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By HaleStewart June 6, 2015 7:56 am
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International Economic Week in Review: A More Positive Tone, Edition

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   

  • The EU continues to grow at a slow but steady pace.  But the ECB’s asset purchase plan will continue placing downward pressure on the euro verses the pound and dollar.
  • The UK is expanding at a solid rate, which is pound bullish.
  • US news turned solidly positive this week, placing a bid under the dollar.
  • It appears the worst of the negative oil shock may be over for Canada.  However, the Canadian dollar is still a bit weaker versus its primary trading partners.
  • News from japan was positive.  But, the BOJ’s asset purchasing plans are still yen negative.
  • While growing at a decent 2.2% top line rate, Australia still has weaker structural issues.

     The RBA kept rates unchanged.  But their statement may be paving the way for a cut in the next few meetings:

In Australia, the available information suggests the economy has continued to grow, but at a rate somewhat below its longer-term average. Household spending has improved, including a large rise in dwelling construction, and exports are rising. But a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year. Public spending is also scheduled to be subdued. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet. With very slow growth in labour costs, inflation is forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with stronger lending to businesses and growth in lending to the housing market broadly steady over recent months.

This is not the first time the RBA has observed the Australian economy is operating below potential.  Other indicators were mixed.  The strongest report was the AIG PMI; it rose from 48-52.3 for the first positive reading in five months.  5 of 8 sectors expanded while 5 of 7 indicators rose.  But the services sector’s 49.6 reading showed a contraction.  Only 1 in 5 sub-indexes rose while 4 of 9 sectors expanded.  Finally, the Australian construction index also showed a contraction; it rose from 47-47.8.  All 4 sub-indexes and 4 sub-sectors showed a contraction.  Although 1Q GDP was positive with a 2.2% Y/Y, retail sales stalled at 0%.  China’s continued manufacturing weakness (with a PMI of 49.2) contributed to a 6% M/M decline in exports.  Australia continues their trudge forward; there is still growth, but the transition from an economy based on Chinese exports to one with a broader sources of growth continues to be problematic.    

     The ECB kept rates unchanged, offering the following appraisal of the EU economy:

Let me now explain our assessment in greater detail, starting with the economic analysis. In the first quarter of 2015, real GDP in the euro area rose by 0.4%, quarter on quarter, after 0.3% in the last quarter of 2014. In recent quarters, domestic demand and, particularly, private consumption were the main drivers behind the ongoing recovery. The latest survey data to May remain consistent with a continuation of the modest growth trend in the second quarter. Looking ahead, we expect the economic recovery to broaden. Domestic demand should be further supported by our monetary policy measures and their favourable impact on financial conditions, as well as by the progress made with fiscal consolidation andstructural reforms. Moreover, the low level of the price of oil should continue to support households’ real disposable income and corporate profitability and, therefore, private consumption and investment. Furthermore, demand for euro area exports should benefit from improvements in price competitiveness. However, economic growth in the euro area is likely to continue to be dampened by the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms.

Overall, consumers are spending at a sufficient pace to grow the economy.  Other EU news was positive.  Unemployment decreased .1% to 11.1% while retail sales were up 2.2% Y/Y.  EU manufacturing PMIs were hopeful: the composite reading was 52.2; Germany’s decreased 1 but was still positive at 51.1, Italy’s increased 1 to 54.8 while Spain’s was up 1.6 to 55.8.  France was the only country in contraction at 49.4.  The service sector is also increasing, with a composite number of 53.8 (down from 54.1).  The headline numbers for Germany, France, Italy and Spain were 53 (down 1), 52.8 (up 1.4), 52.5 (down .7) and 58.4 (down 1.9), respectively.  But perhaps the best news from the EU was the .3% Y/Y inflation rate, the first positive Y/Y reading in six months. 

All indicators continue pointing to modest growth for the foreseeable future.             

     The US released the Beige Book, which offered the following overview of the US economy:

Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded during the reporting period from early April to late May. Activity in the Richmond, Chicago, Minneapolis, and San Francisco Districts was characterized as growing at a moderate pace, while the New York, Philadelphia, and St. Louis Districts cited modest growth. Contacts in the Boston District reported mixed conditions, and the Cleveland and Kansas City Districts indicated a slight pace of expansion. Compared to the previous report, the pace of growth slowed slightly in the Dallas District but held steady in the Atlanta District. Outlooks among respondents were generally optimistic, with growth expected to continue at a modest to moderate pace in several districts.

Aside from the writers over-reliance on the word “moderate,” the report indicated the economy was growing at, more or less, the same rate of the last few years.  Other US data was positive.  Personal consumption expenditures were flat M/M, but the savings rate increased from 5.2% to 5.6%.  I disagree with those who are concerned by the increased savings rate; it indicates the US consumer is correctly judging the oil price drop as temporary and therefore is pocketing the savings for a rainy day.  Both ISM numbers showed growth; the manufacturing index increased 1.3 to 52.8 while the services number dipped from 57.8 to 55.7.  As this table shows, both indicators have consistently been above 50, indicating both sectors are expanding. 

But the best news was the 280,000 payrolls increase demonstrating the spring slowdown was probably temporary. 

     The UK maintained their interest rate and asset purchase policy.  Other news was light.  Nationwide housing prices increased 4.6% Y/Y, indicating the UK housing market is still growing. 

Markit’s numbers were all positive, with construction increasing from 54.2 to 55.9, manufacturing up .2 to 52 and services dropping from 59.5 to 56.5, but still clearly in expansion territory.

     Canada’s RBC MPI increased from 49-49.8, just shy of expansion.  The report noted a modest improvement, although oil’s price drop was still having a negative impact:

At 49.8 in May, up slightly from 49.0 in April, the RBC Canadian Manufacturing PMI reached its highest level since January, but still signalled a fractional deterioration in overall business conditions. A modest increase in production levels was the main positive influence on the headline index in May.

Anecdotal evidence suggested that signs of a stabilization in client spending patterns, especially in export markets, had encouraged manufacturers to boost their output levels. Although total new work dropped in May, the rate of decline moderated from the survey-record pace seen in April. Survey respondents noted that exchange rate depreciation had helped support export order wins at their plants. However, a number of firms continued to report that falling capital spending among clients in the energy sector had weighed on overall demand conditions in May.    

The Canadian unemployment rate was steady at 6.8%.  Overall, oil’s price drop is still hurting the economy.

     And finally we have Japan, where the Markit services number increased from 51.3-51.5 while manufacturing again showed expansion, rising from 49.9 – 50.9.  Both of these indicators have been mostly positive for the last year:

     

 

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