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United States
Critical Macro Investment Themes for 2007 January 03, 2007 By Richard Berner | New York After three years of stubbornly — and wrongly — sticking to my cyclical view that 10-year US Treasury yields would reach 5%, yields finally moved above that level in the first half of 2006. Inflation and growth surprises promoted expectations of aggressive Fed tightening, and term premiums rose, contributing to the selloff in bonds. But the rout proved fleeting as those cyclical factors unwound: Slower growth, cooling inflation, expectations of Fed ease, and declining volatility brought yields back down and inverted the yield curve from bills to bonds. Now what? A significant rise in yields is unlikely, because the secular world of single-digit returns has long been the critical longer-run story (see “A World of Single-Digit Returns,” Investment Perspectives, June 26, 2002). Indeed, deeply-entrenched and powerful forces are still holding yields down. Among them: 26 years of disinflationary monetary policy, globalization, and secularly low volatility. Nor is a significant decline in yields likely, because as I see it, cyclical factors that could again lift yields are only in remission and also matter. Thus, five related macro themes likely imply a trading range for nominal yields in the coming year — but higher real rates: US ‘core’ inflation will peak and move lower, US growth will rebound towards trend, US saving imbalances will shrink, liquidity will dwindle, and term premiums and volatility will rise slightly. Judging by the yield curve and eurodollar futures, we’re a lot closer to consensus than we were last year, but the consensus has moved towards us, with no Fed ease in the price until mid 2007. Has Inflation Peaked? The first key theme is that inflation will move lower in 2007, keeping nominal yields in check. A steady and slightly restrictive monetary policy and a year of subpar growth will bring core inflation measured by the Fed’s preferred gauge — the personal consumption price index (PCEPI) — down towards 2% over 2007. At first blush, that outlook appears to be a no-brainer: Inflation seems to have peaked in September, and inflation risks have moderated, as both inflation expectations and growth have cooled over the past few months. For example, year-over-year “core” inflation measured by the CPI has declined by 0.3% in the past two months to 2.6% in November, and measured by the PCEPI, it declined to 2.2%. Surprising softness in a broad range of categories — motor vehicles, air fares, communications, and apparel — yielded a flat core rate in November, bringing the annualized increase down to 1.8% over the past three months. But the path to a sustained decline in inflation may be bumpy, because some of the same cyclical forces that raised inflation in 2006 are still in play, and as I see it, they likely will lift core inflation over the next few months back to a 2½% rate in terms of the core PCEPI. Among them: Inflation expectations linger at somewhat elevated levels, and operating rates seem likely to rebound as the automotive- and construction-induced manufacturing recession winds down and as stronger growth in exports and capital spending help lift economic activity. In addition, consumer import prices and unit costs have accelerated. Although longer-term inflation expectations calculated by the A Return to Trend Growth I think that a second key theme is that the end of the housing recession and favorable fundamentals will restore growth towards trend. For now, we envision a ‘two-tier’ economy, with housing and Detroit now in recession, and the rest of the economy skirting the fallout from those industry downturns (see “It’s a ‘Growth Recession,’ Not a Lasting Downturn,” Investment Perspectives, December 14, 2006). But in our view, four factors will end this ‘growth recession’ around midyear. First, while we believe that the housing recession is far from over, we think that that the intensity of the downturn will peak by spring 2007, and with vehicle production bottoming in October 2006, this economic headwind should also start to fade. Second, strong job and income gains will allow consumers to rebuild personal saving in the face of decelerating housing wealth while maintaining moderate gains in spending. Incoming data over the past three weeks augur some stability in home sales, while new spending and consumer confidence data suggest stronger-than-expected gains in consumer spending and hint that employment growth is holding up. A third factor that likely will restore US growth to trend comes from abroad: While global growth may be slowing, growth in domestic demand abroad is still stronger than in the United States, and thus net exports seem likely to contribute to US output. Results from our major trading partners, including Finally, we think that notwithstanding a monetary policy