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By HaleStewart January 12, 2014 8:45 am
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International Week in Review: US Payrolls Shocker Edition

Last week was the first full week of economic news for 2014 and the magnitude of the reported data did not disappoint.  Perhaps the most important print was the disappointing US payroll data, which came in at a paltry 74,000.  This was perhaps more shocking in light of the ADP payroll number printing over 200,000 a few days prior.  While the unemployment rate declined from 7%-6.7% the primary causation was people leaving the labor force.  Analysts were left scratching their heads trying to make sense of the low number, especially in light of the very strong string of US economic news we’ve seen over the last few months.  While some attributed the drop to the inclement weather, this would only account for some of the drop.  Perhaps the best explanation was offered by an ING analyst who argued that this data point was too out of place with other recent data to be taken literally.  This at least takes into account the numerous revisions US employment data go through post-issuance.  However it doesn’t completely allevite the nagging feeling that, once again, the US economy will disappoint in the coming year.

The ECB kept rates at .25%.  Here is their analysis of the current EU situation:

Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.1%, quarter on quarter, in the third quarter of 2013, following an increase of 0.3% in the second quarter. While developments in industrial production data for October point to a weak start to the fourth quarter, survey-based confidence indicators up to December have improved further from low levels, overall indicating a continuation of the gradual recovery in economic activity. Looking at 2014 and 2015, output is expected to recover at a slow pace, in particular owing to some improvement in domestic demand supported by the accommodative monetary policy stance. Euro area economic activity should, in addition, benefit from a gradual strengthening of demand for exports. Furthermore, the overall improvements in financial markets seen since the summer of 2012 appear to be working their way through to the real economy, as should the progress made in fiscal consolidation. In addition, real incomes have benefited recently from lower energy price inflation. At the same time, unemployment in the euro area remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on economic activity.

Thankfully, Draghi isn’t over-promising.  The EU printed .3% GDP growth in the 2Q13 only to see that number come in at a disappointing .1% in 3Q13, indicating the recovery is at best shaky.  While the recent Markit surveys have been promising, unemployment is still over 12%. While sovereign debt yields are coming down, that isn’t translating into strong loan growth, especially at the individual level.  And we’ve been hearing about how export growth will lead to further domestic growth from practically all major economies over the last few years only to be disappoint.  Perhaps this is why Draghi issued this important caveat to his statements:

The risks surrounding the economic outlook for the euro area continue to be on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices, weaker than expected domestic demand and export growth, and slow or insufficient implementation of structural reforms in euro area countries.

The Bank of England kept rates unchanged and made no modifications to their asset purchase program at their latest meeting.  We’ll have further information from this meeting later this month when the bank release the minutes to their meeting, but this move shouldn’t surprise anyone.  While the UK is experiencing better economic numbers over the last 3-5 months, the recovery is still nascent, so a change in central bank policy is not warranted.

Canada actually released what could be the most important piece of data this week, when we learn that employed dropped by 45,000 in December, which was in stark contrast to the consensus estimate of about 15,000.  Canada has been experiencing a slowing economic picture over the last few months.  While growth has been positive, an overall rebalancing of the economy has not yet taken place which is concerning to the central bank:

In Canada, underlying growth is broadly in line with the Bank’s projections in its October and July Monetary Policy Reports. Real GDP growth in the third quarter, at 2.7 per cent, was stronger than the Bank was projecting, but its composition does not yet indicate a rebalancing towards exports and investment. The housing sector has been stronger than expected but is consistent with updated demographic data and a pulling forward of home purchases in light of favourable financing conditions. The Bank continues to expect a soft landing in the housing market. Non-commodity exports continue to disappoint and the price of oil produced in Canada has eased further. Business investment spending is up from previous low levels, but is still recovering more slowly than anticipated. On balance, the Bank sees no reason to adjust its expectation of a gradual return to full production capacity around the end of 2015.

Currently Canada has rates at 1%.  The latest report puts a fair amount of pressure on the Canadian central bank to lower rates further.

The decisions from the ECB and the BOE were expected; there is nothing new there.  The biggest shocker of the week was obviously the US payrolls data, which may, in and of itself, force the Fed to slow its tapering program.  But not much farther behind is the news from Canada, which indicates the Bank of Canada is probably doing some serious thinking about its policy level right now.

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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