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By HaleStewart April 13, 2014 12:23 pm
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International Week in Review: China's Problems Continue Edition

          For over 10 years, China reliably printed positive economic statistics.  No more.  For the second month in a row, Chinese economic numbers have disappointed.  Exports dropped 6.6% Y/Y in the latest report, indicating that last month’s sharp drop may have been a harbinger of bad news.  In addition, the Chinese government had a failed bond auction which added more bad news to the Chinese financial sector

     Australia had mixed news.  While the unemployment rate decreased from 6.1% to 5.7%, the business confidence surveys have been declining as shown in this chart:

Finally, consumer sentiment dropped 4.9% Y/Y.

     We had one piece of news from Canada: an 11.6% drop in building permits.  While this decrease follows a strong rise the previous month, the current level of building permits is at multi-year lows.  There is a seasonality to Canadian numbers, with increases in the spring/summer and decreases in the fall/winter.  This seasonality makes sense given Canada’s climate.  But, anytime we see a number print a multi-year low we need to take notice.

     Japan’s central bank voted to maintain their interest rate and asset purchasing policy.  They also released the minutes of the latest meeting, which indicated the economy is growing in a favorable manner.  Contained in the report was very positive news about capital investment:

The pick-up in business fixed investment had become increasingly evident as corporate profits had improved. According to the Financial Statements Statistics of Corporations by Industry, Quarterly, business fixed investment in nominal terms on a basis excluding software fell marginally in the July-September and October-December quarters of 2013 on a quarter-on-quarter basis, while that on a basis including software rose in the October-December quarter. Business fixed investment on a GDP basis continued to increase for three quarters in a row through the October-December quarter. The aggregate supply of capital goods (excluding transport equipment), a coincident indicator of machinery investment, exhibited high growth in January 2014 relative to the October-December quarter of 2013. In addition, machinery orders (private sector, excluding orders for ships and those from electric power companies) -- a leading indicator of machinery investment -- and construction starts (floor area, private, nondwelling use) -- a leading indicator of construction investment -- continued to increase as a trend, albeit with monthly fluctuations.

Finally, the corporate price index rose 1.7% Y/Y.  This index has been rising steadily as shown in this chart:

     Good news continues to come from the UK.  Industrial production increased 2.7% Y/Y and .9% M/M.  As this chart shows, IP is clearly in a rising trend:

The BOE also voted to maintain their current interest rate policy and asset purchase plan.  As inflation is at a 4 year low, this policy makes sense.

     Finally, in the US PPI increased .5% M/M.  However, this increase was due almost entirely to a single sub-component.

     Overall, the news continues to show expansion.  However, a word of caution regarding China.  While the news is not bad per se, cracks are emerging in their economic model that must be dealt with.  The financial system is clearly in need of policy changes.  In addition, for the second month in a row exports disappointed indicating a new trend of slower export growth may be taking hold.  Also of importance is the increased news coverage of China’s pollution issues, which will have long-term negative ramifications for China’s health policy.  Overall, it is appearing more and more likely that the period of rapid Chinese growth is over and the new trend of slower growth with additional problems is beginning.

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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