• Home ::
• Fundamental ::
• Analysis Reports ::
• Daily Global Commentary

• Send
• Print
• Add To
• Rss

Daily Global Commentary

eac61713-58f8-4e13-aa4d-c64b2acdccda

0

0

Jobless Claims Are Troubling Even After Discounting For Distortions

Thu, Aug 7 2008, 22:37 GMT
by Asha Bangalore

Northern Trust

Jobless Claims Are Troubling Even After Discounting For Distortions

The Initial jobless claims rose 7,000 to 455,000 during the week ended August 2. The number of applicants filing for unemployment insurance has risen 107,000 in the four weeks between July 5 and August 2. This large jump is attributed to the fact that extended unemployment benefits under a federal program are now available. According to Labor Department, several more than estimated have filed for benefits under this program as first time claimants. The Labor Department has also indicated that is not possible to “estimate what percentage of the increase could be blamed on this factor and warned the impact could be felt for up to six weeks.” Initial jobless claims have risen 24,000, 31,000 45,000 and 7,000, respectively, in each of the last four weeks.

Continuing claims, which lag initial claims, increased 31,000 to 3.311 million after a gain of 183,000 in the prior week. The insured unemployment rate has held at 2.5% for two weeks in a row.

If the number filing for unemployment insurance claims in the next few weeks shows additional gains, one could be assured that these claims are indeed indicative of further weakness in hiring. That said, the very fact that the number filing for unemployment benefits under the extended benefit program is advancing is itself indicative that job losses are mounting and the labor market is significantly weak.

Pending Home Sales Index Moves Up, Will Actual Home Sales Advance?

The Pending Home Sales Index (PHSI) of the National Association of Realtors increased 5.3 points to 89.0 in June. The regional breakdown of this index is noteworthy. The PHSI posted larger gains in the South (92.4 vs. 84.5 in May) and West (101.0 vs. 96.6) compared with more muted increases in the Northeast (79.6 vs. 77.0 in May) and Midwest (101.0 vs. 96.6 in May). According to the National Association of Realtors, the PHSI leads sales of existing home sales by one or two months. Based on this, sales of existing homes should show gains in the July-August period. The first-time home buyer temporary tax credit of $7,500 under the Housing and Economic Recovery Act of 2008 is being viewed as a factor that may boost sales of homes. The existing home sales (July data will be published on August 25) and new home sales (July data will be published on August 26) reports of the next few months should indicate if this provision in fact has been able to lift sales of homes.

South Korea: Central Bank’s Rate Hike Necessary, Yet Hard to Explain

Today’s decision by the Bank of Korea (BoK) to raise its benchmark rate 25 bps to 5.25% was hardly a foregone conclusion – a fair numbers of analysts believed rates would be on hold for yet another month. The BoK’s relatively transparent inflation-targeting policy would suggest fairly predictable policymaking, but the central bank has been anything but predictable this year. After aggressively raising rates between 2005 and 2007 to keep inflation well below the Bank’s upper target range of 3.5%, monetary policy has been kept on hold while inflation has soared from 2.0% in August 2007 to 5.9% as of last month. If the BoK kept rates steady throughout that period, today’s decision brings to mind an obvious question: “Why now?”

So far there has been no consensus on an answer. An argument could be made that the BoK acted to counter signs of pass-through price effects from higher oil prices earlier this year. There is also the chance that the central bank stepped in not to contain inflation but inflation expectations, which have risen significantly over the last few months. Those opinions have some merit, but we are putting our wager on a different horse. We believe that, despite the BoK’s formal inflation-targeting mandate, it ultimately answers to movements in economic growth.

During times when growth was steady and relatively strong, the BoK appears to tighten without much reservation, while periods of erratic or weak growth prompt rate cuts. Up until the September 2007 credit crunch, growth was on track and the BoK was in a tightening mode, but policy went immediately neutral when growth was threatened. In the monetary policy statements throughout this year, the policymakers specifically cited concerns about wavering domestic demand and a possibly-severe economic slowdown. Apparently, the only thing preventing actual rate cuts was the fact (cited in numerous statements) that inflation was notable.

The first two quarters of this year have indeed shown sub-par growth (3.3% q-o-q annualized), but these low figures were better than expected, suggesting that at least the economy was stable, if not vibrant. We believe that once the BoK saw that growth was not stalling out, it could belatedly tackle the whole inflation matter – per its inflation-targeting policy – without too many worries about an unstable economy.

If this is the case, we believe that the central bank will only act slowly – perhaps raising rates one more time during Q4 and only if growth does not retreat this quarter. With oil prices on the decline right now, some price pressure relief will be entering the equation in the coming months. This will probably be the main factor affecting future inflation, as the central bank seems more committed to growth stability at the moment.

• Download Full Daily Global Commentary

Published on  Thu, Aug 7 2008, 23:05 GMT