Daily Economic Briefing: February 11, 2010

Daily Economic Briefing: February 11, 2010

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Page 1: Global data summary

• EU heads of state issued a short statement telling Greece to implement its deficit-reduction plan on schedule and that progress will be monitored by the EU, drawing on expertise of the IMF, with a first assessment due next month. Left unsaid was that Greece, in return, will get assistance to prevent a liquidity crisis if it is needed. Likewise, it is becoming clearer that EU leaders are prepared to step in if financial stress spreads more broadly in the Euro area with a package of measures that probably would include loans, credit lines and guarantees to those sovereigns and financial institutions that need them.
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• Recent central bank communications signal that policymakers remain firmly biased to supporting growth, reinforcing our view that markets have priced in too much tightening. The few central banks that have raised rates, including the RBA, Norges Bank and Bank of Israel, recently paused. In EM Asia, where tightening appears most justified, Chinese authorities have yet to raise rates or loosen their grip on the currency, and this is holding other regional players back. For example, the Bank of Korea today signaled that it is likely to stay on hold near-term, causing us to push back an assumed first rate hike to 3Q. Similarly, the central bank of Latin America’s hottest economy, Brazil, earlier this month was noncommital on an expected March rate hike. Today’s Riksbank statement is a minor exception to the rule: the Bank signaled its intention to begin raising rates in 3Q, a few months earlier than before. We still see rates on hold at 0.25% through 2010 based on our call that core inflation will slide to close to zero by year’s end.

• China’s inflation rate eased to 1.5%oya in January, which will temper concerns that the economy might be overheating and prompt aggressive tightening. We believe that inflation risks have been overstated and that policy will remain geared to promote growth in 2010. Bank loan growth, which is a central focus of official tightening measures to date, remained strong but has moderated recently to 1.4%/month, equivalent to 17%oya.

• US initial jobless claims retreated to 440,000. The BLS said today’s figures are clear of distortions from California, where a backlog of unprocessed claims boosted national figures in January. Our internal model linking claims and the unemployment rate to job growth says that the current level of claims is consistent with job gains of just over 100,000 per month.

• Australia, which is setting the pace in job creation in the developed world, added 53,000 jobs in January, pushing down the unemployment rate to 5.3%. We stay with our call that the RBA will leave rates on hold until April while it waits to see how consumption is faring.
Page 2: Firms restart capex

Japan machinery orders were reported yesterday to have leaped 21.2%m/m in December, more than recovering the 8% slide in November. Encouragingly, the surge was broad-based, with orders from both manufacturers and non-manufacturers moving sharply higher The strong Japan data follow solid capital goods orders out of the US as well, with US non-defense, non-aircraft capital goods orders up more than 2%m/m in both November and December. Meanwhile, Germany manufacturing orders disappointingly declined in December, though the trend still looks quite positive on a smoothed basis. Taken together, G-3 orders present a very optimistic outlook for capital expenditures going forward.

Firms slashed investment in late 2008 and early 2009 as demand declined and they tried to preserve profits. After about a year of cutting back, capital goods orders started growing again around the middle of last year. Accordingly, there was also a shift in capital shipments, which are closely correlated to orders but lag by 1-3 months. Combining the US, Japan, and Germany data, we create a measure of G-3 shipments, which we use as a proxy for contemporaneous global capital spending. On this basis, we estimate that global capex rose at roughly a 15% pace (saar) last quarter.

The continued resilience in machinery and equipment orders through the end of last year implies that the growth of shipments, and thus spending, is likely to remain elevated in the near term. Further out, we expect elevated capex growth through 2010 as firms continue to steadily transition into an expansionary mindset and make up for minimal investment through the recession. Indeed, we estimate that capital stocks likely contracted in 2009 in the G-3 as firms cut investment below the pace of depreciation.

One implication of our robust capital spending outlook is the positive effect that it will have on global trade. A significant portion of exports is made up of capital goods. While restocking and rising consumer demand, especially for autos, helped boost trade over the past several quarters, a revival in capital spending will reinforce the trend.

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ENDS

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