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By HaleStewart February 14, 2014 6:09 pm
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International Week in Review: Central Bankers Take Center Stage Edition

Last week was full of some as great economic news.  Probably the best came from the EU, where 4Q GDP grew by .3% Q/Q and .5% Y/Y.  French GDP was up .3%, German .4% and Italian up .1%.  While some commentators believe these numbers reduce pressure on the ECB to do something about deflation, I would argue that problem is already several enough to warrant some action.  On the down side, industrial production was down .2% M/M, but it was up .5% Y/Y.

Abenomics was dealt a blow with the 15.7% M/M decline in machinery orders.  But this was coming off a strong showing the previous month, so all we could be seeing is a natural deceleration from a strong upward move.  On the plus side, the corporate gross price index was up 2.4%, indicating inflationary pressures are finally building within the economy.

The UK received some very strong news in a 3.9 Y/Y increase in retail sales.  In addition, the BOE released the latest inflation report, the release of which was presaged by the following remarks from BOE head Mark Carney about the current state of the UK economy:

The recovery has gained momentum. Output is growing at the fastest rate since 2007, jobs are being created at the quickest pace since records began, and after four years above target the inflation rate is back at 2%.

The recovery to date has been underpinned by a revival in confidence, a reduction in uncertainty, and an easing in credit conditions. This has led households to save less and spend more, and has prompted a strengthening in the housing market. While business investment has so far been subdued, recent data and surveys suggest that it is likely to gather pace this year.

Overall, this is a pretty good assessment.

The US’ news was marked by the first appearance of new fed chief Janet Yellen, who gave the following assessment of the US economy:

The economic recovery gained greater traction in the second half of last year. Real gross domestic product (GDP) is currently estimated to have risen at an average annual rate of more than 3-1/2 percent in the third and fourth quarters, up from a 1-3/4 percent pace in the first half. The pickup in economic activity has fueled further progress in the labor market. About 1-1/4 million jobs have been added to payrolls since the previous Monetary Policy Report last July, and 3-1/4 million have been added since August 2012, the month before the Federal Reserve began a new round of asset purchases to add momentum to the recovery. The unemployment rate has fallen nearly a percentage point since the middle of last year and 1-1/2 percentage points since the beginning of the current asset purchase program. Nevertheless, the recovery in the labor market is far from complete. The unemployment rate is still well above levels that Federal Open Market Committee (FOMC) participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.

Among the major components of GDP, household and business spending growth stepped up during the second half of last year. Early in 2013, growth in consumer spending was restrained by changes in fiscal policy. As this restraint abated during the second half of the year, household spending accelerated, supported by job gains and by rising home values and equity prices. Similarly, growth in business investment started off slowly last year but then picked up during the second half, reflecting improving sales prospects, greater confidence, and still-favorable financing conditions. In contrast, the recovery in the housing sector slowed in the wake of last year's increase in mortgage rates.

The key takeaway was her clear reference to using broader and more comprehensive measures of employment and unemployment to arrive at Fed decisions.  While it’s a sure bet the fed already did this, she was probably cuing the market to look at the far broader measures when trying to determine the future path of monetary policy.

While US retail sales decreased .4% and industrial production decreased .3%, the inclement US weather most likely influenced these numbers lower.

Finally there is Australia, where the numbers added to the RBA’s policy conundrum.  Home prices continued their increase, with a 3.4% Q/Q growth rate.  But unemployment also increased .2%, rising from 5.8% to 6%.   While the RBA would probably like to lower rates (which are currently at 2.5%), the potential housing bubble may prevent further central bank easing.

Overall, the news this week was positive.  Two major central bankers (Carney and Yellen) gave upbeat assessments of their respective economies.  In addition, both signaled that their respective easy money policies will probably be continuing for some time.  The biggest concern was Australia where we are seeing a gradual weakening on several important economic fronts.

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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