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By HaleStewart June 8, 2014 12:32 pm
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International Week in Review: ECB Actually Does Something Edition

     The big news last week was the ECB finally stepping into the anti-deflation game.  First, they cut interest rates by 10 basis, which is really more a symbolic move than anything.  However, they are also charging banks 10 basis points to hold money at the ECB.  While analysts seem to be split on the actual efficacy of this policy, it at least moves the bank the appropriate policy direction.  While the decision to take this steps was probably set before the release of this week’s economic numbers, the .7% Y/Y CPI rate and -1.2% Y/Y PPI rate certainly added fuel to the fire.  In addition, unemployment printed at 11.7% -- a .1% drop, but a still very high level.  The final piece of bad news for the region came in the .9% Y/Y GDP growth rate.  On the good side, retail sales increased 2.4% Y/Y and the manufacturing PMI was reported at 52.2

     The ECB wasn’t the only central bank that issued a policy statement this week, as the BOE announced it would maintain its policy rate of .5% along with its asset purchase program.  Neither of these moves was in any way surprising.  Other numbers issued dealing with the UK economy pointed to continued growth: the services PMI printed at 58.6 and the construction PMI came in at 60 (this was the lowest reading in the last 7 months).  And finally there was manufacturing which was reported at 57.  This number has been very consistent as seen in this graph from the report:

     The RBA also issued its policy this week, keeping rates at 2.5%.  They issued a standard policy statement with the announcement, where they offered this appraisal of the Australian economy:

In Australia, the economy grew at a below-trend pace in 2013 overall, but growth looks to have been somewhat firmer around the turn of the year. This has resulted partly from very strong increases in resource exports as new capacity has come on stream, but smaller increases in such exports are likely in coming quarters. Moderate growth has been occurring in consumer demand and a strong expansion in housing construction is now under way. At the same time, resources sector investment spending is set to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative, as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued.

Australian GDP printed at a solid 3.5% Y/Y rate and retail sales expanded .2% M/M.  There was also the AIG services number which was reported at 49.9, just shy of expansion.

    The Canadian central bank was the last major bank to issue its policy statement last week, keeping rates at 1%.  They issued the following assessment of the Canadian economy in conjunction with their interest rate announcement:

The Canadian economy grew at a modest rate in the first quarter, held back by severe weather and supply constraints. The ingredients for a pickup in exports remain in place, including the lower Canadian dollar and an anticipated strengthening of foreign demand. Improved corporate profits, especially in exchange rate-sensitive sectors, should also support higher business investment in the coming quarters. There are continued signs of a soft landing in the housing market and a constructive evolution of household imbalances. We still expect excess supply to be absorbed gradually as the fundamental drivers of growth and inflation in Canada strengthen.

Note the inclusion of the negative effects of a severe winter weather on the Canadian economy.  RBC also issued its monthly manufacturing PMI which registered a 52.2.  While exports and imports declined slightly, the overall trend for both is encouraging.  While an increase in imports might seem a bit counter-intuitive as a good sign, it usually means the domestic demand is increasing.  Finally, the Canadian unemployment rate increased .1% to 7%, but this increase was due to more people entering the labor market.

     The biggest news out of the US was the 217,000 payroll increase and unemployment rate of 6.3%.  This was a treading water report.  While jobs grew, there were no meaningful revisions to previous reports and hourly wages barely grew.  But on the plus side were the new auto sales numbers of 8.04 million units at an annual pace, a 58.1 service PMI and 55.4 manufacturing number.  Overall, the possibility of continued positive economic numbers from the US is continuing. 

     Japanese news was very light last week.  The PMI manufacturing number was 49.9 while the services index was 49.3.  The negative number for both was attributed to the recent increase in the sales tax. 

     By far, the best news this week was the ECB’s actions to lower rates.   While a good argument could be made that they should have acted sooner, at least they have finally acted.  And, with their move into negative interest rates, further, aggressive action might be forthcoming.  The UK continues to print the best numbers of OECD countries, while the US and Canada are still slogging through slower than anticipated 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 

Replies: International Week in Review: ECB Actually Does Something Edition

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    tonyferreira's picture
    tonyferreira Posts: 1

    Hey Hale, I am rather new to your work, and have only been following you for the past couple of months, and so far, I like your style a lot. You present a lot of good economic indicators, some that I never knew existed.

    Here is one of them. I have been concerned for a while, that the low Initial Jobless Claims, might be giving us a false signal, about the true strength of our labor market. After all, if new workers are not offered any benefits, and they are let go, they probably will not file for something that they are not entitled to get.

    But on your Friday Non Farm Payroll report, you mentioned the 5 Week Unemployment Index, and so I back tested it, and found that in 10 of our last 11 recessons, when you got a 25% increase in this index, you got a recession, and it was on average one month late in giving the signal. The only recession that this did not work, was the 1990-91 recession, where we never even got close to hitting 25%.

    Right now, this index is only 5% above its recovery low, so this indicator is confriming that recession should not be a concern for us, even with our first quarter negative GDP.

    Thanks again for all your fine work. And keep sharing great economic indicators wtih us.

    Take care






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