Daily Economic Briefing: March 11, 2010

Daily Economic Briefing: March 11, 2010

Click here for the full Research and disclosures.

Page 1 of 3: Global data summary
• China delivered a package of January/February data that hinted at an unpleasant combination of moderating growth and rising inflation. However, interpretation of the data is clouded by multiple factors, including the Lunar New Year holidays, unusually harsh winter weather, and policy tightening. In sequential terms, the growth of IP and retail sales is relatively sluggish so far this quarter, raising downside risk to our GDP forecast (9.8%q/q, saar). That said, March could deliver large gains that would leave the forecast on track, reflecting payback from adverse weather and the holidays. At the same time, February’s CPI report (2.7%oya) raises the risk that inflation is rising faster than anticipated. Our China team thinks that inflation will move up gradually from here and peak below 4% as food inflation levels off. The March CPI report needs to be watched as a test of this view. For now, we maintain our policy call for an additional hike in the RRR (any time), an initial interest rate hike in mid-April (following receipt of the March data), and a rise in CNY/USD by June.
• US initial jobless claims slipped 6,000 to 462,000 in the week ended March 6. According to our models, the current reading is consistent with modest job growth of about 40,000 per month. We look for claims to fall below 440,000 as private-sector job growth climbs above 100,000 per month in 2Q. The US trade balance narrowed by $2.6bn to -$37.3 bn in January as both exports and imports partially reversed big gains in December. Today’s report was consistent with our view that net exports will make little contribution to 1Q GDP growth this quarter.
• Japan’s 4Q GDP growth was revised down to 38%q/q, saar from 4.6%, based on a lower inventory contribution, which is positive for future growth. The growth of business investment was left at 3.8%, boosting conviction that capex has turned the corner. All that said, we continue to look for GDP growth to downshift below 2% in 1H10, led by consumer spending and public works. With deflation having worsened and the central bank under pressure to act, the BoJ is likely to enact modest, new QE measures next week (see today’s email from Masaaki Kanno).
• Today’s policy statements from central banks in Switzerland, New Zealand, and the Philippines were dovish—more so than anticipated in the cases of the SNB and RBNZ. The Bank of Korea sounded more hawkish. All these banks are expected to begin hiking in either 2Q or 3Q, and while none of these calls is under review, officials made clear they are in no hurry to adjust rates.
• Brazil’s COPOM meets next week and we are looking for a 50bp hike, reflecting very strong economic growth and rising inflation and inflation expectations. Today’s reports reinforced this call: GDP rose 8.4%q/q, saar in 4Q09, while retail sales continued to boom through January.

Click to enlarge

Page 2 of 3: Global IP growth still robust at start of year
Global IP rebounded in January, rising 1.0%m/m, after a modest 0.3%m/m gain in December. The healthy January outcome leaves the 3-month sequential trend at a robust 10% annualized pace of growth at the start of the year—above the 7-8% average pace we expect in 1H10. The pickup in factory production was a result of sizable gains across the G-3, with output expanding about 1%m/m in the US and Euro area (based on country data in hand) and more than 2% in Japan. Japan’s recent IP reports have been very impressive, averaging 2.2% over the last three months.
Meanwhile, EM manufacturing growth slowed in January, largely due to somewhat surprisingly weak growth in EM Asia. Asian data always turn choppy around the start of the calendar year due to lunar new year (LNY) holiday effects. We had expected production to ramp up in January ahead of the LNY in February. Instead, production was weak in Korea, and likely in China as well, though the China production data is particularly murky at the start of the year as the NBS only reports a combined Jan-Feb reading rather than an estimate for each month.
Regardless, the combined China number was certainly weaker than expected. Based on our interpolation of the Jan-Feb print, January output decelerated to 0.8%m/m—from its 13% average in 2H09—and February output declined month-to-month for the first time since April last year. Still, given that EM Asian IP is notoriously volatile around the LNY holiday, we are largely discounting the apparent weak January outcome, figuring that output will get a boost either in February or more likely in March as factories make up for lost production.
Taking stock of the recovery in manufacturing production, the EM is well ahead of developed markets. Production is well above of its pre-recession peak in EM Asia—by 18% in China and 8% on average in the rest of the EM Asia region. In addition, Latam production is roughly back to its previous peak. CEEMEA factory output is still about 10% below its 2008 peak, but this is still better than developed markets. IP in is still down more than 12% in the US and 15% in both Japan and the Euro area.

Click to enlarge

Click to enlarge

Click to enlarge

Click to enlarge

Although industrial production posted a very strong gain in January, this did not extend to exports. This is surprising on its face, since the trends in IP and exports normally are highly correlated. That having been said, both series display considerable noise from month to month, particularly exports, which are subject to numerous distortions, including swings in trade prices since they usually are reported in terms of value, not volume. Indeed, we have learned to discount exports as an indicator of global demand over the years, preferring the more timely and accurate data on industrial production.
As noted, the message from the IP space is that output growth remained robust through January. Moreover, our global manufacturing PMI was at a very high level in January and again in February. Rather, what appears to have dented January exports is a combination of unusually large December gains (see the chart) and adverse weather in Europe, which prevented companies from making shipments to their customers. Based on available data, German and UK exports were particularly hard hit, falling about 6%m/m each (samr).

Click to enlarge

Click to enlarge

ENDS

© Scoop Media