There were some positive economic reports from Japan and Germany on Monday.
From Japan, Bloomberg reports improving confidence among merchants.
Confidence among Japanese merchants rose to the highest level in five months in February, a sign consumers are starting to benefit from the economic recovery.
The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 42.1 from 38.8 in the previous month, the Cabinet Office said today in Tokyo. It was the third consecutive advance.
Other reports from Japan were also mostly positive. From Bloomberg:
Japanese corporate bankruptcies fell for a seventh month in February as emergency government programs helped companies stay afloat.
Business failures slid 17.3 percent from a year earlier to 1,090 cases, Tokyo Shoko Research Ltd. said in Tokyo today, extending the longest streak of declines since 2005...
A global trade revival and stimulus spending has fueled Japan’s recovery from its worst postwar recession. Exports surged 40.6 percent in January from a year earlier, helping the country post an 899.8 billion yen current-account surplus, Finance Ministry figures showed today...
A separate report today showed bank lending declined for a third consecutive month as companies cut spending. Loans, excluding those by credit associations, dropped 1.6 percent last month from a year earlier, the Bank of Japan said.
There was also good news in Germany on Monday as industrial production rebounded in January. Again from Bloomberg:
German industrial production rose in January as energy output surged during the cold winter, helping to offset a collapse in construction activity.
Production rose 0.6 percent from December, when it fell 1 percent, the Economy Ministry in Berlin said today. Economists had forecast a 1 percent gain for January, the median of 36 estimates in a Bloomberg News survey shows. From a year earlier, production increased 2.2 percent when adjusted for the number of work days.
Germany’s economic recovery stalled at the end of 2009, and the coldest winter in 14 years is damping growth at the start of this year. Still, factory orders surged 4.3 percent in January. The Bundesbank expects the economy, Europe’s largest, to expand 1.6 percent in 2010 after a 5 percent contraction in 2009, which was the biggest slump since World War II.
On Friday, the Organisation for Economic Co-operation and Development released its composite leading indicators for January 2010. According to the OECD report, the indicators "continue to signal an improvement in economic activity for the G7 countries although only marginally more so than in the assessment for December". The CLI for the OECD area increased by 0.8 point in January.
Also released on Friday was the employment report for the US. This showed that nonfarm payrolls declined by 36,000 in February while the unemployment rate was unchanged at 9.7 percent. Considering the bad weather during the survey period, this could be considered a decent report.
Employment could start expanding again in coming months with continued economic recovery.
The latest data from the Commerce Department show that the US economy grew at an annualised rate of 5.9 percent in the fourth quarter of 2009 and the Institute for Supply Management's reports indicate that the economy continued to expand in early 2010. The ISM's manufacturing PMI fell to 56.5 in February from 58.4 in January while its non-manufacturing index rose to 53.0 from 50.5. With both indices above 50 in the past two months, economic activity in the US likely expanded at the beginning of this year.
A recovery in consumer spending has helped keep the overall economic recovery going. Consumer spending rose again in January by 0.5 percent and it has now essentially recovered from the recession. After adjusting for inflation, consumer spending in January was only 0.3 percent lower than at its peak in November 2007.
Still, the prolonged period of high unemployment may be taking its toll on consumer confidence. The previous week, reports showed that the Reuters/University of Michigan index of consumer sentiment for February dropped to 73.6 from 74.4 in January while the Conference Board’s consumer confidence index plunged to 46.0 in February from 56.5 in January.
The economic recovery in the euro area may be more fragile.
Real gross domestic product in the euro area was just 0.1 percent higher in the fourth quarter than in the previous quarter and recent data show that it is not getting any better in early 2010. The European Commission's economic sentiment indicator for the euro area fell to 95.9 in February from 96.0 in January while Markit's composite PMI, based on a survey of euro-area purchasing managers in manufacturing and service industries, was at 53.7 in February, unchanged from the previous month.
Official projections also acknowledge the fragility of the economic expansion in the euro area. The European Commission's latest forecast for eurozone growth in 2010 is 0.7 percent while the European Central Bank is forecasting growth of between 0.4 percent and 1.2 percent.
Japan's economic recovery is also widely considered to be fragile. Still, the economy managed to grow by 1.1 percent in the fourth quarter according to a preliminary government estimate, its third consecutive quarter of expansion.
And the expansion has continued at the beginning of 2010. A preliminary estimate of industrial production in January showed a 2.5 percent increase, the 11th consecutive month of increase and the biggest monthly rise since May last year.
However, growth in the Japanese economy remains highly dependent on exports. Today, the government reported that Japanese exports rose 40.6 percent in January from a year earlier and 8.8 percent from December.
A sustained recovery in the Japanese economy will probably require a sustained recovery in the rest of the global economy.
US employment continued to fall in February but by less than expected. MarketWatch reports:
U.S. nonfarm payrolls declined for the 25th time in the past 26 months, falling by 36,000 in February to a seasonally adjusted 129.5 million, the Labor Department estimated Friday.
The nation's jobless rate was steady at 9.7% as the number of people employed rose by 308,000, according to the household survey.
Severe snowstorms during the survey week may have depressed the payroll count, but the Bureau of Labor Statistics said it could not quantify the impact...
The February employment report was better than expected, as economists surveyed by MarketWatch had forecast a drop of 90,000. They expected the unemployment rate to rise to 9.8%.
In another sign that the US economy is recovering, consumer credit has begun rising. Bloomberg reports:
Borrowing by U.S. consumers unexpectedly rose in January for the first time in a year, led by auto and student loans, a sign Americans are gaining confidence in the economy.
Consumer credit increased $5 billion, or 2.4 percent at an annual rate, the Federal Reserve said today in Washington. Borrowing dropped $4.6 billion in December, more than first estimated. The figures track credit card debt and non-revolving loans, including those for automobile purchases.
