Monetary Policy Week in Review - 30 July 2011

The week in monetary policy saw 8 central banks announcing interest rate decisions. Of those that changed rates were: India +50bps to 8.00%, Nigeria +75bps to 8.75%, and Colombia +25bps to 4.50%. Meanwhile those that held monetary policy interest rates unchanged were: Israel 3.25%, Hungary 6.00%, New Zealand 2.50%, Kenya 6.25%, and the Philippines 4.50%. Other than interest rates, the Philippines raised its required reserve ratio by 100 basis points to 21%, and Turkey dropped its required reserve ratios by 100-200bps to add extra liquidity to the market.

In terms of themes, the week was very much dominated by emerging market central bank activity. India surprised the market by raising rates more than expected in response to a persistent inflation threat against the backdrop of still relatively strong economic growth. Indeed the message was that emerging markets are still facing elevated price levels and inflationary impulse, and many of them are still recording relatively high rates of growth, particularly as compared to developed markets.

A selection of key quotes from the monetary policy statements and media releases are listed below:

• Bank of Israel (held rate at 3.25%): "Forecasters' inflation expectations for the next twelve months remained steady at slightly below the upper limit of the target range. Forecasters' inflation expectations and those derived from the capital market go together with the assessment that the Bank of Israel will continue to increase the interest rate, but at a slower pace than in the first half of the year."
• Reserve Bank of India (increased 50bps to 8.00%): "Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance,".
• Central Bank of Nigeria (increased 75bps to 8.75%): "The inflation outlook appears uncertain owing to the expected implementation of the new national minimum wage policy and the imminent deregulation of petroleum products," and that there is "the need for pursuing policies to foster macro- economic stability, economic diversification as well as encouraging foreign capital inflows".
• Reserve Bank of New Zealand (held rate at 2.50%): "Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011 'insurance' cut to remain in place much longer. The current very high value of the New Zealand dollar is acting as a drag on the New Zealand economy. If this persists, it is likely to reduce the need for further OCR increases in the short term."
• Philippine Central Bank (held rate at 4.50%): "bank lending has been growing at double-digit rates since January 2011, supported by the strong momentum of domestic economic activity and stable financial conditions... The Monetary Board is of the view that sustained foreign exchange inflows, driven by upbeat market sentiment over the brighter prospects for the Philippine economy, could fuel a further acceleration of domestic liquidity growth which could pose risks to future inflation."
• Central Bank of Colombia (raised rate 25bps to 4.50%): "Since March, the average measures of core inflation has been a slight upward trend in June and reached a level close to the midpoint of the target range (3% + / - 1 percentage point). Inflation expectations at various horizons are also within that range."

Looking to the central bank calendar, next week is set to be dominated by developed market or advanced economy central bank activity (note, the US also meets early in the following week). So it will be an interesting week in terms of how these banks react to whatever happens with the US debt situation...

• AUD - Australia (Reserve Bank of Australia) - expected to hold at 4.75% on the 2nd of August
• GBP - UK (Bank of England) - expected to hold at 0.50% on the 4th of August
• CZK - Czech Republic (Czech National Bank) - expected to hold at 0.75% on the 4th of August
• EUR - Eurozone (European Central Bank) - expected to hold at 1.50% on the 4th of August
• JPY - Japan (Bank of Japan) - expected to hold at 0.10% on the 5th of August

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2011/07/monetary-policy-week-in-review-30-july.html

Top 5 Graphs of the Week - 24 Jul 2011

This week we check in on the current inflation and monetary policy situation for the key developed economies and emerging markets, with a particular focus on the outlook for inflation and interest rates, and the likely consequent outlook for developed vs emerging market equities. Overall it's looking like the monetary policy outlook may become more friendly to emerging markets than developed markets, but of course that could all change if certain key risks materialize...

1. BRIC Inflation

Inflation has been a key issue in emerging markets this year, creating a unique set of risks e.g. policy tightening, overheating and hyperinflation, social unrest, exported inflation, etc. These risks have only expressed to a limited extent so far. Within the BRIC economies the most recent data (Brazil 6.71%, Russia 9.4%, India 8.72%, China 6.4%) has shown some hope of a peak in inflation or a tapering off, but the risk of further inflation remains as the BRIC economies remain relatively strong, and with commodity prices easing only somewhat. So the key focus for inflation risks is whether the recent string of monetary policy tightening moves is enough...

