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By HaleStewart May 31, 2014 8:40 am
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International Week in Review: Winter Chill Hits US and Canada Edition

     The news this week was actually pretty morose.  Neither the UK for Australia printed any meaningful numbers.  Both Canada and the US reported weak 1Q GDP, indicating that the continent wide adverse winter weather was probably the primary culprit.  Japan is dealing with the post sales tax increase slowdown that many had predicted while the EU appears to be seriously considering additional monetary stimulus.

     The news from Japan was predominantly negative, largely as a result of the sales tax increase which recently went into effect.  Retail sales were down 4.4% Y/Y, but they saw a large increase last month as consumers stocked up before the hike.  Household spending dropped 4.6% and housing starts were down 3.3%.  Industrial production decreased 2.5% as well.  The only good news was on the inflation front, where the CSPI was up 3.4% Y/Y and the CPI was up 3.2%.  As this chart shows, this was a strong number in the latest series:

While it seems counter-intuitive to write positively about increasing inflation, this news does add more credence to the argument that Abenomics is, at minimum, returning inflation to the Japanese economy.

     The biggest news out of the EU region was Mario Draghi’s speech where he described conducting monetary policy in a period of low inflation.  This speech led many to conclude the ECB is at least seriously considering some type of additional policy program in response to the EU’s lack-luster economic performance.  News this week added concern to the EU’s overall situation.  First, M3 printed a meager .8% Y/Y increase.  This number has been decreasing since the end of 2012 when it was printing just below 4%.  In addition, private loans contracted 1.8% Y/Y.  In contrast, the EU economic sentiment indicator rose to 102.7, which, as shown in this chart, is a continuation of the recent upswing:

     US news was decidedly mixed.  While the Markit services indicator printed at 58.4 and the Chicago PMI printed at 65.6, 1Q GDP was revised lower to a decrease of 1% (see a more complete analysis here).  In addition, while durable goods new orders increased .8%, this statistical series has been reported in a fairly narrow range for the last year:

Finally, April personal consumption expenditures contracted -.3%.

     The big news out of Canada was the weak 1.2% annualized pace of GDP growth in the 1Q.  Like the US’ situation, this was largely attributed to the harsh winter weather (of course, the fact Canada actually grew in the 1Q is a strong indication that they’re far more acclimated to this type of weather).  As this chart shows, this is the weakest reading in the last four quarters.

It’s interesting how similar the internals of the US and Canadian 1Q GDP are.  Both showed an increase in consumer spending but an overall contraction in business investment, especially gross fixed capital formation.  This adds more weight to the argument that businesses simply sat out the 1Q due to the weather.  In addition, both reports had a weak exports reading.

     In reality, we really didn't learn anything startling or new from the above data.  Economists and analysts have argued that the harsh winter in North America would have a negative impact on growth for the last few months.  EU news has been remarkably weak for a region with a rallying stock market and the general consensus was for a post-sales tax slowdown in Japan.  Should the news continue for at least several more weeks, we should become a bit more concerned.  However, until that happens, this week's reports simply confirmed what is already known. 

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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