Both the ECB and BoE left interest rates unchanged on Thursday, with the former continuing a gradual exit from the crisis measures. Bloomberg reports:
European Central Bank President Jean-Claude Trichet phased out some of the emergency tools used to fight the financial crisis and said it would be inappropriate for the International Monetary Fund to give help to Greece.
Trichet said the ECB will tighten the terms of its three- month market operations next month by returning to the pre- crisis practice of offering the funds at a variable rate. In its main seven-day operations and the one-month tenders, the ECB will keep lending banks as much money as they need at its benchmark rate until at least Oct. 12. The ECB left the key rate at a record low of 1 percent today...
The Bank of England earlier today kept its bond-purchase program on hold for a second month and left its main interest rate unchanged at 0.5 percent amid a gradual economic recovery.
The ECB today lifted its economic outlook for 2011, forecasting growth of around 1.5 percent after 0.8 percent expansion this year. Trichet said inflation pressures are likely to remain “subdued.” The ECB, which tries to keep increases in prices just below 2 percent, expects inflation to average 1.2 percent in 2010 and 1.5 percent in 2011.
Meanwhile, the data from the US on Thursday were mixed. Again from Bloomberg:
Fewer Americans than expected signed contracts to purchase previously owned homes in January, indicating the extension of a tax credit is doing little to lure buyers.
The index of purchase agreements, or pending home sales, dropped 7.6 percent after a revised 0.8 percent increase in December, the National Association of Realtors announced in Washington...
Factory orders rose 1.7 percent in January, boosted by a surge in commercial aircraft bookings, according to Commerce Department data that also showed less demand for computers and machinery.
Reports from the Labor Department today showed initial jobless claims fell from a three-month high, while productivity rose in the fourth quarter. Claims dropped 29,000 last week to 469,000.
Productivity, a measure of employee output per hour, rose at a 6.9 percent annual rate in the final three months of last year. Labor costs dropped 5.9 percent, more than anticipated.
The recovery in the US economy may be becoming less dependent on manufacturing. From Bloomberg on Wednesday.
Service industries in the U.S. accelerated in February more than anticipated, indicating the economic expansion may soon create jobs following the worst employment slump in the post-World War II era.
The Institute for Supply Management’s index of non- manufacturing businesses, which covers almost 90 percent of the economy, increased to 53 from 50.5 in January. Last month’s reading was the highest since October 2007 and exceeded all estimates of 73 economists surveyed by Bloomberg News.
Other reports on Wednesday also showed improvement in the economy.
The Fed, in its Beige Book business survey, called the improvement in economic activity this year “modest”...
Companies cut an estimated 20,000 jobs in February, in line with forecasts and the smallest drop in two years, data from ADP Employer Services also showed today. The decrease reflected reductions at construction companies as manufacturers and service providers added to payrolls...
A separate report from the job placement firm Challenger, Gray & Christmas Inc. showed employers in February announced the fewest job cuts in more than three years. Planned firings fell 77 percent last month from a year earlier, the Chicago-based firm said today.
In the euro area, however, services slowed in February. From Bloomberg on Wednesday:
Europe’s service and manufacturing industries expanded for a seventh month in February as companies stepped up output to meet reviving global demand.
A composite index based on a survey of euro-area purchasing managers in both industries remained at 53.7 last month, the same as in January, London-based Markit Economics said today...
An index of services, which account for the largest part of the euro-region economy, dropped to 51.8 in February from 52.5 in the previous month, Markit said today. A gauge of manufacturing rose to 54.2 from 52.4 in January.
Other negative news in the euro area on Wednesday included a 0.3 percent fall in retail sales in January.
The UK, however, reported a rebound in the services sector. From Reuters:
The services sector bounced back faster than expected in February to record its strongest expansion in more than three years, a survey showed on Wednesday...
The four-point jump in the CIPS/Markit services PMI index -- to 58.4 from 54.5 -- more than reversed January's fall and took the index to its highest level since January 2007...
Recent evidence on the economy has been mixed. Retail sales fell sharply at the start of the year, depressed by a rise in VAT and unusually heavy snowfall, but many forward-looking indicators have been more upbeat.
A survey by the Nationwide Building Society on Wednesday showed British consumer confidence hit a two-year high in February and REC/KPMG figures showed a further pick-up in Britain's job market last month.
Japan also saw improvement in service activity in February, although it remains in contraction based on the Japan Nomura services purchasing managers' index reading of 44.6 in February, up from 43.4 in the previous month.
Also contracting recently is Japanese capital spending. From Bloomberg today:
Japanese businesses cut spending for an 11th quarter even as their earnings rebounded, signaling a revival in exports remains insufficient to prompt investment that would spur the recovery.
Capital spending excluding software fell 18.5 percent in the three months ended Dec. 31 from a year earlier, the Finance Ministry said today in Tokyo. Sales declined and profits doubled.
The Reserve Bank of Australia raised interest rates on Tuesday. Bloomberg reports:
Australia’s central bank resumed raising interest rates after a one-meeting pause, judging that faster-than-anticipated economic growth will allay concerns that European deficits may roil global confidence.
Reserve Bank of Australia Governor Glenn Stevens increased the benchmark overnight cash rate target to 4 percent from 3.75 percent in Sydney today, as forecast by 14 of 19 economists in a Bloomberg News survey. The rest saw no change. Stevens said rates should be closer to “average,” which he last week signaled may be 75 basis points higher than today’s new level...
The announcement came hours after the government reported retail sales climbed 1.2 percent in January from December, exceeding the forecasts of all 19 economists in a Bloomberg News survey. A separate report showed home-building approvals fell in January, affected by the Reserve Bank’s rate increases and a reduction in government grants to first-time buyers.
The Bank of Canada, though, left rates unchanged. Bloomberg reports:
The Bank of Canada kept its benchmark interest rate at a record low today, and said that inflation and economic output have been higher than policy makers expected, signaling rate increases in coming months.
