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Economies of Note - 19th December

Written by Ian Dobbs on December 19th, 2014.      0 comments

12:30pm(NZT)
Australia
Domestic releases from Australia this week have had little impact on the economic outlook or the Australian dollar. The currency has continued to be influenced by volatility in commodity prices and offshore releases. Data out of China showed their factory activity actually shrank in December for the first time seven months, while in the US the Fed moved a step closer, albeit only a small step, to hiking interest rates. The RBA’s minutes showed they are firmly on hold policy wise, although the central bank have acknowledged the increasing market expectation for interest rate cuts next year. With the holiday period now well upon us there is little data of significance set for release from Australia until the first week in January. This doesn’t necessarily mean quiet markets however, and with so much going on in the world at the moment the reduced market liquidity can easily result in much bigger swings in price action that would otherwise be seen. The Australian dollar could be particularly vulnerable over the period.
 

New Zealand
The two key releases from New Zealand this week have both been a touch stronger than expected. Fonterra, and dairy farmers in general, will have been happy to see a small rise in prices after the latest dairy auction. Although the 2.4% increase is only a drop in the bucket compared to the declines seen this year, it is welcome news and provides a glimmer of hope for a broader recovery heading into next year. Yesterday we saw GDP data for the third quarter and this was a very good number. GDP printed at +1.0% versus expectations of +0.7%, with growth driven by primary industries which increased 5.8%. This is some of the strongest growth in primary industries in 15 years. We have trade balance data set for release next week and then there is little to get excited about until Fonterra’s next auction on January 7th.
 

United States
The two key releases from the United States this week were the inflation data and the FOMC statement. Somewhat unsurprisingly, inflation came in on the soft side driven lower by declining oil prices. Month on month inflation was -0.3% versus expectation of -0.1%. While year on year inflation is now running at 1.3% versus expectation of 1.4%. The core result, which strips out volatile food and energy was bang on expectation at +0.1%. In the rate statement released yesterday morning Fed acknowledged the lower inflation outcome and said even if it spills over into the core number, they see it as transitory, and the net effect of declining oil prices is positive for the economy. The Fed did remove the call for a ‘considerable time’ between the end of QE and rate hikes, preferring instead to say they will be patient before tightening. This is straight out of the play book from 2004 when the Fed hiked exactly six months after making a similar change in wording. Of considerable note in the statement was the lack of reference to current market turmoil or the weakening global growth outlook. Next week ahead of Christmas we get durable goods orders, final GDP and new home sales.
 

United Kingdom
The Bank of England (BOE) this week released the results of stress test conducted on the UK’s banks which showed a resounding pass mark even after severe stress. The Co-operative Bank was the only one to fall below the 4.5% capital threshold, but the BOE have since accepted their revised capital plan. UK inflation also hit the wires and it printed at the lowest level since 2002. Year on year inflation is now running at 1.0% versus expectations of 1.2%. The softer result was driven by declining oil prices and therefore not entirely surprising. Like most other central banks the BOE view declining oil prices as a positive for consumers and this should boost economic growth to a degree going forward. UK employment data was also released this week and it showed the claimant count (unemployment claims) declined by more than forecast at -26.9k. The unemployment rate was a little disappointing remaining at 6.0% against expectations for a small fall to 5.9%. Somewhat more positively though was the average weekly earnings data which jumped 1.4% from the prior reading of 1.0%. Rising wages are exactly what the Bank of England wants to see before they start hiking rates. The BOE minutes suggested just that when they hit the wires on Wednesday night. They also showed the voting pattern was the same as previously with 7 votes for unchanged rates and 2 votes for a hike. Last night’s retail sales figures we encouraging coming in much stronger than forecast. Sales for the month of November were up 1.6% versus 0.4% expected. Current account figures next week and manufacturing PMI on 2nd January are the data highlights over the Christmas / New Year period.
 

Europe
Eurozone manufacturing and service sector PMI’s this week both came in a touch stronger than expected which will have pleased the ECB. We even saw German ZEW economic sentiment improve more than forecast, although participants inflation expectations remain very low. The first round of Greek presidential voting took place and the president failed to reach the required level. There will be more voting between now and December 29th and if hasn’t achieved the required threshold by then the county will go to full elections sometime in late January or early February. With the anti-bailout Syriza party currently leading on the polls this could really shake things up in the New Year. Last night’s release of German IFO business climate index came in bang on expectation at 105.5. This is also a small improvement over the prior reading. There is a raft of second tier data scheduled for release between now and January 4th which should have only limited impact.
 

Japan
The only release of note this week from Japan was the Tankan report which hit the wires on Monday. The non-manufacturing index improved a touch, but the manufacturing index declined further. There was also a notable divergence between large and small firms, with the smaller firm much more pessimistic. The Japanese trade balance was released on Wednesday and it remained negative of the 29th consecutive month. The monthly deficit was less than expected however, thanks to the declining price of crude oil imports. We have the Bank of Japan (BOJ) monetary policy statement out later this afternoon, although no change in policy stance is expected. There is also plenty out next week with the BOJ minutes, household spending, inflation, industrial production, retail sales and average cash earnings all set for release.
 

Canada
We have seen a couple of releases from Canada this week that both came in below expectation. Manufacturing sales and wholesale sales both disappointed, which didn’t help the Canadian dollar that has been at the mercy of volatility in oil prices. Tonight we get inflation and retail sales data and as is the case in most other countries at the moment, the risks for inflation are on the downside thanks to weakness in the price of oil. Headline inflation is expected to fall 0.2% m/m while the core reading should come in at +0.1%. Retail sales are also expected to decline this month, by -0.4%, after posting a +0.8% gain last month. The only release next week is GDP out on Tuesday night.
 
 

FX Update - Markets wind down for the year and liquidity dries up

Written by Ian Dobbs on December 16th, 2014.      0 comments

4:00pm(NZT)
All the team at Direct FX would like to thank you for your continued support throughout 2014. We wish you all a safe and cheerful holiday period and a prosperous 2015.
 
Our Weekly commentary will be taking a break now until the week of 19 January, but we are operational for dealing throughout the holiday period with the exception of the statutory holidays in Australia and New Zealand.
 

Market Overview:
As the markets wind down for 2014, expect the general levels of liquidity to lower in the coming week. These lower levels of liquidity leave the price action vulnerable to sharper than usual moves at times. From an Australasian perspective, following today’s uneventful release of the minutes from the RBA’s previous meeting, the final pieces of NZ data become the focus. Tomorrow’s Fonterra Global Dairy Trade (GDT) auction results will be closely followed. Any further pressure on prices would like see the NZ come under renewed pressure, albeit RBNZ seem calm about the impacts on the wider economy. After the GDT results the attention transfers to the release of the third quarter NZ growth numbers that will be on office on Thursday morning.
 

Australia
The Australian dollar has continued to struggle this past week despite what looked like some good employment data last Thursday. Employment change came in at +42.7k against expectations of just +15.2k. However, most of that gain was in part-time work and the unemployment rate actually edged up to 6.3% from 6.2%. The RBA’s Edwards said employment won’t grow strongly in 2015 and interest rates will remain low. The Australian Treasury released their Mid-Year Economic and Fiscal Outlook yesterday and they see unemployment now rising to 6.5% by the second quarter which is up from May’s estimate of 6.25%. They have left their GDP forecasts largely unchanged, but have significantly increased their budget deficit expectations for the next few years. The RBA released their minutes earlier this afternoon and as there was little new, the impact was non-existent. The rest of the week looks pretty quiet with only leading indicators tomorrow and the RBA’s quarterly bulletin on Thursday.
 

New Zealand
There has been very little in the way of significant data since Last Thursday’s surprisingly ‘hawkish’ RBNZ monetary policy statement (MPS). Governor Wheeler spoke to parliament's finance committee in the wake of the MPS and he said he was concerned about house price inflation in Auckland. He also said they have no plans for further macro prudential instruments. This is significant as it only reinforces the expectation that more rate hike are on the way at some point in the future. Wheeler did however, say that the RBNZ are on hold for a long time and the need for rate tightening has been pushed out. Still to come this week we have another dairy auction from Fonterra to digest and key GDP data is also set for release on Thursday.
 

United States
We have seen some mixed results from the US this past week, although taken as a whole, the results have been very supportive of the economy going forward. Producer prices and the Empire State Manufacturing Index were both weaker than expected but these have been outweighed by other more positive results. Retail sales were significantly stronger than forecast and the prior numbers were also revised up. The University of Michigan Consumer Confidence Index was very strong, printing at the highest level since 2007. Last night we saw industrial production and capacity utilization data and both these result also came in on the strong side. This week should prove to be very interesting with inflation data and the FOMC rate statement set for release. Will the Fed signal rate hikes are on the horizon, or will the low level of inflation see then sit on their hands for much of next year? Long-time bond investor Bill Gross believes the Fed will wait until inflation hits 2% before hiking, and that won’t happen until at least very late in 2015. The Fed need to start normalizing rates before then. The hunt for yield in this ‘zero rate’ environment has caused a massive mispricing of risk across various asset classes and the Fed could easily be sowing the seeds of the next crisis by maintaining this policy for too long. The shale oil industry in the US is just one example. Low interest rates allowed them to finance a massive amount of investments with estimates suggesting they have issued $550 bln in bonds. With oil now below $60 a barrel a huge portion of that industry is now uneconomical. Some producers may ride through this, but others, particularly those highly leveraged, won’t and large scale bond defaults are a very real possibility.
 

United Kingdom
The past week has seen some mixed results from largely second tier data which has failed to support the UK Pound to any degree. Construction output printed much weaker than expected, but offsetting this were large scale positive revisions to previous results. The CBI industrial trends survey out last night was a bit better than forecast printing at 5 vs 3 expected. The main focus however, is on a number of key releases still to come this week. We get the results of the bank stress tests tonight along with inflation data. On Wednesday we have employment numbers and on Thursday we get retail sales. These results will set the tone for the GBP heading into the thin liquidity of the Christmas period.
 

Europe
Late last week the ECB held its Targeted LTRO (long-term refinancing operation) and the uptake from banks was at the lower end of expectation. The central bank lent EUR 129.84 bln worth of loans, which is far less than the EUR 270 bln of old loans due to be repaid. This has the effect of shrinking the ECB’s balance sheet which is the opposite of what the central bank wants. The ECB is trying to expand their balance sheet by EUR 1 tn to try and fight deflation but it seems the banking system doesn’t need any more ultra-cheap money. The only way forward for the ECB now is full-blown sovereign bond purchases known as ‘quantitative easing’ (QE). It seems increasingly likely a decision on this will be taken in the first quarter of next year. It really is just a matter of overcoming German opposition to launching a QE programme. But with growth forecasts for Germany getting revised down by most forecasters, and Euro wide deflation a very real threat it seems the Germans will have to relent. For the French it can’t come soon enough. Recent data showed that core inflation in France turned negative for the first time since modern data began. Adding insult to injury, ratings agency Fitch have just downgraded France AA from AA+ previously, sighting the weak economic outlook and high ratio of public debt. Attention this week now turns to manufacturing and service sector PMI data, along with German ZEW economic sentiment and IFO business climate surveys.
 

Japan
Japan held elections over the weekend and it was a resounding win for PM Abe with his coalition gaining a near two thirds majority. Abe will now push ahead with his plan to fight deflation, while also trying to deal with the government's perilous fiscal position. Ratings agency Fitch said they will probably downgrade Japan if the 2015 budget doesn’t offset the recently delayed sales tax hike. Yesterday’s quarterly Tankan report was a very mixed bag. The manufacturing index declined while the non-manufacturing index increased. There was a notable split between large and small firms however, with the smaller firms much more pessimistic. The focus now turns to Friday’s BOJ monetary policy statement.
 

Canada
The Canadian new house price index came in right on expectation at +0.1% month on month. Governor Poloz last week suggested house prices are 10%-30% over valued, but this week the finance minister Joe Oliver says he doesn’t see a housing bubble in Canada and there is no need to take dramatic steps to cool it down. Capacity utilization data out on Friday came in at 83.4% versus 83.0% expected, suggesting there may not be as much slack in the economy as thought. There is also potential for some M&A activity to support the CAD in the near future with the Spanish company Repsol looking at a $8 billion takeover bid for Canada’s Talisman Energy. We still have a number of key releases to come this week with manufacturing sales, wholesale sales, inflation and retails sales all set for release.
 

