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Friday, May 20, 2005

More Signs Of UK Slowdown

U.K. credit-card borrowing dropped for the first time in more than a decade in April and mortgage lending grew by the least since February 2002. This latest data follows lots of other signals of a continuing slowdown. The real question now is: how far will it go?

"A report from the Royal Institution of Chartered Surveyors on May 17 said house prices fell in April, while activity in the market decreased 30 percent from a year earlier. Overall net lending in the month rose by 4.4 billion pounds in April, down from 5.04 billion pounds in March, the bankers' association said.

``People are becoming very cautious,'' said David Dooks, director of statistics at the association, whose members include HSBC Holdings Plc and Royal Bank of Scotland Group Plc. ``House prices aren't rising and people are tightening their belts.''

The annual rate of increase in U.K. retail sales in April dropped to the lowest in two years, a government report yesterday showed. Boots Group Plc, the Nottingham-based owner of the U.K.'s largest drugstore chain, yesterday said demand hasn't improved after slack consumer spending contributed to a drop in second-half profit"

Oh, Oh... News From The Bank of Japan

"The Bank of Japan on Friday said it would allow the current account balance to fall temporarily below its liquidity target, the first step towards normalising monetary policy since quantitative easing was introduced four years ago."

This news in today's FT might send shivers down a number of spines. The issue is essentially deflation. As the FT itself observes this seems signal the beginning of an end to Japan’s unorthodox quantitative easing policy even though deflation has yet to be beaten. Prices have been falling for seven years and - as I reported earlier in the weak - deflation has recently accelerated: indeed the even the BoJ itself does not expect a return to inflation until the year to April 2007.

"Quantitative easing which floods the market with excess liquidity was introduced in March 2001 to fight deflation in the absence of the BoJ’s ability to move interest rates below zero. Pessimists fear that rushing to mop up liquidity before deflation is beaten is dangerous. Liquidity targets should be maintained, or even expanded, until inflation is firmly entrenched, they argue."

Morgan Stanley's Takehiro Sato - writing before the announcement, advised aginst such a move, in part because:

"The Bank runs the risk of making a serious error similar to ZIRP (zero interest rate policy) abandonment in August 2000 if it mistakenly revises the current account target at a time of heightened uncertainty in global financial markets, including recent speculation about the possibility of massive losses at hedge funds from the GM shock. Policy action would leave the Bank open for criticism from almost anything that goes wrong later on".

A bit of technical background. As feared by Keynes, Japan has effectively created a liquidity 'black hole' in its attempts to over come the 'zero-bound' problem. This is why you get a reading like the 'five times over the liquidity required to maintain interest rates at zero' mentioned by the FT. Essentially the faster you pour money in, the slower it moves around. Quite a headache.

Changes At The World Bank

This is bound to do more than just raise some eyebrows:

The World Bank should focus on promoting economic growth rather than social policies as the route to reducing poverty, the bank's internal watchdog said.

And just two weeks before Paul Wolfowitz takes over as president.

"The hard-hitting report by the bank's Operations Evaluation Department, an independent unit that analyses the bank's lending, criticises the emphasis placed on education and health spending under James Wolfensohn's leadership.....The report calls on the bank to re-focus its efforts on infrastructure projects and urban and rural development. It said the record showed the private sector has not provided adequate financing for infrastructure projects."

Hard to say what I think without more information about what this will actually mean in practice.

Thursday, May 19, 2005

China Investment Overshoot Problem

This news *will* put the cat among the pidgeons: China’s urban fixed asset investment grew 25.7 per cent year on year through the first four months of 2005, overshooting the government’s 16 per cent target and increasing pressure on Beijing to further restrict over-investment in the property sector.

As the FT comments, this data following figures earlier in the week showing an unexpected 16 per cent year-on-year increase in industrial production in April offer evidence the government’s austerity programme has not succeeded in reining in lending and investment. Some response is to be expected from Beijing. Remember all that extra investment means increased capacity, and increased end-user oriented production.

Unless this slows, there will be an 'over-capacity' crisis in China, especially if protectionist measures continue to mount, and following that you could see capital exit from China: ie no dramatic rise in the value of the yuan. Troubling all round.

Korean Central Bank To Stop Buying Dollars: Updated

South Korea's central bank governor said yesterday that the bank will not intervene any further in foreign exchange markets. Although it is far from clear what impact this move will actually have, it implies that South Korea is now unwilling to undertake the intervention required to stem its currency's rise. The central bank has in recent times spent billions of dollars in the foreign exchange markets to contain the won. "The change of stance will have implications both in South Korea where a rising won will further erode exporters' margins and in the US, where it could hit demand for Treasuries and other dollar-denominated assets.With Japan, China and South Korea which together hold at least a third of the world's central bank foreign exchange reserves"..