The target rate for overnight loans between commercial banks remained at 0.25 percent, where it’s been since April, as predicted by all 22 economists surveyed by Bloomberg. The bank also repeated a pledge to leave it unchanged through June unless the “current” inflation outlook shifts.
Low inflation in the euro area means that interest rates are also not expected to be raised by the ECB soon. From Bloomberg:
European inflation slowed in February after rising unemployment and a weakening recovery prompted households to scale back spending.
Consumer prices in the 16-nation euro region rose an estimated 0.9 percent from a year earlier after increasing 1 percent in January, the European Union statistics office in Luxembourg said today. Producer prices fell 1 percent in January from a year earlier, the smallest decline in a year, the statistics office said in a separate report.
There will also be no rate increases soon in Japan, despite continuing signs of recovery. From AFP/CNA:
Japan's jobless rate slipped back below five per cent in January, data showed Tuesday, but the government voiced concern that Toyota's recall crisis and deflation could threaten the export-led recovery...
Unemployment fell to a better-than-expected 4.9 per cent from a revised 5.2 per cent the previous month, Tokyo said, while a separate report said there were 46 job offers for every 100 job seekers, up from 43 in December...
Average household spending rose 1.7 per cent in January from a year earlier but that was down from 2.1 per cent in December, while the average monthly income of salaried households fell 0.5 per cent in real terms.
In fact, more fiscal stimulus could be on the way for Japan. Again from AFP/CNA:
Japan's lower house on Tuesday passed a record trillion-dollar budget for fiscal 2010, adding to the country's bulging public debt burden as Tokyo tries to stimulate a sluggish economic recovery.
The 92.3 trillion yen (1.0 trillion dollar) budget includes new child-care allowances, free public high school tuition and other measures promised by the centre-left government that took power in September.
Data out on Monday show that manufacturing continues to drive the global economic recovery.
Bloomberg reports the latest US ISM and other economic numbers.
Manufacturers increased production and employment in February, signaling factories are leading the nation out of recession as the new year begins.
The Institute for Supply Management’s factory index fell to 56.5 from January’s 58.4, which was a five-year high, figures from the Tempe, Arizona-based group showed. The measure exceeded 50, signaling expansion, for a seventh straight month. The group’s jobs gauge rose to the highest level since January 2005...
Consumer spending, which accounts for about 70 percent of the economy, rose 0.5 percent in January, the fourth straight gain, figures from the Commerce Department showed...
Incomes rose 0.1 percent, the report also showed, less than anticipated and restrained by declines in interest and dividend payments. Wages and salaries climbed 0.4 percent, the most since April...
A third report today showed construction spending fell in January for a third straight month, led by declines in commercial projects.
The 0.6 percent decrease followed a 1.2 percent drop the previous month, Commerce Department figures showed. Commercial building fell 1.4 percent, swamping a 1.1 percent gain in home construction.
Manufacturing accelerated in the euro area. Bloomberg reports:
European manufacturing accelerated to the fastest pace in more than two years in February as reviving global demand boosted export orders.
A manufacturing index for the 16-member euro region increased to 54.2 from 52.4 in January, London-based Markit Economics said today. That’s above an initial estimate of 54.1 published on Feb. 19 and the highest since August 2007. Manufacturing accounts for about a quarter of the economy and a reading above 50 indicates expansion...
European companies may have to rely on emerging economies to bolster sales as rising unemployment and surging energy costs crimp domestic demand. Europe’s jobless rate remained at 9.9 percent in January from the previous month, the European Union statistics office in Luxembourg said today. That’s the highest in more than 11 years.
In the UK, the manufacturing PMI held at a 15-year high. Reuters reports:
The manufacturing sector expanded faster than expected in February, matching the previous month's 15-year high rate of growth and suggesting the economic recovery may be gathering pace, figures showed on Monday.
The CIPS/Markit manufacturing purchasing managers' index held at 56.6 last month, the same level as January, which was the strongest since October 1994. The index has now held above the 50.O mark, separating expansion from contraction, for five months.
China, however, showed falls in PMI numbers. Bloomberg reports:
China’s manufacturing grew at a slower pace in February, reducing the risk of overheating in the fastest-growing major economy.
A Purchasing Managers’ Index released by the government today slid to a one-year low. Another PMI, from HSBC Holdings Plc and Markit Economics, showed the weakest expansion in three months. A weeklong Chinese holiday last month may have affected the numbers...
Overall, the government’s index fell to a seasonally adjusted 52, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. That was less than 55.8 in January and the median 55.2 estimate in a Bloomberg survey of 15 economists. HSBC’s PMI declined to 55.8 from 57.4.
Last week, Japan had released an unchanged manufacturing PMI. From Reuters:
Japanese manufacturing activity was unchanged in February from the previous month in a sign that a rapid recovery in the sector is levelling off, a survey showed on Friday.
The Nomura/JMMA Japan Manufacturing Purchasing Managers Index (PMI) was 52.5 in February on a seasonally adjusted basis, unchanged from January.
US fourth quarter GDP was revised up. MarketWatch reports:
U.S. real gross domestic product increased at a 5.9% seasonally adjusted annualized pace in the final three months of 2009, revised up from 5.7% estimated last month. The revision was exactly in line with expectations of economists surveyed by MarketWatch...
Although GDP grew at the fastest pace in six years, final demand in the economy was tepid, rising 1.9% annualized, revised down from 2.2% earlier. Excluding exports, final sales to U.S. purchasers rose at a 1.6% annual rate.
Other US economic data were mixed. From Bloomberg:
Sales of previously owned U.S. homes unexpectedly dropped 7.2 percent in January to a seven-month low, indicating a lack of job growth is undermining government incentives to bolster the housing market...
The Institute for Supply Management-Chicago Inc. said its business barometer climbed to 62.6 this month from 61.5 in January. Readings greater than 50 signal expansion.
