US data mixed as Fed maintains monetary policy

The US economic data on Wednesday were mixed. Bloomberg reports that durable goods orders jumped in May.

Orders for U.S. durable goods unexpectedly jumped in May, a sign companies are gaining confidence the recession is easing.

The 1.8 percent rise in bookings for items meant to last several years matched the previous month’s increase, the Commerce Department said today in Washington...

Demand for non-defense capital goods excluding aircraft, a proxy for future business investment, jumped 4.8 percent, the most since September 2004. Shipments of those items, used in calculating gross domestic product, rose 0.3 percent after dropping 2.7 percent.

But new home sales remained weak.

... Another report showed sales of new houses unexpectedly dropped last month, indicating foreclosures made existing homes more attractive...

Sales of new houses decreased 0.6 percent to an annual pace of 342,000 after a revised 344,000 rate in April that was lower than previously estimated, the Commerce Department also reported today. The median sales price fell 3.4 percent from May 2008, compared with a 17 percent drop for existing homes reported yesterday by the National Association of Realtors.

No surprise then that the Fed decided to maintain its monetary policy.

“The pace of economic contraction is slowing,” the Fed said in a statement after its meeting. Officials said inflation will remain “subdued for some time,” and rates will stay at “exceptionally low levels” for an “extended period.” Policy makers kept the benchmark interest rate between zero and 0.25 percent.

And if doubts about the US economic recovery linger, the same can be said of Japan's. From Bloomberg:

Japan’s export slump deepened in May, casting doubt on the nation’s growth prospects as the economy struggles to emerge from its worst postwar recession.

Shipments abroad dropped 40.9 percent from a year earlier, more than April’s 39.1 percent decline, the Finance Ministry said today in Tokyo. The median estimate of economists surveyed was for a 39.3 percent decrease. From a month earlier, exports fell 0.3 percent, the first deterioration since February.

Still, the consensus is that the global recession is at least easing, and the OECD is no exception to that view. From Bloomberg:

The Organization for Economic Cooperation and Development raised its forecast for the economy of its 30 member nations for the first time in two years as the U.S. slump shows signs of easing.

The combined economy of the world’s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010, the Paris-based group, which was founded in 1961 to coordinate international economic policies, said today. The new projections compare with March forecasts for contractions of 4.3 percent and 0.1 percent.

US existing home sales and eurozone PMI rise

The global economy continues to show signs that it is gradually turning around.

Reuters reports a rise in US existing home sales.

Sales of previously owned U.S. homes rose for a second straight month in May but were weaker than expected, adding to growing fears of an anemic economic recovery from a deep recession...

The [National Association of Realtors] said sales climbed 2.4 percent last month to an annual rate of 4.77 million units. While that pace was below market forecasts it was the second straight month sales had risen, for the first back-to-back gain since September 2005.

Despite signs the market is stabilizing, the NAR said the median national home price fell 16.8 percent in May from a year earlier, the third-largest drop on record.

A separate government report on Tuesday showed home prices fell 6.8 percent year-on-year in April after dropping 7.3 percent the previous month.

Other data on the US economy on Tuesday also indicate improvement.

A monthly survey of manufacturers from the Federal Reserve Bank of Richmond showed factory activity in the U.S. mid-Atlantic states quickened in June compared with May. However, manufacturers' outlook for the next six months softened, signaling conditions remain fragile...

Separately, U.S. chief executives were less pessimistic about the economy in the second quarter but still planned to cut jobs and capital spending, according to a Business Roundtable survey released on Tuesday.

There were also some signs of improvement from Europe, as Bloomberg reports.

Europe’s manufacturing and service industries contracted at the slowest pace in nine months in June, adding to signs the recession is bottoming out.

A composite index of both industries for the 16 euro nations rose to 44.4, the highest since September, from 44 in May. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates a contraction. Economists forecast an increase to 44.9, according to the median of 12 estimates in a Bloomberg News survey...

Markit’s manufacturing index rose to 42.4 this month from 40.7 in May, according to today’s report. The services index fell to 44.5 from 44.8.

German business confidence rises but US corporate insiders cash out

German business confidence rose in June. Bloomberg reports:

German business confidence rose for a third month in June, providing further evidence that the recession in Europe’s largest economy is easing.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 85.9 from 84.3 in May. Economists expected a gain to 85, the median of 34 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

However, executives at US companies appear to be losing confidence in the prospective performance of their shares.

Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show. Amgen Inc. Chairman and Chief Executive Officer Kevin Sharer and five other officials sold $8.2 million of stock. Christopher Donahue, the CEO of Federated Investors Inc., and his brother, Chief Financial Officer Thomas Donahue, offered the most in three years.

Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.

Indeed, markets showed some nervousness on Monday.

U.S. and European stocks tumbled, sending the Standard & Poor’s 500 Index down the most in two months, as the World Bank said the recession will be deeper than previously forecast. Treasuries rose, while oil fell below $67 a barrel and metals slumped...

The S&P 500 slid 3.1 percent to 893.04 at 4:05 p.m. in New York following last week’s 2.6 percent slump. The Dow average sank 200.72 points, or 2.4 percent, to 8,339.01. Europe’s Dow Jones Stoxx 600 fell 2.8 percent and the MSCI World Index decreased 2.7 percent. Almost 14 stocks fell for each rising on the New York Stock Exchange, the broadest sell-off since May 13.

US leading index rises again

US inflation remained subdued in May, but deflation worries should recede with further signs of an impending economic turnaround on Thursday.

From Bloomberg:

The leading index increased 1.2 percent after a 1.1 percent gain in April, the best back-to-back performance since November- December 2001, the New York-based Conference Board reported today...

The Conference Board’s index of coincident indicators, a gauge of current economic activity, fell 0.2 percent, the smallest drop since October, after decreasing 0.3 percent the prior month...

The Fed Bank of Philadelphia said its general economic index climbed to minus 2.2 from minus 22.6 in May, paced by improvements in orders and sales. Negative numbers signal contraction...

The number of people collecting unemployment insurance plunged by 148,000 in the week to June 6, the most since November 2001, to 6.69 million, the Labor Department said today. The average number of initial claims over the last four weeks fell to the lowest level in four months.

BoJ holds rate amid mixed global economic data

Economic data on Tuesday were mixed.

In Japan, the BoJ left interest rates unchanged as it upgraded its assessment of the economy. AFP/CNA reports:

Japan's central bank on Tuesday left its key interest rate unchanged at 0.1 per cent, while upgrading its assessment of the world's number two economy for the second consecutive month.

"Japan's economic conditions, after deteriorating significantly, have begun to stop worsening," the Bank of Japan said in a statement. "Japan's economy is likely to show clearer evidence of levelling out over time."

Further monetary easing also appears less necessary in Europe.

In Germany, investor sentiment reached a three-year high in June. Bloomberg reports:

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, increased to 44.8 from 31.1 in May. That’s the highest reading since May 2006. Economists expected a gain to 35, according to the median of 35 forecasts in a Bloomberg News survey.

And while inflation has practically disappeared in the euro area, it remains stubbornly persistent in the UK. Reuters reports:

The Office for National Statistics said consumer prices rose 0.6 percent last month, taking the annual rate to 2.2 percent from 2.3 percent in April. That was the lowest since January 2008 but above forecasts of 2.0 percent.

But in the US, signs of a possible upturn in the economy were tempered by further declines in industrial production. Bloomberg reports:

Housing starts jumped more than forecast in May while industrial production tumbled, offering a picture of an American economy still struggling to emerge from the deepest recession in half a century.

Builders broke ground on 532,000 dwellings at an annual rate, with single-family starts posting a third straight gain, Commerce Department figures showed today in Washington. Output at factories, mines and utilities dropped 1.1 percent, and the share of industrial capacity in use slid to a record low, the Federal Reserve said...

Wholesale prices dropped 5 percent in the 12 months to May, the biggest slump in half a century, the Labor Department also reported today. On a monthly basis, the producer-price index rose 0.2 percent, less than forecast.

Stocks fall, IMF raises forecast for US economy

The week hasn't started on a positive note.