The FT retracted on this later in the day, in the sense that - despite what the bank governor said, Korea continued to buy dollars yesterday. Anyone familiar with the history of this debate in Japan and Korea will be aware that this tends to happen. When I decided to post the FT report I imagined that the FT had 'factored-in' this unpredicatbility element, and that the fact they were publishing the article meant that this time it was for real. Obviously I over-estimated them: mea culpa.

"The Bank of Korea on Thursday backtracked on its comments that it did not plan to intervene further in the foreign exchange markets, after precipitating a sharp fall in the US dollar overnight.....

The central bank on Thursday confirmed that Mr Park had been quoted accurately but it nevertheless released a statement saying that he had been “misunderstood.”

“The Bank of Korea will take necessary measures whenever the currency markets are unstable. Especially, we will not sit idly by if speculative funds come in to exploit a groundless news report,” it said."

Masochists can find the whole text of the governors speech here, to see for themselves.

Not completely without interest here might be this comment at the end of the FT original article: "The dollar moved lower on foreign currency markets on Wednesday afternoon, as the FT report of Mr Park’s remarks emerged."

Winding this sorry story up, this latest report in today's FT might not be without importance in understanding events: "South Korea’s economy slowed sharply in the first quarter, as domestic demand did not recover fast enough to offset slowing exports." ie there is economic pressure to stem the rise in the won. Bottom line: don't expect S Korea to stop buying dollars anytime soon. Phew, I'm glad that's done :).

Wednesday, May 18, 2005

EU Fast-Tracks China Textile Dispute

The European Union yesterday issued a final warning to China over its booming textile exports, threatening sanctions against two categories of textiles to prevent “irreparable harm” to European producers. EU Commissioner Peter Mandelson has proposed emergency talks with China on imports of T-shirts and flax yarn. T-shirts and flax yarn are two of the nine categories of textile imports from China currently under investigation by Brussels following allegations of a surge in exports.

Read-on in Comments

China's Currency Once More Under Pressure

According to the Financial Times:

"The US Treasury, in its twice-yearly report to Congress on exchange rates and trade, stopped short on Tuesday of accusing China of currency manipulation but made clear it expected revaluation within six months".

Actually this caused more protest in the US than in China - where they will certainly be in no hurry to be seen to be acting under US pressure. The Economist has a global agenda post on the state of China's currency.

Read-on in Comments

Anonymous Graves In Andejan Uzbekistan

“Not a single civilian was killed by government forces there,” Uzebekistan Prosecutor General Rashid Kadyrov said.

Tuesday, May 17, 2005

Uzbekistan Crisis

I'm blogging over at A Fistful of Euros on the situation in Uzbekistan. These are just some ongoing notes:

The latest news today is connected with a round-up of 'suspects' following the clashes and demonstrations in Andijon last week. The LA Times Moscow correspondent cites interfax to the effect that 70 people have been detained (interfax in its turn cites Uzbek Interior Minister Zakir Almatov).

The LA Times article also cites Andrei Babitsky, a Russian reporter for Radio Free Europe/Radio Liberty, as stating in a telephone interview from Andijon that a local human rights activist told him that about 1,500 people had been detained.

Dan Darling at Winds of Change has a comprehensive background post, Publius Pundit Robert Mayer is also following events his latest post is here.

Nathan at Registan also links to an apparent eye-witness account of the 'detonating' events which can be found in the guardian. Details provided in this article help put some more perspective on things. Nathan also has a useful translation link direct from the Fergana news service. Ideal for non-Russian speakers.

This piece from AFP is typical of the reports coming in over the conventional wires. It highlights clearly the way in which Karimov's membership of strategic alliances with Western Democracies can be usefully turned against him by his local opponents. This part in particular stands out:

In one of the first public protests following the violence, 15 supporters of the Free Farmers party, a secular opposition group, gathered in front of the US embassy in Tashkent. "The United States is partly to blame for the situation in Uzbekistan because they supported, and support, the Uzbek regime," one of the organizers, Akhtam Shaimadanov told AFP. However, he added that the protestors had chosen the site of the US embassy because they had less reason to fear retribution from the Uzbek authorities, in full view of their US allies. "We would be beaten if we had this protest near a government building -- we had it here because the Uzbek authorities don't want to spoil their reputation," he told AFP.