The Reuters/University of Michigan final index of consumer sentiment for February dropped to 73.6 from 74.4 in January.
The UK also reported an upward revision to fourth quarter GDP. From Reuters:
The economy grew faster than previously estimated in the last three months of 2009 but the 18-month recession from which it emerged turned out to be deeper, revised official figures showed Friday.
Chancellor Alistair Darling welcomed the upward revision of fourth quarter GDP growth to 0.3 percent from an originally reported 0.1 percent but said there were still big risks and that support for the economy could not be withdrawn yet.
Meanwhile, Japan looks set to continue growing at the start of 2010. From AFP/CNA:
As overseas demand for Japan's cars, electronics and other goods has picked up, the country's industrial output rose 2.5 per cent in January from December, marking the 11th straight monthly gain, new figures showed...
However, deflation was still burdening the economy, as core consumer prices fell 1.3 per cent in January from a year earlier, marking the 11th straight month of decline, separate data showed Friday. The figure was in line with expectations.
Deflation is less of a concern in the euro area, where the inflation rate for January has been confirmed at 1 percent.
Thursday's economic data from the US were mixed. Bloomberg reports:
Companies scaled back orders for equipment in January and filings for jobless benefits rose, the latest figures in a series of reports this week that show the U.S. economy is recovering in fits and starts.
Orders for durable goods excluding transportation unexpectedly fell 0.6 percent, the most since August, while a measure of bookings for business equipment showed its biggest decrease in nine months, the Commerce Department in Washington said...
Bookings for all goods meant to last several years rose 3 percent, more than anticipated and reflecting a jump in commercial aircraft. They were forecast to rise 1.5 percent, according to the survey.
The number of Americans filing first-time claims for jobless benefits rose 22,000 in the week ended Feb. 20 to 496,000, Labor Department figures in Washington showed. Economists forecast claims would fall to 460,000, according the median in a Bloomberg survey...
The Federal Housing Finance Agency said in a separate report today that home prices fell 1.6 percent in December after a 0.4 percent gain a month earlier. Prices dropped 1.2 percent in the fourth quarter from a year earlier, the smallest decline in two years, as a tax credit for homebuyers boosted demand.
Meanwhile, the economic recovery in Europe appears to be stalling. Again from Bloomberg:
European confidence in the economic outlook unexpectedly worsened in February after the euro region’s recovery almost stalled in the fourth quarter.
An index of executive and consumer sentiment in the 16 nations using the euro slipped to 95.9 from a revised 96 in January, the European Commission in Brussels said today. The economic recovery may fail to gather strength for most of 2010, the commission said in a separate report.
The prospects for recovery in the US housing market became doubtful again on Wednesday. From Bloomberg:
Sales of new homes in the U.S. unexpectedly fell in January to the lowest level on record, a sign that an extension of a government tax credit may not be enough to rekindle demand.
Purchases declined 11 percent to an annual pace of 309,000, below the lowest forecast in a Bloomberg News survey of economists, figures from the Commerce Department showed today in Washington. The median sales price dropped 2.4 percent from January 2009 and the supply of unsold homes increased.
The report underscores Federal Reserve Chairman Ben S. Bernanke’s comments today that the economy is in a “nascent” recovery still in need of low interest rates. Homebuilders face competition from foreclosed properties that have driven down prices at the same time companies are reluctant to create jobs.
In contrast, industrial orders in the euro area provided a positive surprise. Bloomberg reports:
European industrial orders unexpectedly rose for a second month in December led by a surge in demand for capital goods such as machinery and equipment.
Orders to industrial companies in the 16-nation euro area rose 0.8 percent from November, when they gained 2.7 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast a drop of 1 percent, according to the median of 18 estimates in a Bloomberg News survey. From the year-earlier month, industrial orders increased 9.5 percent, the first annual gain since July 2008.
And in Japan, export growth accelerated in January. Bloomberg reports:
Japan’s exports climbed at the fastest pace in almost 30 years in January, supporting the nation’s economic recovery as falling wages damp demand at home.
Shipments abroad advanced 40.9 percent from a year earlier, the biggest increase since February 1980, the Finance Ministry said today in Tokyo. The median estimate of 22 economists surveyed by Bloomberg was for exports to rise 39.5 percent...
Imports rose 8.6 percent, the first increase since October 2008, today’s report showed. That was less than the median estimate for a 12.1 percent gain.
Consumer confidence took a big fall in the US in February. Bloomberg reports:
Confidence among U.S. consumers fell in February to the lowest level in 10 months, a sign that concern about job prospects may hold back the spending needed to sustain the recovery.
The Conference Board’s confidence index slumped to 46, below the lowest forecast in a Bloomberg News survey of economists, from 56.5 in January, a report from the New York- based private research group showed today...
On a more positive note, home prices rose again in December.
The S&P/Case-Shiller home-price index of 20 U.S. cities increased 0.3 percent. Compared with December 2008, prices fell 3.1 percent, the smallest year-over-year decline since May 2007.Meanwhile, confidence has also fallen among business executives in Germany. Bloomberg reports:
German business confidence unexpectedly fell for the first time in 11 months in February as the coldest winter in 14 years damped retail sales and construction.
The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, fell to 95.2 from 95.8 in January. Economists expected a gain to 96.1, according to the median of 37 forecasts in a Bloomberg News survey. The index reached a 26-year low of 82.2 in March last year.
The news was not much better elsewhere in Europe.
Italian consumer confidence unexpectedly declined for a second month in February as job losses fueled concern about the economic outlook. In France, consumer spending dropped in January after the government trimmed a program to encourage new car sales.
There was mixed news on the US economy on Monday. Reuters reports:
Economic activity rose sharply in January, further evidence the recovery is gaining ground, but manufacturing in Texas slipped in February.
The Federal Reserve Bank of Chicago on Monday said its gauge of the national economy rose to +0.02 from -0.58 in December, the second time in three months it was positive.
