This week we start by checking out a dismal Q1 GDP result for Australia. Then we examine the slight fall in China's manufacturing PMI (purchasing manager index), as well as the U.S. manufacturing PMI shocker. Following that is a quick check in on US consumer confidence and housing market. Finally a review of some monetary policy decisions over the past week is checked out, before the flurry of policy activity due next week.
1. Australia GDP
Australia had a pretty bad quarter in Q1 this year, only the second quarter of negative growth over a 10-year period. Much of the weakness was driven by the catastrophic floods that hit earlier this year. To be sure there was also some general weakness in the non-materials sector, while the materials/mining/energy sector has continued to perform well on the back of demand from emerging markets, particularly China. For Australia the vulnerabilities remain high exposure to commodity prices, a high Aussie dollar, the housing market, and weakness in the non-mining sector. Other than that, if China keeps buying stuff out of the ground in Australia the Aussies will probably do alright.
2. China PMI
Over to China, the manufacturing PMI came in at 52.0 vs 52.9 in the previous month - not a huge drop, and driven mostly by a 6 point drop in the input prices index. So on balance, given the figure is still above 50 (i.e. expansionary) the result was somewhat positive. Indeed, so long as activity levels stay relatively strong, a significant tapering off or fall in inflation will be an extremely positive signal for China as an investment. Simple because it will mean a less aggressive monetary policy stance, and it would also signal a victory of sorts, which would be good from a sustainable growth point of view. Though risks remain for China, I don't see a significant slowdown on the horizon - and if I did I probably still wouldn't be worried because the Chinese government has proven capable in manufacturing economic growth!
3. U.S. PMI
In the U.S. the manufacturing PMI result was a bit of a shocker, down almost 7 points to 53.5. Yes it's still positive, but while the declines were broadly based across the sub-indexes, all the wrong things were falling; new orders plunged 10.7 points to 51, likewise export orders fell 7 points to 55, and production fell about 10 points. Grim. Yet the non-manufacturing PMI brought some respite later in the week, showing a small rebound of 1.8 points to 54.6, with new orders and new export orders both expanding the most. So it's probably not time to push the panic button yet, I mean this recovery was never going to be straightforward, when you go through something like the global financial crisis, something's got to give. But at the same time, I would probably tread carefully around U.S. equities.
4. U.S. House Prices
The same old depressing story for house prices remained for the S&P/Case Shiller house price index results, with house prices continuing to stagnate - if not fall a bit. Meanwhile consumer confidence is still basically in the doldrums, albeit slightly higher that most of the last two years. So why is this chart important? Well, essentially, you have what were once the key drivers of the U.S. economy. That is, in the old days the U.S. economy was surging along on the back of a buoyant housing market, and a debt fuelled consumption frenzy. Many have gone on about the need for a rebalancing to a more sustainable model, and maybe that will happen, but I think the easiest outcome will be back to business as usual. The trick is, it's going to take a few years before the housing market and consumer will be the economic power driver that they once were, but they will come back, so it's a matter of positioning for that eventual come back - without fumbling or mis-timing.
5. Monetary Policy Review
The past week in monetary policy saw interest rate changes from: Colombia +25bps to 4.00%, Belarus +200bps to 16.00%, Kenya +25bps to 6.25%, Jordan +25bps to 4.50%, and Thailand +3.00%. While Saudi Arabia 0.25%, Russia 8.25%, Canada 1.00%, and the West African States 4.25% held steady. So very much a week of emerging market monetary policy tightening. Next week will be an interesting one with decisions due from Brazil, Korea, Poland, New Zealand, Australia, and the ECB and Bank of England. While the decisions from those banks will be fairly mundane, it will be the tone and content of their press releases that will be particularly interesting to read in terms of the global inflation and monetary policy outlook.
Summary
So we saw a poor GDP result in Australia, triggered mostly by natural disasters, but also some underlying economic challenges playing through. Then we saw a slight slowdown in China's PMI, but potentially with a silver lining. In the U.S. the PMI results were much worse, but with pockets of positives in the non-manufacturing index, but otherwise signaling a time to be careful. Likewise the U.S. housing and consumer confidence picture remained very sleepy, with confidence still low and house prices still stagnant. On monetary policy, the week was characterized by continued emerging market tightening, but next week will bring a few key developed markets to the spotlight as they announce their decisions.
Sources:
1. Australian Bureau of Statistics
2. CFLP & Markit/HSBC & Yahoo Finance
3. U.S. Institute for Supply Management & Yahoo Finance
4. Conference Board & Standard & Poors
5. CentralBankNews.info
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
