US consumer spending rises, Japanese industrial output falls

US economic data on Friday were positive.

US consumer spending increased 0.7 percent in February, faster than the 0.4 percent rise in January. The increase was partly due to higher gasoline prices. After adjusting for inflation, spending was up 0.3 percent, the same rate as in January.

Meanwhile, personal income resumed growth in February, increasing by 1.1 percent after having declined 3.7 percent in January. Real disposable income rose 0.7 last month after having fallen 4.0 percent the previous month.

To add to the positive consumption picture, another report on Friday showed that the Thomson Reuters/University of Michigan index of consumer sentiment rose to 78.6 in March from 77.6 in February.

Data from Japan on Friday were mixed though.

Japan's jobless rate rose to 4.3 percent in February from 4.2 percent in January.

The country also remained in deflation, with core consumer prices falling 0.3 percent in February from a year ago.

However, household spending rose 0.8 percent in February from a year ago after adjusting for price changes.

Industrial production shrank 0.1 percent in February but manufacturers expect it to rebound 1 percent in March.

Indeed, Markit's manufacturing PMI for Japan rose to 50.4 in March from 48.5 in February, rising above the neutral 50 mark for the first time since May 2012.

S&P 500 hits record high amid mixed economic data

The S&P 500 finally closed at a record high after it rose 0.4 percent on Thursday to hit 1,569.19.

The new high came despite mixed US economic reports on Thursday.

US fourth quarter GDP growth was revised up to 0.4 percent from 0.1 percent.

However, initial claims for unemployment benefits increased 16,000 to 357,000 last week. The four-week moving average rose 2,250 to 343,000.

The Institute for Supply Management-Chicago's business index fell to 52.4 in March from 56.8 in February.

There were also mixed economic data from Europe on Thursday.

In the euro area, loans to the private sector fell 0.9 percent in February from a year earlier, the same rate as in January. The rate of growth in M3 money supply fell to 3.1 percent in February from 3.5 percent in January.

In Germany, retail sales rose 0.4 percent in February but unemployment increased by 13,000 in March.

In the UK, services sector output increased 0.3 percent in January and house prices rose 0.8 percent in March from the previous year but consumer confidence remained unchanged this month from February.

Markets and eurozone economic confidence weaken as Italy remains in deadlock

Even as Cyprus prepares to open its banks on Thursday, investors' concerns shifted back to Italy.

US Treasuries rallied and the euro weakened to a four-month low against the dollar on Wednesday as Italy's Democratic Party leader Pier Luigi Bersani said there was no possibility of a broad coalition to end the deadlock caused by last month’s elections. Italian five-year yields rose 25 basis points, the most in a month, to 3.58 percent.

Disappointing data from the euro area added to the negative sentiment in markets. A report from the European Commission on Wednesday showed that its economic sentiment indicator for the region fell to 90.0 in March from 91.1 in February.

Even US data were not very positive on Wednesday. Pending home sales fell 0.4 percent February. However, it remained at the second highest level since April 2010.

Will the US be the next Cyprus?

Dean Baker raises concerns over the big banks in the US.

Many highly-respected Washington types have been running around for the last three years yelling that because of its large budget deficits, the United States is Greece. Then we learned last week that the immediate danger is the United States being Cyprus...

As the Cyprus crisis was unfolding last week, we also got to see the report of the Senate Permanent Subcommittee on Investigations (pdf) on JP Morgan's losses at its "London Whale" trading division. The report chronicles a series of bad bets on derivatives that were compounded by traders doubling down their stakes. They concealed the size of their losses both to bank officers and regulators. The end result was a $6bn loss...

If the regulators were not able to catch the London Whale's huge gambles before they went bad, why would we think that they will catch the next crapshoot from the Wall Street gang?

Meanwhile, though, the US economy appears to be maintaining some positive momentum for the time being despite some mixed economic data on Tuesday.

Durable goods orders jumped 5.7 percent in February, more than reversing January's 3.8 percent decline. Orders for non-defense capital goods excluding aircraft fell 2.7 percent but this came after a 6.7 percent jump the previous month.

