For a more comprehensive roundup of the week, listen to Stephen’s full report here.
Data releases during February were a mixed bag and pointed to moderating economic growth in the US, partly severe-weather related, softer growth in China and Japan, but marginally firmer than expected growth in Europe. Data releases during February were a mixed bag, pointing to weak economic growth in the US (partly due to the severe weather they’ve experienced throughout the month), softer growth in China and Japan, and growth in Europe which was marginally firmer than had been expected. In Australia, housing and international trade data were strong, but most other readings – including employment – took a softer turn. Inflation was very low everywhere – assisted by low energy prices – and central banks continued to respond to the low growth, low inflation world, mostly by easing monetary conditions. The RBA cut the cash rate by 25bps to a record low 2.25% at its early February policy meeting and implied, in various commentaries, that more cuts may come.
In the US, the first reading of Q4 2014 GDP was softer than expected at 2.6% annualized growth. This has fallen significantly from 5.0% in Q3 and the softness is evident in key domestic spending categories such as household consumption spending and business investment. The US economy has suffered as a result of the severe winter; the softness in the January readings of retail sales (-0.8% m-o-m), housing starts (-2.0%), and housing permits (-6.7%), may also be due to the weather. Most survey readings of manufacturing and consumer sentiment have held up in very strong territory, pointing to better times ahead. Employment growth has also held up, with non-farm payrolls up 257,000 in January albeit softer than the strong increases in December and November, of 329,000 and 423,000 respectively. The unemployment rate edged up to 5.7% in January from 5.6% in December.
The minutes of the Federal Reserve’s January policy meeting confirmed that the Fed will remain cautious before they start to lift its Funds rate, with concerns revolving around soft global growth, the strong US dollar and disinflationary pressure.
In China, data releases were quite limited for January as a result of the floating date of the lunar New Year celebrations from year-to-year. Retail sales, industrial production and urban fixed asset investment spending are released as joint January-February readings and will not be available for another fortnight. The January readings that have been released have been soft; January exports unexpectedly fell by 3.3% y-o-y and imports were even weaker, down by 19.9% y-o-y. Inflation was unusually weak in January (+0.8% y-o-y, down from 1.5% y-o-y in December) and producer prices fell (down 4.3% y-o-y in January), both of which point to further disinflationary pressure ahead. The Peoples’ Bank of China is responding to soft growth and very low inflation as they have reduced the Reserve Ratio Requirement for banks in February. These cuts range from 50bps, for the bigger banks, to 450bps, for the China Agricultural Development Bank.
In Europe, the preliminary reading of EU Q4 2014 GDP growth was slightly stronger than expected at 0.3% q-o-q and 0.9% y-o-y, compared with 0.2% q-o-q and 0.8% y-o-y in Q3. Among the big-four euro-area economies GDP growth was comparatively strong in Germany and Spain (each up 0.7% q-o-q) while France (+0.1% q-o-q) and Italy (0.0% q-o-q) were both weak. EU inflation slipped further into deflationary territory on the preliminary January estimate, -0.6% y-o-y from -0.2% in December. Greece was in focus for much of February wanting its creditors to ease terms and conditions on its outstanding debt as well as extending the maturities. An agreement allowing a four month extension was agreed, but with only limited concessions from creditors on the austerity programs that Greece needs to pursue for the debt bailout.
In Australia, indicators of housing activity were all comparatively strong. December home building approvals fell by 3.3%, but after increasing by more than 20% over the previous two months. December owner-occupier housing finance commitments rose by 2.7% m-o-m and the value of commitments to investors was up by 6.0%. House prices rose in Q4 2014 by 1.9% q-o-q and 6.8% y-o-y. The international trade data was comparatively strong too with the trade deficit contracting sharply to $A436 million in December, from $A1,017 million in November. On the weaker side, retail sales improved only 0.2% in December pointing to indifferent Christmas trading conditions. Employment unexpectedly fell in January by 12,200, admittedly after a 40,000 monthly increase in November and December. Nevertheless, the employment setback in January was sufficient to push up the unemployment rate to 6.4% from 6.1% in December.
At its first policy meeting for 2015 in early February, the RBA decided to cut the cash rate by 25bps, after having left it unchanged at 2.50% for 18 months. The reason for the cut was a change in the RBA’s forecasts towards lower economic growth persisting for longer and consistently well-contained inflation. The RBA detailed its forecast changes in its quarterly Monetary Policy Statement and was then quizzed on the forecasts when Governor Stevens presented his quarterly testimony to the Parliamentary Economics Committee. The minutes of the meeting then added more colour; the upshot is that the RBA is indicating the likelihood of further rate cuts and recognizes that housing is strong. However, they view any unwelcome consequences of too strong a lift in house prices as the result of restrictions on housing supply beyond anything the RBA can influence.
Looking ahead, comparatively soft global economic growth and very low inflation implies more monetary policy easing moves by central banks. We predict the RBA cutting the cash rate another 25bps to 2.00%, probably at its March meeting. We then expect to see the RBA holding the cash rate at 2.00%, but with potential to ease further if necessary.