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By HaleStewart April 5, 2014 12:01 pm
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International Week in Review; The ECB Drops the Ball (Again) Edition

     This week, let's start with Australia where the Reserve Bank of Australia kept rates at 2.5% this week.  Governor Stevens gave the following assessment of the economy in the press release:

In Australia, the economy grew at a below trend pace in 2013. Recent information suggests slightly firmer consumer demand over the summer and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have improved from a year ago and exports are rising. But at the same time, resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of improved conditions before committing to expansion plans. Public spending is scheduled to be subdued.

The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. It will probably rise a little further in the near term. Growth in wages has declined noticeably. If domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be expected over time, which should keep inflation consistent with the target, even with lower levels of the exchange rate.

The general tenor is one of continuing moderate growth.  In addition, the most recent retail sales number increased .2% M/M while exports and imports were close to unchanged in the latest monthly reading.

     Markit released a slew of numbers this week; their Japanese manufacturing number was 53.9 while Japan's service number was 52.2.  The BOJ also released the Tankan survey which contained the following two charts of historical data:

While the latest readings were mixed, the overall trend has been positive for the duration of this expansion.  Also note the marked increase when Abenomics started in mid-2012.  Finally, industrial production decreased 2.3% M/M but was up 6.9% Y/Y.  Underlying all of these numbers is concern about the sales tax increase that is set to take effect soon.  There is concern of a repeat of the scenario from 1997, where a similar increase led to a quarter of economic contraction.

     Canada had two pieces of good news this week.  Employment increased by 43,000, which led to a .1% decrease in the unemployment rate to 6.9%.   Here is a chart of the Canadian unemployment rate from the report:


The rate has been relatively stable at high levels for the last 6-9 months between 7% and 7.5%.  And, last month's GDP increased by .5% M/M.  The trade balance also increased to 29 billion.

     The EU decided to keep rates unchanged (for more on the ECB policy statement, see this link).  We also learned that year over year inflation again decreased, this time to .5%, while retail sales increased .4%.  Perhaps the best news for the region was the composite Markit PMI, the chart of which is here:


This is actually a very encouraging chart.  (Earlier this week I wrote an extended piece on the EU economy here

     The UK housing market continues to show signs of a potential bubble, with the Halifax price index increasing 8.7% Y/Y and the HPI index up 9.5% Y/Y.  Other numbers indicate the UK economy is in the middle of a solid expansion, with the manufacturing PMI printing at 62.5 and the services number coming in at 57.6.  Finally, all areas of construction continue to show very strong expansion as shown in this chart:

     US news was optimistic.  The obvious big number of the week was the 192,000 expansion in payrolls, although the unemployment rate remained at 6.7%.  In addition, auto sales increased to a 7.75 million annual pace.  The ISM manufacturing number printed at 53.7 while the services number was 53.1.  Both reports contained bullish anecdotal reports.

     The biggest concern going forward is still the ECBs apparent reluctance to engage in any form of program that attempts to stem the potential for a deflationary spiral in the region.  Close behind is the potential negative impact of the upcoming Japanese sales tax hike.  We've seen surges across the board in various economic activities as consumers and businesses appear to be pulling purchases forward in anticipation of the increase.  The employment news from the US indicated the negative impacts of the extreme winter are thawing.  And finally, the UK looks to be in the middle of a strong expansion.

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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