Daily Economic Briefing: March 4, 2010

Daily Economic Briefing: March 4, 2010

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Page 1 of 2: Global data summary

• In markets, the most important event this week probably has been the continued calming of fears about sovereign debt in Europe. With respect to the economy, the highlight has been the February global PMI. In a period in which adverse weather has battered activity across much of the globe, the continued rise in the PMI sent a reassuring message about the economic recovery. Tomorrow brings US payrolls, which are universally expected to decline due to the snowstorms.
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• In today’s news, US initial jobless claims retreated to 469,000 last week despite the blizzard in the Northeast. Pending home sales tumbled almost 8%m/m in January, suggesting that existing home sales may have retreated futher in February. Revised data show that US labor productivity rose 5.8% over the year ended 4Q, while unit labor costs fell 4.7%. The aggressive cost cutting has promoted a surge in corporate profits, which we look to fuel a recovery in business spending.
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• The ECB announced plans to further scale back its emergency liquidity measures with a return to competitive bidding at the three-month tenders. However, banks will get all the liquidity that they bid for at the final six-month tender later this month and at all one-week and one-month operations until mid-October, so access to liquidity will remain generous until then. Malaysia’s central bank became the first in EM Asia to hike interest rates. That said, inflation remains low and property prices are not a concern, leading BNM to state that policy will remain growth supportive.
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• Although global capex is growing once again, today’s reports showed that the trend is not universal. Japan’s MoF survey again delivered a downside surprise on capex, finding that spending by nonfinancial corporations fell 3.4%q/q saar in 4Q09. GDP growth may be revised down to 4.1% last quarter (vs 4.6%). Other aspects of the survey were more positive. In particular, the recovery in corporate sales and profits accelerated in 4Q.
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• Similar to Japan, the Euro area’s 4Q GDP report (which finally provided expenditure detail) confirmed that fixed investment declined at a 3.3% pace there. This category includes not only business equipment but also housing and commercial structures; nonetheless, it seems likely that equipment spending was flat or down on the quarter.
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• Greece announced an offering of EUR 5bn of 10yr bonds. The deal was heavily oversubscribed, which eased concerns about Greece’s ability to refinance the EUR 20bn in debt that will mature in April and May. The Greek PM meets with Germany’s Merkel tomorrow and France’s Sarkozy on Sunday.
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Page 2 of 2: Inflation is peaking in the DM but not the EM

Food prices have garnered some recent attention as they have pushed up headline CPI readings in several big EM countries. For example, food inflation notably accelerated in each of today’s CPI reports from Turkey and Russia. In Turkey, food inflation has spiked to nearly 30% annualized on a 3m basis, pushing headline inflation to an uncomfortable level for the CBRT, contributing to the mounting market pressure for the central bank to start hiking rates. In Russia, food prices appear to also have recently accelerated after a stabilization late last year. Food prices also have spiked in India. Indeed, a more complete examination of country data shows that the sequential (%3m, saar) rate of food inflation recently has picked up in both the EM and the DM.

That said, global agricultural commodity prices actually have drifted lower in the year-to-date, suggesting that the pickup in food inflation may prove short-lived. A similar story unfolds when looking at these prices on a year-ago basis. As is true for oil prices, the base effect we see in agricultural commodity prices is peaking—assuming that these prices do not move up much from current levels—and will dissipate rapidly into midyear.

In the DM, the impending dissipation of the base effects from oil and agricultural commodity prices will begin to temper headline inflation after this quarter. The decline in headline inflation will be reinforced by lower core inflation, which is falling in response to record low resource utilization. Thus, we look for the year-ago rate of DM headline inflation to fall over the balance of this year (see Tuesday’s DEB for more on the DM inflation outlook).

However, inflation dynamics are different in the EM. Consumer food prices respond with a considerably greater lag to movements in agricultural commodity prices in the EM compared with the DM. Based on our modeling of the passthrough of commodity prices to consumer prices, it will take about 2 quarters for this food price increase to fully work through to consumer prices. (See bar chart on next page for summary of passthrough of food commodity prices to EM and DM consumer prices.) Moreover, food has a much bigger weight in the EM consumer basket—roughly 50% higher than in the DM. Finally, with resource utilization near par in the EM, core inflation is expected to be stable, not fall, as in the DM. These differences point to a continued climb in the year-ago rate of EM headline inflation into the middle of the year, even as it rolls over in the DM economies.

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ENDS

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