* UK housing market show tenative signs of recovery as prices rise by 1.2% in October compared to the previous month
* US consumer credit rises
* European Commission cuts its growth forecasts for the euro area as political uncertainty continues in Europe
* Chinese inflation at five month low as industrial production and domestic demand remain robust
UK housing market finds a floor
Two surveys of the UK residential real estate market that were released during the week indicated that the housing market is showing tentative signs of recovery. While the Housing Market Survey published by the Royal Institute of Chartered Surveyors (RICS) noted that the number of surveyors reporting falling prices over the three months to October exceeded the number of surveyors reporting rising prices by 24%, more than half of respondents indicated that prices were broadly stable over the period. Respondents who reported a decline indicated that the price falls were minimal. Encouragingly, the numbers of new buyer enquiries and of agreed sales edged upwards. Halifax noted that the average house price in the UK was £163,311 in October: by this measure, house prices were down 0.3% over three months and down 1.8% over 12months. However, prices are 1.2% higher than in September. Martin Ellis, Halifax’s housing price economist, highlighted the resilience of prices ‘despite the weak economic recovery and the deterioration in the outlook for both the UK and the global economies.’
Meanwhile, the Monetary Policy Committee (MPC) of the Bank of England voted to maintain interest rates at 0.5% and to continue with an asset purchase program of £275bn. The MPC expects that the program will take another three months to complete.
US consumer credit rises
During the week, Federal Reserve data showed that consumer credit in the USA increased by US$7.4bn in September. This was more than had been expected. Households reduced credit card and other revolving debt, but increased borrowings for big-ticket items such as cars and education. The rise follows a fall in consumer credit in August and suggests that households are not entirely despondent, notwithstanding the weak US labour market.
Meanwhile, the US Senate passed – unanimously – a bill that will repeal the requirement for governments (federal, state and local) to begin withholding 3% of payments to contractors from 2013. The bill also includes tax credits for companies that hire unemployed veterans. In essence, the bill will result in an estimated US$11bn in foregone revenue to the US government over 10 years, but should provide an impetus for employment growth over the short-to-medium term.
The American Farm Bureau Federation published data which suggested that the cost of a Thanksgiving dinner for 10 people will rise by 13% to US$49.20 this year. The price of turkey – the main element of the meal – will be about 22% higher. The 13% gain is the largest since 1990. For its part, the government is looking for food price inflation in the USA of 3.5-4.5% this year. Both sets of data highlight how global food prices have been rising: this is partly the result of adverse weather conditions and rising demand in the emerging markets.
Political uncertainty continues in Europe
Financial markets in Europe remained volatile, as investors reacted to complex and rapidly changing political situations in Greece and Italy.
Economic data that was published was mixed. Germany’s Federal Statistics Office noted that that country’s exports increased by 0.9% month-on-month in September, they had increased by 3.2% in August. September’s result was better than expected by many analysts – and suggests that Germany’s world-class export companies continue to capture orders in emerging markets, which are still expanding reasonably rapidly.
With the sovereign debt crisis rumbling on, the European Commission cut its forecasts for economic growth in the euro area for 2011 and 2012. Previously, the Commission had forecast growth of 1.6% and 1.8% respectively: now the corresponding figures are 1.5% and 0.5%. The Commission is tentatively looking for growth of 1.3% in 2013. It has noted that there is a risk that the euro area will slip into recession – thanks in part to the ongoing fiscal crisis. The Commission forecasts aggregated gross government debt for the euro area to rise from 88% of GDP this year to 90.4% next year. However, the aggregated budget deficit should slip from 4.1% of GDP in 2011 to 3.4% in 2012.
During the week, Credit Agricole was the latest French bank to report that its profitability had been impacted by its holdings of Greek bonds. Its net income for the third quarter of 2011 was €258m, a sharp reduction from the €742m of the third quarter of 2011. Pre-tax losses in relation to Greek assets amounted to €905m.
Japanese business made cautious by high Yen
During the week, Japan’s Cabinet Office noted that bookings for new machine orders were 8.2% lower in September than they had been in August. The implication is that Japanese companies are delaying major investments in capital equipment because of the challenges posed by the strength of the yen.