New home sales fell 4.6 percent in February. However, this followed a 13.1 percent surge in January. The combined January-February sales performance was the best two-month showing since August and September 2008.

In another sign of an improving housing market, data from S&P/Case-Shiller showed that home prices in 20 US cities increased 8.1 percent in January from the same time last year, the biggest 12-month gain since June 2006.

However, the Conference Board’s consumer confidence index plunged to 59.7 in March from a three-month high of 68 in February.

Still, the overall trend of the economic data in recent weeks indicates that the US economy continues to grow.

US economy grows as Fed policy gains traction

The US economy appears to be maintaining its growth momentum.

A report from the Chicago Federal Reserve on Monday showed that its national activity index rose to +0.44 in February from -0.49 in January. Although the three-month moving average of the index fell to +0.09 in February from +0.28 in January, the report said that the readings indicate that economic growth “was somewhat above its historical trend”.

Many economists think that the Federal Reserve's monetary policy has been helpful in boosting growth. From Reuters last week:

The Federal Reserve's aggressive easing of monetary policy is proving surprisingly effective at blunting the blow to the economy from tighter fiscal policy, according to economists who have been scrambling to raise their growth forecasts...

"Monetary policy is beginning to gain some traction here," said Tom Higgins, global macro strategist at Standish Mellon Asset Management in Boston.

According to Higgins, if it were not for the monetary stimulus, the economy would probably be facing growth of a 1 percent annual rate or less. As it is, he expects growth to come in at a 2.5 percent pace in the first quarter.

But the Fed's monetary policy works through financial markets, and the increased risk-taking there is becoming obvious. From Bloomberg on Monday:

Money managers from Ares Management LLC to Onex Corp. (OCX) are borrowing at the fastest pace in six years to buy the type of speculative-grade loans that federal bank regulators warned last week is becoming riskier.

Ares, which oversees $59 billion, and Onex’s credit unit are among firms that have raised $22.9 billion of collateralized-loan obligations this quarter, approaching the all-time high of $26.4 billion in the three months ended June 30, 2007, according to Royal Bank of Scotland Group Plc. Leveraged-loan mutual funds have received their two biggest weekly inflows since January.

Cyprus gets bailout deal

An agreement has been reached on Cyprus. Reuters reports:

Cyprus clinched a last-ditch deal with international lenders on Monday for a 10 billion euro ($13 billion) bailout that will shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians...

The plan, swiftly endorsed by euro zone finance ministers, will spare the east Mediterranean island a financial meltdown by winding down Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a "good bank".

Deposits above 100,000 euros, which under EU law are not guaranteed, will be frozen and used to resolve debts, and Laiki will effectively be shuttered, with thousands of job losses.

Initial market reactions to the news were positive. Asian stocks rose and the euro gained against other currencies.

However, losses last week on concerns over Cyprus had not been very large, so any gains today and subsequent days are also likely to be mild.

Cyprus moves towards bailout deal

It will be an interesting weekend for Cyprus. Reuters reports the latest developments:

Cyprus is expected to make a dramatic U-turn on Saturday to avert the imminent threat of financial meltdown, having signaled it is willing to tax big savers in its stricken banks to clinch a bailout from the European Union.

The island's partners in the 17-nation euro zone scheduled a meeting for Sunday in Brussels, in a strong sign they believe a solution is near.

As hundreds of demonstrators faced off with riot police outside parliament late into Friday night, lawmakers inside voted to nationalize pension funds, pool state assets for a bond issue and peel good assets from bad in stricken banks.

Officials said a deal was imminent to raise 5.8 billion euros demanded by the EU in return for a 10 billion euro ($13.00 billion) lifeline, including some kind of levy on bank deposits, which could be voted on as soon as Saturday.

Investors apparently see a likelihood of an agreement on the bailout. Markets mostly rose on Friday, leaving the S&P 500 down just 0.2 percent for the week. The STOXX Europe 600 was down 1.1 percent for the week.

A report from Ifo on Friday showing that its business climate index for Germany fell to 106.7 in March from 107.4 in February seemed to have made little impact on markets. It was the first decline in five months.

