* Bank of England Governor expects UK inflation to subside by the middle of 2011
* European Central Bank leaves interest rates at 1% but indicates rate rise is imminent
* Robust export demand drives US manufacturing sector
* Japanese economic reports show economy on recovery path
* Manufacturing sector continues to expand in emerging markets
* HSBC´s share price slumps 5% as company downgrades 2011 outlook
BoE expects inflation to recede in mid-2010
Bank of England Governor Mervyn King said this week that the UK central bank’s judgment is that “inflationary pressures [will be] pretty much back to target by around the middle of this year.” The Monetary Policy Committee’s latest report showed that inflation is expected to rise at a seasonally-adjusted annualised rate of almost 7% this quarter, before dropping to roughly 2% by September.
Separate data from the Bank of England showed that lending to private, non-financial companies expanded by £1.1bn in February, and over the three months to the end of January grew at an annualised rate of 2.6%. The number of loans approved to buy houses in January showed a slight increase from December and was above the average for the previous six months. The data also suggested that households were trying to gain control of their finances as repayments outstripped new lending in the month. Meanwhile, the Nationwide House Price Index for February rose 0.3%, compared with a fall of 0.1% in January. The measure conflicted with Hometrack data which showed that UK house prices fell for an eighth month in February. Hometrack’s monthly decline in prices was, however, the smallest in six months.
In other news, the purchasing managers’ index (PMI) for UK manufacturing remained at a record high of 61.5 in February, unchanged from January. (A figure above 50 indicates that companies are reporting rising activity.) Employment rose at a record rate in the month and exports increased. However, wholesale prices were also near a record as commodity prices surged. The PMI for services fell from 54.5 in January to 52.6. Employment fell for the fifth month in a row, albeit at a slower pace. Other encouraging signs within the services report included the subindices for new business and business confidence which were not far below long-term averages.
ECB leaves interest rates at 1% but signals higher rates
Official figures showed that Euroland inflation hit 2.4% in February, the highest since October 2008. The European Commission forecast that inflation in the Euro area would average 2.2% this year, breaching the central bank’s 2% medium-term target. In addition, the Commission warned that Middle East unrest was also tilting inflation risks upwards. In spite of the stronger outlook for inflation, the European Union (EU) revised its Euroland GDP forecast by 0.1% to 1.6% in 2011. As was widely anticipated, the European Central Bank (ECB) Governing Council left the Refi rate unchanged at 1% for the 22nd consecutive month. In an accompanying statement, the central bank said that Euroland inflation warranted “strong vigilance” - a term that has been used previously to indicate an imminent rate hike. The Bank indicated that banking sector support measures - put in place following the Lehman Brothers’ collapse in September 2008 - would be maintained until the second quarter of the year.
Elsewhere, Euroland’s purchasing managers’ index for manufacturing rose to 59 in February, up from 57.3 in January. The February measure was the fastest in more than 10 years. According to the report, the recovery was broadening beyond Germany and France “with improving trends in output also evident in ‘peripheral’ countries such as Ireland, Italy and Spain”. Adding to the evidence of a sustainable recovery, Germany reported that retail sales rose by an unexpectedly sharp 1.4% in January. Moreover, unemployment in the Euro area’s largest economy fell to a twodecade low of 7.3% in February. German companies have ramped up production and hiring to meet strong export demand.
Separately, Standard & Poor’s warned that Portugal’s “high external financing needs and limited funding sources” could force it to seek help from the European Financial Stability Facility, the EU’s bail-out fund, and the International Monetary Fund. The ratings agency upheld its A-rating for Portugal’s long-term debt and A2 for shortterm borrowing.
Global demand drives US factory orders
The Institute for Supply Management’s US manufacturing index rose from 60.8% to 61.4% in February. The measure was stronger than had been expected and was at its highest level since May 2004. Robust export demand drove production and new orders. Hiring in the manufacturing sector was also strong, breaching the 60% mark for only the third time in the past 10 years. Separately, the Bureau of Economic Analysis said that US consumer spending rose 0.2% from December to January compared to a 0.5% increase the previous month. Spending was outpaced by rising incomes, which increased by 1% in January. Excluding the impact of a tax cut, disposable personal income rose 0.1%. The savings rate increased in January from 5.4% to 5.8%.