that has become mildly restrictive, Internal and External Rebalancing The third key theme involves the reduction of Regarding domestic imbalances, sustainable job and income gains likely will be the critical factor fueling a “saving swap” from corporate to personal income. Over the past three years, consumers dipped into savings and housing wealth to defend their lifestyles in the face of higher energy quotes. By comparison, Corporate America realized record profits, but investment and hiring discipline kept the corporate “financing gap” at or close to zero. Both saving gaps are poised to change, in my view, as income continues to shift to consumers from companies. With gains in wealth slowing, consumers likely will begin to save more out of current income. And as profit margins level off and capital spending growth rebounds, companies will increasingly tap external funding to finance investment. The growth context for these swings in domestic saving matters for real interest rates. Many market participants believe that any rebound in personal saving would signal consumer retrenchment. But I think such changes in the saving-investment balance will occur as growth improves. As I see it, the risk is that a swing in income to consumers from companies will fuel a rebound in overall growth and upward pressure on real interest rates (I think my analytics of a year ago are still valid; see “Will the Coming Saving Swap Bring Higher Real Rates?” Investment Perspectives, December 15, 2005). The growth context for the prospective swing in the Put differently, these shifts mean that some of the flow of saving from abroad that has so far helped to finance the US current account deficit on attractive terms will now be diverted to finance demand growth in many of our overseas trading partners — and in this context, that may contribute to somewhat higher US real interest rates. Reinforcing that tendency, if Asian central banks allow their currencies to appreciate against the dollar at a faster pace, they will accumulate dollar-denominated reserves more slowly. Indeed, our global interest rate strategy team sees these two factors as sufficient for a rise in US real rates (see “2007 Global Interest Rate Outlook: Unraveling the Conundrum,” December 19, 2006). As I see it, the combination of relatively healthy growth and the shifts in saving make such a rise highly likely. Draining Liquidity That brings me to a fourth and related theme that may be associated with higher real rates: Liquidity likely will ebb over the coming year. Liquidity has both macro and micro dimensions. In a macro sense, the relatively abundant liquidity characterizing markets today will probably diminish gradually as the Fed remains on hold and central banks abroad either move toward restraint or maintain rates relatively high compared with inflation. Moreover, global rebalancing, as noted above, also means that the growth in private sources of liquidity that has fueled rising markets — from high-saving Asian economies and oil and other commodity producers — likely will slow. How to measure such macro liquidity? As I see it, disintermediation, securitization, and globalization have rendered the monetary aggregates — which largely represent the liabilities of depository institutions — less useful measures of overall financial liquidity than in the past. Instead, I would look to four other macro proxy metrics for US and global liquidity, which on net are beginning to show signs of deceleration. First, the share of liquid assets relative to debt for nonfinancial corporations is still close to a forty-year high, but has declined by about 90 bp in the past year. Second, commercial banks report in the Fed’s Senior Loan Officer Survey that they have stopped easing their lending standards. Third, a slightly larger share of small businesses reported that credit was harder to get in October and November, although Morgan Stanley industry analysts report that credit conditions in early December were still favorable. Finally, the growth in reserves in oil producing and non-oil developing countries was running close to 20% at the end of the third quarter, but the flattening in commodity prices has produced a sharp deceleration from 30% a year ago. The microeconomic dimensions of market liquidity also matter, and right now there is scant sign that market liquidity is ebbing. Liquid markets are those in which participants can rapidly execute large-scale transactions with little impact on prices — they have tightness, depth and resilience. I would add that such markets can readily absorb shocks. Liquidity in a micro sense is thus manifest in today’s minuscule bid-asked and risk spreads in virtually all markets. Our credit strategy team has convinced me that the boom in structured credit — the bespoke and effortless ability to create securities with credit characteristics tailored to the needs of investors and issuers, and