The Skeptical Speculator

Greece bailout in doubt as eurozone economy shrinks

2012-02-16T08:33:00.000+08:00

China appears ready to help the euro area overcome its debt crisis, with Premier Wen Jiabao and People's Bank of China Governor Zhou Xiaochuan both expressing support for the region in recent days.

The euro area's support for Greece, however, is in doubt. From Reuters:

After a three-hour teleconference between finance ministers of countries that share the euro, questions remain over the euro zone's bailout of Greece, a German government official said on Wednesday...

"Along with the examination of information made available at short notice, questions remain that are very important to Germany and other member states about the sustainability of the program," the official said.

The questions had to do in part with Greece's ability to work off its mountain of debt in the years ahead. Further information regarding this matter must be examined by Monday, the official added.

Greece's ability to reduce its debt to GDP ratio is being undermined by a shrinking economy that some analysts think could turn into one of the deepest economic slumps of modern times.

Meanwhile, the rest of the eurozone economy is only a little better off. Economic output in the euro area fell 0.3 percent in the fourth quarter, the first contraction since the second quarter of 2009. France managed to grow 0.2 percent while Germany shrank just 0.2 percent. However, Italy's economy contracted 0.7 percent while Portugal's shrank 1.3 percent.

Elsewhere in Europe, claims for jobless benefits in the UK rose by 6,900 in January to 1.604 million, the highest level since January 2010.

US data on Wednesday, though, were mostly positive.

Unusually warm weather caused a fall in utility output in January and left overall industrial production unchanged but manufacturing production increased 0.7 percent.

Strength in manufacturing was also indicated by the February Empire State manufacturing survey, which showed the general business conditions index rising six points to 19.5, its highest level in more than a year.

Housing also appears to be recovering. The National Association of Home Builders/Wells Fargo housing market index rose for the fifth consecutive month to 29 in February from 25 in January, reaching its highest level in more than four years.

BoJ QE expands, Greek economy contracts

2012-02-15T09:36:00.000+08:00

The Bank of Japan has become the latest central bank to boost monetary stimulus. On Tuesday, it increased its asset purchase programme by 10 trillion yen to about 65 trillion yen even as it kept its benchmark interest rate unchanged at between zero and 0.1 percent.

Last week, the Bank of England had made a similar move, a move seemingly justified by the latest UK inflation figure. The Office for National Statistics reported on Tuesday that consumer price inflation fell to 3.6 percent in January -- the lowest rate since November 2010 -- from 4.2 percent in December.

The euro area reported a less welcome fall on Tuesday. Industrial production fell 1.1 percent in December after having been unchanged in November.

Meanwhile, Europe's bailout of Greece is back in doubt after its finance ministers cancelled a Brussels meeting slated for Wednesday that had been scheduled to discuss the bailout.

And that was not the only bad news for Greece. It reported on Tuesday that its economy shrank 7 percent from a year ago in the fourth quarter, worse than the 5 percent contraction in the third quarter.

The US, though, provided some positive data on Tuesday. Retail sales rose 0.4 percent in January.

OECD sees positive change in economic momentum

2012-02-14T09:31:00.000+08:00

Japan may have reported a contraction in its economy for the fourth quarter on Monday but it remains one of those that is driving an improvement in the world economy, according to the report on the OECD's composite leading indicators for December.

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to a positive change in momentum for the OECD as a whole, driven primarily by the United States and Japan, but similar signs are beginning to emerge in a number of other developed economies. The CLIs for India and Russia also show signs of an upward change in growth momentum.

OECD composite leading indicators
	Ratio to trend, amplitude adjusted			Change from previous month
	Oct	Nov	Dec	Oct	Nov	Dec
OECD area	100.1	100.2	100.4	-0.1	0.1	0.2
United States	100.8	101.3	102.0	0.2	0.5	0.7
Euro area	98.8	98.5	98.3	-0.5	-0.3	-0.1
Japan	101.5	101.7	101.9	0.0	0.1	0.2

The CLI for the euro area continued to decline in December but by a smaller amount than in previous months. The OECD noted that the CLIs for seven of the fifteen countries in the euro area “are now pointing towards a positive change in momentum”.

