NBK's global economic outlook

UNITED STATES OF AMERICA

What better news can one get than the best quarterly growth in nearly two decades from the US? The economy shot out of the doldrums to grow during the third quarter at an annualized rate of 7.2%.

Spending by consumers, exports and residential construction, all registered sharp gains. But most significantly, business investment grew at an 11% annual rate, the fastest pace since the early 2000. Business investment has been the primary source of economic weakness since the economy slid into recession in 2001.

Of course, some economists are still questioning whether steady growth could continue once the short-term effects of pump-priming from tax cuts and low interest rates wear off, not to mention the mounting federal budget deficits. But there are always no sayers, and only time will tell who is right.

Meanwhile, the FED has left interest rates on hold once again. This has surprised no one. The markets were more interested to see if there was going to be any change in the statement that accompanied the decision.

Much to their relief, the statement was almost identical to those issued the previous two months, except for a slightly more upbeat assessment of the labor market, which the FED said is "stabilizing".

In September it had said the labor market was "weakening". The cautious stance form the FED even in the face of a steady flow of positive economic data confirms that they wish to see any remaining excess capacity used up and employment rate pick up.

It is also pertinent that the FED continues to remain more concerned about falling inflation rather than increasing inflation. This would suggest that although the FED could change its wordings and bias at some time, any rate increase is likely to be delayed until well into next year. However, the futures market are now pricing in a rate hike in May, which goes contrary to the continuing commitment from the FED to keep interest rates low for a "considerable period".

Other good news came in the form of a growth in durable goods orders for September. These orders, which cover goods that are expected to last for three years or more, rose by 0.8% from a 0.1% drop in August. It is important to note that the growth came despite a sharp decline in orders for defense-related capital goods.

The data is further evidence of a cyclical upswing in manufacturing. Consumer confidence reports from both the Conference Board and the University of Michigan moved up, reflecting the improvement in the jobs market.

With so much good news around, the upcoming holiday season is expected to provide succor to the retail business segment.


EURO-LAND (EUROPE)

If cold winds blow in the political corridors of Moscow, Western Europe shivers. The arrest of Russia's richest man, Mikhail Khodorkovsky, last week has probably dealt a substantial, if not lasting blow to one of the cornerstones of political stability in that country.

As the chief executive of Yukos, Russia's biggest oil group, Mr. M.K. has been closely identified with the capitalistic leaning former President Yeltsin, and his cronies who serve under current President Putin. With this development, Putin has sent stern warnings to political challengers across the board.

How is this relevant to the rest of Europe? Western Banks have significant exposure to Russia. There has been a growing interest among investors in that country, more so after an optimistic up rating of Russia's sovereign debt to investment grade earlier in October.

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.