International Economic Week In Review: Oil May Be Bottoming, Edition

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Includes: ADRU, AUSE, BNO, CHN, CN, CXSE, DBAU, DBEU, DBEZ, DBJP, DBO, DNO, DTO, DWTI, DXJ, EEA, EPV, EURL, EWA, EWJ, EWV, EZJ, EZU, FAUS, FCA, FEEU, FEP, FEU, FEUZ, FEZ, FIEU, FJP, FXI, FXJP, FXP, GCH, GXC, HAUD, HEDJ, HEGE, HEGJ, HEWJ, HEZU, HFEZ, HFXE, HFXJ, HGEU, HGJP, IAF, IEUR, IEV, JEQ, JFC, JPN, JPNH, JPNL, JPP, JPXN, MCHI, NKY, OIL, OLEM, OLO, PGJ, QAUS, SBEU, SCO, SZO, TDF, UCO, UPV, USL, USO, UWTI, VGK, XPP, YANG, YAO, YINN, YXI
by: Hale Stewart

This week, oil's price drop was the primary overarching market development:

Oil started to decline at the beginning of November, and has attempted four counter-rallies since. But this week, prices rallied above the downward sloping trend line connecting the highs of the four-month move lower. There is still plenty of bearishness on oil's daily price chart. But the close right below the 50-day EMA provides a glimmer of hope that oil might be finding a bottom.

On Monday, Draghi gave a speech to the EU parliament, in which he reiterated the now familiar statement that emerging markets and commodity price weakness are the primary reasons for recent market fluctuations. He then noted that actions taken since the recession should allay investors' concern about the overall condition of the financial sector. He made the following observation about the EU's economy:

Against the background of downward risks emanating from global economic and financial developments, let me now turn to the economic situation in the euro area. The recovery is progressing at a moderate pace, supported mainly by our monetary policy measures and their favourable impact on financial conditions as well as the low price of energy. Investment remains weak, as heightened uncertainties regarding the global economy and broader geopolitical risks are weighing on investor sentiment. Moreover, the construction sector has so far not recovered.

Curiously absent is any mention of consumer spending, which Draghi specifically highlighted in previous speeches. Instead, his comments feature a downbeat assessment of the investment picture. The following table from the most recent Economic Bulletin place Draghi's assessment in a broader perspective:

Over the 4Q14-3Q15 period, private consumption increased between .3% and .5%. But gross fixed capital formation was very weak. While it increased a strong 1.5% in 1Q15, it slowed sharply to .1% and 0% in 2Q15 and 3Q15, respectively. This week's .6% drop in construction spending shows that investment weakness continues (this data point has moved sideways for the last two years). Finally, Draghi promised a re-evaluation of the ECB's policies at the next meeting:

In order to make the euro area more resilient, contributions from all policy areas are needed. The ECB is ready to do its part. As we announced at the end of our last monetary policy meeting in January, the Governing Council will review and possibly reconsider the monetary policy stance in early March. The focus of our deliberations will be twofold. First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices. Second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks. If either of these two factors entail downward risks to price stability, we will not hesitate to act.

Like the Federal Reserve, the ECB believes they are importing at least some deflationary pressure. However, the degree to which those prices are flowing through to low CPI may be weak. The ECB is concerned the benefits of their asset purchase program aren't flowing to the economy. Here, Draghi is most likely concerned about the growth of business loans, which were weak until the last few months of 2015.

Japanese news was terrible. First of all, 4Q GDP contracted 1.4%:

Consumer spending (see table above) contracted sharply. This data runs counter to the BOJ's recent assertion that increased wage growth would naturally translate into higher consumer spending. The report did, however, contain two glimmers of hope. The first was the 5.7% annual increase in non-residential investment. This data confirms the BOJ's recent statement that corporate profit increases would translate into higher investment. The second was that GNI increased at a .3% annual rate. Remember that GNI is GDP plus (essentially) extra-national income. Adding to the gloom was a 1.4% decline in industrial production.

The news from the UK will keep the BOE on the sidelines for the foreseeable future. While unemployment was 5.1%:

Wage growth was only 2% Y/Y:

And price pressures are still very contained, with a .3 Y/Y CPI and -1% PPI. Overall, the UK remains in a really nice economic place.

The RBA released the latest meeting minutes. They observed that household spending returned to a 10-year average, while housing investment remained strong. Exports were positive, although, due to commodity price declines, the terms of trade were a bit weaker. Key to their observations were the following two points:

Members began their discussion of economic developments by focusing on the domestic economy. They noted that conditions in the labour market had improved while GDP looked to have continued growing at a below-average pace over 2015. The unemployment rate declined to 5.8 per cent in December, employment grew at an above-average rate over 2015 and the participation rate was on an upward trend. The national accounts for the September quarter, released the day after the previous meeting, indicated that GDP growth had picked up as expected in the September quarter, partly because net exports had rebounded following weather-related disruptions in the June quarter. More recent data on activity and trade suggested that output growth had eased in the December quarter and remained below-average in year-ended terms.

Members noted that there had been further evidence of activity rebalancing away from the resources sector towards non-resource sectors. Output growth in the services sector, particularly household services, had been strong. The relatively labour-intensive nature of this growth suggested that compositional change may help to reconcile a rise in employment growth to an above-average rate, on the one hand, and output growth remaining below average, on the other. Also, low growth in labour costs was likely to have contributed to an improvement in Australia's international competitiveness and encouraged businesses to employ more labour than otherwise. Members observed that growth in goods-related production appeared to have picked up recently, but remained modest.

Australia has enjoyed a great run of declining unemployment over the last year, as shown in the following chart from the latest employment report (which was released this week and showed a .1% decline):

In addition, the economy continues to progress from being resource-dependent to having a more balanced growth model. Finally, auto sales increased a solid 5.1% Y/Y.

And finally, there is China, where the news was bearish. Exports contracted 11.2%, while imports dropped 18.8 (both Y/Y rates). Both numbers were far below consensus. And PPI inflation continued to contract, this time at a 5.3% Y/Y rate. Both data points continue the recent trend of data weakness.

Hale Stewart, XE.com