US Exits Recession
The US economy bounced back into growth during the 3rd quarter. The Commerce Department’s preliminary report indicated annualized growth of 3.5% surpassing the consensus forecast of a 3.3% annualized expansion. Data for the prior quarter indicated a 0.7% contraction.
The recovery was aided by increased activity across the economy with consumer spending, housing, inventories and exports all reporting significant improvement.
Consumer spending which accounts for over 2/3 of economic activity jumped 3.4% in the recent quarter, the fastest advance since the first quarter of 2007. Spending relating to homes, jumped at a 23.4% rate after crashing 23.3% in the April-June period. Business inventory liquidation also improved as firms prepared, hopefully, for higher demand in the 4th quarter and into 2010. Excluding inventories, GDP rose at a 2.5%. Exports were helped by the weaker dollar.
Japanese Industrial Output Strengthens
For the seventh consecutive month, industrial output rose in September, the longest run of gains since 1997. Further improvement is predicted during the 4th quarter with inventories at a 21 year low despite the recent increase in production.
Car and electronic goods manufacturers were the main beneficiaries of the production recovery with sales to Asia accounting for more than half of exports. Vehicle production rose 8.2% in September accelerating from August’s 1.9% increase.
The positive data will reassure the Bank of Japan that its plans to withdraw some of the industry-focused stimulus later in 2009 are justified, though interest rates are expected to remain near zero throughout Q4 and 2010 due to ongoing deflationary pressures and weak domestic demand.
Chart: Japan Nikkei 225 Weekly to 29th October Source Stockcharts
Oil Retreats on Weaker Risk Appetite and OPEC Comments
Comments from OPEC and a decline in risk appetite have reversed the recent bullish trend in oil, at least temporarily.
The recent high of circa $82 compares to a cyclical low of $35 enjoyed by consumers late in 2008. Oil, like most other risky assets, has rallied strongly this year and speculators are once again looking towards $100, the most significant price target and resistance level. Increasing demand and a weaker dollar have contributed to the rally, in addition to speculative inflows.
OPEC also has one eye on $100 and a leading spokesman for the group implied that it would boost output if the psychologically key price was reached. OPEC also acknowledged the global economic recovery would be increasingly jeopardized the more the price stretched above $80.
Most economists feel $70-$75 per barrel represents the fair price equilibrium which meets consumer affordability and allows producers to make sufficient profits to cover production costs and invest in exploration.
A growing consensus is also suggesting much of the recent increase is attributable to speculation and the demand-supply fundamentals do not support the current price. Other more cynical observers have suggested the oil producing countries are keen to enjoy a period of abnormal profits, via $80-$100 per barrel, to compensate them for ‘suffering’ the dip in price during the worst of the global recession.Chart: WTI Crude Weekly to 29th October. Source Stockcharts
Bank of England Likely to Consider Expansion of QE Program
With the UK trailing Germany, France, the US, Australia and the vast majority of other industrialized nations into the global economic recovery, the BoE is to consider expanding its Quantitative Easing program from its current £175bn budget.
A recent poll indicates 2/3 of economists expect the BoE to increase stimulus by either £25bn or £50bn. The new consensus follows the appalling GDP data reported last week. Prior to the news of the Q3 0.4% contraction, economists had predicted the current package would be left intact.
The Bank will have to secure authorization from the Chancellor of the Exchequer, Alistair Darling, to expand quantitative easing, as the Treasury previously approved the stimulus package with a ceiling of £175bn.UK Housing Recovery Persists but Pace to Ease
UK house prices rose 0.9% in September according to latest data from the Land Registry building on recent month’s gains bringing six month gains to near 10%. The average price of a home in England and Wales now stands at £158,377, still 5.6% lower than the same month a year earlier. However recent headline figures implying a strong recovery is in place hides vastly differing fortunes in the property market from region to region.
In particular London and East Anglia continue to gain favor whilst transaction levels and prices in Wales and the North East remain in weak.
Looking forward even in the South East the pace of gains are set to lessen, at least temporarily, as consumers increasingly focus on the festive season. Rightmove, the specialist property firm, confirmed the seasonal trend was already in motion reporting new listings had fallen from 105,924 during September to 94,629 in October.UK Business Leaders Enjoy Inflation Busting Pay Rises
FTSE 100 CEO’s and other senior executives have seen their base wage increase by 7.4% on average over the past year, the Directors Pay Report by Incomes Data, a subsidiary of Thomson Reuters has indicated.
The inflation beating boost to executive basic pay compares favourably to the 5.2% drop in UK Gross Domestic Product over the same period and rising unemployment which now stands at 2.47 million.
Offsetting the generous base pay increase was a reduction in performance related remuneration bringing the average bonus, on top of salary, down to a little more than £500,000.