Daily Economic Briefing: April 8, 2010

Daily Economic Briefing: April 8, 2010

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• The signs are that China is preparing to launch a new phase of policy normalization that will include a stronger RMB and interest rate hikes. The moves, which are expected to be modest and gradual, would supplement previous tightening measures including RRR hikes and credit controls. We think the overall policy stance will remain growth supportive this year and look for growth to run near 10% annualized.

• A shift in Chinese currency policy will be a landmark development. Since China froze the CNY exchange rate nearly two years ago, its EM competitors have resisted letting their currencies appreciate vs the dollar. This desire to contain currency appreciation, in turn, has deterred EM central banks from raising interest rates. This is a pressing issue in EM Asia, where policy rates remain at historical lows even though the output gap is turning positive once again. Indeed, we raised our 2010 growth forecast for EM Asia ex China and India by about 1% pt this week.

• The Greek crisis has escalated sharply this week, pushing borrowing costs to new highs (e.g., 10Y yields have increased over 80bp to nearly 7.40% this week) and making it more likely the Greeks will tap the EU/IMF support facility. Of particular concern are reports that funds are being withdrawn from Greek banks, which might force them to delever. However, our colleague David Mackie notes that the recent decline was concentrated in short-term deposits, whereas longer-term deposits have increased sharply. This is the opposite of the pattern one would expect if residents were concerned about the solvency of the banking sector and the government.

• US initial jobless claims rose 18,000 to 460,000 during the week including Good Friday. The Labor Department warned that the figure was suspect due to the difficulty of properly seasonal adjustment for this floating holiday

• Global car sales appear to have set a record high in March, raising the chances of a good gain in consumer spending. We estimate that sales rose 1.6mn units (ar) to 31.4mn in the developed economies, led by increases in the US and the Euro area. The EM total is uncertain because China has not reported; however, sales rose 25% to 4.0mn in Brazil due to the impending end of incentives.

• Japanese machinery orders took a pause in February, similar to Germany. That said, the underlying momentum in G-3 orders growth is very strong, reaching 22% on a 3m/3m basis in February. This bodes well for continued, strong growth in global capex near-term (see page 2).

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Capital goods orders point to strong 1Q capex
The trend in G-3 capital goods orders and shipments provides valuable information about global capital spending. The aggregate orders is a good leading indicator for global spending; while the total for shipments aligns very closely with real-time capex. With this week’s reports from Japan and Germany, we now have G-3 totals for both orders and shipments through February.

For the month of February, G-3 orders advanced over 1%m/m. Data were mixed, with a strong gain in the US offsetting a stall in Japan and Germany. Smoothing through the monthly volatility, G-3 orders rose 22% annualized on a 3m/3m basis through February, consistent with very strong near-term gains in capex. The orders trend in Japan is particularly striking, dominated by demand from abroad.

The growth of G-3 shipments also is strong, although it has not quite kept pace with orders. As with orders, the G-3 aggregate rose over 1%m/m, with all three countries posting solid gains. Looked at on a smoothed, 3m/3m basis, shipments rose 13% through February. Based on past experience, this growth rate would be consistent with global capex growth of about 12%.

To be fair, shipments have been running a bit ahead of actual capex spending so far in the recovery. For instance, capital goods shipments pointed to a huge, 16% gain in capex in 4Q, whereas the realized pace was about 8%. Eventually, we would expect this gap to close. With the growth of capital goods orders remaining elevated, implying that shipments will also, it seems likely that capex growth will rise toward the shipments-implied pace.

ENDS

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