BoE Holds Rate At Record Low; Continues GBP 175 Bln Asset Purchase

Thursday, the Bank of England decided to maintain its interest rate for the sixth consecutive month and also voted to continue the GBP 175 billion asset purchase programme using central bank reserves.

As expected, the Monetary Policy Committee of the central bank decided to hold the official Bank Rate paid on commercial bank reserves at 0.5%. The rate now stands at the lowest level since the central bank was established in 1694. The previous change in the rate was a reduction of 0.5 percentage points in March 2009.

The MPC expects the asset purchase programme to take another two months to complete. The scale of the programme will be kept under review, the bank said in a statement.

Initially, the central bank introduced a GBP 75 billion programme of asset purchases financed by the issuance of central bank reserves on March 5. Later, the size of the quantitative easing was raised to GBP 125 billion on May 7 and again to GBP 175 billion on August 6.

The minutes of the two-day rate setting meeting will be published on September 23.

In the previous rate setting meeting held on August 5 and 6, six members of the MPC voted to raise the size of asset purchases by GBP 50 billion to GBP 175 billion, while the other three members including Governor Mervyn King sought a GBP 75 billion increase to GBP 200 billion, minutes had revealed.

While economists and policymakers across the world are increasingly spotting signs of recovery for the global economy, the UK is expected to be left behind in severe recession.

In a recent interview to BBC, former Federal Reserve chief Alan Greenspan said UK would be harder hit than the U.S. by the current recession and collapse in world trade.

The Paris-based Organization for Economic Co-operation and Development in its latest Interim Economic Assessment revised the 2009 GDP contraction estimate to 4.7% from 4.3%. The agency predicted a gloomier situation in the UK, while saying that the global recovery from the recession is likely to arrive earlier than expected.

The Office for National Statistics had upwardly revised the British economic contraction for the second quarter to 0.7% from 0.8%. The think-tank National Institute of Economic and Social Research said the economy grew 0.2% in the three months ended August, after a 0.3% decline in the three months ended July.

Elsewhere on Thursday, former BoE rate-setter David Blanchflower launched a scathing attack on the bank’s governor Mervyn King and criticized the monetary policy committee for not spotting the recession.

The economics professor, who foresaw recession well ahead of his colleagues on the MPC, wrote in an article published in Thursday’s New Statesman magazine that King “the old iron fist of the BoE”, dominated the MPC with his hawkish view on rates. He accused King of presiding over an institution which was ‘hobbled by group-think’.

Blanchflower expects the MPC to approve further quantitative easing by November at the very latest. He added that King may even manage to get rates down below 0.5%.

In reactions to the latest rate decision, British Chambers of Commerce’s Chief Economist David Kern said as a temporary measure, the MPC should consider the interest rate paid on deposits kept by commercial banks at the BoE and in some circumstances make this rate negative. The business lobby urged the MPC to raise the quantitative easing measures to GBP 200 billion and to buy more company debt.

Across the world, policymakers and finance ministers including Chancellor Alistair Darling have sought to continue with stimulus measures until the global economy recovers with sustainable growth.

Annual inflation in July stood at 1.8%, the same as in June, which was the lowest since September 2007. Thus, the rate stayed below the central bank’s 2% target for the second straight month.

The BoE said in its latest quarterly Inflation Report that the CPI inflation is more likely to fall below 1% in autumn, requiring an open letter from the Governor to the Chancellor. After releasing the quarterly report, King said in a press conference the economic recovery could be slow and protracted.

Weekly Jobless Claims Fall By More Than Expected

First-time claims for unemployment benefits decreased by more than expected in the week ended September 5th, according to a report released by the Labor Department on Thursday, with the data indicating that the pace of firings continues to moderate.

The report showed that initial jobless claims fell to 550,000 from the previous week’s revised figure of 576,000. Economists had been expecting jobless claims to edge down to 560,000 from the 570,000 originally reported for the previous week.

With the bigger than expected decrease, jobless claims fell to their lowest level since mid-July, when seasonal issues in the auto sector skewed the data artificially lower. Excluding the July data, jobless claims were at their lowest level since early January.