2. BRIC Interest Rates

Looking at the BRIC central banks, focusing on interest rates, total interest rate moves since policy rates bottomed out are as follows: Brazil +375 basis points, Russia +50bps, China +125bps, India +325bps. Each of the banks are playing a delicate and fraught balancing act with the risks of further inflation on the one hand and the risks of scuttling growth or even hard landing on the other hand. For now the balance is probably about right, but we're approaching territory where any further upside impetus on the inflation front is likely to force the central banks' hands to more aggressive tightening. Of course this will be bad for equities, with emerging market equities being held firmly back by this monetary policy tightening, but on the other hand, if inflation shows signs of peaking or even turning then emerging market equities should start to factor in an end to monetary policy tightening.

3. Developed Market Inflation

While developed markets have not been growing as fast as emerging markets, thanks in part to rising commodity prices, general price normalization, and demand normalization, inflation has clearly recovered in developed markets. Since their lowest figures in 2009 to the most recent readings inflation has increased as follows US +570bps, EU +340bps, Japan +290bps, UK +310bps. However each of those economies still remain at least 100bps away from the peak inflation figures of 2008. That will most likely not last. In fact, without a significant drop in commodity prices or a return to recession (a non-zero probability given some of the recent weaker readings and the Euro and US debt risks), inflation will almost certainly return to pre-crisis levels, and policy makers could easily miss the boat.

4. Developed Market Interest Rates

With the exception of the ECB, the monetary policy response to rising inflation has been to ignore it and focus on the growth side of things. This stance probably makes sense for the period of about 2-years after the crisis due to the depth and severity of it all. But abnormally low rates are not sustainable, low rates lead to greater risk appetites and ultimately higher inflation. The only saving grace is that governments like the US, UK and Japan all seriously need to do some decent fiscal tightening to get their government finances in order; this may (or may not) contain some aspects of inflation, but ultimately these banks need to start on a slow progression back to normality. So on balance the monetary policy outlook for developed markets is likely more bearish for equities than the outlook in emerging markets.

5. Monetary Policy Week in Review

Diving back down to the detail in the here and now, the past week in monetary policy saw the Banco Central do Brasil increase its Selic rate by 25 basis points to 12.50%. Meanwhile those that held rates unchanged were: Canada at 1.00%, South Africa at 5.50%, Turkey at 6.25%, and Egypt at 8.25%. Common themes in the media releases were a pretty keen focus on the risks coming from the EU and US debt situations, and Brazil possibly signaled an end to its tightening cycle. Next week there's a few interesting monetary policy decisions due; Israel, India, New Zealand and the Philippines are among those reviewing policy settings, with India the only one expected to move, with consensus seeing another +25bps.

Summary

So we saw inflation tracking along in emerging markets, showing a brief history of accelerating inflation, and although upside inflation risks remain, there are some signs that inflation may be peaking in at least some of the BRIC economies. Accordingly the monetary policy outlook for emerging markets could well become more accomodative, or at least no more tighter, and this could possibly brighten the outlook for emerging market equities.

Over to developed markets, flirtations with deflation were quite short-lived as the past year or so has seen significant reinflation, and unless fiscal tightening is particularly onerous, and as long as another slowdown is avoided, the inflation outlook for developed economies might be for further upside. Accordingly, the monetary policy outlook for developed economies is, or at least should be, for tightening and higher interest rates, which may take some of the shine of developed market equities.

So for the emerging market vs developed market equity allocation, a keen eye should be fixed on the developing inflation and monetary policy outlook, for today; this is a macro-driven market.

Graph Sources:

1. Trading Economics www.tradingeconomics.com

2. Central Bank News www.centralbanknews.info

3. OECD Statistics stats.oecd.org

4. Central Bank websites

5. Central Bank News www.centralbanknews.info

Article Source: http://econgrapher.blogspot.com/2011/07/top-5-graphs-of-week-24-jul-2011.html

Monetary Policy Week in Review - 23 July 2011 (guest post)

The past week in monetary policy was relatively quiet, with just five central banks announcing interest rate decisions. The only central bank to adjust rates was the Banco Central do Brasil, which increased its Selic rate by 25 basis points to 12.50%. The other banks that held rates unchanged were: Canada at 1.00%, South Africa at 5.50%, Turkey at 6.25%, and Egypt at 8.25%. Elsewhere in central banking, Taiwan's central bank increased commercial bank minimum liquidity requirements as part of an ongoing program to strengthen risk management in the banking system.

