Daily Economic Briefing: March 3, 2010

Daily Economic Briefing: March 2, 2010

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Page 1 of 2: Global data summary

• The RBA resumed its tightening campaign today, hiking the cash rate 25bp to 4%. Notably, Board members were presented with very strong retail sales data for January, which likely eased concerns about how households were adjusting to previous hikes. Having lowered rates over 400bp at the height of the global financial crisis, the RBA still views the current setting as overly accommodative based on its economic forecast. We look for the next rate hike to occur in May.

• The Bank of Canada left rates on hold but noted that both growth and core inflation are higher than anticipated. We continue to think that economic conditions no longer warrant policy at an emergency setting: real GDP surged 5.0%q/q saar in 4Q, unemployment has apparently peaked, and inflation is on a higher trajectory than the Bank expected. Consequently, we continue to look for the Bank to begin raising rates in July.

• GDP reports from Switzerland and Poland broke a pattern of downbeat readings from Europe. Swiss GDP rose nearly 3% annualized in 4Q09, led by solid growth in domestic final demand and net trade. The Swiss recession was very shallow and confirmation that the recovery is on sound footing is expected to prompt a series of gradual rate hikes beginning in 3Q. Just as Switzerland is outperforming its peers in Western Europe, Poland is doing the same in relation to Hungary and the Czech Republic in Central Europe. Our calculations show that GDP rose nearly 5% annualized, again with domestic demand leading the way. The NBP is forecast to begin raising rates in 3Q.

• Japan delivered a mixed bag of January reports. On the positive side, the labor market continued to firm, with the job offers ratio climbing and the unemployment rate falling 0.3% pts to 4.9%. On the negative side, the survey of household spending plunged. This contradicted the rise in retail sales reported last Friday, and cast doubt on the outcome for consumer spending on the month. The Cabinet Office index, which is due next week, will settle the issue. More fundamentally, it remains unclear how sharply consumer spending will moderate in 1H10 as fiscal stimulus fades. We will need a few more months of data to know.
• The first sampling of February CPI reports hints that global headline inflation is cresting. The year-ago headline rate eased slightly in the Euro area, Korea and Thailand, although not in Indonesia. We look for headline inflation to peak during this quarter but the exact timing depends on any lags in the transmission of commodity-price base effects to consumer prices for energy and food, and on the path of core inflation (see page 2).

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Page 2 of 2: Global headline inflation about to roll over

With Japan’s CPI report last Friday, we are able to update our global consumer prices aggregate. Global headline CPI rose 0.2%m/m in January, taking the over-year-ago percent change to 2.2%—up 0.1%pt from December and 2.5%pts from last summer’s trough. This rapid acceleration in over-year-ago inflation readings of course is largely due to base effects from commodity prices. (See next page for tables and charts displaying regional CPI outcomes.)

Despite the recent acceleration in global inflation, we expect over-year-ago CPI readings to roll over in the next month or two. The importance of commodity price base effects will begin diminishing starting this quarter. In addition, global core inflation is projected to decline considerably further this year. The underlying trend of both developed market (DM) core services and core goods inflation has already made a marked move lower (Feb 26 GDW: “Developed market core goods inflation poised to slide”). Despite above-potential growth this year, resource utilization will remain very low in the developed world, putting continued downward pressure on prices. As such, we predict DM core inflation to slide to near 0.5%oya by year end—an all-time low and an additional 0.6% pts below our January estimate of 1.1%oya.

The EM starts the current expansion on very different footing from the DM, with resource utilization still at roughly its historical average. As such, solid 2010 growth—as we have marked in our forecast—is more likely to exert upward pressure on consumer prices. With much less economic slack, EM central banks will lead the policy normalization process. Currently, we are expecting 75bp of tightening in the EM by December 2010, compared to just 10bp in the DM. (See next page for additional charts and tables.)

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ENDS

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