Additionally, the Labor Department said that the less volatile four-week moving average edged down to 570,000 from the previous week’s revised average of 572,750.

Continuing claims, which measure the number of people receiving ongoing unemployment help, also declined in the week ended August 29th, the latest week for which the government has data.

While continuing claims fell to 6.088 million from the preceding week’s revised level of 6.247 million, Peter Boockvar, equity strategist for Miller Tabak, noted that evidence still suggests that the decrease has more to do with those not finding new jobs and exhausting their benefits.

Boockvar pointed to another increase in the number of people claiming Emergency Unemployment Compensation (EUC), which rose to 3.103 million in the week ended August 22nd, an increase of 73 thousand from the prior week.

The report also showed that those that are receiving extended benefits past the EUC fell by about 19 thousand to 439,000.

“Bottom line though, its clear that the pace of firings continue to moderate with the pace of hiring’s still in question,” Boockvar said.

Last Friday, the Labor Department released a separate report showing that employment fell by less than expected in the month of August, although the report also showed a much bigger than expected increase by the unemployment rate.

The report showed that non-farm payroll employment fell by 216,000 jobs in August following a revised decrease of 276,000 jobs in July. Economists had expected a loss of about 230,000 jobs compared to the loss of 247,000 jobs originally reported for the previous month.

While job losses continued in many of the major industry sectors, the Labor Department noted that the declines have moderated in recent months.

Despite the slower pace of job losses, the Labor Department also said that the unemployment rate jumped to 9.7 percent in August from 9.4 percent in July. With the increase, which exceeded economist estimates, the unemployment rate rose to a new 26-year high.

Surge In Imports Results In Wider U.S. Trade Deficit In July

With the value of imports increasing at a much faster pace than the value of exports, the Commerce Department released a report on Thursday showing that the U.S. trade deficit widened by much more than expected in July.

The report showed that the trade deficit widened to $32.0 billion in July from a revised $27.5 billion in June. Economists had been expecting the deficit to widen to $27.3 billion from the $27.0 billion originally reported for the previous month.

A jump in the value of imports contributed to the wider deficit, with the value of imports increasing by 4.7 percent to $159.6 billion in July from $152.4 billion in June.

The increase in the value of imports outpaced the increase in the value of exports, which rose by 2.2 percent to $127.6 billion in July from $124.9 billion in June.

While the surge in imports points to an increase in U.S. domestic demand, the increase could limit the strength of third quarter gross domestic product growth, as imports are subtracted when
calculating GDP.

“Net trade is unlikely to support U.S. real GDP growth in the current quarter to the same extent as in the second quarter,” said Christoph Balz, an analyst for Commerzbank. “Indeed, the July data alone would suggest that it could subtract from growth.”

Balz added, “A turnaround in private investment and inventory rebuilding, however, should lift growth markedly in the third quarter.”

While the increase in the value of imports was partly due to an increase in crude oil prices, the deficit still widened by almost $4 billion excluding petroleum products.

The report also showed that the goods deficit widened to $42.7 billion in July from $38.3 billion in June, while the services surplus narrowed to $10.7 billion in July from $10.8 billion in the previous month.

Additionally, the Commerce Department noted that the trade deficit with China widened to $20.4 billion in July from $18.4 billion in the previous month. The trade deficit with the European Union also jumped to $8.0 billion in July from $4.5 billion in June.

Chinese Industrial Output Grows, Prices Decline Moderately

China’s economy was firmly on the recovery track, a slew of economic data released by the National Bureau of Statistics Friday showed. The economic indicators showed an improvement in August, with industrial production, retail sales and urban investment in fixed assets all improving, while consumer and producer prices declined at a slower annual rate.

Consumer prices were down 1.2% on year in August compared to the 1.8% contraction in July, representing a slower rate of decline than the 1.3% drop expected by economists. Month-on-month, consumer prices were up 0.5% in August.

In terms of commodities, housing prices recorded the biggest annual fall, down 5.4% in August. Transportation & communication prices decreased 2.9%, and clothing prices dropped 2.2%. The fall was partly offset by food prices, which increased 0.5%, while prices for tobacco, liquor & articles were up 1.3%. Healthcare & personal articles prices rose 0.9% in August.