Souring the mood somewhat was Moody's, which cut the debt ratings of Italy, Portugal, Spain, Slovakia, Slovenia and Malta on Monday.

Moody's also downgraded the rating outlooks of France, the UK and Austria to negative.

Greek parliament approves austerity, Japanese economy shrinks

2012-02-13T08:50:00.000+08:00

The Greek austerity bill was approved by parliament on Sunday amid spreading violence. Reuters reports:

Greece's parliament approved a deeply unpopular austerity bill Monday to secure a second EU/IMF bailout and avoid national bankruptcy, as buildings burned across central Athens and violence spread around the country.

Cinemas, cafes, shops and banks were set ablaze in central Athens and black-masked protesters fought riot police outside parliament before lawmakers voted on the package that demands deep pay, pension and job cuts - the price of a 130 billion euro bailout needed to keep the country afloat.

On Monday, Japan reported that its economy shrank in the fourth quarter. Again from Reuters:

Japan's economy shrank a bigger-than-expected 0.6 percent in October-December, hurt by slowing global growth, Thai floods and a strong yen, casting doubt about expectations that growth will resume this quarter as Europe's debt crisis clouds the outlook.

Domestic demand also weakened in a worrying sign that the economic boost from rebuilding the country's earthquake-devastated northeast coast is slow to materialize.

The weakness in the economy at the end of last year has not stopped the Japanese stock market from rising at the start of this year. From Bloomberg:

Japan’s benchmark Topix index has climbed 6.9 percent this year, following a 19 percent slump in 2011, partly on optimism the losses at consumer electronics makers would accelerate job cuts and an exit from money-losing businesses.

The rally also shows analysts are looking beyond the gloomy economic and earnings forecasts for the current fiscal year, said Mark Matthews, head of research for Asia at Bank Julius Baer & Co. in Singapore. The gains by shares in Asia this year have further to go, he said.

Greek cabinet approves austerity plan

2012-02-11T09:12:00.001+08:00

Greece has taken another step closer to getting a second bailout. Its cabinet approved the austerity plan on Friday despite strikes by Greek workers protesting the plan.

Among economic data released on Friday, China reported a higher trade surplus for January as imports plunged 15.3 percent from a year earlier while exports declined 0.5 percent. The fall in both exports and imports could be signs of a slowing economy, although it should also be noted that the figures may have been distorted by the Chinese Lunar New Year.

In contrast, an increase in the US trade deficit in December probably reflected stronger economic growth. Exports increased 0.7 percent while imports increased 1.3 percent.

However, the Thomson Reuters/University of Michigan preliminary index of US consumer sentiment dropped to 72.5 in February from 75 in January.

Greek bailout deal: Still not quite there yet

2012-02-10T08:58:00.000+08:00

Greek political leaders settled their differences on an austerity plan on Thursday but still couldn't get the required bailout. From Reuters:

Greek political leaders said they had clinched a deal on economic reforms and spending cuts needed to secure a second bailout, but euro zone finance ministers demanded more measures and a parliamentary seal of approval before providing the aid...

Jean-Claude Juncker, who chairs the Eurogroup, set three conditions, saying the Greek parliament must ratify the package when it meets on Sunday and a further 325 million euros of spending reductions needed to be identified by next Wednesday, after which euro zone finance ministers would meet again.

"Thirdly, we would need to obtain strong political assurances from the leaders of the coalition parties on the implementation of the program," Juncker told a news conference after six hours of talks in Brussels. "Those elements needs to be in place before we can take decisions."

"In short, no disbursement before implementation."

There is a possibility, though, that the European Central Bank could help Greece. Again from Reuters:

European Central Bank President Mario Draghi opened the door on Thursday to helping Athens indirectly after Greek politicians finally signed up to an austerity package following days of dither and delay...

