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By HaleStewart May 3, 2014 8:56 am
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International Week in Review: The US' Weak Growth Head Fake Edition

     The biggest news events this week came from the US, starting with the Fed announcing a further reduction in its asset purchase program.  After noting the US economy is still expanding -- albeit against some moderate headwinds -- they announced:

Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Something that's been lost in the coverage of this event is the Fed is still reinvesting the principal payments of its portfolio as they comes due, which is a fairly major amount of money.  In addition to the Fed policy, the US announced very weak growth in the first quarter of .1%.  However, most analysts (myself included) concluded this was the result of adverse weather conditions, not a permanent change.  Bolstering this argument was the very strong (for this expansion) employment report showing a net improvement of 288,000 in establishment jobs and the .9% M/M increase in personal consumption expenditures.  The strength of consumer spending was overlooked in the 1Q GDP report.  Here is a chart of that number from the end of the recession:

The data shows the consumer has been remarkably resilient, especially considering  overall economic headwinds.  Finally, the last piece of strong good news was the ISM manufacturing report, which increased to a reading of 54.9.  Most importantly, the anecdotal comments in the report showed a very solid manufacturing sector.

     Japan also announced its monetary policy, which it kept at .1% with no change in its asset purchase program.  The bank is lowering its economic projections "due mainly to a delay in export recovery."  We also saw more front loading of economic activity in anticipation of the upcoming sales tax increase.  First, retail sales increased a sharp 11%, indicating consumers are stocking up on purchases.  Along these same lines, household spending  increased 7.2%.  Second, manufacturing PMI dropped to 49.4, part of which was caused by a drop in new orders.  As this chart shows, the drop is fairly severe:

The general consensus is for a drop in Japanese GDP in the 2Q, largely as a result of the sales tax increase.  The above numbers bolster this contention.

     News from the EU was mixed.  First, the private loan market continued to contract, printing a 2.2% decrease.  In addition, CPI only increased 1% Y/Y, adding further deflationary evidence.  And unemployment is still high, printing at 11.8%.  However, manufacturing is increasing, with the Markit numbers printing at 53.4.  Most importantly, all of the respective manufacturing numbers are now above 50:

     The UK continues to be the star performing economy.  GDP increased .8% in the first quarter, which translates into a 3.1% Y/Y figure.  We also saw a strong manufacturing number of 57.3.  However, concern is growing about a potential housing bubble as house prices increased 10.9% Y/Y.   Sir Jon Cunliffe gave a speech on the topic last week, in which he noted:

“It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year.  The extent to which that will jeopardise financial stability depends on whether that pressure actually results in more transactions at higher prices, whether that in turn leads to an increase in household indebtedness and where that debt is concentrated.”

This focus on the housing sector indicates the BOE may be looking at a rate hike sooner rather than later.

     Canada had a good week.  Their manufacturing report printed at 55.4, solidly above the "50" line that separates expansions and contractions.  In addition, their GDP increased .2% M/M, continuing its advance:

Finally, central banker Stephen S. Poloz testified before the Canadian government, where he noted the Canadian economy is doing fairly well.  However, he noted that parts of the Canadian export economy are facing increased competition and reliance on the strength of overseas economies -- an issue the country must deal with going forward.

     Australian manufacturing continues to have problems, with the Australian PMI dropping 3.1 points to a reading of 44.8.  As this chart shows, Australia is still dealing with the ramifications of the Chinese slowdown:

     The most important news this week came from the US, where it appears the weak first quarter GDP reading was an anomaly caused by bad weather.  Hope continues for future EU growth, as evidenced by the PMI numbers, but underlying structural issues are still clearly in play.  It appears more and more likely we'll start seeing negative numbers from Japan for at least a short period of time as the sales tax increase takes effect.  And the UK continues to be the strong growth story of the first half of 2014.

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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