Cyprus given deadline for bailout

The drama in Cyprus continues as its government is given a deadline to come up with a new plan to raise money. Bloomberg reports:

Cypriot lawmakers will begin debate today on legislation to unlock bailout funds and prevent a financial collapse with a European Central Bank deadline to cut off funding for its lenders in three days.

Euro-area finance ministers expect a proposal from Cyprus “as rapidly as possible” to raise the 5.8 billion euros ($7.5 billion) needed to trigger the emergency loans, they said in a statement late yesterday after meeting in a teleconference...

The ECB turned up the pressure on Anastasiades and euro- area finance chiefs to deliver a rescue package, saying it may cut off emergency funds to Cypriot banks after March 25 unless a plan is in place “that would ensure the solvency of the concerned banks.”

Economic data on Thursday were mixed.

In Japan, the all industry activity index fell 1.4 percent in January and exports fell 2.9 percent in February from a year ago, leaving the trade balance with a deficit of 777.5 billion yen.

There was better news from China. The HSBC manufacturing PMI rose to 51.7 in March from 50.4 in February, alleviating concerns that China's growth is slowing.

However, contraction in the euro area appears to have worsened in March after Markit's composite index fell to 46.5 from 47.9 in February. The services index fell to 46.5 from 47.9 while the manufacturing index fell to 46.6 from 47.9.

There were positive data though from the UK. Retail sales rose 2.1 percent in February, the biggest increase in almost a year, while the budget deficit excluding temporary support for banks was 2.76 billion pounds, the smallest February deficit in five years.

Another report from the UK showed that the Confederation of British Industry's total order book balance fell to -15 in March from -14 in February. However, the output expectations balance rose to +22 from +5.

The trend of positive data is more entrenched in the US though and that trend was maintained on Thursday. Existing home sales rose 0.8 percent in February while Markit's manufacturing PMI rose to 54.9 in March from 54.3 in February.

And US economic growth is likely to strengthen further as the Conference Board's index of leading indicators rose 0.5 percent in February.

Fed to maintain stimulus as markets at risk of sharp fall

The Federal Reserve is set to continue its monetary stimulus. Bloomberg reports the outcome of the Fed's monetary policy meeting on Wednesday:

Federal Reserve Chairman Ben S. Bernanke said further gains in the U.S. labor market are needed for the central bank to consider reducing its record monetary easing.

“Obviously, there has been improvement,” he said at a news conference in Washington today after the Fed decided to leave the pace of asset purchases unchanged at $85 billion a month. “One thing we would need is to make sure that this is not a temporary improvement.”

The Fed's forecast for the unemployment rate at the end of the year has been lowered to a range of 7.3 percent to 7.5 percent from a previous forecast of 7.4 percent to 7.7 percent. The forecast for economic growth was revised to 2.3 percent to 2.8 percent this year compared with the earlier forecast of 2.3 percent to 3 percent.

While the Fed hopes that the extension of monetary stimulus would help the economy expand, Cullen Roche at Pragmatic Capitalism sees the possibility of it leading to excess. Indeed, Morgan Stanley's Gerard Minack thinks that emerging market debt and developed market high-yield corporate debt are two areas that could see “more dangerous mis-pricing of risk emerge in coming quarters because monetary policy is likely to remain loose, liquidity plentiful, and investors will continue to hunt for yield”.

Meanwhile, Doug Short at Advisor Perspectives notes that investors are increasingly bullish on US equities. Quoting another investor, he writes that “bull markets go for as long as they go and for whatever reason” but it is the “terminal valuation that determines the degree of damage done in the subsequent bear market”. And he shows that from current valuation, the market has in the past fallen by over 30 percent.

Economic data positive as India cuts rates

Economic data on Tuesday were mostly positive.

China's foreign direct investment rose 6.3 percent in February from a year earlier, its first gain in nine months.

In the US, housing starts rose 0.8 percent in February. Building permits rose 4.6 percent to the highest level since June 2008.

In contrast, eurozone construction output fell 1.4 percent in January.

The good news for Europe, though, was that the ZEW index of German investor confidence rose to 48.5 in March, the highest level since April 2010, from 48.2 in February.

However, confidence in the euro area as a whole is being shaken after lawmakers in Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday.

