>NATIONAL ACTIVITY INDEX

What is the National Activity Index?
The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Why are there two index values?
Each month, we provide a monthly index number, which reflects economic activity in the latest month for which we have data, and a three-month moving average. Month-to-month movements can be volatile, so the index’s three-month moving average, the CFNAI-MA3, provides a more consistent picture of national economic growth.

What do the numbers mean?
When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained increasing inflation has begun.

Led by improvements in production-related and employment-related indicators, the Chicago Fed National Activity Index increased to –0.32 in November, up sharply from –1.02 in October. Two of the four broad categories of indicators that make up the index improved, although only the production and income category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, increased to –0.77 in November from –0.87 in October. November’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The level of activity, however, remained in a range that has historically been consistent with the early stages of a recovery following a recession. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.35 to the index in November, compared with –0.09 in October. This contribution accounted for much of the improvement in the index
in November. Industrial production rose 0.8 percent in November after being unchanged in October; and manufacturing production increased 1.1 percent in November after decreasing 0.2 percent in the previous month. Furthermore, manufacturing capacity utilization increased to 68.4 percent in November from 67.6 percent in October.

Employment-related indicators made a contribution of –0.12 to the index in November, up from –0.42 in October. Initial unemployment insurance claims in November declined to their lowest level during the past year; and the unemployment rate edged down to 10.0 percent in November from 10.2 percent in the previous month. In addition, payroll employment decreased by 11,000 in November after declining by 111,000 in October; and average weekly hours worked in manufacturing increased to 40.4 in November from 40.1 in the previous month.

The consumption and housing category’s contribution to the index was –0.48 in November, roughly unchanged from its value in October. The sales, orders, and inventories category made a contribution of –0.07 in November, down slightly from –0.02 in October.

To read the full report: NATIONAL ACTIVITY INDEX

>First quarter 2010: 2010 to be turning point for world economy (LLOYDS TSB)

In this, our inaugural World Economic Quarterly (WEQ), we focus on the G10 and E10 countries. Our G10 and E10 groups are defined as the top ten countries by gross domestic product (gdp) in each segment. The rest of the world is also analysed, but in less detail. Our approach is to recognise that investors want to focus on the fastest growing, and largest, of the world’s economies, but at the same time not lose touch with what is occurring in other parts of the world. Many countries in the latter are also fast-growing and are as instrumental in the reshaping of the world economy that is underway.

Two decades or so ago, the developed economies accounted for over two-thirds of global gdp, by
2006 this fell closer to one-half and on current trends it will fall to around one-third by 2020. That is a measure of the pace at which the global economy is evolving and why there needs to be focused research and analysis of the opportunities and challenges this opens up for companies. In this publication, we focus on the economic and financial market implications of this rapid change over the next two years.

The overall theme is that 2010 will be a year of global economic recovery after the deepest downturn since the Great Depression. However, the effects of the policy loosening that has led to
recovery will also be felt for many years.

Financial market themes in this Quarterly

1. US dollar to rally against its main trading counterparts
Among our G10 advanced economy grouping, we look for the US to record the fastest pace of economic growth in 2010. A more rapid closure of its output gap should see the US Federal Reserve raising interest rates well before the ECB, BoJ and BoE. This is likely to support the US dollar going forward. In addition, we feel that the dollar will soon start to benefit from stronger US economic fundamentals as the theme of a dollar-positive response to risk aversion fades on a better-established global recovery.

2. Emerging Asian currencies to extend gains in 2010
The main impetus to global economic recovery will continue to come from emerging markets in 2010, notably in emerging Asia. Assuming only a limited risk that activity in China slows in response to rising bad debts after the recent surge in bank lending, the orientation of emerging East Asian economies towards export-led activity should propel global growth. Relatively faster growth and accelerating inflation pressures (related to rising commodity prices) should see some emerging market central banks raise interest rates from early 2010, benefiting their currencies. But some (East European) emerging markets are in a different position, with interest rates likely to be lowered further now that the risk of currency collapse has been reduced (often as a result of IMF bail-outs). Hungary is one such example.