Also on Monday, however, the Federal Reserve Bank of Dallas said its Texas monthly manufacturing index slumped to -0.1 in February from 8.3 in January.
The Fed appears likely to keep interest rates low anyway.
On Monday ... San Francisco Fed President Janet Yellen, speaking in San Diego, said the U.S. economy still needs ultra-low interest rates since inflation is "undesirably low," and growth is expected to be sluggish for several years.
On 18 February, the Federal Reserve announced that it was raising the discount rate charged to banks for direct loans from 0.50 percent to 0.75 percent with effect from the following day. In addition, with effect from 18 March, the term of loans at the discount window reverts to being primarily overnight as compared to the maximum maturity of 90 days allowed during the financial crisis.
Although the discount rate was raised, the Fed said in a statement accompanying the move that it did not represent a tightening of monetary policy. Rather, it was a step towards "further normalization of the Federal Reserve's lending facilities" and does not signal any change in the outlook for the economy or for monetary policy.
Following the move, Fed officials at separate events said much the same thing.
In a speech to the Economics Club of Hampton Roads in Norfolk, Virginia, Federal Reserve Board Governor Elizabeth Duke pointed out that the discount rate "is not the rate we target for monetary policy purposes" and the rate hike is "not expected to lead to tighter financial conditions for households and businesses".
In a speech at the Augusta Metro Chamber of Commerce annual meeting, Federal Reserve Bank of Atlanta President Dennis Lockhart said that he "would not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent" but rather as "a normalization step".
Federal Reserve Bank of St Louis President James Bullard told reporters after speaking to the Economic Club of Memphis that the move is "part of a normalization process" and "does not indicate anything one way or the other about what we might eventually do with the federal funds rate."
Indeed, last week's economic data indicate that the Fed is unlikely to take actual tightening action soon.
A Labor Department report on Friday showed that inflation is unlikely to be a near-term concern for the Fed. While the headline consumer price index rose 0.2 percent in January and 2.6 percent in the preceding 12 months, the CPI excluding food and energy fell 0.1 percent and was up only 1.6 percent from a year ago.
And with the unemployment rate at 9.7 percent in January, just slightly lower than the peak of 10.1 percent in October last year, the Fed's expectation that substantial resource slack will restrain inflation is likely to be maintained in the near future.
Nevertheless, other data last week indicate that the economic recovery remains on track and that it is not too early to prepare for an eventual exit from the ultra-loose monetary policy initiated at the height of the financial crisis.
Reports last week show that the housing market may be stabilising. Housing starts rose 2.8 percent in January and the National Association of Home Builders/Wells Fargo index of builder confidence increased to 17 in February, the highest in three months, from 15 in January.
And while the unemployment rate remains near its peak in the cycle, the industry capacity utilisation rate increased to 72.6 percent in January from 71.9 percent in December, its seventh consecutive month of increase after the utilisation rate had fallen to a low of 68.3 in June last year.
Historically, the unemployment rate peaks soon after the industry capacity utilisation rate troughs, and is eventually followed by a series of increases in the federal funds rate.
Still, the Fed is likely to take its time in tightening monetary policy this time. It has made clear in the last few monetary policy meetings that even as it sees the economy improving, exceptionally low levels of the federal funds rate are likely to be warranted for an extended period.
Therefore, last week's data and the move on the discount rate are unlikely to lead to a hike in the federal funds rate soon.
Thursday's discount rate increase notwithstanding, the Fed is unlikely to feel rushed into tightening monetary policy after Friday's US inflation numbers. From Bloomberg:
The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is generating little inflation.
The consumer-price index increased 0.2 percent for a fifth straight month, led by higher fuel costs, Labor Department figures showed today in Washington. Excluding energy and food, the so-called core index unexpectedly fell 0.1 percent, reflecting a drop in new-car prices, clothing and shelter.
Furthermore, the US economic expansion is likely to slow in coming months. From Reuters:
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 128.4 for the week ended Feb. 12 from 130.0 the prior week.
It was the lowest reading since November 13, 2009, when it stood at 127.5.
The index's annualized growth rate declined for the tenth straight week to 17.1 percent, from 19.6 percent in the prior report, which was revised down from an original 19.7 percent.
It was the lowest rate since Aug. 7, 2009 when it read 14.6 percent.
Meanwhile, the economic recovery remains on track in the euro area. From Bloomberg:
Europe’s service and manufacturing industries expanded for a seventh month in February, as rising export orders helped to counter sluggish domestic demand.
A composite index based on a survey of euro-area purchasing managers in both industries remained at 53.7 in February, London-based Markit Economics said today. Economists forecast a drop to 53.5, according to the median of 16 estimates in a Bloomberg News survey. A reading above 50 indicates expansion...
An index of services dropped to 52 in February from 52.5 in the previous month, Markit said today. A gauge of manufacturing rose to 54.1 from 52.4.
The Federal Reserve Board raised the discount rate charged to banks for direct loans to 0.75 percent from 0.50 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.
“These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the Federal Reserve Board said today in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”
The discount rate action is effective on Feb. 19. The Board also said that effective March 18 “the typical maximum maturity for primary credit loans will be shortened to overnight.”
While the timing was unexpected, economic reports earlier in the day were already suggesting that tighter monetary policy was not inappropriate. From Bloomberg:
Manufacturing will remain at the forefront of a U.S. economic recovery that’s likely to extend at least through the middle of the year as companies invest in new equipment, reports today indicated.
The New York-based Conference Board’s measure of the outlook for the next three to six months increased 0.3 percent in January. The Federal Reserve Bank of Philadelphia’s general economic index rose to 17.6 in February from 15.2 as a measure of orders surged to the highest level in more than five years. Readings greater than zero signal growth...
The number of Americans filing first-time claims for unemployment insurance unexpectedly rose last week, indicating improvement in the labor market will be uneven. Initial jobless claims rose by 31,000 to 473,000 in the week ended Feb. 13, the Labor Department in Washington said today...
