U.S. And Eurozone Industrial Output Continue To Diverge
Marc Chandler | Jul 15, 2014 02:38AM ET
This Great Graphic was tweeted by Cigolo and retweeted by Pauly@spz_trader, which is how we saw it. The data is from Thomson Reuters Datastream. It shows US and euro area industrial production since 2002.They closely tracked each other until 2011 and since have diverged.
It seems that the policy response to the debt crisis has broken the synchronizations of the business cycle.
The divergence is set to widen further. Yesterday, the euro area reported that May industrial output fell 1.1%. On a workday adjusted basis, it is up 0.5% from a year ago.
In May, the US industrial output rose 0.6% on the month and 4.3% from a year ago. Tomorrow, the US will report June industrial output figures. The Bloomberg consensus looks for a 0.3% increase, which could produce a small increase the year-over-year rate further, given the base effect (last June industrial output rose almost 0.2% and will drop out of the year-over-year comparison).
July will also have favorable year-over-year comparisons. The going gets tougher in August and September. There was a surge in industrial output at those times in 2013. During those two months, there was a combined increase of almost 1.3%. To put that in perspective, with a 0.3% rise in June, industrial output would have risen less than half as much as those two months for the entire quarter--and this is a quarter in which estimates for GDP are around 3%.
The divergence of economic activity, for which the industrial output numbers are but a weak proxy, is thought to lead to the dollar's out-performance. However, the rub is that activity alone does not necessarily move the dollar. It is mediated through monetary policy and contrary to the Wall Street Journal's piece about the tightness in the labor market spurring a more heated debate at the Federal Reserve, the fact of the matter is that no voting member at the Fed has dissented in favor of a rate hike or expediting the tapering. The labor market is not tight even if there is less slack than there was.
When contemplating foreign exchange determination, growth and monetary policy are a set of variables, but there are others. In the euro's case, its large current account surplus and capital inflows are also important factors. Diversification of reserves by Asian central banks, for example, may also play a role. We are also struck by the continued de-leveraging for European banks and and other financial institutions. This means the sale of assets, like real-estate related securities and portfolios of bad loans. Dollar-based investors are reportedly among the featured buyers. The upcoming stress tests provide banks added encouragement to pare back their balance sheets.
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