Major Announcements last week:
  • Chinese Trade Balance 54.5 B USD vs 44.3B USD expected
  • NAB Australian Business Confidence Index 1 vs 5 previous
  • UK Manufacturing Production -.7% vs +.2% expected
  • Chinese Inflation 1.4% vs 1.6% expected
  • RBNZ leave monetary policy unchanged
  • Australian Unemployment rate 6.3% as expected
  • US Retail Sales +.5% vs +.1% expected
  • Chinese Industrial production 7.2% vs 7.6% expected
  • US UoM Consumer Sentiment 93.8 vs 89.6 expected
 

Economies of Note - 11th December

Written by Ian Dobbs on December 11th, 2014.      0 comments

4:00pm(NZT)
Australia
The Australian dollar has continued to struggle this week with some local data releases keeping pressure on the currency. Falls in both business confidence and consumer sentiment have raised alarm bells, especially in light of the recent very weak GDP result. Westpac’s chief economist called the 5.7% fall in consumer sentiment “a very disturbing result” with the index now at its lowest point since August 2011. The property market remains a big focus with Australian Prudential Regulation Authority talking about potential limits on borrowing for property investment. At the same time the Australian Securities and Investment Commission are taking a hard look at interest only loans that now make up 42.5% of all new mortgage lending. That’s a record high and is very concerning as these loans are the most sensitive to movements in interest rates. In the past couple of hours we have seen the latest reading on employment change, with a nice boost in part-time jobs growth providing a highlight.
 

New Zealand
It has been an interesting week in New Zealand with two key releases drawing attention. The first was the announcement from Fonterra that they have revised down their forecast payout for 2014/15 to NZ$ 4.70 per kg from NZ$ 5.30 previously. This revision was widely anticipated and probably not as big as some had predicted. As a result the negative impact on the currency was very short lived. A much bigger reaction in the currency did however occur after the RBNZ released their monetary policy statement this morning. The central bank left the cash rate unchanged at 3.50%, but added “some further increase in the OCR is expected to be required at a later stage”. This comes after the October statement dropped any reference to the need for further tightening instead saying “a period of assessment remains appropriate before considering further policy action”. This talk of further tightening was a hawkish surprise and as such boosted the NZD which jumped over a cent against the USD and AUD in minutes. The RBNZ are firmly focused on the fact that the economy is running above what they see as capacity and in their view this will eventually generate inflation. They are at a loss to explain why non-tradable inflation hasn’t increased despite the economy currently running above capacity. The bank has also significantly revised up GDP forecasts for the coming few years. They don’t seem concerned at all about the potential for a slowdown in China or Australia which are NZ’s two biggest trading partners. The bank still believes the currency is overvalued and will moderate further, thanks to weak commodities, and they were actually surprised at the NZ dollars reaction to their statement. It is a little hard to reconcile their expectation for further falls in the currency with the potentially increasing interest rate differential NZ is now going to have with many other countries.
 

United States
It has been a relatively quiet week for economic news so far in the United States. The Jolts job openings data was slightly higher than expected at 4.83m and of particular interest was the jump in Crude Oil Inventories. Crude inventories came in at +1.5M barrels against an expectation of a 2.6M barrel fall. This played into the current plunge in the global crude pricing. Later today we get to see the latest Retail sales data with a marginal .1% rise expectation in the core index. Producer price data and the UoM Consumer Sentiment Index round out the week on Friday and will be closely watched. All these indicators are a good warm up for what is an important week to come, with the inflation numbers on Wednesday ahead of the Fed’s monetary policy meeting Thursday.
 

United Kingdom
The only real data of note released from the United Kingdom this week has been manufacturing and industrial production. Both figures came in significantly below expectation and weighed on the UK Pound. Trade deficit numbers were also released and they showed that although the deficit declined from the prior result, it is still very sizable indeed. The British Chamber of Commerce released a report suggesting the economy was set for a strong 2015. They did however highlight the risks around a premature rate hike. They warned that the UK’s dependence on consumer spending and mortgages means the UK economy is particularly sensitive to interest rates. Governor Carney was quoted on the press as saying the stimulus of low interest rates was still appropriate as they are currently seeing a period of low inflation. He believes inflation will dip below 1% and while interest rates will have to increase at some stage the pace of increases will be gradual. Next week is a big one for economic releases with inflation, the BOE minutes, employment data, and retails sales all set to hit the wires.
 

Europe
There has been little in the way off significant economic data released from Europe this week. We did see disappointing French industrial production data last night and earlier in the week the German trade balance came in better than forecast, but both releases had minimal impact on the currency. Greece is once again starting to garner a fair amount of attention. The Eurozone crisis really kicked off in Greece in 2009 and maybe we are now going to come full circle. Greek PM Samaras has called a snap election for the presidential post and if he doesn’t get the majority needed (and it looks like he won’t’) he will be forced to call a general election. Polls currently show the anti-bailout and anti-austerity party of Syriza would win such an election. The Greek stock market took the news of a surprise vote very badly and was down 13% on Tuesday. Should Syriza win it could spell real trouble for Greece. Unfortunately for Europe this isn’t an isolated event. In a number of countries the anti-austerity and even anti Euro fringe parties are gaining ground as populations become increasingly frustrated with the lack of economic progress. Next week we have manufacturing and service sector PMI’s to draw focus along with the German ZEW economic sentiment and IFO business climate indexes.
 

Japan
In Japan on Monday the final GDP numbers for the 3rd quarter were released. The data disappointed at a higher than expected -.5% fall confirmed and this produced an annual decline of 1.9%. Since then the BSI Manufacturing Index came in at 8.1 (13.1 expected) and this afternoon core machinery and tertiary industry data both coming in under expectations that were already pitched at pretty low levels. Recent polls continue to see Prime Minister Abe retaining leadership, and this would be confirmation that he has the mandate to continue with his “Abenomics” experiment. This should continue into Sundays elections. Aside from these elections, next week we have the excitement of the Tankan manufacturing and nonmanufacturing surveys to absorb. These come ahead of the final Bank of Japan monetary policy announcement on Friday.
 

Canada
The only data released so far this week from Canada has been housing starts and building permits. Both numbers came in below expectation and added a little further pressure to the Canadian dollar. Last night BOC Governor Poloz was on the wires suggesting the fall in oil prices might shave a third of a point off GDP, but wouldn’t be enough to derail the economy. He said the recovery has been frustratingly slow and that the biggest risk to the economy remains the housing market. He believes house prices are 10-30% overvalued. We get the latest reading from the New House Price Index tonight and next week we have manufacturing sales, wholesale sales, inflation and retails sales data to digest.
 
 

FX Update - Shifting central bank expectations drive currencies

Written by Ian Dobbs on December 9th, 2014.      0 comments

3:45pm(NZT)
Market Overview:
The US dollar has been the biggest gainer over the past week, driven by a much better than expected result from non-farm payrolls data on Friday. While this has increased the potential for sooner than expected rate hikes in the US, locally the Australasian duo have seen pressure on reduced expectations of future growth. Last week’s surprisingly poor Australian GDP data has seen many forecasters now calling for rate cuts from the RBA next year. From the RBNZ’s perspective, the slowdown in Australia combined with that in China must surely see them moderate their forecasts for growth and inflation when they release their monetary policy statement on Thursday morning. In Europe policy makers seem far away from any consensus on outright sovereign quantitative easing and it looks like President Draghi will have an uphill battle on his hands trying to get it introduced next year. Meanwhile the Eurozone stagnates further and perpetually low inflation isn’t helping the debt dynamics of many Eurozone states. The social consequences of continued austerity, as opposed to growth policies, is seeing a rise in popularity of fringe ‘anti-Euro’ parties which could dramatically change the landscape in a number of states.
 

Australia
Data from Australia last week proved to be a mixed bag. There were better than expected results for company profits, building approvals, retails sales and the trade balance. But these were all overshadowed by a dramatically weaker than forecast GDP result. The quarterly reading of +0.3% was well below expectations of +0.7% and a number of banks are now forecasting rate cuts in 2015 on the back of the data. The Australian dollar has suffered as a result and the latest trade data from China, released yesterday, didn’t help either. Imports into China were much lower than forecast signalling weaker economic growth ahead for this major trading partner. In the past couple of hours we have seen the latest reading of business confidence. This showed deterioration from last month and has only reinforced calls for rate cuts. Still to come this week we have consumer sentiment, inflation expectations and employment change data.
 

New Zealand
Last week saw the latest Global Dairy Trade (GDT) auction results reveal a further softening in prices for New Zealand’s all important export sector. The index fall of another 1.1% will put further pressure on the season payout expectations that are due for release this week. The lowering of expectations to below average farm gate costs is of real concern to not only the farmers themselves, but also the wider economy. Finance Minister English acknowledged this last week, when he commented that given the fall in prices, that expected growth rates for 2016 maybe optimistic. This week’s focus is all about the RBNZ monetary policy decision on Thursday morning NZT. Whilst no change is expected, the accompanying Monetary Policy Statement will be closely watched. Later on that day, Governor Wheeler also makes his testimony on the economy to the Finance and Expenditure Committee.
 

United States
Over recent months there have been a number of employment indicators suggesting the US should be seeing some very strong payrolls gains, but the actual numbers while solid enough weren’t overly spectacular. That all changed on Friday evening with the latest non-farm payrolls data that blew expectations out of the water. The gain of 321k was miles above forecasts for 230k, and on top of this the previous result was also revised up by 29k. That’s the best reading in over four years. While the unemployment rate remained unchanged at 5.8%, average hourly earnings rose by +0.4% which was double the expectation for +0.2%. Make no mistake, this was very very good data that came on the back of strong PMI readings for the manufacturing and nonmanufacturing sectors earlier in the week. The data was so good in fact a number of Fed watchers have started calling for rate hikes earlier than expected. The Fed however, seem to be pouring cold water on that idea. In the past 24 hours two Fed officials, Lockhart and Williams, have been on the wires suggesting patience is needed for the lift off in rates, and that mid-2015 or even later is still appropriate. The Fed no doubt feel that the lack of inflation pressure means they can keep rates ultra-easy for longer. But focusing solely on inflation at this point is a mistake. Zero rates are not appropriate for an economy growing at around 3% and producing stellar jobs growth. The unintended consequences of this prolonged policy setting will start to outweigh the benefits. This week we have retail sales, producer prices and consumer sentiment to draw focus.
 

United Kingdom
Data from the United Kingdom last week was supportive of the economic outlook and this helped the UK Pound regain some ground. PMI’s from the manufacturing, construction and service sectors suggest a continued healthy pace of expansion and as widely expected the Bank of England (BOE) left policy setting unchanged. House prices also continue to gain with the latest reading for November showing an increase of +0.4%. In line with a global trend however, inflation expectations are falling with the latest data showing consumers expect prices to rise 2.5% over the next twelve months, down from 2.8% in August. Five year inflation expectations are now 3.0% down from 3.4%. This week we get manufacturing and industrial production figures, the trade balance and an estimate of GDP from the NIESR (National Institute of Economic Research).
 

Europe
The main focus in Europe over the past week was on the ECB rate meeting held last Thursday. It seems some in market were expecting something more concrete from President Draghi in terms of a sovereign QE programme and his failure to deliver saw the Euro make some gains. What the meeting did show is that there are big divisions within the governing council and that it is going to be very hard to get any consensus on plans to buy government bonds. The statement released talked about expanding the banks’ balance sheet to the levels it had at the beginning of 2012, but the decision to include that wording in the statement wasn’t even unanimous. The bank has revised its growth projections ‘substantially downward’ with 2015 GDP now seen at 1.0% from 1.6% previously, and inflation in 2015 expected at 0.7% down from 1.3%. Dramatic revisions like those would normally suggest further action is coming, but it’s all too clear that there is a lack of support, particularly from Germany, for full-blown QE. Since the meeting we have seen comments from the ECB’s Nowotny who said although QE was successful in the US and UK, those are individual countries and it is a whole different ball game across the 18 countries that make up the Eurozone. The Bundesbank’s Weidmann said the discussion over unconventional policies is difficult and that current monetary policy is too expansive for Germany. He added they cannot use the same formulas that were used in Japan and elsewhere. There will be further debate on the issue within the ECB in the first quarter of next year and it could well be the case by then that a further deterioration in economic data will force their hand, but at the moment it seems sovereign QE is far from certain. The economic calendar this week contains largely second tier data, although we do get the results of the target LTRO on Thursday evening which will be closely watched.
 