Stocks and commodities fell sharply on Monday. Bloomberg reports:

The S&P 500, which had climbed 40 percent from a 12-year low on March 9, decreased 2.4 percent to 923.72 at 4:08 p.m. New York time. The Dow Jones Industrial Average, which last week erased its 2009 loss, tumbled 187.13 points, or 2.1 percent, to 8,612.13 as 28 of its 30 companies declined. Almost 13 stocks fell for each that rose on the New York Stock Exchange. The MSCI World Index of 23 developed nations plunged 2.6 percent, the most since April 20.

Europe’s Dow Jones Stoxx 600 Index lost 2.5 percent after Group of Eight finance ministers, who met in Italy over the weekend, began drawing up contingency plans for rolling back budget deficits and bank bailouts as the economy shows signs of recovery and investors start worrying about inflation...

The dollar strengthened the most against the euro since April today after Russian Finance Minister Alexei Kudrin said the U.S. currency is in “good shape,” further affirming there’s no substitute for the world’s reserve currency...

Kudrin’s comments helped U.S. Treasuries climb for a third day, the longest streak in a month, even after international holdings of long-term U.S. financial assets rose at a slower pace in April as China, Japan and Russia trimmed holdings of bonds. Purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March, the Treasury said today in Washington...

Crude oil for July delivery slid 2.1 percent to $70.56 a barrel in New York Mercantile Exchange trading as the stronger dollar limited the appeal of commodities as a hedge against inflation.

Freeport-McMoRan, the world’s biggest publicly traded copper producer, slid 5.8 percent to $55.14 as gold declined to a three-week low. Copper futures fell 3.7 percent in New York, the most in eight weeks.

Markets received no boost from economic reports.

Bloomberg reports that employment in the euro area has been falling.

Europe’s economy lost a record 1.22 million jobs in the first quarter as companies cut spending to survive the worst global economic slump in more than six decades.

Employment payrolls in the 16-member euro region fell 0.8 percent from the fourth quarter, when they declined 0.4 percent, the European Union statistics office in Luxembourg said today. The first-quarter drop was the biggest decline since the data series started in 1995. From a year earlier, payrolls contracted 1.2 percent, the first annual decline on record.

And the recovery in the US economy may not materialise as quickly as some anticipate. Bloomberg reports that the nascent recovery in homebuilder confidence stalled this month.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 15 this month from 16 in May, the Washington-based NAHB said today. A reading below 50 means most respondents view conditions as poor.

And manufacturing continued to contract in the New York region this month.

The Federal Reserve Bank of New York’s June general economic index fell to minus 9.4, less than forecast, from minus 4.6 the prior month, the bank said today. Readings below zero for the Empire State index signal manufacturing is shrinking.

But it isn't all gloomy.

Factory executives in the New York Fed’s district, which encompasses New York state, northern New Jersey and one county in Connecticut, turned more optimistic about the future. The gauge measuring the manufacturing outlook climbed to 47.8, the highest level since July 2007, from 43.8.

And the IMF has raised its forecast for the US economy. Again from Bloomberg:

The International Monetary Fund, which has rescued economies from Pakistan to Iceland in the past year, raised its outlook for the U.S. and called for steps to reduce concern about rising public debt and inflation.

The IMF forecasts the world’s largest economy will contract 2.5 percent this year before expanding 0.75 percent in 2010, according to a statement today after an annual staff analysis of the U.S. In the IMF’s World Economic Outlook report released in April, the U.S. was forecast to contract 2.8 percent this year before stalling in 2010.

Most global economic indicators show improvement

The week ended with mostly positive data on the global economy.

In China, industrial production and retail sales both increased in May. AFP/CNA reports:

China's May industrial output and retail sales both grew at a faster pace than in previous months, the government said Friday, as massive stimulus measures introduced since last year kicked in...

Industrial production, a key gauge of activity in factories and plants across China, grew 8.9 per cent in May, the National Bureau of Statistics said - compared to a 7.3 per cent increase in April and 8.3 per cent in March.

Retail sales meanwhile grew 15.2 per cent in May, it said.

Japan is also looking better, with industrial production for April having been revised up. From Reuters:

Industrial output rose 5.9 percent in April, the biggest monthly gain since 1953, Friday's revised data showed, in another sign the economy may be picking up from its deepest recession in decades...

Even households are feeling better. From Bloomberg:

Japan’s household sentiment rose to a 14-month high in May, adding to signs that the deepest postwar recession may be easing.

The confidence index climbed to 35.7 from 32.4 in April, the Cabinet Office said today in Tokyo. It has improved every month since tumbling to a record low of 26.2 in December. A number below 50 means pessimists outnumber optimists.

US consumer confidence has also improved. Bloomberg reports:

Confidence among U.S. consumers rose for a fourth straight month in June, reinforcing signs of an impending end to the recession, while prices of imported goods jumped as oil costs climbed.

The Reuters/University of Michigan preliminary index of consumer sentiment increased to 69, from 68.7 in May. The import-price index rose 1.3 percent in May, the most since July and in line with forecasts, a Labor Department report showed today in Washington.

The euro area, however, provided some disappointing data. From Bloomberg:

European industrial production dropped by the most on record in April as the worldwide recession ravaged demand for goods.

Production in the euro region plunged 21.6 percent from a year earlier, the most since the data series started in 1986, the European Union’s statistics office in Luxembourg said today. Economists expected a 19.8 percent decline, according to the median of 14 estimates in a Bloomberg News survey. From March, output declined 1.9 percent.

US retail sales rise, China's fixed-asset investment surges

The US data on Thursday were somewhat encouraging. From Bloomberg:

Retail sales rose in May for the first time in three months, an increase driven almost solely by U.S. shoppers returning to automobile showrooms seeking bargains and the rising cost of gasoline...

Retail sales rose 0.5 percent, as forecast, after a 0.2 percent drop in April, the Commerce Department said in Washington. Sales excluding autos also increased 0.5 percent, led by gasoline as prices jumped last month...

The number of Americans filing claims for unemployment insurance fell for the third time in four weeks, to 601,000, lower than economists had forecast. The number of jobless continuing to collect benefit payments still rose to a record for the 19th straight time, to 6.82 million.

Inventories at U.S. businesses fell in April for an eighth straight month, the longest stretch since 2002, as companies cut back in the face of slowing sales. The 1.1 percent decline in stockpiles followed a revised 1.3 percent drop in March and sales decreased 0.3 percent, Commerce also said today.

However, if US demand fails to pull the global economy out of recession, there is always China. From Bloomberg:

China’s spending on factories, property and roads surged by the most in five years as the government’s 4 trillion yuan ($585 billion) stimulus package countered a record slump in exports.

Urban fixed-asset investment climbed 32.9 percent in the five months to the end of May from a year earlier, the statistics bureau said today in Beijing. Overseas shipments declined 26.4 percent last month from a year earlier, the customs bureau said...

The slide in exports was the biggest since data began in 1995...

Even the Chinese export slump may be turning around.

Seasonally adjusted, the decline was a smaller 22.8 percent, and month-on-month shipments rose 0.2 percent, the customs bureau said. China’s export orders index advanced to 50.1 in May, marking the first expansion in 11 months, a government-backed manufacturing index showed previously.

Mixed economic data

Wednesday's economic reports were mixed.

In the US, the trade deficit widened in April, according to a Reuters report.

The U.S. trade gap widened to $29.2 billion in April as exports weakened again in a reflection of waning global demand, a U.S. government report on Wednesday showed.

The Commerce Department said total exports fell 2.3 percent to $121.1 billion, the lowest level for foreign sales since mid-2006...

Imports declined in April for a ninth straight month but by a smaller amount than exports, down 1.4 percent to $150.3 billion.

But the Fed's beige book shows signs that the slide in the economy is easing.

In Europe, France reported that industrial production fell by 1.4 percent in April but Italy reported that industrial production rose 1.1 percent in April, offsetting somewhat a worse-than-expected downward revision in first quarter GDP growth to minus 2.6 percent.

The UK also reported a rise in industrial production. Reuters reports:

British industrial output rose for the first time in over a year in April after a jump in oil and pharmaceuticals production, raising the prospect that the economy could already be out of recession...