Meanwhile, elsewhere in Europe, UK inflation rose to a nine-month high of 2.8 percent in February, but economists still see more monetary stimulus as likely.

“What does it mean for the Bank of England? Not a lot. I don't think high inflation will act as a deterrent to their desire to do something else if they want to,” said Peter Dixon, an economist at Commerzbank.

However, it was the Reserve Bank of India that announced a cut to its benchmark repo rate by 25 basis points to 7.50 percent on Tuesday, its second reduction this year.

Markets dip, US homebuilder confidence falls, China home prices rise

Markets mostly shrugged off the implications of a plan to impose a levy on depositors in banks in Cyprus. The STOXX Europe 600 Index fell just 0.2 percent on Monday while the S&P 500 Index fell 0.6 percent.

The lack of panic by investors probably did not surprise the folks at Global Macro Monitor, who had written on Monday that “we seriously doubt Cyprus’ $20 billion economy is going to derail the fundamentals that have been driving the U.S. stock market”.

Indeed, Citigroup chief economist Willem Buiter, who had in the past often criticised official measures to resolve Europe's debt crisis, even described the Cypriot bank creditor bail-in as “a net positive for the euro area”.

Among economic reports on Monday, there were some housing data from the US and China.

In the US, the National Association of Home Builders/Wells Fargo index of builder confidence fell by 2 points to 44 this month, the second consecutive decline. “In addition to tight credit and below-price appraisals, homebuilding is beginning to suffer growth pains as the infrastructure that supports it tries to re-establish itself,” David Crowe, chief economist at the builders association, said in a statement.

Moving in the opposite direction, new home prices in China rose 2.1 percent in February from a year ago. This followed an increase of 0.8 percent in January. Home prices rose month-on-month in 66 of 70 major cities monitored by the government, up from 53 in January.

US growth firming, mixed data elsewhere

The world's developed economies reported mixed data last week, with the United States producing most of the positive reports.

In the US, a report last week showed that retail sales rose by a solid 1.1 percent in February. While this was partly due to higher gasoline prices, retail sales excluding gas also showed a rise of 0.6 percent.

In addition, another report from the US showed that industrial production rose 0.7 percent in February.

In contrast, a report last week showed that industrial production in the euro area fell 0.4 percent in January.

In Japan, core machinery orders was reported last week to have plunged 13.1 percent in January. Another report showed that the tertiary industry index fell 1.1 percent in January.

Still, there were also signs that the major developed economies are improving.

A report at the beginning of last week from the Organisation for Economic Co-operation and Development showed that the composite leading indicator for the OECD as a whole rose to 100.4 in January from 100.3 in December. Growth in the US and Japan was described as “firming” while the euro area was reported to be showing a “pick-up in growth”.

OECD composite leading indicators
	Ratio to trend, amplitude adjusted					Change from previous month
	2012				2013	2012				2013
	Sep	Oct	Nov	Dec	Jan	Sep	Oct	Nov	Dec	Jan
OECD area	100.0	100.1	100.2	100.3	100.4	0.02	0.06	0.08	0.10	0.10
United States	100.6	100.7	100.8	100.9	100.9	0.09	0.11	0.10	0.09	0.08
Euro area	99.4	99.4	99.4	99.6	99.7	-0.05	0.01	0.08	0.13	0.16
Japan	100.0	100.1	100.2	100.4	100.6	-0.01	0.06	0.11	0.17	0.20

The main risk to the global economy remains -- as it has been for the past few years -- Europe's financial problems.

The country that is now the focus of attention is Cyprus after its government proposed at the end of last week -- at the behest of other European governments -- to fund a bailout of its banks with a levy on depositors. This precedent raised fears that bank deposits are no longer safe and may trigger fresh financial turmoil by encouraging withdrawals from banks not only in Cyprus but other European banks as well.

A renewed financial crisis would very likely dent the prospect of a recovery in Europe while putting the rest of the global economy at risk as well.

US economic data mixed, more monetary stimulus to come

US economic data on Friday were mixed.

Industrial production rose 0.7 percent in February, the most in three months. The Federal Reserve Bank of New York’s Empire State index fell to 9.2 in March from 10 in February but showed expansion for the second consecutive month.

