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By HaleStewart October 24, 2014 4:15 pm
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International Week In Review: The Absence Of Bad News Is A Minor Victory Edition

     The week before this, it seemed as though the bottom was beginning to drop out of the financial markets.  Equities, which are the most visible financial market, sold off sharply and bonds rallied.  News stories of the sell-off increased, adding to the overall intensity.  In contrast, this week we saw a rebound in the equity markets and a far more muted financial press.  But this latest rally could be considered more technical than fundamental, as traders simply picked-up what they perceived to be under-valued shares.  There was also a lack of any meaningful economic news, preventing a market swaying event.  Put more succinctly, it wasn’t that the tenor of events improved.  Instead, the absence of negative news was the real story.

     The big news out of the EU was there wasn’t any.  We saw two major numbers released, with the most important being the Markit composite number of 52.3.  Manufacturing was just barely positive at 50.7 while services printed a somewhat stronger 52.4.  But the underlying detail was not encouraging:

Furthermore, although output rose at a slightly faster rate, new orders barely rose in October, registering the smallest monthly improvement since orders began rising in August of last year. Manufacturers reported a second consecutive monthly drop in new orders, albeit again only modest, while inflows of new business in the service sector showed the smallest rise since January.

The weaker new orders and production numbers do not bode well for the next few reports.  Secondly, the current account was 19.9 billion euros.  The EU has consistently had an export surplus for the last 4-5 years, which some analysts have argued was a primary reason for the euro’s strength.

     The most important news from the UK was the 3% Y/Y GDP growth rate, which increased the number of consecutive quarters where growth occurred to 7:

Also note that since the 3Q13 UK GDP has been above the previous, pre-recession peak. 

But growth has largely been in services (green line) which has risen in tandem with overall GDP growth.  In contrast, production (dark blue/black) and construction (yellow dash) are still at low levels.  This one-dimensional nature of the UK’s growth could be a problem should the service sector take a negative hit.

     The Reserve Bank of Australia released its latest Meeting Minutes, which offered the following assessment of the Australian economy:

The June quarter national accounts had been released the day after the September Board meeting. The accounts showed an increase in real GDP of 0.5 per cent in the quarter and a little more than 3 per cent over the year, in line with the forecasts published in the August Statement on Monetary Policy. Members noted that a decline in resource exports in the June quarter had followed very strong growth in the previous two quarters, which meant that resource exports had made a significant contribution to year-ended growth. Consumption recorded moderate growth in the first half of 2014. Over the year to June 2014, consumption had grown faster than real disposable income, resulting in a further decline in the savings ratio. Growth in dwelling investment had been strong, whereas mining and non-mining business investment in aggregate had fallen over the year.

Overall, the economy appears to be doing fairly well.  But underneath problems are developing in two areas.  First is the over-allocation of the economy to real estate and the drop in business investment.  In addition, the underlying composite picture is painting a slowing picture:

The table above shows the Conference Board’s leading and coincident indicators.  The leading indicators were 129.3 February and 128.9 in August – a net drop.  The coincident indicators did show an increase, but the rise was from 124.5 to 125. 3 – a .8 increase over six months.  Adding to the concern is the table on the bottom that shows the six month change in the LEIs and CEI clearly decelerating, with the LEIs printing a negative number overall.  Overall, these point to continued slower Australian growth in the near future.

     Canada released its Monetary Policy Report, which outlined an economy in decent shape.  Exports have picked up, largely due to the US economy’s strength and Canadian dollar weakness.  Housing is also doing well, but business investment is weak due to a fair amount of excess capacity.  The employment situation is improving, but the unemployment rate – which has recently dropped to 6.8% -- probably overstates job market strength.  There have been some inflationary pressures caused by a pass-through from the weaker currency, but the bank feels these are transitory.  Overall, growth in the 2%-2.5% is expected.

     Overall US news was positive, starting with the .8% increase in the leading economic indicator index.  Inflation printed a very tame. 1.7% Y/Y rate while existing home sales increased 2.4%.  New home sales, however, were reported at a disappointing .2% increase.  As the 30-year mortgage rate is now again at lower levels, I would expect a pick-up in this area of the economy over the next few months.

     As the above summation highlights, there was a dearth of any major news items.  The only news from the EU was slightly positive, allowing for traders to take a breath and wait for next week.  News from the UK, Canada and US confirmed growth, although at a grinding rate.  And the news from Australia again pointed to an economy that has a higher probability of slowing over the nest 3-6 months.  But the lack of any extremely damaging news was really the story – although that’s just not a very positive takeaway in an economic sense.

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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