Japan
Three weeks ago we had preliminary GDP data from Japan that showed the economy was in recession with a second quarter of negative growth, this time by -0.4%. Yesterday we got the final reading of that GDP data and it’s got worse, with a -0.5% decline now registered. The market was expecting a revision up to around -0.1%. In annual terms the economy contracted by 1.9% from July to September and it was driven by a big fall in business spending. The poor GDP result last month caused Prime Minister Abe to call a snap election, which is now only days away. He is seeking a fresh mandate to continue is “Abenomics” policies and also delay the next planned sales tax hike scheduled for 2015. All indications are he will again win a healthy majority. Adding to the negative tone of data we also saw the Reuters Tankan survey of confidence among manufacturers fall in December and expectations are for it to deteriorate further. Still to come this week we have consumer confidence, core machinery orders and tertiary industry activity data.
 

Canada
We have seen a rash of data hit the wires since the Bank of Canada left rates unchanged at 1.00% last Thursday. The Ivey PMI index came in much stronger than expected at 56.9, but gains in the Canadian dollar on the back of this data were short lived. Employment change figures on Friday evening disappointed printing at -10.7k vs expectations of +5.3K, with the unemployment rate ticking up to 6.6%. Weaker than expected results have also been seen for the trade balance, housing starts and building permits. Governor Poloz was quoted as saying he sees a larger drag from falling Canadian oil prices and we can look forward to further comments from him on Thursday when he is set to speak again. The week is rounded out with the New House Price Index and capacity utilization data on Friday.
 

Major Announcements last week:
  • Chinese HSBC Manufacturing PMI 50.3 vs 50.5 expected
  • UK Manufacturing PMI 53.5 vs 53.1 expected
  • US ISM Manufacturing PMI 58.7 vs 57.9 expected
  • RBA leaves monetary policy unchanged
  • NZ GDT Auction prices -1.1%
  • Australian GDP .3% vs .7% expected
  • BOC leaves monetary policy unchanged
  • ECB leaves monetary policy unchanged
  • Canadian Jobs growth -10.7k vs +5.3k expected
  • US Jobs growth 321k vs 231k expected
  • Chinese Trade Balance 54.5b vs 44.3b expected
 

Economies of Note - 4th December

Written by Ian Dobbs on December 4th, 2014.      0 comments

3:30pm(NZT)
Australia
Ahead of yesterday’s GDP result there were some very mixed views on which direction the next move in interest rates from the Reserve Bank of Australia would be. A number of banks were forecasting a rate cut in late 2015, while others suggested rates will go up, or at least remain stable next year. But after yesterday’s surprisingly weak GDP figure anyone forecasting a rate hike next year will be quickly reassessing their outlook. The market was expecting GDP for the third quarter of +0.7% but the actual result came in at just +0.3%. That is a big miss. Year on year GDP was 2.7% versus 3.1% expected. This data suggests that as the mining industry slows, the slack left in the economy isn’t being taken up by other sectors anywhere near as quickly as the RBA would like. The data weighed heavily in the Australian dollar that was already under pressure from declining commodity prices. The RBA held their last rate meeting of the year on Tuesday and released a statement very much in line with previous ones. They expect growth to remain a little below trend going forward, they believe the AUD needs to fall further to help balance growth, and unemployment will remain high for some time yet. While they believe a period of stability in rates remains appropriate, the potential for a rate cut next year has now significantly increased. Earlier this afternoon we got the latest reading on retail sales. These actually surprised on the strong side with positive revisions to previous numbers also engorging. Next week to draw focus we have business confidence, consumer sentiment, inflation expectations and employment change.
 

New Zealand
The key release from New Zealand this week came in the form of Fonterra’s latest dairy auction. Overall prices were down again falling by 1.1%, but whole milk powder, which is Fonterra’s biggest export, fell a whopping 7.1%. This was not the result dairy farmers were looking for and the only questions now is by how much will Fonterra revise down their forecasted pay-out for 2014/15 when they review it next week. The current estimate of $5.30 per kg is likely to end up below $5.00 and could even go sub $4.50. These levels are well below the cost of production for most farmers and will result in a significantly less amount of money flowing through the NZ economy. Finance Minister Bill English this week suggested the economy was resilient enough to withstand the fall in dairy prices, but that forecasts for GDP growth of 2.75% in 2016 seem “a little bit optimistic”. The New Zealand dollar saw pressure in the wake of the dairy result and lost ground on most crosses. There is now nothing of significance on the economic calendar until next Thursday’s RBNZ official cash rate review and monetary policy statement.
 

United States
Two key releases from the US so far this week have both come in much stronger than forecast. ISM Manufacturing PMI came in at 58.7 vs expectation of 57.9, while the ISM Non-manufacturing PMI printed at 59.3 vs expectation of 57.5. That non-manufacturing figure was the second highest reading in three and a half years. Some second tier data has also come in on the firm side, with construction spending up 1.1%, strong vehicle sales figures and a big jump in the New York ISM index. Data like this would suggest the Fed will remain firmly on course to hike rates around the middle of next year. There was one release which raised some eyebrows and could be significant in relation to rate hike expectations. Non-farm productivity data was revised a touch higher in line with expectations, but unit labour costs were revised sharply lower to -1.0% from +0.3% previously. That is a big drop in labour costs and hourly compensation data shows that wages are very subdued. There is little threat of inflation rising if wages remain stagnant and if inflation fails to pick up the Fed could decide to remain on hold for much longer than expected. The Fed released its Beige Book last night, which is a summary of commentary on current economic conditions, and in it they acknowledged only slight to moderate labour cost increases with overall price and wage gains remaining subdued. The rest of the report was more positive however with job gains described as ‘widespread’ across Fed districts, strong manufacturing and continued gains in consumer spending. Still to come this week we have key employment data in the form of non-farm payrolls numbers. The market is expecting gains or around 230k with the unemployment rate to remain steady at 5.8%. Next week retail sales, producer prices and consumer sentiment data will draw attention.
 

United Kingdom
The UK pound has been boosted this week by data showing continued solid expansion in the manufacturing, construction and services sectors. The service sector PMI was particularly strong and this is a key part of the economy that contributes significantly to GDP. The Office for Budget Responsibility released their latest forecasts this week and they now see GDP in 2015 at +2.4% vs +2.3% previously. The also see unemployment falling to 5.4% next year vs their previous estimate of 6.3%. The Bank of England and the Treasury have also announced they are going to extend the Funding for Lending Scheme (FLS) for one more year. It was due to expire in January 2015, but the bank wants the scheme to help small and medium sized enterprises gain cheap funding through to the end of next year. Tonight we have the Bank of England rate meeting, although it is likely to be a very subdued affair. No change in rates is expected and there won’t be much in the way of a statement released. Next week we have manufacturing production, industrial production and the trade balance to draw focus.
 

Europe
There has been little to get excited about this week from Europe. The final Eurozone manufacturing and service sector PMI’s both came in below forecast and down on the prior readings. Retail sales were also softer than expected at +0.4%, and producer prices had a sharp drop to -0.4% from +0.2% prior. The main culprit in dragging down producer prices was the energy component which shouldn’t be shock to anyone. Although lower oil prices are like a small stimulus to the economy in the long run, when you’re flirting with deflation it is less than ideal. If consumers adopt the mind-set that prices won’t go up at all, or might even fall, they can happily delay spending and an ugly cycle develops in the economy. Japan knows all too well what that feels like. The key event of this week however, is still to come with tonight’s European Central Bank meeting and subsequent press conference. A lot of attention will be paid to assessing how close the bank is to outright sovereign QE (unsterilized purchases of government bonds). Draghi has said many times the bank is working on a plan for such action, but that a decision to undertake it has not been made yet. There has been talk that they will make that decision in the first quarter of next year, and this seems reasonable, but President Draghi is certainly capable of springing the odd surprise. There is a rash of second tier data next week along with the results of the targeted LTRO set for release on Thursday.
 

Japan
The only data of significance out of Japan this week was average cash earnings. It came in at +0.5% which was below the forecast of +0.8%. It also marks the third monthly decline from the peak of +2.6% set back in September. If current polling is correct, it looks like PM Abe’s ruling coalition will succeed in gaining a healthy margin in the upcoming election. This would ensure a continuation of his plan to reinvigorate the economy while at the same time trying to get the fiscal position under control. Campaigning officially began on Tuesday and the vote will be held on December 14th.
 

Canada
The only release of note so far this week from Canada has been the Bank of Canada’s rate statement out last night. As expected the bank left rates unchanged at 1.00% with the balance of risks remaining in a zone where current monetary policy is appropriate. The bank does see sign of a broadening recovery that is leading to more balanced growth. Stronger exports are beginning to be reflected in increasing business investment and employment. Lower oil and commodity prices will weigh on the economy as will global growth that continues to disappoint. One key comment the bank made was that the output gap (the amount of spare capacity in the economy) appears to be smaller than projected in October. This is a hawkish remark as inflation pressure will build as spare capacity is absorbed. Subsequent comments from Governor Poloz said the bank believes it will take about two years of above potential growth before slack in the economy is used up. Still to come this week we have Ivey PMI and employment data to digest. Next week we have housing starts, building permits and the new house price index scheduled for release.
 
 

FX Update - Have commodity declines run their course?

Written by Ian Dobbs on December 2nd, 2014.      0 comments

1:30pm(NZT)
Market Overview:
The past week has been dominated by continued declines in commodity prices which have weighed on the commodity bloc currencies of Australia, New Zealand and Canada. A sharp recovery in the price of oil and gold in the past 24 hours has given some hope that the recent weakness may have run its course, although it is still too early to make that call. The only thing that is certain is the volatility is likely to remain high especially with a number of key releases scheduled this week. We have central bank meetings from the RBA, ECB, BOE and BOC to digest this week along with the all-important US non-farm payrolls employment report. Overall the recent theme of increasing volatility within a contained range should continue. It appears to be prudent not to expect much to happen in the way of paradigm shifts in market trends ahead of the second quarter of 2015, much to the exasperation of most committed market observers.
 

Australia
Some better than expected data out of Australia last week failed to halt the slide in the Australian dollar. Thursday’s private capital expenditure figures were somewhat encouraging, with the headline figure printing at +0.2% vs -1.9% expected. Capital spending estimates for 2014/15 were also revised higher and are now 7.5% higher than a year ago. Friday saw the release of private sector credit which was also a touch stronger than forecast +0.6%. The driving force of the increase was investor housing credit which was up +9.9% year on year.  This only serves to highlight the RBA’s concerns about investor lending and increases the chance of macro prudential tools been implemented at some stage to counter the growing imbalance in lending. The manufacturing sector in Australia looks to expanded very so slightly in November, with the AIG manufacturing index improving to 50.1 from 49.4 previously. Unfortunately, commodity prices have continued to remain under pressure recently and these have weighed on the AUD seeing the currency make fresh cycle lows to the USD. Still to come this afternoon we have building consents data and the RBA rate statement. Later in the week we have GDP, retail sales and the trade balance to draw focus.
 

New Zealand
Data from New Zealand last week didn’t have much impact on the level of the local currency. We saw a the trade balance come in worse than expected, largely on the back of weaker dairy exports, building consents jumped 8.8% reversing a large portion of the previous decline, and business confidence recovered a touch further to 31.5 from 26.5 last. Consumer debt rose at its fastest pace in almost nine years during October, according to the latest monthly Reserve Bank credit figures. Consumers are obviously feeling confident with debt up 7.2% in the year to October, the biggest jump since December 2005. RBNZ Governor Wheeler released a speech yesterday morning in which he said inflation targeting has worked for NZ delivering stable prices, without damaging the long term growth rate. He said the LVR loan restrictions will be eased when housing pressure eases and that they have eliminated the need for between 25 and 50 basis points of rate hikes. He also repeated the call that the level of the New Zealand dollar remains unjustified and unsustainable, although he admitted there is little the central bank can do to sustainably alleviate an overvalued real exchange rate.
 