reinforced by Basel II and new accounting rules like FASB 155 — has created a strong secular bid for credit that magnifies such market liquidity (see “Dancing in the Rain: Investment Grade Credit 2007 Outlook,” December 14, 2006). But watch this space carefully; my hunch is that some cyclical deterioration is likely. Volatility Poised to Rise— at Least Slightly The fifth and final theme also points to higher real rates: I believe that “term premiums” — the compensation for moving out the risk-free yield curve — and volatility are both poised to rise at least slightly as uncertainty about the global economic and monetary policy outlook increases and liquidity dwindles. Term premiums are close to all-time lows; based on a model developed at the Fed, a 10-year zero-coupon term premium stood at 16 bp in mid-December (see Don Kim and Jonathan Wright, "An Arbitrage-Free Three-Factor Term Structure Model and the Recent Behavior of Long-Term Yields and Distant-Horizon Forward Rates," FEDS Paper 2005-33). Model-based measures of term premiums suggest that about two-thirds of the 65 bp decline in long-term yields between late June and late November can be traced to a slide in both the inflation and real components of term premiums. Correspondingly, I think a rise in term premiums will boost long-term yields and help to re-steepen the yield curve over the coming year, just as my colleague David Miles and I thought it would last year — and did in the first half of 2006 (see “The Term-Premium Case for Higher Yields,” Global Economic Forum, January 20, 2006). At issue is how much of the term premium compression is secular and how much is cyclical. As I see it, three secular factors have reduced volatility for a couple of decades: The volatility of economic activity and inflation have steadily declined in what is called the “Great Moderation.” Financial innovation has spread risk more broadly across market participants. And central banks have become more transparent about goals and their strategy to achieve them, and they have become more explicit about the likely path of interest rates consistent with their objectives. The secular factors won’t go away quickly, so a major reversal in volatility’s trend isn’t likely from shifts among those causes. To the extent that central banks continue their explicit guidance, moreover, term premiums will correspondingly stay depressed. That implies permanently lower term premiums and flatter yield curves than in the past (see “Will Volatility Rebound?” Global Economic Forum, September 11, 2006). However, two cyclical factors also depressed volatility over the recent past. Believing the secular story, and experiencing moderate but steady GDP growth over the past few years, investors have increased their appetite for risk. And many market participants seeking to enhance yield have expressed their volatility view by selling it in liquid markets. Those cyclical factors could change quickly as uncertainty about the outlook or about monetary policy increases; investors may then decide that the volatility they’ve been selling is cheap. Balancing those forces, a return to the volatility levels of ten or fifteen years ago seems highly unlikely. But the unwinding of those cyclical factors does seem likely to promote a pickup in volatility from current levels. It’s worth noting that moves in term premiums imply an ironic twist in the yield curve debate. Many fear that the current inversion in the To sum up: A trading range for nominal yields will mask stable or declining inflation premiums but rising real rates. Some of that shift has already occurred; the entire 30 bp backup in 10-year yields over the course of December reflected a rise in real rates rather than increased inflation premiums. In addition, if I’m right that volatility will rise, a parallel increase in term premiums likely will add to the move in 10-year Treasury yields towards 5% or so. Because it likely will be a byproduct of stronger growth, the resulting re-steepening of the yield curve need not imply bad news for risky assets. And it may be consistent with a gradual decline in the dollar, especially relative to Asian currencies, partly reflecting a coming narrowing of yield differentials in favor of Risks to this benign scenario abound. Inflation risks still linger, and a return to trend growth or above could reignite the cyclical factors boosting inflation. But the direction of liquidity and volatility are the biggest wildcards in the outlook. The status quo would be bullish for bonds and risky assets. But complacency about risk premiums is widespread, which makes me nervous. And I agree with my colleague Steve Roach that the leftward swing in the political pendulum could intensify latent protectionism (see his accompanying dispatch, “The Lessons of 2006”). Protectionism and diversification away from the dollar could serve as potent catalysts for higher volatility.
