Friday, February 19, 2010

Economics Headlines from the week

· US CPI - The Consumer Price Index (CPI) increased 0.2% last month as energy prices rose 2.8%. More surprising was the 0.14% decline in the ex-food and energy core CPI. A methodological issue may have biased this figure down by about 0.05% (more below), but even after accounting for that, this is an extremely weak number. The year-ago rate of core CPI is now 1.5% and the six- and three-month annualized rates of change are 0.9% and 0.0%. The policy implications of today's number are clear, core inflation is moving further below the Fed's implicit inflation target and in the process real interest rates are moving higher: this is new news -- unlike yesterday's well-telegraphed discount rate hike -- and reinforces the case for a Fed on hold for an extended period. Recent declarations of "mission accomplished" in the fight against deflation risks now look somewhat premature. Feroli Feb. 19

· US Fed raises discount rate 25 bp - The Federal Reserve announced today that it is raising the discount rate 25bp to 75bp and shortening the maturity of its lending to overnight. It is the first step towards normalizing the spread between the discount rate and the interest on excess reserve rate which is currently 25bp. The spread will eventually rise to 100bp. Kasman Feb. 18

· US PPI - The headline PPI increased 1.4%m/m in January on higher energy prices and rose 4.6%oya. The core PPI increased 0.3%m/m (0.349%) and rose 1.0%oya. On a year ago basis core inflation remains soft, while over the last three months prices have grown at a relatively fast 3.3% annualized pace, the most since the last three months of 2008. The recent firmness in core producer price inflation is something to watch closely, although there are some reasons to partially discount the jump in inflation over the last few months. Reinhart Feb. 18

· US Philly Fed - The Philadelphia Fed survey was upbeat and pointed to continued growth in manufacturing activity. The general business activity index increased to 17.6 from 15.2 and the ISM-weighted composite rose to 55.1 from 52.5. The ISM-weighted composite is at its highest level since March 2006. The fact that the Philadelphia Fed index rose from an already decent level is especially positive in light of the fact that severe snowstorms hit part of the Philadelphia Fed district in the first half of February. Major snowstorms have typically caused the Philadelphia Fed index to decline. Reinhart Feb. 18

· US Jobless Claims - Initial jobless claims leapt to 473,000 in the week ending February 13 from 442,000 in the week ending February 6. The 31,000 increase largely reverses a 41,000 drop in the prior week and leads to new concerns that jobless claims are stalling at a high level. The four-week average edged down to 467,500 from 469,000. Reinhart Feb. 18

· US Industrial Production - Industrial production posted a solid 0.9% increase in January and manufacturing production rose 1.0%. Manufacturing has recently alternated between months of strong gains and very small declines, with the result being that manufacturing posted a 5% annualized gain in 4Q and it is on track to meet or slightly exceed that rate of increase in the current quarter. Reinhart Feb. 17

· US Housing Starts - The January housing starts report was constructive: the key single-family starts and permits categories both increased, starts in December were revised up, and single-family permits remained well above starts in permit-issuing areas. Both starts and permits are on track to rise this quarter, which could lead to a small increase in real residential investment spending by 2Q. Residential investment spending this quarter is likely to be about unchanged because of a fall in starts last quarter and what a probable fall in brokers commissions this quarter. Reinhart Feb. 17

· US Homebuilder Survey - The National Association of Homebuilders survey rose to 17 in February from 15 in January. The increase in the NAHB index indicates that new home sales were probably beginning to rise again by early February after a 16.2% drop in the last two months of 2009. This is welcome news, although sales still look to be at very low levels. The NAHB index is only back to where it was in October and November 2009, and it is below the recent high of 19 in September. In 2009 new home sales peaked at a 419,000 annualized pace, which was 70% below the peak. Reinhart Feb. 16

