in late August, while bearish responses fell to 17.6 percent, the lowest since January 2012, from 43 percent.

Another recent survey by Barron's found that 65 percent of money managers were bullish while only 8 percent were bearish.

Again, it is all thanks to the Fed, apparently. The article quoted Patrick J. O'Hare, chief market analyst at briefing.com, as saying: “Everyone is reading from same script — that you can't lose buying the dips because the Fed is by your side. And it's clearly working.”

Less confident in the Fed's ability to sustain the bull market in stocks is John Hussman. In an article last week entitled “Did Monetary Policy Cause the Recovery?”, he pointed out that aggressive monetary easing did not prevent the market from losing half of its value during the 2000-2002 and 2007-2009 plunges.

Indeed, Hussman asserts that monetary policy may not even have been the central factor in ending the banking crisis during the last recession. Instead, “the clearest and most immediate event that ended the banking crisis was not monetary policy, but the abandonment of mark-to-market accounting by the Financial Accounting Standards Board on March 16, 2009,” he wrote. That rule change “removed the risk of widespread bank insolvency by eliminating the need for banks to make their losses transparent”.

Hussman said that faith in the Fed's ability to sustain the current bull market “is already wavering, but the loss of this faith will be one of the most painful aspects of the completion of the present market cycle”.