Indonesia
December Inflation Accelerates January 03, 2007 By Deyi Tan and Chetan Ahya | Singapore, Mumbai November inflation rises above expectations. November headline inflation rose 6.6% YoY in December (versus +5.3% in November), much above our and market expectations. This is the first time since May 2006 that inflation has accelerated. On a sequential basis, the CPI index rose by 1.2% MoM (versus 0.3% MoM in November). However, inflation excluding food-related products remained almost steady at 4.0% YoY (versus 3.9% YoY in November). In addition, core inflation was largely stable at 6.0% YoY in December compared with 5.9% YoY in November. Food-related products explain most of the upside in inflation numbers. Inflation for food and the processed food segments, which together have a weighting of 42.3% in CPI, accelerated to 12.9% YoY and 6.4% YoY, respectively, in December (versus 8.1% and 5.9% in November). Inflation in the other two heavyweight segments — housing and clothing — was 4.8% YoY and 6.8% YoY, respectively, in December (versus 4.4% and 7.6% in November). Pace of rate cuts to slow going forward. We believe that the central bank is now entering a phase of more gradual loosening, given that the differential with the
Global
The Lessons of 2006 January 03, 2007 By Stephen S. Roach | New York The turn of the calendar year is always a convenient time for taking stock -- looking back on the year just ended and pondering what that passage of time portends for the future. The temptation is to wipe the slate clean and come up with a fresh look at the macro puzzle. Yet barring shocks, economies and markets don’t operate in such a discontinuous fashion -- they are heavily influenced by trends of the recent past. Notwithstanding the inertia of such an autoregressive world, I have long believed that we macro practitioners periodically need to look inside ourselves and re-examine what worked and what didn’t. In the mark-to-market spirit of personal growth, I present the Lessons of 2006. Global rebalancing. This has been my personal crusade for the better part of the past five years. In its simplest form, the rebalancing thesis maintains that ever-widening disparities between the world’s surplus and deficit savers are not a recipe for sustainable global growth. With Absent such a shift in the mix of global saving, the rebalancing thesis argues that there should be important consequences for the terms on which the deficit economy conducts its external financing. In the case of the I think it is critical, however, to make the distinction between the problem -- ever-mounting global imbalances -- and the consequences of the problem -- its saving, currency, and real interest rate implications. I am not of the view that a problem should be dismissed because its consequences have failed to fully materialize. Moreover, I now draw greater comfort from an international community that takes the threat of global imbalances seriously -- as evidenced by coordinated statements from G-7 finance ministers and the IMF last spring. At the same time, as noted below, I also recognize the need to rethink the financial market repercussions of a problem whose implications could well continue to materialize later rather than sooner. Footprints of globalization. Last year was a critical milestone on the globalization front. Courtesy of an accelerated pace of cross-border integration, global trade exceeded 30% of world GDP in 2006 for the first time ever. Nor was last year an aberration. Over the 1998 to 2006 interval, the growth in global trade accounted for fully 42% of the cumulative increase in world output (as measured in US dollars at market exchange rates). This trade-intensive global growth dynamic was not without important macro consequences. The rapidly expanding supply of goods and services from the low-cost developing world was the functional equivalent of a major disinflationary headwind in the developed world. Even in the face of rapidly rising energy prices, our estimates put CPI-based inflation in the industrial world at just 2.4% in 2006 -- identical to the energy-elevated outcome in 2005 but little changed on a “core” basis in either of those years. Given the narrowing of slack in labor and product markets in most large industrial economies, the persistence of low inflation underscores an increasingly important global offset to the more traditional domestic pressures that have long shaped underlying inflation in the developed world. Meanwhile, the ever-powerful global labor arbitrage continued to exert downward pressure on both job creation and real wages in most major economies of the developed world -- sufficient to push the labor compensation share of national income down to a record low of 53.7% in the major industrial countries in 2006. This raises serious questions about the so-called “win-win” results of globalization. While there has been a big win for low-wage workers in the developing world, it is exceedingly difficult to find