More info from Technorati tag

Japan: No End To Deflation in Sight

The former deputy governor of the Bank of Japan Yutaka Yamaguchi is suggesting that the BoJ is is poised to abandon its forecast of a return to inflation this fiscal year, delaying an exit from zero interest rates until the year to March 2007 at the earliest. What a surprise!

Perhaps also worthy of note is the fact that despite a moderately successful quarter (1.3% growth in real terms, or an annualised rate of 5.3%) stocks continue to slide. In part stocks are likely to be influenced by any indication of slow-down in the US or China, given the export dependent character of the Japanese economy.

But there is more here. The first quarter growth followed zero growth in the fourth quarter of last year (so you could say that over the half year growth was at a 2.65% rate: still not too bad mind you). Worse, deflation is deteriorating: the GDP deflator, which measures the degree of deflation, was put at minus 1.2 pct for Q1, compared to minus 0.4 pct in the final quarter of 2004.

And furthermore............despite the higher than expected GDP growth, the total amount paid in wages - seen as a key driver of long-term recovery- remained flat quarter on quarter. This is hardly surprising since, for demographic reasons, the Japanese labour force is actually shrinking, and at such a pace that it is hard to see how real income growth can ever compensate for the reduced head count.

More info from Technorati Tags: :

Central Banks The Dollar and the Euro

The Financial Times is drawing attention to continuing moves by Central Banks to diversify their reserves away from dollar based instruments. It also seems that there is an increased temptation to do this at a time when the dollar is on a 'light rebound'. In this case they can switch reserves without risking provoking a stampede. The euro is now down around $1.26. From the point of view of economies like Italy and Germany this gradual decline could continue, but the realities of the global economy, and among these this long term trend to diversification (the other could area would, of course, be the continuing US current account defecit), make it more probable that - in the mid term - we will once more see upward pressure on the euro.

"The world's central banks were net sellers of US assets in March for the first time since September 2002, according to figures that may hint that the recent rebound in the dollar will be temporary. Central banks sold a net $14.4bn in US assets during the month, the largest sale since August 1998, the US Treasury revealed....

Private-sector inflows into the US remained robust in March at $74.5bn, only slightly down from $79.4bn in February.

“It does seem that when private sector investors are willing to buy dollars, the central banks are happy for any excuse to offload part of the mountain of dollars they have accumulated,” said David Bloom, currency strategist at HSBC.

Demand for US Treasuries was boosted by $28bn of net purchases from the Caribbean region, the highest level in at least four years. Analysts associate banking centres in the Caribbean with hedge funds.

Some analysts suggest that hedge fund buying of US government bonds in recent months may be associated with unwinding failed bets in which the funds were short on Treasuries while owning riskier, higher-yielding debt.

Monday, May 16, 2005

Inflation Easing in China

This is interesting news:

"China said on Monday consumer price inflation had slowed to 1.8 percent in the year through April from 2.7 percent in March, the lowest rate in 20 months, easing fears about inflation amid rampant speculation on the yuan.

Easing inflation is seen a boon to Beijing, which is under heightened foreign pressure to revalue the yuan.

A high base of comparison in 2004, a stabilisation of food prices and companies’ willingness to cut profit margins rather than lose market share are keeping a lid on consumer inflation despite rising wages and high prices for inputs such as oil, economists say
Source: Financial Times

Rising consumer price inflation, which peaked last summer at a seven-year high of 5.3 percent, helped trigger the country’s first interest rate rise in nearly a decade last October. China analysts have generally been on the lookout for signs of quickening inflation because of the large quantities of foreign money entering China as people bet on a yuan revaluation. To keep the yuan fixed near 8.28 per dollar, Beijing has had to buy-up these foreign funds, and doing so tends to pump up the money supply. Hence the inflation reading is a sensitive one. What the present number indicates is that pressure from this source for revaluation may not be as strong as was thought.

Clearly the Chinese economy is enourmous, and ongoing inflation in, say, Guandong, can be perfectly compatible with deflation in other regions, so it is hard to draw general conclusions. That being said, any economy which is able to sustain a growth rate of around 9% without fuelling more than 1.8% inflation clearly has a long way to go before reaching full capacity output. Also since China is increasingly a major global supplier, the lack of inflation pressure in China should put the inflation danger in other parts of the world in some sort of perspective. Maybe, eg, the ECB are seriously overestimating likely inflation pressures in the eurozone.

