Tuesday, June 10, 2014

Global Economy Is Muddling Along (excerpt)

The recent rebound in the CRB raw industrials spot price index seems to be running out of steam in recent days. That’s consistent with our view that the global economy is growing, but at a slow pace. Interestingly, the Citigroup Economic Surprise Index for the US is also showing signs of flagging after its recent run-up. Let’s review some of the latest indicators out of China, Japan, and the Eurozone:

(1) China: The People’s Bank of China (PBOC) announced on Monday that it would like to strengthen the “weak links” in China’s economy, which is clearly slowing faster than officials expected. The PBOC cut the reserve requirement ratio by 50bps for banks that have sizeable loans to the farming sector and small- and medium-sized firms. It would also apply to financial firms that disburse consumer or auto loans. This targeted approach is deemed necessary to avoid increasing credit supply for all businesses, which would probably stoke speculation or wasteful investment.

The slowdown in China’s economy is evident in merchandise imports, which fell 1.6% y/y during May. Exports are still growing, but at a relatively slow pace of 7.0%.

(2) Japan: Japan’s real GDP rose sharply during Q1 by 6.7% (saar). Leading the way were nonresidential investment (34.2%), exports (26.3), and household consumption (9.4). The jury is out on how much of this strength was attributable to spending in advance of the April 1 sales tax hike. In any event, real GDP is likely to fall during Q2. Consumer confidence remains depressed, below where it was just before Abenomics was introduced, though it edged up during May.

(3) Eurozone: While the Eurozone’s recovery has been weak, the region’s latest data show that it is still recovering despite some of the uncertainties caused by the Ukraine crisis. The volume of retail sales (excluding motor vehicles) rose 2.4% y/y during April. That’s not much, but it’s the best pace since May 2007.

German factory orders rebounded during April by 3.1% m/m following the 2.8% decline the previous month. The gain was led by a 9.9% jump in orders to the Eurozone, which had dropped by the same amount during March. Industrial production excluding construction rose 0.4% m/m during April. However, it is up only 1.7% y/y.

Today's Morning Briefing: Too Much Love? (1) Bullishness too high and volatility too low. (2) Same old reasons for staying bullish. (3) Earnings are earning their keep. (4) King Kong vs. the Bull. (5) Bulls don’t die of broken hearts. Recessions kill them. (6) Three risks to the bull market: reflation, melt-up, and oil spike. (7) Commodity price index confirming slow global growth. (8) PBOC gives some relief to selected banks. (9) Chinese imports are weak. (10) Will Japan’s Q1 lift be temporary? (11) Eurozone recovery muddles along. (More for subscribers.)

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