Prices paid to factories, farmers and other producers accelerated more than anticipated in January, Labor Department figures showed. The 1.4 percent rise in the producer price index followed a 0.4 percent increase in December and reflected in part higher energy costs.
In contrast, a scheduled policy meeting by the Bank of Japan on Thursday saw interest rates being left unchanged. AFP/CNA reports:
Japan's central bank announced Thursday that it was leaving its benchmark interest rate unchanged at 0.1 percent as it fights stubborn deflation in the world's second-largest economy.This is even as economic indicators show continuing economic recovery in Japan, the coincident index for December rising to 97.4 from 96 in November and the leading index to 94.3 from 91.
Wednesday's data show that the US economy continues to recover. From Bloomberg:
Industrial production in the U.S. rose more than anticipated in January as factories churned out more consumer goods and business equipment, leading the recovery of the world’s biggest economy.
The 0.9 percent increase in production at factories, mines and utilities followed a 0.7 percent gain the prior month, according to the Federal Reserve in Washington. Figures from the Commerce Department today showed housing starts climbed to a 591,000 annual pace, exceeding the median forecast in a Bloomberg News survey...
The Commerce Department said housing starts increased 2.8 percent in January after dropping 0.7 percent. The annual rate was faster than the median forecast in a Bloomberg survey for a 580,000 pace. Construction of single-family houses rose 1.5 percent, while work on multifamily homes such as townhouses and apartment buildings jumped 9.2 percent...
A separate report from the Labor Department showed prices of goods imported into the U.S. rose 1.4 percent in January, reflecting in part a jump in the cost of petroleum.
There were also positive data from the euro area. Again from Bloomberg:
European exports increased in December as a strengthening global economy and a weaker euro boosted demand for goods from the region.
Exports from the euro area rose a seasonally adjusted 3.1 percent from November, when they remained unchanged, the European Union’s statistics office in Luxembourg said today. European construction output gained 0.5 percent from November, when it fell 0.8 percent, a separate report showed.
The UK economy just returned to growth in the fourth quarter but already, inflation is surging. From Reuters:
Inflation surged further above the Bank of England's target in January, forcing Bank of England Governor Mervyn King to write a public letter where he said inflation should still get back on track later this year.
Official data showed consumer price inflation rose to 3.5 percent in January from December's 2.9 percent -- in line with economists' expectations, after a rise in value-added tax on January 1, as well as falls in oil and food prices a year ago coming out of the annual comparison.
At least the recovery has not faltered, not in the US anyway. From Bloomberg:
Confidence among U.S. homebuilders rose in February to a three-month high, a sign that the housing market is stabilizing amid government support.
The National Association of Home Builders/Wells Fargo index of builder confidence increased to 17, higher than anticipated, from 15 the prior month, the Washington-based group said today. Readings below 50 mean most respondents view conditions as poor...
The Federal Reserve Bank of New York’s general economic index rose to 24.9 this month from 15.9 in January. Readings above zero in the so-called Empire State Index signal growth in the area covering New York and parts of New Jersey and Connecticut.
Japan's economic recovery remained intact at the end of 2009. BBC reports:
Japan's economy grew by a better-than-expected 1.1% in the final quarter of last year, according to official figures...
Consumer spending, which accounts for about 60% of the Japanese economy, rose 0.7% from the previous quarter as shoppers took advantage of government incentives on cars and home appliances. However, consumer spending remains weak in general.
Corporate capital spending rose by 1% in the quarter, seeing the first expansion since the three months to March 2008.
Public investment fell 1.6%, while exports jumped 5%.
At its last monetary policy meeting last month, the Fed reiterated its expectation that the federal funds rate will stay at exceptionally low levels for an "extended period". However, its emergency programmes implemented at the height of the financial crisis will be gradually wound down, including those for the purchase of securities.
A commitment by the Fed to keep the federal funds rate low would, in most times in the past, have been enough to keep yields on longer-term Treasuries low.
The accompanying chart shows how, over each of the years from 1955 to 2009, the change in the 10-year Treasury yield (shown on the vertical axis) has varied with the difference between the change in the federal funds rate and the spread between the 10-year yield and the federal funds rate at the beginning of each year (shown on the horizontal axis).
Assuming that the Fed keeps the federal funds rate unchanged for the rest of the year, the expected change in the 10-year yield in 2010 -- represented by the red square -- is negative.
Still, these are not normal times.
Fiscal stimulus to maintain the current economic recovery on top of on-going budget deficits is forcing the US government to sharply increase the sale of government securities. The US government has projected that the US budget deficit will rise from US$1.4 trillion in 2009 to a record US$1.6 trillion this year and the public debt will rise from US$7.5 trillion at the end of 2009 to US$9.3 trillion in 2010.
The past week perhaps provided a foretaste of things to come.
US Treasuries fell last week as the government sold US$81 billion in notes and bonds. The yield on the 10-year Treasury note rose 13 basis points to 3.69 percent. The 30-year bond yield also increased 13 basis points to 4.65 percent.
The sale of US government securities fetched yields that were higher than expected as the increase in supply pushed down the prices of Treasuries. The sale of US$40 billion of three-year notes, US$25 billion of 10-year notes and US$16 billion of 30-year bonds drew yields of 1.377 percent, 3.692 percent and 4.720 percent respectively, all of which were higher than forecasts in Bloomberg surveys of bond-trading firms.
A flight to safety probably mitigated the rise in US Treasury yields last week as the euro area remained rocked by uncertainties created by the debt problems in Greece and other eurozone countries.
Still, not all recent events in other countries are helping to keep interest rates in the US down.
Yesterday, China celebrated the start of the Year of the Tiger but investors received no presents from Chinese policy-makers to start the new year with. Quite the opposite, in fact.