So for the central banks that reviewed monetary policy settings it was very much a case of wait and see, with the banks largely viewing current settings as appropriate. Indeed if holding rates steady was the theme, the BRIC economy Brazil was consistent with this even though it increased rates, in that the Brazilian central bank slightly altered the tone of its statement; perhaps hinting that it is near the end of its tightening cycle. Another theme within this was strong vigilance of risks, particularly those emanating from the Euro area, with still high levels of uncertainty as to how the crisis will unfold.

Listed below are some of the key quotes from central bank monetary policy statements and media releases from the week ending 23 July 2011:

• Bank of Canada (held interest rate at 1.00%): "To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2.0 percent inflation target. Such reduction would need to be carefully considered".
• Banco Central do Brasil (increased rate +25bps to 12.50%): "evaluating the prospective scenario and the balance of risks for inflation, the Copom decided, unanimously, at this moment, to raise the Selic rate to 12.50% p.a., with a neutral bias."
• South African Reserve Bank (held interest rate at 5.50%): "The MPC is not complacent and will remain vigilant and continue to monitor closely any indications of second-round effects on inflation emanating from these cost pressures as well as the changing risk profile of the inflation outlook."... "The view of the MPC continues to be that the underlying inflation pressures are mainly of a cost push nature, notwithstanding signs of a possible moderate increase in underlying inflation."
• Central Bank of Turkey (held interest rate at 6.25%): "it would be appropriate to narrow the interest corridor gradually should the sovereign debt problems regarding some European economies and the concerns on global growth continue to have adverse impact on the risk appetite. The Committee has also stated that all policy instruments may be eased should global economic problems intensify and lead to a contraction in domestic economic activity."
• Central Bank of Egypt (held interest rate at 8.25%): "the slowdown in economic growth should limit upside risks to the inflation outlook. Given the balance of risks on the inflation and GDP outlooks and the increased uncertainty at this juncture, the MPC judges that the current key CBE rates are appropriate."

Next week is set to be relatively busy in terms of monetary policy decisions, with at least 8 central banks scheduled to review policy settings. Many of the banks are in emerging market countries so it will be timely to get an update on what they are thinking about and concerned about:

• ILS - Israel (Bank of Israel) - expected to hold at 3.25% on the 25th of July
• HUF - Hungary (Magyar Nemzeti Bank) - expected to hold at 6.00% on the 26th of July
• INR - India (Reserve Bank of India) - may increase rate 25bps to 7.75% on the 26th of July
• NGN - Nigeria (Central Bank of Nigeria) - may increase rate 50bps to 8.50% on the 26th of July
• KES - Kenya (Central Bank of Kenya) - expected to hold at 6.25% on the 27th of July
• NZD - New Zealand (RBNZ) - expected to hold at 2.50% on the 28th of July
• PHP - Philippines (Bankgo Sentral ng Pilipinas) - expected to hold at 4.50% on the 28th of July
• PKR - Pakistan (State Bank of Pakistan) - expected to hold at 14.00% on the 30th of July

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2011/07/monetary-policy-week-in-review-23-july.html

Monetary Policy Week in Review (Guest Post)

The past week in monetary policy was dominated by Asian central banks, with the central banks of Japan, Indonesia, Thailand, and South Korea all announcing interest rate decisions. The only banks to adjust interest rates were Thailand +25bps to 3.25%, and Kenya, which dropped its discount window rate -175bps to 6.25%. Meanwhile those that held interest rates unchanged were: Japan 0.10%, Indonesia 6.75%, Latvia 3.50%, South Korea 3.25%, and Chile 5.25%. Elsewhere in monetary policy and central banking, Brazil's central bank announced further policy measures to curb speculation on its currency, the Real.

While inflation remained a threat for most of the central banks who reviewed monetary policy settings during the week, for many the focus was squarely on the downside risks to both domestic and global growth. Indeed a couple of the banks pointed specifically to the tail risks in the form of the European sovereign debt crisis. For those that held rates unchanged, for the most part the messaging was positive, with some viewing inflationary pressures as somewhat contained, while many presented a positive outlook on their domestic economy.