signs of the second win for high-wage workers in the developed world. Global politics. Largely because of the global labor arbitrage, the interplay between economics and politics took an important twist in 2006. A persistence of relatively stagnant real wages in the rich countries of the developed world had important implications for political outcomes in the Another post-bubble shakeout. As was the case with the equity bubble six years ago, another major asset bubble burst in 2006 -- this time, Commodity cycles. The super-cycle view of commodity markets met a stern challenge in 2006. Oil prices fell by more than 25% from their mid-July peaks, natural gas prices dropped by more than 30%, and late in the year there were signs of a softening in economically-sensitive base metal prices such as copper. The super-cycle theory is premised mainly on a very credible case of shortages on the supply side of major commodity markets, where there has been a notable lack of investment in new extractive and processing capacity for well over 20 years. With globalization promising new sources of demand from large commodity-intensive economies such as Lessons learned? It’s all too easy to become fixated on any one of these lessons. The financial market outcome reflects the interplay between all these developments. As I put the package together, the lessons of 2006 did a reasonably good job of explaining the major developments in the markets last year. Bonds did better than expected, in part because globalization played an important role in containing core inflation in the face of both a major energy shock as well as diminished slack in the industrial world. Equities turned in a good year as an ever-powerful global labor arbitrage continued to squeeze worker compensation and boost earnings. And orderly adjustments were the rule in currency markets, as the stewards of globalization finally turned their attention to the need for containing the dreaded dollar-crisis scenario. But do the lessons of 2006 hold the key for 2007? If it were only that easy. While undoubtedly there are some important hints that can be gleaned from last year’s experience, there is also a critical catch: Significantly, I continue to expect a two-engine global slowdown -- driven by a post-housing bubble shakeout in the My biggest concern is the complacency that continues to shape the outlook for ever-frothy risky assets -- namely, high-yield corporate debt, structured credit products, emerging market securities, and yes, even commodities. This, in my opinion, is the next bubble. But as was the case with equities and housing, experience tells us that the extremes in asset markets always persist for longer than we think -- especially in an era of excess liquidity. That was certainly an important lesson in 2006, but it may be tougher for the bubble in risky assets to persist for another year. This underscores the trickiest aspect of any market call -- the near impossibility of predicting that point in time when an asset bubble bursts. That’s a lesson for all years.
Singapore
4Q GDP Estimated at 5.9% January 03, 2007 By Deyi Tan and Chetan Ahya | Singapore, Mumbai 4Q06 advance estimate at 5.9% YoY. The advance estimate released by the government today shows the economy expanding at 5.9% YoY in 4Q06, higher than our and market expectations of 5.5% and 5.1% YoY, respectively. However, GDP growth in the first three quarters were retrospectively adjusted downwards from 8.6% YoY to 8.4% YoY. This brings expected 2006 growth to 7.7% YoY, roughly in line with our forecast of 7.8% YoY. Manufacturing moderates in line with softening global demand. The manufacturing sector is expected to grow 7.3% YoY in 4Q06 (versus +9.5% YoY in 3Q06). October and November industrial production data are now tracking at 8.8% YoY with the electronic deceleration under way, although biomedicals appear to be holding up still. For the full year, we expect the manufacturing sector to rise 11.4% YoY. Construction sector growth slow but steady. Expansion in the construction sector remained relatively slow but steady at 2.4% YoY (versus +2.6% YoY in 3Q06), likely on the back of non-residential construction. We estimate full-year growth at 1.1%. Services segment eased further. Services-producing industries are expected to decelerate to 6.0% YoY (versus +6.6% YoY in 3Q06), with full-year growth standing at 6.9% YoY. Wholesale and retail trade are likely to be slower as private consumption remained lackluster. However, we expect the financial services segment growth to be faster on the wave of wealth management expansion. Moderation to continue into 2007. We expect the moderation to continue into 2007. Global demand is softening and the economy remains extremely leveraged on external factors, despite the ongoing diversification. Specific segments in the economy such as construction will likely remain resilient because of projects such as integrated resorts. However, we still expect overall growth to slow to 5.0% in 2007.