The National Association of Realtors said that pending home sales, which reflect transactions signed but not closed, fell by 2.8% from December to January, a sharper decline than had been expected. According to the Federal Reserve Beige Book survey, every US district reported that their economies had expanded during January and early February. The anecdotal reports also revealed downward pressures on inflation. Meanwhile, the core personal consumption price index, a measure of inflation favoured by the Federal Open Market Committee, rose by 0.1%. The measures signal that underlying US inflation remains in check.
Japan economic data upbeat
This week’s newsflow in Japan suggested that the economy was recovering. The Markit Japan Manufacturing Purchasing Managers Index showed that Japanese manufacturing activity rose at the fastest pace in eight months to a seasonally-adjusted 52.9 in February, from 51.4 in January. The Trade Ministry said that industrial production rose by 2.4% in January from a 3.3% increase the previous month. The report showed that companies plan to increase output by 0.1% this month and 1.9% in March. A separate report revealed that retail sales in January rose by a better-thanforecast 0.1%. Meanwhile, it was reported that earnings at listed Japanese companies were nearing their pre-financial crisis levels. Japanese companies appear to be overcoming the drag on earnings caused by the generally-stronger Yen.
Emerging market news
According to this week’s data, manufacturing continues to expand in emerging economies. In South Africa, the manufacturers Purchasing Managers’ Index (PMI) rose to a 10-month high in February of 54.8, compared to 54.6 in January. The latest measure was the fourth consecutive month of expansion and was spurred by a decline in the nation’s jobless rate.
China’s official Purchasing Managers’ Index (PMI) published by the Federation of Logistics and Purchasing fell to 52.2 from 52.9 in January. The February measure was higher than had been forecast and remained above 50, indicating an expansion in factory production. The unofficial but widely-watched HSBC PMI fell from 54.5 to a seven-month low of 51.7 in February.
In India, the HSBC PMI moved up to 57.9 from January’s 56.8, with the pace of growth rising for the second successive month. The report showed that input prices faced by Indian manufacturers rose at the quickest rate since 2005. Labour costs also rose because of a shortage of skilled workers. On a positive note, the latest data showed that food inflation slowed to near a three-month low. In its annual Economic Survey, India’s Finance Ministry forecast that economic growth would advance to between 8.75% and 9.25% in the coming fiscal year, up from this fiscal year’s estimate (which ends March 31) of 8.6%. India’s overall inflation remains above 8%, despite pledges by Prime Minister Manmohan Singh to reduce it to below 6%.
Elsewhere, Poland’s Central Statistical Office said that fourth quarter GDP expanded at an annualised rate of 4.4%, compared with 4.2% in the previous quarter. Fixed investment rose a disappointing 0.9% in the quarter after rising 0.4% in the three months to September. Poland’s Monetary Policy Council left interest rates unchanged at 3.75%.
In contrast, rising inflationary pressures led Russia’s central bank to raise rates by 0.25% to 8% as inflation hit an annual rate of 9.7% in February. The rate hike ends a two-year cycle of rate cuts that began in April 2009.
In Brazil, the central bank raised the benchmark Selic rate by 0.5% to 11.75%, a two-year high. Brazil’s inflation hit 6.1% in the 12 months to mid-February. Brazil’s GDP expanded by 5% in the fourth quarter from a year earlier, down from 6.7% in the previous quarter.
Company news
The share price of HSBC fell more than 5% during the week following a cut to the UK investment bank’s target range for return on equity from 15-19% to 12-15%. The group said that the downward revision reflected constraints from tough new capital requirements under the so-called Basel III rules. Moreover, the group’s pre-tax profit, which more than doubled in 2010 from $7.1bn to $19bn, was lower than had been expected. One bright spot for the bank was the turnaround in the USA, where HSBC had been hit hard by an ill-timed acquisition of sub-prime lender Household. The North American business delivered a profit of $454m in 2010 compared with a loss of $7.7bn in 2009.
Separately, the share price of Standard Bank Group, Africa’s largest bank, declined 0.4% after the group revealed that full-year net income dropped 3% to 10.8 billion Rand ($1.57bn) in 2010. Revenues also declined as the group incurred higher costs from firing staff.
On a positive note, London insurer Aviva reported a 35% increase in annual profits and announced that it had eliminated the vast majority of its pension deficit. The profit increase came in spite of the snow and ice in the run-up to Christmas, which meant that annual weather-related costs were more than normal.
