* US Federal Open Market Committee indicates that it will maintain low interest rates until late 2014
* Surveys continue to point to improving economic conditions in Germany
* Japan runs a trade deficit in 2011 for the first time in 30 years
* HSBC´s flash PMI for China points to moderating growth in the manufacturing sector
MPC may undertake more quantitative easing in UK
UK Economic data published during the week was generally downbeat, with the minutes of the 11-12 January meeting of the Bank of England’s Monetary Policy Committee (MPC) hinting at a possible extension of the Bank’s asset purchase (quantitative easing) program.
According to the Office of National Statistics (ONS), the UK economy contracted by 0.2% in the fourth quarter of 2011, ‘driven by weakness in the production sector and the construction sector.’ GDP had previously risen by 0.6%, 0.0% and 0.4% in the proceeding quarters. Relative to the fourth quarter of 2011 UK GDP had expanded by 0.8%.
The latest quarterly Industrial Trends Survey of the Confederation of British Industry (CBI) found that ‘production weakened sharply in the three months to January.’ It also indicated that manufacturers’
sentiment about the business environment and the prospect for exports had deteriorated for the third consecutive quarter. According to John Cridland, CBI Director General: ‘Within this survey there are
some tentative signs that things could improve somewhat in the coming quarter. Key factors behind this include the fact that the US recovery has been doing better than expected and the impact of the credit rating downgrades in the euro area has been muted.’
Meanwhile, the latest CBI Distributive Trades Survey – in relation to the first two weeks of January – found that 44% of retailers experienced lower sales volumes (in comparison with those of a year ago). By contrast, 22% reported higher volumes. The resulting balance of -22% was broadly in line with expectations, but was the lowest since March 2009.
FOMC will maintain ultra-low rates to late 2014
The Federal Open Market Committee (FOMC) provided a number of important indicators about the direction of monetary policy in the USA over both the short and long-term. Unsurprisingly, the FOMC resolved to keep the interest rates target unchanged at 0.00-0.25%. The committee will also continue with other existing policies (such as the extension of the maturity profile of its portfolio of US Treasuries, the reinvestment of principal payments from agency bonds and agency mortgage backed securities (MBS) and the rolling over of proceeds of maturing Treasuries.)
The FOMC, for the first time, specified a formal inflation target of 2% and, as a result of a decision that was not unanimous, said that interest rates would remain at ‘exceptionally low’ levels at least until late 2014. The FOMC had previously indicated that it would maintain the current target until at least mid-2013. Nevertheless, it was clear that, within the committee, there is a broad divergence of
opinion as to when monetary policy should be tightened (with several members indicating each year from 2012 to 2016 inclusive) and what is the appropriate level for the target at the end of 2012, 2013 and 2014.
The FOMC’S comments on economic conditions that accompanied the announcement that were similar to others made in recent months. ‘The economy has been expanding moderately, notwithstanding some slowing in global growth. …The unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.’ The committee, and the non-member Federal Reserve Bank Presidents, published their latest forecasts in relation to growth and inflation, for 2012-14. Relative to November, they are now looking for marginally slower growth (and lower inflation) in each of 2012 and 2013, but slightly higher growth in 2014.
Elsewhere, the US Census Bureau noted that new orders for durable goods rose by 3.0%, or US$6.2bn, in December. By this measure, investment has risen in five of the last six months.
Surveys continue to show an improving business climate in Germany
Research institute Ifo said that its widely-followed Business Climate index rose for the third consecutive month in January. Ifo noted that the business climate for Germany’s retailers had deteriorated since December: however, the climate had improved for the manufacturing and construction sectors. For manufacturers, ‘export expectations and personnel planning are … somewhat more positive once again. Capacity utilisation in manufacturing is currently slightly lower than in autumn 2011. However, use of equipment and machinery remains above average.’
Markit’s flash Germany Composite Output Index advanced from 51.3 in December to 54.0 in January – suggesting the strongest pace of growth for the overall economy since June 2011. Markit’s indices of services activity and manufacturing output, as well as its manufacturing Purchasing Manager’s Index (PMI), are also at multimonth highs.
The recent improvement in business conditions in Germany were sufficient to have an impact on Markit’s latest PMIs for the euro area as a whole. The flash Composite Output Index rose from 48.3 in December to 50.4 – a five month high – in January. Chris Williamson, Markit’s Chief Economist, noted that the rate of contraction in the euro area’s economy may have peaked in October and that ‘a slide back into recession may be avoided.’ Nevertheless, Markit remains ‘cautious about the improvement. Inflows of new business continued to fall, meaning the marginal increase in output seen in January was the result of firms eating into their backlogs of orders. Furthermore, many firms are having to offer discounts to stimulate sales.’
Japan reports trade deficit for 2011
During The Policy Board of the Bank of Japan voted unanimously to maintain its key interest rate at 0.00-0.10%. In its comments, and the separate Monthly Report of Recent Economic and Financial Developments, the Board noted that Japan’s economy had been held back due to factors outside the country. Within Japan, ‘financial conditions have continued to ease’, while ‘business fixed investment has been on a moderate increasing trend and private consumption has remained firm.’ However, exports and production have been constrained by ‘the slowdown in overseas economies and the yen’s appreciation, as well as the remaining effects of the flooding in Thailand.’ The Board is looking for GDP to contract by between 0.3% and 0.4% in the fiscal year to March 2012. However, the economy is still expected to recover modestly over the next two fiscal years.
Separately, the Ministry of Finance reported that Japan had, in calendar 2011, run its first trade deficit for 30 years. This partly reflects the disruption to the economy caused by the earthquake, tsunami and subsequent nuclear energy crisis in March last year. However, it is also partly due to Japanese multinational companies’ continued relocation of production to foreign countries where costs are lower.
Emerging market news
During the week, HSBC reported that its flash China Manufacturing PMI rose from 48.7 in December to 48.8, a three-month high, in January. Hongbin Qu, Co-Head of Economic Research at HSBC, noted that this outcome pointed to a further moderation in growth. Elsewhere, the ongoing slowdown of investment and exports should also temper growth over the coming months. We expect more policy easing to stabilise growth.
The Bank of Korea reported that South Korea’s GDP expanded by 0.4% from the third to fourth quarters of 2011. In the previous quarter, the equivalent figure had been 0.8%. The deceleration of growth may prompt the central bank to cut official rates in coming months.
Company news
Hyundai Motor Co., the largest car company in South Korea, said that its net income in the final quarter of 2011 was 2,000bn won (US$1.8bn), or 38% more than the same period 12 months previous. The company has benefited from sharp rise in sales in the USA of its Elantra sedan.
The Chief Financial Officer of US conglomerate United Technologies Corp. said that that company may sell some of the installation businesses from its fire and security operations. United Technologies needs to raise funds in order to complete its US$16.5bn takeover of Goodrich Corporation later this year. Swiss pharmaceuticals group Roche announced a US$5.7bn hostile bid for Illumina, a biotech company that is based in San Diego, California. Through its acquisition of Illumina, Roche would gain access to technology that reads the genetic make-up of tumours: Roche would potentially then have the ability to provide specific treatments to individual patients.
Seadrill, the Norwegian/Bermudan company that is the world’s largest offshore oil driller (in terms of market capitalisation) announced plans to spin-off its Brazilian business Seabras by way of an Initial Public Offering (IPO) that could raise up to 1.7bn reals (US$971m). If the deal goes ahead, it could spark a wave of IPOs in Brazil – given that volatile markets have caused a number of companies to postpone capital raisings in that country.
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