The week's top news in world financial markets from Maximus Capital

  • 2009-09-10
USA

The ISM manufacturing index came in last week well above consensus, and the details of the report are very encouraging. For example, the new orders index rose to 64.9 in August, the highest level since December 2004. The gap between new orders and inventories widened to its highest level since 1975, another indication that manufacturing production is set to surge. In addition, housing data continue to come in strong. Pending home sales rose for the sixth consecutive month in July and point to further acceleration ahead in existing home sales.

As discussed last week, many analysts expect housing to provide substantial support to overall GDP growth in the coming quarters. The recovery abroad is reinforcing the effect of improving domestic demand on the manufacturing sector. Not only did the ISM point to rapid growth in domestic orders, but the export index firmed as well, rising to 55.5 in August from 50.5 in July. This was the strongest reading since August 2008 and points to a substantial pickup in exports in the coming months.

Euro zone

The ECB has signaled in its latest press conference that it continues to be wary about the euro area's economic prospects. Essentially, the latest staff projections 's as endorsed by the Governing Council 's appear to envisage barely any GDP expansion until H2 2010 (when as low as 0.2 percent quarterly rate is expected). As a consequence, the ECB is continuing to proceed with its very generous monetary policy, in particular offering unlimited financing for euro area banks once again at end-September at the main policy rate of 1.0 percent.

Such exceptionally generous liquidity provision is having various consequences. Euribor term interest rates continue to decrease (one year Euribor has been hitting new lows of 1.29 percent - the same as dollar Libor). In turn, this is happening partly because confidence both within, and with respect to, the banking sector has improved substantially. Hence in considering the money market curve alone, the ECB's monetary policy is now almost indistinguishable from the Fed's.

Central and Eastern Europe

Last week we pointed out that while asset markets in the region move largely in tandem, countries' macroeconomic prospects seem more divergent, with forces pulling in different directions. On the one hand, the inflection point in inventory cycles and the growth recovery in the euro area should support industrial production in the coming quarters. This was again reflected in last week's August PMI data, which provided further improvements in Russia, Poland and Czech Republic.

Russia is now close to the 50 threshold that indicates expansion, and such countries as Turkey, Poland and Israel are already above 50. On the other hand, pro-cyclical fiscal policy and bank lending behavior weigh on domestic demand in several CEE countries, protracting the recession. Hungary, which saw a 3.4 point drop in the August PMI, is a case in point. While euro area growth should help its export industry, fiscal tightening (particularly July's VAT hikes) and a decline in bank lending continue to depress private consumption. Similar effects will be felt in IMF program countries like Latvia and Romania, where despite relatively large headline deficits granted by the IMF, the fiscal policy remains contractionary on a cyclically adjusted basis.

Written using materials from Bloomberg and  Reuters Research