As per usual, following is a selection of key quotes from central bank monetary policy statements and media releases from the past week:

• Bank of Japan (held interest rate at 0.10%): "Japan's economic activity is picking up with an easing of the supply-side constraints caused by the earthquake disaster. After declining sharply following the earthquake, production has recently shown clear signs of picking up with the easing of supply-side constraints."
• Bank Indonesia (held interest rate at 6.75%): "Bank Indonesia views that the current BI Rate level is still in line with the effort to maintain stronger economic activities supported by stability, amid domestic excess liquidity and continued large capital inflows... Meanwhile, inflation is estimated to be under control and could be lower than earlier forecasted if there is no Government policies regarding energy prices while the supply and distribution of basic foods are well maintained."
• Bank of Thailand (increased interest rate 25bps to 3.25%): "In light of the continued risks to inflation amid robust domestic demand, the MPC deemed it necessary to continue increasing the policy rate to maintain economic stability and anchor inflation expectations... Inflationary pressure remained high due to elevated energy prices and continued upward adjustments in the prices of prepared foods."
• Bank of Korea (held interest rate at 3.25%): "The Committee expects the high level of inflation to continue in the coming months, driven largely by demand-side pressures resulting from the underlying uptrend in economic activity and by inflation expectations."
• Banco Central de Chile (held interest rate at 5.25%): "Domestically, output, demand and labor market figures are progressing with strength, showing signs of moderation in line with the baseline scenario in the last Monetary Policy Report. Annual CPI inflation indicators have hovered around 3%, while measures of core inflation remain bounded. Private inflation expectations show a decline, although some of them remain above the target."

As for next week the Reserve Bank of Australia (19th of July), and the Bank of England (20th of July) will release the minutes from their most recent monetary policy meetings, meanwhile the following central banks are scheduled to review interest rates:

• Canada (Bank of Canada) - expected to hold at 1.00% on the 19th of July
• Brazil (Banco Central do Brasil) - expected to increase rate 25bps to 12.50% on the 20th of July
• South Africa (South African Reserve Bank) - expected to hold at 5.50% on the 21st of July
• Turkey (Central Bank of the Republic of Turkey) - expected to hold at 6.25% on the 21st of July

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2011/07/monetary-policy-week-in-review-16-july.html

Time to Go Long Vietnam With VNM?

Vietnam briefly slipped into the headlines this week with yet another interest rate increase, bringing its refinancing rate to 15.00% (up 100bps). The move follows a series of 100 basis point increases in interest rates and is driven by a surge in prices, with annual inflation reaching 17.5% in April. These events rightfully bring into focus the merits of investing in this emerging (or frontier?) market, at least in the short term, but also in view of the longer term prospects...

http://seekingalpha.com/article/270596-time-to-go-long-vietnam-with-vnm

Top 5 Economics Graphs of the Week - 23 Apr 2011

This week the focus goes to the giants of the emerging markets, the "BRIC" economies (the economic/investment one, not the political club). In this edition we review inflation, GDP, monetary policy and the stock markets of Brazil, Russia, India, and China. Also thrown in is a quick review of the monetary policy decisions over the past week.

1. BRIC Inflation
First up is a look at inflation, the BRIC economies are basically the key representatives of emerging markets. And if there's been one key theme for emerging markets, it's inflation. Inflation has been surging in the emerging market world over the past year, driven by a strong run-up in agricultural commodities, thanks to supply shocks paired with the steady increase in demand due to rising wealth in places like the BRIC economies. As I've noted before, inflation will be the key issue in emerging markets this year - mostly because of the monetary policy response, and the subsequent impact on GDP, and stock market returns. It is likely that we'll start to see a tapering off of inflation through the second half of this year - but if not, then things could get 'interesting'.

2. BRIC GDP
Over to GDP, the BRICs bounced back strongly from the great recession. China took a small hit, but charged back with large scale stimulus. India was more or less unscathed on its growth path. Brazil took a decent hit, but has subsequently returned to pre-crisis growth rates. Meanwhile Russia took a significant hit with the collapse of the commodity bubble and is still struggling to get back to pre-crisis levels as it takes on significant economic challenges. However, while the medium term outlook may be less than certain, the fundamentals still support the long term growth story. Also, while the pattern was similar to that of the developed markets' experience, on a relative basis emerging markets got off lightly.