Producer prices slid 7.9% year-on-year in August compared to the 8.2% decline in the previous month. The drop was roughly in line with economists’ expectations for a 7.8% annual contraction.
On a monthly basis, producer prices climbed 0.8% in August, marking the fifth consecutive month of growth.

Producer prices for means of production decreased 9.7% on year in August. Of this, prices in the mining & quarrying industry were down 25.9%, and the raw materials industry dropped 11.5%. Prices in the processing industry slipped 6.9% in August. Prices for means of livelihood were down 1.9% on year, with food prices and durable consumer goods prices falling 2.3% each. Also, purchaser’s prices for raw materials, fuel & power contracted 11.4% year-on-year. Of this, prices for non-ferrous metals, fuel & power, ferrous metals, and raw chemical materials & wire decreased 20.9%, 17%, 19.2% and 11.3%, respectively.

Retail sales were also roughly in line with expectations, gaining 15.4% on year in August compared to forecasts for a 15.3% rise, and were worth a total of 1.01 trillion yuan. Retail sales had risen 15.2% in July.

Analyzing by commodities, sales of grain & oil went up 12.7% year-on-year in August. Clothing sales increased 23.3%, and sales of articles for daily use was up 15.6%. Sales of motor vehicles and building & decoration materials rose 34.8% and 36.6%, respectively.

Industrial production was up 12.3% on year, topping forecasts for a 11.9% annual increase after the 10.8% gain in the previous month. August was the fourth consecutive month which witnessed an acceleration of annual growth.

All 39 industrial sectors showed year-on-year growth in August. Significant increases were reported in the textile industry, which grew 9.8%, and the raw chemical materials & chemical products industry, up 18.2%. The manufacture of non-metallic mineral products and the manufacture of general machinery was up 17.3% and 12%, respectively.

In terms of products, the output of coal climbed 14.6% over the previous year in August. The output of crude oil was up 1.6%, and electricity output rose 9.3%. The production of motor vehicles soared 90% in August.

The Bureau also announced that the urban fixed asset investment for the period of January to August, increased 33% year-on-year and amounted to 11.3 trillion yuan. Economists were looking for 32.7% growth.

From January to August, Investment in coal mining & washing was up 36% compared to the corresponding period of the previous year. Investment in production & supply of electric power & heat power increased 23.5%, while investment in railway transport soared 103.5%.

The Chinese yuan rose against the dollar following the release of August data.

European Economics Preview: UK Producer Prices Data Due

Friday, major reports due for the day are British producer prices and German wholesale prices.

At 2.00am ET, the German Federal Statistical office is slated to release wholesale prices details.

A slew of statistical reports are due at 3.00am ET. The Spanish statistical office is scheduled to issue CPI for August. Annually, consumer prices are expected to fall 0.8% in August. Meanwhile, Czech construction and industrial output reports are due.

The Statistics Sweden is set to issue final data for the second quarter GDP. The economy remained flat on a sequential basis in the second quarter. In the meantime, Dutch manufacturing and trade balance reports are due.

At 4.00am ET, Italian industrial output details are due. Industrial production is expected to rise 0.4% month-on-month in July compared to a 1.2% fall in June. After declining 21.9% in June, economists forecast 21% annual fall in July.

At 4.30am ET, the Office for National Statistics is slated to issue UK producer prices data for August. Input prices are forecast to rise 1% month-on-month in August versus 1.4% fall in July. Annually, input prices are expected to drop 8.4%. Meanwhile, monthly growth in output prices are expected at 0.3%.

Japan GDP Grows Less Than Estimated In Q2

Japan downwardly revised its economic growth for the second quarter, to reflect a steeper fall in domestic demand that was partly offset by a faster growth in exports, an official report showed Friday.

The Cabinet Office revised down the quarterly growth in the gross domestic product for the second quarter to 0.6% from 0.9% reported on August 17. Economists had expected the growth figures to be left unchanged from the preliminary numbers.

Domestic demand contracted 1% sequentially in the second quarter, faster than a 0.7% fall estimated earlier.

