Daily Archives: July 6, 2010

James Politi

Money Supply - click for larger image

Money Supply – click for larger image

Last week’s dispiriting jobs report has led to pervasive pessimism about the state of the US labour market specifically and the pace of the recovery more in general.

So it was quite refreshing to see a research note land in my inbox this morning from Milton Ezrati, senior economist and market strategist at Lord Abbett, a fund manager, laying out the case why the labour market recovery is actually proceeding ahead of schedule compared to other recoveries.

Mr Ezrati’s argument is based on measuring this cycle’s labour market recovery with the average time that it taken a variety of labour market indicators to rebound after gross domestic product hits its trough during previous cycles. 

Turkey’s monetary policy committee is feeling vindicated. For months it has argued a spike in inflation was temporary: June’s inflation data, released this week, confirmed consumer prices had not just stabilised, but even fell 0.56 per cent last month.

The figures, showing annual inflation eased to 9.1 per cent from a peak of 10.2 per cent in April, boosted the Turkish lira and bonds. Combined with last week’s GDP data that suggested the economic recovery was losing momentum, they have also led most economists to defer expectations of higher interest rates to next year.

The volatility in inflation has been largely due to seasonal swings in food prices – a big component of the CPI basket in Turkey. But the central bank, in comments published on Wednesday, emphasized that core inflation had also eased, and a decline in services price inflation had become more pronounced – with rent inflation, one of the most persistent features of Turkish inflation, at a historic low.

This suggests that the central bank will use its next quarterly inflation report, due on July 27, to lower its forecast for year-end inflation from its previous call of 8.2 per cent. It is also likely to postpone the start of policy tightening, after signalling in its last quarterly report that rate rises could begin in the last quarter of 2010. 

James Politi

The doves on the Federal Open Market Committee already have plenty of ammunition to argue against any early rate hikes or asset sales, given the slowdown in the economic recovery. But they have acquired an additional weapon with the release of the Institute for Supply Management’s monthly surveys on business activity in the services and manufacturing sectors.

Both the ISM services survey, released today, and the ISM manufacturing survey, released last Thursday, disappointed forecasters, revealing bigger-than-expected drops in activity. But that’s not all. The ‘price’ component of both surveys were sharply lower – a very concrete sign that disinflationary pressures are accelerating across the US economy.

The manufacturing ISM showed the prices index down from 77.5 to 57, while the services survey’s price index fell from 60.6 in May to 53.8 in June. Let’s not forget that core inflation -  as measured by the labor department’s consumer price index excluding food and energy – rose by 0.9 per cent in the year to May - its slowest pace since 1966 and well below the Fed’s target of about 2 per cent.

Of course, the ISM price indices include 

Not one eurozone country deserved a credit rating upgrade in the past quarter, while some, such as Spain, deserved six-notch downgrades, new data show. Indeed, 13 of the worst-performing 15 countries were European (see Q-o-Q change column; source: CMA data).

The UK, by contrast, did deserve a one-notch upgrade. (The bad news is that even an upgrade leaves the UK’s implied rating one notch below its actual rating of AAA.) Far greater winners were Guatemala, Uruguay, Egypt, Bahrain and Colombia, which all merited multi-notch upgrades. 

Ahead of Friday‘s rate-setting meeting, the International Monetary Fund has sharply revised up its forecast for South Korean growth and urged the central bank to start raising rates. Growth for Asia’s fourth-largest economy this year is now forecast at 5.75 per cent, up from 4.5 per cent, Reuters reports:

“In light of the strong economic recovery, a carefully calibrated exit from supportive macroeconomic policies is appropriate,” IMF said in a statement. 

Ralph Atkins

Psychological analyses of the German character are the flavour of the week, what with the country’s team doing so well in the football World Cup and the debate rumbling over whether Berlin should stimulate domestic demand in the economy. Is there something that makes Germans naturally better at exporting, but scared of shopping (and capable of beating 4 – nil an Argentinian football team managed by Diego Maradona)?

After living here for a few years, I still believe Germans are not really any different to other nationalities. They are careful with their money, and like it when their national football team wins. But in an article in Foreign Policy, Mark Schieritz, economics correspondent at Die Zeit newspaper, sets out why he thinks his compatriots are intrinsically different. 

The Bank of Thailand’s new governor is to be Prasarn Trairatvorakul, currently president of one of Thailand’s largest banks. Dr Prasarn has a cv to make mortals weep: initially studying electrical and industrial engineering, he went on to receive an MBA and doctorate from Harvard. As well as being president of Kasikorn bank, Dr Prasarn is executive director of the Thai Bankers’ Assocation (the source of his photo, right), and a director of the Thai red cross. He has worked for a long time as an economist and in the Securities and Exchange Commission, giving him an excellent background for the current global situation. 

Ralph Atkins

The European Central Bank, which has championed fiscal austerity across the continent, has scolded Romania’s government for forcing a 25 per cent pay cut on employees of the country’s central bank.

In a strongly-worded statement, the ECB on Monday warned that Romania’s actions violated European Union treaties allowing monetary authorities to operate freely and without political interference. It presaged a similar showdown with Hungary’s government, which plans to cut its central bank governor’s pay.