After the ECB left interest rates at a record low 1.0 percent, Draghi spent much of his hour-long news conference refusing to show his hand, before indicating at the very end that the bank could pass profits from its Greek bonds to euro zone countries.

The countries could then funnel the money to Greece. The ECB is forbidden from financing governments directly.

Also likely to help ease the sovereign debt crisis generally will be the ECB's second offering of three-year loans that will come with rules that expand the range of assets eligible as collateral.

Somewhat more direct in easing monetary conditions has been the Bank of England. On Thursday, it added 50 billion pounds into its bond buying programme despite a 0.5 percent increase in industrial production and a narrowing in the trade deficit.

Indonesia's central bank also eased monetary policy on Thursday, cutting its benchmark interest rate to a record low of 5.75 percent.

China, though, may be slow in easing monetary policy after its inflation rate rose to 4.5 percent in January, the highest level in three months.

Elsewhere in Asia, there were mixed data from Japan. Core machinery orders fell 7.1 percent in December but the consumer confidence index rose to 40.0 in January from 38.9 in December.

Greek bailout: Still no deal

2012-02-09T09:16:00.000+08:00

The drama on Greece's rescue package drags on yet again after Greek Prime Minister Lucas Papademos failed to get full agreement from his coalition supporters on Wednesday on measures needed for a second aid package. The reduction of pensions has been cited as the area of contention.

On another front, there was somewhat more hopeful news for Greece. There are reports that the ECB may agree to exchange the Greek bonds it purchased in the secondary market last year at a price below face value provided that there is agreement on the debt-restructuring plan.

Economic data on Wednesday were mostly weak.

In Germany, exports fell 4.3 percent in December.

In France, the Banque de France's business sentiment indicator for industry was unchanged at 96 in January but the business sentiment indicator for services fell to 93 from 94 in December.

Outside of Europe, Japan reported mixed economic data on Wednesday.

Japan's current account surplus fell 43.9 per cent in 2011 as the trade balance fell into deficit.

This year has not started too well for Japan either. The economy watchers survey's current service sector sentiment index fell to 44.1 in January from 47.0 in December. However, the outlook index moved in the opposite direction, rising for the first time in seven months to 47.1 from 44.4.

Greece rescue package delayed again

2012-02-08T08:13:00.000+08:00

Tuesday brings news that the Greek bailout has been delayed yet again. Bloomberg reports:

Greek Prime Minister Lucas Papademos postponed a meeting with heads of the political parties supporting his caretaker government a second time in as many days as the government and international creditors haggled over terms to secure a second aid package.

Papademos will meet with the leaders in Athens tomorrow, instead of tonight as previously scheduled, a spokeswoman for his office said. Instead, he will meet tonight with the so- called troika, comprising the European Commission, the European Central Bank and the International Monetary Fund, to put the final touches to terms required for a 130 billion-euro ($172 billion) rescue package, the spokeswoman said.

Elsewhere in Europe, Germany reported a surprisingly sharp 2.9 percent fall in industrial production in December. It was the biggest drop in production since January 2009.

There was better news in Japan though. The index of coincident economic indicators for Japan rose 2.9 points in December while the index of leading economic indicators rose 0.6 point.

Eurozone investor confidence improves

2012-02-07T08:26:00.000+08:00

Economic data out of Europe on Monday were relatively positive.

Investor confidence in the euro area rose to a seven-month high in February. The Sentix investor confidence index increased to minus 11.1 from minus 21.1 in January.

In Germany, factory orders rose 1.7 percent in December.

However, the talks on Greece's bailout drags on as the parties involved failed to reach agreement on Monday. Reuters reports:

German Chancellor Angela Merkel told Greece Monday to make up its mind fast on accepting the painful terms for a new EU/IMF bailout, but the country's political leaders responded by delaying their decision for yet another day...

The office of Prime Minister Lucas Papademos, a former central banker who heads a government of politicians, said a meeting of leaders from the conservative, socialist and far-right parties due Monday had been postponed to Tuesday.