Private demand contracted 1.7%, quicker than a 1.3% decline initially recorded. This reflected the slower growth of 0.7% in private consumption compared to a 0.8% growth estimated initially. Further, business investment contracted at a faster pace of 4.8% compared to a 4.3% fall estimated earlier.

Public demand grew at a slower pace of 1.1% compared to a 1.2% growth in the preliminary estimates. Within this, the growth in investments made by the public sector eased to 7.5% from 8.1% initially.

Gross fixed capital formation fell at a quicker pace of 3.1% than a 2.6% fall estimated earlier. Core machinery orders dropped 9.3% in July, reversing a 9.7% rise in the preceding month, official reports showed Thursday, indicating firms were still cutting investments.

Exports rose 6.4%, faster than a 6.3% growth seen in the preliminary estimates, but imports fell 5.1%, unchanged from its initial reading.

On an annual basis, the economic growth was reduced to 2.3% from the initial estimate of 3.7%. Economists expected the growth figure to be held at 3.7%.

In the meantime, other reports seems to point that the Japanese economy is on the road to recovery. The leading index, which measures the direction the economy will take, rose for the fifth consecutive month to 83 in July from 80.9 in June. Moreover, the coincident index, which measures the current state of the economy, increased for the fourth consecutive month to 89.6 from 88.6.

Earlier this week, the Cabinet Office kept its economic assessment for the economy unchanged and said the world’s second largest economy was showing signs of picking up, even as it faced record high unemployment. On the basis of the latest figures, the jobless rate stood at 5.7% in July, up from 5.4% in June.

Further, the rating agency Fitch Ratings affirmed Japan’s long-term foreign and local currency Issuer Default Ratings or IDRs at ‘AA’ and ‘AA-’, respectively, with a stable outlook.

“Japan’s sovereign ratings reflect a balance between the country’s exceptionally strong external balance sheet and its deteriorating public finance position, which is already among the weakest of the advanced economies,” the firm noted.

Elsewhere, the Bank of Japan’s board member Miyako Suda pointed out that the need for extraordinary measures were diminishing as the corporate financing conditions showed improvements.

UK Factory Gate Prices Rise In August

UK output prices increased in August on oil prices, official data showed Friday. Meanwhile, prices paid by companies to buy materials and fuels recorded the fastest monthly growth since June 2008.

Reflecting price rises of other manufactured, petroleum and chemical products, output prices rose 0.2% month-on-month in August, the same as in July, a report from the Office for National Statistics revealed. The expected growth rate was 0.3%. Price increases in oil and chemical products were partially offset by a drop in tobacco and alcohol product prices.

Annual decline in output prices was the smallest since May with prices falling 0.4% in August, smaller than July’s 1.3% annual drop and the 0.5% decrease expected by economists.

Core output price inflation that excludes food, beverages, tobacco and petroleum accelerated to 0.7% annually from just 0.1% recorded in July. At the same time, core monthly inflation halved to 0.2% from 0.4%. While, annual core inflation came in smaller than the 0.8% rise expected, monthly inflation matched economists’ expectations.

Input prices grew 2.2% on a monthly basis in August, reversing a 1.1% fall in July. Input prices increased more than the expected growth of 1%. August’s growth was the biggest since June 2008.

Meanwhile, the input price index for materials and fuels purchased by manufacturing industry slipped 7.5% in August from the prior year compared to a larger decline of 12.2% in July and a consensus forecast for a 8.4% drop.

The ONS is set to issue the CPI data for August on September 15. The rise is factory-gate prices suggest an upward pressure on consumer prices. Consumer prices are forecast to rise 0.3% month-on-month in August, after staying flat in July. Annual inflation is expected to slow to 1.6% from July’s 1.8%.

The Bank of England said in its latest quarterly Inflation Report that the CPI inflation is more likely to fall below 1% in autumn, requiring an open letter from the Governor to the Chancellor.

On September 10, the central bank had maintained its interest rate for the sixth consecutive month at 0.5% and also voted to continue the GBP 175 billion asset purchase programme using central bank reserves.