Meanwhile, Mitsubishi Corp., the largest trading company in Japan, agreed to buy a 24.5% stake in Anglo American Sur SA, Anglo American’s copper operation in Chile, for US$5.39bn. One implication of the deal is that Chilean copper producer Codelco, which had hoped to exercise an option to buy 49% of Anglo American Sur, will now only be able to acquire a 24.5% stake. The transaction improves Mitsubishi’s ability to secure supplies of copper at a time when copper prices remain well supported.
Ratings agency Moody’s Investor Services cut the rating of Daiwa Securities Group to Baa3, the lowest investment grade level. Moody’s also warned that it may downgrade Nomura Holdings, Japan’s largest securities firm, from the current Baa2. In both instances, Moody’s is concerned about the implications of the firms’ substantial expansions into global markets (in Nomura’s case, through the purchase of Lehman Brothers’ operations in Europe and Asia in 2008) at a time when global financial conditions have become more challenging.
Emerging market news
Several data releases pointed to China’s economy heading towards a ‘soft landing’ – where a slowing in growth (but not a recession) is accompanied by moderating inflation. The Customs Bureau reported that exports in October were 15.9% higher than they had been a year previously. By this measure, export growth is the slowest that it has been for two years. The trade surplus for the month was US$17bn – or lower than had generally been expected. Imports were 28.7% higher than they had been in October 2010. These figures highlight how domestic demand remains considerably stronger in China than in most of the country’s major trading partners. Meanwhile, the National Bureau of Statistics (NBS) noted that consumer price index (CPI) inflation in October was 5.5%, the lowest for five months. Industrial production in October was 13.2% higher than it had been a year previously.
According to the China Association of Automobile Manufacturers, total deliveries of passenger and commercial vehicles slipped by 1.1% to 1.52m in October, largely due to a sharp drop in sales of minivans, following the phasing out of government incentives which had been in place for two years. In India, sales of passenger vehicles fell by 24% to 138,521, according to the Society of Indian Automobile Manufacturers. Sales were hurt by strikes at Maruti Suzuki India, the largest auto producer in the country.
Elsewhere, the Board of Governors of Bank Indonesia, the country’s central bank, surprised many observers by cutting its key policy interest rate by 0.50% to 6.00%. This decision was taken to reduce the impact of the slowdown in the global economy. The Board noted that Indonesia’s economy had grown by 6.5% year-on-year in the third quarter of 2011 and that inflationary pressures were moderating.
Ratings Agency Standard & Poors increased the credit rating of Kazakhstan by one notch to BBB+, the third-lowest investment grade. This means that Kazakhstan now has a higher rating from S&P than Russia. This reflects the stronger position of Kazakhstan’s public finances. In spite of the financial turmoil in Europe (and volatility in the zloty earlier this year), the National Bank of Poland (NBP) decided to keep its key seven-day interest rate unchanged at 4.5%.
Company news
Global tobacco giant British America Tobacco (BAT) indicated its opposition to a new law proposed by Australia’s government, which will require that cigarettes sold in that country will have to be in plain brown packages - without the company logos. BAT suggests that it is unconstitutional for the government to require that companies suppress the branding of their products – and has warned that it will mount a legal challenge in Australia’s highest court if the law is enacted.
KGHM, the Polish company that is the largest producer of mined copper in Europe, said that its year-on-year profit in the third quarter of 2011 tripled, relative to the third quarter of 2011, due to higher copper prices and the weakness of the zloty. The company hopes to make major acquisitions.
During the week, three major telephone companies Deutsche Telekom, Vodafone and SingTel, posted results for the third quarter of 2011. Deutsche Telekom released better-than-expected earnings thanks to cost cuts in Germany and the expansion of its T-Mobile USA wireless operation. Vodafone also beat forecasts and lifted its profit guidance for the year as a whole. It has been helped by a new tariff charge, as well as double-digit growth for its businesses in India and Turkey. In Singapore, SingTel’s results were slightly less positive as contributions from overseas businesses such as Bharti Airtel in India have been negatively impacted by the strength of the Singapore dollar.