Global economy gives no hint of recession at start of 2012

2012-02-06T10:00:00.000+08:00

Last week's data showed that the global economy picked up pace at the start of the year, making a recession in early 2012 look very unlikely.

Surveys of purchasing managers around the world showed improvements in economic activity in most countries.

In the United States, the purchasing managers indices for both manufacturing and services rose further above the 50 mark that separates expansion from contraction. The Institute for Supply Management's manufacturing PMI rose to 54.1 in January from 53.1 in December while the non-manufacturing index jumped to 56.8 from 53.0.

In the euro area, the composite index from Markit Economics rose above the 50 mark for the first time in five months in January. It increased to 50.4 from 48.3 in December after the services index rose to 50.4 from 48.8. The manufacturing index also improved to 48.8 in January from 46.9 in December.

In Japan, Markit's composite output index rose to 51.1 in January from 50.1 in December. The Markit/JMMA manufacturing PMI rose to 50.7 in January from 50.2 in December while Markit's services business activity index rose to 51.0 from 50.4.

The worldwide improvement in purchasing managers indices pushed the JPMorgan global all-industry output index up for the third consecutive month to 54.6 in January from 52.7 in December. The new orders index jumped to 54.0 from 51.5.

JPMorgan Global All-Industry Indices
	December	January
Output	52.7	54.6
New orders	51.5	54.0
Input prices	56.2	56.7
Employment	50.3	52.6

Continued economic growth in the US at the start of 2012 was also signalled by the employment report released on Friday. The report showed that nonfarm payrolls increased by 243,000 in January, the fastest pace in nine months. The unemployment rate fell to 8.3 percent, the lowest since February 2009, from 8.5 percent in December.

Even the eurozone economy may be able to avoid a recession. In his commentary on the purchasing managers' data, Markit's chief economist Chris Williamson said that the January data indicated that business conditions have stabilised and that “a more definitive return to growth is possible in February”.

Stocks jump with US employment

2012-02-04T11:03:00.000+08:00

Friday was a good day for stocks, the S&P 500 gaining 1.5 percent as investors responded to some strong economic data from the US.

US nonfarm payrolls increased by 243,000 in January, the fastest pace in nine months, pushing the unemployment rate down to 8.3 percent, the lowest since February 2009, from 8.5 percent in December.

Providing further evidence of a strengthening economy, the Institute for Supply Management’s non-manufacturing index rose to 56.8 in January from 53 in December.

And in manufacturing, US factory orders rose 1.1 percent in December after an upwardly-revised 2.2 percent gain in November.

Economic data from the euro area on Friday were not as positive, with retail sales falling 0.4 percent in December.

However, there was indication of improvement in the economy in January. Markit's composite index for the euro area rose to 50.4 from 48.3 in December after the services index rose to 50.4 from 48.8.

Meanwhile, the UK services sector also improved in January. The Markit/CIPS services PMI rose to 56.0, the highest in ten months, from 54.0 in December.

Analysts turning bullish on stocks

2012-02-03T09:27:00.001+08:00

In a commentary on 2 February, Doug Kass says it is time to be contrarian and go long on stocks.

Today's dominant investor classes -- individual investors, hedge funds and pension funds -- have de-risked and are relatively uncommitted to equities.

A re-allocation into stocks (and out of bonds) represents an underappreciated and potentially massive (and latent) demand that could easily be the catalyst for a move to all-time highs in the S&P 500 in 2012.

Ironically enough, that appears to be what some other analysts are also saying, according to a Bloomberg article.

Strategists at the biggest banks are capitulating on their bearish forecasts after the best start to a year for global stocks since 1994 and gains of more than 7 percent in emerging-market currencies.

Just two weeks after saying that investors should “remain cautious,” Larry Hatheway, the chief economist at UBS AG (UBSN), raised his recommendations on global shares and high-yield bonds in a Jan. 23 note to customers entitled, “Wrong, but not too late.” Royal Bank of Scotland Group Plc (RBS), and Benoit Anne, the global head of emerging-markets strategy at Societe Generale (GLE) SA, said their estimates for developing nations were proven wrong.