3. BRIC Stock Indexes
Honing in on the stock markets of the BRIC economies, over the past 2 years Russian stocks have been the key performers (thanks in part to the rebound in commodity prices following the crash), while Indian stocks have been a distant second. Brazilian stocks have fallen slightly short of the S&P 500 and Chinese stocks remain weighed down due in part to the uncertainty around the monetary policy tightening cycle. The reigning intuition had been that since the BRIC economies are going to become the next big thing in terms of economic clout and contributors to global growth, then their stocks will also be the next big thing. But for a variety of reasons this may only be partially true. But interestingly, it also doesn't necessarily mean relative out-performance of US stocks since their are a lot of ADRs and large global companies that will reap rewards of said economic ascension, while benefiting from well developed capital markets and associated regulation and transparency.

4. BRIC Monetary Policy
On monetary policy, this (vis a vis inflation) is one of the key factors in the course of emerging market investments this year. The chart below shows that basically all of the BRIC economies are well into the monetary policy tightening cycle, with Brazil increasing rates again in the past week. Clearly, rising policy rates will have a negative short term impact on stocks since on the valuation front higher interest rates reduce the discounted cash flows due to a higher discount rate, but they also have the impact of slowing economic activity - even stalling it over the medium term. This explains much of the caution that investors have collectively shown in relation to emerging markets in recent times. And this is also why people should be watching developments there closely for signs that the worm may turn.

5. Monetary Policy
On the topic of monetary policy, the theme of global monetary policy tightening continued through the past week. The week saw interest rate increases from Thailand +25bps to 2.75%, Sweden +25bps to 1.75%, and Brazil +25bps to 12.00%. Of course there were also two reserve ratio hikes - showing that the inflation fight is not limited to the usual policy interest rate tools, with China hiking required reserves by 50bps and Turkey by 100bps. What was most interesting was the theme of a more global nature of policy tightening starting to come through. Sweden's move perhaps epitomized this, echoing the ECB's recent 25bp increase. So next week it will be particularly interesting to see what the US federal reserve has to say - indeed also Bernanke, in his post-meeting press conference.

Summary

So looking at the emerging giants that are the BRIC economies a couple of key themes stick out. First of all the long-term growth story remains intact, with no major damage to the fundamentals. However over the short-medium term the outlook is less than certain as the challenge of fighting rising inflation presents a tangible set of risks. The course of inflation, and thus monetary policy will perhaps be the key determinant of medium term investment returns. Interestingly, on the topic of monetary policy, the policy tightening cycle is well and alive, and is increasingly becoming a global theme. But there is some truth in the suggestion that emerging markets are a key driver behind this trend. So the main message - watch closely for a turn in the inflation worm.

Sources:
1. Trading Economics www.tradingeconomics.com
2. OECD Statistics stats.oecd.org
3. Yahoo Finance finance.yahoo.com
4. CentralBankNews.info www.centralbanknews.info
5. CentralBankNews.info www.centralbanknews.info

Article Source: http://www.econgrapher.com/top5graphs23apr11.html

Top 5 Economics Graphs of the Week - 19 Mar 2011

This week the focus is on inflation as we review some of the latest inflation data from a selection of key economies. First we look at a revival in US inflation, then review the situation up in Canada, then we look at the inflation situation in the Euro Zone, before finishing up with a look at the BRIC economies. Following that is a review of some of the key monetary policy decisions over the past week.

1. US Inflation
The US recorded annual headline inflation of 2.2% in February, up from the 1.7% rate seen in January (up 0.5% month on month). Core inflation also continued its climb, rising to 1.1% from a low of 0.6% in October last year. The key driver of the rise in headline inflation was commodity prices, but specifically energy prices - with energy up 11% (no surprise given the recent run up in oil prices). The main takeaway from the result was a confirmation that the inflation situation in the US is starting to see greater inflationary pressures due to the transmission of rising commodity prices. The base case still seems to be one of higher or normalized inflation, but with a possibility of lower inflation or deflation if commodity prices drop back - but then you can't count out even higher inflation either - especially if the recovery really starts to gain traction and momentum.

