Friday, February 5, 2010

Top 5 Graphs of the Week - 6 February 2010

In this edition we look at the positive signs in the US PMI release, more 'less-bad' data in US nonfarm payrolls, the RBA pausing on its road to neutral policy, the BoE and ECB keeping policy easy, and New Zealand employment. If there's any theme to it all, it could be an employment and monetary policy theme.

Indeed, it would be interesting to think about things around this theme, because these indicators are likely to tell you where the recovery is at (e.g. faster recovery = jobs growth, and monetary policy tightening). At the same time it could tell you where the recovery might be going too (e.g. easy monetary policy stimulates - or perhaps even over-stimulates activity, slow job growth impacts on consumer deleveraging).

1. US ISM PMI - Onwards and Upwards?
The main index came in at 58.4 for January vs 54.9 in December and beating consensus of 55.0. This was a pretty positive report overall, and pointed to a continuation of the momentum spurred on by stimulus measures and the inventory cycle. One of the key features again was the state of New Orders, the green line in the chart below, this leading indicator points to what will likely be another strong quarter of economic activity in Q1 2010. There were other interesting points in the report too, e.g. the prices index jumped further to 70, the exports index grew faster than the imports index, the employment index showed net positive hiring, and inventory levels still showed up as being too low.

2. US Nonfarm Payrolls - Rolling Along
The US saw further "improvement" in the change of nonfarm payrolls, as January saw only -20k jobs lost. Another positive was the November figure, which was revised up to positive 64k. The downside was several large downward revisions - so overall the situation is a little worse than initially reported due to methodological quirks - you can see the BLS release for specifics. The overall message to take though is that the trend is still going in the right direction for less losses, and towards eventual gains. The negative is that the job losses have been significant and this will impact on consumer deleveraging, and ultimately end up depressing consumer spending over the medium term.

3. RBA Pauses its Monetary Policy Normalisation
The Reserve Bank of Australia kept its key interest rate unchanged this time at 3.75% after 3 consecutive hikes of 25 basis points - away from "emergency settings". The drivers of this decision were basically that the banks had passed the rate hikes to borrowers; and then some (estimated about 1% extra), and being increasingly coupled to the Chinese economy, the commencement of tightening that occurred there. The decision also reflects a view that inflation is relatively contained for now, and that the best course is to monitor how the recovery unfolds. Of note though, it signalled a return to tightening at some point given that interest rates still remain "below average".

4. ECB and BoE Keeping it Easy

Both the ECB and the BoE kept monetary policy conditions easy in their decisions this week. The BoE effectively paused its asset purchase program, having made purchases up to the full GBP 200 billion limit. They noted that the next step for that will depend on how things unfold - and given the state of the UK economy, the next move will probably be more purchases. The ECB noted that it will make decisions about some of the extraordinary policy moves it took, in March. The ECB carried on the same general sentiment about subdued and uneven growth, contained inflationary conditions, and of course the need for explicit and proactive fiscal policy exit strategies (and not just Greece).

5. New Zealand Employment

New Zealand reported its employment figures for Q4 2009, showing an increased unemployment rate thanks to more people look for jobs, and less Kiwis going offshore to find work (one of the main places to go is the UK - and well...). But within the result the actual number of persons employed basically went sideways (well, down -0.1% q/q), which paired with the recent 2 quarters of positive GDP growth could well point to a bottoming out or even turning point for jobs in New Zealand. Looking at the chart below, you can also see that the quarterly change in full time jobs is showing tentative moves toward the zero mark. The outlook for the New Zealand economy is broadly similar to their Australian neighbor, but simply not as good.

To sum up, the strongly improved PMI result had various positive elements to it, and more importantly; pointed to a further pick up of activity for the US in Q1 2010. Alongside this the nonfarm payroll figures pointed to a gradually improving situation, but also hinted at factors that may impede recovery of consumer demand. Together these paint a picture of a strong improvement, followed by more subdued activity i.e. the "W" or "square root" shaped recovery.

Looking abroad, the pause in Australian monetary policy tightening is not a negative signal, if anything it is a positive one, it means monetary policy will remain stimulatory there, and that for now inflation is reasonably contained. Over in the Euro area though, the continued inaction in monetary policy shows that things are still pretty grim there, though improving unevenly.

The critical message in the ECB statement for many of the members of the EU and elsewhere is the need for some fiscal discipline and proper plans for exit strategies from fiscal stimulus. The example of what not to do is Greece, and the potential ramifications there of not acting appropriately - though still unfolding - should strike fear into the hearts of any politicians and investors alike wise enough to foresee them.

2. US Bureau of Labor Statistics
3. Reserve Bank of Australia
4. ECB & BoE &
5. Statistics New Zealand

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