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Broadgate: Weekly Briefing

27 January 2012

U.S. – The Federal Reserve has said it does not now expect to raise interest rates in the U.S. until late 2014. The surprise move sent the dollar sharply lower in markets, and caused U.S. government borrowing costs to fall.

In its regular policy statement, the central bank said it saw “significant downside risks” to the economy, and said inflation had fallen back to a level in line with its mandate. Rates remain in a target range of zero to 0.25percent.

Along with its usual economic forecasts, the Fed decided to publish the interest rate forecasts of individual committee members for the first time.

Japan – Japan has announced its first annual trade deficit in more than 30 years, a setback for a country known for its exports including cars and electronics.

The deficit came in at JPY2.49tn (USD32bn) for 2011, the finance ministry said. Japan’s imports rose 12percent and its exports fell 2.7percent, compared to the previous year.

The decline in exports was attributed to the impact from the earthquake and tsunami on 11 March. Japan’s last annual trade deficit came in 1980. The latest shortfall underscores the pressure that Japanese exporters have come under since the disaster.

Greece – Key talks between Athens and its private creditors resumed on Thursday to try to agree a debt write-off that would dramatically reduce Greece’s debt levels.

The two parties have so far failed to agree an interest rate on new bonds that would replace existing debts. If agreement can be reached, Greece should be in line for additional bailout funds.

Reaching an agreement with private creditors is a precondition of any further bailout funds from the European Union, European Central Bank and International Monetary Fund.

Without the funds, Athens will not be able to make EUR14.5bn of loan repayments that are due in March.

Europe – German Chancellor Angela Merkel appealed to business leaders at the World Economic Forum to give policy makers the space they need to tackle the debt crisis, pledging that Europe will pull together and restore confidence.

“I would like to ask all of you who are here as the representatives of the business community” to recognize how democratic governments work and to “please take the long-drawn- out processes with a degree of acceptance,” Merkel said in a question-and-answer session after opening the forum in Davos, Switzerland.

“Europe will become more attractive once we have conquered this crisis, and I’m absolutely convinced that we will be able to master this crisis,” she said. European leaders will discuss measures to raise competitiveness and create growth and jobs at their Jan. 30 summit and again in March, she said.

India – Indian stocks climbed to a ten-week high on Thursday amid speculation the central bank will add to a new reserve requirement cut to stimulate economic growth.

The BSE India Sensitive Index, or Sensex, rose 0.5percent, its highest level since Nov. 14. The Reserve Bank of India reduced the amount of deposits banks must keep aside as reserves for the first time since 2009 and signalled future interest-rate cuts, joining other emerging markets in shielding growth. The Sensex sank 25percent last year amid concern a weak rupee and record interest-rate increases will exacerbate the effects of Europe’s debt crisis on company earnings.

Commodities – The International Monetary Fund (IMF) has warned of a 20-30percent oil price spike if Iranian exports are disrupted.

The IMF warned that if the West imposed financial sanctions on Iran, it would be tantamount to an oil blockade, and the shock to the market could be as bad as from Libya’s revolution last year.

Iran produces 5percent of global oil output.

About a quarter of all oil produced globally, and some 40percent of all oil exports, including those from Iraq, Kuwait and Saudi Arabia, are shipped through the Straits each year.

Spotlight on: The U.S. recovery…..in manufacturing?

Some might say that the recent news of economic improvement in the U.S. conveniently coincides with the impending launch of Barak Obama’s presidential challenge campaign. However, independent statistics suggest that the U.S. is making some real progress despite the gloomy economic back drop, so much so that the latest set of IMF growth forecasts predict that the U.S. is actually better placed than many other developed economies.

In what could potentially be his last State of the Union address, President Obama challenged the country’s manufacturers to “ask yourselves what you can do to bring jobs back to your country.” However, rising wages in China and new tax incentives at home may not be enough to reverse the long-term erosion in U.S. manufacturing employment, even as some U.S. companies return production to previously closed plants.

“We’re no longer going to be the manufacturing country that we once were,” said John Russo, co-director of the Centre for Working Class Studies at Youngstown State University.

Factory jobs, which have been shrinking as a share of total U.S. employment since the early 1950s, remain 2 million below their pre-recession level. It is felt by many that Obama’s plans “to bring manufacturing back” fly in the face of structural changes that inexorably lower employment in goods-producing industries.

With each year, technology allows factories to produce more goods with the same number of, or fewer, workers. Since the landmark 1994 North American Free Trade Agreement, U.S. factory workers also have faced increasingly vigorous competition from low-wage countries. That agreement drove manufacturing jobs from their 1979 peak of 19.5 million to today’s 11.8 million even as industrial output almost doubled.

The vast majority of those lost jobs are gone for good, say many economists.

“I can’t really see a situation where manufacturing employment starts to rise significantly and takes a larger share of employment,” said economist Paul Dales of Capital Economics in London. “The United States is an advanced economy. It will gradually move away from manufacturing to services.”

“We believe manufacturing punches above its weight economically,” said Gene Sperling, head of the White House National Economic Council. “The strength of your advanced manufacturing is critical to your innovation as a country.”

Recent months have brought a measure of good news from the nation’s manufacturers. As the global economy healed, U.S. companies gained market share, according to Capital Economics, which noted that industrial production in November rose at an annualized 3.9percent rate versus a 3.2percent increase in global output.

Employment likewise has increased for three consecutive months and is up 334,000 since the December 2009 trough. Aircraft maker Boeing Co. (BA) added about 11,000 new jobs last year in South Carolina and Washington. The administration’s labour union allies want Obama’s new push to fuel further hiring.

“There is a manufacturing renaissance which is going on and is likely to continue, but we need to put these things in perspective,” says economist Neil Dutta of Bank of America Merrill Lynch in New York.

Even as U.S. manufacturing output increases, and some work is brought home, the employment gains may be modest. U.S. factories boast high productivity thanks to widespread use of automation. Whether the U.S. can outsmart its Asian manufacturing competitors remains to be seen, although it certainly appears to be a focus that those currently in the White House feel may get the country back on its feet. Whether the current office gets to see out its plans, long-term, will be determined later this year.

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Broadgate can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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