After a slightly confusing day for economic statistics the Dow Jones Industrial Average closed just 28 points higher at 10415. The confusion was caused by some obfuscation at the Bureau of Labor statistics. There was no such obfuscation with Japanese economic statistics and the Nikkei 225 rallied by 140 points to 9239 getting it out of bear market territory for now anyway. It also meant that the current wide gap between the two indices narrowed to 1176 points but it is still some 12.7% of the Nikkei’s value.
Germany’s banking sector and euro zone stress tests
Adding to my recent theme of weakness at European and more particularly German banks we saw this statement in the Financial Times Deutschland edition by Juergen Stark who is the chief economist at the European Central Bank.
Juergen Stark, considers the German banks to be undercapitalized. Stark made this statement on Wednesday at a meeting with the head of Unions Parliamentary Group in Berlin, according to participants. He was referring largely to savings banks and regional banks (Sparkassen und Landesbanken). Accordingly, [Stark] called for privatization of the German savings banks, based on the successful Spanish model.
It is not entirely clear to me that the Spanish model is as successful as he claims but already his comments have produced a revealing result. Deutsche Bank is going to raise some 8 to 9 billion Euros of capital and far from all of it is required to help in its acquisition of Postbank. It reminds me of the aphorism that in financial markets there are “the quick and the dead”. Other equally undercapitalised German banks may rue the fact the Deutsche has shot to the front of the queue as depending on what the new Basel banking regulations settle on German banks look like they will need around 100 billion Euros of new capital. Those who analyse Mr.Stark’s contribution should consider two other matters.Firstly we have a pretty immediate response from a bank which is not in the categories he singled out for criticism but apparently still needs capital which implies a rather poor position at those other institutions his remarks directly addressed. Also it would appear that Mr.Stark does not appear to be much of a fan of the euro zone banking stress tests that CEBS enacted back in July. I wrote on this subject back on the 23rd and 26th July and it would be fair to say that I had several criticisms of them too. CEBS itself has had to issue a rather curious reply to criticism from the Wall Street Journal this week from which I quote this section.
CEBS notes that comparison with other sources should be treated with caution as a result of different reporting dates and reporting methodologies. For instance, data provided by the Bank for International Settlements (BIS), is aggregated in a way which makes comparison with the data disclosed by banks during the CEBS exercise impossible.
Thanks to them for making the situation clear,or not as the case may be! One objective of this sort of official intervention should be transparency and it is plain that this was not provided. Even supporters of CEBS may be wondering why National Bank of Greece and Deutsche Bank are raising funds when they were apparently in such good shape just over a month ago….
The Japanese economy: economic growth is revised higher but disinflation persists
The Japanese Cabinet Office reported today that her Gross domestic product grew at an annualized 1.5 % in the three months ended June 30, faster than the 0.4 % reported last month. So the second estimate if we convert it to the UK style is at just under 0.4% rather than 0.1%. This does not sound quite so good but is a clear improvement which was caused by capital investment which rose by a revised 1.5 % from the previous quarter, rather than the 0.5 % initially reported.
However the numbers do also give us something of an old friend as the GDP implied deflator, which is probably the best measure of price trends we get as it covers the whole economy, fell 1.7 % from a year earlier.That is five quarters of drops in a row and leads to a curious anomaly where on the quarter on an annualised basis nominal GDP fell by 2.5%. This leads to an interesting conundrum if you compare it with national debt levels does it not? I will leave that subject there for now but if anyone does not understand what I am saying please ask in the comments section as I am deliberately leaving this a little opaque as to understand Japan’s position I feel that one does have to cogitate on such issues as they are very different to elsewhere.
One caveat on these figures is that Japan had not so long ago to reform them as one particular revision was so large it led to considerable embarrassment so on the new basis we lack much of a track record. Rather un-Japanese I thought at the time although of course in some ways Toyota has followed this trend since so it is perhaps not quite as un-Japanese as i had thought.
After the figures we saw a slightly contradictory move of a weakening of the Yen exchange rate and as I type it is at 83.79 versus the US $ and 106.70 versus the Euro.On this subject there has been some concern expressed in Tokyo about recent purchases of Japanese Government Bonds by China. Now most countries would be pleased to see the Chinese buy their bonds! This hits on a difference between Japan and say the US and UK. She has a high domestic savings rate and so in spite of her large stock of national debt she can finance it domestically whereas we cannot. Last time I looked at the figures only some 5% of the JGB’s in issue were owned by foreigners whereas the UK figures are more like 30%. These purchases are in some places being blamed for the rise in the Yen which I think is to overstate their importance and I think it would be more truthful to say that Japan is an insular nation which does not like depending on gaijin or to use a literal translation alien (rather than foreigner) and how can I put this delicately particularly not China.
There is something of an irony for Nakoto Kan’s stimulus package being announced on a day that had improved growth figures and in an economy of Japan’s size I wonder what he expects a stimulus of 920 billion Yen or 11 billion US dollars will achieve. Going forwards the real issue is whether the rise in the Yen will return Japan to recession or whether she can continue to grow. A further problem from the Yen’s rise is that it adds to Japan’s dis inflation problem by reducing import prices.Much in Japan is not as elsewhere.
America’s economic statistics
As I said at the beginning of this week we would get information from the US trade figures but that they were very unreliable, however the unexpected twist was that the initial (jobless) claims figures from the Bureau of Labor Statistics would turn out to be unreliable too, as according to Bloomberg.
For the latest reporting week, nine states didn’t file claims data to the Labor Department in Washington because of the federal holiday earlier this week, a Labor Department official told reporters. As a result, California and Virginia estimated their figures and the U.S. government estimated the other seven.
A much simpler answer would have been to delay the numbers for a day to allow everyone to catch- up and it is for this reason that I cannot report on these weeks figures. The one piece of information we did get was that last week’s figures were revised up by 8000 to 478,000 continuing a trend that usually sees upwards revisions over time.
The trade figures showed a narrowing from June’s concerning $49 billion deficit to $42.8 billion with exports rising and imports falling to complete a much happier picture.However if one steps back and looks at trends rather just monthly figures the three-month average actually rose to $44.4 billion from $43.9 billion reminding us that we need to look at more than one months figures and the chart the BEA shows on its press release which goes back to July 2008 shows persistent problems in my view.
I think we are still left with a picture of a slowing economy but we are not much the wiser as to whether it is a severe or a minor one.
Fiscal Policy and a possible stimulus
A comment on this blog was posted yesterday on the subject of fiscal policy and suggested that a fiscal stimulus would be a good idea. I would be interested in readers views on this and I would like to narrow the debate to whether this is the right time for one as I feel this is the crucial issue. Changes in fiscal policy take a considerable time to be enacted usually and to start the debate my concern is we are not yet absolutely clear that it is required and so it would be running a large risk. Indeed we have a lot of stimulation both monetary and fiscal in world economies right now which sometimes gets forgotten. So now I have posed two questions! Sorry.One is about timing and the other is about total stimulus size.