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By HaleStewart January 18, 2014 8:27 am
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International Week in Review: Inflation Still a Non-Threat

Last week, the biggest news was the continued lack of global inflationary pressures.  The US’ core PPI was 1.4% Y/Y while the core CPI printed at 1.7% for the same period.  Germany’s WPI was .4% M/M, Italy’s was .2% M/M and .7% Y/Y while Spain’s was .3% Y/Y.  UK inflation dropped a bit, with core CPI coming in at 1.7% Y/Y and core PPI coming in at 1% Y/Y.  The sum total of all this news is central banks in the US, EU and UK have nothing to worry about from inflationary pressures.  Should each bank want to continue their policy of low interest rates, they certainly can.

The Conference Board reported another increase in the UK leading indicator index, with the latest reading coming in at .5%.  From the report:

“The fifth consecutive monthly advance by the U.K. LEI suggests that the economy will continue expanding and its pace could even pick up moderately in the first half of 2014,” says Bart van Ark, Chief Economist at The Conference Board. “Widespread strength from production and job growth, along with sustained support from monetary policy, will add fuel to the recovery. Productivity, however, will remain the Achilles’ heel of Britain’s long-term growth performance, as reflected in The Conference Board’s latest release of productivity estimates, yesterday.”

In contrast, while retail sales increased 5.3% Y/Y, the devil is in the details of the report: “The underlying pattern in the data as suggested by the three month-on-three month movement shows much weaker growth (0.4%) than suggested by the year-on-year increase (5.3%). Contractions in the quantity bought in food stores and petrol stations continued to offset growth in the quantity bought in non-food stores and non-store retailing.”  In addition, the cumulative, 12 month Y/Y comparison of 2013 to 2012 was an increase of 1.6%.  Still, the December Y/Y increase is good news, indicating the holiday shopping season may have been better than expected.

News from Japan continued to show improvement.  Total machinery orders increased 28% Y/Y, while core orders increased 4.3% M/M and 16.6% Y/Y. 

Australia had perhaps the worst week; they saw total employment drop by 22,600 – a strong miss and a number that was a bit far outside the expected results.  While the unemployment rate remained at the 5.8% rate, the overall damage was done by the employment number, sending the Australian dollar through support.

US news continued to show a “moderate” expansion.  The National Federation of Independent Business’ optimism index increased from 92.5 to 93.9.  However, note this reading is still at historically low levels.  Core retail sales increased .7.  The best news came on the industrial production front, which increased .3% M/M.  Perhaps the best description of the overall US economic picture came from the Federal Reserve’s Beige Book, which described the US economy thusly:

Reports from the twelve Federal Reserve Districts suggest economic activity continued to expand across most regions and sectors from late November through the end of the year. Nine Districts indicated the local economy was expanding at a moderate pace; among these, the Atlanta and Chicago Districts saw conditions improve compared with the previous reporting period. Boston and Philadelphia cited modest growth, while Kansas City reported the economy held steady in December. The economic outlook is positive in most Districts, with some reports citing expectations of "more of the same" and some expecting a pickup in growth.

Without a doubt, the best news this week was that regarding inflation.   QE programs are clearly not leading to rampant inflation, thereby giving central banks a great deal of room to maneuver on the policy front.  While Abenomics continues to bear economic fruit, Australia may be entering a period of below consensus economic prints.  Finally, the US continues to expand at a moderate pace.   

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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