Euroland
Towards a Smooth Transition? January 03, 2007 By Eric Chaney | Paris After having meticulously crunched the November business surveys data, I wrote: “The party is not over, but it is late” (Global Economic Forum, November 24, 2006). Indeed, the party continued until the very last second, according to December business surveys. As we close the books on 2006, our survey-based tools continue to track a robust rebound in the last period of this year, with GDP growth accelerating to 0.7%Q after 0.5% in 3Q, and confirm that the transition into the New Year should be smooth, with GDP growth remaining above trend, at 0.6/0.7%Q in 1Q07. However, uncertainties continue to loom large and conflicting signals from the real economy in the next two to three months could generate a lot of volatility in the financial markets. Going forward, I believe that deciphering the signals sent by euro area companies and especially German ones will be crucial. It’s all about demand … Production edged up in December, as companies were once again surprised by the strength of demand. In contrast with the 2004 recovery, when production led demand, because companies anticipated that demand would accelerate and needed to replenish inventories, this time, managers have made a conservative assessment of demand signals and been reluctant to raise production plans. As a result, they had to beef up production more than expected, as reported by our Surprise Gap Index which, on average, remained significantly above the acceleration threshold this year. December was no exception: although lower than in November, the Surprise Gap was almost double the height of the neutral zone. With strong production and signs of acceleration, our Compass model proudly indicated that the economy was ‘Strong and Accelerating’. All’s well that ends well? That is probably true for 2006, but do not bet on further good news in early 2007. … but demand is likely to deflate in early 2007 First, good surprises were reported in one country only ( Watch the impact of the German VAT rate hike Because the way producers and retailers will pass the three-percentage-point VAT hike into actual prices and the behaviour of German consumers is so important for the euro area economy, we have built a battery of indicators in order to track the impact of this fiscal tightening. Because the gap between demand and production plans has never been so high, we will watch it carefully, as well as the unfortunately highly volatile German Surprise Gap. Our main case scenario is that companies have anticipated the boomerang effect of advanced purchases but that downside surprises, although limited, are likely. Accordingly, production should slow more than our indicator is suggesting, since the latter is assuming that demand gyrations are perfectly anticipated. Be long the short end of the curve … In other words, I believe that the next batch of business surveys is likely to be weaker than markets are currently anticipating. If correct, this should prove positive for the short end of the yield curve, which has significantly suffered from hawkish ECB statements, reinforced by a super-strong December Ifo reading. Interestingly, markets did not pay too much attention to early signs of weakness, such as the downgrade of production plans in the Ifo survey or the sluggishness of indicators outside of … but do not stay in the pessimistic camp too long Looking forward, however, there are converging signs that the transition into 2007 should be smoother than, maybe, the next run of business surveys may suggest. First, our early GDP indicator shrugged off the output plans downgrade, because of positive news from the services and construction sectors. While the former is so sensitive to weather conditions that an improvement cannot be taken for granted, the former is less volatile and generally follows the manufacturing sector. Second, demand gyrations are likely to be much larger than production changes, since producers are prepared to them. Third and more importantly, fundamentals such as productivity and labour supply are improving in the euro area, underpinning medium-term growth. Optimism about the real economy is probably exaggerated, currently. But in the medium term, I think it is justified.
United States
Review and Preview January 03, 2007 By Ted Wieseman and David Greenlaw | New York, New York Over the past quiet holiday week, better-than-expected economic data, with upside in both new and existing home sales and a much better than expected consumer confidence report, drove the Treasury market to significant losses. This was the market’s fourth straight losing week -- the first such run since July and August of 2005 -- as the firmer tone to incoming data has forced investors to sharply scale back what had been extremely dovish expectations for the Fed priced into futures markets, driving benchmark Treasury yields to their highest levels since late October/early November to wrap up the year. Over the course of this month-long correction, investors have essentially taken two full rate cuts out of the expected Fed easing cycle, upping the 2008 trough priced in for the funds target from 4.25% to 4.75%, while also significantly pushing out the expected start of the anticipated easing cycle. A lot of key economic news due out in the short upcoming week, essentially three days with the New Years’ holiday Monday