* Mixed economic data prompts BoE to leave monetary policy unchanged
* ECB signals no further rate rise in June but maintains bias towards tighter monetary policy
* Latest figures for US retail sales and consumer spending exceed expectations
* Japanese factory output suffers worse-than-expected decline following March earthquake
* SocGen reports 14% profit decline
BoE leaves monetary policy unchanged
This week’s statistics and reports painted a mixed picture of the UK economy. Preliminary estimates showed that Britain’s output expanded by 0.5% in the first quarter of 2011 - offsetting the decline in GDP of a similar magnitude in the previous quarter. Meanwhile, median pay rises remained steady at 2.5% in the three months to March – well below inflation – suggesting that a sharp squeeze on real incomes is continuing. (Consumer price inflation is currently 4% while retail price inflation, used as the benchmark in many wage negotiations, is 5.3%).
The latest data from the Bank of England also revealed that lending to businesses has fallen further while new mortgage lending remains weak. Results of a separate survey for the construction sector for April showed that activity had slowed more sharply than expected while two new surveys showed further falls in house prices. The latest services purchasing managers´ index fell from 57.1 in March to 54.3, indicating that service sector growth had slowed in April. More positive was the CBI’s monthly distributive trades’ survey, which found a balance of 21% more retailers reported better sales this April than in April 2010. Against this mixed backdrop, the National Institute of Economic and Social Research downgraded its January forecast for 2011 GDP growth by 0.1% to 1.4%.
As expected, the Bank of England’s Monetary Policy Committee voted to hold short term rates at 0.5% while remaining committed to quantitative easing at the current £200bn level. Policymakers signalled that key to deliberations in May will be a detailed assessment of growth in the first quarter of this year.
ECB maintains its tightening bias.
European Central Bank (ECB) President Jean-Claude Trichet signalled that the central bank would not raise the Refi rate in June but would maintain its bias towards further interest rate rises for the 17-nation region. (The ECB lifted the Refi rate by 0.25% to 1.25% in April.)
Consumer inflation in the Euro area was 2.8% in April, above the Bank’s 2% target and the highest annual rate in more than two years. In Germany annual inflation rose to 2.6% in the month, 0.3% higher than the corresponding figure the previous month and the highest level in more than two years. In a separate report, the Federal Labour Office said that German unemployment dropped to less than 3m in April for the first time since 1992. The steady improvement in the German labour market continues to improve the domestic demand outtake.
In other news, the ECB unveiled a €78bn financial rescue package for Portugal – the third Euroland country behind Greece and Ireland to require outside aid. The deal commits Portugal to cutting its budget deficit to 3% of GDP by 2013, a year later than planned under the government’s previous debt-consolidation programme. The agreement contains a series of austerity measures, including a freeze on public sector pay and pensions until 2013, as well as a special tax on pensions above €1,500 a month. Up to €12bn of the bail-out funds will be used to shore up the country’s banks.
Portuguese banks will have to increase their core tier one capital ratios – a key measure of financial strength – to 9% this year and 10% in 2012. The Portuguese economy is likely to contract by 1.5%-2% in both 2011 and 2012 and unemployment is expected to climb to over 12%.
Latest US economic data upbeat
Although official figures showed that US GDP grew at an annualised rate of only 1.8% in the first quarter, this week’s economic reports were generally upbeat. In this regard, Retail Metrics reported that US retail sales in April were up 8.7% from a year ago at stores open at least 12 months, equalling the largest monthly gain in the past 11 years. A separate report revealed that consumer spending rose by a better-than-forecast 0.6% in March. Personal incomes in the month also increased, up by 0.5%. (February’s personal incomes were revised up 0.2% to a 0.9% increase.)
