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By HaleStewart May 17, 2014 12:17 pm
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International Week In Review: Japanese And EU Slowdown In the Works Edition

     Let's start by looking at the good news coming from Japan: the corporate CPI index increased 4.1% Y/Y and 2.8% M/M.  This is very good news on the inflation front, indicating that price gains are starting to take hold.  In addition, machine tool orders increased 48.8% Y/Y, indicating the businesses are starting to retool as a result of consumer demand.  We also saw a .7% increase in industrial production and a .4% increase in capacity utilization.  All of this leads to the best news for Japan: a 5.9% Y/Y increase in GDP.  However, this was due to consumers stocking up on all sorts of products before the sales tax increase takes hold.  The general thinking is we'll see at least one quarter of contraction as a result of all the economic activity getting pulled forward.

     Bad news continues for the EU.  First, EU GDP only increased .9% on an annual basis.  The worst part of the news was the -.1% contraction in Italy and the 0% growth rate from France.  Here's a table from the report showing the weakness:

As the table shows, of the three largest economies only Germany shows any meaningful growth rate.  Adding to the pressure was the -.3% M/M decrease in industrial production and weak .7% Y/Y CPI increase which only continued the weak pricing situation within the trading block:

  The only conclusion to draw from this data is the EU is still a very sick region in need of something to increase growth.

     Overall the US news was positive.  The housing market received two pieces of good news: building permits increased 8% while housing starts rose 13.2%.  We also saw a decent increase in prices with PPI up 2.1% Y/Y and CPI up 2% Y/Y.  As this chart shows, these are some of the strongest readings we've seen from these statistics over the last year:

While these are only one month of data, the increases are strong enough to credibly indicate deflatary pressures may be weakening.  Industrial production decreased .6%, but this was mostly due to a drop in utilitiy production.  

     The primary news out of the UK was the release of the quarterly inflation report.  More importantly were the comments from the BOE on the matter, which the media interpreted as being very dovish.  When talking about the overall policy goals of the bank's current program, they noted, "The MPC’s flexibility to maintain extraordinary stimulus for as long as necessary is supported by close coordination with the Financial Policy Committee (FPC), which remains vigilant to any resulting risks to financial stability, including those associated with housing. Having taken initial steps in November, the FPC retains considerable flexibility over a graduated range of tools to manage those risks."  In addition, Carney noted that additional slack would need to be taken up before the bank removed any of its extraordinary stimulus.  

     The biggest concern now is the potential for a Japanese contraction and the continuing slow progress in the EU.  While the consensus there is for the economy to bounce back after a quarter of contraction, there is no guarantee of that.  And the EU region is still in terrible shape.  While it's no longer in a recession, it's growth rate is nowhere near the level needed to begin lowering the 11.8% unemployment rate.  And there is no indication we'll start to see that level anytime soon.  The 1Q slowdown in the US is appearing more and more to have been caused by the weather, while the news from the UK continues to point to 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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