* UK Monetary Policy Comittee member hints at further quantitative easing as UK export demand slows
* European Central Bank continues to buy peripheral government bonds, despite opposition from Germany
* US durable goods orders rise as transportation demand shows signs of recovery
* Moody´s downgrades Japan´s credit rating to Aa3
* S&P announces credit outlook upgrades for Brazil, the Czech Republic and Slovakia
* A number of companies announce share buy-backs following recent stock market falls
UK policymaker supports monetary stimulus
Bank of England’s Monetary Policy Committee member Martin Weale said this week that Britain’s weakening economy may require another round of monetary stimulus. He cited anaemic secondquarter growth rates in Europe - the destination of over 40% of Britain’s exports - as a major reason for his concerns over domestic demand. The policymaker suggests that purchases of longer-dated government gilts could lower interest rates, support UK business investment and boost demand.
Nevertheless, the latest reports indicate that Britain is experiencing a sustainable recovery in manufacturing. The latest Confederation of British Industry’s (CBI) survey of manufacturers showed that the sector had healthy order books and many expect production to rise in coming months. (The survey results contrast with the July purchasing managers’ index survey which showed the largest decline in new orders for just over two years.) Moreover, the British Bankers´ Association (BBA) said that bank loans to the manufacturing sector increased in July after two successive months in which net lending contracted. The BBA report also showed that personal deposits – a key source of funding for banks – increased by £2.4bn in July. The rate at which people are building their savings has, however, slowed in 2011 compared with the same period last year.
A separate CBI distributive trades’ survey highlighted the fastest drop in High Street sales since May 2010. Retailers are also more pessimistic about the future than at any time since early 2009, and are beginning to curtail plans to step up hiring and invest in their businesses. More encouraging is the fact that the CBI noted that the employment picture for the sector was the least negative it had been since February 2004.
ECB continues buying government bonds
The European Central Bank (ECB) continued to buy Euroland government bonds as Italian and Spanish yields stabilised at around 5% (after almost reaching 6.5% before the ECB commenced their bond purchases). The €14.3bn spent by the central bank during the seven days to the middle of last week was less aggressive than the €22bn of purchases in the previous seven days. The programme is controversial within the ECB and its reactivation was opposed by at least three members of its Governing Council, including Bundesbank President Jens Weidmann. Further highlighting the divisions, the Bundesbank warned this week that steps to strengthen Euroland’s bail-out mechanism could weaken incentives for sound public finances and undermine the principles behind the 17-nation region.
In other news, the European Commission said that its consumer confidence indicator for the Euro area fell 5.4 points to -16.6 in August, the lowest level since June last year. Separately, Purchasing Managers’ Indices (PMI) showed that Euroland’s private sector activity rose slightly in August, driven by an unexpected reacceleration in French private sector activity. The PMI revealed that German service sector expectations about prospects registered the biggest monthly drop since the survey began in mid-1997. The Euro area corresponding manufacturing index dropped from 50.4 to 49.7 in August, falling below the 50 level (which marks the boundary between expansion and contraction) for the first time since September 2009. The region’s “composite” index, covering services and manufacturing, stood at 51.1 in August, unchanged from the previous month.
In Germany, the Centre for European Economic Research (ZEW) economic institute reported that an index of investor confidence in the Euro area’s largest economy fell 22.5 points to -37.6 in August; the lowest level since December 2008. Market Researcher GfK’s measure of households’ economic expectations also reduced in August although the index of consumers’ willingness to spend rose over the month.
The outlook for Germany remains positive and for its part, the Bundesbank expects Germany’s economy to continue to grow in the second half of 2011 (German growth slowed to 0.1% in the second quarter from 1.3% in the first.) Germany’s central bank expects output to expand by 3% this fiscal year as unemployment, at a twodecade low of 7%, bolsters household spending.
