This week we look at Industrial Production figures from the US, EU, Japan and China, and then we take a look at where commodities are tracking, before reviewing the inflation results out over the week from the US and EU. Then we finish up with a review of the monetary policy decisions from Japan, Switzerland, and Mexico. The analysis echoes some of the comments made in the economic calendar for the week just past.
1. Industrial Production
Industrial production figures released over the week showed no real surprises with the pattern broadly in line with the expected path from recovery. The US showed a deceleration in Industrial production growth as the comparator figure started to recover; still too soon to call a double dip but it will pay to watch the rest of the data. Japan also saw a slight deceleration in its industrial production recovery – as the trade dependent economy continues to rebound from the deep drops during the height of the crisis. The EU showed continued signs of recovery or renormalisation, and the China data – there for comparison showed continued strength. So broadly Industrial Production has shown a period of deep contraction followed by short term recovery, the question is – where to next?
2. Commodities Index
On a slightly related note, commodity prices have over the past year recovered slightly from the crash in late 2008. however this recovery is showing signs of running out of steam. This may be driven by lower demand from large industrial producers such as China (which lines up with a slight tapering of its industrial production growth rate), but also risk appetites will be playing into the equation. On the inflation front it is a bit of a two-way street (as is apparent in the next two charts), with falling year on year returns likely to play into lower headline inflation, and relatively subdued core inflation having little inflationary impulse on commodity prices.
3. US Inflation
US headline inflation came in at 2%, down from 2.2% in April. Core inflation compared to May 2009 was up 0.9%, the same rate as April. The headline figure is starting to turn due to relative topping out of commodity prices, and will certainly give ammunition to those who see a high risk of deflation for the US. It is likely that disinflation will continue, but unless there is continued weakness and a sizable double dip, then it’s probably a low probability outcome. The results also vindicate the Federal Reserve’s stance on interest rates, and gives room for continued super stimulatory monetary policy for the time being.
4. Euro Zone Inflation
EU inflation on the other hand showed signs of further increases, with headline inflation up 1.6% from 1.5%, and core inflation remaining stable at 0.8%. However there is still unlikely to be persistent inflation in the EU as the recovery remains uncertain and weak, indeed fiscal austerity measures may even drive up inflation as price setters seek to compensate for an increases in taxes that may occur as fiscal jitters remain the issue du jour. Not much else to say, but to note that as usual inflation rates vary significantly between countries in the EU – this goes to the repeated observation that the recovery in the EU is going to be gradual, fragile, and uneven.
5. Monetary Policy Review
Three major central banks announced their monetary policy decisions this week, with all of them announcing no change to the interest rate, as their respective situations saw the balance of risks still lying on the growth side, vs those like Australia/Canada/Brazil/India with the risks increasingly turning to the inflation side rather than the growth sustainability side. Banco de Mexico left its core rate at 4.5%, the Swiss National Bank held at 0.25%, and the Bank of Japan held at 0.1%. The interesting point of all was the Bank of Japan announcing a $33 billion dollar loan scheme, whereby it will make low cost funding available to private banks in order to try and spur lending to companies, in an attempt to stimulate the economy and beat down the persistent deflation problem.
So we saw industrial production continuing its rebound in most economies, with a few key ones, including China, Japan, and the US, showing tentative signs of a deceleration in the rate of growth. However one or two data points a trend does not make. On a related note commodities prices have shown a marked drop in the annual rate of return as commodity prices stabilize following a slight rebound since the 2008 crash.
On the inflation front, in most of the key developed nations there are no clear signs of a pick up in inflation, if anything there is a slight risk for deflation. Indeed as we saw in the monetary policy decisions this week, the balance of risks for most economies are still weighted towards sustaining the recovery, rather than risks of a resurgence in inflation.
And on both the industrial production, commodity prices, inflation, and monetary policy fronts, things could change quickly as the year unfolds. But one thing’s for sure, the all clear signal will still be some time coming.