United States
Ahead of the US thanksgiving holiday late last week there was a rash of data released that suggests the US economy is coming “off the boil” so to speak, after very strong third quarter. GDP for quarter three came in at +3.9% which was significantly stronger than expected. It seems likely however, that growth will moderate somewhat in the fourth quarter and this was backed up by slightly softer than expected releases for new home sales, Chicago PMI, personal income, core durable goods orders, consumer sentiment and weekly jobless claims. Last night we got the latest manufacturing PMI data which printed slightly stronger than expected and at relatively healthy levels. None of these releases have impacted current market expectations for the first hike from the Fed to come around the middle of next year. Still to come this week we have non-manufacturing PMI, the Fed’s Beige Book, and the all-important non-farm payrolls employment data.
 

United Kingdom
During last week’s inflation report hearings BOE Governor Carney all but confirmed market expectation that the start of rate hikes has been pushed back into late 2015. This revised expectation has been a major factor weighing on the UK Pound over the past couple of months. We have also seen some political uncertainty start to creep into the market with the rise of the anti-euro UKIP party. With a general election not too far away (May 2015) any further ground made by the UKIP will only add to that uncertainty and weigh on the GBP further. Data last week was generally supportive of the economy going forward, albeit at a more moderate pace than earlier in the year. GDP for the third quarter came in on expectation at +0.7% quarter on quarter, while CBI realized sales were a touch softer than forecast at 27, and down from the prior reading of 31. House price appreciation has moderated a touch, although it’s still running the decent pace of +8.5% year on year. Last night we got the latest reading from the manufacturing sector with the manufacturing PMI coming in better than forecast at 53.5. Expectations were for a result around 53.00. The prices component of the report showed the slowest pace of gains in 17 months which is in line with other indicators suggesting inflation will remain subdued in the near term. We get the construction and service sector PMI’s over the next couple of days ahead of the BOE rate meeting on Thursday.
 

Europe
Last week provided a mixed bag of data from the Eurozone, which is an improvement over the universally poor readings we were getting just a few weeks ago. On the positive side a number of German releases have managed to show some improvement recently. These numbers include the IFO business climate index, unemployment change, retail sales. But data from the Eurozone as a whole is still struggling, and on Friday we saw inflation come in at just 0.3% year on year, and the unemployment rate remain unchanged at 11.5%. Both those results were bang on expectation. We also heard from ECB board member Sabine Lautenschlaeger over the weekend who said she sees no further room for monetary policy easing despite the very low inflation rate. She said at the current time, the costs and benefit analysis of a government bond purchase programme just doesn’t stack up, and the hurdles for such a programme are very high. This only serves to highlight the struggle ECB President Draghi will have in trying to implement a sovereign QE programme. We will hear from Draghi himself on Thursday night in the wake of the latest ECB rate meeting. Other data to watch out for this week includes Eurozone retail sales, German factory orders and Spanish and Italian PMI’s.
 

Japan
Japan released a rash of data on Friday afternoon, although none of it had much impact on the level of the Yen. Household spending fell by less than expected at -4.0%, retail sales were close to expectation at +1.4%, and industrial production was a touch stronger than forecast at +0.2%. The key release was that of inflation and if you strip out the effects of April's sales tax hike, along with volatile food and energy, you get the core rate which came in at just 0.9%. This is the first time in over a year is has fallen below 1%, and it’s now a long way from the Bank of Japan’s (BOJ) 2% target. Declining consumption and the steep fall in oil prices are dragging inflation lower and it’s hard to see a quick turnaround in either of those metrics. Last night Moody’s rating service downgraded Japan’s sovereign rating one notch to A1 from AA3 due to concerns about the fiscal deficit and PM Abe’s policy measures. Abe in is a very tight spot trying to stimulate the economy on the one hand, and reign in the fiscal deficit on the other. Confidence in the country’s ability to manage is massive mountain of debt is at the heart of Abe planned sales tax hike, which has recently been delayed. Moody’s have sighted the risk of rising bond yields making the debt mountain sustainable, hence the downgrade.
 

Canada
Canada has seen a decent run of healthy data recently, although falling oil prices have limited the Canadian dollar’s ability to make gains as a result. Last week saw strong retail sales numbers released which were followed by better than expected GDP data on Friday. Canada’s economy grew at an annualized rate of 2.8% in the third quarter, beating expectations for a 2.1% expansion. The growth was mainly the result of exports and household spending. Also on Friday we saw the raw material price index which fell by -4.3% against expectations of a -2.5% decline. The decline was largely driven by softer crude oil prices. This week should prove very interesting with some key releases scheduled over the coming days. The Bank of Canada (BOC) hold their rate meeting on Wednesday night, this will be followed by Ivey PMI on Thursday, and employment data on Friday.
 

Major Announcements last week:
  • German IFO Business Climate Index 104.7 vs 103.0 expected
  • Canadian Retail Sales (core) 0.0 vs +.4% expected
  • US prelim. GDP 3.9% vs 3.3% expected
  • US core Durable Goods -.9% vs +.5% expected
  • Australian Private Capex +.2% vs -1.7% expected
  • European Inflation +.3% as expected
  • Canadian GDP +.4% as expected
  • UK Manufacturing 53.5 vs 53.1 expected
  • US Manufacturing 58.7 vs 57.9
 

Economies of Note - 28st November

Written by Ian Dobbs on November 28th, 2014.      0 comments

1:00pm(NZT)
Australia
The Australian dollar has been under pressure for much of this week. The RBA’s Deputy Governor Lowe did his best to talk the currency down in a speech on Tuesday. He said the real exchange rate of the AUD is still quite high and he sees a further drop over time. He also added the RBA can still lower rates if they need to. These comments just added to the negative sentiment toward the AUD that was already struggling on the back of softening commodity prices. Iron ore in particular has been in focus with prices falling below US$70 this week for the first time in five years. A glut of iron ore production has been compounded by declining demand from the world’s biggest user, China. It is for exactly this reason the central bank is keen to see the economy ‘transition’ away from mining into other areas of growth. Yesterday’s Private Capital Expenditure figures suggests this is slowly taking place. The data unexpectedly edged up in the third quarter, by 0.2%, which is the second straight gain. The market was expecting a fall of -1.9%. The equipment, plant and machinery component was much better at +4.4% versus expectations of -1.0%, and this could have positive implications for next week’s GDP data. Capital spending expectations for 2014/15 have also been revised higher and now stand 7.5% above where they were a year ago. Although this data was much better than expected it is still far from being considered strong and overall has done little to alter our view that the RBA will remain on hold for the foreseeable future. Along with GDP next week we have the RBA rate meeting as well as data on building approvals, retails sales and the trade balance.
 

New Zealand
The New Zealand dollar saw pressure in the early stages of this week helped by declining inflation expectations. Two year expectations fell to 2.06% from 2.23% previously. Trade balance data was also lower than forecast at -908m for the month of October, this was however an improvement over the prior reading of -1367m. Declining dairy exports were the main driver in seeing the data missing expectations which were centred around a deficit of -642m. This also saw China replaced as our top export market by our closest neighbour, Australia. Exports to China were some 40% lower in October from a year earlier. The only other data of note this week came in the form of building consents. These were up 8.8% as the numbers bounced back from last month’s dramatic fall, but again was of limited impact. Next week is looking pretty light on the data front with only the overseas trade index and another Fonterra dairy auction of any note.
 

United States
Data out of the United States this week suggests something of a moderation / stabilization in economic activity after a very solid third quarter. The second reading of GDP for the July - September period came in much better than forecast at +3.9%. The previous reading was +3.5% and economists had expected a small negative revision to +3.3%. Better consumer spending accounted for a good portion of the increase and this is only likely to increase with the benefit of lower petrol prices going forward. However, this was as good as the data got this week with a slew of subsequent releases all coming in below expectations. New home sales, Chicago PMI, personal income, core durable goods, consumer sentiment and weekly jobless claims all disappointed and eventually weighed on the US dollar. None of these releases were weak enough to raise alarms about the outlook and a slight moderation in activity from the booming third quarter won’t affect expectations for a Fed tightening sometime around the middle of next year. Next week there is plenty of key data to digest with the highlights being manufacturing and non-manufacturing PMI’s, the Fed’s Beige Book and non-farm payrolls.
 

United Kingdom
Bank of England (BOE) Governor Mark Carney spoke in front of the Treasury Select Committee this week and suggest the central bank will press on delivering an interest rate rise despite the shadow cast by the struggling Eurozone. He did add however, that the combination of low inflation and slowing international demand means hikes could come later, and at a slower rate, than previously expected. He believes there is substantial uncertainty about the estimate of slack in the economy, but that they may have finally turned the corner on wage growth. Market expectations for the first rate hike are currently centred around the third quarter of next year and Carney’s speech has done little to alter this. The second estimate of GDP was also released this week and came in bang on expectation at +0.7% quarter on quarter. We have also seen a couple of slightly weaker than forecast results from preliminary business investment and CBI realized sales, but both had little impact on the value of the GBP. Next week we have PMI’s from the manufacturing, service and construction sectors to digest along with the Bank of England rate meeting.
 

Europe
The Euro has managed some gains this week helped by recent small improvements in some data releases. One such release was Monday’s German IFO business climate index which saw the first improvement since April this year. French business confidence also came in a touch better than forecast while German GDP was in line with expectations at +0.1% for the quarter. Last night we got the latest readings on German inflation and unemployment. While unemployment fell by more than expected so did inflation, which came in at just 0.5% year on year. The market was looking for a result of 0.6% and while that only a small miss, when inflation is that low it is concerning. The ECB’s Noyer has been on the wires this week repeating the call that they are prepared to do more if there is a threat to their goals or outlook. He said the tools they could use include forward guidance and buying securities. A recent Reuters poll of economists show roughly 50% expect the ECB to launch sovereign QE, while unnamed sources within the central bank suggest a decision on whether to buy government bonds will be made in the first quarter of next year. We will hear from Draghi himself next week after the ECB’s rate meeting on Thursday. Other data to watch out for includes retail sales, German factory orders and PMI’s from Spain and Italy.
 

Japan
There hasn’t been much in the way of actual data released from Japan so far this week. In the next couple of hours we do get a rash of releases which include household spending, inflation, unemployment, industrial production and retail sales. The Japanese Cabinet Office released their monthly economic assessment this week. Although they left the overall assessment unchanged there were some notable changes to the previous release. They have turned a little more cautious about future conditions due to declines in consumer sentiment and cautious business confidence. The also suggested gains in the labour market have paused and some parts of the economy are weak. This is certainly a more realistic assessment of the current situation than BOJ Governor Kuroda came out with this week. He repeated the now regular statement that the economy is recovering moderately as a trend. If that was the case then why was there the need for the surprise easing a few weeks ago? The highlight of next week’s economic calendar will be average cash earnings data on Tuesday.
 

Canada
The only data of note from Canada this week was retail sales which came out on Tuesday night. The headline figure was better than expected at +0.8%, which is also a solid improvement over the previous reading of -0.2%. The main driver of the gains were autos, with the core retail sales number, which excludes automobiles, coming in flat at 0.0% against expectations of +0.4%. The Canadian dollar took a hit after the OPEC meeting last night voted not to cut oil production. This caused the price of oil to fall again which weighed on the CAD. Tonight we get GDP data for September and the market is looking for an improvement to +0.4% from -0.1% in August. Next week should prove interesting with the Bank of Canada rate statement, Ivey PMI, employment change and the trade balance all set for release.
 
 

FX Update - Slowing Chinese growth prompts a response from the PBOC

Written by Ian Dobbs on November 25th, 2014.      0 comments

3:30pm(NZT)
Market Overview:
The People Bank of China surprised markets on Friday evening by announcing a cut in interest rates in an effort to support the world’s largest economy. The initial reaction for the Australasian currencies was positive as anything that is supportive of Chinese demand will have flow on effects for New Zealand and Australia. But the market quickly realised the move is actually a signal of the real problems facing China going forward and this negative sentiment eventually weighed on the local pair. This was the first rate cut from the PBOC since 2012 and the question is will it be the start of a cycle of cuts. The move was designed to ease difficulties in financing for companies, especially small companies, and there has long been question marks over the sustainability of debt creation seen in the Chinese economy in recent years. Large company defaults and bankruptcies, once unheard of in China, are now occurring regularly, and house prices are declining in almost all major cities. The headwinds the Chinese economy is currently facing suggest we will see further interest rate cuts.
 

