* Bank of England´s Monetary Policy Committee hints that it may embark on a further round of quantitative easing in the future
* Global markets are unnerved by the latest Markit PMI for the Euro area
* The Federal Open Market Committee introduces its latest stimulus package for the US economy
* The Monthly Economic Report of Japan´s Cabinet Office indicates that the gradual economic recovery continues
* The IMF´s World Economic Outlook highlights the superior prospects of the emerging markets
Bank of England: moving towards further quantitative easing?
During the week, the Bank of England published the minutes of the Monetary Policy Committee (MPC) meeting that had taken place on 7-8 September. The minutes showed that, although the MPC faces something of a dilemma, given that it has to deal with inflation in the UK that is persistently higher than the 2% target and weak domestic demand, the latter continues to be seen as the more pressing problem. The MPC noted that ‘there had been significant downside news on activity over the month, which had pointed to a synchronised slowing in global growth,’ while in the UK, ‘there had been a marked deterioration in the business surveys, especially for services.’ The MPC kept the bank interest rate unchanged at 0.5%, and decided not to extend its quantitative easing program. However, the minutes noted that a continuation of the conditions seen over the past month may be sufficient to justify further quantitative easing for some members.
The other main development during the week was the publication of the latest monthly industrial trends survey for the UK by the Confederation of British Industry (CBI). This indicated that factory orders in September had fallen by more than expected, thanks to further slippage in demand for exports. However, the survey also showed that 29% of the manufacturers surveyed expect their output to increase over the next 12 weeks, while 20% anticipate that their output will decline. The net balance of +9% suggests that the UK’s manufacturers are more optimistic than their counterparts in the Euro area.
Eurozone PMI slips
One of the factors that contributed to volatility in global financial markets towards the end of the week was the release of Markit’s latest composite purchasing manager’s index (PMI) for the Euro area. The composite PMI – which includes both the services and the manufacturing sectors – slipped from 50.7 in August to 49.2 in September. This outcome was worse than had been expected and and indicated that – for the first time since July 2009 – that activity is contracting. Separately, Eurostat’s figures showed that industrial orders in the Euro area had fallen by 2.1% month-on-month in July, having slipped by 1.2% in June.
Earlier in the week, investors had been unsettled by the decision of ratings agency Standard & Poor’s (S&P) to lower Italy’s sovereign credit rating from A+ to A, with a negative outlook. The agency noted that it was worried that the country’s ‘fragile’ government and the generally difficult economic environment would prevent a reduction in the burden of public debt. S&P’s downgrade of Italy‘s sovereign credit rating was the first since 2006 and surprised some observers – who had envisaged that Moody’s Investor Services would move first to lower the country’s rating. Italian Prime Minister Silvio Berlusconi attacked the decision by S&P, saying that it had been politically motivated.
‘Operation Twist’
A highlight of the week was the announcement by the US Federal Open Market Committee that it would extend the average maturity of the Federal Reserve’s holdings of US Treasuries. The Fed intends to purchase US$400bn of long-dated Treasury securities by June 2012, selling an equal amount of Treasury securities with remaining maturities of three years or less.’ The Committee noted that ‘this program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.’ This program was dubbed ‘Operation Twist’ – a reflection of the nickname given to a similar program that had been undertaken by the Federal Reserve in 1961.
Aside from keeping the federal funds target unchanged at 0.00-0.25%, the Committee also decided to reinvest the proceeds from maturing agency debt and agency mortgage-backed securities (MBS) back into the market, aiming to boost the flagging housing market.
Japan’s gradual recovery continues
Japan’s Cabinet Office released its Monthly Economic Report, which indicated that industrial production is picking up, as the reconstruction of supply chains continues following the March earthquake. The report also highlighted growth in exports and a pick up in private consumption. Looking forward, the government will identify what measures to take in order ‘to respond to the downside risk of the economy stemming from the rapid appreciation of the Yen and the risk of hollowing-out of industry.’
Seperately, the Bank of Japan announced that it is continuing to undertake unorthodox monetary policy measures, having purchased ¥22.3bn (US$292mn) in exchange-traded funds (ETFs) and ¥1.7bn in Japanese Real Estate Investment Trusts (J-REITs). These purchases are a part of the central bank’s program to promote trading in these securities.
Emerging market news
Another highlight of the week was the publication of the latest edition of the semi-annual World Economic Outlook of the International Monetary Fund (IMF). Much media commentary focused on the caution of the Outlook in relation to the prospects for developed countries. The Outlook cut its GDP growth projections for the developed world by 0.6 percentage points, to 1.6% for 2011, and by 0.7 percentage points, to 1.9% for 2012. Risks include a potential deterioration of the crisis in the Euro area and from a new downturn in economic activity in the USA.
