USA
The long economic winter seems to be coming to an end. After the months of dark data, last week's releases have been less shadowy. Following a dismal holiday season, core retail sales have been on the rise, durable goods orders and core capital goods orders have bounced higher, business surveys have moved off their lows, and new and existing home sales and several measures of home prices have all come in better than expected. News on the monetary and fiscal policy front seems even more compelling. The Fed continued to move ahead in a surprisingly aggressive fashion. After the Fed went ahead with a $300 billion plan, a number of analysts believe that lower mortgage rates will spark a major refinancing wave, freeing up about $50 billion in lower interest payments. Last week the talk of efficiency and feasibility of the U.S. financial system surfaced anew. The biggest risk to the plan is a possible lack of investor participation. Recently, Congress has repeatedly threatened to rewrite contracts with financial firms, including mortgage cram downs, limits on executive pay, and bonus claw backs for firms that have accepted TARP funds. While most of these ex-post rule changes have yet to be enacted, the very visible threat that contracts can be changed retroactively has already caused concern among many potential investors.
Europe
During the past week, eurozone data has, on the whole, continued to suggest that the business sectors remain ultra-depressed. The most important coincident indicator, the eurozone composite PMI, remained very weak. This is consistent with the eurozone real GDP contracting at a rate of about 1½ percent quarter on quarter (not annualized). An even more gloomy assessment came from the IFO report, which showed that manufacturing confidence hit a record low, while sentiment in the services survey was its weakest since February 2003. In the United Kingdom, last week's inflation data was quite a surprise. Not only did the much-anticipated negative rate of RPI inflation fail to materialize (it fell just 0.1 percentage points to 0.0 percent year on year, compared with a consensus forecast of -0.7 percent), but the rise in CPI inflation to 3.2 percent year on year triggered a letter from the Bank of England governor to the chancellor explaining why inflation was so far above the 2 percent target. One striking feature of the current recession that surfaced last week has been the response by private businesses and workers. Pay settlements data showed a sizable increase in the number of pay freezes, and there have been widespread reports of other labor-saving measures (such as moves to part-time working). This flexibility should mean that the ultimate increase in unemployment is lower than might otherwise have been the case.
Russia and CIS
Some good news and some bad news arose in the FX reserve data. The good news is that there is further evidence of equilibrium in the Russian balance of payments, as FX reserves showed a large weekly increase of $9.2 billion to $385.3 billion. Improvements in the balance of payments have been ongoing for some time. This weekly increase continues to bode well for the coming months, especially if oil prices remain well over the stress point for the budget and the ruble stays within its trading range of below 41 against the basket. The bad news is that parts of the improvement reflect the devastation of demand in the economy 's namely that imports are collapsing. The economy's growth prospects are expected to remain very poor and eventually to result in more pressure on banks through NPLs and on the fiscal position.
*** Written using materials from Bloomberg, Reuters, and Barclays Capital Economics Research
