* The Bank of England increases its asset purchase program by GBP 75bn to GBP 275bn
* Federal Open Market Committee Chairman Ben Bernanke gives no indication that the Federal Reserve is considering more quantitative easing
* The European Central Bank announces that it will purchase EUR 40bn in covered bonds and continue to provide financing to European banks
* The Bank of Japan´s Tankan survey highlights manufacturers are downbeat
* The Brazilian central bank´s index of commodity prices rises by another 7.83% in September
Bank of England: Expands asset purchase program to £275bn
At its meeting on 6 October, the Monetary Policy Committee (MPC) of the Bank of England voted to increase the size of the Bank’s asset purchase program by £75bn to a total of £275bn. The MPC’s Press Release noted that ‘the pace of global expansion has slackened, especially in the UK’s main export markets. Vulnerabilities associated with the indebtedness of some euro area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.’
The MPC is also concerned that the underlying pace of growth within the UK has slowed. CPI inflation was 4.5% in August – and is likely to rise above 5.0% in the next month or so. However, the MPC remains satisfied that the factors that are causing CPI inflation to be well in excess of the Bank’s 2% target over the medium term are temporary. Indeed, looking further ahead, the MPC believes that it is more likely that inflation will undershoot the target. The announced asset purchases will likely take place over the next four months. Meanwhile, the Bank Rate remained unchanged at 0.5%.
The Office for National Statistics (ONS) published revised data in relation to the UK’s GDP growth in Q2 2011. Activity rose by 0.1%, relative to Q1 2011, down from the 0.2% originally announced. GDP rose by 0.6% year-on-year. Consumer spending fell by 0.8% in the quarter: the weakest it has been since Q1 2009. However, good news came in the form of the Markit/Chartered Institute of Purchasing and Supply (CIPS) index of manufacturing, which rose from a revised 49.4 in August to a higher-than-expected 51.1 in September. This result suggests that the UK’s manufacturers have recently stepped up production in order to clear a backlog of orders.
Bernanke: No more QE at this stage
On 4 October, Federal Reserve Chairman Ben Bernanke testified before the Joint Economic Committee of the US Congress. Mr Bernanke highlighted a number of ‘positive developments’ in the US economy over the three years since the global financial crisis reached its critical phase. ‘Nevertheless, it is clear that, overall, the recovery from the crisis has been much less robust than we had hoped.’ Mr Bernanke noted several steps that the Federal Open Market Committee (FOMC) had taken ‘in view of the deterioration in the economic outlook over the summer and the subdued inflation picture over the medium term.’ In August, the central bank had confirmed that exceptionally low interest rates would likely remain in place at least until mid-2013. In the last few weeks, the FOMC has announced that it will extend the maturity of the Federal Reserve’s holdings of securities (termed as ‘Operation Twist’). However, the latest stimulus package does not extend the size of the Fed’s balance sheet and Mr Bernanke gave no indication that the FOMC is looking at a new round of Quantitative Easing (QE3) at this stage.
US economic news during the week was mixed. The Institute for Supply Management (ISM) announced that its index of nonmanufacturing businesses slipped from 53.3 in August to 53.0 in September. This indicates that activity is still expanding – and faster than had generally been expected. The Labor Department noted that applications for jobless benefits in the week to 1 October were 401,000, or lower than had been expected. The implication is that US businesses may be beginning to slow the rate of labour retrenchment. However, Bloomberg’s Consumer Comfort Index rose to minus 50.2 in the week to 2 October, from minus 53 of the preceding week that had been the second-lowest level on record. US consumers are still worried about the fragility of the labour market, housing prices and the general state of the economy.
European Central Bank announces asset purchases
At its meeting on 6 October, the last to be presided over by Jean-Claude Trichet, the Governing Council of the European Central Bank (ECB) kept the key refinancing rate unchanged at 1.50%. However, the Council has decided that the ECB will buy €40bn in covered bonds from next month. The ECB will also offer commercial banks in the Euro area unlimited quantities of money in 12-month and 13-month loans. The ECB will continue to lend banks as much money as they need through its normal refinancing operations at least until July next year. Mr Trichet noted that the ECB remains cautious about the prospects for the euro area economy over the remainder of the year. The challenges that he identified included ‘a moderation in the pace of global demand, falling consumer and business confidence, and unfavourable effects on financing conditions resulting from ongoing tensions in a number of euro area sovereign debt markets.’
Meanwhile, the latest round of statistics confirmed that economic activity in much of the euro area remains lacklustre. Eurostat noted that retail sales across the euro area slipped by 0.3% in August (relative to July). Markit Economics published its final services and composite purchasing managers indices (PMIs) for September. The services PMI slipped from 51.5 in August to 48.8 in September, while the composite PMI dropped from 51.1 to 49.1. Any figure below 50 indicates contraction. Markit’s composite PMI for Germany was 50.5 in September.
