* Bank of England meeting minutes show widening divisions over UK interest rates
* German business confidence hits record high
* US home resales rise by 2.1% in January
* Moody´s warns Japan of sovereign debt downgrade
* Insurance and financial services company earnings exceed forecasts
Divisions grow over UK monetary policy
Minutes of this month’s meeting of the Bank of England’s (BoE) rate-setting committee showed a move toward a tightening bias. Three members of the nine-strong Monetary Policy Committee voted for a rate rise: external member Andrew Sentance, voted for a 0.5% rate rise; Martin Weale, another external member, voted for a 0.25% rise for the second month in a row while Spencer Dale, the Bank’s Chief Economist also supported a 0.25% rate hike - becoming the first Bank insider to do so. Adam Posen, an American academic and external member of the Committee, called for a further £50bn of quantitative easing while the other five members voted to keep policy unchanged.
Meanwhile, the British Bankers’ Association said that lending to private, non-financial corporates in Britain contracted by £0.3bn in January, compared with a £3.4bn drop in December and an average monthly fall of £1.7bn over the previous six months. The report showed that net mortgage lending rebounded in January when compared with December, setting the highest rate for lending since August 2010. Separately, the BoE’s monthly Agents’ Report on business conditions noted that credit conditions appear to be improving for large companies.
Separately, the Office for National Statistics said that net costs paid by services sector businesses rose in the fourth quarter by 0.6% for a year-on-year rise of 2.7% – far lower than cost rises seen in the manufacturing sector. Meanwhile, a quarterly survey of Britain’s services sector revealed that companies serving business and professional customers have seen a pick-up in demand while those serving consumers have seen demand fall. Companies in both the consumer and business and professional sub-sectors expect to increase business investment during the next year by balances of 31% and 13%, respectively.
The latest retail sales data paint a mixed picture for the outlook of the sector. The Office for National Statistics said that sales volumes rose by 1.9% between December and January, much stronger than had been expected. The CBI’s monthly Distributive Trades survey found that, compared to 12 months earlier, only 6% more retailers reported sales volume higher rather than lower – far less than had been expected. Moreover, the survey, conducted during the first two weeks in February, found that as many retailers expect sales volumes to be lower in the three months ahead as expect them to rise. A balance of 73% said that prices were rising rather than falling relative to those a year earlier. The dip in demand is coinciding with rising prices, complicating the BoE’s monetary policy decisions.
German business confidence hits record high
A closely-watched report confirmed the upswing in the German economy. The Ifo institute’s business confidence index for Euroland’s largest economy rose to 111.2 points for February from 110.3 in January, the ninth consecutive month-on-month rise and the highest since 1991. By contrast, Italy’s national statistics office Istat reported that the nation’s manufacturing-sentiment index unexpectedly declined to 103 from a revised 103.4 in January, which was the highest since February 2008. Meanwhile, Euroland’s “composite” Purchasing Managers’ Index, covering the region’s services and manufacturing activity, rose to 58.4 in February – the highest since July 2006. The German manufacturing index hit 62.6 – its highest since the series started in 1996. A figure above 50 indicates an expansion in activity. The indices also showed that output price inflation in Euroland rose in February at the fastest rate since July 2008. The increase suggests that businesses are taking increasing advantage of robust economic growth to pass higher fuel and raw material costs on to customers.
US economy maintains upward momentum
Data this week showed that the US economy continues to recover. The National Association of Realtors said that home resales rose by 2.1% from December to January. The measure was better than had been expected and left sales up by 5.3% from the same period 12 months previous. Less positive were Commerce Department figures which showed that new home sales fell by 12.6% from December to January. The S&P/Case-Shiller home price index revealed that house prices in the biggest US cities fell by 0.4% from November to December. Separate Commerce Department data revealed that durable goods orders rose by 2.7% in January and increased by 8.2% year-on-year.
Meanwhile, the Labour Department said that the latest weekly initial jobless claims fell by 22,000 to 391,000. The decline was steeper than had been expected and brought the four-week average for new claims down to 402,000. The number of Americans continuing to claim jobless benefits also declined.
The Conference Board’s index of consumer confidence rose from 64.8 to 70.4 in February, its highest level in three years. The increase was fuelled by a brighter economic outlook and improving labour market conditions. Clearly, consumer confidence is an important indicator of consumer spending, which accounts for around 70% of US economic activity.
Moody’s warns Japan on debt downgrade
This week ratings agency Moody’s warned that it may change the outlook on its Aa2 rating to negative from stable for Japan’s sovereign debt. The reassessment follows rival Standard & Poor’s decision in January to cut its Japanese rating. Moody’s cited increasing worries that “economic and fiscal policies may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt” as the reasons for the possible downgrade. The Japanese government’s gross debt is projected to exceed twice the size of the economy this year. In the meantime, Japan’s opposition parties are threatening to block essential budget-related legislation through the parliament unless the ruling Democratic Party abandons benchmark policies or calls an election. Japan’s new debt issuance in 2011 is set to be a bigger source of government revenue than taxes for the third year in a row.
Emerging market news
Reports this week showed that inflation in many Asian economies continues to climb. For instance, Vietnam’s consumer prices rose 12.3% in February from a year earlier while prices in Malaysia climbed 2.4% in January, the fastest pace since mid-2009.
Currencies of several emerging nations were generally stronger this week as surging oil prices heightened inflation concerns. Fears that reduced oil supplies from North African producer Libya (the world’s 12th largest oil exporter) may be replicated in other regional producers led to a spike in the price of oil. (Popular discontent toppled presidents in Tunisia and Egypt and has brought Libya to the brink of civil war.) The price of Brent crude oil jumped $17 to $119 per barrel while West Texas Intermediate, the US benchmark exceeded $100 a barrel for the first time since October 2008.
Meanwhile, Russia raised Rb40bn ($1.37bn) from its first Rouble Eurobond. The issue was priced with a yield of 7.85%, lower than had been expected. Russia is one of the world’s biggest oil exporters. Moreover, the Rouble is at a ten-month high against the Dollar, boosting the issue’s appeal among market participants.
Elsewhere, official figures showed that the South African economy grew by an annualised 4.4% in the fourth quarter, on a seasonally adjusted basis. Around a quarter of the growth came from the mining and agricultural sectors.
Company news
Reported earnings from insurance and financial services this week were better than expected. Dutch insurer Aegon announced a sharp rise in profits for 2010 to €1.76bn compared with €209m in 2009. Underlying earnings for the year were up 65% while the insurer’s underlying earnings before tax in the fourth quarter rose 2% yearon- year. Aegon plans to raise €750m ($1bn) in a share capital increase in order to pay back government aid. Meanwhile, Allianz, the world’s biggest listed insurer by market capitalisation said that 2010 revenues of €106.5bn were the company’s highest ever. The group’s operating profits were a better-than-expected €8.2bn although €500m of that was due to an accounting change and currency effects. Elsewhere, part-nationalised lender Royal Bank of Scotland posted a net loss of £1.1bn in 2010 compared with a £3.6bn loss in 2009. The reasons given for the improvement included a sharp fall in loan impairments over the year, a resilient performance by its retail and commercial businesses and a fasterthan-expected reduction of non-core assets. The group’s share price fell 3.6%.
Separately, Commerzbank reported that 2010 operating profits of €1.4bn exceeded forecasts. Germany’s second-largest bank by assets said that in 2011 it expects to repay a significant amount of state aid received in 2009 after it acquired troubled rival Dresdner Bank.