The Office for National Statistics said industrial output...rose 0.3 percent on the month -- the first increase since February 2008 and better than the 0.1 percent decline economists had expected...

The National Institute of Economic and Social Research estimated after the data that Britain's economy returned to growth in April, expanding by roughly 0.2 percent over the month and another 0.1 percent in May.

There have also been unofficial reports that Chinese industrial production rebounded in May.

However, prospects for Japan's economic recovery encountered a setback on Wednesday. Bloomberg reports:

Orders for Japanese machinery fell to a 22-year low and producer prices tumbled the most since 1987 as dwindling profits forced companies to cut costs amid the worst postwar recession.

Bookings, an indicator of capital investment in the next three to six months, fell 5.4 percent to 688.8 billion yen ($7.1 billion) in April, the lowest since 1987, the Cabinet Office said today in Tokyo. Wholesale prices, the costs companies pay for energy and raw materials, slid 5.4 percent in May from a year earlier, the Bank of Japan said.

Still, a report today shows that Japan's contraction has not been quite as bad as previously reported. Again from Bloomberg:

Japan’s economy shrank at a record 14.2 percent annual pace last quarter as exports and business investment plummeted.

The contraction in gross domestic product was smaller than the 15.2 percent estimated last month, revised figures from the Cabinet Office showed today in Tokyo. The fourth quarter contraction was revised to 13.5 percent from 14.4 percent.

German industrial production and exports fall

Tuesday's economic reports were more mixed than those from previous days.

Germany provided much of the bad news, as Bloomberg reports:

German exports fell more than economists forecast in April as the global crisis restrained demand, keeping Europe’s largest economy mired in a recession.

Sales abroad, adjusted for working days and seasonal changes, fell 4.8 percent from March, when they rose a revised 0.3 percent, the Federal Statistics Office in Wiesbaden said today...

German imports dropped 5.8 percent in April from the previous month, when they increased a revised 0.2 percent, the statistics office said. The trade surplus narrowed to 9.4 billion euros ($13.1 billion) from 11.3 billion euros.

Bloomberg also reports that German industrial production was down in April.

German industrial output unexpectedly declined in April led by investment goods, suggesting Europe’s largest economy may struggle to gather strength.

Production dropped 1.9 percent from March when it rose 0.3 percent, the Economy Ministry in Berlin said today. Economists predicted an increase of 0.3 percent, the median of 30 forecasts in a Bloomberg survey showed. From a year earlier, output declined 22 percent when adjusted for work days.

However, the positive news flow continued in Japan, with both the coincident and leading indices of economic indicators rising 1 point in April, and in France, where the Bank of France’s Business Sentiment Indicator climbed to 81 in May from 75 in April.

Meanwhile, economic data from the UK were mixed, with the Royal Institution of Chartered Surveyors reporting that house prices fell at their slowest annual pace in 1-1/2 years in the three months to May but the British Retail Consortium reporting that consumers curbed spending in shops.

OECD indicators show slower decline

More hopeful indications for the global economy on Monday, this time from the OECD. Reuters reports:

The economic outlook for the OECD area declined at a slower pace in April, an OECD survey said on Monday, and there were stronger indications that the downturn may have hit bottom in Canada, France, Italy and Britain.

The Paris-based Organization for Economic Co-operation and Development said its composite leading indicator for the OECD area rose in April, reaching 93.2 compared to a revised 92.7 in March. There was an 8.3 point drop from April a year earlier.

Other reports from Europe on Monday reinforced the view that the recession is easing. Sentix's gauge of investor and analyst sentiment in the euro zone rose to -27.0 in June from -34.3 in May while German manufacturing orders held steady in April after increasing in March.

Recession abating in US and Japan

Recent economic reports continue to show that the worst of the recession is probably over for the United States and Japan.

On Friday, the US Labor Department reported that non-farm payrolls fell by 345,000 in May. Although the unemployment rate rose to 9.4 percent, the highest since 1983, the number of jobs lost in May was the least in eight months, boosting hopes that the recession is easing.

While the decline in job losses for May represents only one month's data, it is consistent with the picture coming from reports on claims for unemployment insurance. Initial claims fell by another 4,000 to 621,000 in the week ending 30 May, boosting hopes that it had peaked at 674,000 in the week ending 28 March and that the recession is therefore coming to an end. In addition, continuing claims for unemployment insurance fell to 6,735,000 in the week ended 23 May from 6,750,000 the prior week, the first decrease in almost five months.

Earlier last week, reports from the Institute for Supply Management also indicated that the recession is abating. The ISM's manufacturing PMI rose to 42.8 in May from 40.1 in April while its non-manufacturing index rose to 44.0 from 43.7. Although both indices remain below the 50 level that traditionally separates expansion from contraction, they remain on rising trends that have been in place since late last year.

Today's data indicate that Japan's economy may also be past its worst.

A Ministry of Finance report on Japan's current account for April shows that the trade situation is improving. Although exports came in 40.6 percent below the level last year, on a seasonally-adjusted basis, they were 7.2 percent higher than in March.

And the improvement does not apply just to the external sector of the economy. The Cabinet Office's economy watchers survey shows improving sentiment among workers in economically-sensitive jobs in general. The survey's diffusion index for current conditions rose to 36.7 in May from 34.2 in April while the diffusion index for future conditions jumped to 43.3 from 39.7.

So based on the latest economic indicators, it looks like the recession is abating in the US and Japan.

US job losses ease

The US employment picture brightened a little in May. Bloomberg reports:

The U.S. lost fewer jobs than forecast in May, reinforcing signs that the deepest recession in half a century is starting to abate.

Payrolls fell by 345,000, the least in eight months, after a revised 504,000 loss in April, the Labor Department said today in Washington. The jobless rate increased to 9.4 percent, the highest since 1983, in part as more people joined the labor force to look for work...

Revisions added 82,000 to payroll figures previously reported for April and March, the Labor report said.

Treasury yields jumped on Friday but stocks could not hold on to gains.

Yields on benchmark 10-year U.S. notes jumped to 3.84 percent at 4:16 p.m. in New York from 3.71 percent late yesterday, and the dollar climbed to a four-week high against the yen, gaining 2.4 percent to 98.85. The Standard & Poor’s 500 Stock Index slipped 0.3 percent to 940.09 after rising as much as 1 percent earlier.

ECB, BoE and BoC leave rates unchanged

The ECB and BoE both left interest rates unchanged on Thursday. Bloomberg reports:

The European Central Bank kept its benchmark interest rate at a record low of 1 percent today after first signs of an economic recovery emerged.

President Jean-Claude Trichet also said the ECB will start its plan to buy 60 billion euros ($85 billion) of covered bonds in the primary and secondary markets next month. The Bank of England today left its rate at 0.5 percent...

Central bank rate cuts aren't necessarily a thing of the past.

Other central banks are still cutting rates to bolster their economies. Iceland’s central bank today lowered its benchmark by a percentage point to 12 percent, defying the International Monetary Fund. Russia’s central bank cut the main rates for the third time in six weeks, lowering the refinancing rate to 11.5 percent from 12 percent.

Still, the Bank of Canada on Thursday chose to follow the ECB and BoE's examples and left its key lending rate unchanged at 0.25 percent.

The more sanguine stance by the major central banks is quite understandable. Recent data indicate that the global economy may already be on the mend. For example, Thursday also saw a Bloomberg report showing that eurozone retail sales rose in April.

European retail sales increased for the first time in seven months in April as consumers spent more on food and drinks.

Sales in the 16-nation euro region rose 0.2 percent from the previous month, when they fell 0.1 percent, the European Union’s statistics office in Luxembourg said...

And jobless claims in the US appear to have peaked, according to another Bloomberg report.

Initial applications for unemployment insurance fell by 4,000 to 621,000 in the week ended May 30, in line with forecasts, figures from the Labor Department showed today in Washington...

The claims report also showed the number of people collecting unemployment insurance fell to 6.74 million in the week ended May 23 from 6.75 million the prior week. It was the first decrease in almost five months, breaking a string of 17 consecutive records.