Tankan highlights manufacturers’ gloom
The Bank of Japan reported that its Tankan index of sentiment among the country’s large manufacturers rose from minus 9 in June to plus 2 in September. This result suggests that business sentiment is in line with most observers’ expectations, but below what it had been in March. Looking forward, the number of large manufacturers who are positive about conditions in December is only marginally larger than the number that are negative: the index is plus 4. Meanwhile, small and medium-sized manufacturers are more bearish than larger companies. The implication is that many Japanese businesses are concerned about the softness of the global economy and the strength of the yen. Press reports during the week indicated that Toyota, for instance, is considering making the Toyota Camry cars that it plans to sell in South Korea next year at one of its plants in the US state of Kentucky.
Emerging market news
During the week, the central bank of Brazil announced that its index of commodity prices rose by 7.83% in the month of September, and by 24.77% relative to September 2010. Although the index is based on commodities which are thought by the central bank to have the greatest impact on consumer prices within Brazil, these figures highlight the strong improvement in the country’s terms of trade over the last year or so. Meanwhile, Brazil’s Mining Ministry said that it is considering a plan to lift the royalty rate that applies to iron ore from 2% of net sales to 4% of gross sales. However, this may be offset by a reduction in the levy on fertilisers. The Ministry is keen to promote domestic production of fertilisers and to reduce Brazil’s dependence on imports.
Meanwhile, the Central Bank of the Republic of Turkey (CBRT) sold US$1.2bn of foreign currency in order to protect the Lira from further declines. As at the end of September, the country’s foreign currency reserves stood at US$87.5bn: the CBRT’s intervention in currency markets is seen as being one of its largest ever. This news came at about the same time that Sergey Ignatiev, the Chairman of the Bank of Russia, acknowledged that that central bank had sold around US$8bn from foreign currency reserves (which stand at about US$526bn) during September in order to strengthen the Rouble.
Two emerging markets central banks announced a tightening in monetary policy during the week. The Central Bank of Kenya lifted its key policy rate by 400 basis points to 11%. The central bank is keen to combat inflation which, at 17.3%, is more than triple the official target set by the government. The State Bank of Vietnam announced an increase in its refinancing rate by 100 basis points to 15%.
Two announcements during the week highlighted how the development of financial services in South East Asia is continuing. Indonesia’s Finance Minister said that the government will proceed with a planned US$1bn global Sukuk (bonds which are structured so that it complies with Islamic principles). Meanwhile the President of the Philippine Stock Exchange said that the bourse is looking to introduce exchange-traded funds (ETFs) and securities lending in order to promote trading by foreign investors.
Thailand’s government announced plans to buy rice at prices that are upto 44% above the levels that are currently prevailing in local markets. According to Prime Minister Yingluck Shinawatra, the intention of the policy is to boost rural incomes, in order to promote domestic demand and economic growth. The plan comes in the wake of disruption to agriculture through severe flooding. The election of Yingluck’s party was in part due to substantial support from poorer Thais, who will be the main beneficiaries of the new policy.
Japan’s Nissan Motor Company said it is looking to invest 2.6bn reals (US$1.4bn) in a new assembly plant at Resende near Rio de Janeiro, Brazil. Nissan’s decision is influenced by the growth potential of the Brazilian motor market, which has expanded by 10% annually over the last five years. In addition, the recently increased taxes on some vehicles whose use of local components is less than 65% of the total is an additional incentive to make cars for Brazil in Brazil. Like other major Japanese multi-nationals, Nissan also has to deal with a strong yen.
JC Bamford Excavators, the UK company that is a leading maker of construction and excavation equipment, said that it hopes to increase sales of backhoes and other products by 15% in India thanks to burgeoning demand in rural areas of that country. The price of the H shares of CITIC Securities, China’s largest stockbroker in terms of market capitalisation, fell following their listing during the week on the Hong Kong Exchange (HKEx). CITIC Securities’ Initial Public Offering (IPO) in Hong Kong raised HK$13.2bn (US$1.7bn) and was the largest Hong Kong listing since June, when Prada SpA, the Italian retailer, raised US$2.5bn. As a result of the general volatility in world markets, the value of IPOs in Hong Kong in Q3 2011 was 65% lower than in Q2 2011.
In Europe, Deutsche Bank issued a profit warning in relation to Q3 2011 and made €250m in write-downs in relation to its exposure to Greek government bonds. Negotiations continued over the restructuring of Dexia, the troubled Franco-Belgian bank.