Thursday, February 15, 2007

Net Capital Outflow From US in December

From CBS Marketwatch:

U.S. monthly capital flows reversed in December to an outflow for the first time since June 2005, the Treasury Department reported Thursday.

The U.S. recorded an outflow of $11 billion in December, compared with an inflow of $70.5 billion in November, the Treasury said.

The U.S. economy has required big inflows of capital of about $70 billion every month to fund its large current account deficit, which totaled $225.6 billion in the third quarter -- about 6.8% of gross domestic product.

The large inflows of foreign capital have kept U.S. interest rates lower than they would otherwise be, boosting the real-estate sector and other asset markets with cheap money.

The dollar fell against yen and the euro following the report, which, according to Action Economics, "didn't sit too well" with the markets after Tuesday's report on the nation's growing trade gap and a Wall Street Journal report that China is considering shifting some of its $1 trillion in foreign reserves into riskier assets, such as corporate bonds, stocks and even commodities. See full story on currency markets.

The December flows data include both long- and short-term securities. The outflow resulted from total sales of $42.5 billion in securities by private investors, partially offset by $31.5 billion in purchases by official institutions.

Here's a link to the official data.

Let's look at this in a bit more detail.

The grand total of outflows was $11 billion. In the big scheme of things, this is not large number and could be adjusted to a positive figure in the coming months.

The one figure that jumps out from the Treasury release is the net 11.1 billion sale by private foreigners of equities. This was the first negative number in the last few months. It could easily have been simple, year-end profit taking.

We're still seeing large purchases of corporate bonds at the expense of US Treasury bonds. This is probably for two reasons. First, Corporate bonds have a higher yield. Secondly, it could be simple portfolio diversification.

We also see a net sale of foreign official institutions selling of US Treasury Bills, although not by much.

Again, given the US trade deficit (which set another record this year) this number should raise eyebrows. However, it could just as easily beenb the result of year end profit taking in equities.