· US Empire Manufacturing Survey - The Empire State survey pointed to continued growth in manufacturing in February, but the details were mixed, as new order and shipment growth decelerated. The headline business activity index jumped to the strong level of 24.9 in February from 15.9 in January, while the ISM-weighted composite fell to 52.3 from 53.5. The survey suggests that output gains remain decent, but that we could experience some slowing. Some slowing in the manufacturing recovery is to be expected as the contribution to growth from inventories moderates. Reinhart Feb. 16

· UK Retail Sales - Retail sales volume dropped 1.8%m/m in January. The ONS have reclassified automotive fuel so it is now included in retail sales. Excluding fuel, sales volume dropped 1.2%m/m (JPMorgan -1%; Consensus -0.5%). Virtually every direct measure of consumer spending has dropped sharply in Jan. This is most likely explained by the snowstorms and VAT at the start of the month. Sales at food stores - which are usually relatively stable - dropped 2.4%m/m. Anecdotal evidence from retailers, collected by the ONS, attributes the weakness to weather. We expect sales to rebound in February. The first indication of this will come from next week's CBI retail survey. Monks Feb. 19

· UK Public Borrowing - Overall borrowing came in higher than expected at £+4.3bn in January (JPMorgan £-0.4bn; Consensus £-2.6bn). The public finances typically move into surplus in January due to the collection of tax revenues. Despite a likely lift from VAT receipts and better recent outturns in the finances, the January figures showed the first deficit in this month since records began in 1993. This will attract many negative headlines in the media. But it remains the case that the public finances are actually looking in better shape than the Chancellor thought in the PBR. Borrowing for the fiscal year through to December was revised down in January by nearly £2bn. And with only two months of the current fiscal year to go, it looks as though the PSNB will come in at just under £160bn for the FY09/10 reporting period, or 11.4% of GDP. Though still very high, this would be less than the Treasury's £178bn assumption, or 12.6% of GDP. This gives the chancellor some more options at the Budget in March. We expect that most of the improvement in the underlying budgetary position will be used to reduce the deficit, while still giving the Chancellor scope to offer some modest giveaways to key groups ahead of the election. Monks Feb. 18

· UK CPI Data - For some time we have been emphasising that inflation would pick up sharply around the turn of the year. Despite a wide dispersion of estimates about where inflation would peak, the CPI rose broadly in line with our expectations in January from 2.9% to 3.5%oya (JPMorgan 3.4%; Consensus 3.5%). Food prices (and alcohol and tobacco) rose strongly in January, offsetting the impact of a weaker than expected core reading on headline inflation. The core CPI rose from 2.8% to 3.1%. RPI and RPIX rose to 3.7% and 4.6% respectively. Monks Feb. 16

· Euro Area PMI - The composite flash PMI was unchanged in February, after falling by 0.5pts in January. At 53.7, the pre-recession relationship between the PMI and GDP growth would point to GDP growing at a tick below 2%. This is above where GDP has been running recently; clearly, there remains uncertainty about the exact mapping at present. One other encouraging aspect of the report was that the composite PMI broadened out a bit by country, with the French PMI falling from a very high level and the rest of the region moving higher. Fuzesi Feb. 19

· German PPI - German PPI surprised on the upside, with the yearly rate of change moving up to -3.4% in January (JPMorgan and Consensus: -4.0), from -5.2% oya in December. Producer prices rose 0.8%m/m in the month of January. Bastoni Feb. 19

· Japan 4Q GDP - Fourth quarter real GDP was stronger than expected, jumping 4.6%q/q, saar. However, details were not so encouraging; inventories continued to increase through last year when the inventory to final sales ratio elevated, and public consumption rose more than our expectation, which is basically irrelevant to economic cycle. While the strong growth in 4Q GDP validated our relatively bullish view that Japan's export-driven recovery continued, the details were not so positive in terms of near-term outlook. We maintain our forecast on 1H10, which looks for a slowdown to 1.5-1.8%ar growth from an average of 3.3% growth between 2Q09 and 4Q09. Adachi Feb. 14

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