* Bank of England leaves UK monetary policy unchanged
* In line with market expectations, the European Central Bank raises rates by 0.25% to 1.25%
* US labour market continues to recover
* China´s central bank raises rates by 0.25% to 6.31%
* Bank of Japan to offer cheap loans to banks
* Minmetals in US$6.5bn bid for Equinox
BoE leaves monetary policy unchanged …
This week, the Bank of England Monetary Policy Committee voted to keep the bank rate steady at 0.5% and to make no change to the existing £200bn programme of asset purchases, known as quantitative easing. Meanwhile, the Markit UK service sector purchasing managers´ index (PMI) jumped to 57.1 in March from 52.6 in February, well above its pre-financial crisis average. A figure above 50 indicates that companies are reporting rising activity. The report showed that employment in private services, which make up around 40% of the economy, rose for the first time in nine months in March. A separate PMI for construction suggested that the industry grew faster than its pre-financial crisis average over the first three months of the year.
The Markit manufacturing PMI fell to 57.1 from 61 in February. The index remained well above its long-term average of 51.3 and was consistent with strong growth. The survey also showed that input prices for raw materials remained close to record highs, although prices at the factory gate were more subdued. The Office for National Statistics (ONS) said that industrial production unexpectedly fell 1.2% in February, with manufacturing (which accounts for 80% of the index and hitherto a strong performer) seeing no growth and oil extraction plunging 7.8%. A separate survey by the British Chamber of Commerce corroborated the ONS findings on manufacturing. Separate ONS figures showed that profits in the corporate sector in the fourth quarter of 2010 rose by 0.1% to 12.2%, the best since the first quarter of 2009. Returns were particularly strong in manufacturing with the sector experiencing its strongest profitability in nearly three years.
Meanwhile, the National Institute for Economic and Social Research estimated that UK GDP in the first quarter expanded by 0.7% (from the 0.5% contraction in output in the final three months of 2010.) The Office of Budget Responsibility and the Bank of England both estimate that GDP expanded by 0.8% in the quarter.
… ECB lifts rates 0.25% to 1.25%
This week saw the European Central Bank (ECB) Governing Council vote to raise the refi rate by 0.25% to 1.25%. The decision, which was widely expected, highlights the ECB’s determination to reassert its primary role of delivering price stability. Central bank President Jean-Claude Trichet said that acting against inflation was “in the interests of all members and partners of the single [European] market and single currency”, and would help boost economic confidence. The Euro eased back from a 14-month peak of $1.4350 against the Dollar.
In the meantime, Portugal’s outgoing government requested a possible €70bn-€80bn ($100bn-$114bn) from the European financial stability facility, the European Union’s bail-out fund, to finance its public debt and support its banks over the next three years. Yields on Portugal’s 10-year government bonds have soared above 10% (and prices have fallen) after a package of austerity measures failed in parliament, leading to José Sócrates’ resignation last month. For its part, Moody’s Investors Service cut Portugal’s sovereign rating by one notch from A to Baa1 and said that “political, budgetary and economic uncertainty” had increased the risk that Portugal would be unable to meet “ambitious” deficit reduction targets. Portugal is the third Euroland country to seek a bail-out after Greece and Ireland. In a separate report, Moody’s downgraded the credit ratings of seven Hungarian banks. Around 70% of Hungary’s loans are foreign-currency denominated, mostly in Swiss Francs. The Swiss Franc has appreciated over 10% against Hungary’s Forint, causing problems for Hungarian borrowers as their repayments rose.
Elsewhere, leading German economic research institutes, led by the Ifo, raised their growth forecast for Euroland’s largest economy for the current year to 2.8%, up from 2% forecast last September. The group also released its first growth estimate for 2012 with German output expected to expand by 2%.
US labour market continues to recover
Reports this week revealed further signs of recovery in the US labour market. The Labour Department said that initial claims for jobless benefits fell by 10,000 to 382,000 in the week ending April 2 from an upwardly revised 392,000 the previous week. The figure, lower than had been expected, brought the four-week average of new claims, a less volatile measure, down to 389,500. In addition, the number of Americans continuing to seek benefits was lower. Claims for emergency assistance made by those who have used up traditional benefits also fell. The weekly claims data followed March’s stronger-than-expected employment report, which showed that the US economy created 216,000 jobs in the month. The jobless rate fell to a lower-than-expected 8.8%. March was the second consecutive month of strong jobs growth.
