Last week, news of China raising its interest rate by 0.25% barely moved the market. As reported by the Wall Street Journal, most analysts expected that there would be only one interest rate raise left in PBOC’s pocket this year. They reasoned that inflation would peak during the first half of 2011 and gradually drop in the second half largely due to a higher base.

These analysts might be too optimistic in their forecasts. The first thing that came to mind is a series news stories by both Chinese and English media on the National Development and Reform Commission (NDRC), a powerful economic planning body in China. Near the end of March, NDRC asked Chinese coal miners to keep the coal prices low, as coal is the major input for generating electricity in China. Then, NDRC urged Unilever (UL) and other consumer goods producers to stop raising prices.

Recent violence and regime changes in the Middle Eastern and North African countries drastically increased uncertainties and raised risk premiums of emerging market assets. Especially for those countries, mounting political risks not only hindered economic activities, but also scared investors away from those economies. Prices of assets in countries in Middle East and North Africa, measured by the S&P Pan Arab Composite index, fell by 6.41% YTD.

When the unrest spreads across Middle East and North Africa and seems to be unstoppable, there are exceptions, which are countries largely in a different category from the troubled areas. One of those exceptions now in Middle East is Turkey, a strategically important country, has a lot of religious and demographical similarities to countries who are struggling with the political turmoil.

Along with other stock markets, Istanbul stock market index (XU100) so far has dropped by more than 6% since the peak in

The latest released inflation data in developed economies so far have appeared to be in line with the market expectation. U.S. inflation in January is 1.6%, higher than that in previous months, but still well below the Fed’s inflation target. Inflation rates in U.K. and Germany are rising fast; U.K. inflation in January is up to 4%, driven by surging food, oil, and commodity prices. This inflation rate is already double the inflation target (2%) set by BOE. German inflation in January rose 2% from a year ago, and was the highest annual growth rate since October 2008. The inflation target of ECB is "close to but below 2%."

Regarding the policy implication of these inflation numbers, the Fed will definitely go along with QE2 and low interest rates as planned, since the inflation threat is still low on their list. Concerning the PIIGS debt problems, the

The economic buzz word of this week is inflation. China, the UK, the US, and Canada all will release their January CPI numbers this week.

As widely reported, the severe drought in northern China helped push the food cost in China up by 10.3% in January; inflation in China is up to 4.9%, from 4.6% in December. The weights of components of Chinese CPI are changed in January: the weight of housing increased while the weight of everything else decreased modestly, including food. This change should have limited impacts on CPI since prices of both housing and food costs are rising in China. Even though the latest January narrowing trade surplus has boosted the Chinese stock markets as investors saw a sign of more balanced economy and less money inflow into China’s economy, the threat of spiking food inflation after the Lunar New Year holidays weighed heavily on the stock

Inflation in emerging markets is accelerating. China raised its interest rate by 25 bps at the end of the Spring Festival holidays. Indonesia just raised its official interest rate by 25 bps last week, the first time since August 2009. In the Philippines, the January inflation rate surprisingly rose to 3.54% from 3% in December.

The Philippines is one of the few economies in emerging Asia with a favorable demographic trend. Its youth dependency ratio is higher than 0.8 in 2010, one of the highest in the world. Youth dependency ratio is defined as the population aged 19 years and under, compared to the population aged 20−65 years.

The Philippine economy has mostly relied on domestic consumption in the past two decades. In 2008, private consumption accounted for 71% of Philippine GDP, while most other ASEAN countries relied more on export and investment as the engine of economic growth.

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The US January PMI (60.8) is surprisingly good, not only stronger than December 2010, but also better than the market expectation. New Orders (67.8) are significantly higher than December 2010, reflecting the strong growth in demand from consumption and business investment in the US. Employment (61.7) also improved from the previous month. Other developed economies, such as Germany and UK, showed significant gains in their PMI readings in January as well.

Conversely, China’s official PMI showed a slight decrease in January, 52.9, the lowest in six months. Both export order and employment indices saw large drops in January partially due to the upcoming long holidays.

It is widely known that developed economies and developing economies will face drastically different environments in 2011. Developing economies are struggling with inflation and overheating, while developed countries are pursuing growth. While the PBOC is expected to raise interest rates again in February, the Fed

German inflation rate (y-y change) is up to 1.9% in January 2011, the highest level in two years. Inflation in other European core economies, such as the UK and France, also picked up significantly by the end of 2010. December inflation (y-y change) in France is 1.8% and December inflation (y-y change) in the UK is 3.7%.

