Daily Economic Briefing: May 11, 2010

Daily Economic Briefing: May 11, 2010

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• We are seeing a modest pullback in most financial markets following yesterday’s impressive gains. Today’s economic data from China and Europe were solid.

• China released most of its economic indicators for April. Coming into today, the question was whether the economy’s blistering growth rate was moderating in response to official tightening measures, and whether inflation would continue to climb, putting pressure on policymakers to move more quickly. On the growth side, any slowing appears modest, with retail sales, fixed asset investment, exports, and industrial production still expanding at solid rates. By the same token, money and loan growth rates remain robust but have moderated, as has the advance of fixed asset investment. These are the targets of policy tightening, which seems to be having some effect. Consumer price inflation ticked up to 2.8%oya, while prices ex food rose a modest 1%oya. China’s asset markets are showing a very divergent pattern: property prices surged 12.8%oya in April, while the stock market index, while still up almost 16%oya, is down in the year-to-date.

• This mix of data probably would leave the authorities on track to introduce new tightening measures in the near-term, including a hike in the policy interest rate and allowing the resumption of modest currency appreciation vs the US dollar, as we forecast. One wild card is whether the recent turmoil in Europe and the spillover to global markets might be enough to stay their hand. Our China team is maintaining its policy call for now, but the situation appears fluid.

• European reports on industrial production in March have been impressive. Today, the UK said that manufacturing output rose 2.3%m/m after a 1.4% increase in February. Euro area IP looks on track for a gain of well above 1%m/m based on data from Germany, France and Italy (the report is due tomorrow). Output surged in Sweden and growth was solid in Norway. With the business surveys continuing to climb in April, it looks like European growth picked up decisively this quarter. The business surveys will be a useful guide as to whether the intensification of the sovereign debt crisis since mid-April is hurting the economy. As noted, both the sentiment surveys and the PMI rose solidly last month. The flash PMI for May is due Friday May 21; the national business sentiment surveys will be out the following week.

• German core inflation—defined to exclude all food and energy— nosedived to 0.5%oya in April after having ticked up in March. If the Euro area series follows a similar pattern (due next Tuesday), it will break below 1%oya for the first time since record-keeping began in 1991.

Sales of motor vehicles tallied 52.0 million units at a seasonally-adjusted annual rate in April, according to our global proxy, hinting at a weak outcome for consumer spending last month. This pace is 5% lower than was seen in March. After cratering in late 2008, auto sales surged in 1H09 thanks to targeted incentives programs and improving macroeconomic conditions. Though most of these incentives programs had been phased out, sales continued to rise, and set an all-time high in March.

April’s decline was broad and nearly universal—only 4 of the components in our proxy saw an increase, with the most notable declines occurring in the Euro area. As a whole, the currency union saw sales fall 11%, from 10.7mn saar to 9.5mn. As local incentives programs ended in March, consumers in Italy cut back the most, with sales falling 24.9% m/m. German sales fell by a more modest 3.1%, but were down for the tenth straight month. Since peaking in June 09, auto sales in Germany are off 36.8%.

Mirroring the worldwide trend, sales in the US fell 5% to 11.2mn units. After six straight months in the 2.2-2.4mn range, UK sales fell 8.5% to 2.0mn units in April. Japan was the only G-4 economy to see a month-to-month rise in sales, where they grew 5% to 4.2mn units. As a whole, sales in the DM fell 6% m/m to 29.7mn units.

For the past eighteen months, the explosion of growth in China has dominated the EM auto sales discussion. From a pace of 6.1mn units sold at year-end in 2008, sales peaked in January at 14.8mn. They continue to ease down off that pace, gradually retreating over the past three months to 12.4mn in April. This still represents a considerable increase of 37% over April a year ago.

Throughout the rest of the EM world, sales ticked down from March’s pace. The biggest decline was seen in Brazil, where some of April’s potential sales were pulled into March by expiring incentives programs. Brazil’s pace of 3.5mn units was down 12.5% from March’s high, but still represents an increase of 17.6% oya. Sales in India rose 19% m/m to 2.3mn units, representing the biggest gain in terms of both percentage and level in the Emerging markets in our proxy. All told, EM sales fell 3.0% to 22.3mn units saar.

It remains important not to read too much into the month-to-month swings in auto sales. While the fall of 2.3mn units from March to April represents a not insignificant decline, it is worth keeping in mind that the overall trend in growth remains in the range of its pre-crisis path.

ENDS

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