* UK CPI rises to 4.5% in April, double average annual wages growth rate
* EU endorses a EUR 78 billion bail-out package for Portugal and pressures Greece on austerity measures
* Disruption to supply chain hinders US industrial production
* Japan´s GDP contracts by 0.9% in Q1
* Data suggests China´s house prices remain buoyant
UK CPI hits 4.5%, as average wages grow by 2.1%
Figures released this week revealed that the UK suffered the highest rate of inflation in over two years in April, forcing Bank of England (BoE) Governor Mervyn King to write to the Chancellor of the Exchequer George Osborne explaining why the figure was above the central bank’s 2% target. Inflation rose to a higher-thanexpected 4.5% in April from 4% in March. However, inflation does not appear to be feeding through into higher wage growth. Average earnings excluding bonuses rose by 2.1% in January to March, down 0.1% on the previous three months. Including bonuses, the figure was 2.3%. Britain’s unemployment fell by 36,000 to 2.46m in the three months to March, the lowest level since last September. The unemployment rate was 7.7% of the workforce, down 0.1% on the previous quarter.
A separate index of UK consumer confidence slipped to 43 from a revised 45 in March. A measure of shoppers’ willingness to spend on household goods and major purchases fell 5 points to 62 in the month. In addition, a gauge of consumers’ expectations for the economy over the next six months dropped slightly in April. With inflation around double annual earnings growth, consumers still lack the spending power to help drive the economy forward. Meanwhile, the Office for National Statistics (ONS) said that construction sector output fell 4% in the three months to the end of March, less than the 4.7% drop that was revealed in the preliminary estimate of first quarter GDP growth. The Council of Mortgage Lenders said that 37,800 homebuyers received mortgages in March, up 24% from February. Separate ONS figures showed that retail sales in April, including petrol, climbed a higher-than-expected 1.1% from March, rising by a revised 0.3%. Excluding fuel, sales rose 1.2% in April from the previous month and were up 2.7% on the year.
Minutes of the latest meeting of the BoE’s Monetary Policy Committee revealed that policymakers remained split three ways but voted for no change in UK monetary policy. Three of the ninemember committee again voted for a rise in rates, one voted for an increase in stimulus through extra quantitative easing and the rest voted for no change. The minutes suggest that the majority of the Committee is waiting to assess data over the next few months before making a decision on rates.
IMF and EU pressure Greece on austerity measures
In Greece preliminary estimates showed that GDP in the first three months of the year rose 0.8% quarter-on-quarter, matching the overall Euroland growth rate and overturning the Finance Ministry’s negative forecast for the period. The news followed heightened speculation that Greece would be forced into early debt restructuring. Officials from the International Monetary Fund (IMF) and the European Commission (EC) insisted that Greece deepen spending cuts and gain more revenue from asset sales in exchange for the June-release of the next €12 billion portion of an expanded aid package. Following indecisiveness, Greek 10-year bond yields rose 0.17% to 15.61%. In the meantime, European Finance Ministers endorsed a €78 billion aid package for Portugal, the third peripheral country behind Ireland and Greece to seek emergency loans from the EC and the IMF. The three-year aid programme calls for Portugal to implement austerity measures, including cuts to pensions in 2012 and 2013 that its parliament rejected in March.
European Finance Ministers appear set to approve the nomination of Bank of Italy Governor Mario Draghi as the next President of the European Central Bank (ECB). Separately, Eurostat figures for April revealed that Euroland consumer prices, excluding energy and unprocessed food, rose 1.8% year-on-year, the fastest rate of increase in more than two years. The corresponding figure for March was 1.5%. The European Union’s statistical office confirmed headline inflation in the Euro area was 2.8% in April, in excess of the ECB‘s target of “below but close” to 2%. Meanwhile, in Germany the ZEW index of investor expectations, which aims to predict developments six months in advance, fell to 3.1 in May from 7.6 in April. The latest measure declined further than expected and was the third consecutive monthly fall. Elsewhere, Russia’s GDP growth in the first quarter slowed to 4.1% from a year earlier after increasing 4.5% in the previous three months. Uncertainty is increasing in Russia ahead of parliamentary elections in December and a presidential poll next year - leading to increased capital outflows which are restraining output. The Ruble weakened 0.8% to 28.1625 per Dollar.