Services improve in May

The global economy looks like it remains on track to turn around.

In the US, the ISM's non-manufacturing index rose in May while factory orders rose in April. Bloomberg reports:

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, climbed less than forecast to 44 from 43.7 in April...

Another report today showed orders placed with factories in April rose for the second time in three months, as demand for automobiles, electrical equipment and construction machinery increased. Bookings gained 0.7 percent, after a revised 1.9 percent drop in March that was more than twice the previous estimate, the Commerce Department said.

However, employment remains weak.

... ADP Employer Services estimated companies cut 532,000 workers from payrolls.

The euro area also reported improvement in the services sector. From Bloomberg:

Europe’s manufacturing and service industries contracted more slowly in May, adding to evidence that the region’s worst recession since World War II is easing.

A composite index of both industries rose to 44.0 from 41.1 in April...

Markit’s services index increased to 44.8 from 43.8 in April...

There was even better news for the services sector in the UK. From Reuters:

The services purchasing managers' index rose to 51.7 in May from 48.7 in April, its highest level since March 2008 and the first time it has crossed the 50-mark that separates growth from contraction since April 2008, a survey by Markit and the Chartered Institute of Purchasing and Supply showed.

The unexpected increase in the service PMI also propelled the composite PMI, which includes Britain's harder-hit manufacturing and construction industries, into growth territory for the first time since March 2008, and pushed sterling to a 6-month high versus the euro.

Positive housing data, inflation risk

There was another piece of good economic news in the US on Tuesday. Bloomberg reports:

The number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, more than forecast and the fourth increase in five months, as lower prices attracted buyers.

The gain in the index of signed purchase agreements, or pending home resales, was the biggest in more than seven years and followed a 3.2 percent increase in March, the National Association of Realtors said today in Washington. The April reading was up 3.2 percent from the same month a year earlier.

The UK housing market also appears to be getting better. Telegraph reports:

Bank of England figures showed mortgage approvals rose for the fourth month out of the last five to a one-year high of 43,201. That was higher than the 41,000 expected and an increase of 3,163 compared with March...

Separately the latest construction Purchasing Managers' Index (PMI) showed that housing output and orders showed a sharp improvement in May...

Housing activity jumped to 48.5 on the PMI from 33.7 in April... It was the highest level since November 2007...

Output and orders in construction overall rose to 45.9 in May, the highest since last April and up from 38.1 the month before.

If housing markets are improving, there is hope for some sort of economic recovery in the not-too-distant future.

And that in turn means that it may be time to start looking at inflation risk again. Indeed, Paul Kasriel thinks that inflation is the bigger risk over the next five years, not deflation.

... [E]ven with relatively large output gaps in the near term, other factors point to, at least, continued inflation in the neighborhood of what has been experienced in recent years rather than persistently very low inflation or outright deflation. With the reversal of...secular disinflationary factors in combination with cyclical factors such as relatively high money growth and the potential for a depreciating U.S. dollar, it seems to me that over the next five years inflation rather than deflation is the greater risk.

Global stocks surge as manufacturing shows signs of recovery

It looks like financial markets are all ready to welcome the global economic recovery. From Bloomberg:

The S&P 500 surged 2.6 percent to 942.87 at 4:08 p.m. in New York, its highest close since Nov. 5. The Dow rose 221.11 points, or 2.6 percent, to 8,721.44, the highest since Jan. 8. Almost nine stocks climbed for each that fell on the New York Stock Exchange.

Europe’s benchmark Dow Jones Stoxx 600 jumped 2.9 percent, the biggest gain in two months, and the MSCI Asia Pacific Index advanced 1.9 percent to the highest since October. The MSCI Emerging Markets Index, up 61 percent the past three months, posted the steepest advance in almost a month with a 3.7 percent climb...

U.S. bonds dropped, driving the yield on the benchmark 10- year note 20 basis points higher to 3.67 percent, the steepest increase in eight months.

Economic reports provided good reasons to cheer. Bloomberg reports the US data.

Manufacturing in the U.S. shrank less than forecast in May, spurred by the first gain in new orders since the recession began, a sign companies are increasingly confident the slump will end this year...

The Institute for Supply Management’s factory index rose to 42.8, the highest level since September, from 40.1 in April; readings of less than 50 signal a contraction. Consumer spending fell 0.1 percent in April and the savings rate rose to 5.7 percent, spurred by an unexpected jump in incomes linked to the fiscal stimulus, Commerce figures showed...

... Spending on construction unexpectedly rose in April, led by gains in residential and commercial building, Commerce also reported. The 0.8 percent gain was the biggest since August and followed a revised 0.4 percent increase the prior month.

Europe's manufacturing sector is also showing signs of improvement. Bloomberg reports:

Europe’s manufacturing industry contracted at the slowest pace in seven months in May, adding to signs that the worst may be over.

A gauge of manufacturing activity rose to 40.7 from 36.8 in April, Markit Economics said today. That was the biggest increase since the survey started in 1997 and compared with the initial estimate of 40.5 published on May 21...

And the same story is told for the UK by Reuters.

The manufacturing PMI rose to 45.4 last month from an upwardly revised 43.1 in April, beating the consensus forecast of 44.0, but is unlikely to alter expectations that interest rates will stay at record lows for some time to come.

That marked the third consecutive month of improvement in the headline index, which has been below the 50 level which separates expansion from contraction for more than a year.

Friday had shown that the Nomura/JMMA Japan Manufacturing Purchasing Managers Index rose to 46.6 in May from 41.4 in April.

But it was China that really sparked the markets on Monday by reporting another month of manufacturing expansion. From Reuters:

China's manufacturing sector continued to expand moderately in May as new export orders improved, two surveys showed on Monday, adding to tentative signs that the world's third-largest economy is stabilising...

The official purchasing managers' index (PMI) fell slightly to 53.1 from 53.5 in April, its third straight month above the mark of 50 that separates expansion from contraction.

A separate PMI published by Hong Kong-based brokerage CLSA rose to a 10-month high of 51.2 from 50.1 in April, its second month above 50.

Friday's economic reports mostly positive

AFP/CNA reports that Japanese industrial output surged in April.

Factory output in April rose 5.2 per cent on the previous month, the fastest monthly jump in more than half a century and far above market expectations for an increase of around 3.3 per cent, the trade ministry said...

Manufacturers forecast that output may rise 8.8 per cent in May and 2.7 per cent in June, raising hopes for a rebound in Asia's biggest economy.

Other data on Japan weren't so positive though.

Japan's seasonally adjusted unemployment rate rose to 5.0 per cent in April from 4.8 per cent in March - the highest since November 2003, said the Ministry of Internal Affairs and Communications...

Separate data showed there were only 46 job offers for every 100 job seekers - matching the worst ever figure in June 1999.

Average monthly household spending dropped by 1.3 per cent in real terms in April from a year earlier, falling for the 14th consecutive month...

Japan's core consumer prices fell 0.1 per cent in April from a year earlier after a 0.1 per cent drop in March, which was the first fall in 18 months.

Meanwhile, India appears to be shrugging off the global economic recession, its GDP growing 5.8 percent in the three months to March, beating forecasts of 5.0 per cent growth.

In Europe, the data were also generally positive. Eurozone inflation fell to zero in May but German retail sales rose 0.5 percent in April and UK house prices rose 1.2 percent in May.

There was also good news from the US. Bloomberg reports:

Confidence among U.S. consumers rose this month to the highest level since September...

The Reuters/University of Michigan final index of consumer sentiment increased to 68.7, higher than anticipated, from 65.1 in April...

And first quarter GDP has been revised upward.

The Commerce Department also reported today that the economy shrank at a 5.7 percent pace in the first quarter, less than the government estimated last month. Following the 6.3 percent pace of decline in the last three months of 2008, the drop capped the worst six-month performance in five decades.

But a regional report turned down in May.

... The Institute for Supply Management-Chicago Inc. said its business barometer decreased to 34.9 from 40.1 in April; readings below 50 signal a contraction...