However, the Thomson Reuters/University of Michigan preliminary sentiment index for March came out at 71.8, well down from 77.6 in February and the lowest level since December 2011.

A jump in consumer prices may also affect consumer demand. The consumer price index rose 0.7 percent in February as gasoline saw the biggest jump in price in more than three years.

Despite the rise in consumer prices, the Federal Reserve is expected to hold its course on stimulus at its monetary policy meeting next week. This, in turn, is likely to put pressure on other central banks to maintain monetary stimulus, according to PIMCO's Mohamed El-Erian. From Bloomberg:

The Federal Reserve’s record monetary stimulus has compelled central banks from Mexico to Japan to follow suit, said Pacific Investment Management Co.’s Mohamed El-Erian.

The Fed’s “artificially low” benchmark interest rate has put upward pressure on several currencies, threatening to erode the competitiveness of those nations’ economies, El-Erian, chief executive officer of the world’s largest manager of bond funds, said in a speech today in Stanford, California. “Ultimately, they are forced -- Mexico has been forced, Brazil has been forced, Korea has been forced, Japan has been forced -- into doing exactly the same thing” as the Fed.

Indeed, Japan's parliament on Friday confirmed the appointment of Haruhiko Kuroda as Bank of Japan governor. Having earlier vowed to do “everything possible” to reverse falling prices, Kuroda is widely expected to ease monetary policy in Japan more aggressively.

And in the UK, there is talk of a change in the Bank of England's remit to allow greater monetary stimulus.

Eurozone employment falls, leaders call for budget flexibility

The recession is clearly taking its toll on the eurozone economy. A report on Thursday showed that employment in the euro area fell 0.3 percent in the fourth quarter of 2012.

Bloomberg reports that amid the weak economy, European governments are loosening up on budget restraint.

“If there is too much austerity, there will be too much unemployment,” French President Francois Hollande said at an EU summit in Brussels late yesterday. “Flexibility is necessary if we want to make growth the priority.”

The euro zone’s economic slump has shoved aside the financial crisis as the bloc’s biggest headache, leading the EU to push back deficit-reduction deadlines and making it perilous for politicians to wrap themselves in the flag of austerity.

Further signs that Europe's sovereign debt crisis has abated for the time being came on Thursday. Spain managed to sell 803 million euros of bonds maturing in 2029, 2040 and 2041 at yields lower than at previous sales.

Still, Business Insider reports that Société Générale is warning of another "Eurozone shockwave" in the spring.

US retail sales rise, eurozone industrial production falls

In a good sign for the US economy, a Commerce Department report on Wednesday showed that retail sales rose 1.1 percent in February. It was the biggest increase in five months and followed a 0.2 percent increase in January.

Higher gasoline prices helped boost sales from gas stations by 5.0 percent. However, even excluding gas, sales rose 0.6 percent.

In another positive sign for the outlook on US consumer spending, the Federal Reserve reported on Wednesday that the household debt-service ratio fell to 10.38 percent in the fourth quarter, the lowest since the series started in 1980, from 10.56 percent in the third quarter.

Meanwhile, however, the eurozone economy continues to struggle. A report on Wednesday showed that Industrial production in the region fell 0.4 percent in January.

Japan shows weak recovery, UK heading back towards recession

Japan's recession may have ended at the end of last year but its recovery remains weak.

On Monday, a report showed that core machinery orders plunged 13.1 percent in January. On Tuesday, a report showed that the tertiary industry index fell 1.1 percent in January.

It has not been all bad for Japan though. Another report on Tuesday showed that the consumer confidence index rose from 43.3 in January to 44.3 in February, its highest level since mid-2007.

While Japan is leaving a recession, the UK may be falling back into one.

The National Institute of Economic and Social Research said on Tuesday that output in the UK declined by 0.1 percent in the three months to February after having fallen 0.2 percent in the three months to January. Another report on Tuesday showed that UK industrial output fell 1.2 percent in January.

The UK goods trade deficit did shrink though in January following the biggest monthly drop in oil imports since August 2008.

