Friday, July 26, 2013

While I was away...

I’ve just come back from a few days away in the glorious Hawkes Bay.  While catching up with developments of the last few days, there were a few things that caught my attention…

While acknowledging the generally positive tone of recent US data, especially the labour market, some US June month activity data was a tad weaker than expected.  June retail sales rose 0.4% in the month versus expectations of 0.8%.  Sales were softer still once automotive and petrol sales were excluded, falling 0.1%.  While the housing market is on an improving trend off a low base, building permits and housing starts were also weaker than expected in June, falling 7.5% and 9.9% respectively.  The poor housing stats result was probably weather-related.  The Leading Index was also flat between May and June.

It therefore looks like my 1.2% (saar) expectation for Q2 GDP data due next week could be a bit “toppy”.  I’d already shaved a bit of following weaker than expected trade data (net exports).  It’s important to remember that June quarter growth should not be seen as a bellwether for US growth in the period ahead.  We have long expected the second quarter to be the weakest for US growth this year reflecting the fact that fiscal drag would be at its zenith in the period.  While most forward indicators continue to point to a stronger second half of the year, I’m still not as convinced as some that the Fed will start tapering in September.  Revisions to historical GDP released at the same time could be critical, as will payrolls data next Friday.

The July China flash manufacturing PMI was softer than expected, coming in at 47.7 in July.  This suggests further downside risk for GDP growth this year.  Remember this index is the SME export-dominated index.  While we weren’t expecting to see any recovery in this index until later this year as America and Europe post stronger growth, the slip in the index this month was significant.  I expect the official PMI which has broader coverage to continue to hold up better but it seems likely this index is now destined for a sub-50 print in July.  That means risk to my 7.6% China GDP forecast for 2013 is biased to the downside.  The authorities seem still content to focus on reforms rather than stimulus, although the announcement of tax breaks for small companies and a speeding up of infrastructure construction will lend some support to growth.

In brighter news, the Euro zone flash PMI printed over the 50 benchmark in July, its strongest reading since early 2012.  The composite index (manufacturing and services combined) came in at 50.4, up sharply from 48.7% in June.  That supports our view that while we don’t expect rampant growth anytime soon, economic conditions in the Euro zone are beginning to stabilise.  There might even be an element of upside risk to my q/q forecast of zero for Q2 GDP.  With forward indicators continuing to improve (German business confidence rose for a third straight month in July) I think we see modest growth in the second half of the year which would result in annual growth (q4/q4) of zero for calendar 2013.   

UK GDP second quarter growth came in at 0.6% q/q, in line with market expectations.  Annual growth is now 1.4%.   It’s pleasing to see the UK string two consecutive quarters of growth together after the economy posted a more modest 0.3% expansion in the March quarter, especially following recent downward revisions to historical GDP growth.  This latest result leaves the UK still 3.3% below its pre-GFC peak but suggests some momentum was starting to build.

I was surprised to see in the minutes of the July MPC meeting at the Bank of England that no-one supported an expansion of the Bank’s asset purchase program.  That’s surprising on two fronts.  Firstly, at the previous meeting 3 people (including previous Governor Mervyn King) supported an expansion of the program, although that was voted down by the other members.  Secondly, this was Mark Carney’s first meeting in charge and the perception was that he would be more inclined towards further monetary accommodation.  Perhaps at this point they believe that given the better tone to the data, the development of their forward guidance process will be sufficient to achieve their objectives.

Finally at home the RBNZ’s July OCR review statement was interpreted as hawkish.  The offending comment was the “…removal of monetary stimulus will likely be needed in the future…”. That’s certainly the first move towards an explicit tightening bias as opposed to the implicit bias in its interest rate projections.  I’ve kept with an expectation of a first tightening in December this year while most of the rest of the economic prognosticators have shifted to March 2014.  I think it will clear by year-end that higher interest rates are warranted and that March will ultimately prove to be too far out for the Bank’s comfort.  If the RBNZ wants to stick to its expectation not to move rates this year, then the January OCR review is also a possibility for the first move.  Time will tell.