Still, the outlook is clearly brightening. From Reuters:

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index ticked up to a 30-week high of 111.9 for the week ending May 22 from 111.0 the prior week, which was revised lower from 111.1.

The index's annualized growth rate surged to a 43-week high of negative 9.3 percent from last week's rate of negative 11.5 percent.

US durable goods orders rise, eurozone confidence at 6-month high

Evidence of a bottoming in the US economy continues to accumulate. From Bloomberg:

Durable-goods orders hovered near a 13-year low and the number of Americans collecting unemployment insurance reached a 17th straight record, offering no sign of an imminent rebound from the worst U.S. recession in half a century.

Orders rose 1.9 percent in April after a 2.1 percent drop in March that was more than twice as large as previously estimated, the Commerce Department said in Washington. Meanwhile, the Labor Department said 6.79 million people are collecting jobless benefits...

Sales of new houses increased 0.3 percent in April to an annual pace of 352,000, Commerce also reported...

The data from Europe are also getting better. From Bloomberg:

An index of executive and consumer sentiment in the 16 nations that use the euro increased to 69.3 from 67.2 in April, the European Commission in Brussels said today. The May reading was the highest since November and was above the median estimate of 69 in a Bloomberg survey of 26 economists. Consumers’ price expectations, which turned negative for the first time on record last month, fell to the lowest since at least 1990.

US existing home sales, Japanese exports and French confidence rise

Wednesday provided a bit more hope that the US housing slump is easing. From Bloomberg:

Home resales in the U.S. rose for the second time in three months in April as foreclosure auctions and cheaper prices spurred bargain hunters, buttressing the case for an end to the industry’s slump this year.

Purchases increased 2.9 percent to an annual rate of 4.68 million, in line with forecasts, from 4.55 million in March, National Association of Realtors figures showed in Washington. The median price slumped 15 percent from a year earlier, the second-biggest drop on record. A separate report indicated that the slump in home values eased in the first quarter.

Meanwhile, Japan's export slump may be at an end. From Bloomberg:

Japan’s export slump moderated in April, helping the country post an unexpected trade surplus and adding to signs the worst recession since World War II is easing.

Shipments abroad fell 39.1 percent from a year earlier, after dropping 45.5 percent in March and a record 49.4 percent in February, the Finance Ministry said today in Tokyo. From a month earlier, exports rose 1.9 percent, a second straight gain.

And confidence is rising in several major European economies. Again from Bloomberg:

French consumer and manufacturer confidence rose in May and optimism among Italian executives held at the highest in more than year on expectations the worst of the recession is over.

French manufacturing confidence gained for a second month, while consumer optimism advanced to highest in 13 months, Insee, the national statistics office said. In Italy, household confidence matched the April reading, the highest since December 2007, the country’s national statistics institute reported.

German business, US consumer confidence improve

The latest economic data continue to show a weak global economy that is gradually improving.

Eurozone industrial orders fell 0.8 percent in March and Germany confirmed a dramatic 3.8 percent contraction in GDP in the first quarter.

However, German consumer confidence held steady in June while business confidence improved in May, the IFO index rising for a second month to 84.2 from 83.7 in April.

Meanwhile French consumer spending on manufactured goods increased 0.7 percent in March.

And US consumer spending also looks likely to hold up better than previously expected. From Bloomberg:

Confidence among U.S. consumers jumped in May by the most in six years, fueling speculation the economy will recover later this year.

The Conference Board’s sentiment index surged to 54.9, higher than forecast, according to figures from the New York- based research group today...

The 28-point jump in confidence over April and May is the biggest two-month rally since records began in 1967. The measure reached its lowest point ever in February, with a reading of 25.3.

On a more negative note, however, US home prices continued to decline in March.

... A report from S&P/Case-Shiller today showed home prices in 20 U.S. metropolitan areas fell a more-than-forecast 18.7 percent in March from the same month last year, as foreclosures surged.

The better consumer confidence though was enough to drive US stocks up for the first time in five sessions. The S&P 500 jumped 2.6 percent on Tuesday.

Good news from Japan and China

The Bank of Japan reported on Friday that the recession is easing. AFP/CNA reports:

Japan's worst post-war recession appears to be easing, the central bank said Friday, upgrading its assessment of the world's number two economy for the first time in almost three years...

"Economic conditions have been deteriorating, but exports and production are beginning to level out," it said in a statement.

"Going forward, although domestic private demand is likely to continue to weaken, exports and production, after levelling out, are expected to start recovering and public investment to increase.

"Therefore, the pace of deterioration in economic conditions is likely to moderate gradually, leading to a levelling out of the economy," it said.

The BoJ also left interest rates unchanged.

The Bank of Japan (BoJ) also left its key interest rate unchanged at 0.1 per cent at a two-day meeting, as widely expected.

And it expanded the type of debt it will accept from banks in return for emergency funds to include bonds issued by the governments of the United States, Britain, Germany, and France.

There is also some optimism from China. From AFP/CNA:

China said industrial output is expected to rise eight per cent in the second quarter and exceed ten per cent in the second half of the year as stimulus measures kick in.

The Ministry of Industry and Information Technology forecast the second quarter would post a jump from the 15-year low of 5.1 per cent growth seen in the first three months of the year.

"The overall situation in both heavy and light industries is turning positive," the ministry said in a report on its website.

US leading index and eurozone PMIs rise

The US economy continues to show increasing signs of an end to the recession. Bloomberg reports:

The index of U.S. leading economic indicators rose more than forecast and a manufacturing gauge improved in signs the deepest recession in five decades could end later this year.

The Conference Board’s leading gauge increased 1 percent in April, the biggest gain since November 2005, the New York-based group said today. The index points to the direction of the economy over the next three to six months...

For the first time since the recession started in December 2007, the change in the leading index over the last six months, on an annualized basis, surpassed the year-over-year measure as both improved. That also happened before the end of the previous two recessions.

The factory industry’s contraction in the Philadelphia region slowed as shipments and employment improved, the Federal Reserve Bank of Philadelphia said in its report...

The Philadelphia Fed’s general economic index climbed to minus 22.6 this month from minus 24.4 in April, the bank said today. Negative numbers signal contraction...

Initial jobless claims fell by 12,000 to 631,000 in the week ended May 16, from a revised 643,000 the prior week that was higher than initially estimated, the Labor Department said today in Washington. The total number of people collecting benefits rose to 6.66 million, a record reading for a 16th straight week, and a sign companies are still not hiring.

Europe also revealed signs of improvement on Thursday. The Markit flash euro-zone composite PMI rose to an eight-month high of 43.9 in May from 41.1 in April. The services index rose to 44.7 from 43.8 in April and the manufacturing index rose to 40.5 from 36.8.

In the UK, retail sales reportedly rose 0.9 percent in April. On the downside, however, bank lending and business investment fell.

Japanese economy suffers record contraction

Japan's economy fell at a record rate in the first quarter of this year. Bloomberg reports:

Japan’s economy shrank by a record last quarter as exports collapsed and consumers and businesses slashed spending, a decline that probably marked the low point in the country’s worst recession since World War II.

Gross domestic product fell an annualized 15.2 percent in the three months ended March 31, following a revised fourth- quarter drop of 14.4 percent, the Cabinet Office said... The economy contracted 3.5 percent in the year ended March 31, the most since records began in 1955...

GDP fell 4 percent on a non-annualized basis...

Weaker domestic demand was the biggest contributor to the decline, shaving 2.6 percentage points off GDP, the most since 1974. Net exports -- the difference between exports and imports -- was responsible for 1.4 percentage points of the drop.

But the economy could already be stabilising.

Still, reports in the past month suggest the world’s second-largest economy may grow for the first time in a year this quarter, albeit from a low point, as exports stabilize and Prime Minister Taro Aso’s 15.4 trillion yen stimulus plan, announced in April, takes effect.

See also my post on Monday.

US housing starts fall but confidence improves

US housing starts fell to a record low in April. Bloomberg reports:

Housing starts unexpectedly slid 13 percent to an annual rate of 458,000, led by a 46 percent tumble in multifamily starts, which tend to be more volatile, Commerce Department figures showed in Washington. Building permits, a sign of future construction, fell 3.3 percent to a record low of 494,000.