US corporate earnings losing momentum

Despite the recent rally in the US stock market, Business Insider reports that Gluskin Sheff's chief economist David Rosenberg sees corporate earnings falling.

If contraction and recession are synonymous, then an earnings recession is already underway... [A]t last count, S&P 500 Q4 operating EPS is running at -1.7% on a YoY basis, and at a $23.32 estimate right now for last quarter, it is actually running only moderately above the level prevailing in Q4 2006 ($21.99)...

John Hussman is probably not surprised at this. In his latest commentary, Hussman says that elevated corporate profits have been the result of massive government deficit and depressed household savings but this may be reversing.

Notice that elevated profit margins are also strongly mean-reverting over the economic cycle. In general, elevated profit margins are associated with weak profit growth over the following 4-year period. The historical norm for corporate profits is about 6% of GDP. The present level is about 70% above that, and can be expected to be followed by a contraction in corporate profits over the coming 4-year period, at a roughly 12% annual rate. This will be a surprise. It should not be a surprise.

Hussman adds that the historical norm for the sum of government and household saving as a percent of GDP is about 4 percent. At present, the sum is a negative 5 percent of GDP. A return to the historical norm could trigger a decline in corporate earnings.

Notice that over the past three years, we’ve seen a very slight improvement in the sum of government and personal savings as a fraction of GDP... Accordingly, though corporate profits are still extraordinarily elevated, we have also observed a significant decline of earnings momentum in recent quarters. This is not some temporary anomaly. It should be clear from the previous chart that the normalization of government and household savings is just getting started.

China's industrial output slows, inflation accelerates

China's economy appears to have cooled at the start of the year. From Bloomberg:

China’s industrial output had the weakest start to a year since 2009 and lending and retail sales growth slowed, toughening challenges for a new leadership that wants to narrow the gap between rich and poor.

Production increased 9.9 percent in the first two months and retail sales rose 12.3 percent, government data showed March 9, trailing economists’ estimates. New local-currency loans in February fell to 620 billion yuan ($99.6 billion), the People’s Bank of China said yesterday, lower than the estimates of 27 out of 28 analysts in a Bloomberg News survey.

However, fixed-asset investment was greater than expected.

Fixed-asset investment excluding rural areas in the first two months of the year rose 21.2 percent, against a median economist estimate of 20.7 percent and a 20.6 percent pace for the whole of 2012.

Also, inflation in China accelerated in February. From AFP/CNA:

The consumer price index -- a main gauge of inflation -- rose 3.2 per cent year-on-year in February, the National Bureau of Statistics said in a statement.

It was a spike from January's 2.0 per cent and the highest since April last year, when it climbed 3.4 per cent.

US reports strong job growth, Japan signals end to recession

Economic data on Friday were mostly positive.

In the US, the closely-watched employment report came out strong with 236,000 jobs added in February. The unemployment rate fell to 7.7 percent, the lowest since December 2008, from 7.9 percent in January.

Earlier in the day, Japan had reported some good news. Fourth quarter growth was revised up to flat from a 0.1 percent contraction, possibly signalling an end to the recession. Service sector sentiment has also improved recently, with the index for current conditions from the Cabinet Office's economy watchers survey rising to 53.2 in February from 49.5 in January and the future conditions index rising to 57.7 from 56.5.

Less positively, Japan also reported its third straight current account deficit in January. The current account deficit came in at 364.8 billion yen as the trade deficit hit 1.48 trillion yen.

In contrast, China's trade balance remained in surplus in February as exports surged 21.8 percent from the previous year and imports fell 15.2 percent.

However, Europe's export powerhouse, Germany, reported that industrial production stagnated in January.

More encouragingly, French industrial confidence rose for a third month in February and Spain's industrial production fell 5.0 percent in January, an improvement over the 7.1 percent decline in December.

Central banks leave monetary policies unchanged

The three major central bank meetings on Thursday ended relatively uneventfully. The European Central Bank, the Bank of Japan and the Bank of England all left monetary policy unchanged after their monetary policy meetings.

Central banks can perhaps afford to be sanguine at the moment. There were few signs of distress in financial markets on Thursday, with Spanish bond yields in particular falling 11 basis points to 4.9 percent after a successful government bond auction that saw 2.44 billion euros of 10-year bonds sold at an average yield of 4.917 percent, the lowest since November 2010.