However, less attention was paid to the still significantly more benign prospects for many emerging markets. The Outlook expects that the world’s emerging markets will, collectively, achieve GDP growth of 6.4% in 2011 and of 6.1% in 2012. This represents a mild deceleration relative to 2010, when the emerging economies expanded by 7.3%.
The Outlook noted that Asia’s track record over the last three years has been good. ‘Growth remains strong, although it is moderating, with emerging capacity constraints and weaker external demand. Downdrafts from weaker activity in major advanced economies suggest that some economies may stop raising rates, highlighting the importance of rebalancing growth toward domestic sources.’ The Outlook advocates a greater focus on domestic demand in regional economies ‘with persistent current account surpluses.’ The Outlook was also generally upbeat about the prospects for Latin Sub-Saharan Africa and most of the Middle East and North Africa, as well as Russia.
Elsewhere, several signs continue to point to China’s approaching an economic ‘soft landing.’ HSBC’s ‘flash’ purchasing manager’s index (PMI), which seeks to indicate the likely direction of manufacturing activity, slipped from 49.9 in August to 49.4 in September. This means that the PMI has been around 50 – the level below which activity is likely to contract – for three consecutive months. However, HSBC itself notes that a reading as low as 48 would still be consistent with annual growth in industrial production of 12-13% and a rise in GDP of around 9%. Meanwhile, Chinese property stocks were sold down sharply as a result of reports that the China Banking Regulatory Commission (CBRC) had ordered trust companies to stop lending to Greentown, the largest builder in Zhejiang, the wealthy province to the south of Shanghai. The CBRC’s move was seen as being the latest of a long line of official measures to curb speculation in the real estate market. Reports indicate that, already, major developers in Shanghai have been cutting sales prices for their residential projects. In Hong Kong, too, the real estate market is cooling thanks in part to measures introduced by the government in June to limit further rises in prices that had been skyrocketing.
A feature of the week was the softness in many emerging markets currencies (and some developed market currencies that are perceived as being linked to commodity prices and global growth, such as the Australian dollar). The Turkish lira slipped to record lows against the US dollar. Brazil’s real also fell against the dollar, ironically after the government had lamented the strength of the real as a result of ‘currency wars’ with investors and policy-makers in developed countries. Writing in a column that appeared in the Financial Times on September 21, Brazilian President Dilma Rousseff noted that: ‘threatened by large speculative capital flows as well as by a rapid and unsustainable currency appreciation, developing countries that adopt a floating exchange rate regime, such as Brazil, are forced to take prudential measures to protect their economies and their national currencies.’
The central banks of Turkey and South Africa kept monetary policy settings on hold during the week. In both cases, the policy-makers noted that external conditions had become more challenging. In Saudi Arabia, official statistics indicated that headline inflation had slipped from 4.9% to 4.8% in August. This was in spite of the recent rise in food prices which, according to the Food and Agriculture Organisation (FAO) had risen by 26% over the year to the end of August. The implication is that the government is having considerable success in convincing retailers (and, presumably, food manufacturers) to limit price increases. For its part, the IMF envisages that inflation in Saudi Arabia will be around 6% for 2011 as a whole.
Company news
This week, Australian brewing giant Fosters agreed to a take over bid by SABMiller, the global beer company that is based in the UK, at a price of A$5.5325 per share. The deal values Fosters at A$12.3bn. The Australian company had previously rejected a hostile bid from SABMiller in a deal that had valued Fosters’ shares at A$4.90.
The share price of Japan Tobacco Inc., Japan’s largest cigarette maker, rose sharply to the highest levels for nearly three years. This was because of widespread perceptions that the company will be able to lift the prices of its cigarettes by more than the tax increases that have recently been proposed by Japan’s Health Minister, Yoko Komiyama. Ms Komiyama, who was appointed to her post on September 2, is calling for a 75% rise in the tax that is applied to an average packet of cigarettes to ¥700 (US$9.15), or 75% more than the current level. The Minister wants the price of cigarettes to be at a level that maintains tax revenues, but which encourages those smokers who want to quit smoking to do so.
In the USA, ratings agency Moody’s Investor Services cut its ratings of three of the country’s largest banks – Bank of America, Citigroup and Wells Fargo.
Prada, the Italian luxury goods company, reported that net income in the six months to the end of July amounted to €179.5m, or 74% more than in the previous corresponding period. The company is benefiting from strong growth in demand for its products in Asia, and an aggressive campaign to open new stores.
