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Econ Grapher currently publishes the Econ Grapher blog. He previously worked in markets, trading, investment management, and corporate strategy. He has also set up two internet research businesses in stock research and economic research.
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  • Top 5 Graphs of the Week: EU inflation, Commodities, Japan GDP
    This week we take a look at some inflation numbers from the EU and UK, and while on the topic have a check in on commodity prices. Then we review the latest GDP numbers from Japan, before finishing up with a check in on global monetary policy.

    1. EU Inflation
    The EU saw a continued spike in inflation, with Euro Area annual inflation at 2.8%, vs 2.7% in March (1.5% in April 2010), while EU annual inflation rose to 3.2% vs 3.1% in March (2.0% in April 2010). Meanwhile Euro Area Core inflation was perhaps the most remarkable, rising to 1.6% in April, from 1.3% in March, and just 0.8% in April 2010. The highest rate of inflation was seen in Romania (8.4%), followed by Estonia (5.4%); while the lowest rate of inflation was recorded in Switzerland at just 0.1%, followed by Norway with 1.3%. While there is a degree of divergence in results, inflation is broadly creeping upwards in the Euro Zone and Core inflation is fast approaching the ECB inflation target.

    2. UK Inflation
    Over in the UK, a similar theme of rising inflation was seen with April annual consumer price inflation of 4.5%, up from 4.0% in March, and 4.0% in April 2010. The spike in inflation in the UK has caused some to speculate on a sharp rise in interest rates from the Bank of England, with inflation still well above its official inflation target. However the Bank of England, by and large, is not particularly set on aggressive tightening, particularly when the UK economy is still struggling along in recovery mode. The most likely policy path will be a steady path of rate increases, perhaps commencing later this year, depending on how the broader economy fares.

    3. Commodities
    On a rolling 12 month return basis, the latest data shows commodities were up 35.6% as measured by the Reuters/Jefferies commodity index. On a rolling monthly basis though the figure was -6.6% driven by a sell-off in a few commodities, particularly Silver. Commodity prices continue to be the key variable for 2011, as rising prices have catalyzed uprisings and social unrest, driven surging inflation in emerging markets, and have begun to have an increasing impact on inflation in developed markets. There's also the growth risks that high commodity prices present. But commodities are probably a good example of mean reversion in practice as high prices generally lead to a supply response, thus prices shouldn't be able to run up too high for too long unless structural changes have taken place in the global economy.

    4. Japan GDP
    Japan had a disappointing Q1 GDP figure, with GDP declining -0.9% on a quarterly basis (annualised -3.7%) , compared to -0.8% in Q4 2010, while Q1 2010 was 2.2%. On an annual basis this mean contraction of -0.7%, compared to 2.4% in Q4 2010, and 5.5% in Q1 2010. Much of the negative results can be explained by the impact of the earthquake as the disaster weighed heavily on private consumption and caused supply chain disruption impacting on net exports, and general uncertainty limiting capital spending. As with most large scale disasters the economic pattern is a short-term hit, but a medium term spike. So, provided the Japanese government can manage the process well, the rebuilding phase should help Japan's economy return to growth later this year, with 2012 likely to see much stronger economic activity levels.

    5. Monetary Policy
    The past week in monetary policy was relatively quiet with only 5 central banks announcing monetary policy decisions, and of those, only 1 adjusting its policy stance. Vietnam was the only bank to adjust monetary policy settings; increasing its reverse repurchase rate by 100 basis points to 15.00%. Meanwhile those that held their monetary policy interest rates unchanged were: Serbia (12.50%), Hungary (6.00%), Sri Lanka (7.00%), and Japan (0.10%). So there was somewhat of a theme of emerging markets beginning to ease off on aggressive policy tightening (with the exception of Vietnam, which is still seeing rampant inflation) as some inflation pressures begin to ease, if not peak, and as the growth outlook comes to fore in terms of policy risk. Monetary policy, and by extension inflation, remains one of the key factors for the growth and financial market outlook in emerging markets this year.

    Summary

    So we saw the pace of inflation beginning to show a more marked uptrend in the Euro Zone, which may well mean that the ECB's interest rate increase in April will likely be repeated in the near term. Meanwhile the UK also saw a continued high rate of inflation, but the Bank of England is still unlikely to budge as the UK economy is still on the go-slow. On a related topic, commodity prices saw surging 12-month returns in May, but with monthly returns diving into negative territory, perhaps heralding an easing in commodity prices over the medium term. In Japan, first quarter GDP results were disappointing, driven into negative territory by the disaster impact. On monetary policy, further signs of a peak in monetary policy tightening for emerging markets surfaced as the growth-inflation risk mix is becoming increasingly finely balanced.