2. Canada Inflation
To the north in Canada inflation came in at 2.2% for the 12-months to February (up 0.3% month on month), slightly lower than the 2.3% seen in January. The main driver of inflation in Canada has been energy costs, with gasoline prices up 15.7%, but the transportation component also tracked upwards, rising 5.1% from February, and alcohol and tobacco rising 2.7%. The core inflation figure in February was 0.9%. Thus the trends are relatively similar to that of the US, with commodity prices driving up inflation, but also a gradual rise in aggregate demand. The Bank of Canada has remained in pause mode after hiking rates three times last year, it is reasonably likely that the Bank may begin to recommence the monetary policy normalization process later this year.

3. EU Inflation
The EU recorded inflation of 2.4% in February, up from 2.3% in January, with the broader region recording 2.8% inflation, unchanged from January. EU core inflation came in at 1% after hovering around the 1-1.1% mark for the past few months. The lowest annual rates came from Ireland (0.9%), Sweden (1.2%), and France (1.8%), with the highest rates seen in Romania (7.6%), Estonia (5.5%), and Bulgaria (4.6%). The key contributors were housing (up 4.9%), transport (up 5.7%), and alcohol and tobacco (up 3.5%). As noted by the ECB when it put its tough stance on inflation forward in its latest meeting, inflation is tracking up in the Euro Zone, and it is primarily being driven by commodity prices - rather than by a significant improvement in aggregate demand. The ECB is concerned about second round effects on core inflation, and rightfully so.

4. BRIC Inflation
Looking abroad to the major emerging market economies, the BRIC (Brazil, Russia, India, China) economies have seen inflation rise to much higher levels than their developed market counterparts. Sure, on average the BRIC economies have a higher weighting to food prices in their indices (and rightfully so), so some of the high inflation is a result of last year's surge in agricultural commodity prices. But unlike the developed markets, the BRIC economies have broadly experienced pretty strong economic growth, so the aggregate demand side of the equation is having a significant effect on inflation too. This of course gives rise to policy risk for those markets, with India and China both announcing further monetary policy tightening moves last week.

5. Monetary Policy Review
The main events in monetary policy over the past week were: India increased rate +25bps to 6.75%, Chile increased +50bps to 4.00%, and Colombia increased +25bps to 3.50%, Japan expanded its asset purchase program another 5 trillion Yen in response to the unfolding natural and nuclear disasters, and China raised the required reserve ratio another 50 basis points - placing the rate at 20% for the larger banks. So for the most part it was the same old story of emerging market economies raising rates in response to higher inflation. But, some of the Banks like Norway and Switzerland made comments about the need to normalize policy in the near term... in other words more and more central banks are starting to talk about rising inflation, so this may well be the part where we start to see inflation as a global theme rather than an emerging market theme.

Summary

So we saw the US with rising headline and core inflation, showing that inflationary pressures are well entrenched for now. Up in Canada, inflationary pressures were likewise tracking along, likewise driven by the surge in commodity prices - but particularly energy prices. Over in the EU, the ECB's comments on inflation were confirmed by higher headline inflation, and it is right to worry about the second round effects of rising commodity prices. In the BRIC economies, the distinction is made that inflation is not just a supply side - commodities thing, it is also an aggregate demand thing. Thus we continued to see monetary policy tightening by emerging market central banks, but we also started to see greater vigilance on inflation from developed market central banks. So the question arises; has inflation now progressed from an emerging market theme to a global theme?

Sources
1. Bureau of Labour Statistics www.bls.gov
2. Trading Economics www.tradingeconomics.com
3. Eurostat epp.eurostat.ec.europa.eu
4. Trading Economics www.tradingeconomics.com
5. CentralBankNews.info www.centralbanknews.info

Article Source: http://www.econgrapher.com/top5graphs19mar11.html

Top 5 Economics Graphs of the Week - 26 Feb 2011

In this edition of the top 5 graphs of the week we review some of the GDP numbers coming out of the UK and Germany. Then we look at the consumer sentiment figures from the US, and take a look at the course of the US housing market. Finally we check out what's been going on in monetary policy; with a focus on the running theme of emerging market inflation.

1. UK GDP
The UK slipped into negative growth in Q4 2010, recording a q/q change in GDP of -0.6%, compared to 0.7% in the previous quarter. That put year on year growth at 1.5% from 2.5%, making the UK economic recovery seem somewhat short-lived. The results are not encouraging, especially in the backdrop of fiscal austerity measures and plans to fix the UK government financials. It brings to mind two ugly terms: stagflation and double-dip, stagflation is pretty much confirmed, but as for the double-dip, it remains to be seen. Speculation that a Bank of England rate hike may come has already been pushed out, so it remains a long hard road to economic recovery.

