Toronto Gold Bullion Newsletter Archive - Daily FX report dated 20/01/2011

Strong economic signs from China - and the subsequent speculation that Beijing will hike interest rate to cool things off - are unsettling global markets this morning.

The Shanghai composite slipped 2.9 per cent, Japan’s Nikkei 1.1 per cent, and Hong Kong Kong’s Hang Seng 1.7 per cent. In Europe, London’s FTSE 100 was down 0.9 per cent, Germany’s DAX 0.4 per cent and the Paris CAC 40 was little changed by about 6 a.m. ET.

Dow Jones industrial average futures were down just slightly, and S&P 500 futures were flat.

The numbers from Beijing illustrate why China has been the world’s engine of growth after the recession. Its economy expanded 9.8 per cent in the fourth quarter compared to a year earlier, and that’s up from 9.6 per cent in the third quarter. Inflation, meanwhile, dipped in December to 4.6 per cent from 5.1 per cent a month earlier. But that’s still 4.6 per cent, and markets fear a further tightening in monetary policy, which, in turn, could reduce demand from China in key areas such as resources.

“GDP growth was a little stronger than expected in the fourth quarter, and the near-term outlook for growth also looks solid,” the emerging markets research group at RBC Dominion Securities said today.

“This suggests that price pressures will remain uncomfortably strong in the months ahead, and that the dip in headline CPI inflation in December will likely be temporary. The case for further policy normalization remains strong and Beijing still has more work to do to keep the economy on an even keel. We continue to expect more rate hikes, forecasting benchmark rates to be increased another 75 basis points this year, with the next move by the end of the first quarter - risks are skewed to more aggressive action.”

While it's not yet official, it appears China has now surged past Japan as the world's second-largest economy behind the United States.

For the full year, China's economy expanded by 10.3 per cent in 2010, to reach almost 40-billion yuan, or almost $5.9-trillion (U.S.) based on last year's exchange rates, according to calculations by The Wall Street Journal. While Japan releases its economic readings next month, the forecasts call for gross domestic product of some ¥477-trillion, or $5.4-trillion.

The number of Americans filing first-time claims for unemployment insurance payments fell more than forecast last week, adding to evidence the labor market is healing.

Applications for jobless benefits decreased 37,000 in the week ended Jan. 15, the biggest decline since February 2010, to 404,000, Labor Department figures showed today. The number of people on unemployment benefit rolls fell, while those getting extended payments rose.

Employers may be retaining workers after the economy showed signs of strengthening at the end of last year. Economic growth may need to accelerate further and encourage companies to ramp up the hiring necessary to reduce an unemployment rate that’s hovering close to a 26-year high.

“New jobless claims have broken to the downside in the last 11 weeks, suggesting that labor markets are finally improving,” Steven Wood, president of Insight Economics LLC in Danville, California, said in an e-mail to clients. “However, there is typically a lot of volatility in the claims data between mid-November and mid-February both because of the various holidays and because of winter weather.”

Wholesale sales were up 1.2% to $45.7 billion for the month, the federal agency said. November marked the fourth consecutive monthly increase in sales.

“This increase in sales is explained in large part by higher sales in the machinery, equipment and supplies subsector, the miscellaneous subsector, and the food, beverage and tobacco subsector,” the agency said.

“This report is one of the final clues — along with tomorrow’s retail sales report — for November real GDP, and yesterday’s manufacturing sales numbers ... were not encouraging,” Robert Kavcic, an economist at BMO Capital Markets, said in a morning note.

On Wednesday, Statistics Canada reported a drop in manufacturing sales in November, with the vehicle and auto-parts sector leading the decline. Sales were down 0.8% to $44.9 billion during the month, compared to a revised 1.5% increase in October.

Meanwhile, retail sales for November will be released Friday by Statistics Canada, with economists forecasting a 0.4% gain after a 0.8% advance the previous month.

The Bank of Canada this week cautioned that a stronger Canadian dollar and the country’s poor productivity levels will hold back economic growth. As a result, the central bank said Canada will not “fully benefit” from an improved outlook for the United States and the global economy.

Still, the bank revised its economic growth outlook for Canada to 2.4% this year and 2.8% in 2012 — compared to previous expectations for growth of 2.3% and 2.6%, respectively.

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