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By HaleStewart February 13, 2015 11:05 am
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International Economic Week in Review: Hope For the EU and Rising Concern For Australia Edition

            The main news out of the EU was a stronger than expected GDP report, which showed the entire region growing .9% Y/Y, thanks to a big push from Germany, which grew at a 1.5% pace.  France eked out a .2% gain while Spain showed it is clearly out of a recession with a 2% Y/Y rate.  The main big four laggard was Italy, which slipped .3%.   As noted by Bloomberg:

Gross domestic product rose 0.3 percent in the fourth quarter after expanding 0.2 percent in the previous three months, the European Union’s statistics office in Luxembourg said Friday. Analysts surveyed by Bloomberg News predicted growth of 0.2 percent. The Greek economy unexpectedly shrank 0.2 percent.

While the currency bloc’s economy is overcoming its longest-ever slump, falling consumer prices and the rise to power of an anti-austerity party in Greece have increased the risks to growth. To avert deflation in a region where consumer spending is bolstering the recovery, European Central Bank President Mario Draghi announced a 1.1 trillion-euro ($1.3 trillion) quantitative-easing package that has already pushed down bond yields and the single currency.

“For the first time in two years, we can say that the region is going for solid growth,” said Anna Maria Grimaldi, an economist at Intesa Sanpaolo SpA in Milan. “The euro area is supported by the very strong tailwinds of the fall of the euro, the fall of oil prices and the fall of interest rates sparked by ECB QE.”

In addition, industrial production decreased .2% Y/Y.  This data series is still far below its pre-recession level:

            UK Industrial production was up .5% Y/Y, while manufacturing production increased 2.4%.  However, like the EU IP data series, this statistics is still far below its pre-recession levels.  However, the real news out of the UK was the inflation report, which predicted a short period of deflation later this year:

In it (the inflation report), he says that "the UK is not experiencing deflation" and that the "most important single reason for below-target inflation over the past year is the unexpected recent sharp drop in energy prices".

"On the assumption that energy and food prices stabilise, CPI inflation should pick up notably once earlier declines start to drop out of the annual comparison, towards the end of this year, " he writes.

This has important ramifications for interest rates.  Six months ago, the BOE was one of two central banks that was predicted to be in a rate increasing position.  Now it appears the BOE is neutral with a slightly negative downside bias.

            There were two important pieces of information from the US, starting with a weak retail sales number.  However, as noted by NDD, this was largely caused be weak gas prices:

There is some actual weakness in the retail sales numbers, compared with November, but it is very slight.  The lion's share of the story behind retail sales is that, so far, consumers have chosen to save rather than spend their savings on gas prices.

In addition, The Michigan Consumer Confidence number decreased from 98.1-93.6.

            There were two pieces of news from Japan.  First, the corporate goods price index registered a .3% Y/Y increase.  This is a very disappointing number, as it indicates the initial inflationary bump caused by the BOJ doubling the money supply is fading.  In addition, the current account surplus was .187 trillion yen.  But the real story here is the slow move of Japan’s current account to near parity since the recession:

            The Australian housing price index increased 1.9% from the previous quarter.  While the pace of increases has slowed, there is still evidence that Australian housing my by inflated.  But the worst news was the bump in unemployment, which increased from 6.1% to 6.4%:

This indicates the RBA was more than justified in its rate cut at the last meeting. 

            The best news of the week was the EUs GDP figure, as it gave market participants hope that the EU was at least holding its own in the fact of the Ukraine and Greek situations.  However, the drop in the Japanese CGPI adds additional concern regarding the future of their program.  But worst of all was the unemployment jump in Australia, indicating there is a slowdown of potentially increasing proportions down under.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer  


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