Higher ground

5 September 2011 By Wayne Arnold

If markets swoon anew, as negative economic signals suggests they might, Asian bonds and CDS both stand to gain ground. In the past, the two have moved in opposite directions. Their altered relationship offers a handy storm shelter for investors while it persists.

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Initial claims for unemployment benefits dropped 12,000 to a 409,000, the U.S. Labor Department said in a report Sept. 1, suggesting the U.S. economy may not be slipping into recession. But claims are still above the 400,000 usually associated with a stable labour market.

Japan and South Korea reported on Aug. 31 surprisingly weak July factory output as global electronics demand faded. Industrial output rose just 0.6 percent in Japan, less than half the rate economists polled by Reuters had predicted. South Korea’s declined 0.4 percent, defying expectations for a 0.6 percent rise. Japanese companies, moreover, expect production to dip next month, according to Japan’s Ministry of Economy, Trade and Industry. Manufacturers surveyed by the ministry ramped up their output growth forecast for August to 2.8 percent from 2.0 percent, but predicted a 2.4 percent decline in September.

Three-month interbank dollar lending rates also rose Aug. 30 to their highest in over a year. Banks have reduced activity in the intra-dealer U.S. Treasury repurchase agreement market by 63 percent since the end of June, according to Barclays Capital.

U.S. consumer confidence plunged in August to its lowest since the 2007-2009 recession, according to the Conference Board, which said Aug. 30 that its index of consumer attitudes sank to 44.5, from a 59.2 in July. The August reading was the weakest since April 2009, when the U.S. economy was in recession, and the decline was the steepest since October 2008.

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