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By HaleStewart August 29, 2014 1:44 pm
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International Week in Review: Concern Mounting About the EU and Japan Edition

          This week, two economies moved into the “we are growing concerned” column, starting with the EU.  As I discussed earlier today, the unemployment rate ticked down .1% to 11.5% in its latest reading while CPI dropped another .1% to .3% Y/Y.  As if these numbers weren’t bad enough, private lending contracted again, this time by 1.6% and business sentiment was broadly flat:

The news from the EU has increased in its severity, indicating the region is in serious economic trouble. (For an overview of the situation, see this article; and here is a review of this week's weak news from Germany.)

          In addition to the EU, Japan is now on the list of countries that are issuing concerning economic numbers.  A few weeks ago, we learned that Japanese GDP contracted 6.6% in the second quarter.  While a contraction was expected, the severity of this number was concerning.  Now we’ve learned that the BOJs attempt to stimulate inflation is running into a headwind.  The national core CPI – while rising over 3% Y/Y – was flat month to month. 

And retail sales only increased.5% in their latest reading.  Adding to the concern was the weak industrial production increase of .2% this month:

While no one thought that implementing Abenomics would be smooth sailing, the negative numbers have now occurred for several months, leading to the conclusion that a new round of stimulus may be needed.

          The most important number from Australia this week was the -5% Y/Y drop in new capital expenditures.  This data series has been moving lower for sometime.

In addition, new home sales decreased 5.7% M/M.  However, private credit increased 5.1% Y/Y with increases coming in all three sub-sections: housing (+6.5%), personal (+.8%) and business (+3.4%)).  Australia is still trying to rebalance from a raw material exporter to a more even source of growth – a process that will take time. 

          Canada continues to be the stealth “good news” story.  GDP increased .8% in the 2Q, which translates to an annualized growth rate of 3.1%:

There was also a 2.5% increase in corporate profits from last quarter.  While industrial production was down .3% M/M it was up 2.9% Y/Y.  The one piece of negative news this week was the -11.9 billion current account number.

          Finally, there is the US, where the best piece of news was the upward revision of 2Q GDP in 4.2%.  The increase was the result of increases across most major categories:

Real GDP increased 4.2 percent in the second quarter after decreasing 2.1 percent in the first.  This upturn in the percent change in real GDP primarily reflected upturns in exports and in private inventory investment, accelerations in PCE and in nonresidential fixed investment, and upturns in state and local government spending and in residential fixed investment that were partly offset by an acceleration in imports.

At the same time, real personal consumption expenditures dropped .2% M/M while real disposable personal income increased .1%.  The housing news was mixed.  New homes sales decreased 2.4%, but pending home sales were up 3.3%.  And while the Case Shiller home price index increased 8.1% Y/Y, this pace of increases is decreasing:

Durable goods printed at a 22.6% increase, but this was largely the result of aircraft orders.  Durable goods ex-aircraft and ex-defense decreased .5%.  Finally, consumer confidence increased from 79.2 to 82.5.

          The most concerning news came from the EU, where it is now very obvious that the region is looking at a lost decade with little on the horizon to indicate something has changed.  And not far behind now is Japan, there it appears Abenomics may be stalling.  Australia is muddling through moderate growth, but they have one key advantage: their interest rates are still at 2.5%, giving them ample room to lower if needed.  Finally we have the US, which, like Ausralia, is muddling right now.  Although the 2Q GDP number was very strong, when that it averaged with the 1Q, we’re about to moderate growth.

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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