- US Retail Sales were broadly weaker than expected, with the ex Autos & Gas measure up 0.2% MoM in Jan vs 0.4% expected, and the Dec print revised down from 0.4% to 0.1%. The Headline Print was also weaker, printing 0.3% Mom vs 0.5% expected. Finally, the core print rose 0.4% MoM, vs -0.1% previously. As is the case for all January data, weather likely had a large impact.
- US Import Price Index jumped to 5.3% YoY in Jan vs 4.8% expected and 4.4% previously.
- Empire manufacturing printed 15.4 in Feb vs 15.0 expected and 11.92 previously.
- NAHB homebuilder index was unchanged at 16 as expected.
- European officials signaled that the new bailout fund would have a lending capacity of EU500B, nearly 2x the current capacity. There are still several outstanding issues that have to be resolved, however there are signs that substantial progress was made during the meetings today. WSJ
- BoE Governor King’s letter was interpreted hawkishly, noting that the committee’s central view was that "under the assumption that Bank Rate increases in line with market expectations … inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead,” even though “attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.” As the market is pricing in hikes by June, the market interpreted this to mean that the MPC could move soon. Furthermore, this is a hawkish update vs the November Inflation Report, which judged that inflation was more likely to be below 2% at the 2 yr horizon.
- The German tabloid Bild reports that J Weidmann will become the new Bundesbank President
- German Zew index of Economic Sentiment rose to 15.7 in Feb vs 20.0 expected and 15.4 previously. The EU Zew index, however, improved to 29.5 in Feb vs 28.5 expected.
- UK CPI rose to 4.0% YoY in Jan as expected, vs 3.7% previously.
- Riksbank hiked 25bps today to 1.5% as expected. It now expects the policy rate to average 2.25% in 4Q vs 2.03% previously
- Chinese CPI rose 4.9% YoY in Jan vs 5.4% expected and 4.6% previously. The NBS announced revisions to the CPI basket, where the weight for food component came down 2.21% while housing proportion was up by 4.22% compared to the old weights.
- Chinese M1 growth slowed to 13.6% YoY in Jan, vs 19.6% expected and 21.2% previously. Seasonal effects likely played a large role.
- There has been a lot of talk recently about the Federal budget and the size of the deficit. What has been surprising is that people have not connected the size of the deficit with its impact on the economy. A Federal budget deficit of 10% of GDP is generating less than 5% of nominal growth! The deficit is adding 1.1 trn to personal income, the majority of which is likely to have been spent immediately. What’s going to happen when that gets cut? The perma-bears have been talking about this for a long time, but I’d expected that the press would follow up on the impact of lower future deficits on the economy given the recent budget talk.
The chart below graphs the relationship. Correlation between the yearly change of each variable is -39% over the sample, and -46% since 1990, with a Beta of -0.7 and -0.5, and T-Statistics of -2.6 and -2.2, respectively. Thus, if historical relationships hold, a reduction in the budget deficit from -10% to the long run average of -2.5% over 3 years (per the CBO Outlook) is likely to reduce growth by roughly (7.5% / 3) * 0.5 = 1.25% each year. As growth has averaged 3% YoY from 1990-2007, such an impact could reduce growth to under 2% annually, well below the rate necessary to lower UE.
- BAML Survey: A net 67 percent of respondents, who together manage $569 billion, had an “overweight” position on global equities, the highest level since the survey first asked the question in April 2001. Meanwhile, a net 9 percent is “underweight” cash, the lowest allocation since January 2002. – BBG