2. German GDP
Over in Germany, growth slowed down a little, but the EU economic powerhouse continued to surge along at about a 4% pace. Germany saw 0.4% growth q/q in Q4, compared to 0.7% in Q3, with the year on year growth rate at 4% in the past two quarters (3.9% in Q2). So it's clear where the strength is in the EU, which interestingly creates a bit of a tension; on the one hand you have the strong German economy, and on the other you have basket cases like the "PIGS". This remains a risk, but also a source of strength, for the course of the Euro and the EU over the coming year.

3. US Consumer Sentiment
In another positive sign for the US economy, the UoM Consumer Sentiment index continued to rise in February, at 77.5 vs 74.2 in Jan; with much of the rise coming from current conditions (86.9 vs 81.8 in Jan), but with expectations also rising (71.6 vs 69.3 in Jan). Also of interest though is the point that much of the jump in confidence was seen in the higher income households (driven by improving job prospects on the upper end of the socio-economic totem pole). As noted in the Reuters report: "Consumers are increasingly aware that the economy is improving and, more importantly, expect job prospects to become more favorable in 2011." However rising prices remains a thorn in the collective sides of consumers; but the key takeaway is that the result was good, and possibly signals further strength in the US economy.

4. US House Prices
The December results for the S&P/Case Shiller house price index showed further monthly declines with a -0.4% drop in December 2010, and an annual decline of -2.4%, extending a 6 month string of monthly drops in the 20-city index. The numbers just go to show that even though the rest of the US economy is starting to show more and more signs of life, the housing market still has a lot of ground to cover. The fact is that the fundamentals just aren't there to support rising house prices. But with the improving economy, rising consumer confidence, and slowly but surely improving job market, the higher probability outcome is stabilization or sideways movement in the price; rather than downward. But the housing market still remains a risk for the US economic recovery.


5. Monetary Policy Review
The monetary policy scene was dominated by emerging markets in the past week, with Russia, Colombia and Israel hiking rates 25bps and Vietnam going for another 100bps (on top of a 200bp increase the week before). The running theme in the statements from the central banks were basically about the aggregate demand drivers (econ growth) as well as the supply/price side drivers i.e. commodity prices. Indeed the variety of supply hits around the world in agriculture have seen a strong run up in agriculture commodity prices; energy has also popped up somewhat, but metals have also seen a rally (with copper still being a benefactor of emerging market growth). So the emerging markets inflation theme will likely continue for most of this year and of course creates a bit of policy risk - i.e. can the c.banks get inflation under control without stomping out econ growth?

Summary

So we saw what looked like the UK economy heading into a double dip, recording a negative quarter of GDP growth in December last year. Then we saw the opposite in Germany; continued strength and a source of stability (but possibly also instability) in the Euro Zone. In the US the consumer appeared to be getting more confident as conditions start to improve; adding signs of momentum in the US economic recovery. But the US housing market remained in the doldrums in December, as the fundamentals are yet to support more than stabilization in prices. Finally, in monetary policy we saw more tightening as the running theme of emerging market inflation played through, with policy risks proving that emerging market growth may not be such a sure thing over the medium term.

Sources
1. OECD Statistics stats.oecd.org/index.aspx
2. OECD Statistics stats.oecd.org/index.aspx
3. Thomson Reuters customers.reuters.com/community/university/default.aspx
4. Standard & Poor's www.standardandpoors.com
5. CentralBankNews.info www.centralbanknews.info

Article Source: http://www.econgrapher.com/top5graphs26feb11.html

Top 5 Economics Graphs of the Week - 4 Sep 2010

This week we look at some particularly strong second quarter GDP numbers out from emerging markets Brazil and India, as well as one lucky developed market, Australia. Then we review the PMI results from the two biggest economies; China and the US.

1. Brazil GDP
The Brazilian economy saw further signs of strength in Q2, reporting 8.8% growth year on year, compared to estimates of 7.9% and a similarly strong 9% in Q1. But with unemployment at record lows, there have been increasing concerns about overheating; especially going into next year. The Banco Central do Brasil has already increased the selic rate a few times this year to 10.75% as well as raising the required reserve ratios. The government expects the economy to grow at least 7% this year. Asset bubbles and overheating aside; it's clear where the growth is coming from in the recovery from the post GFC recession.


