* UK economic data mixed
* European Central Bank buys Italian and Spanish debt as French bond yields rise
* Standard & Poor´s downgrades US sovereign debt rating as Federal Open Market Committee expects to hold rates steady for two years
* Japan´s current account surplus shrinks following March earthquake
* China´s trade surplus expands and inflation increases slightly
* Bank of Ireland and Commerzbank report disappointing earnings
UK economic data mixed
This week’s reports and statistics continued to paint a mixed picture of the UK economy. The Office for National Statistics said that in June industrial production was flat while manufacturing output fell 0.4% compared to the previous month. The British Retail Consortium revealed that in July the total value of retail sales rose 2.5% compared with a year ago, higher than this year’s average increase of 1.9%. The trade deficit widened from £4bn in May to £4.5bn in June. The biggest single contributor to the declining trade in goods was a sharp drop in oil exports. Meanwhile, the Royal Institution of Chartered Surveyors said that respondents reported the lowest average number of house sales over the past three months since the summer of 2009.
The National Institute of Economic and Social Research estimated that Britain’s GDP rose 0.6% in the three months ending in July compared to growth at just 0.2% in the three months to the end of June. In its quarterly inflation report, the Bank of England (BoE) cut its projection for GDP growth for next year by almost 0.5% to around 2%. The UK central bank warned that there was a “good chance” that inflation would reach 5% later this year, adding that the timing and extent of the subsequent decline in inflation remains uncertain. BoE Governor Sir Mervyn King signalled that another round of quantitative easing was unlikely unless price pressures subsided to the point that inflation looked set to fall below target (2%).
ECB buys Italian and Spanish bonds
This week investors continued to fret about the possibility that the fiscal problems of the Greek government would spread to other countries in the Euro Area, including Italy, Spain and France. The European Central Bank and the Group of Seven industrialised nations said that they would intervene in the markets for Italian and Spanish bonds if conditions warranted. The Group said that “…these actions, together with continuing fiscal discipline efforts, will enable long-term fiscal sustainability.” For her part, Spain’s Finance Ministry Elena Salgado promised budget measures worth €5bn ($7bn) to ensure that Spain meets this year’s deficit reduction target. The extra yield that investors demand to buy 10-year French debt rather than German bunds jumped to 0.87%, almost triple the 2010 average - even though both countries’ debt carry AAA ratings from the major rating companies.
Meanwhile, the Swiss National Bank (SNB) which has been battling to rein in the strength of the Swiss francs - as it is considered a safe haven by investors - this week left open the possibility of temporarily pegging the Swiss franc to the euro. The Swiss central bank also said that it could employ other tactics, raising speculation that the SNB could impose penalty rates on non-resident franc deposits for the first time since the 1970s. The Swiss franc dropped 4.6% to SFr0.7614 against the dollar and fell 5.3% to SFr1.0850 to the euro but was still higher against both currencies compared to the previous week. A separate report revealed that the Swiss franc’s recent appreciation threatens to undermine consumer confidence and economic growth in Hungary as it is estimated that almost twothirds of Hungarian mortgages are denominated in foreign currency, mostly Swiss francs.
In other news, an expected 1.2% decline in German exports in June saw the trade surplus of Euroland’s largest economy shrink to €11.5bn compared with €12.9bn in May. The rise in imports suggested that resilient domestic demand was compensating for the slowdown in exports.
US credit rating downgraded
In an unprecedented move, ratings agency Standard and Poor’s downgraded the US sovereign debt rating from the highest rating of AAA to double A plus. In the wake of volatility on global financial and currency markets following the rating downgrade, the Federal Open Market Committee expect to hold US short-term interest rates for two years and opened the door to more quantitative easing. The rate-setting committee stated that “economic conditions, including low rates of resource utilisation and a subdued outlook for inflation over the medium term, are likely to warrant exceptionally low levels for the Federal Funds rate at least through mid-2013”. The yield on 10-year Treasuries temporarily fell 0.25% to a record low of 2.0346 (and prices rose).