But there was good news in the underlying data.

Construction of single-family homes rose 2.8 percent to a 368,000 rate, today’s report showed, the second straight monthly gain. Work on multifamily homes, such as townhouses and apartment buildings, plummeted to an annual rate of 90,000 from 167,000 the month before.

The rise in single-family home construction looks more consistent with Monday's report from the NAHB. From Bloomberg:

Confidence among U.S. homebuilders in May increased to the highest level since September, providing further evidence that the housing slump that started in 2006 may be closer to a floor.

The National Association of Home Builders/Wells Fargo index of builder confidence rose to 16 from 14 the prior month, the Washington-based NAHB said today, capping the first back-to-back gain since February 2008...

Another confidence index, this time of German investors, also improved in April. Bloomberg reports:

German investor confidence rose more than economists forecast to a three-year high in May after stock markets rallied and data signaled the worst of the recession may have passed.

The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, increased to 31.1 from 13 in April. Economists expected a jump to 20, according to the median of 35 forecasts in a Bloomberg News survey.

Worst looks over for Japanese economy

Japan's economy contracted dramatically in the fourth quarter of 2008 and the first quarter of 2009 but recent reports indicate that the economy may have seen the worst.

The Japanese economy contracted 3.2 percent in the last quarter of 2008 and is estimated by economists to have contracted over 4 percent in the first quarter of 2009.

Reports from last week and today indicate that the economy has performed somewhat better since.

Last week, the Cabinet Office reported that it composite coincident index of business conditions fell to 84.9 in March from 85.2 in February, the smallest decline in eight months. Even better, the leading index rose to 76.6 in March from 74.5 in February, indicating a possible rebound in the near future.

Another report from the Cabinet Office based on the economy watchers survey showed that workers in economically-sensitive jobs have become more confident about the economy. The survey's diffusion index for current conditions rose to 34.2 in April from 28.4 in March. The diffusion index for future conditions rose to 39.7 in April from 35.8 in March. Both indices are now well off their lows of 15.9 and 17.6 respectively hit in December last year.

Today, we learn that Japanese consumers have also become more confident. The Cabinet Office reported today that its consumer confidence index rose to 32.4 in April from 28.9 in March. Based on the index, Japanese consumer sentiment last month was at its highest level in 10 months, having rebounded from a low of 26.2 in December.

So it is quite clear that the Japanese economy is stabilising. It now remains to be seen whether the improvement can develop into a sustained recovery.

Decline in US industrial production slows

After some disappointments in economic reports earlier in the week, Friday's US data turned out better. Bloomberg reports:

Industrial production contracted the least since October last month and New York’s manufacturing slump eased further in May, signaling the recession’s grip is loosening.

Output at U.S. factories, mines and utilities decreased 0.5 percent last month, less than forecast, after dropping 1.7 percent in March, Federal Reserve figures showed today in Washington. The New York Fed’s Empire state manufacturing index rose to minus 4.6, also beating economists’ estimates...

Consumer sentiment improved for a third straight month in May, a private survey showed. The Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.9 from 65.1 in April. The index reached a three-decade low of 55.3 in November.

Still, the second quarter GDP estimate by Macroeconomic Advisers has now been revised downward. From Real Time Economics:

According to Macroeconomic Advisers‘ GDP tracking estimate, second quarter GDP was on pace to decline just 0.5%, at an annual rate, as recently as Tuesday...

On Friday, following release of April industrial production figures showing lower-than expected vehicle assemblies, second quarter GDP is tracking a 1.3% decline, according to Macroeconomic Advisers.

Economic indicators take a negative turn

James Hamilton looked at the latest US economic indicators and asked "Where's my recovery, dude?"

[T]he Labor Department reported today that seasonally adjusted new claims for unemployment insurance rose by 32,000 for the most recent available week. That bumps the 4-week average to 630,000, up 6,000 from its value the previous week...

Well, if recovery cannot be discerned from the latest US data, it's not apparent in today's European GDP report either. From Bloomberg:

Europe’s economy contracted at a record pace in the first quarter as companies cut output and jobs to survive the worst global slump in more than six decades.

Gross domestic product in the 16-member euro region dropped 2.5 percent from the fourth quarter, when it fell 1.6 percent, the European Union’s statistics office in Luxembourg said today. That’s the biggest drop since the euro-area GDP data were first compiled in 1995 and exceeded the 2 percent decline economists expected in a Bloomberg News survey. Inflation held at 0.6 percent in April, a separate report showed.

And while there had been some better numbers from Japan earlier in the week, today's machinery orders report suggests that its economy is likely to continue to struggle. From AFP/CNA:

Japan's core machinery orders, a leading indicator of corporate capital spending, fell by a smaller-than-expected 1.3 per cent in March from the previous month, official data showed on Friday...

The data also showed core machinery orders dropped 9.9 per cent in the three months to March compared with the previous quarter.

Mixed data on global economic recovery

Good news continued to come out of Asia on Wednesday.

Japan reported a further improvement in merchant sentiment in April, according to Bloomberg.

Confidence among Japanese merchants rose to a 12-month high in April, signaling a recession in the world’s second-largest economy may be easing.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 34.2 from 28.4 in March, the third biggest jump on record, the Cabinet Office said today in Tokyo.

There were also positive numbers coming out of China.

China’s industrial production grew less than economists estimated in April as electricity output fell and exports tumbled. Retail sales climbed.

Output rose 7.3 percent from a year earlier, the statistics bureau said today, after gaining 8.3 percent in March. That was less than the 8.6 percent median estimate of 20 economists surveyed by Bloomberg News. Retail sales grew 14.8 percent.

However, the economic reports were gloomier elsewhere.

In the euro area, industrial production fell the most on record in March.

Production in the euro region plunged 20.2 percent from a year earlier, the biggest drop since the data series started in 1986, the European Union’s statistics office in Luxembourg said today. The March decline, which followed a 19.1 percent drop in February, was steeper than the 17.6 percent fall economists expected, according to the median of 17 estimates in a Bloomberg survey. From the previous month, output declined 2 percent.

And US retail sales took another step back in April.

Retail sales in the U.S. unexpectedly dropped in April for a second month, indicating that rising unemployment is prompting consumers to conserve cash.

The 0.4 percent decrease followed a revised 1.3 percent drop in March that was larger than previously estimated, the Commerce Department said today in Washington. Other reports showed companies continued to cut stockpiles as demand slowed, and climbing oil costs pushed up prices for imported goods.

US trade deficit widens, UK sees signs of stabilisation

The US trade deficit widened in March. Reuters reports:

The U.S. trade gap widened in March for the first time in eight months, as oil imports jumped and weak overseas demand took a bite out of exports.

The trade gap grew to $27.6 billion in March, the U.S. Commerce Department reported on Tuesday, after shrinking in each of the previous seven months and hitting its lowest level in nine years in February...

U.S. exports tumbled in March to $123.6 billion, after rising for one month in February. The March downturn resumed a trend dating back to July.

There is a positive side to the report.

However, in a sign the U.S. economy could be nearing a turnaround, imports declined at a slower rate, down 1 percent in March compared with a 5.1 percent drop in February and even bigger declines in some preceding months.

The deficit also was smaller than the U.S. government expected when it reported U.S. economic output contracted 6.1 percent in the first quarter.

"Taking account of all information presently available, it is likely that the Q1 GDP decline will be revised from 6.1 percent to 5.7 percent," said Nigel Gault, chief economist at IHS Global Insight.

Reports from the UK also offered some hope for improvement in its economy. Reuters reports:

Manufacturing output recorded its smallest monthly fall in more than a year in March, pointing to a possible end in prospect for the sector's contraction after the worst calendar quarter since records began.

Leading economic think-tank NIESR said there were signs the economy stabilised in April, which along with news of a jump in retail sales and a marked slowdown in house price falls, boosted hopes Britain may be starting to emerge from recession.

Asia bottoming?

The economic reports out from Asia today boost hope that the worst is over.

In Japan, the leading index rose in March, Bloomberg reports.