Sunday, May 15, 2005

Strong Stuff

Patrick Cockburn in today's Independent has some strong concluding words for the US administration:

"Almost exactly a century ago the Russian empire fought a war with Japan in the belief that a swift victory would strengthen the powers-that-be in St Petersburg. Instead the Tsar's armies met defeat. Russian generals, who said that their tactic of charging Japanese machine guns with sabre-wielding cavalry had failed only because their men had attacked with insufficient brio, held their jobs. In Iraq, American generals and their political masters of demonstrable incompetence are not fired. The US is turning out to be much less of a military and political superpower than the rest of the world had supposed".

The question is a real one. Could an exercise which was in part intended to serve as a show of US strength, turn out to be a show of weakness? The whole article is worth a read.

Library Of The Future?

Is this what the library of the future will look like: ie no books? The photo in fact comes from the computer lab at the University of Southern California in Los Angeles (courtesy of the NYT). As the Times points out this trend is currently only really evident in undergraduate libraries, but with more and more material becoming available online, and bookreading amongst young people declining, it isn't clear that the future won't look like this.

Curiously, the Times mentions reference books as the only ones being retained, and yet these are the among the most readily available and useable items online.

Taking The Shears To the Hedge

Morgan Stanley's Robert Feldman had an untimely title for his Friday post: hedge funds like Japan. This is undoubtedly true, though heaven only knows why. Meantime in Germany the headline would probably have been: Germany Doesn't Like Hedge Funds. And again heaven only knows why :). The German situation has all the hallmarks of a huge storm in a tea cup with forthcomg elections as a backdrop. The FT reports that Schröder has ordered a thorough review of hedge fund activities:

"Gerhard Schröder, German chancellor, on Friday ordered a government review of controls on hedge funds, saying he might consider imposing tighter curbs after foreign investors helped topple the management of Deutsche Börse, the German stock exchange group.

The chancellor had ordered three ministries to mount a co-ordinated review “to achieve, where necessary, more transparency, and where possible, tighter controls”, his spokesman said.

More transparency, well there's nothing in principle wrong with that, but it will be interesting to see what the review actually comes up with.

Rather unsurprisingly:

Hedge funds reacted angrily to the review. “This whole debate is crazy, groundless rubbish,” Achim Pütz, chairman of the Bundesverband Alternative Investments said.

and perhaps more to the point:

"Senior officials in Berlin hinted the chancellor's intervention was aimed at rallying SPD support for the regional election in North Rhine-Westphalia next weekend. “This is really about politics,” said one."

It might be worth bearing in mind that hedge funds do also lose money from time to time.

Europe's Diverse Economy

EU finance ministers meeting in Luxemburg have been taking stock of the complications involved in trying to have one monetary policy for twelve different economies. European Central Bank President Jean Claude Trichet described lending rates - which are at a six-decade low - as 'appropriate' and tried to play down finance ministers' concerns about economic the difficulties presented by ongoing divergences in the 12 countries sharing the euro.

"In a huge continental economy with 306 million inhabitants, it's perfectly normal that we should have considerable differences between areas,'' Trichet told a press conference in Luxembourg today following a meeting with European Union finance ministers and central bankers. "Do we ask if policy is appropriate for Texas, California or Alaska?"
Source: Bloomberg

I think Trichet misses the point here. Texas, California and Alaska all form part of one single Federal state, the euroland 12 are different nation states, with all the differences that this implies. Texas, California and Alaska would be better compared with German Lander for these purposes.

Actually behind the scenes - as the FT suggests - the failure of the eurozone 12 to really converge is begining to cause concern, despite Trichet's best efforts to brush the problems aside (he would, as they say, wouldn't he: it's his job to do so).

"The European Central Bank has voiced growing concern about the persistence of economic divergences among eurozone countries and urged urgent structural reform in underperforming countries.

Its comments, coming on the day data showed Italy in recession, mark a change of tone for the ECB, which has previously shied away from discussing individual countries' performances.

The bank, in its monthly bulletin released on Thursday, acknowledged that variations in economic growth and inflation rates among the 12 eurozone countries persisted, in spite of the introduction in 1999 of the single currency and a single interest rate. However, the ECB denied that divergences had worsened since then and said its job had not been made more difficult by the weakness of several eurozone countries.
Source: Financial Times

The above mentioned ECB monthly bulletin - which is indeed a weighty document - can be found here. Those with nothing better to do on a nice sunny day might enjoy the read :). In all seriousness though, this problem isn't going to go away. Both Germany and Italy now have trend growth which hovers between + and - 0.5%, and in a world of fiscal containment it is not clear what can be done to change this.