Australia
There has been no data of significance released from Australia over the past week. The Australian dollar did however get a boost, albeit temporarily, from news that China had cut interest rates, but a recent announcement from BHP Billiton that they are going to dramatically cut spending by up to $US4b per year has weighed on the AUD. Tomorrow we get data on construction work done and on Thursday we have private capital expenditure figures to digest.
 

New Zealand
Producer prices data from New Zealand last week came in much weaker than forecast suggesting there is little in the way of pipeline inflation pressure in the economy. The index was dragged down by lower farm-gate milk prices that reduced input costs for dairy manufacturers and this trend could have further to run. Fonterra’s latest dairy auction, also out last week, saw another decline this time by 3%. On a more positive note, yesterday’s migration data saw a record all time high of people coming to the country on a permanent or long-term basis. The number of net migrants jumped to 5,200 in October from 4,800 in August. It is exactly this sort of data that the Reserve Bank of New Zealand pointed to when deciding not to ease the LVR lending restrictions recently. Still to come this week we have the trade balance, building consents and business confidence numbers.
 

United States
The US economy continues to perform well and the Fed remains on course to hike interest rates sometime around the middle of next year. Although inflation data last week came in stronger than forecast at 1.7% year on year, long term inflation expectations are actually declining and these are unlikely to force the Feds hand on tightening. The Fed will hike because they know as well as anyone that zero rates, over the long run, probably create as many problems as they solve. Over the next couple of months we should get more clarity from the Fed on their approach to, and potential timing of, future rate hikes and this was alluded to in the minutes released last week. There are plenty of risks however, particularly to the outlook for global growth with some real question marks hanging over the prospects of China, Europe and Japan. But barring a full on crisis in one of those countries the Fed should push on with interest rate ‘normalization’. Tonight we get the second reading of GDP and the market is expecting a slight revision downward to 3.3% from 3.5% previously. This is still a very healthy result and would support the current outlook for the Fed. Other data to watch out for this week includes consumer confidence, durable goods orders and new home sales.  
 

United Kingdom
The Bank of England (BOE) minutes released last week suggested that they believe the recent downward pressure on inflation will ease as spare capacity in the economy is absorbed. This will push inflation back toward their target over the next 2-3 years. Although the UK economy has seen a slowdown from growth seen earlier in the year, a good portion of this attributable to the tough export environment with their biggest trading partner, Europe, floundering economically. Domestically the UK economy continues to perform well and this point is not lost on the BOE. Employment remains strong, with encouraging signs of wage gains, and last week’s retail sales numbers were much better than forecast. There are however some real risks coming from within the UK and this point was highlighted over the weekend after a by-election was won by the anti-EU UK Independence Party (UKIP). The UKIP has been gaining traction lately and now present a very real risk to the current two-party system in Britain. Should they end up holding the balance of power after next year’s election there could be some real turbulence. One recent report suggested an EU exit by the UK would result in a 10% decline of the Pound. The political situation could have a big impact on the value of the GBP over the coming months. Still to come this week we have the BOE Inflation Report Hearings, the second estimate of GDP, CBI realized sales and the Nationwide House Price Index.
 

Europe
Data from Europe last week was a mixed bag, although there was a hint of improvement in a couple of readings that could be considered encouraging. The trade balance improved by more than forecast and this was followed by the German ZEW Economic Sentiment Index which saw the first improved reading in 2014. Reinforcing this was last night’s German IFO Business Climate Index which improved to 104.7 from 103.2, after the previous six readings which all declined. One month’s improvement does certainly not make a trend, but is it however an optimistic signal. Countering this were last week’s PMI readings for the manufacturing and service sectors that both declined and we have also seen a number of comments from ECB officials that suggest they won’t hesitate to undertake outright sovereign QE should the inflation picture deteriorate. We are not there yet and the ECB certainly has a number of hurdles to overcome before they could start buying government bonds, but the threat of this should keep the Euro under pressure heading into next year. Still to come this week we have German retail sales, French consumer spending, inflation and unemployment data.
 

Japan
The big news from Japan last week were the duel announcements from PM Abe that he will delay the next planned sales tax hike, and dissolve the lower house of parliament and call fresh elections. The move came after the latest data from the July-September period showed the Japanese economy actually contracted. This surprised most economists who were expecting modest growth to save the economy from recession. The economy has taken a massive knock, and largely failed to recover, from April’s sales tax hike and PM Abe has decided he needs to seek a fresh mandate from the population to continue his economic policies, dubbed “Abenomics”. PM Abe is walking a tightrope, trying to stimulate the economy out of two decades of low growth and deflation on the one hand, while on the other trying to shore up the country's fiscal position that sees total debt at more than twice the size of the economy. It is almost an impossible task, but he is getting plenty of help from the Bank of Japan who are easing policy on a scale never seen before. These easing’s have resulted in a dramatic weakening of the Yen and it continues to remain under pressure trading at multi year lows across the board. BOJ Governor Kuroda is due to speak this afternoon and later in the week we get data on household spending, inflation, unemployment and retail sales.
 

Canada
The Canadian dollar saw plenty of pressure in the early part of November as falling oil prices weighed on the currency. However, recent data has been supportive of the Canadian economy and this has resulted in something of a turnaround for the currency. The positive economic numbers continued last week with wholesale sales coming in much stronger than forecast up 1.8%, and inflation also printing stronger than expected at 2.4% year on year. The forecasts were for around 2.1% y/y and it seems the recent uptick in inflation may not be as “temporary” as the Bank of Canada (BOC) expects. We get further key data this week in the form of retail sales and GDP, along with the current account and raw materials price index.
 

Major Announcements last week:
  • NZ Retail Sales 1.5% vs .8% expected
  • Japanese GDP -.4% vs +.5% expected
  • UK Inflation +1.3% vs +1.2% expected
  • EU German Economic Sentiment 11.0 vs 4.3 expected
  • NZ GDT Auction results -3.1%
  • BOJ leaves monetary policy unchanged
  • Chinese HSBC Manufacturing 50.0 vs 50.2 expected
  • UK Retail Sales +.8% vs +.4% expected
  • US Inflation 0.0 vs +.1% expected
  • US Philly FED Manufacturing Index 40.8 vs 18.9 expected
  • Canadian Inflation +.3% vs +.2% expected
 

Economies of Note - 21st November

Written by Ian Dobbs on November 21st, 2014.      0 comments

1:30pm(NZT)
Australia
There were a couple of releases from Australia this week that drew the markets attention. The first was the minutes from the last RBA meeting. These were largely in line with expectations and in a very similar vein to previous RBA statements and minutes. The impact on the currency was there for muted. Subsequent to this release however, Governor Steven’s made a speech that did give the market something more to chew on. The tone of his speech suggested a moderation in the outlook for 2015 and that rates in Australia could be on hold for much longer than many thought. He said faltering jobs and wages growth meant it would be a couple of years before inflation triggered rate hikes. Obviously the caveat to this is that house prices increases are kept in check. Both the RBA minutes and Governor Stevens’ speech made reference to the still overvalued Australian dollar, which did decline somewhat throughout the second half of the week, although this was more as a result of the subdued outlook than the direct references to it. Next week we have private capital expenditure data and the Treasuries mid-year fiscal outlook to digest.
 

New Zealand
Monday saw retail sales data from New Zealand come in much better than expected at +1.8% for the quarter. This was significantly better than the forecast of +0.8% and helped to support the NZD in the early stages of the week. However, the currency ran out of steam on Wednesday after the latest Fonterra dairy auction results were released. Dairy prices fell again, this time by 3%, which will be very concerning for the economically important sector. Whole milk powder, which is NZ’s biggest dairy export, actually fell by 5.1%. This latest result now makes Fonterra’s forecast payout for the 2014/15 season of NZ$ 5.30 per kg very optimistic. It is likely to be revised lower at the December board meeting to somewhere under NZ$ 5.00. Yesterday we also saw producer prices data and it too was softer than expected. PPI input (which measures changes in the price of goods and raw materials purchased by manufactures) fell -1.5% versus expectations of a 0.3% gain. This would indicate there is little in the way of pipeline inflation pressure in the manufacturing sector. Next week we have inflation expectations, the trade balance, building consents and business confidence data to digest.
 

United States
Economic data and releases from the United States this week have generally been supportive of the economy and the outlook going forward. We did see a couple of softer than forecast results at the start of the week from industrial production, capacity utilization and the Empire State Manufacturing Index, but they all only missed expectation by a small amount. Since then we have seen a rash of stronger than forecast releases including producer prices, building permits, inflation and the Philadelphia Fed Manufacturing Index. Inflation has been undershooting expectations in most developed nations recently, but in the US it came in stronger than forecast at +1.7% year on year. This comes despite falling oil prices. The core inflation reading that strips out volatile food and energy increased to 1.8% from 1.7% in September. The Philly Fed Index was so strong you have to question the result. It printed at 40.8 versus expectation of 18.5, and this is the highest reading since 1993! Even if you assume there is something fishy in these numbers, you can’t deny that factory activity in the mid-Atlantic regions must be doing very well. We also had the minutes from the latest Fed meeting released this week and they were very balanced. The Fed discussed the weaker outlook for Europe, China and Japan along with the potential for inflation to undershoot their target in the near term. But there was also talk that it might soon be helpful to clarify the approach on the pace of future rate hikes. Some participants also wanted to drop the reference to a ‘considerable time’ between ending QE and the first rate hike. A recent survey of primary dealers in the US showed an overwhelming expectation of a rate hike around June 2015. Data like we have had this week will only serve to reinforce that expectation. Next week to draw focus we have GDP, consumer confidence, durable goods orders and new home sales data.
 

United Kingdom
We have seen two key data points this week from the UK the both came in above expectation. Inflation printed at 1.3% versus 1.2% expected and retail sales came in at +0.8% versus 0.3% expected. The Bank of England (BOE) also released the minutes from their latest meeting and these were perhaps a little more positive than many had expected. Although the bank acknowledged global growth is somewhat sluggish and this is constraining exports, they believe near term downward pressure on inflation will reverse as slack in the economy continues to be reduced. This should push inflation back to their target over the next 2-3 years. The voting pattern remained 7/2 to leave rates unchanged, with two voting or a hike. Other data worth noting this week was the house price index which showed prices still in the rise, up 12.1% y/y versus 11.7% previously, and the CBI industrial trend orders which measures economic expectations of manufacturing executives in the UK. This is considered a lead indicator of business conditions and it improved to +3 from -6 previously. Overall the releases this week have been supportive of the economy and the UK Pound, although the currency hasn’t gained as much as might have been expected. Next week we have the second estimate of GDP, business investment and CBI realized sales to draw focus.
 

Europe
The past week has seen improvements in Eurozone trade balance and the ZEW economic sentiment index, both of which came in above expectation. The improvement in economic sentiment breaks a string of falling results that started early this year and it may be that actions taken by the ECB over the past few months are starting to have an impact. These positive results have been largely negated by falls in both manufacturing and service sector PMI’s, both of which also missed expectation. Consumer confidence also fell a touch and its clear there is a lot more work to be done to turn the Eurozone around. The work can’t just be left to the central bank however, and governments need to start doing some of the heavy lifting. The ECB’s Mersch this week repeated the call made many times now, when he said monetary policy alone can’t create growth and that structural reforms in the Euro area must continue. Sadly these calls seem to be falling on deaf ears, at least in Germany, who really are standing in the way of adopting more growth friendly policies. The focus next week will be on inflation and unemployment data, although we also have the German business climate index, German retail sales and French consumer spending figures set for release.
 