Meanwhile, the Institute for Supply Management’s nonmanufacturing index slipped to 57.3 in March from February’s 59.7. Despite this, business activity, new orders, inventories and employment all grew in March, albeit at a slower pace than in February. The index also showed that prices grew at a slower rate in March.
Official figures revealed that US consumer borrowing rose for a fifth straight month in February. Revolving debt, which includes credit cards, decreased in the month while non-revolving debt, including educational loans, rose. Separately, minutes of the latest meeting of the Federal Open Market Committee (FOMC) showed that “almost all” policymakers “saw no need” for the central bank to taper off its current $600bn round of asset purchases as they come to an end in June. The comment is the first evidence that the FOMC intends to halt its asset purchases once it has completed its current round of
quantitative easing (QE2).
BoJ to offer $11.7bn of cheap loans
The Bank of Japan said that it plans to offer as much as ¥1,000bn ($11.7bn) of cheap funding to qualifying banks affected by the March 11 earthquake and tsunami for up to one year, in anticipation of an increase in demand from individuals living off savings. The new funding scheme was announced as the government said that it was likely to spend ¥Y4,000bn on the initial phase of its disaster reconstructi on plan. Separately, under proposals drawn up by Japan’s Industry Ministry, companies may be expected to cut electricity consumption by up to 25% in July and August as Japan grapples with a crippling power shortage. The recent earthquake and tsunami damaged some of Tokyo Electric Power’s (Tepco) thermal generating stations as well as two nuclear plants. Tepco supplies electricity to one-third of Japan’s population living in Tokyo and surrounding districts with electricity.
Emerging market news
This week, in a bid to tackle inflation, the People’s Bank of China (PoBC) raised China’s one-year lending rate by 0.25% to 6.31%, the fourth increase in five months. China’s central bank also raised the deposit rate to 3.25%. In addition, large banks in China are subject to required reserve ratios of at least 20%. In South Korea, the nation’s inflation rate spiked to a 29-month high of 4.7% in March. In Chile, the central bank raised its 2011 forecast for inflation to 4.3%, above its target and higher than the 3.3% that had been forecast previously. In Poland, the central bank policy committee raised interest rates by 0.25% to 4% in a widely anticipated move to curb risks of inflation which is running at 3.6%, ahead of policymakers’ 2.5% target.
Elsewhere, Fitch lifted the rating on Brazil’s local and foreign currency debt to BBB from BBB-, and its country ceiling to BBB+ from BBB. The ratings agency praised Brazil’s new President Dilma Rousseff for keeping a lid on the minimum wage and steadily reducing the treasury’s loans to BNDES, Brazil’s national development bank.
Separately, official figures showed that South African manufacturing rose by 6% from a year earlier. Growth accelerated from a revised 1.6% in January. In addition, the Purchasing Managers Index, an indicator of factory output, climbed to a 13-month high of 57.2 in March. The manufacturing sector, which accounts for 15% of South Africa’s GDP, is being supported by three cuts to the benchmark interest rate last year – bring it to 5.5%.
Company news
This week State-owned Chinese miner Minmetals Resources launched a C$6.3bn (US$6.5bn) bid for Australian-Canadian miner Equinox. Equinox, listed in Toronto and Sydney, operates a copper mine in Zambia and is to invest in a copper-gold operation in Saudi Arabia. The all-cash offer of C$7 per share is the largest unsolicited takeover attempt by a Chinese mining company. The proposed offer – which requires Beijing’s approval – would be financed by cash, long-term credit facilities provided by Chinese banks and by Chinese equity investment. The bid is conditional on Equinox dropping its hostile, C$4.7bn cash-and-shares offer for Vancouverbased Lundin Mining. Equinox’ share price rose 28.7% while that of Minmetals rose 2.4%. Minmetals’ interest in Equinox is another sign of China’s significant appetite for raw materials.
Separately, the pace and scale of European bank recapitalisations increased this week. Germany’s Commerzbank and Italy’s Intesasanpaolo announced that they planned to raise a combined €13.25bn ($18.9bn) of new equity, topping the rankings of bank rights issues this year. The capital management programmes are the result of the European-wide bank stress tests. The tests, conducted by regulators are designed to ensure that the region’s banking system is significantly robust, particularly in the context of ongoing fears about the weakness of sovereign debt in Euroland’s peripheral nations.