Meanwhile, the core personal consumption price index, a measure of inflation favoured by the Federal Reserve, increased 0.1% in March after rising 0.2% the previous month. The Commerce Department said that new orders for manufactured goods jumped by a higher-than-expected 3% in March while long-lasting durable goods orders grew by 2.9%, better than the preliminary 2.5% reported previously. Construction spending rebounded in March following an unusually harsh winter across much of the country that had depressed building activity for the previous three months. However, the latest Federal Reserve survey of senior bank-loan officers showed that demand for US mortgages is still falling, even though banks are no longer tightening their lending conditions.
The Institute for Supply Management (ISM) said that its index of the non-manufacturing sector slid to 52.8 in April from 57.3 in March, a steeper decline than had been expected. By contrast, the corresponding index of manufacturing, while declining slightly from the previous month, was stronger than had been expected, recording its fourth consecutive monthly reading above 60. Less positive was a Bureau of Labour Statistics report which showed that productivity growth in the first quarter slowed to 1.3% compared with a year ago. (Productivity grew as fast as 6% during the recession.)
S&P downgrades outlook for Japan’s debt
Japanese factory output suffered a worse-than-expected decline in March as the devastating earthquake, tsunami and nuclear accident early in the month crippled the nation’s supply chains. Meanwhile, ratings agency Standard and Poor’s cut its outlook for Japan’s sovereign debt from “stable” to “negative,” citing concerns that costs related to Japan’s recent disasters would increase the nation’s fiscal deficit above prior estimates. For its part, Japan’s government unveiled a first supplementary budget of ¥4,153bn to pay for the initial costs of rebuilding parts of North-eastern Japan.
Separately, official figures showed that Japan’s unemployment rate was unchanged at 4.6% in March, while overall household spending decreased 8.5% from a year earlier.
Emerging market news
In China the Federation of Logistics and Purchasing said that its manufacturing Purchasing Managers’ Index (PMI) fell to 52.9 in April from 53.4 in the previous month, indicating continuing growth but at a slightly slower pace. The equivalent figure for South Korea also indicated that the pace of manufacturing growth eased. By contrast, the PMI for India rose to 58.0 in April, signalling a slightly stronger pace of growth than its high level in March.
India’s headline inflation jumped to 8.9% in March, above the central bank’s target of 4-5%. The Reserve Bank of India raised the repo rate - the rate at which the central bank lends to commercial banks – by 0.5% to 7.25%, warning that inflation at current levels posed a threat to the nation’s economic growth. The rate rise was the ninth in just over a year.
In Brazil, the central bank, Banco Central do Brasil raised the Selic interest rate by 0.25% to 12%. Brazil’s inflation reached 6.44% in the 12 months through to mid-April and is forecast to breach the upper limit of the central bank’s target of 4.5% plus or minus 2% this month. Meanwhile, Russia’s central bank unexpectedly raised its policy interest rate by 0.25% to 8.25%, the second increase this year. Russia’s inflation rate climbed to 9.6% in April from 9.5% in March, well above the 7.5% target for 2011.
Company news
This week French lender BNP Paribas, Euroland’s largest bank by deposits, reported that net income for the first three months of 2011 rose 14.6%. The bank said that buoyant retail banking in Europe and the USA offset weaker investment banking activity and the effects of political turmoil in some of its emerging markets. By contrast, rival Societe Generale, France’s second-largest bank by market value, said that first-quarter profit fell a larger-than-expected 14%, hurt by a charge tied to its own debt and provisions resulting from political turmoil in Egypt. The company’s share price slid more than 4%.
Separately, it was reported that Chinese property investment trust Hui Xian raised Rmb10.48bn ($1.6bn) in the first Renminbi denominates initial public offering (IPO) outside mainland China. The shares were priced at the bottom end of the expected range of between Rmb5.24 to Rmb5.58 per share.
Elsewhere, the share price of Renren, China’s leading real-name social networking service surged 40% on its trading debut in New York. The IPO, priced at $14 per share (the top of its projected range of $12-$14), raised $743m. The sale of US-listed Renren shares, or American depositary receipts, is the largest this year by a Chinese technology company on the New York Stock Exchange.
