George Lucas
The most significant development for markets is that the US core personal consumption expenditure (PCE) deflator – the Federal Reserve’s preferred measure of inflation – rose by 1.7 per cent in the year to January, says George Lucas managing director, Instreet Investment.
“This is the strongest increase in the PCE deflator since the end of 2012 and it is above the FOMC’s current median projection for the end of the year (1.6 per cent).
“It indicates that strong employment numbers and increasing average hourly wages are beginning to flow through to the real economy, causing “slack” in the US economy to decrease.
“This may be the wake-up call financial markets need to realize that the US and the world is not heading into recession.
“However, other recent data out of the US has also been strong. Not only have we seen a rebound in industrial production, but GDP has been revised up to 1% for quarter four – in contrast, the market was expecting GDP to be revised down.
“The other development worth noting is that the strong rally in oil prices last week helped plump up markets as Brent settled at $35.10 a barrel – up 6.3 per cent for the week.
Down in Australia
The 0.8 per cent quarter on quarter rise in investment in Q4 in Australia was much better than the 8.4 per cent quarter on quarter fall in Q3. The improvement suggests that GDP growth in Q4 may be stronger than previously thought.
The RBA has been waiting for investment to rise as this is the last piece of the puzzle signalling a stronger economy and reduces the likely hood of further rate cuts in Australia going forward.
This week the RBA is highly likely to leave interest rates on hold at 2.0 per cent at Tuesday’s policy meeting, but is less likely to express its displeasure at the recent strength of the dollar in the policy statement.
Release of the Australian National Accounts on Wednesday should show that GDP rose by 0.6 per cent quarter on quarter in Q4. And the release of January’s international trade and retail sales figures on Thursday and Friday, respectively, will probably suggest that the economy performed reasonably well at the start of this year too.
G20 disappoints
Finance ministers and central bankers clashed at the G20 meeting over a number of issues – ranging from the need for global stimulus to negative interest rates. The fallout is that they are unlikely to agree on the “bold” measures urged by the International Monetary Fund (IMF) earlier this week.
The IMF wants countries that have already made commitments to the G20 growth initiative to accelerate those commitments. They feel the world needs the support right now (even though numbers out of the US are looking positive).
There was also pressure on China to do more and to implement stimulus policy quicker.
Another point of contention was divergent interest rate policies. Some countries that have adopted negative rates were attacked as it is believed this policy is aimed at boosting demand through weakening currencies – a zero sum game for the global economy.
There are also fears that after G20, Japan may intervene in currency markets to weaken the YEN. The negative interest rate policy has been over shadowed by the flight to the YEN as a safe haven currency – significantly strengthening the YEN.
With the G20 over, Japan no longer needs to be on its best behaviour and intervention in currency markets to weaken the YEN is now more likely.