and National Day of Mourning in honor of President Ford Tuesday, will help get the new year off to a fast start, with focus on the employment report, ISM survey, and early reads on December consumer spending from the chain store and auto sales reports. Benchmark Treasury yields rose 5 to 11 bp the past week and the curve flattened. The old 2-year yield rose 11 bp to 4.82%, the 3-year 10 bp to 4.74%, the old 5-year 11 bp to 4.70%, the 10-year 9 bp to 4.71%, and the long bond 5 bp to 4.81%. The new 2-year closed Friday at 4.812% after being auctioned Wednesday at 4.765%, while the new 5-year closed at 4.699% after being auctioned Thursday at 4.704%. For the full year, this left benchmark yields 27 bp (for the 30-year) to 41 bp (for the 2-year) higher. Buying the then current 10-year (the 4 1/2% November 2015 issue) at the end of 2005 and holding it through 2006 would have produced a meager total return of just over 2%. The total return on the old (February 2031) long bond was barely above zero for the year. Futures markets’ expectations for Fed easing continued to be sharply scaled back over the past week. In the near term, the April fed funds contract lost 1.5 bp to 5.22% and the May contract 2 bp to 5.185%, cutting the odds of a rate cut by the March FOMC meeting to only a bit better than 10% and by the May FOMC meeting to about 35%. The total amount of easing expected in the anticipated rate cutting cycle was also scaled back in the eurodollar futures market; the Mar 07 to Mar 08 spread steepened 12 bp to an eight-week high of -42.5 bp, with the former off 1.5 bp to 5.315% and the latter losing 13.5 bp to 4.89%. The low rate Sep 08 contract sold off 12 bp on the week to 4.85%, the highest rate since the first week of November and way up from the all time low rate of 4.455% hit December 6, a sell off that has shifted expectations for the trough of the rate cutting cycle from 4.25% to 4.75% in just three and a half weeks. The past week was fairly light on economic data, but the news that was released was mostly quite good, with upside in both new and existing home sales and surprising strength in consumer confidence. The weekly jobless claims report was in line with expectations, continuing to point to some recent deterioration in job market conditions -- though this was contradicted by the details of the consumer confidence report -- and confirming our +100,000 December payrolls forecast. Meanwhile, a number of regional manufacturing surveys released through the week posted sharply mixed results: significant deterioration in the Richmond Fed survey, a more moderate decline in New home sales rose 3.4% in November to 1.047 million units annualized, and the prior three months were revised up by 46,000 units. With sales having risen 7% since troughing in July and housing completions having falling 8% over this period, the inventory situation is starting to show some meaningful improvement. The number of unsold new homes has fallen the past three months for a cumulative 3.2% decline and the months' supply of unsold new homes has dropped from the peak of 7.2 hit in July to 6.3 in November. This was the low since May and not terribly far above the 5.4-month average seen over the past 20 years. Meanwhile, existing home sales rose 0.6% in November to a 6.28 million unit annual pace, the second straight small rise after six straight previous declines. Sales of single-family homes ticked up 0.2% to 5.52 million units, having now held close to this level, which is 13% below the June 2005 peak, for five months. Condos, which had been in an absolute freefall, managed a bit of a rebound in November, rising 3.1% to 757,000 units. The used home inventory situation remains much more problematic than for new homes. The inventory of existing homes on the market dipped 1.0% in November but was still up 30.6% year/year (though this was the smallest annual rise since February). The months’ supply of unsold existing homes dipped a tenth to 7.3 from the cycle high of 7.4 months hit in October. New home sales are counted at contract signing and existing home sales generally at closing, resulting in the latter tending to lag the former. So the more pronounced recent gains in new home sales point to more upside in existing home sales going forward. And the recent underlying trend -- looking through some typical significant recent week-to-week volatility -- in mortgage applications suggests the upside in demand seen in November extended into December. While we certainly think it's too soon to declare the housing recession over, we are seeing some at least temporary bottoming out in demand after the collapse seen from the summer 2005 peak through the summer 2006 trough. The unusually warm weather in November and December has likely helped the recent bounce, so we may see a renewed leg down when more normal winter weather arrives. The better than expected results for new and existing home sales in November led us to raise our estimate of the brokerage commissions component of residential investment enough to boost our Q4 GDP forecast to +2.7% from +2.6%. The Conference Board’s measure of confidence rose to 109.0 in December from a significantly upwardly revised 105.3 in November. This was the highest reading since April and second highest since 2002. The current conditions index rose 4.5 points to 129.9 and the expectations gauge 3.2 points to 95.1. If