Supplier delays stall US industrial production growth
US industrial production was unchanged in April after a 0.7% gain in March, led by a drop in automobile production after parts supplies were disrupted by the earthquake and tsunami in Japan. Factory output, which makes up 75% of the total, fell 0.4%. Excluding autos, manufacturing rose 0.2%. Capacity utilisation, which measures the amount of a plant that is in use, fell to 76.9% in April compared with an average of 79.5% over the past 20 years. The National Association of Home Builders said that homebuilder confidence stalled at extremely low levels in May while new building permits, an indication of future construction, fell in the month. By contrast, the Thomson Reuters/University of Michigan consumer sentiment index rose to 72.4 in May from 69.8 in April, the highest reading since February. The report also showed that expectations of inflation over the next year moderated to 4.4% from 4.6% in March and April, but remain above the 3.4% forecast at the beginning of 2011. The fiveyear outlook for inflation ticked up to 3% from 2.9% in April. In the meantime, Labour Department figures showed that US consumer prices rose 3.2% year-on-year in April, the most since October 2008. The rise, slightly higher than had been expected, followed a 2.7% increase in March. Month-on-month, prices rose 0.4%, in line with expectations, following a 0.5% gain the previous month. Nearly half of the gains in April came from a 3.3% rise in the cost of petrol. The Federal Reserve’s preferred inflation measure - core prices - rose 0.2% from March to April. The increase was faster than a 0.1% gain in the previous month, suggesting that companies are beginning to pass on higher commodity costs to their customers. Separately, according to minutes of the recent meeting of the Federal Open Market Committee (FOMC), nearly all Committee members said that the central bank’s first step toward “less accommodative policy” would be stopping the reinvestment of early repayments from the portfolio of mortgage-backed securities (MBS). A majority of the members said that they would prefer to start sales of MBS after increasing the central bank’s target for short-term interest rates. The FOMC was balanced over the timing of such policy tightening, suggesting that the Committee is unlikely to raise rates or sell assets during 2011.
Japan’s GDP contracts 0.9% in Q1
This week preliminary data showed that output in Japan contracted by 0.9% in the first quarter compared with the previous three months, nearly twice the decline that had been forecast. A large part of the first quarter GDP contraction was caused by falling inventories, led by disruptions to supply chains following the earthquake, tsunami and nuclear disaster in Northern Japan. Output in the last three months of 2010 was downgraded to a 0.8% contraction, a much sharper decline than the -0.3% initially estimated – resulting in two consecutive quarters of negative growth.
A separate report showed some signs of recovery in Japan. The Reuters Tankan survey – a monthly measure of business sentiment modelled on a Bank of Japan report – showed that the mood among manufacturers was improving. Reconstruction following the earthquake on March 11 is expected to propel the economy in coming quarters.
Emerging market news
Various indicators published during the week suggest that China’s economy remains extremely robust. The nation’s home prices rose in 67 of 70 cities monitored by the government in April from last year, led by smaller cities that are defying official efforts to control property prices nationwide. (The government raised the minimum down payment for second-home purchases this year and introduced residential taxes in Shanghai and Chongqing. Beijing and Guangzhou also imposed restrictions on housing purchases.) Separate Ministry of Commerce figures showed that foreign direct investment climbed 15% in April. Investment has risen by 26% for the first four months of this year. Meanwhile, the actions of two central banks surprised investors. Chile’s central bank raised the nation’s interest rates by a higher-than-expected 0.5% to 5% while in South Korea, Bank of Korea unexpectedly left rates unchanged. In other news, a World Bank report released this week predicts that the US Dollar will lose its solitary dominance in the global economy by 2025 as China’s Renminbi and the Euro establish themselves on an equal footing in a new “multi-currency” monetary system. The report concludes that the shift will be driven by increasing power and strength of emerging market economies, with six countries – Brazil, China, India, Indonesia, Russia and South Korea – accounting for more than half of global growth in 14 years.
Company news
This week saw the announcement of demergers in the banking sector. Bank of America (BofA) agreed to sell its remaining stake in BlackRock for $2.5bn, severing ownership ties BlackRock forged with Merrill Lynch before the financial crisis forced the bank’s merger with the biggest US lender. The deal marks BofA’s latest effort to raise capital and shed non-core assets. For BlackRock, the buy-back was an opportunity for it to spend some of its cash as well as reduce its number of shares on issue. BlackRock will pay $187.65 for each of the 13.6m series B preferred shares BofA still owns. The money manager will use cash and $2bn in debt to buy back the shares. BofA will record a pre-tax gain from the sale of about $375m in the second quarter. BlackRock’s share price jumped 2.5% while Bank of America fell 0.5%. Elsewhere, South Korea’s government relaunched an attempt to sell its 57% stake - valued at $6bn - in Woori Financial Group, the country’s biggest bank by assets. Previous attempts to sell Woori in small tranches proved unsuccessful and the sale was halted in December. In order to avoid another failure, regulators demanded that any buyer take a minimum stake of 30%, granting the purchaser management control of Woori. In a separate cross-border takeover, US chemicals group DuPont said that it had succeeded in its hard-fought battle to buy Danisco of Denmark, securing 92.2% of the shares with an all-cash bid that values the target’s equity at $6.4bn.