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Fiscal austerity measures for European countries in the middle of the sovereign debt crisis, such as PIIGS countries, are supposed to cut the public spending, reduce the labor cost, and make their economies more competitive. However, inflation in PIIGS countries rose even faster than these core economies in Europe, partly due to the consumption tax increases. These faster-rising inflation problems actually push business costs in PIIGS countries even higher, compared to core European economies. Portugal inflation rate (y-y change) increased from 0.1% from January 2010 to 2.5% in December. Spain

China’s GDP growth rate in the 4th quarter in 2010 is 9.8%, which puts the 2010 annual GDP growth rate at 10.3%. The December China CPI is 4.6%, a little bit lower than November CPI. This news triggered a sell off in Asia markets since everybody is expected that the policy-makers in Beijing will take stronger measures to cool the overheating economy. Brazil on Wednesday just raised its official policy rate by 50 bps to 11.25% to cool inflation. The central bank of Poland also raised its official interest rate by 25 bps on Wednesday and stressed that there are more raises to come.

While emerging economies across the world are struggling to contain inflation and fighting to keep their economies from overheating, there are few exceptions. One of these exceptions is Mexico.

The December inflation rate in Mexico was 4.4%, though higher than in November, which is still below

The 2010 November Japan trade surplus dropped by 15.7% compared to the same month in 2009. The relatively successful auction of Portuguese bonds boosted risky assets (equity and commodity) in the U.S. These two seemly unrelated pieces of news should have one common implication: A rising USDJPY.

A shrinking trade balance suggested that Japanese exporters are losing ground in the international market due to the expensive JPY. As the fear of a Portugal debt crisis is abated for now, “risk on” mode returned to the market. The typical “safe harbor” currency like JPY should also see its value declining as investors leave for risky currencies. But USDJPY dropped by 0.3% on Wednesday instead.

Though I do not want to focus too much on the one day movement of a currency pair, in recent days USDJPY has defied the major pattern set last year. In 2010, the correlation between USDJPY and

On Friday, the December advanced retail trade number will be released, showing that the lost ground of retail sales after the financial crisis was finally recovered in December 2010. Advanced retail trade hit its peak in November 2007 at about $380 billion. Then in December 2008, it reached the bottom, with less than $336 billion (a 12% drop). The retail trade rebounded since then.

Of course, a simple linear time series forecasting model shows that if the financial crisis had not happened, the advanced retail trade in December 2010 would have been $424 billion (a 12% increase from the peak in November 2007).

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The lost ground is set to be recovered; the question is, what next? Apparently, consumers are still cautious. People are borrowing less relative to their income. The ratio of outstanding consumer credit to disposable income is at its lowest level since 2000, and

As I expected last week, the December U.S. PMI was quite strong, pushing stock markets up to the new high of the last two years. The December PMI is 57 compared to the November PMI 56.6, showing the economy was growing well last month. Moreover, both the production index and the new orders index enjoyed strong growth. The December production index is 60.7 compared to 55 in November. The December new order index is 60.9 compared to the November 56.6.

Also as expected, the ISM Prices Paid index also increased in December, 72.5 compared to 69.5 in November. While a few sectors reported decreasing production and new orders in December, such as Nonmetallic Mineral Products, Paper Products, and Printing & Related Support Activities, none of the 18 manufacturing industries reported paying lower prices on average during December.

Then, when manufacturers saw demand growing fast, they were cautious and added fewer

After an illiquid final week in 2010, the U.S. stock market will embrace a data-heavy week in the beginning of 2011. The most significant ones are the December PMI and the December nonfarm payrolls.

On Monday, the December U.S. PMI will be released. As one of the most important leading indicators on manufacturing activities, the U.S. PMI in the first half of 2010 had been very strong. However, in the second half of 2010, PMI dropped to 54.4 in September. With the new order index at 51.1, that's slightly above the 50 level that edges closer to the territory of economic declinr. With the support of QE2, the October and November PMI showed strong growth again.

As the first important economic indicator to be released in 2011, the December PMI could set the tone of markets as investors come back from long vacations. For those who want to make an

A few days ago, Japan revealed the biggest fiscal budget plan of 92.4 trillion yen ($1.1 trillion) in its history for the next fiscal year (FY 2011, starting in April 2011). The number sounds big, but it is just a 0.12% increase from the budget of 92.3 trillion yen in the current fiscal year (FY 2010). Since the budget will be partially financed by one-off funding from previous savings, the projected borrowing needs of the Japan government in the next fiscal year will be 5 billion yen (about $60 million) lower than its debts in FY 2010.

The economic rebound in Japan in 2010 has been pretty strong so far, after the seven-quarter drop in GDP in 2008 and 2009. The average growth rate of the real GDP in the first three quarters in 2010 over the same period in 2009 is about 4.9%, compared to 2.9% in the

For those who are interested in the year-end thin markets, the following table presents the returns of S&P 500 index in the week between the Christmas and the New Year in the past 20 years. The number of the positive returns is 12 and the number of the negative return is 8 for the last two decades, which give us little hint of direction in the final week this year.

But while most of Western countries were in vacation, PBOC raised interest rates by 0.25% in China due to rising inflation. I looked at the most recent eight rate raises in China and the market reactions following the raises. The following table illustrates the date of each recent rate raise, the 5-days return of related stock markets following the rate raise, the 5-days return of Dow Jones-UBS commodity index, and inflation rates at the time.

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