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By HaleStewart April 10, 2015 11:26 am
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International Economic Week in Review: Increasing Caution, Edition

     The divergent paths of various central banks continues dominating news reporting and analysis.  Analysts still expect the US to raise rates first, although the latest employment numbers and still low inflation rate gives the Fed ample maneuvering room.  While the UK’s economic situation is very similar to the US’, the BOE is instead firmly committed to a neutral stance.  In contrast is the EU, which is just beginning their QE experiment. Japan, still working to overcome decades of deflation, won’t be raising rates anytime soon.  And Canada recently lowered in an attempt to stave off the negative impact of oil’s price drop.    

     Turning to an analysis of country specific news, releases from the EU continued pointing to a turnaround.  The retail sector provided the strongest news, where sales were up 3% Y/Y.  While this was slightly lower than last month’s 3.2% reading, sales continue their three month run of strong readings:

Markit also released their final March numbers.  The composite readings for the EU, Germany and France were 54, 55.4 and 51.5, respectively.  The service index for Spain increased from 56.2 to 57.3 while Italy’s was up .6 to 51.6.  Once again, all the economic news indicates the EU’s growth rate is increasing.

     Moving onto the US, news flow was light.  The Federal Reserve released their mid-March meeting minutes, which contained the following overview of the US economy:

The information reviewed for the March 17‒18 meeting suggested that real gross domestic product (GDP) growth moderated in the first quarter and that labor market conditions improved further. Consumer price inflation was restrained significantly by declines in energy prices and continued to run below the FOMC's longer-run objective of 2 percent. Market-based measures of inflation compensation were still low, while survey measures of longer‑run inflation expectations remained stable.

The low inflation readings cited above are leading some commentators to push out the expected date for the first US rate hike, in some cases to next year.  In addition to the Fed Minutes, the ISM released their monthly services report where the headline number decreased .4 to a still healthy 56.5.  The anecdotal component of the report contained positive comments about 2015:

◾"Business remains strong this month." (Health Care & Social Assistance)

◾"Current business conditions are positive and the outlook for 2015 is on track this first quarter." (Finance & Insurance)

◾"See tremendous increase of business activities due to increase of capital investment, sales efforts and competition for human resources." (Professional, Scientific & Technical Services)

◾"Some increase in activity related to pre-construction season spending for budgeted capital projects." (Public Administration)

◾"Business slightly increasing year-over-year, but about the same as last month." (Retail Trade)

◾"Lower fuel prices improving overall profits, but do not appear to be lowering freight costs." (Transportation & Warehousing)

◾"Fuel costs continue to remain low; however, suppliers not willing to give back on fuel surcharges or to reduce fuel cost components of transportation." (Utilities)

◾"Overall business is continuing to expand for 2015." (Wholesale Trade)      

Overall, the news wasn’t strong enough to draw any conclusion.

     Australia didn’t lower rates at their meeting last week.  That’s surprising, considering the RBA’s assessment of the domestic economy contained in the policy announcement:

In Australia the available information suggests that growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Over the last two weeks, the Australian Industry Group released manufacturing, service and construction indexes, which were reported at 46.3, 50.2 and 50.1 respectively.  But the expansionary readings are recent; the services number has only been above 50 for two months and the construction number just turned positive.   Finally, retail sales were up .3% from February.  At the start of the week, the Australian economy was expanding below potential.  Nothing reported last week changes that assessment.

     Japan’s Central Bank maintained their asset purchase program while keeping rates at .1%.  Their announcement contained the following assessment of the Japanese economy:

Business fixed investment has been on a moderate increasing trend as corporate profits have improved. Public investment has more or less leveled off at a high level. Private consumption as a whole has remained resilient against the background of steady improvement in the employment and income situation, although recovery in some areas has been sluggish. Housing investment, which continued to decline following the front-loaded increase prior to the consumption tax hike, has recently started to bottom out. Against the backdrop of these developments in demand both at home and abroad, industrial production has been picking up, due in part to the progress in inventory adjustments. Business sentiment has generally stayed at a favorable level.

The wording is nearly the same as the previous month’s report.  The BOJ also released their leading and coincident indicators; the LEIs dropped from 105.5 to 105.3 while the CEIs decreased from 113.3 to 110.5.  The Japanese economy is still struggling to overcome deflation.

     Moving onto the UK, the news releases point to continued growth.  The Markit services number increased from 56.7 to 58.9.  And the industrial sector continues growing; production increased .1% M/M, while manufacturing was up .4%.

     As I noted earlier this week, Canada is starting to feel the negative impact of oil’s price drop.

     The US continues to lead the developed nations’ growth stories, with the UK a close second.  There has been sufficient positive news from the EU to argue the region is now entering a period of higher growth.  But, all is not well.  Canada will have at least one bad quarter thanks to oil’s price drop.  Japan is still trying to prove Abenomics works and Australia continues to struggle.  And now the IMF has released a report that a period of slower growth is more than likely here.  Topping off the negativity is a Bloomberg story from China that paints a very negative picture of the country’s economy.  Overall, there are still a number of potential problems to warrant caution going forward.             

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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