Daily Economic Briefing: February 2, 2010

Daily Economic Briefing: February 2, 2010

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Page 1: Global data summary

• US car sales eased to 10.8mn units in January from 11.2mn in December. This poses a modest headwind for overall consumption last month although other aspects of spending easily could pick up the slack. We look for a 2% gain in consumer spending and a 3% gain in GDP in the current quarter.

• US pending home sales rose 1%m/m in December. These data are a leading indicator of existing home sales based on contract signings and their plunge in November correctly pointed to the sharp decline (16.7%) in December existing home sales. Today’s report suggests that sales have found a bottom at this lower level. This is not necessarily a bad message about the resale market, since the implied sales rate is far above the previous lows and job growth has not taken off yet.

• German retail sales rose 0.8%m/m in December; however, previous declines left the level of sales in 4Q09 down 0.7%q/q saar below the 3Q09 level. With car sales down sharply (around 40%q/q saar) due to the expiry of the car scrappage scheme, overall consumer spending in Germany is tracking a decline of almost 2%q/q saar in the fourth quarter. This poses downside risk to our Euro area estimate, which assumes that spending was flat last quarter after falling 0.6% in 3Q09. The lack of any takeoff in Euro area consumption up until now is a worry and a key departure from developments in the US.

• The RBA confounded consensus expectations and left rates on hold at 3.75%. The statement was even more bullish on growth than in December, citing buoyant domestic conditions and a faster than expected rebound in Asia. The one discordant note was a reference to increased investor concerns about sovereign credit risk in some countries. We now think the RBA will next raise rates in April, and are staying with a view that rates will reach 5% by year’s end. Bigger picture, the RBA is at the vangard of the global policy normalization process, and its willingness to pause in the face of what so far is a modest setback in financial markets is a strong reminder that global policymakers remain firmly biased to supporting growth in 2010. Partly for this reason, almost all of our policy rate calls are below the market for this year, including our view that the Fed and the ECB will not raise rates at all.

• The RBA’s pause probably increases the odds that the Norges Bank, being more exposed to possible fallout from the sovereign credit turmoil in Europe, will take a pause tomorrow. They already have hiked twice in a row and, although we see tomorrow’s meeting as a close call, we think they will hold off hiking again until April.
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Page 2: Ultimately it will come down to final sales

Yesterday’s global manufacturing PMI leaped to a 5yr high, with all of the major survey components moving higher. The robust outcome strongly suggests that output growth will remain robust for at least a few more months.

With that said, the bigger question is what will happen thereafter. Our forecast calls for the boom in global IP to extend at least through the middle of this year, albeit at a somewhat more moderate 7% annualized pace, compared with the record, 10% pace experienced in 2H09. However, the possibility remains that the IP surge will fizzle out in coming months, if final sales disappoint.

A similar sequence played out in the first year of the previous recovery in 2002. Manufacturers cut the level of output below the level of sales during the 2001 recession, liquidating inventory. This is exactly what happened last year, although the gap between output and sales was much wider in 2009. Once sales bottomed they began to raise output to close the gap before stocks fell excessively low. This led to a 6-month stretch of strong output growth in 1H02. The manufacturing recovery then stalled, however, because what had been a promising rally in final sales (sales of consumer goods and capital equipment) quickly fizzled.

Conditions look decidedly better at the current juncture; indeed, we recently doubled down on our manufacturing call, arguing that the boom would continue (“Global IP boom has legs” GDW, Jan 8, 2010). For one thing, our proxies indicate that manufacturers have yet to close the gap with sales, so stocks are still falling, which is an unsustainable condition. Moreover, our proxy for final goods sales was expanding at a healthy 5% annualized pace as of the latest data. That said, it is difficult to have too much confidence that the recovery in final sales will be maintained without a resumption of job growth. Ultimately, our forecast depends on the labor market rebound getting under way before policy support runs out.

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ENDS

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