2. India GDP
Another one of the BRIC economies to report on Q2 GDP this week was India, who also reported 8.8% growth year on year; compared to 8.6% in Q1. In spite of concerns about data integrity around a revision of the demand component to 10% from 3.7% (with no change in the headline 8.8% figure). The strong points were manufacturing (up 12.4%), services (up 9.7%) and construction (up 8.9%). In terms of the outlook, the monsoon season has been relatively normal so far (a key determinant of output from the agricultural sector - and of course food prices), there may also be potential benefits from helping Pakistan rebuild after the floods. But as with Brazil, with great growth comes the potential for great inflation; and the RBI has already lifted rates and reserve ratios this year.


3. Australia GDP
Australia saw further strength in its economy in Q2 this year, with the economy growing 1.2% q/q vs consensus 0.9% and 3.3% y/y vs consensus estimates for 2.8% growth. The pick up in growth was driven by a 5.6% rise in export volumes, largely due to mining exports. The consensus view on the outlook for the Australian economy is increasingly for an investment boom, with the RBA being the most aggressive of the G20 nations in raising interest rates (which now sit at 4.50%). But of course the outlook for interest rates and the Australian economy will be very much dependent on the global economy; particularly the EU and US, where concerns peaked around the Greek debt situation and potential for a US economic double-dip.


4. China PMI
China reported improvement in the manufacturing sector during August, with the official CFLP PMI rising to 51.7 from 51.2 (consensus 51.5), and the HSBC/Markit PMI rising to 51.9 from 49.4. The data point to the possibility that the recent slowdown is only a temporary one, and with the government having recently tightening lending conditions, there is plenty of room to maneuver if additional stimulus is required. Also out this week was the HSBC/Markit services sector PMI, which rose to 57.6 from 56.3 (the services sector accounted for 43.4% of China's output last year). So for now it seems the outlook is relatively positive; confirming the growing economic clout of the so-called BRIC economies. But as with the results we saw earlier (Brazil, and India) the threat of a resurgence in inflation is still a credible threat in spite of policy tightening.


5. US PMI
The PMI results for the US were also out this week and also showed an upwards blip; rising to 56.3 from 55.5, against consensus 53. However much of the lift in the main index was due to more lagging indicators such as production and employment; new orders dropped slightly, and prices rose, with exports falling and imports rising. The non-manufacturing index was also out, which fell to 51.5 from 54.3 in July, below consensus 53. The new orders index fell 4.3 points, as did export orders, production, and employment. So not such a great outcome. Also out this week was the payrolls data, showing an expansion in private payrolls, but a contraction in overall nonfarm payrolls, wages rose slightly. The strength in private payrolls is promising, but the numbers are still not great, so again, for the US it's the muddle ages.



Summary

We saw a continuation of the strengthening rebound of the Brazilian and Indian economies, confirming views on the global economy being driven by strength in emerging markets. We also saw continued strength in the Australian economy, which is set to continue its mining boom driven surge; but as with the strong emerging markets, inflation is a growing threat. The results are largely consistent with the idea of a 3-tiered economic recovery.

In China we saw improvement in both of the manufacturing PMI data, with some strength in new orders, and strength also showing through in the non-manufacturing sector. The data point to the possibility of the recent slowdown being temporary, and lines up with the results from the other big emerging markets, with the theme being strong growth - but potential for overheating.

Finally we saw some positives, but nothing particularly great in the US data this week. Aside from the promise of further stimulus measures coming next week, the scenario seems to be the muddle ages of the recovery. But one question on the US economic outlook front will be to what extent it may eventually gain from the growing strength in the large emerging market economies like India, China, and Brazil?

Sources
1. Trading Economics www.tradingeconomics.com
2. Trading Economics www.tradingeconomics.com
3. Australian Bureau of Statistics www.abs.gov.au
4. Yahoo Finance finance.yahoo.com & CFLP www.chinawuliu.com.cn & Markit/HSBC www.markiteconomics.com
5. Yahoo Finance finance.yahoo.com & Institute for Supply Management www.ism.ws

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