Last Friday, the People's Bank of China announced that the reserve requirement for financial institutions will be raised by 50 basis points on 25 February. The increase will bring the rate for large banks to 16.5 percent.
This was the second time in about a month that the PBC has raised the reserve requirement. It had also raised the requirement by 50 basis points on 18 January.
The Reserve Bank of Australia has been even more aggressive in monetary tightening, raising interest rates three times last year. It left its overnight cash rate target unchanged at 3.75 percent after its latest monetary policy meeting in February but indicated that interest rates would be "adjusted further" to keep inflation within the central bank’s target range of 2 to 3 percent.
As central banks around the world unwind emergency levels of monetary stimulus initiated during the financial crisis, global interest rates are likely to rise.
Having said all that, the federal funds rate at near zero provides a powerful anchor for US Treasuries and the recent increase in yields for the latter are unlikely to be sustained for very long.
China has taken yet another step to rein in lending. From AFP/CNA:
China's central bank on Friday ordered financial institutions to increase the amount of money they keep in reserve, as authorities seek to rein in rampant lending amid fears of asset bubbles.
The People's Bank of China said the deposit reserve ratio would be raised by 50 basis points as of February 25, the second reported increase since the start of the year...
The increase will bring the rate for large banks to 16.5 percent, according to Dow Jones Newswires.
Economic data on Friday were mostly positive.
The US reported a rise in retail sales in January. From Bloomberg:
January sales at U.S. retailers climbed more than anticipated, while consumer confidence unexpectedly fell this month from a two-year high, showing a recovery in household spending may be gradual.
Retail purchases increased 0.5 percent, the third gain in the past four months, Commerce Department figures showed today in Washington. The Reuters/University of Michigan’s consumer sentiment gauge dropped to 73.7 from 74.4 the prior month.
There were also positive signals on Japanese consumption. Bloomberg reports:
Japan’s household sentiment rose for the first time in four months as concerns the economy will slip into another recession receded.
The confidence index climbed to 39 last month from 37.6 in December, the Cabinet Office said today in Tokyo. The median estimate of seven economists surveyed by Bloomberg News was for sentiment to rise to 38.
Not so positive, however, was fourth quarter GDP growth in Europe. Bloomberg reports:
Europe’s recovery almost stalled in the fourth quarter as waning spending and investment in Germany unexpectedly brought growth in the region’s largest economy to a halt.
Gross domestic product in the 16-nation euro region rose 0.1 percent from the third quarter, when it gained 0.4 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast expansion of 0.3 percent, the median of 34 estimates in a Bloomberg survey showed. The recession in Greece deepened, with GDP falling 0.8 percent in the fourth quarter after a 0.5 percent slump in the previous three months.
Inflation in China turned out lower than feared in January but authorities there still appear concerned about credit growth. AFP/CNA reports:
New lending surged to 1.39 trillion yuan (203.5 billion dollars) last month, and property prices rocketed at the fastest rate since April 2008, figures from the National Bureau of Statistics said...
Following the release of the data, the central bank called for vigilance against "possible hidden systemic financial risks" and controls on credit in a report that otherwise announced no new major policies.
"Credit funds will support projects under way, and loans for new projects are to be strictly controlled," it said without elaborating...
Meanwhile, inflation in January was lower than expected, with the consumer price index rising just 1.5 percent year-on-year.
The increase was mainly driven by food prices, which rose 3.7 percent during the first month of the year. But inflation slowed from December, when prices rose 1.9 percent...
Property prices in 70 medium and large cities meanwhile rose 9.5 percent in January from the same month a year ago, the fastest pace since April 2008...
The prices increased by 1.3 percent last month from December, according to a statement on the National Bureau of Statistics website.
A report on Wednesday showed that Chinese trade surged in January. From Bloomberg:
China’s imports climbed for a third straight month in January, signaling increasing strength in domestic demand that’s aiding the global economic rebound.
Imports climbed a record 85.5 percent from a year before, a jump that was influenced by a shift in the lunar new year holiday to February this year from January 2009, customs bureau figures showed in Beijing today. Exports rose 21 percent in a second monthly advance after 13 declines that may reinforce overseas calls for China to allow a stronger currency.
But the seasonally-adjusted month-on-month rate was weaker.
Seasonally adjusted, exports fell 5.5 percent from December and imports dropped 0.9 percent, the customs bureau said.In the US, trade maintained its momentum in December.
The U.S. trade deficit unexpectedly widened in December as imports rose faster than exports, gains that signaled a pickup in global economic growth.
The gap grew to $40.2 billion, the biggest in a year, from $36.4 billion in November, according to Commerce Department data released today in Washington. Imports increased 4.8 percent and exports climbed 3.3 percent to the highest level since October 2008.
The trade data reflect the global economic recovery. And there was evidence on Wednesday that the recovery will continue.
In Japan, machinery orders rebounded in December.
Japanese machinery orders rose the most in nine years from a record low, supporting a recovery from the country’s deepest postwar recession.
Domestic orders, a sign of business investment in three to six months, climbed 20.1 percent in December from a month earlier, the Cabinet Office said today in Tokyo. That was faster than the median 8 percent gain estimated by economists.
In the UK, industrial production rose in December.
U.K. manufacturers increased production in December at triple the pace economists forecast as the economy emerged from its worst recession on record.
Output rose 0.9 percent from November, the Office for National Statistics said today in London. Economists predicted a 0.3 percent increase, according to the median of 26 forecasts in a Bloomberg News survey...
Overall industrial production, which includes utilities and mining and quarrying and accounts for 17 percent of the economy, rose 0.5 percent on the month. Economists predicted a 0.2 percent gain, the median of 30 forecasts in a Bloomberg survey showed.
However, continental Europe reverted to being the bearer of negative news, with both France and Italy reporting declines in industrial production in December.
Industrial production in France and Italy unexpectedly declined in December as demand for factory goods remained weak after the worst recession in six decades.