US durable goods orders rise
US durable goods orders rose a higher-than-expected 4% in July following a revised 1.3% fall in June. Transportation demand drove much of the volume of new orders - with a 14.6% rise. The figures suggest that the automobile sector has started to recover from supply disruptions related to the March disasters in Japan.
Separately, the Congressional Budget Office (CBO) estimated that the US would accumulate US$3,487bn in deficits between now and 2021, which is much narrower than the US$6,737bn fiscal gap it estimated earlier this year. The improvement is mostly the result of the savings agreement struck three weeks ago by Congress and the White House. The budget watchdog expects the US to post a budget deficit of US$1,284bn, or 8.5% of GDP, in the current fiscal year. Deficits are expected to shrink substantially thereafter providing Congress does not extend tax cuts which are due to expire at the end of 2012. The agency lowered its economic outlook compared with estimates earlier this year, although it does expect the unemployment rate to fall gradually from 9.1% to 8.5% by the end of next year. In the meantime, the Labour Department reported that initial claims for jobless benefits rose to 417,000 last week following an increase of 5,000 in the week ending August 20. The figures are being distorted by striking Verizon workers filing for insurance.
Moody’s downgrades Japan’s debt rating
This week saw Moody’s cut Japan’s credit rating by one notch to Aa3, bringing it in line with rival agency Standard & Poor’s AArating for the world’s third-largest economy. Later this month, Japan will face yet another change in the country’s political leadership, the frequency of which Moody’s cited as a key factor obstructing the implementation of necessary fiscal measures to reduce the government’s mountain of debt. Separately, Japan’s Finance Minister Yoshihiko Noda announced that US$100bn of foreigncurrency reserves will be released to the Japan Bank for International Cooperation (JBIC), a export credit agency, to assist companies with the impact of the appreciating yen against the dollar. Specifically, the one-year funding program will be used to aid small export companies, promote mergers and acquisitions, and secure resources. The yen hit a post-World War II high of ¥75.95 to the dollar on August 19 and traded around ¥76.60 following the Finance Minster’s announcement.
Emerging market news
This week several emerging economies had their credit rating outlook upgraded by Standard & Poor’s (S&P). The outlook on Brazil’s foreign currency sovereign credit rating was revised to positive from stable with the ratings agency citing the nation’s economic stability as the main reason for the revision. S&P also lifted the Czech Republic’s long-term foreign currency debt to AAfrom A, citing the government’s low indebtedness and the “prudently managed and balanced economy” as the main factors. Slovakia’s outlook was raised to positive from stable on expectations that the Eastern Euro area member will continue to reduce its budget deficit.
Elsewhere, South Africa’s inflation in August rose by 0.9% monthon-month. Compared to the same month last year, prices rose by a higher-than-expected 5.3%, following a 5% increase in July. By contrast, inflation in Mexico rose by a lower-than-expected 0.09% during the first half of August. The latest figures bring inflation over the last 12 months to around 3.5%, within the central bank’s target of 3% with a margin either side of 1%. Lower export volumes to the USA have reduced inflationary pressures in Mexico.
Company news
The latest newsflow highlights how companies are taking advantage of recent stock price falls, with more US companies announcing share buy-backs in August than in any month since 2008. Chemicals group Huntsman recently announced a US$100m share buy-back programme and stated that the move was an expression of confidence in the company’s long-term future. During the week, Warren Buffett’s Berkshire Hathaway agreed to invest US$5bn in Bank of America. The US bank’s share price has fallen almost 40% this year amid concerns that its mortgage business could overwhelm its balance sheet. Bank of America’s share price rose 12% following the announcement.
In an unprecedented degree of regulatory co-ordination, short-selling bans on selected European (French, Spanish, Italian and Belgian) bank stocks were extended by regulators until the end of September. The current clampdown came after French regulator Autorité des Marchés Financiers, became alarmed by a spike in the trading of bank stocks. The decision signals an increasing willingness by regulators to work together under the umbrella of the European Securities and Markets Authority, the new pan-European Union regulator.