3. Divergent economic performances to keep volatility high
Notwithstanding our central view of a return to global economic growth, starkly divergent performances across countries will almost certainly feature in 2010. This may be a source of uncertainty and volatility in financial markets. As noted above, some emerging market economies - particularly those dependent on external financing - may experience difficulties in the form of additional currency weakness and/or higher bond yields. Equally, confirmation that the rally in ‘riskier’ assets seen since March is sustainable could fuel a further rebound in equities and commodities with government bonds falling out of favour. Given the challenging fiscal backdrop in many countries at the moment, rising government bond yields and tougher financing conditions represent a potentially significant downside risk to the global outlook.

4. Inflation pressures of increasing concern for central banks
At first glance, the excess spare capacity created by deep recessions in various economies points to subdued inflation pressures going forward. In economics jargon, aggregate supply exceeds aggregate demand. But under these conditions, inflation pressures will only be muted if inflation expectations are under control. At the current juncture, there is a risk that these expectations start to become elevated. First, inflation rates in many countries are poised to accelerate in the short term as energy price declines in the previous year fall from the annual comparison. Second, central banks around the world may keep so-called ‘unconventional’ monetary policy measures in place for too long (or unwind them too slowly). And third, the nature of the economic and financial crisis means that supply potential in many countries will have been partially destroyed, so adding to inflation pressures. All of these indicate potentially significant upward pressure on government bond and swap yields over our forecast horizon.

5. De-leveraging holds the key for the US dollar longer term
While our central view is for the US dollar’s trade-weighted exchange rate to appreciate into next year, the medium to longer-term outlook may be rather different. If private and public sector de-leveraging is too slow (or non-existent), the US will run large current account deficits well into the future - a structural drag on the US dollar. Our latest forecasts show the US current account deficit narrowing to 3.2% of gdp in 2009, from a shortfall of 4.9% in 2008 but then widening back to a similar level by 2013. Given that progress is likely to be only gradual, it is not inconceivable that financial markets turn their attention to the theme of wider external deficits quite quickly.

To read the full report: FIRST QUARTER 2010

>India: will higher inflation lead to monetary tightening? (NATIXIS)

Since March, India has been experiencing a clear rise in inflation, primarily, but not exclusively, linked to the increase in food prices. While official forecasts for GDP growth and inflation were revised upwards in October and the stock market registered very robust growth (+120% since March), the issue of a monetary restraint has become a topic for debate.

Yet, it must be recalled that monetary management in India is strongly linked to the funding requirements of the public sector, which have risen sharply this year, and is unfettered by an inflation target. Apart from the negative effect that an increase in funding cost would have on public finances, the RBI must also consider the effect that an interest rate hike could have on the volume of foreign capital inflows. A surge in foreign capital influx into India to take advantage of the interest rate differential would place additional appreciating pressure on the Indian rupee while the current account deficit continues to expand again.

The direction taken by monetary policy will depend on the arbitrage between public sector funding requirements, a stable exchange rate and stable prices, an objective that will most probably continue to be subordinated to the first two, which would therefore leave scant room for monetary tightening.

Upward-bound Inflation
Since March 2009, India has been experiencing a clear rise in consumer prices up by 11% (YoY) in October, as well as wholesale prices, for which the annual growth stood at 4.8% in November (versus 1.3 in October, chart 1). The spread between the CPI and wholesale price can be primarily explained by the weight of food in the basket comprising the IPC. Food prices rose sharply due to a disappointing monsoon between April and August 2009 (mostly in the northern part of the country, where the level of rainfall was the lowest recorded since 1972 and less than 22% of the historic average) resulting in a meager harvest. The prices of sugar, potatoes, onions, rice, peanuts, and many other foods rose sharply.

