Econoday Weekly International Economic Summary

¹²Econoday Weekly International Economic Summary:

Many people think that the stock market only lifts when the economy grows, but China's GDP growth rate was exceeding 10% per year when the Shanghai Stock Exchange composite index was crashing about -73% from 6124 to 1664 from October 2007 to October 2008. So don't be surprised if the US stock market indexes grow when the Fed starts to lift rates, which would constrain growth but also serve to tighten up and improve the prospects of the nation's banks. India just has raised its bank rate for the 6th time this year, and yet the Bombay Stock Exchange Sensex Index continues to soar as has the share prices of the country's leading banks, ICICI (IBN) and HDFC (HDB).

Market focus was squarely on the U.S. last week. The midterm elections Tuesday went about as expected with the Republicans winning a majority in the House of Representatives while the Democrats retained control of the Senate. Wednesday's long awaited Federal Reserve decision to begin a new round of quantitative easing (aka QE2) was greeted at first with circumspection then with glee. However, not everyone was happy about it, especially those policy makers in emerging markets who are concerned about inflows of cash.

There were a plethora of central bank meetings— the largest concentration since the first week of October 2008 when they met in emergency sessions to fight the global financial crisis. The results of last week's meetings include two interest rate increases (Reserve Banks of Australia and India), three with no policy change (European Central Bank and the Banks of England and Japan) and one that expanded its quantitative easing program (US Federal Reserve). On Thursday, the S&P 500 and Dow hit two year highs.

Elsewhere, the FTSE and DAX were at their highest since June 2008. Many analysts attributed the rally to the removal of the uncertainties surrounding the elections and the Fed. Stocks however have been supported by strong corporate profits— and possibly stronger economic growth. Policy makers in emerging market nations criticized the Federal Reserve for its decision to pump more money into the U.S. economy, a measure that they fear could escalate the worrisome influx of cash into fast-growing economies around the world.

Officials from Brazil to South Korea threatened more measures to curb the flood of money that has pushed up currency values and fueled concerns that asset price bubbles might be in the making in their countries. The unusually sharp backlash against the Fed's action underscores the divide among some of the largest economies in the world over appropriate economic policy and is likely to overshadow a gathering of leaders of the Group of 20 leading economies in Seoul at the end of the week.

The consumer sector softened in September on both the income and spending facets. Personal income in September slipped 0.1%, following a 0.4% boost in August. The headline number came in noticeably below the market consensus for a 0.3% gain. Weakness was led by a sharp drop in government unemployment insurance benefits. Also, the wages & salaries component was unchanged, following a 0.2% rise in August.

Clearly, the consumer sector decelerated in August but part— emphasis on part— of the slowing may be related to coming off strong numbers in August. But without a doubt, the government sector [[ie, primarily the states and municipalities: normxxx]] is a negative in terms of wages and unemployment benefits. The PCE price index firmed only 0.1% in September after rising 0.2% in August.

The manufacturing sector surged in October led by a burst in new orders and supported by strong employment gains. The composite headline index jumped nearly 2.5 points to 56.9. New Orders are the standout, up nearly eight points to 58.9 to indicate strong month-to-month growth for the best reading since May. Employment rose more than one point to 57.7 indicating no let up in hiring The demand for labor reflects strong production needs. Production at 62.7 is up more than six points and, like new orders, is at its best level since May.

While the consumer sector may be slowing, we are seeing improvement in construction and manufacturing. Construction spending rebounded in September, gaining 0.5% after a 0.2% dip the month before. The median market forecast called for a 0.5% decline. The boost in September was led by a 1.8% increase in private residential outlays, following a 4.2% decline in August.

These numbers reflect recent improvement in housing starts. In contrast, private nonresidential spending fell 1.6% in September, following a 0.8% increase the prior month. While not a huge drag on the economy, businesses simply are not at a high enough rate of utilization to want to boost expansion through new construction of facilities. Overall, economic news is net positive and earnings reports are favorable.

Factory inventories rose 0.7% in line with the gains underway for orders. Shipments rose 0.4% while unfilled orders, in an especially healthy sign, rose 1.0% A key reading in the report is a 0.4% rise for new orders excluding transportation, offering a baseline view of progress. The factory sector is beginning to pick up new steam and is re-exerting its leadership for the economy.

The bulk of the economy picked up steam in October according to the ISM's non-manufacturing index which rose 1.1 points in October to 54.3. New orders show special monthly acceleration, at a 56.7 level for a nearly two point gain. Backlogs orders moved back over 50 at 52.0 to indicate a month-to-month build. Rising orders and rising backlogs point squarely at rising employment.

Taken together, the FOMC Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with 'reinvestment' purchases. Purchases of nominal coupon Treasury securities will be in the range of 1.5 years through 30 years, although most will be in the 2.5 years to 10 years range. The New York Fed anticipates that the assets purchased will have an average duration of between 5 and 6 years.

The favorable productivity and cost numbers were largely due to an improvement in output growth. Compensation actually rose modestly. Businesses need to see a boost in production to see this pattern continue. But for now, the overall news is good. However, the numbers are tempered a little by a bump up in initial jobless claims.

The employment index has been stubbornly slow, inching seven tenths higher to 50.9 to indicate only mild month-to-month hiring for October. But, this report is positive, indicating that prior and once again accelerating gains in the manufacturing sector are now spilling into the non-manufacturing sector. Payroll jobs finally returned to positive territory as the impact of layoffs of temporary Census workers has dwindled and the private sector is strengthening. Payroll employment in October rebounded 151,000, following a revised 41,000 decline in September and a 1,000 decrease in August.

The October gain came in higher than analysts' projection for a 60,000 increase. The August and September revisions were net up 110,000 Private nonfarm employment posted another gain, advancing 159,000 in October, following a revised boost of 107,000 in September. The consensus called for an 85,000 boost for private payrolls. The average workweek for all workers edged up to 34.3 hours from 34.2 hours in October, marginally topping expectations for 34.2 hours….

For only the second time in the last 20 months consumer credit shows a monthly increase, up $2.1 billion in September. If August, at $2.41 trillion, remains the cycle low after revisions, the peak-to-trough decline from the July 2008 peak of $2.58 trillion will be 6.6% September's gain is due solely to a $10.4 billion rise in non-revolving credit, a component boosted by strong auto sales. Revolving credit, reflecting the move away from credit cards, contracted $8.3 billion during September.

Initial jobless claims for the October 30 week rose 20,000 to 457,000. The latest report offset the prior week's dip of 18,000. The swings focus attention on the four-week average which rose a mild 2,000 to 456,000 for a slight improvement from the month-ago readings. Continuing claims extended their decline, down 42,000 to 4.340 million in the October 23 week with the four-week average down 43,000 to 4.411 million.

The U.S. international trade gap increased sharply in August to $46.3 billion from $42.3 billion the prior month. Exports edged up a modest 0.2%, following a 2.0% gain in July. Imports rebounded 2.1%, following a 2.1% decline in July. The worsening in the trade gap was primarily in the nonpetroleum deficit which grew to $35.9 billion in August from $33.2 billion the previous month.

The Reuter's/University of Michigan's Consumer sentiment index for the final October reading came in at 67.7 just below mid-October's 67.9 and compared to 68.2 for final September. The October figure is the weakest of the year but at least moderately above recession readings in the 50s.