Japan
Prime Minister Abe held live TV broadcast this week in which he declared he would dissolve Parliament then hold national elections for the Lower House on December 14. He also announced he will delay the next sales tax hike until April 17th. He explained the move by saying there are divided opinions about the economic policies they are pursuing and that he needs to listen to the voice of the people before they can continue down the path of ‘Abenomics’. He added he will resign if the coalition doesn’t gain a majority. It seems he is also considering cutting some of the sales tax that was introduced in April on items deemed necessities. None of this helped to turn the tide in the Yen which continues to lose ground across the board. The effect of the weakening Yen was apparent in the trade balance figures for October that were released yesterday. The trade deficit narrowed more than expected thanks to a big improvement in exports. Exports jumped 9.6% year on year rising at their fastest pace since February. This is the first piece of really good news the Bank of Japan have seen in a while and is encouraging considering the Yen has only weakened further since then. Next week we have the BOJ minutes, household spending, inflation, industrial production and retail sales to digest.
 

Canada
It has been a quiet week for data from Canada so far, with only one release of note. That was wholesale sales that hit the wires last night. It came in much better than forecast at +1.8% versus expectation of +0.7%. Last week’s manufacturing sales data was also stronger than expected and these are positive signs for the Canadian economy. Tonight we get key inflation data and the market is looking for a month on month increase of 0.2% for the core reading. Next week the focus turns to retail sales and GDP data.
 
 

FX Update - Risks associated with central banks remain prevalent

Written by Ian Dobbs on November 18th, 2014.      0 comments

3:00pm(NZT)
Market Overview:
Declining oil prices are helping to drag down inflation rates in most developed nations and this is seeing expectations for rate hikes from many central banks get pushed further into the future. The question has to be asked whether this is a good enough reason to keep interest rates at, or close to, zero in countries like the US and the UK. Zero percent interest rates are an emergency measure that have their place, but over the long term there is little evidence of a benefit to the economy. Japan has had zero interest rates for nearly 20 years now and they are no closer to achieving sustainable growth or inflation rates. At some point the financial risks and imbalances that this policy setting promotes start to outweigh the potential benefits and this should be in the forefront of central banker’s minds. The scary fact is that out of the G7 nations, Bank of England Governor Carney is the only one to have ever raised interest rates. He did so when he was leading the Bank of Canada.
 

Australia
Encouraging signs last week from business confidence, consumer sentiment and inflation expectations all helped to support the Australian dollar to a degree. RBA deputy Governor Kent tried to talk the AUD down a touch late last week when he suggested the central bank hadn’t ruled out intervening in the currency markets, but the impact was short lived. There was no market impact from the G20 meetings held in Australia over the weekend, with the most notable point that tensions between Russia and the West are as frosty as ever. In the past few hours we have seen the minutes from the last RBA meeting although these held no surprises. Although the central bank believes the AUD is still above fundamental value, they also suggest the Bank of Japan stimulus and Japanese pension fund flows could keep the AUD there for some time. The see the housing market supported by very low interest rates and population growth, and they also note that lending to home investors is rising faster than to owner occupiers. Governor Steven’s is set to speak tonight and that pretty much wraps up the scheduled releases for the week.
 
 
New Zealand
The focus last week in New Zealand was on the RBNZ’s Financial Stability Report. The main point to come out of that was that with still very positive migration flows the central bank does not feel comfortable adjusting the LVR restrictions at this stage. Yesterday we got the latest reading from retail sales and it showed the consumer is good spirits. Sales jumped +1.5% from the previous reading against an expectation of just +0.8%. There were solid increases in supermarket and grocery store sales, possibly helped by the strong population growth from positive migration, but also good increases in discretionary spending areas like cafes and restaurants. This is a positive sign for the economy going forward and is certainly boosted the value of the NZD in the hours after the release. The focus now turns to Fonterra’s dairy auction tonight which will be followed by producer prices data on Thursday.
 

United States
We saw some decent data from the United States last week, although the USD remained on the back foot heading into the weekend. Pressure on the currency came as a survey of US inflation expectations declined to its lowest level since early 2009. That release seemed to outweigh the better than forecast readings that were seen on Friday night from retail sales and consumer sentiment. The market may be getting hung up on the weaker inflation outlook, but comments from some Fed governor are starting to suggest low inflation may not be a hindrance for rate hikes. The Fed’s Bullard said low inflation doesn’t justify keeping interest rates near zero, and the Fed’s George suggested financial stability risks warrant hiking rates to curb excesses in lending and financial markets. She said although financial stability doesn’t appear to be an issue today, it didn’t appear to be an issue in 2007 or 2008, and it turned out to be a terrible problem. She’s right about that and there are once again signs of excesses in the financial sector. Subprime auto loans (auto loans to people with tarnished credit) have risen more than 130 percent in the last five years. This explosive growth is been driven by some of the same dynamics that were at work in subprime mortgages, i.e. the demand for securitized debt with good rates of return. History is destined to repeat itself, but are people’s memories really this short?! Tonight we get producer prices data then later in the week the focus turns to building permits, the FOMC minutes, inflation data and the Philadelphia Fed manufacturing index.
 

United Kingdom
The UK Pound has remained under pressure in the wake of last week’s Bank of England’s (BOE) inflation report. With the central bank having slashed its inflation outlook there are now no forecasters predicting a rate hike from the BOE before the second half of next year. Some have even pushed their forecasts for the first hike out until quarter one of 2016. But is low inflation such a bad thing? Not if it’s driven by declining oil prices, which a good portion of this is. Cheaper petrol prices act like a tax cut on the economy, allowing more funds to be spent on other goods and services. Central banks will also ‘look through’ inflation moves that are temporary or driven by one off factors. The Bank of England did exactly that throughout 2010, 2011 and 2012 when inflation got as high as 5 percent. Another positive for the UK economy came in the form of last week’s average earning data. Wage gains increased by 1% and we may well be close to a time once again where wage gains outstrip inflation. That is a key metric for long term sustainable growth in the economy. Tonight we get the latest reading of inflation and the market is expecting a reading of 1.2%. The BOE minutes are out on Wednesday and these are followed by retail sales on Thursday.
 

Europe
ECB President Draghi, along with many other Eurozone officials, will have breathed a sigh of relief on Friday after GDP data didn’t print negative and actually came in a touch above the expectation at +0.2%. However, this was only a small piece of good news and there is no room for complacency on boosting the recovery. Draghi himself said last night that the economic outlook in the Eurozone is ‘increasingly sobering’.  He said early indications are that their credit easing package is delivering tangible benefits, although they need to remain alert for possible downside risks to their inflation projections. He added that growth momentum had weakened over summer and risks to their outlook continue to be on the downside. For the first time he also mentioned that the expanded asset purchase programme could include government bonds, although he added the ECB want’s more time to assess the effects of the measures already announced. Tonight we get German ZEW economic sentiment numbers then later in the week the focus will turn to manufacturing and service sector PMI data.
 

Japan
Japanese Prime Minister Abe’s plan to re-inflate the economy, commonly referred to as Abenomics, is in real trouble. It was dealt a serious blow by yesterday’s GDP data that showed the economy has fallen back into recession in the third quarter. GDP fell by -0.4% against expectations for a rise of +0.5%. This comes on the back of the second quarters -1.9% decline after the sales tax increase in April. A big chunk of the recent GDP decline came on the back of inventory adjustment which does have some positive aspects. A glut of inventories was holding back production, but those inventories have now been cut back and this should have a positive effect on production down the line. That is however, as good as it gets. Newspaper reports suggest PM Abe will hold a press conference today where he will announce a delay of second sales tax increase planned for October 2015. That seems like a no brainer, but the problem for Japan is they are facing a demographic time bomb. An rapidly aging population is going to put a real strain on public finances and Japan already has the world highest debt to GDP ratio at 227%. If confidence is lost in the government’s ability to get that under control, then a catastrophe is around the corner. The rumours are that at today’s press conference PM Abe will also dissolve parliament and call fresh elections for December. As if all this wasn’t enough we have the Bank of Japan (BOJ) rate meeting to digest on Wednesday and the trade balance on Thursday.
 

Canada
Last week was a reasonably light one in terms of economic released from Canada. The most notable outcome came from manufacturing sales data on Friday which printed at +2.1% versus expectations of +1.3%. This helped to support the Canadian dollar to a degree, as did an improvement in existing home sales and a investment flow data that came in better than expected. There is little else to digest until the end of this week when we get wholesale sales and inflation data. The market is looking for core inflation to remain stable at +0.2% on the month, whole wholesale sales are expected to increase 0.7%.
 

Major Announcements last week:
  • Chinese Inflation 1.6% as expected
  • UK Ave. Weekly Earnings 1.0% vs .9% expected
  • UK Unemployment rate 6.0% vs 5.9% expected
  • BOE lower Inflation expectations
  • European GDP +.2% vs +.1% expected
  • Canadian Manufacturing Sales 2.1% vs 1.3%
  • US (UoM) Consumer Sentiment 89.4 vs 87.3% expected
  • NZ Retail Sales 1.5% vs .8% expected
  • Japanese GDP -.4% vs +.5% expected
 

Economies of Note - 14th November

Written by Ian Dobbs on November 14th, 2014.      0 comments

1:00pm(NZT)
Australia
The past week has seen some mildly encouraging signs from what has been mostly second tier data. The best result came from business confidence, which actually saw the headline reading decline to 4 vs the previous reading of 5. Although that headline number wasn’t so great, looking deeper into the report made much better reading. The business conditions component jumped from 1 to a reading of 13. That’s the highest level since 2008 and the biggest point jump on record. Consumer sentiment has also improved a touch coming in at +1.9% up from the previous +0.9%. That index is still however, 12.5% below its level of a year ago. Wage growth came in bang on expectation at +0.6%, while inflation expectations edged up to 4.1% from 3.4% previously. The other positive news this week has been that Australia and China are set to agree a free trade agreement. This could have potential benefits for many sectors of the economy. Yesterday afternoon the RBA’s Kent made an on the record speech. He reiterated the AUD was above estimates of fundamental value given falling resource prices, and that is may well depreciate further once the Fed starts raising rates. He believes growth will be below trend in the near term, but will pick up in the future helped by low rates that encourage household to save less and spend more. In something of a surprise he also said the RBA hasn’t ruled out FX intervention. The focus now turns to the Reserve Bank of Australia's minutes set for release on Tuesday, just ahead of the Treasuries mid-year economic and fiscal outlook.
 

New Zealand
The main focus in New Zealand this week was on the RBNZ’s Financial Stability report released on Wednesday. There had been plenty of speculation in the media that Governor Wheeler might signal an easing of the LVR restrictions put in place late last year, but it seems the bank does not think now is the right time. Wheeler said that while housing risks had reduced thanks to a slowing of price gains, the current strong migration flows mean it would be too risky to ease the LVR “speed limit” at this stage. Overall Governor Wheeler said that while the four key risks remain the same in May’s report, the balance of these risks has shifted in the past six months. Those four key risks are: the housing market, high levels of debt in the dairy sector, a potential slowdown in China, and the banking systems reliance on offshore funding. Also this week we go the latest reading from the Business NZ manufacturing index. It improved in October to 59.3 from a prior reading of 58.5. That is the best reading for 2014 and the second highest reading since 2007. Next week we have retail sales, producer prices, and the latest Fonterra dairy auction to digest.
 

United States
A bank holiday on Tuesday means it has been a quiet one for data from the United States so far this week. Last night we did see weekly unemployment claims and JOLTS jobs openings data, both of which continue to point to a healthy employment market. The Fed’s Dudley was in the wires saying patience was needed in timing of the first rate hike. He did however add that market expectations for rate lift off in mid-2015 are reasonable. Still to come this week we have the key releases of retail sales and consumer sentiment, both out tonight. The focus will then turn to next week’s data in the form of producer prices, building permits, the FOMC minutes, inflation and the Philadelphia Fed manufacturing index.
 

