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By HaleStewart January 9, 2015 11:01 am
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International Economic Week in Review: New Year Not Starting Off Well, Edition

     Let’s start with the EU, where the two statistics most representative of the region’s problems were released: unemployment remained at 11.5% and inflation decreased .2% Y/Y, largely as a result of oils’ price drop. 

Both of these stats highlight just how deeply mired the region is in its economic malaise.  On the good side retail sales increased .6%, furthering their increase.  While the overall PMI was positive, this was mostly caused by an increase in services; manufacturing barely grew.  And the PMI readings from two of the largest economics – France and Italy – were negative.  Finally, several sentiment readings (business climate and consumer confidence) were both weak. 

     The biggest news out of the UK was the BOE kept rates at .5%, which was hardly shocking news to the market.  In addition, their services industry continues to print solid numbers with a reading of 55.8.  While the report said this was the lowest reading in 19 months, that statement needs to be taken with a grain of salt, as the index printed above 60 and has been slowly moving lower since.  Overall, services are clearly operating at an above trend rate.   And finally, the ONS released monthly production and manufacturing figures, which had a solid headline number but weak internals. 

•Total production output increased by 1.1% in November 2014 compared with November 2013. Of the four main sectors, manufacturing (the largest component of production) was the only one to rise, increasing by 2.7%.


•Total production decreased by 0.1% between October 2014 and November 2014. There were decreases in three of the main sectors, with mining & quarrying being the largest contributor, decreasing by 3.7%.

The most likely reason for the decrease is a drop in oil production, as North Sea production prices are high.  This means we could continue to see a split in the UK manufacturing numbers going forward.

     The US Federal Reserve released their most recent meeting minutes, which provided the following synopsis of the US economy:

The information reviewed for the December 16-17 meeting suggested that economic activity was increasing at a moderate pace in the fourth quarter and that labor market conditions had improved further. Consumer price inflation continued to run below the FOMC's longer-run objective of 2 percent, partly restrained by declining energy prices. Market-based measures of inflation compensation moved lower, but survey measures of longer-run inflation expectations remained stable.

This is standard central bank speak for, “things are going fairly well.”  It is interesting they have not yet highlighted the increased growth speed the economy recorded in the 2H14 yet.  The ISM services index printed at 57.2 with strong anecdotal numbers supporting continued expansionary hopes for the economy.  And finally, the BLS released the latest employment report which was fair.  While the headline number was 252,000 and all monthly revision showed a new 50,000, wages decreased 5 cents/hour, lowering the Y/Y change to 1.7%.  This was a big disappointment.

     The biggest news from Australia was the release of the AIG numbers (The Australian equivalent of the Markit surveys) for manufacturing, services and construction, which were reported at 46.9, 47.5 and 44.5 respectively.  Below the surface, all three surveys showed deepening problems.  Only two manufacturing sub-indexes increased while only 4 of 8 industries expanded.  The service sector has been reporting negative numbers for 10 consecutive months and all sub-indexes were contracting.  And the construction sector’s four main components were all below the 50 reading.  When read together, these reports show an economy that is struggling to maintain momentum, which explains the 6 month equity market sell-off.  And to top off the weaker economic numbers, exports only increased by 1%, which continues their slowdown:

     I discussed Canada’s weekly statistics in detail earlier this week.  Since the release of that report, Canada also released their unemployment report which showed a slight decrease in jobs and a steady unemployment rate at 6.6%. 

Given Canada’s position as a net oil/raw materials exporter, they could face some weakness going forward related to the drop in oil prices.    

     Finally, Japan released their leading and coincident indicators, both of which declined, with the former dropping .7% and the latter moving 1% lower. 

     We start the year with several areas of concern, beginning with the EU.  As I noted at the end of last year, the region is mired in sluggish growth which this week’s economic numbers simply confirmed.  Japan is also facing potentially slower growth while Australia, although growing, has obvious internal weakness.  Canada is starting to see the bite from lower oil prices as well.  The only two economies that are printing solid numbers are the US and UK.

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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