* Bank of England divided on QE and warns of prolonged economic weakness
* European Central Bank President believes Euroland debt crisis may threaten banks´ stability
* Federal Open Market Committee leaves monetary policy unchanged
* Japanese government upgrades economic outlook
* Emerging markets target inflation battle
BoE divided on UK monetary policy
This week saw Sterling depreciate against all major currencies, dropping to a record low against the Swiss Franc. Yields on 10-year government bonds fell to 3.15% from 3.24% (and prices rose). Minutes of the Bank of England’s (BoE) Monetary Policy Committee’s June meeting revealed that policymakers were divided on the nature of weak underlying demand in Britain and had voted 7 to 2 in favour of keeping interest rates at record low levels. The minutes said that “the current weakness of demand growth was likely to persist for longer than previously thought,” suggesting that moves to increase the purchases of gilts from the current level of £200bn may be gathering support. The minutes said that, for “some members,” an extension of the programme was an option if inflation fell in the medium term. Adam Posen who had been the single supporter of the move to extend the asset purchase programme (known as quantitative easing) has recently been joined on the Committee by Ben Broadbent, an external member who appears inclined towards promoting growth. (Mr Broadbent replaced Andrew Sentance who consistently voted for an increase in rates – most recently urging a 0.5% rise from 0.5%).
The BoE’s monthly report from its network of agents who monitor economic activity around the country described the growth rate of nominal spending on consumer goods and services as “sluggish”, although on some other measures – employment intentions, export orders and business investment intentions – prospects for growth are improving. Meanwhile, a businesses survey by the CBI employers’ group said that in June retail sales weakened sharply. Other reports on the economy were generally upbeat. Britain’s housing market stabilised in the first three months of this year amid signs that fewer homeowners are falling behind in their monthly mortgage payments. Moreover, data on public sector finances in May pointed to an improving fiscal position for the government with revenue growth roughly on track once the effects of last year’s bank bonus tax are removed. Meanwhile, the Office for Budget Responsibility said that it expected to see even more improvement in tax receipts for the remainder of the current fiscal year. A CBI survey of businesses showed that UK manufacturing orders remained strong in June with industrial orders well above the historical average and higher than had been expected.
ECB President: Debt crisis threatens Euroland stability
European Central Bank (ECB) President Jean-Claude Trichet said that the debt crises faced by countries such as Greece and the spillover effects on the Euro area banking system pose the “most serious threat to financial stability in the European Union.” President of the European Commission, José Manuel Barroso promised to accelerate €1bn ($1.4bn) in development grants to Greece if austerity measures were approved. (Greece faces the prospect of a sovereign default if the parliament does not approve a €28bn austerity package). However, international lenders told Greece that the €28bn austerity package agreed to last month was no longer sufficient, and that Athens must close a €5.5bn “black hole” in the nation’s four-year programme of fiscal and structural reforms before it is approved by legislators.
Highlighting the financial tensions in Euroland, the ECB reported a surge in demand for funds from banks in its offer of weekly liquidity - the €187bn provided at the central bank’s main interest rate of 1.25% was the highest since February and €50bn more than the previous week. The International Monetary Fund (IMF) said that Spain must step up efforts to overhaul its economy, warning that financial conditions could deteriorate further, reflecting rising concerns about sovereign risks in the Euro area.
Ireland’s Central Statistics Office said that the nation’s GDP returned to growth of 1.3% in the first three months of the year. Activity in the construction industry, which has seen more than 200,000 job losses since the onset of the financial crisis, was down 15%. The “composite” purchasing managers’ indices in Euroland (covering manufacturing and service sectors) fell more than expected from 55.8 in May to 53.6 in June, suggesting that private sector activity had expanded at the slowest pace in almost two years. (A figure above 50 indicates an expansion in activity.) Germany’s “composite” index rose from 57.1 in May to 57.3 in June but the German index for manufacturing dropped to a 17-month low.
FOMC leaves monetary policy unchanged
This week the Federal Open Market Committee (FOMC) left the Federal Funds rate unchanged at 0-0.25%. In an accompanying statement the Committee said that US rates will remain at close to zero for an “extended period.” The central bank will complete its purchases of $600 billion of longer-term Treasury securities (QE2) by the end of this month and “will maintain its existing policy of reinvesting principal payments from its securities holdings.” The rate-setting Committee re-evaluated the outlook for US growth, lowering the forecast range for 2011 to 2.7-2.9% from forecasts of 3.1-3.3% in April. Growth in 2012 is forecast to be between 3.3% and 3.7%, lower than previous estimates. The inflation outlook was little changed at 2.3% to 2.5% for this year but projections of core prices - which exclude food and energy costs - moved up to a 1.5% to 1.8% range from 1.3% to 1.6%. Inflation is expected to fall only in line with the FOMC’s target, indicating that there is little scope for further stimulus.
The Thomson Reuters/University of Michigan consumer sentiment index fell to a preliminary reading of 71.8 for June, down from 74.3 in May, a much larger fall than had been expected. US sales of previously-owned homes fell to a six-month low in May. New home sales were also weak in May following two months of strong increases.
Japanese government upgrades economic assessment
The Japanese government upgraded its assessment of Japan’s economy for the first time in four months, encouraged by recoveries in industrial production and exports which sank after the March earthquake and tsunami. The report suggests, that the recovery remains patchy, however. Separately, Japan’s government was forced to delay the launch of fiscal and welfare reforms amid efforts by senior ruling party members to press Prime Minister Naoto Kan into naming a resignation date. Failure to reach agreement underscores the effects of partisan struggles in the Democratic Party of Japan and conflict with opposition parties dominating the upper house.
Emerging market news
This week’s reports and statistics painted a mixed picture of inflation in emerging economies. In China, the National Development and Reform Commission said that inflation will accelerate in June. The nation’s top economic planning agency also said that the “momentum” of price increases has “to some extent been curbed.”
In South Africa, inflation accelerated to 4.6% in May, the fastest pace in 12 months, following 4.2% the previous month. South Africa’s central bank said that it has seen no evidence that higher fuel and food prices are translating into more generalised inflation. In Brazil, official figures showed that consumer prices in the 12 months through mid-June quickened to 6.55%. On a monthly basis, Brazil’s inflation slowed to 0.23% in mid-June from 0.7% the previous month. The Czech central bank kept the two-week repurchase rate at 0.75%. Czech inflation accelerated to 2% in May, matching the central bank’s target, from 1.6% the previous month. In Turkey the central bank left the one-week repo lending rate at a record low of 6.25% in spite of a recent acceleration in inflation. In India, the wholesale price index rose to 9.1% in May in spite of tighter monetary policy (the Reserve Bank of India last week raised benchmark lending rates for the 10th time in 15 months - taking the repo rate to 7.5%.).
Falling energy prices in coming months are expected to restrain inflation in many emerging economies. Oil prices dropped more than 7% this week following an agreement by the International Energy Agency to release 60m barrels of oil in coming months to offset the daily production loss of 1.5m barrels of high quality oil from Libya, the North African country engulfed in a civil war.
Company news
This week FedEx, considered a bellwether because it transports goods for a wide range of industries, said that net income rose a better-than-expected 33% to $558m in the three months to the end of May compared with $419m in the same period last year. Revenues were 12% higher than the previous year. FedEx’s share price rose 2.5%. Australian brewer Fosters rejected an A$9.5bn ($10bn) takeover offer from South African-based brewer SABMiller, the world’s second-largest brewer by sales, claiming that the bid significantly undervalued the company. Foster’s share price rose 13.5% while that of SABMiller fell nearly 3%.