United Kingdom
It’s been an interesting week for the UK Pound. The currency came under all sorts of pressure on Wednesday night after the Bank of England (BOE) released their quarterly inflation report. The bank has slashed inflation forecasts for 2014 to 1.2% from 1.9% previously, with 2015 forecasts cut to 1.4% from 1.7%. They said inflation could well fall below 1% in the next six months before recovering back toward 2% over the next three years. This lower inflation forecast has been driven by lower imported commodity prices and weak demand. The bank also signalled that rates won’t be going up until the second half of next year at the earliest. They see the UK outlook a little weaker, with downsides risks from Europe and upside risks from the US. On a more positive note, Governor Carney did say they are seeing the first tentative signs of wage growth. This was certainly evident in the employment data also released on Wednesday. Although the claimant count change fell by a little less than forecast at -20.4k, average hourly earnings were up 1.0% vs expectations of +0.8% and a prior reading of 0.7%. Real wage growth is key to containing any near term dip in inflation and helping build a robust sustainable recovery. Next week we get the latest reading of inflation which will be very closely watched. We also get the BOE minutes and retails sales data to digest.
 

Europe
There has been little in the way of data to cheer about from Europe this week. Industrial production disappointed, as did German wholesale prices and Sentix investor confidence. The latest monthly report from the OECD showed their indicators point to weaker Eurozone growth ahead and they said it was “high time” for more growth and investment friendly policies. ECB President Draghi has been on the wires saying unemployment in the Euro area remains unacceptable high. He added monetary policy has done and will continue to do its part, but it is not enough. Structural reforms are needed along with fiscal policy that promotes investment and growth. The ECB released their monthly bulletin last night and it was largely a re-hash of the statement we saw after the recent rate meeting. They did stress the council is unanimous in its commitment to act further if needed. A recent survey found that 50% of respondents think the central bank will undertake sovereign QE over the coming months. Tonight we get GDP data from France, Germany, Italy and the Eurozone as a whole, along with the final reading of inflation. The GDP data should be interesting with the very real risk of a negative result. Next week the focus turns to German economic sentiment, along with manufacturing and service sector PMI’s.
 

Japan
Data out of Japan this week has been something of a mixed bag. The best result came from core machinery orders that printed well above expectation, while revised industrial productions was also a little stronger than forecast. On the negative side we saw a drop in consumer confidence and economy watches sentiment index, both of which also missed expectation. The monthly Reuters Tankan survey (not to be confused with the official quarterly Tankan report) showed current manufacturing sentiment has improved, although their outlook is a lot more cautious. The media has been full of rumour and speculation about a snap election in Japan, along with debate about whether the next round of sales tax hikes should be delayed or not. Prime Minister Abe has seen his approval ratings fall as the economy fails to recover from the previous sales tax hike and he may go to the polls to seek a fresh four year mandate to continue with his plan to reinvigorate the economy, often referred to as “Abenomics”. Next week we have GDP data and the Bank of Japan’s (BOJ) Monetary Policy Statement to digest.
 

Canada
Data from Canada hasn’t had much impact this week. We have only seen housing starts and the new house price index released and both came in a touch below expectation. The housing sector remains a risk in Canada and policy makers have been nervous about it since the US market collapse in 2008. In a speech by the Bank of Canada’s (BOC) Schembri this week, he noted the main risks to the economy come from China, Europe and the housing market. On a positive note US senators on Wednesday voted to approve the Keystone XL pipeline which aims to bring Canadian oil to the Gulf of Mexico coast. This pipeline is a positive for Canada as it would double the flow of heavy tars sand oil from Canada to refineries in the Gulf Coast. Tonight we get manufacturing sales numbers to digest, while next week the focus will turn to wholesale sales and inflation data.
 
 

FX Update - The slow grind of economic recovery continues

Written by Ian Dobbs on November 11th, 2014.      0 comments

2:00pm(NZT)
Market Overview:
The economic data releases from the last week have revealed a continuation of the theme of a slow economic recovery in the global sense. With Europe and Japan in economic respective quagmire’s, eyes are closely on the news from the UK and the US for inspiration. Both economies continue to improve, albeit not plain sailing for either economy. Wage growth remains the sticky indicator across the board and until wages start to climb, the full benefits of lower levels of unemployment will not be seen. The Chinese economy continues to represent a significant risk with the property and credit markets remaining vulnerable. The economic resilience in China is of primary importance to both the Australian and New Zealand economies. 2015 looks to be a crucial year for China as it looks to continue to develop its economy, in the face of the pressures created by the extraordinary global monetary conditions of the last six or so years.
 

Australia
The Australian dollar struggled last week despite some better than expected data from retail sales and October employment change. However, prior employment numbers were revised lower which will only serve to reinforce the RBA’s view that jobs growth is moderate and unemployment is likely to stay elevated for some time. That outlook was repeated in the Reserve Bank of Australia’s (RBA) Statement on Monetary Policy published on Friday. This statement is released four times a year and it largely reflected what the central bank said earlier in the week after their rate meeting. Inflation is expected to remain in line with the 2-3 per cent target and the most prudent course is a period of stability in rates. The bank added that the slowing Chinese property market is one key risk to global growth. Chinese trade figures released on Monday were better than expected, although they do show export growth slowed to 11.6% in October from 15.3% the prior month. Australian home loans data also hit the wires yesterday and it won’t have done anything to relax the Reserve Bank’s position that imbalances in the housing market are also a potential threat. Investor loans reached a new high in September at 41.4% of all mortgage lending. Still to come this week we have business confidence, consumer sentiment, the wage price index and inflation expectations.
 

New Zealand
There has been no data of significance from New Zealand since last Wednesday’s strong employment figures. Tomorrow we do get the RBNZ’s Financial Stability Report and we will also hear from Governor Wheeler when he appears before a parliamentary select committee. There has been lots of speculation in the media that he could signal a relaxing of LVR restrictions that were introduced back in October 2013. Although the property market has cooled somewhat I not sure Wheeler will want to risk sparking a surge of first home buyer demand just yet.
 

United States
Aside from the US mid-term elections, which saw Republicans take control of both the Senate and House of Representatives, the main focus last week was on Friday’s employment report. A range of indicators had all pointed to a very strong result and the markets were primed for a number in excess of 235k. Unfortunately the actual result didn’t live up to expectations coming in at just 214k. While jobs growth of above 200k is still very respectable and raises no concerns about the ongoing recovery, the markets disappointment was evidenced in the reaction of the USD which immediately came under pressure. Although the headline number didn’t live up to expectations, there were positive revisions of +31k to the prior two months results and the unemployment rate dropped to 5.8% from 5.9% which is the lowest reading in six years. These factors have helped the USD to slowly regain most of the ground lost in the immediate aftermath of the data. A US holiday today has meant it has been a very quiet start to this week data wise. Things should get more interesting later in the week with retail sales and consumer sentiment numbers set for release.
 

United Kingdom
Last week saw some mixed data from the United Kingdom, but nothing that should raise concerns about the ongoing economic recovery. While manufacturing PMI came in better than expected, the construction and service sector readings were lower than forecast. They are both still at healthy levels overall, but perhaps not strong enough to put any pressure on the Bank of England (BOE) to raise rates. The BOE meeting last week came and went with little market impact and that could well be the case until late next year now. Trade balance data on Friday showed a bigger than forecast trade deficit. This was however, driven by increasing domestic demand as imports increased at a faster pace than exports. This week we have claimant count change (unemployment claims) and average cash earnings data to digest ahead of the BOE’s inflation report on Wednesday.
 

Europe
Last week’s ECB meeting and resulting press conference seems to have quashed speculation in the media of a rift within the governing council. There was talk that leader Mario Draghi’s communication style had upset other council members and his leadership could be challenged. Draghi certainly came across and a man in control at his press conference and there has been nothing printed on the topic since. Datawise over the past week there has been little to suggest any meaningful recovery in the Euro area is just around the corner. German data continues to mostly disappoint with weaker than expected readings from factory orders and industrial production. Eurozone retail sales were also very soft last week and comments from the ECB’s Mersch last night summed the situation up correctly when he said “the Eurozone recovery has lost momentum”. He added that unemployment is still unacceptably high and that governments must boost competitiveness for sustained growth. This week we have Eurozone industrial production, GDP and the final reading of inflation to draw focus.
 

Japan
Largely second tier data from Japan last week had little market impact. Of particular note however, were the average cash earnings figures that came in below expectations at +0.8%. PM Abe is keen to see wages grow in order to create a “virtuous cycle” of growth in the economy. Unfortunately the economy seems to have struggled to recover from the sales tax hike back in April and all indications are growth in the third quarter could be flat or even negative. A decision on another sales tax increase is due to be made soon and the issue is being hotly debated, at least in the media. The economy doesn’t seem anywhere near strong enough to withstand another hike, but it is critical for confidence in the government’s ability to address high public debt and establish a record of fiscal discipline. Japan is in a very tough situation with one of the highest government debt levels in the world and an aging population that will only put further pressure on public finances. The Japanese Centre for Economic Research recently said that without further consumption tax hikes, sovereign default cannot be avoided. Focus this week turns to tertiary industry activity data along with core machinery orders.
 

Canada
The majority of data out of Canada last week was very supportive. The only exception was the Ivey PMI which saw a big drop to 51.2 from 58.6 previously. This was countered however, by better than expected readings from the trade balance, building permits and then employment change on Friday. The market was expecting a small drop in employment of -4k, but the economy actually added jobs to the tune of +43.1K. The unemployment rate also saw a big fall to 6.5% from 6.8% previously and now stands at a six year low. This was all round good data and the Canadian dollar responded positively. However, against this solid data is a backdrop of declining oil prices which will create some headwinds for a resource rich country like Canada. This week is relatively quiet on the data front with only the new house price index and manufacturing sales of any note.
 

Major Announcements last week:
  • Chinese HSBC Manufacturing 50.4 as expected
  • UK Manufacturing 53.2 vs 51.5 expected
  • US ISM Manufacturing 59.0 vs 56.5 expected
  • Australian Retail Sales 1.2% vs +.3% expected
  • RBA leaves monetary policy unchanged
  • NZ Fonterra GDT Price Index -.3% vs +1.4% previous
  • NZ Unemployment rate 5.4% vs 5.5% expected
  • Australian Unemployment rate 6.2% as expected
  • BOE leave monetary policy unchanged
  • ECB leave monetary policy unchanged
  • Canadian Unemployment rate 6.5% vs 6.8% expected
  • US Unemployment rate 5.8% vs 5.9% expected
 

Economies of Note - 7th November

Written by Ian Dobbs on November 7th, 2014.      0 comments

1:30pm(NZT)
Australia
The past week has seen some mixed data from Australia, along with the RBA rate statement that was little changed from the previous one. Building approval and the trade balance were both softer than expected, while retail sales and employment change both came in stronger than forecast. However, the positive impact of the employment number was dented by revisions to prior data released by the Australian Bureau of Statistics earlier in the week. They revised away around 35,000 jobs for the period of August and September and this took the unemployment rate up to 6.2% from 6.1%. For the record, the most recent data showed Australia gained 24.1k jobs in October, versus expectation of around 20k, with the unemployment rate steady at 6.2%. The RBA remain firmly in the neutral camp, believing continued accommodative monetary policy remain appropriate. The expect inflation to be consistent within the 2-3 per cent target over the next two years. Later today we have the RBA’s quarterly statement on monetary policy which will be closely watched. Next week we have business confidence and consumer sentiment data to digest along with the wage price index, and inflation expectations.
 

New Zealand
There have been only two releases of note from New Zealand this week. The first was Fonterra’s dairy auction which showed prices continuing to stabilize. The overall index was down just -0.3% from the prior result. On Wednesday we had employment change data and this came in stronger than expected at +0.8%. The unemployment rate also dropped from 5.5% to 5.4%. This was very good data considering the growth in population NZ is seeing with the recent strong migration flows. Wage growth however, remains subdued at only 1.6% for the year, this is a trend that can be seen in many western nations at the moment. Next week we just have the RBNZ’s financial stability report and the Business NZ manufacturing index to draw focus.
 

United States
It has been an interesting week so far for the United States and we still have the key release of non-farm payrolls to come tonight. Expectations are for a gain of around 230k, but it looks like the risks are skewed to the topside with number of lead indicators are suggesting we could see a very strong employment outcome. The most notable of which was the employment component of Wednesday’s ISM non-manufacturing index. Although the over index came in below forecasts, the employment component jumped to the highest level since 2005. Other data this week included a very solid reading from the ISM manufacturing index, while factory orders and the trade balance were both somewhat weaker than forecast. Financial markets did have a significant reaction to the US midterm elections. Republicans won a majority in both the Senate and the House of Representatives on Wednesday evening, which resulted in decent gains for stocks and the USD.
 