Japan’s deepest recession since 1945 may be abating, the nation’s broadest indicator of the outlook for the economy showed.

The leading index, a composite of 12 statistics including production, consumer confidence and stock prices, rose to 76.6 in March from a revised 74.5 in February, the first advance in six months, the Cabinet Office said in Tokyo today. The median estimate of 14 economists surveyed by Bloomberg News was for 77.

Bloomberg also reports some positive news from China.

China’s investment in factories and property surged by more than economists forecast in response to the government’s 4 trillion yuan ($586 billion) stimulus package, countering a deepening slump in exports.

Urban fixed-asset investment climbed 30.5 percent in the four months to the end of April from a year earlier, from 28.6 percent in the first three months, the statistics bureau said today in Beijing. Overseas shipments declined 22.6 percent in April from a year earlier, the customs bureau said...

Imports dropped 23 percent, leaving a trade surplus of $13.14 billion, less than the previous month and a year earlier.

Seasonally adjusted exports rose 6.9 percent from the previous month, the customs bureau said.

Stress tests for banks over, stocks next?

The stress tests conducted by federal regulators on banks in the United States have been completed and the results gave the stock market little reason to stop its recent positive run. Still, neither the economy nor the stock market is necessarily out of the woods yet.

On May 7, the Federal Reserve announced that 10 of the 19 banks examined would need to raise US$75 billion by November based on stress tests conducted under the Supervisory Capital Assessment Program. This is less than what many analysts had feared.

The relatively benign conclusion of the stress tests comes in the midst of a stream of better-looking economic data and reinforces the view that the US economic outlook is improving. For example, on Friday, the Labor Department reported that the US economy lost 539,000 jobs in April, the lowest rate of job loss since October. In addition, the Institute for Supply Management's indices for manufacturing and non-manufacturing activities both increased in April.

Investors certainly appear to be happy with the results of the stress tests. Financial shares led US stocks up on Friday, the day after the announcement of the results. The Dow Jones Industrial Average closed at 8,574.65 for a 2.0 percent gain for the day and a 4.4 percent gain for the week. The Dow Jones is now down only 2.3 percent since the start of the year, helped by the hefty 31.0 percent rally since 9 March. The latter seems to suggest that investors are expecting something like a V-shaped recovery.

Not everyone is sanguine though.

In an article in the Wall Street Journal entitled "We Can't Subsidize the Banks Forever" on 5 May, Matthew Richardson and Nouriel Roubini, professors at New York University's Stern School of Business, wrote that the stress tests "will not mark the beginning of the end of the financial crisis" because the estimates of the losses on US loans and securities by the International Monetary Fund and RGE Monitor imply that "the financial system is currently near insolvency in the aggregate".

Furthermore, the so-called stress tests might not have accounted for a sufficiently adverse economic scenario. "For example, the first quarter's unemployment rate of 8.1% is higher than the regulators' 'worst case' scenario of 7.9% for this same period," they wrote. "At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010."

Paul Krugman, who won the Nobel Prize for Economics last year, is also not optimistic. In his 7 May New York Times article "Stressing the Positive", he wrote that "the odds are that the financial system won’t function normally until the crucial players get much stronger financially than they are now". However, he thinks that the US government will not do anything dramatic to recapitalise the banks and will instead hope that the banks can earn their way back to health.

The risk is that this strategy "will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth".

Indeed, the experience from Japan shows us that the recent rally in the US stock market is not really unusual in the context of a secular bear market.

Ambrose Evans-Pritchard wrote an article for the Telegraph on 10 May, and his message is clear from the title, "Enjoy the rally while it lasts - but expect to take a sucker punch".

"Bear market rallies can be explosive," he wrote. "Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average."

There is much debate over whether the US economy would fare as badly as Japan and experience its own "Lost Decade". The US does have one advantage over the latter that is not often mentioned: its demographics is not as unfavourable as Japan's was. Japan's population barely grew throughout the 1990s, a situation that was not conducive to economic growth.

Still, as the accompanying chart shows, even within the first three years of the bear market in Japan, the Nikkei 225 index experienced a wild ride. The fluctuations in the US stock market today have been sharper, especially in the past year or so. However, in terms of the magnitudes of the moves -- including that of the latest rally -- they have so far been comparable with Japan's in the early 1990s (for a chart comparing the present US bear market with that during the Great Depression, see "Bear market rallies").

So big stock market rallies are not proof of an impending recovery and the bank stress tests are not proof of a healthy financial system. The latest market rally may have been impressive but it remains vulnerable to an adverse turn in financial and economic conditions.

Stock market investors relieved over the bank stress test results may yet face more tests of their own in the market.

Economic data keep getting better

Bloomberg reports April US employment data.

Payrolls in the U.S. shrank last month by the least since October as employers detected signs the worst of the recession had passed and government hiring stepped up for the country’s next census.

Payrolls fell by 539,000, after a 699,000 loss in March, while the unemployment rate rose to 8.9 percent, the highest level since 1983, the Labor Department said today in Washington. The Commerce Department separately said that wholesalers reduced their supply of unsold goods for a seventh month in March...

Revisions subtracted 66,000 from payroll figures previously reported for March and February.

Meanwhile, Canada reported on Friday that its economy actually added jobs in April.

Canada’s economy produced new jobs for the first time in six months in April as workers facing the first recession since 1992 created positions for themselves.

A net 35,900 people found work during the month and the jobless rate stayed at 8 percent, the highest in seven years, Statistics Canada said today in Ottawa...

The day's data weren't all positive for Canada though, as housing starts in April fell to 117,400 units on an annualised basis compared with a revised 146,500 in March.

Still, nowadays, good news is not hard to find, and the recent economic data for Germany look quite good. Reports on Friday showed that industrial production held steady in March and exports actually rose 0.7 percent. And the improvement could persist as a report on Thursday had shown that manufacturing orders jumped 3.3 percent in March.

Stocks, bonds fall despite US bank test results and ECB move

The much-awaited bank stress test results came out on Thursday. Investors apparently decided to sell on the news. Bloomberg reports:

U.S. stocks slid from a four-month high as declines in financial, telephone and technology shares snuffed out an early rally...

The S&P 500, which has risen 34 percent from a 12-year-low in March, slid 1.3 percent to 907.39 at 4:06 p.m. in New York. The Dow Jones Industrial Average decreased 102.43 points, or 1.2 percent, to 8,409.85... Three stocks fell for each rising on the New York Stock Exchange.

Bonds didn't gain from the stock sell-off.

Treasury 30-year bonds fell the most since February as investors demanded higher-than-forecast yields at today’s auction of $14 billion of the securities with the U.S. slated to sell a record amount of debt this year...

The benchmark 30-year bond yield climbed 18 basis points, or 0.18 percentage point, the most since Feb. 3, to 4.27 percent at 3:58 p.m. in New York, according to BGCantor Market data. The 3.5 percent security due in February 2039 dropped 2 3/4, or $27.50 per $1,000 face amount, to 87 1/8.

The 10-year note yield increased 12 basis points to 3.31 percent, the most in a day since gaining 15 basis points on March 10.

Meanwhile, there were important developments elsewhere in the financial world too.

While the Bank of England left interest rates unchanged on Thursday, the European Central Bank cut rates and announced a surprise bond purchase programme. Bloomberg reports:

Jean-Claude Trichet has dragged the European Central Bank into a new era by pursuing direct asset purchases over the objections of Germany’s Bundesbank.

President Trichet yesterday announced the ECB will buy 60 billion euros ($80 billion) of covered bonds, taking markets by surprise after Bundesbank chief Axel Weber had campaigned against such a policy...

... While the bank yesterday cut the rate by a quarter point to 1 percent and called that “appropriate,” Trichet said it is not necessarily at its lowest level. All of the decisions were “unanimous,” Trichet added.

Despite the ECB move, European stocks could not sustain their recent rally. From Bloomberg:

European stocks fell for the first time in six days as Barclays Plc and Lloyds Banking Group Plc said bad loans may soar this year, overshadowing a rally by food and beverage companies...