Economic data on Thursday were mixed.

In Japan, the index of coincident economic indicators fell 0.3 points in January. However, the index of leading economic indicators rose 3.1 points.

In Germany, factory orders fell 1.9 percent in January after having risen 1.1 percent in December.

In the US, the trade deficit widened in January as exports fell 1.2 percent and imports rose 1.8 percent. Initial claims for unemployment benefits fell 7,000 to 340,000 last week, pushing the four-week average down 7,000 to 348,750, the lowest level since March 2008.

US economic data show growth, ECRI sees recession

The US economy grew at a "modest to moderate pace" last month, the Federal Reserve reported in its Beige Book on Wednesday.

Other economic reports on Wednesday appear to confirm the Fed report. ADP reported that private employers added 198,000 jobs in February. The Commerce Department reported that factory orders fell 2 percent in January as orders for transportation equipment plunged. However, excluding transportation, orders rose 1.3 percent.

Despite the generally positive data on the US economy, the Economic Cycle Research Institute's Lakshman Achuthan says that the economic conditions are actually recessionary.

We are now in the Yo-Yo Years as described by ECRI early last year. Meanwhile, even though some economic data seems stronger on the surface, U.S. Nominal GDP growth is recessionary and we are below a "stall speed" measure highlighted by the Fed. And this isn't the first time the stock market has risen through a recession.

See the full report from ECRI.

Meanwhile, there is no doubt that the euro area is in recession. A report by Eurostat on Wednesday confirmed that the eurozone economy contracted 0.6 percent in the fourth quarter of 2012, the biggest quarter-on-quarter fall in a year of contraction.

Dow posts record high as global stocks rally

The Dow Jones Industrial Average hit a record high on Tuesday. The Dow rose 0.9 percent to 14,253.77. The S&P 500 also rose, gaining 1.0 percent to 1,539.79, less than 2 percent below its record high.

European stocks also rose on Tuesday. The STOXX Europe 600 jumped 1.8 percent to 294.11, the highest level since June 2008.

The global equity rally had begun earlier in the day in Asia. The Shanghai Composite Index in particular jumped 2.3 percent as outgoing Premier Wen Jiabao announced at the opening of the National People's Congress that the government would target growth of 7.5 percent.

Economic data on Tuesday were mixed though.

In China, the HSBC services PMI fell to 52.1 in February from 54.0 in January.

In the euro area, the services sector shrank again in February as Markit's services PMI for the region fell to 47.9 from 48.6 in January, pulling the composite index also down to 47.9 from 48.6. However, retail sales in the euro area jumped 1.2 percent in January, the biggest increase since December 2009.

Meanwhile, growth in the UK services sector accelerated in February. The Markit/CIPS services PMI rose to 51.8 last month from 51.5 in January.

Growth in the US services sector also accelerated in February. The Institute for Supply Management’s non-manufacturing index rose to 56.0 last month from 55.2 in January.

Chinese stocks plunge, growth target unchanged

There may be less pressure for tightening of China's monetary policy for now (see yesterday's post) but the measures to curb property prices announced last week appear to have been enough to spook investors on Monday. From AFP/CNA:

Chinese shares fell 3.65 percent to close at a seven-week low after the government last week unveiled fresh measures to cap rising property prices, dealers said...

Among the new rules announced by Beijing on Friday was a 20 percent capital gains tax on home sales, well up from the previous one to two percent of the sale price.

The government also ordered the central bank to raise downpayments and mortgage lending rates for buyers of second homes in some cities, and told local governments to limit non-residents from buying more than one home.

In other news out of China on Monday, the government has set its 2013 economic growth target at 7.5 percent, unchanged from last year. Its inflation target was lowered to 3.5 percent from 4.0 percent last year.

China's services sector slows, less pressure to tighten policy

Growth in China's services sector slowed in February. The National Bureau of Statistics reported that China's non-manufacturing PMI stood at 54.5 last month, down from 56.2 in January and the lowest in five months.