    Sources
    1. EuroStat epp.eurostat.ec.europa.eu
    2. National Statistics Office www.statistics.gov.uk
    3. Jefferies www.jefferies.com
    4. OECD Statistics stats.oecd.org
    5. Central Bank News www.centralbanknews.info

    Article Source: http://www.econgrapher.com/top5graphs22may11.html

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    May 21 9:39 PM | Link | Comment!
  • New Zealand Reports Higher Inflation, What Does it Mean for the Kiwi?
    New Zealand reported QoQ inflation of 0.8% in the first quarter, down from 2.3% in the December quarter last year, and below consensus forecasts of 1.0%.  This placed the annual inflation rate at 4.5%, up from 4.0% in the previous quarter.  Broken down, tradeables inflation was 0.5% QoQ and 3.7% YoY, while non-tradeables inflation (i.e. goods that do not face foreign competition) was 1.1% QoQ and 5.2% YoY. 

    New Zealand is still seeing the one-off effects of a series of regulatory changes on its inflation rate, e.g. an increase of the sales tax (GST or Goods and Services Tax), and increases in ACC levies etc.  Meanwhile the tradeables figure - susceptible to global commodity prices - has been partially headed off by the strong New Zealand dollar, which is riding strong on high terms of trade (boosted by strong dairy and agricultural commodity prices).



    The Reserve Bank of New Zealand [RBNZ] is likely to find some comfort in the results as it ponders the time to re-start its tightening cycle.  Prior to the tragic earthquakes in September last year and February this year the RBNZ had hiked rates by 25bps twice to 3.00%, but dropped the rate 50bps to 2.50% following the worst of the Christchurch earthquakes in February. 

    The market expects the RBNZ to begin tightening as soon as December this year, but a lot will depend on the rebuilding efforts in Christchurch and how quickly the economy recovers.  But there are upside risks to inflation, with the potential for second round effects from the one-offs and rising commodity price impacts, as well as the major rugby world cup event that will take place in New Zealand this year.



    Already the New Zealand Dollar, or 'Kiwi' (BNZ) as it is known by most, has begun to respond to the possibility of higher interest rates.  Over the past week the Kiwi climbed roughly 200 pips or 2 cents, barely touching 0.80 against the US dollar, before falling back to the low 0.79's following the release of the inflation data.

    The outlook for the New Zealand economy is slowly improving, with credit conditions easing, one-offs such as the rugby world cup, and stimulatory policy conditions set to support the economic recovery.  While the housing market is showing some signs of improvement, the labor market is still relatively sluggish, and consumer spending has been capped somewhat as a result of this and the deleveraging cycle. 

    Thus a more robust recovery will need to be driven by business spending and investment, and in particular: exports.  As it is also an election year, there is a certain degree of uncertainty; however it is looking likely that the pro-business National Party will remain in power, which may mean some partial privatization of State Owned Enterprises in coming years.  This will likely be good for the local share market, the NZX, which is still trading on relatively attractive valuations, particularly when it comes to dividend yields.

    Sources:
    Statistics NZ
    Yahoo Finance


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Apr 18 4:37 AM | Link | Comment!
  • Quants: The Alchemists of Wall Street
    I found this interesting video while relaxing at home on a weekend morning, it gives a bit of an insight into the world of "quants" - the PhDs, mathematicians, engineers, and model builders of wall street. It also adds a bit of insight into their role in the financial crisis. I certainly wouldn't say that they caused the crisis, but rather a lack of controls and insights into the assumptions that the models were based on may have contributed (but of course there was all the other things like the government encouraging subprime lending, perverse incentive structures, a lack of risk insights, understanding, and thinking). This is well worth a watch if you're in any way finance/markets inclined:



    By the way, I found the clip here, (a site which has quickly become a favourite of mine!) there's a few other interesting videos on there as well - great way to whittle away your weekends and broadband bandwidth!

    Here's the description from Top Documentary Films:
    Quants are the math wizards and computer programmers in the engine room of our global financial system who designed the financial products that almost crashed Wall st.

    The credit crunch has shown how the global financial system has become increasingly dependent on mathematical models trying to quantify human (economic) behavior.

    Now the quants are at the heart of yet another technological revolution in finance: trading at the speed of light.

    What are the risks of treating the economy and its markets as a complex machine? Will we be able to keep control of this model-based financial system, or have we created a monster?

    A story about greed, fear and randomness from the insides of Wall Street.

    So enjoy, but also ask yourself what you can learn from it. From my experience, the discipline of being very explicit about financial model inputs and assumptions is absolutely critical to ensuring the integrity of the outputs, and ensuring others understand the outputs and the sensitivities. Happy viewing and happy modeling!

    Source: http://www.youtube.com/watch?v=ed2FWNWwE3I

    Blog post: http://econgrapher.blogspot.com/2010/11/quants-alchemists-of-wall-street.html


    Disclosure: "No positions"
    Nov 27 8:36 PM | Link | Comment!
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