The Dow Jones Stoxx 600 Index declined 0.8 percent to 206.29. The European benchmark has still rebounded 31 percent since March 9 on optimism the U.S. government’s plan to finance the purchase of illiquid assets from banks will help to pull the global economy out of its first recession since World War II.

US loses fewer jobs, European services sector improve

Reports on Wednesday continued to show that the recession is easing.

In the US, ADP data indicate that the worst of the recession’s employment losses may have passed. From Bloomberg:

Payrolls fell by an estimated 491,000 workers last month, less than economists forecast and the fewest since October, figures from ADP Employer Services today showed. March’s reading was revised to show a reduction of 708,000 workers, down from a previous estimate of 742,000...

Another report today also reflected a weak labor market. Job cuts announced by U.S. employers rose 47 percent in April from a year earlier to 132,590, led by planned cutbacks at government and non-profit agencies and automotive companies, Chicago-based placement firm Challenger, Gray & Christmas Inc. said.

In the euro area, retail sales fell 4.2 percent from a year earlier in March but the services activity index rose in April, as Bloomberg reports:

Europe’s service industries contracted at the slowest pace in six months in April, suggesting the region’s worst recession since World War II is easing.

A gauge of activity rose to 43.8 from 40.9 in March and a record low of 39.2 in February. That’s better than an initial estimate of 43.1 published on April 23. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates contraction.

The picture is similar in the UK. From Reuters:

The latest PMI survey by CIPS/Markit showed activity in the services sector, which accounts for three-quarters of the economy, shrank at its slowest pace since last August.

The headline activity index rose to 48.7 in April from 45.5 in March, the biggest one-month rise in a decade, leaving it only a tad below the 50-mark that would indicate growth.

Crucially, new business levels also contracted at a much slower pace and companies were their most upbeat in almost a year about the business outlook.

Mortgage lender Nationwide said consumer morale improved at its fastest pace in two years last month as people sensed the worst of recession may have passed.

And the REC/KPMG report on jobs showed the decline in permanent job placements eased to its slowest in seven months, while wages also fell at a slower pace in April.

Meanwhile, further monetary policy easing will likely help underpin an eventual economic recovery. On Tuesday, Indonesia's central bank cut interest rates, while Wednesday saw central banks from Romania and Norway do the same.

ISM non-manufacturing index rises in April

US service industries joined their manufacturing counterparts in showing improvement in April. From Bloomberg:

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 43.7 from 40.8 the prior month, according to the Tempe, Arizona-based group. Readings below 50 signal contraction...

Real estate, retail and finance companies were three of the seven service industries that expanded last month, according to the ISM report. Eleven industries continued to contract, led by management, agriculture and construction firms...

The ISM non-manufacturing industries index of employment rose to 37 from 32.3 the prior month, and its gauge of new orders climbed to 47, the highest level since September, from 38.8 in March.

The improving data flow recently has boosted confidence among CEOs.

An index of confidence among U.S. chief executive officers climbed in April to 50, the highest level since early 2006, from 25.9 in January, as more company leaders believed the recession will ease, a Business Council survey showed today.

Fed chairman Ben Bernanke largely shares that optimism but is wary of a relapse in the financial system.

“A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall,” Bernanke said today in testimony to the congressional Joint Economic Committee. He highlighted that the economic contraction may be slowing and that the housing market has “shown some signs of bottoming” after a three-year slump.

Eurozone economy to contract 4 percent

The European Commission has cut its forecast for the eurozone economy. Bloomberg reports:

The economy of the 16 countries sharing the euro will shrink 4 percent in 2009 and 0.1 percent in 2010, the European Commission, the EU executive in Brussels, said today, revising a January estimate for a contraction of 1.9 percent this year. The region’s average budget deficit will swell to 6.5 percent of output next year, when unemployment will rise to 11.5 percent, the commission said...

Euro-area inflation will slow to 0.4 percent this year before accelerating to 1.2 percent in 2010, the commission projected. That follows a report from the commission last week showing consumers expect prices to decline over the next 12 months, the first time the price-outlook gauge has been negative since at least 1990.

However, this downward revision in the forecast comes at a time when reports are showing that the worst may already be over. For example, Bloomberg reports that the contraction in manufacturing is easing.

The recession in Europe’s manufacturing industry eased for a second in April, suggesting the worst may be over.

A gauge of manufacturing activity rose to 36.8, a six-month high, from 33.9 in March. That was slightly better than the initial estimate of 36.7 published on April 23. The index is based on a survey of purchasing managers by Markit Economics and a reading below 50 indicates contraction.

And the US is already reporting some positive economic data. Again from Bloomberg:

Pending sales of U.S. existing homes posted their first back-to-back gain in almost a year in March and construction spending ended a six-month slide, spurring a rally in stocks.

The number of Americans signing contracts to buy previously owned homes jumped 3.2 percent after a 2 percent gain in February, the National Association of Realtors said today in Washington. Construction unexpectedly rose 0.3 percent as gains in commercial and government projects overshadowed a continued drop in homebuilding, Commerce Department data showed.

Chinese manufacturing expands, Asian stocks jump

There was confirmation today of a rebound in China's manufacturing sector. From Bloomberg:

China’s manufacturing expanded for the first time in nine months after declines in export orders moderated and investment surged because of the government’s 4 trillion yuan ($586 billion) stimulus package.

The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 50.1 in April from 44.8 in March, CLSA Asia- Pacific Markets said today in an e-mailed statement. A reading above 50 indicates an expansion.

An official manufacturing index released on May 1 also showed growth, adding to signs that China’s economic recovery is gaining pace and global demand is stabilizing. The Shanghai Composite Index closed 3.3 percent higher, extending its increase this year to 41 percent, and Hong Kong’s Hang Seng Index jumped 5.5 percent.

Other stock markets in the Asia-Pacific region also rose strongly today, according to another Bloomberg report.

The MSCI Asia Pacific excluding Japan Index jumped 4.9 percent to 295.11 as of 6:42 p.m. in Hong Kong, the highest since Oct. 3. The measure has gained 19 percent this year amid speculation the worst of the global recession is over. It sank by a record 53 percent in 2008. Japan’s stock market is closed for a three-day holiday.

Australia’s S&P/ASX 200 Index gained 3 percent. Hong Kong’s Hang Seng Index climbed 5.5 percent even as a 25-year-old Mexican was confirmed as the city’s first swine flu patient. Taiwan’s Taiex index jumped 5.6 percent after Goldman Sachs raised its recommendation on the island’s equities to “overweight.” All markets in Asia advanced.

Manufacturing improves

The pattern of improving global economic data continued on Friday, with manufacturing being an important contributor.

Bloomberg reports the US data.

Measures of U.S. manufacturing and consumer confidence last month unexpectedly jumped to their highest levels since the credit crisis intensified in September, indicating the economy is on the mend.

The Institute for Supply Management’s factory index rose to 40.1 from 36.3 in March; readings less than 50 signal a contraction. The Reuters/University of Michigan final index of consumer sentiment jumped by the most in more than two years, climbing to 65.1...

A separate report from the Commerce Department showed factory orders dipped in March after a February gain, suggesting any manufacturing recovery is likely to be gradual.

UK manufacturing has also improved, as Reuters reports:

The manufacturing sector contracted at its slowest pace in 8 months in April, as the weak pound helped support new orders, a survey showed on Friday.

The CIPS/Markit manufacturing purchasing managers' index improved to 42.9 in April from an upwardly revised 39.5 in March. Analysts had expected a more modest improvement to 40.0.

And Chinese manufacturing activity expanded at a faster pace in April. Bloomberg reports:

China’s manufacturing expanded for a second month as government stimulus spending stoked a fledgling recovery in the world’s third-biggest economy.

The Purchasing Manager’s Index rose to a seasonally adjusted 53.5 in April from 52.4 in March, the Federation of Logistics and Purchasing said...

A recovering Chinese economy could pull up the rest of Asia.

Stronger Chinese demand is helping exporting nations across Asia, where South Korea reported today a 9 percent gain in shipments in April from the previous month...

Singapore’s shipments to China jumped 29 percent in March from February, and those from Japan, South Korea and Taiwan also increased...