June 12, 2009

Economic Outlook: Global possibilities

Asian markets climbed higher Friday, following U.S. reports the jobless claims had decreased and retail sales had made gains.

As a symbolic improvement, Japan's Nikkei average closed above 10,000 points for the first time since October.

The Nikkei closed at 10,135.82, up 1.55 percent, while the Hang Seng index in Hong Kong climbed 0.5 percent to 18,889.68. The Kospi index in South Korea climbed 0.7 percent to 1,428.59, while the S&P/ASX in Australia rose 0.4 percent to 4,062.20.

In China, the Shanghai Composite index, slipped back 1.9 percent to 2,743.76 with investors turning cautious, analyst Huang Xiangbin at Cinda Securities told The New York Times.

At stake is what a recovery will look like and how to manage it. In China, fresh data showed it's a tough road of recovery ahead, Xiangbin said.

In the United States, a Treasury auction showed enthusiasm for $11 billion in government bonds, a boost of confidence for a market where yields on 10-year notes have risen from 2.5 percent in March to nearly 4 percent.

Federal Home Loan Mortgage Corp. Vice President and Chief Economist Frank Nothaft explained the tie-in this week.

Mortgage rates followed the increase in bond yields this week as the May employment report showed that the economy lost fewer jobs than the market consensus had expected, he said.

Revisions to the jobs report for earlier months also showed the job loss was not as large as early estimates had indicated "¦ as a result, federal funds futures rose after the report, signaling that the market expects the Federal Reserve may raise its benchmark rate sooner rather than later.

Investors are keenly second-guessing the Fed's next move, which could be a move to slow down on purchases of mortgage-backed securities or Treasuries to bring yields down to earth. The Fed may also raise its bank-to-bank lending rate, as Nothaft suggested.

Such moves would be an early endorsement of a recovery, which economists concede still has a long way to go. Rising rates make home buying less likely, although Nothaft said demand for homes -- what there is of it -- had not yet suffered.

The Fed must balance out a recovery with the threat of inflation, which economists say is unlikely with a labor market still in shock, having lost 7 million jobs since December 2007.

Fed Chairman Ben Bernanke has frequently pointed to the reprieve given the economy by the falling price of oil, which dropped from $147 per barrel last July to about $35 per barrel. That inflation bellwether is not likely to be overlooked as the Fed considers its options, the price having ballooned back above $72 per barrel recently.

In midday trading in Europe, markets were consistently lower. The FTSE in London fell 0.15 percent to 4,455.00. The DAX 30 in Frankfurt fell 0.39 percent to 5,087.42. The CAC 40 in Paris lost 0.1 percent to 3,331.63, while the broader DJStoxx 600 lost 0.01 percent to 214.77.

After a flat start to the week, U.S. markets turned up Thursday as an unofficial recovery continued.