There is, however, a general trend towards rising prices in India, (perhaps with the sole exception of textile products). The relatively low level of savings in the country (comparatively to China and other Asian countries) means less accumulated capital while the growth rate has become very high (like in China) resulting in pressure on production capacities. While most countries in the world are currently faced with excessive supply of goods, which theoretically rules out a return to inflation despite the monetization of public deficits and monetization of the purchase of foreign exchange reserves (notably in China and commodity exporters countries), inflation in India has surged higher than in other places. India begins gradual exit from soft monetary policy While the official growth forecasts were gradually revised upwards to 7% for the fiscal year ending in March 2010, and the Reserve Bank of India (RBI) has corrected its inflation
anticipations (6.5% for the year 2009/10 in October versus 5% in March), the issue of a tougher monetary policy has become a topic for debate.

The RBI continues to maintain its repo rate at 4.75% and its reverse repo rate at 3.25% since April 2009 but has raised the statutory reserve ratio of commercial banks from 24% to 25%, a
measure in effect since November 8.

An additional toughening would curb the development of bubbles on financial asset prices – already significantly up since April (the stock market gained 117% between March and December, chart 2) and the widespread increase in the prices of non-food assets. On the other hand, a tougher monetary policy cannot halt rising food prices, mostly caused by the scarcity of food supplies.

It should be noted as well that the interest rate is not the principal monetary policy instrument (the RBI’s main target being the growth of monetary aggregates). As the monetary market is mostly adjusted by “quantities”, interbank loans are often made outside the corridor constituted by the RBI’s repo transaction rates (chart 3). This means that interest rate movements only partially reflect the direction of monetary policy.

To read the full report: INFLATION

>BANDRA KURLA COMPLEX: Mumbai’s second business district (RELIGARE)

Bandra Kurla Complex (BKC), one of Mumbai’s key business destinations, has gradually transformed itself from a secondary district to the city’s second business district (after Nariman Point) and is set to become India’s international financial centre. BKC’s G block, housing leading banks and financial institutions, has secured Maharashtra government’s nod to increase its floor space index (FSI) from 2 to 4. However, development in the block is likely to be spaced out due to the high realty prices stemming from the strong, continued demand and improving connectivity to this well-planned and centrally located business hub.

■ Doubling of FSI to 4 to attract staggered demand: BKC-G block has 9,72,400 sq mt area on two FSI; increase in FSI to four is likely to near double this area over the next few years. However, existing corporates in the G block may choose to expand their present premises depending on their requirement and only if their cost-benefit analysis is favourable. This is because the additional two FSI in G block is likely to be offered at a high rate of ~ Rs 10,000 per sq ft (psf) or 150% of the ready recokner rate. Therefore, expansion at BKC-G block is expected to be staggered over the next four to five years.

■ Realty prices at BKC to remain firm: Despite the doubling of supply to 8-9m sq ft (msf) at BKC-G block, prices of commercial properties at BKC are likely to remain firm in the short to long term on spaced out expansions. Moreover, there are only few plots left for sale by MMRDA where 4 FSI will be applicable. In the shortterm, we expect rentals and capital value to move upwards in tandem with commercial realty prices as transaction volumes soar. We also expect residential prices at BKC to firm up as employees of corporates operating at BKC hold on to their existing accommodation to derive the benefit of a shorter commuting cycle. Nevertheless, realty development at Dharavi, located 1km from BKC, may attract some BKC residents to this area – however, such development is not anticipated in the near future.

■ Upcoming transport projects to boost connectivity: Connectivity to BKC is set to improve under the Mumbai Metro Project as the Charkop-Bandra-Mankhurd corridor would pass through BKC – connecting E and G blocks with Bandra and Kurla, both important business destinations, on either side. The corridor would also connect the G block to the H block with C.S.T road on both sides. In addition, the proposed monorail project will connect Kalangar - Bharat Diamond Bourse - Bandra east station (under phase 1) and Jacob Circle – Chembur- Wadala (under phase 2).

■ Nariman Point, other business locations lose ground: Better infrastructure facilities and affordability has enticed many corporates operating in Mumbai’s other business locations to shift base to BKC. Rentals in BKC are Rs 100psf lower than Nariman point and Fort. Besides, BKC also offers better and faster approachability to the Airport and boasts of better traffic management than other business destinations like Worli, Andheri, and Lower Parel. BKC has also attracted companies looking for outright purchase due to its central location and strong upside potential of its capital value.

To read the full report: BKC