NBK's global economic outlook (page 2 of 2)

Already, the second and third most powerful people in Russia under Putin have expressed their disapproval of Putin's handling of the Yukos case. There has been some flight of capital out of Russia already. And the Euro has suffered too.

Meanwhile, economic news from Europe included a steep rise in Germany's confidence index. The German Ifo index rose 2.2 points in October to 94.2, the sixth straight gain and highest reading since February 2001.

A drop in money-supply growth to a 7.4% annual rate in September compared with 8.2% in August has further fueled recovery hopes. Central bankers worry when money supply jumps, as it leads to inflation.

The European Central Bank has noted recent fast growth in money supply is a sign of investor caution since they are fleeing to safe assets. In any case, it is unlikely that the ECB will move interest rates when Mr. Trichet chairs his first meeting as President on Thursday.


UNITED KINGDOM

We have been indicating that with the recent rise in economic activity globally, and the fact that key statistics from the UK have been revised significantly; the first country to raise rates will probably be Britain. This view has gained further credibility last week, and the markets reacted by buying the Pound.

The currency strengthened on a number of crosses in anticipation of a rate hike as near as this Thursday. The important thing to note here is should the Monetary Policy Committee decide to wait another month before hiking rates, then the markets would be disappointed and the Pound could come off rather quickly in that event.

The UK housing market showed renewed strength in October, with house price inflation returning to the growth levels reported in the first half of this year. Home buyers appear to be shrugging off fears of imminent interest rate rises, which suggests that there is considerable amount of momentum in that market.


JAPAN

After surging over 10% against the dollar since early August, dragging the US unit to a fresh three-year low below 108, the Yen finally gave back some of its gains, thanks to a tepid testimony before a banking Senate committee from US Treasury Secretary John Snow.

The markets had widely expected him to crank up the pressure on Japan whom he had tacitly accused of manipulating currency rates. However, following his report of FX, it appears that while the US is displeased with Japan's interventionist strategy, things have not gotten sour enough to gain mention again.

Consequently, the markets had to run for cover ahead of the weekend, and stop-loss buying of USD/YEN took the currency paid above the 110 level for the first time in a week.

On the economic data front, there was further good news from Japan. Industrial production expanded a stronger-than-expected 3% in September from a month earlier. This suggests that the country's export-led economic recovery remains on track despite a worrying rise in the yen.

Despite signs Japan's economy is picking up pace, price and labor market data show deflation remains a problem and jobs growth has yet to benefit from the export-led rebound. Japan's core consumer price index fell for the 48th straight month in September, slipping 0.1% from a year earlier, while the jobless rate stood unchanged at 5.1% from August.

This lingering problem of deflation whose four-year run has squeezed corporate profits and increased the burden of Japan's legion of debtors is certainly a worrying factor. Thus, it is no surprise that the Bank of Japan is expected to keep its ultra-easy monetary stance unchanged for the time being.