there has been recent deterioration in the job market as the recent jobless claims figures have suggested -- with continuing claims this week hitting their highest level since last January -- consumers apparently haven't noticed it. The percentage of respondents describing jobs as "plentiful" rose a point to 26.9% and the percentage seeing jobs as "hard to get" fell a point to 21.2%, the best net view of the current labor market since July. Expectations for future job market conditions showed a smaller but decent improvement. With the New Year’s holiday Monday and the National Day of Mourning Tuesday, the upcoming week will see a lot of economic news packed into the last three days of the week. December chain store sales for most companies will be released on Thursday, providing hard data on the end of the Christmas shopping season after the recent flurry of contradictory anecdotal and survey based estimates. These results combined with motor vehicle sales results Wednesday will set initial expectations for December retail sales. We are currently forecasting a robust 4.0% gain in Q4 consumption, which assumes flat real spending in December. In respect for President Ford’s funeral Tuesday, the ISM and FOMC minutes releases originally scheduled for Tuesday have been delayed until Wednesday, when construction spending will also be released. Thursday sees the release of factory orders, and then the week’s data highlight will be the employment report on Friday: * We forecast a December ISM reading of 49.5. The regional Fed manufacturing surveys this month were sharply mixed. Empire ticked down -- but from a very high level. Philly and * We look for a 0.5% gain in November construction spending. We look for a solid rebound in the nonresidential sector and another gain in the public category to lead to a gain in overall spending. Also, the modest upside surprise in the starts data points to at least a temporary flattening out in residential activity. Finally, unusually mild weather conditions across much of the nation could provide a bit of a boost this month. * Preliminary industry reports point to an uptick in motor vehicle sales pace in December relative to the 16.0 million unit rate seen in November. We forecast a rise to 16.6 million. While there is likely to be some stepped up promotional activity heading into year end, there are indications that it will be somewhat less intense than in the past. This reflects the absence of any serious inventory overhang. Indeed, inventory levels at the end of November were at a 5-year low for that time period. Finally, automakers continue to pare back unprofitable fleet deliveries, which should represent a bit of a sales headwind in December. * We look for a 1.3% gain in November factory orders. The previously reported 1.9% gain in the durable goods component that was led by the volatile defense category combined with a modest expected rebound in nondurables as gasoline prices moved a bit higher after sharp prior declines should combine for a decent gain in overall factory orders. * We forecast a 100,000 gain in December nonfarm payrolls. The unemployment claims data have been unusually volatile of late but do appear to be signaling at least some modest deterioration in labor market conditions. Moreover, we suspect that the Veterans’ Day calendar shift may have provided a modest boost to job growth in November and that there will be some payback in December. However, unusually mild weather conditions across much of the nation should provide a noticeable boost for the employment tally this month. In fact, according to the Sorting through these cross currents, we expect to see a pace of job growth that is somewhat below the recent trend. Finally, we look for the unemployment rate to register another slight uptick to 4.6%.
Thailand
December Inflation Remains Steady January 03, 2007 By Deyi Tan and Chetan Ahya | Singapore, Mumbai Inflation rises below expectations. December inflation rose 3.5% YoY, maintaining the momentum observed last month. However, this is slightly below our and market expectations. This brings 2006 inflation to 4.7% YoY (versus 4.5% YoY in 2005). Even on a sequential basis, prices declined by 0.1% MoM, the same as last month. Particularly core inflation slowed to 1.5% YoY (versus +1.7% YoY in November), the lowest level since July 2005, thus hinting at dissipating price pressures. Food and transport up; housing down. Food prices rose 6.0% YoY (versus +5.8% YoY in November), contributing 2.2%-pt to headline inflation. The acceleration in prices of rice and cereal (+8.9% YoY versus +8.4% YoY in November) and fruits & vegetables (+24.0% YoY versus +21.5% YoY in November) was a result of the lagged impact of flood damage. Prices in the transport category accelerated to 3.3% YoY and 0.8%-pt in December, following 2.4% and 0.6%-pt increases registered last month. On the other hand, inflation in the non-food category moderated slightly to 1.9% YoY (versus 2.0% YoY in November). Specifically, prices in the housing and tobacco and alcohol segments decelerated to 1.5% YoY and 0.9% YoY, versus 1.6% YoY and 7.3% YoY in November, respectively. Domestic growth and inflation environment warrant rate cuts.However, we believe that the continued political uncertainty is making it difficult for the BOT to act in a swift manner. In addition, the recent reversal in market expectations for the |