In other news, new claims for US unemployment benefits dropped to 395,000 last week, their lowest level in four months. Non-farm labour productivity decreased 0.3% in the second quarter from the previous quarter as unit labour costs rose 2.2%. Output increased 1.8% and hours worked rose 2%. The Commerce Department said that the US trade deficit in June widened to US$53.1bn, its highest level since October 2008. Imports and exports declined in the month. Separate Commerce Department figures showed that sales at wholesalers in June increased by 0.6% from May’s revised figures and 15.4% over the same period last year. Inventories also increased by 0.6%, more moderate than the 1% that had been forecast. The increase was the smallest rise in seven months. The increase in sales and a moderate rise in inventories should point to a stronger manufacturing sector over the second half of the year.
Meanwhile, the International Energy Agency’s (IEA) monthly oil market report for June disclosed a substantial cooling of demand and an increase in oil supply. The IEA cut its forecast of global oil demand this year by 100,000 barrels per day to an average of 89.5m barrels per day. A weak US dollar and the temporary pullback in the price of crude oil should offer a kind of substitute stimulus to US exporters and households.
Japan’s machinery orders recover after earthquake
Japan’s current account balance stood at a surplus of ¥5.5tn (US$67bn) in the first half of 2011, down 36.3% year-on-year. The Finance Ministry said that while dividends from overseas investment increased, exports plunged after the earthquake and tsunami in March.
Separately, the Cabinet Office said that the nation’s machinery orders rose for a second month in June as companies increased spending to restore businesses and production disrupted by the March earthquake. Factory orders – key indicator of capital spending – rose 7.7% from May to June.
Emerging markets news
China’s exports in July climbed 20.4% from a year earlier to a record high, pushing the trade surplus to US$31.5bn - the highest level in more than two years. Imports climbed 22.9%. China’s currency the renminbi touched a 17-year high of 6.4120 against the dollar. Meanwhile, China’s consumer inflation in July rose slightly to 6.5% from a year earlier. Inflation was driven mostly by volatile food prices, which soared 14.8% in the month. Industrial production growth from a year earlier decelerated from 15.1% in June to 14% in July and retail sales slowed to 17.2% in July from a year earlier and from 17.7% in June. The figures suggest that efforts on the part of the authorities to contain growth are effective.
Elsewhere, Russia’s currency, the rouble depreciated 2.7% to 35.38 against the dollar-euro basket, the sharpest daily decline since the basket’s introduction in 2005, prompting Russia’s central bank to intervene in the domestic currency market. Meanwhile, official estimates showed that Russia’s GDP expanded 3.4% from a year earlier in the April-June period, compared with 4.1% in the first quarter.
In South Africa, the Chamber of Commerce and Industry said that the nation’s confidence index dipped to 99 from 102.4 in June. This is the first time since February 2010 that the year-on-year index has been negative. Meanwhile, hundreds of thousands of South African workers have resumed work following disputes over salaries involving metal workers, petroleum workers, as well as diamond, gold and coal workers.
Company news
The Bank of Ireland explained that a rise in wholesale funding costs following the turmoil in European debt markets helped to wipe out more than a quarter of the lender’s net interest income in the first half of 2011. The bank posted a pre-tax loss of €556m in the first six months compared with a €116m profit a year earlier, even though bad debt impairments fell by a fifth. Elsewhere, Commerzbank said that its second-quarter earnings were all but wiped out by a €760m (US$1.1bn) writedown on Greek bonds. Germany’s second-largest bank by assets announced just €55m of operating profit in the three months to the end of June, compared with €771m in the second quarter a year ago.
Separately, New China Life Insurance, China’s fourth largest life assurer, revealed that it plans to raise up to US$4bn by selling shares in Hong Kong and Shanghai. The company originally planned to finish the initial public offerings before the end of October but, with global markets plummeting in reaction to ongoing issues in Europe and the USA, the company said that it may delay the listing. A separate report by Dealogic revealed that around US$42.1bn of IPOs have been withdrawn globally so far this year, an 8% increase from the same period last year.
