Friday, March 5, 2010

Top 5 Graphs of the Week - 6 March 2010

This week we look at Canadian GDP, Australian GDP, US ISM indices on manufacturing and non-manufacturing, and a wrap up of some of the monetary policy decisions announced this week; including the tightening decisions in Australia and Malaysia.

1. Canada GDP
Canada made further progress in its economic recovery in Q4 2009, recording 1.2% growth q/q (or if you insist on the questionable practice of annualizing results then it was 5%), against consensus forecasts of 1%. On an annual rate the decline improved to only -1.2%. The annualized rate of 5% was above the Bank of Canada's forecast for 3.3% growth, and this has lead some to speculate that the Bank of Canada may break its commitment to keep interest rates on hold at 0.25% until the end of the 2nd quarter of 2010. This remains to be seen, but there are also other measures being taken in Canada e.g. the government aspiring to be the first G7 country to break its fiscal deficit. All up, this is a reasonably healthy economy here...

2. Australia GDP
The Australian economy grew at consensus forecast pace of 0.90% q/q, improving on the previous quarter's 0.3%, and placing it up 2.7% year on year. Basically the Australian economy is going from strength to strength thanks to a fundamentally strong economy, strong export demand and resources sector, and stimulus measures. The Australian job market has already started to show this strength too with the unemployment rate clearly peaking thanks to jobs growth. The RBA even had to tighten again when it last met - but more on this later.

3. US ISM Manufacturing PMI
In a look at the ISM's surveys of both the manufacturing and non-manufacturing sectors, first up is the manufacturing PMI. The main index figure came in at 56.5, below consensus of 57.9, and previous of 58.4. So a slight pull back, but still in expansionary territory. Some aspects were distorted by the severe weather conditions e.g. backlogs grew markedly, and new orders pulled back quite a bit too. Exports and imports continued to grow and the employment indicator was also up with reports of higher net hiring.

4. US ISM Non Manufacturing Index
On the non-manufactuing ISM index; the non-manufacturing index came in a bit better, the figure was 53.0 vs consensus forecasts for a slight improvement to 51.0 and the January figure of 50.5. The standouts were employment (+4), supplier deliveries (+3), business activity (+2.6) and on the downside, inventory sentiment (-4.5), inventories (-1.5). Overall the trend shows an improvement or bounce-back thanks to things like stimulus and inventory cycles, but it is promising to see both indexes in expansionary territory and on an upward trend, it bodes well for the potential for a self-reinforcing upward cycle, but risks remain.

5. Monetary Policy Update
The RBA increased its key rate by 25bps to 4%, and Bank Negara Malaysia increased its rate 25bs to 2.25%. While the European Central Bank (1%), Bank of England (0.5%), Bank of Canada (0.25%), and Bank of Indonesia (6.5%), all held rates steady. The story is by and large unchanged for the banks who didn't change, but for Australia it was back to tightening after a small pause in Feb, the RBA noted that with inflation near target and growth near trend that stimulatory conditions were no longer warranted. Likewise the recovering Malaysian economy prompted the Bank Negara Malaysia to commence returning conditions to neutral.

In reviewing the above charts we can make some generalisations, for example the Canadian and Australian economies are handling the recession relatively well. There are promising signs in both of these economies that the recovery is strengthening, and so too are the relevant authorities commencing or at least talking about exiting stimulus measures.

Meanwhile in the US there are some promising signs in the ISM PMI indices, on both manufacturing and non-manufacturing, that there is, at least in the short term, a recovery. New orders are growing reasonably well on both counts, while the employment indices are starting to show more improvement. The thing to note too is that both of the main indexes are in positive or expansionary territory. Of course in the short term this may be able to be explained away by stimulus measures and the inventory cycle, however it is promising for a potential upward spiral effect, but of course significant risks remain.

On Monetary policy the bias for most central banks, especially in developed economies, is to hold steady at record lows. Though there are modifications and cessations of some of the more extraordinary policy moves taken to stabilise financial markets. But there are some positive steps being taken in returning policy rates to neutral in economies where growth and inflation are starting to normalise and return to trend.

Even 3 of the BRIC economies; China, India, and Brazil have increased their bank required reserve ratios - moves read by most to herald interest rate increases. Ultimately to prevent excesses returning in general prices and asset markets monetary policy will need to move back to neutral - and in so far as this means a preventing of future crises then this is a potentially positive sign.

1. OECD Stats
2. Australian Bureau of Statistics
3. Institute for Supply Management
4. Institute for Supply Management
5. Reserve Bank of Australia

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