* New signs that the Bank of England is moving towards more quantitative easing
* German unemployment falls
* US capital goods orders increase, aided by sales to large emerging markets such as China and India
* The Bank of Japan buys more Real Estate Investment Trusts
* Brazil´s government cuts the import tax on petrol
* Citic Securities successfully undertakes a large scale Initial Public Offering in Hong Kong
Bank of England: moving towards further Quantitative Easing?
During the week, two members of the Bank of England’s Monetary Policy Committee (MPC) hinted that they were moving towards supporting an increase in the Bank’s quantitative easing program (QE – expansion of the money supply through the purchase of bonds). As at the MPC meeting that took place on 7-8 September, only one Committee member had voted in favour of an increase in asset purchases – from £200m to £250m. However, in an interview with The Times this week, David Miles indicated that he may vote in favour of an increase in QE in the coming months. Separately, Ben Broadbent said on 26 September that he was ‘reasonably close’ to voting for more QE at this month’s meeting.
M4 money supply growth, the measure that the Bank follows in order to gauge the effectiveness of its QE program, slipped from an annualised rate of 3.7% in the three months to the end of July, to 2.3% in the three months to the end of August. Elsewhere, the Bank of England’s data showed that the number of home mortgage loans granted in the UK rose from 49,644 in July to 52,410 in August. This means that the number of mortgages has risen to a 20 month high, thanks in part to very low interest rates.
Germany votes to expand European Financial Stability Facility
Investors reacted positively to the news that Germany’s parliament had voted overwhelmingly in favour of measures that will increase the ability of the €440bn European Financial Stability Facility (EFSF) to buy securities and to inject capital into troubled banks. The vote had been widely seen as a major hurdle that would need to be overcome if the EFSF is to have the flexibility to prevent ‘contagion’ in financial markets. Other Euro area parliaments have yet to vote on the proposed changes to the EFSF. During the week, the ‘troika’ of officials from the International Monetary Fund, the European Commission and the European Central Bank resumed negotiations with the government of Greece: the next €8bn tranche of the €110bn rescue package will only be paid if the Greek government has made adequate progress in cutting spending.
The European Commission’s index of business and consumer sentiment in the euro area fell from a revised 98.4 in August to 95: this is the lowest level since December 2009 and was below expectations. In Italy, Istat’s index of sentiment in the manufacturing sector slipped from a revised 98.6 in August to 94.5, the lowest level since January 2010.
However, the economic data that was released in the euro area was far from uniformly gloomy. The Federal Labour Agency noted that the number of unemployed people in Germany fell by a seasonally adjusted 26,000 to 2.92m this month, the largest fall since April and considerably greater than had been expected. At 6.1%, the unemployment rate in Germany is substantially less than in other OECD European countries (9.4%) or the USA (9.1%). Separately, the Ifo institute said that its index of business confidence in Germany had slipped from 108.7 in August to 107.5 in September: this suggests that, collectively, Germany’s business executives are more upbeat than most observers had been expecting. Ifo’s gauge of current conditions fell from 118.1 to 117.9, while the index measuring expectations dropped from 100 to 98.
Better than expected conditions in the US labour market
Data released by the US Labor Department during the week showed that applications for jobless benefits dropped by 37,000 in the week to 24 September to 391,000. This is the lowest number of initial jobless claims since April and was less than had generally been expected by analysts. Separately, the Commerce Department reported that the US economy grew by 1.3% in Q2 2011 – or faster than had been estimated last month – thanks to higher exports and spending on services. The Commerce Department also noted that orders for capital goods in the US (excluding military hardware and aircraft) rose by 1.1% in the month of August. This was the fastest increase since May. Some large manufacturers of capital goods are benefiting from sales to China, India and other developing countries. Demand for all durable goods slipped by 0.1%, less than had been previously expected.
During the week, there were two noteworthy speeches by senior Federal Reserve officials. Governor Sarah Bloom Raskin noted that record monetary easing by the central bank had not boosted growth in activity and employment by as much as had been anticipated: however, this fact should not, she said, discourage the Federal Reserve from further easing. ‘Given the elevated rate of unemployment and the large number of individuals who are experiencing long spells of unemployment, both fiscal and monetary policymakers should be considering a wide array of approaches for promoting job creation,’ she added. Chairman Ben Bernanke considered what lessons could be learnt from emerging markets in relation to sustainable growth, highlighting ‘…the importance of disciplined fiscal policies, the benefits of open trade, the need to encourage private capital formation while undertaking necessary public investments, the high returns to education and to promoting technological advances, and the importance of a regulatory framework that encourages entrepreneurship and innovation while maintaining financial stability.’