Global manufacturing improves

2012-02-02T08:45:00.000+08:00

Wednesday's economic reports showed that global manufacturing activity accelerated in January as JPMorgan's global manufacturing index improved to 51.2 in January from 50.5 in December.

The US led the way among developed economies as the Institute for Supply Management’s manufacturing PMI climbed to 54.1 in January from 53.1 in December.

The positive picture for the US economy was supported by reports of a 170,000 increase in private sector employment and a 1.5 percent increase in construction spending.

UK manufacturing also improved in January. The Markit/CIPS manufacturing PMI rose to 52.1 from 49.7 in December.

Manufacturing in the euro area was not as strong but showed improvement nevertheless. Markit's eurozone manufacturing PMI rose to 48.8 in January from 46.9 in December.

China's manufacturing also improved in January. The China Federation of Logistics and Purchasing manufacturing PMI rose to 50.5 from 50.3 in December while the HSBC's preliminary PMI stood at 48.8 in January, up only marginally from 48.7.

However, China's improvement paled in comparison with India's where the HSBC manufacturing PMI jumped to 57.5 in January from 54.2 in December.

Real Time Economics has a summary of the world's manufacturing PMIs.

Japanese industrial production rises, US consumer confidence falls

2012-02-01T08:18:00.002+08:00

Tuesday's economic data were mixed.

The day started positively in Japan where the Markit/JMMA manufacturing PMI rose to 50.7 in January from 50.2 in December. Industrial output rose 4.0 percent in December, reversing a 2.7 percent fall in November. Household spending rose 0.5 percent in December from a year earlier, the first rise since February 2011. The jobless rate edged up to 4.6 percent in December from 4.5 percent in November but the ratio of job offers to job seekers also rose to 0.71 in December from 0.69 in November.

In the euro area, the December unemployment rate was unchanged from an upwardly-revised rate of 10.4 percent in the previous month but German retail sales fell 1.4 percent in December and French consumer spending fell 0.7 percent.

In the UK, the GfK NOP consumer confidence index rose to -29 in January from -33 in December but consumer credit posted its sharpest drop in nearly two decades in December even as mortgage approvals rose to the highest level since December 2009.

In the US, the Conference Board's consumer confidence index unexpectedly fell to 61.1 in January from 64.8 in December while the Institute for Supply Management-Chicago's business barometer declined to 60.2 in January from 62.2 in December. The S&P/Case-Shiller index of home prices in 20 cities declined 3.7 percent in November from a year earlier after decreasing 3.4 percent in October.

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

2012-01-31T09:04:00.000+08:00

US economic data on Monday were mixed.

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

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

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

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

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

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

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

US economy maintains growth while eurozone economy stabilises

2012-01-30T10:00:00.000+08:00

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

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

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

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

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

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

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

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

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

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

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

US economy accelerates, Fitch downgrades five European countries

2012-01-28T10:18:00.000+08:00

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

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

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

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

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

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

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

US economic data on Thursday mostly positive

2012-01-27T09:23:00.000+08:00

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

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

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

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

Not all the US data on Thursday were positive though.

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

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

Fed to keep monetary policy accommodative

2012-01-26T10:24:00.001+08:00

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

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

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

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

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

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

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

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

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

2012-01-25T10:57:00.000+08:00

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

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

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

The news from Japan, though, has been negative.

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

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

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

Mixed data from euro area, economy remains in dangerous state

2012-01-24T10:32:00.002+08:00

There was mixed news from Europe on Monday.

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

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

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

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

ECB and Fed policies gain traction

2012-01-23T10:00:00.000+08:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Chinese manufacturing stays weak but US existing home sales jump

2012-01-21T08:22:00.002+08:00

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

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

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

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

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

2012-01-20T08:55:00.000+08:00

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

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

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

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

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

Positive news for euro area

2012-01-19T10:14:00.000+08:00

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

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

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

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

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

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

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

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