The slower growth in services, together with the slower growth in manufacturing reported last week, may ease pressure for China to tighten monetary policy despite possibly higher inflation this year. From Bloomberg:

The PBOC is “fully confident of controlling inflation this year,” Deputy Governor Yi Gang said in Beijing yesterday. While the nation faces “some” pressure, he estimated the consumer- price index will rise about 3 percent in 2013, compared with 2.6 percent last year...

Song [Guoqing], one of three academics who sit on the PBOC’s monetary policy committee, said inflation will be “relatively low” this month due to slowing food-price gains. Compared with January and February, the pressure for tightening monetary policy and macro- economic controls “has in my view been relieved,” he said at a forum in Beijing.

Manufacturing grows in US, weaker elsewhere

US economic data on Friday were mostly positive.

The Institute for Supply Management’s manufacturing PMI rose to 54.2 in February, the highest reading since June 2011, from 53.1 in January. Personal spending rose 0.2 percent in January even as incomes fell 3.6 percent, giving back the gains from the previous two months. Indeed, consumer confidence appears to have improved with the final Thomson Reuters/University of Michigan index of consumer sentiment for February coming in at 77.6, well up from 73.8 in January.

Confirmation of growth in US manufacturing activity came from Markit, whose US manufacturing PMI read 54.3 for February, down from 55.8 in January.

Marring the picture somewhat was a 2.1 percent fall in US construction spending in January, the biggest decline in 1½ years.

Economic data elsewhere on Friday were mostly weak.

In the euro area, manufacturing activity continued to contract in February, Markit's manufacturing PMI for the region staying unchanged at 47.9. Other data for the euro area showed that inflation cooled to 1.8 percent in February from 2.0 percent in January and the unemployment rate rose to a record 11.9 percent in January from 11.8 percent in December.

There were also weak data from the UK on Friday. The Markit/CIPS manufacturing PMI for the UK fell to 47.9 last month from 50.5 in January. Another report showed that mortgage approvals fell to 54,719 in January from 55,632 in December.

Even in China, manufacturing barely showed growth in February. The manufacturing PMI from the National Bureau of Statistics and the China Federation of Logistics and Purchasing fell to 50.1 in February, the lowest in five months, while HSBC's manufacturing PMI fell to 50.4, the lowest in four months.

BoJ expected to add monetary stimulus, US GDP revised up

More monetary stimulus is being expected from the Bank of Japan as a new governor takes over the helm. From Bloomberg:

The Bank of Japan may add monetary stimulus as early as April as prospective governor Haruhiko Kuroda looks to demonstrate a more aggressive approach to tackling 15 years of falling prices.

Kuroda, the current Asian Development Bank president, would take office after Governor Masaaki Shirakawa retires March 19, if confirmed by Parliament following his official nomination yesterday. Analysts at banks from Nomura Holdings Inc. to Mizuho Securities Co. see more easing as soon as an April 3-4 meeting...

“The party has just started,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who in January predicted that Kuroda would get the job. “Give us more alcohol and get us excited -- he will do that,” Kanno said of Kuroda, predicting that the bank’s open-ended bond purchases --currently scheduled to begin in January -- will be brought forward to May or June.

Persistent deflation makes further monetary easing likely. A report on Friday showed that Japan's consumer prices excluding fresh food fell 0.2 percent in January from a year earlier, the third consecutive decline.

However, other economic data for Japan released on Friday were mixed. Capital expenditure fell 8.7 percent in the fourth quarter from the previous year but the unemployment rate also fell to 4.2 percent in January from 4.3 percent in December and household spending rose 2.4 percent in January from the previous year, rebounding from a 0.7 percent fall in December.

There had also been mixed data for Japanese manufacturing on Thursday. Factory output increased 1.0 percent in January, slower than the 2.4 percent increase in December. Meanwhile, the purchasing managers survey showed manufacturing contracting in February but at a slower rate, the PMI rising to 48.5 from 47.7 in January.

US economic data on Thursday had been more positive. Fourth quarter GDP growth was revised to show a 0.1 percent expansion from 0.1 percent contraction in the initial estimate. The MNI Chicago Report business barometer rose to 56.8 in February from 55.6 the prior month.