Relentless Concern about Advanced Economies

November 16, 2010

The take-no-prisoners angered folk of the U.S. Republican Party have turned their sights on the Bernanke-led Federal Reserve.  QE2 has been associated with rising long-term interest rates, not the decline it was intended to promote.  Stocks got pummeled overnight.

In Europe, Britain announced a further and unexpected rise in CPI inflation, and Bank of England Governor King predicted such would remain elevated throughout next year.  An even bigger worry is the contagion of the sovereign debt crisis.  Ireland’s Prime Minister Cowan hints that Ireland may seek aid from the EU after all, which helped narrow the bloated Irish bond yield premium somewhat.  Fear is swinging toward Portugal and behind that, Spain and Italy.

In Japan, Monday’s news of a 1.6% drop in industrial production for September was followed today by news of a 0.9% decline in the tertiary index, which measures activity in the service sectors.  Wholesale and retail fell 1.6%, while the component for information and communication fell by 3.7% in the latest month.  Japanese machine tool orders were 71% higher than a year earlier in October, down from a 12-month increase of 113.6% in September.

Concern that China will take further actions to contain inflation and slow growth weighed on Asian equities. Stocks fell by 4.4% in China, 2.8% in Thailand, 2.2% in India, 1.4% in Hong Kong, 0.8% in Singapore and South Korea, 0.5% in Sri Lanka and 0.4% in New Zealand.  In Europe, the Paris Cac and British Ftse have skidded 1.7% and 1.6%, while the German Dax is trading 0.9% weaker.

The Bank of Korea as expected raised its key interest rate to 2.5% from 2.25% and signaled more moves ahead by calling policy still accommodative.

Minutes from the Reserve Bank of Australia’s November meeting, which sanctioned a 25-bp rate hike, cited stronger economic activity and a likely upturn in inflation.  The minutes correctly anticipated that some banks would raise their lending rates in response by more than 25 basis points.

The dollar is unchanged against the euro but up by 0.6% against the Canadian and Australian dollars, 0.4% versus sterling, 0.3% relative to the kiwi, 0.2% against the yen and 0.1% vis-a-vis the Swiss franc.  China’s yuan edged 0.1% higher, its first rise since the G20 summit.

Ten-year sovereign debt yields eased two basis points in Britain and Japan but firmed one basis point in Germany.

Oil (down 1.5% to $83.62) and gold (off 1.0% to $1354.90) fell rather sharply overnight.

The ZEW Institute released better-than-forecast indications of investor sentiment toward Germany and the euro area.  The expectations index for Germany improved from negative 7.2 in September to +1.8, a three-month high, while current conditions climbed further to 81.5 from 72.6 in September, 59.9 in August, 44.3 in July and 14.6 in June.  The survey for Euroland showed a 12-point improvement to 13.8 in the expectations component, but the current conditions index stagnated at minus 1.0 after minus 1.1 in September, minus 6.3 in August, minus 13.0 in July and minus 26.5 in June.

The house price index of Britain’s Department of Communities and Local Government sank 0.8% on month in September, trimming the 12-month rate of rise to 6.1% from 8.3% in August and a 2010 peak of 11.0% in May.

Euroland consumer price data were released for October, showing gains of 0.4% on month and 1.9% on year.  Consumer prices had dipped 0.1% in the previous year to October 2009.  Core inflation was 1.1% in the last 12 months, up from 1.0% in both the year to September and the year to October 2009.  Energy prices went up 0.6% on month and 8.5% on year in October.  On-year inflation rates ranged from minus 0.8% in Ireland to 1.3% in Germany, 1.8% in France, 2.0% in Italy, 2.3% in Spain and 5.2% in Greece.

French nonfarm payroll employment rose 0.3% on quarter and 0.6% on year in August-October.  Spain’s index of leading economic indicators dipped 0.1% in September.  Italian consumer prices were confirmed to have risen 0.2% on month and 1.7% on year in October.  Sweden’s government is projecting a tiny budget surplus in 2011 and a bigger surplus by 2012.

Hong Kong unemployment held steady at the 3Q level of 4.2% in August-October. Singapore retail sales fell 2.4% in September, reversing August’s rise, but increased 0.7% excluding motor vehicles.  Non-oil domestic exports in Singapore were 35% greater than a year earlier in October.  China’s index of leading economic indicators rose 0.6% in September according to the Conference Board.

Several key U.S. indicators get released today: producer prices, industrial production, capacity use, the National Association of Home Builders index, weekly chain store sales, and the monthly capital flow data compiled by the Treasury Department.  Canada’s monthly survey of manufacturing sales and orders arrives as well.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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