Bank of Japan continues to buy REITs
Towards the end of the week, the Bank of Japan reported that it had spent another ¥1.7bn (US$22m) on purchases of Japanese Real Estate Investment Trusts (J-REITs). These purchases are a part of the central bank’s unorthodox monetary policies – and seek to promote the trading in J-REITs. In recent weeks, the Bank of Japan has also been buying exchange-traded funds (ETFs).
Meanwhile, the Ministry of Economy Trade and Industry (METI) said that retail sales in August were 1.7% lower than they had been in July and 2.6% lower than they had been in August 2010. The slippage in retail sales was driven in part by lower sales of cars and in part by lower sales through department stores. The implication is that the rebound in spending in the wake of the earthquake (and tsunami and nuclear disaster) of March may be losing momentum.
Emerging market news
Much of the newsflow from emerging markets highlighted how developing economies continue to grow at a high rate. The General Statistics Office of Vietnam, for instance, said that economic growth in the first nine months of 2011 was 5.76%, or a little less than the 6.54% of the previous corresponding period. The slowdown is the result of moves by the State Bank of Vietnam to tighten monetary policy in order to rein in inflation by lifting its key interest rate from 7% at the beginning of November 2010 to 15% in May this year. In July however, the State Bank of Vietnam reduced the key interest rate to 14%.
Thailand’s Office of Industrial Economics said that industrial production in July was 7% higher than in the same month of 2010. Most commentators had been looking for growth of 4%. Thailand’s auto industry is benefiting from pent-up demand for new cars, both at home and overseas. Production of cars, as well as of rubber products and hard-disk drives, has grown at double-digit rates over the last year. Earlier this month, the Commerce Ministry had said that Thailand’s exports should rise by about 20% in calendar 2011.
In Singapore, official statistics showed that industrial production increased at a seasonally adjusted rate of 3.9% in the month of August (relative to July). Manufacturing activity is 21.7% higher than it was in August 2010 – thanks mainly to pharmaceuticals.
In Taiwan, the Central Bank of China (CBC) kept its key interest rate unchanged at 1.875%. According to CBC Governor Perng Fai-nan, the decision to keep monetary policy unchanged reflected the slowing of the global economy and the diminution of inflationary pressures in Taiwan itself.
Elsewhere, the Bank of Korea said that its index of consumer confidence in September stood at 99, or the same level as in August. A reading below 100 indicates that households are slightly more pessimistic than over the long-term average.
The latest statistics show that Mexico’s economy is slowing, albeit gradually. According to INEGI, the national statistics office, economic activity in July was 3.74% higher than it had been a year before. In July 2010, the corresponding figure was 4.51%. Over the last year, activity has grown most rapidly in the agricultural sector, where INEGI’s indicator has advanced by 6.95% year-on-year.
Meanwhile, a report published by the International Monetary Fund (IMF) following its Article IV Consultation with the government of Russia noted that the economy should grow by 4.3% this year and by 4.1% in 2012. Previously, the IMF had been looking for growth of 4.8% and 4.5%. The IMF expects that inflation in Russia this year will be 7.5%, or a little more than the central bank’s 6-7% target.
In part as a response to mounting inflationary pressures, Brazil’s government cut the CIDE tax that applies to imported petrol by 16% - from BRL192.60 per cubic metre to BRL230 per cubic metre. One beneficiary will be state-owned (and listed) oil giant Petrobras, which had not previously been able to pass onto consumers the total cost of the petrol that it was importing.
Company news
This week, Finnish mobile phone giant Nokia said that it would cut 3,500 jobs (out of a total workforce of nearly 139,000) and close a factory in Romania that was only opened in 2008. In Europe, Nokia’s feature phones (which it was producing in Romania) face stiff competition from smartphones. However, the company is producing and selling feature phones in China, South Korea and India – and is building a new plant in Vietnam.
The share price of conglomerate Berkshire Hathaway soared when the board approved a stock buy-back. This is an unusual move for the company and suggests that Warren Buffett, the investment guru who is the Chairman and CEO, sees it as being undervalued.
Citic Securities, the largest stockbroker in China, successfully raised US$1.7bn by way of an Initial Public Offering (IPO) of H Shares in Hong Kong. This was the fourth largest IPO in Hong Kong this year (after Glencore, Prada and Shanghai Pharmaceuticals Holdings) and the third largest financial sector company IPO globally (after Bankia and Vallares). The success of the IPO is notable given that a number of other high profile deals in Hong Kong have been postponed because of volatile markets.