French industrial production fell 0.1 percent from November, when it increased a revised 0.6 percent, Paris-based statistics office Insee said today. Italian output fell 0.7 percent from November, when it rose a revised 0.4 percent, statistics office Istat said in Rome. Economists expected increases of 0.5 percent in France and 0.1 percent in Italy, according to their median forecasts in Bloomberg News surveys.
Bloomberg reports some good economic news from Germany on Tuesday.
German exports unexpectedly jumped in December, notching their fourth successive monthly gain, as the global recovery bolstered demand for goods from Europe’s largest economy.
Sales abroad, adjusted for working days and seasonal changes, increased 3 percent from November, when they gained 1.1 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 0.1 percent decline, the median of 10 estimates in a Bloomberg News survey showed. From a year earlier, exports rose 3.4 percent, the first annual increase since October 2008...
Imports rose 4.5 percent in December from the previous month, the statistics office said. The trade surplus narrowed to 13.5 billion euros ($18.5 billion) from a revised 17.2 billion euros in November.
However, it was another piece of news from Europe that was the main focus of investors' attention.
European officials said they are considering assistance for Greece as its struggle to contain the European Union’s highest budget deficit threatens to erode confidence in the euro.
“We are talking about support in the broad sense,” Olli Rehn, the EU’s new economic affairs commissioner, said in an interview in Strasbourg, France today. Michael Meister, financial affairs spokesman for German Chancellor Angela Merkel’s Christian Democratic Union, said in an interview in Berlin that aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.”
Investors reacted positively to the turn of events.
Stocks rallied, with emerging-market equities recovering from the worst three-day slide in a year, and the euro and commodities gained as European officials said they were considering financial assistance for Greece. Treasuries tumbled, while Greek bonds surged.
The Standard & Poor’s 500 Index rose 1.3 percent at 4:10 p.m. in New York. The MSCI Emerging Markets Index increased 1.9 percent after falling 6.1 percent in the past three sessions. Greece’s ASE Index climbed 5 percent, rebounding from four days of losses. The euro strengthened the most in more than five months against the dollar, snapping four days of declines, and ended a three-day drop against the yen. Oil, copper and aluminum surged at least 2.2 percent to help lead gains in commodities.
Japan's exports appear to have made a substantial recovery. From Bloomberg on Monday:
Japan’s current-account surplus widened for a fifth month in December as demand from Asia helped exports advance for the first time in more than a year.
The surplus rose to 901 billion yen ($10 billion) from a year earlier, the Ministry of Finance said in Tokyo today. Exports rose 11.7 percent, the first advance in 15 months, while weak demand at home caused imports to fall 6 percent.
The export recovery took a small step back in December though.
On a seasonally adjusted basis, the current-account surplus narrowed to 1.101 trillion yen in December. Exports fell 0.2 percent from November, and imports climbed 1.5 percent.Of greater concern is the continuing fall in bank lending.
The export recovery has yet to spur spending by companies and consumers at home. A Bank of Japan report today showed bank lending fell 1.7 percent in January from a year earlier, the biggest drop in more than four years, in part because of waning corporate demand for loans.Still, leading indicators show that the recovery is likely to be sustained. From Bloomberg last week:
Japan’s broadest indicator of economic health rose for a ninth month in December as growth in Asia spurred factory output.
The coincident index, a composite of 11 indicators including industrial production and retail sales, gained to 97.6 from 96 a month earlier, the Cabinet Office said today in Tokyo. The median estimate of nine economists surveyed by Bloomberg was for an advance to 97.3...
The leading index, a gauge of economic conditions in three to six months, rose to 94 in December from a revised 91 in November, today’s report showed.
And from Reuters on Monday:
Japan's service sector sentiment index rose to 38.8 in January, a Cabinet Office survey showed on Monday ... from 35.4 in December...
The outlook index, indicating the level of confidence in future conditions, rose to 41.9 from 36.3 in December.
The global economy entered 2010 on a positive note, according to surveys of purchasing managers worldwide. The JPMorgan global all-industry output index edged up to 53.2 in January from 53.1 in December. Growth was led by manufacturing, with the JPMorgan global manufacturing PMI rising to 56.1 in January, its highest reading in five and a half years, from 54.6 in December. Growth was pulled down by the services sector as the JPMorgan global services business activity index fell to 51.2 in January from 51.8 in December.
Global economic growth is likely to continue, according to the composite leading indicators (CLI) published by the Organisation for Economic Co-operation and Development. A report on Friday by the OECD showed that the CLI for the OECD area as a whole rose 0.9 point in December. The CLIs for the US and the euro area increased by the same amount. The CLI for Japan increased by 1.2 points. According to the report, the CLIs provided "stronger signals of an expansionary economic outlook" in December than in the previous month.
In the US, economic reports last week were mixed but not inconsistent with continuing gradual expansion of the economy.
In line with the global pattern, purchasing managers' data released by the Institute for Supply Management at the beginning of last week were generally positive. Its manufacturing PMI rose to 58.4 in January, the highest since August 2004, indicating that manufacturing activity expanded strongly at the beginning of 2010.
The services sector was somewhat weaker, though. The non-manufacturing index rose to just 50.5 in January from 49.8 in December. The business activity index actually slipped to 52.2 in January from 53.2 the previous month.
Employment has also been slow to return to growth. The employment report released by the US Labor Department on Friday showed that non-farm payrolls fell by 20,000 in January based on the establishment survey.
Set against this, however, was an unexpected drop in the unemployment rate to 9.7 percent from 10.0 percent in December. This was achieved because, in contrast to the establishment survey, the household survey on which the unemployment rate is based showed that employment rose by 541,000.
In any case, a return to job growth is unlikely to be far off as the employment trend has remained generally positive. As long as the economy maintains its recovery, as the OECD CLI for the US suggests it will, it is a matter of time before the data start showing an unambiguous increase in employment.
