The Global Markets Weekly – 2/1/13

Posted February 4, 2013 by rvillareal

Where was the Real Q4 Problem?

U.S. Q4 GDP unexpectedly shrank 0.1%, but, as was quickly noted, a slowdown in inventory building seemed to account for the weakness, subtracting 1.3 percentage points from total growth. Oddly, however, GDP goods production—what would be affected by inventory adjustment decisions—grew by 1.0%. [private]

The inventory slowdown did restrain goods production massively—final sales of goods had surged 5.6% in the quarter. But where fourth quarter weakness was really centered was in services, where final sales dropped 1.2%.  In construction, meanwhile, final sales jumped 5.2%.   The services sector is big enough that the final sales decline there offset more than three quarters of the increase of about 5.5% in the rest of the economy—for an overall figure of +1.1%.

The services weakness was in government purchases.  Consumer services demand was not particularly strong, rising only 0.9% in the quarter, and an improvement in net trade in services combined with that to add about 0.6 percentage point to GDP.   But, the drop in government demand subtracted 1.4 percentage points.

That subtraction, in turn, was accounted for by a plunge in federal purchases of outside defense-related services, and it had been preceded by a 0.8-percentage-point positive Q3 contribution from exactly the same source.  Surely, the close to the federal fiscal year played a role in the Q3 outside-services surge, and Q4 amounted to a coasting period—the average level of expenditures in the two quarters was about equal to the Q2 level.

• U.S.: Big data releases are limited to the January Non-Manufacturing ISM (Tue) and the December international trade balance (Fri). The normal post-FOMC parade of officials giving personal spins will not really start until next week.
• Eurozone: With another insight into ECB thinking, and a host of data, the week has plenty of potential to move markets. The numbers may take precedence over the ECB meeting, with the key issue being whether recent less downbeat surveys are corroborated by actual data on both sales and production.
• UK: The BoE comes back into the spotlight, both in terms of current policy and of how future policy may be shaped.  The BoE will stay on hold at its meeting (Thu), but testimony from soon-to-be Governor Carney (Thu) may be more interesting.
• Japan: The key indicators this week, December machinery orders (Thu) and January bank lending (Fri) will give early readings on effects the prospect, and actuality, of PM Abe’s taking power had on business willingness to commit.
• Emerging Markets/Regions:  In China, CPI is due, but should be a non-event from the standpoint of both policy and the markets, as will be the trade surplus and lending activity. In Mexico, the CPI should drop further into the middle of the target range, leaving room for the BdeM to lower interest rates if deemed necessary.

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