Entries from January 1, 2011 - January 31, 2011
US labour demand improving
In further evidence that US companies have shifted into expansionary mode, online job postings rose sharply in January, having moved sideways during the second half of 2010, according to the Conference Board. Vacancies lead employment, suggesting stronger payrolls growth ahead – see chart. Confidence in this prospect will increase if the pick-up in postings is confirmed by the Monster employment survey, released on Thursday.
EMU-periphery monetary contraction accelerates
Eurozone monetary trends continue to suggest a significant slowdown in growth in core economies and a recession in the periphery.
Narrow money M1 is a better economic leading indicator than the broader M3 measure; it weakened before the last recession and surged before the recovery. M1 comprises currency in circulation and overnight deposits – forms of money more likely to be related to economic transactions. Six-month M1 growth slowed from 3.3% (not annualised) in June to 1.1% in December. With CPI inflation picking up, real M1 is now contracting. (All figures are seasonally adjusted.)
The aggregate figures conceal an unprecedented divergence between core and peripheral economies. The ECB publishes a country breakdown of overnight deposits but not currency. Deposits in a core grouping of Austria, Benelux, France and Germany rose by a real 1.8% in the six months to December, down from 5.0% in June but still respectable. In Greece, Ireland, Italy, Portugal and Spain, however, they fell by 4.1% – larger than the decline preceding the 2008 recession.
The first chart shows the core / peripheral split while the second gives a country breakdown of the latter grouping. Real deposits are falling in all five cases, with Greece registering the largest decline but Portugal recently catching up. Among the core grouping (not shown), contraction in Belgium is counterbalanced by buoyancy in the Netherlands, with moderate growth in Germany and France.
Are global business surveys peaking?
Global industrial growth picked up in late 2010 but is expected to peak this spring, based on monetary trends – see previous post. This peak should be foreshadowed by a topping-out of forward-looking components of business surveys, such as the US ISM manufacturing new orders index. (The January ISM survey is released on Tuesday.)
Interestingly, an imminent softening in ISM new orders is also suggested by a comparison of the recent behaviour of the index with prior recoveries – see first chart. (The four-cycle average is based on movements around troughs in January 1958, December 1974, January 1991 and January 2001. The index reached another major low in June 1980 but the subsequent recovery aborted early, so this cycle is excluded from the comparison.)
US regional manufacturing surveys for January have been strong but hint at a peak in order flows – second chart. (The Dallas Fed survey is released on Monday so the latest survey averages use December readings.)
Korea is often a bellwether of the global industrial cycle. The Federation of Korean Industries manufacturing survey for January reported weaker expectations – third chart. This may reflect some cooling in China in response to recent stepped-up policy tightening. China's PMI new orders index fell in December and may ease further in January.
Current global monetary trends are not suggesting serious economic weakness while the ISM new orders four-cycle average strengthens again later in 2011. Investor behaviour, however, typically turns more cautious around peaks in economic momentum, even when the subsequent slowdown proves to be a "pause to refresh".
UK consumer inflation fears escalate further
The EU Commission's UK consumer survey for January will increase MPC worries about inflationary expectations becoming detached from the 2% target.
The net percentage of consumers expecting faster price rises over the next 12 months increased to 42, above the 2008 peak of 39 and the highest since 1994. The net percentage reporting higher prices over the last 12 months climbed to 40, though reached 60 in 2008 – see first chart.
The second chart shows CPI inflation together with the sum of the two survey responses. (In theory, the backward-looking net percentage should be related to current inflation while the forward-looking response will gauge the expected rise or fall, so the sum should be a measure of one-year-ahead inflation expectations.)
The combined measure leads inflation and is approaching the 2008 peak, which foreshadowed a CPI headline rate of 5.2%. Expectations and inflation itself, of course, fell sharply in 2009, reflecting the recession and a collapse in commodity prices; the current overshoot is likely to prove more sustained.
UK economy won't "double dip" but sterling could
Bank of England Governor Mervyn King now expects CPI inflation to reach 4-5% over the next few months. Even if Drs Sentance and Weale are able to convince a majority of the MPC (presumably not including the Governor) to vote for tightening, Bank rate is unlikely to rise beyond 1%. The real level of Bank rate, therefore, is heading deeper into negative territory and could reach minus 4.5% – the lowest since 1977.
Real policy rates moved from positive to negative in 1970 and again in 1974, with both movements followed by a large fall in the effective exchange rate – see first chart. The two currency declines were separated by a year-long period of stability, similar to the recent sideways movement. The second chart superimposes the fall in sterling from a December 1971 peak on the recent decline.
Will increasingly negative real rates scare off foreign investors and lead to a 1975-style second leg down for sterling, thereby further boosting import prices and entrenching the current inflation overshoot?
UK public borrowing back on course for undershoot
After two heavy months, public sector borrowing fell back sharply in December, to its lowest seasonally-adjusted level since November 2008 – see chart. If the adjusted run-rate in the final quarter of 2010-11 matches the average for the first nine months, full-year borrowing will be £146 billion, below the Office for Budget Reponsibility's November forecast of £148.5 billion. A larger undershoot, indeed, is possible, partly reflecting additional receipts from the VAT hike to 20% (forecast to raise £2.85 billion in 2010-11).