RBA turns more optimistic

The Reserve Bank of Australia held its key lending rate at 3.0% and noted that the global economy is resuming growth, and "growth in China has been very strong," which is having a significant impact on other economies in the region and on commodity markets.

The Board said the present accommodative setting of monetary policy remains "appropriate for the time being," but its increasingly optimistic tone suggests it may be setting the stage for a rate hike later in the year, in my view.

However, there was nothing explicit in its language that indicated a tightening is imminent.

China manufacturing accelerates

Following yesterday's 7% drop in China's Shanghai Composite Index, the Purchasing Managers' Index in China rose from 53.3 in July to 54.0 in August, signaling that the expansion in the manufacturing sector accelerated modestly in the latest month. A reading above 50 is expansionary.

China's economy has grown dramatically in recent months as well-directed stimulus money has bolstered growth and offset weak exports. Strong lending growth from the banks has also buttressed the expansion, but concerns that the government may restrict lending to prevent new bubbles from developing spooked the market yesterday and sent commodity prices spiraling lower today.

Although the world economy does appear to be poised for a rebound, and copper prices, which have historically been a precursor to economic activity, are well off the lows, a key measure of world activity, the Baltic Dry Index, has shown signs of weakness lately. And I will take a look at the pricing measure shortly.

Good news from Japan, but will it last

Manufacturing gains ground

The government in Japan reported that preliminary data showed that industrial production rose 1.4% in July, the fifth-straight monthly increase, while the Nomura/JMMA Manufacturing PMI increased from 50.4 in July in 53.6 in August, the best in over two years and the second-consecutive reading above 50 . A reading of 50 suggests the sector is neither expanding nor contracting.

Production remains sharply lower versus one year ago, but the level on the PMI indicates that manufacturing is expected to continue to expand as companies replenish depleted stockpiles.

However, when inventories rise to more normal levels, the expansion in Japan may flounder unless demand in China remains strong and the US consumer exits hibernation.

Consumer sentiment rises in late August

Turns out consumer sentiment did not fall quite as much in August as numbers released today revealed an upward revision to the preliminary data.

The Reuters/University of Michigan consumer sentiment survey increased from the initial reading of 63.2 to 65.7 in the final August reading. Still, that was down slightly from July’s final number of 66.0 and the lowest in four months.

Worries next year

Issues that may impact the economy next year gave the director of the survey reason for concern.

“The problem looming on the horizon is that after the inventory correction and the exhaustion of the stimulus, consumer demand will not be strong enough to maintain a robust pace of economic growth after mid 2010,” he said.

Though we saw an upward revision from early August, consumers reported “the worst assessments of their personal finances since the surveys began in 1946.”

Much can happen between now and next summer, and an improving economy seems likely to be come a self-perpetuating cycle, which would remove some of the doubts about the sustainability of any expansion past mid-2010.

However, consumers racked up plenty of debt this decade and are more focused on savings and repairing damaged balance sheets.  And that may turn into a strong headwind and prevent a more robust recovery, which is typical following a steep recession.

GDP maintains losing streak but 3Q should be brighter

The government left its estimate of a 1.0% annualized decline in Gross Domestic Product (GDP) unchanged this morning when it released its preliminary estimate (2nd release) of the largest measure of economic output.

Consumption, which makes up 70% of GDP, weakened after an upward blip in 1Q, and spending by businesses continued in a downward trend, though weakness eased, while inventory liquidations lopped off 1.4 percentage points from the headline number.

But uncertainty in the private sector was balanced by a jump in government spending and an improvement in the trade picture.

The second quarter, however, ended 7 weeks ago and it’s time to look ahead.

We are likely to see an end to the four-quarter losing streak that extends back to the 1940s when quarterly records were first kept.

A pick up in housing starts may snap what has been 14 straight declines in residential investment, and the massive liquidation of inventories, which has hurt GDP, may finally come to an end as manufacturers have begun to re-open idle production lines.

The Achilles heel of the economy remains consumer spending.  Banks are not in the mood to take any major risks, and debt-burdened consumers are still worried about jobs, which may hamper expected gains in 3Q.

Natural gas inventories bubble to the brim

Falling industrial demand, coupled with a mild summer in much of the nation, have pushed natural gas inventories to 18% above the five-year average for this time of year, according to the Energy Information Administration.

Working Gas in Underground Storage Compared with 5-Year Range

Source: EIA

And with excess gas in storage, the drop in prices to lows not seen since early in the decade or predictable.  If the trend continues, it should cost much less this year to heat many of the nation’s homes that are reliant on the odorless/colorless commodity.

Details available at Examiner.

Weekly jobless claims refuse to cooperate

Weekly initial jobless claims fell 10,000 in the latest week to 570,000 but remain unacceptably high as companies continue to trim their workforces.   Claims are slowly headed in the right direction but progress has been painfully slow.

Continuing claims fell 119,000 to 6.13 million, but it seems more likely that the standard six months of benefits have run out for those who filed early in the year rather than the unemployed finding gainful employment.

The stubbornly high rate of initial claims is all the more frustrating because economic activity has begun to pick up, yet  companies continue to trim payrolls.  That is likely a sign that the recovery will be gradual or U-shaped (see L, W, U, V - The alphabet soup of economic recoveries).