United Kingdom
This week saw PMI’s for the manufacturing, construction and service sectors released in the UK with mixed results. The manufacturing PMI came in better than forecast at 53.2, which is also stronger than the prior reading of 51.5, but the PMI’s for both the construction and service sectors disappointed coming in below expectation and down on the prior readings. The service sector is the biggest part of the UK economy and slowing growth there means the Bank of England (BOE) will be in no hurry to raise rates, especially considering the recent run of downbeat data They met last night and as expected left policy settings unchanged. We now wait for two weeks to get the minutes to gain further insight into thinking within the Monetary Policy Committee (MPC). The only other data released this week has been manufacturing and industrial production. Market impact from these releases was very muted with improvements in the monthly reading, countered by weaker year on year results.
 

Europe
Data from Europe this week has remained subdued and it has done nothing to improve the current economic outlook. Manufacturing and service sector PMI’s both came in a touch below expectation, while retails sales and German factory orders missed forecasts by a much bigger margin. Reuters released an article this week which got a lot of attention suggesting there were big divisions within the ECB’s governing council and that President Mario Draghi’s leadership may be under threat. It said governing council members had issues with Draghi’s secretiveness and communication style and that he kept aides in the dark on policy steps. This caused some volatility in the Euro as the market weighted up the chance of a less proactive central bank leader. That speculation was largely put to bed last night after the ECB rate meeting and press conference. Draghi moved to quash any hint of divisions within the governing council repeating the word ‘unanimous’ on many occasions when describing council decisions and opinions. The ECB took no further action at this meeting, but Draghi stressed they were all committed to act again if needed, with staff undertaking preparations for extra measures in case they are required. There is growing speculation in the market that we could see further action from the ECB in December and this should keep the Euro under pressure over the coming weeks. The focus next week will be on industrial production numbers along with GDP data from France, Germany, Italy and the Eurozone as a whole. We also have the final reading of inflation to digest.
 

Japan
This week has seen only second tier data released from Japan and it has had little impact. The most notable release was that of average cash earnings which came in just below forecast at +0.8% year on year. That number needs to grow if Japan want’s any sort of sustainable recovery. A report by Japan’s Centre for Economic Research said that real GDP likely fell in September for the time since April. The official numbers aren’t released until Nov 16th, but a negative result doesn’t seem unrealistic. The Bank of Japan (BOJ) released minutes from the Oct 6-7 meeting. These were not from the Oct 30th meeting when the surprise easing was announced, and as such didn’t contain any revelations. The most interesting point was that there was no hint or signal that they might undertake action at the next meeting apart from the much repeated statement that they will “keep easing until 2% inflation is stable”. Next week we have the current account, tertiary industry activity and core machinery orders to look forward to.
 

Canada
Canada posted a surprise trade surplus for September of CAD 710 million, thanks to a jump in exports of 1.1% and a drop in imports of -1.5%. Unfortunately with the recent drop in oil prices, future trade surpluses look very unlikely. Building permits data also came in on the positive side with a jump of +12.7%. Its impact was limited as the previous reading was -27.3%, so it was no major surprise. It is obviously a very volatile series. The other data point released so far this week was last night’s Ivey PMI. This came in at a disappointing 51.2 vs expectation of 59.2. The prior reading was 58.6, so this was a very weak result. All sub components of the index were lower as well. Bank of Canada (BOC) Governor Poloz has been on the wires this week saying the European headwinds are being offset by a tailwind from the US recovery. He believes housing remains the biggest domestic risk to the economy and added rate hikes would have a larger effect than in the past due to household debt levels. Tonight we get key employment data with the market expecting a change in employment of -3.9k and the unemployment rate to hold steady at 6.8%. Next week to draw focus we have housing starts, the new house price index and manufacturing sales data.
 
 

FX Update - Central banks provide market direction

Written by Ian Dobbs on November 4th, 2014.      0 comments

2:30pm(NZT)
Market Overview:
Central bank announcements last week provided market direction for a number of currency pairs with significant reactions to releases from the US Federal Reserve, the RBNZ and then the Bank of Japan. Although we have both the Bank of England and European Central bank meetings later this week, along with the Reserve Bank of Australia today, they shouldn’t provide anywhere near the same sort of volatility. The focus now turns to employment data set for release from New Zealand, Australia and the US over the coming days. The overriding theme from all the recent volatility has been continued US dollar strength. This is expected to continue to dominate heading into the years end. Declining oil prices and a lack of inflation pressure in many western countries means central banks are in no hurry to raise rates. Countries like the US and the UK however, should be looking to start normalizing interest rates if only so they have room to cut again should we see another significant economic downturn. With rates effectively at zero the only action the Fed or BOE could take now if needs be would be to turn the printing presses back on and undertake further QE. The diminishing returns of such policy suggest the downside of this action would outweigh any positives.
 

Australia
Last week was a quiet one for data from Australia with only import prices and the producer price index of any note. Neither had much of an impact on the market with import prices coming in softer than expected at -0.8% and the producer price index printing right on expectation at +0.2%. Yesterday saw the Australian dollar come under a little pressure after building consents data surprised with a very weak result of -11.0% month on month. The market was expecting a reading of around -0.9%. This marks the single worst monthly decline since July 2012. It didn’t help sentiment that had already been dented by softer than expected Chinese manufacturing PMI, which fell to a five month low. However, there is much more to come this week and that started with retail sales this afternoon. The market was looking for an increase of around 0.3%, and this came in at a strong 1.2% The trade deficit, also just released, came in wider than expected at 2.26 billion. The Reserve Bank of Australia (RBA) rate statement will be released later on today and no change is expected at all in the actual monetary policy or statement tone. Later in the week the focus will turn to employment change numbers, which have been volatile lately to say the least.
 

New Zealand
Last week’s RBNZ meeting saw the central bank largely confirm market expectations that they are on hold for the foreseeable future. With a lack of inflation pressure, declining commodity prices, and some heat coming out of the property market, there is no hurry for the bank to tighten again and it looks like they will remain on hold until late next year at least. Friday saw the release of building consents and these were very weak. The month on month decline of -12.2% was something of a surprise and well below expectations for +1.0%. The NZD saw some pressure on the back of this data. Countering this was news the China has lifted the temporary suspension of Fonterra base powder for infant formula and whey powder. This suspension had been in place since August 2013. The focus now turns to employment data on Wednesday and Fonterra’s latest dairy auction.
 

United States
The key economic releases from the United States over the past week have generally been very supportive. After the Federal Reserve (Fed) struck a more positive tone at last Thursday’s meeting, the USD saw solid gains and sentiment was improved further on the back of GDP data. Third quarter GDP came in at a very healthy 3.5%, which was significantly higher than the forecast of 3.1%. Weekly unemployment claims remain low and last night’s ISM manufacturing index was much stronger than forecast printing at 59.0. Some second tier data has been a little more mixed with personal spending and income figures missing expectation, while consumer sentiment and Chicago PMI were both stronger than forecast. Overall, the US economy seems to be performing very well at this stage and market expectations for a rate hike around the middle of next year seem well placed. The US dollar is reacting how you would expect making broad based gains, however the same cannot be said for long term interest rates. Yields on government bonds remain at very low levels considering the improving economic outlook. The US 10 year treasury is currently trading at 2.34%, only up a few points over the past week. Still to come this week we have the trade balance, ISM non-manufacturing PMI, non-farm payrolls data and a speech from Fed Chair Janet Yellen.
 

United Kingdom
Data from the UK last week was a mostly second tier affair with results printing close enough to expectation to have little market impact. This week should prove a lot more interesting, with a number of key indicators set for release. The first of which was manufacturing PMI out last night. It came in significantly better than forecast at 53.2 and helped to support the UK Pound. Over the coming days we get constructing and service sector PMI’s along with manufacturing production data and the Bank of England (BOE) rate meeting. There has been a lot in press recently around the UK’s continued membership in the European Union. The European Commission set out revised contributions for all EU member states recently, which took into account their economic growth in recent years. This resulted in the UK been handed a surcharge of GBP 1.7bln which David Cameron called a “growth tax” and has so far refused to pay. While negotiations continue on that Cameron has also said he wants to cap the amount of migrants the UK accepts from other parts of Europe. He was quickly shot down by Germany’s Angela Merkel however, who said the free flow of labour was key to the EU and she would accept a UK exit from the EU in order to protect the migration rules.
 

Europe
There has been little to get excited about in terms of economic data from Europe over the past week. Key inflation data came in bang on expectation at +0.4% year on year, which was at least an improvement over the previous 0.3% reading. It is still dangerously low and this was acknowledged by the ECB’s Visco who said they cannot ignore the concrete risk of Eurozone deflation. We did see German unemployment fall by more than forecast, however the European wide unemployment rate remains constant at 11.5%. German retail sales and French consumer spending both disappointed, as did the Eurozone manufacturing PMI released last night. It printed at 50.6 which was just below the expectation of 50.7. Declines in German and Italian manufacturing were largely offset by gains in the French and Spanish readings. We get service sector PMI’s over the coming days along with EU economic forecasts, German factory orders, French industrial production and the ECB rate meeting.
 

Japan
It has been a long time since a central bank completely surprised the market, but that is just what the Bank of Japan (BOJ) did on Friday afternoon. In this day and age changes in central bank policy stance are usually signalled and/or predicted well ahead of time, but almost no one was expecting the BOJ to make any adjustments at Friday meeting. Completely out of left field the BOJ announced further easing measures and sent markets into a spin. The BOJ have increased the rate at which they expand the monetary base by around 20 trillion Yen annually. They are going to increase purchases of government bonds, exchange traded funds, and real estate investment trusts. The Yen got slaughtered immediately and has remained under heavy pressure ever since, while the stock market surged nearly 5%. The BOJ’s Kuroda said the easing was aimed at ending the deflationary mindset and that the BOJ will continue easing as long as needed to reach their 2% target. Recent falls in oil prices had put downward pressure on inflation and this risked undoing all the work the bank had achieved in erasing the deflationary mindset. This action was obviously hotly debated within the BOJ and it only passed by a 5:4 vote. The BOJ are now creating money to cover the fiscal deficit and the majority share of Japan’s annual budget. They are effectively monetizing the national debt, which is something more often seen in developing nations. Any data releases have taken a back seat to this news and the Yen is likely to remain under pressure for the foreseeable future. We get the BOJ minutes on Thursday and these should make very interesting reading.
 

Canada
Last week saw only a couple of releases of note from Canada. The raw material price index came in below forecast at -1.8%, as did GDP for August when it printed at -0.1% vs expectations of 0.0%. This was the first contraction in eight months and was driven by declines in oil and gas production and manufacturing. Last night we saw manufacturing PMI data which increased to 55.3 from 53.5 prior, and we also heard from BOC Governor Poloz who said that continued monetary policy stimulus may be needed even after excess capacity is absorbed. He added the effects of deleveraging, fiscal normalization and uncertainty will restrain global growth, and that it should take around two years to use up the excess slack in the Canadian economy. We have some key economic releases still to come this week with the trade balance, building permits, Ivey PMI and employment change all set for release.
 

Major Announcements last week:
  • US Durable Goods Sales -.2% vs +.5% expected
  • US CB Consumer Confidence 94.5 vs 87.4 expected
  • FED statement buoys outlook
  • RBNZ confirms more neutral policy stance
  • BOJ surprises with further policy stimulation
  • US advanced GDP 3.5% vs 3.1% expected
  • European Inflation +.4% as expected
  • Canadian GDP -.1% vs 0.0 expected
  • Australian Building Approvals -11.0% vs -.9% expected
  • UK Manufacturing PMI 53.2 vs 51.5 expected
  • US ISM Manufacturing 59.0 vs 56.5 expected
  • Australian Retail Sales +1.2% vs +.3% expected
 

Economies of Note - 30th October

Written by Ian Dobbs on October 30th, 2014.      0 comments

3:30pm(NZT)
Australia
It has been a very quiet week for data from Australia with nothing of significance released so far. We did get import prices a couple of hours ago and these were softer than expect at -0.8%. The impact on the market from this data however has been negligible. Tomorrow we do get producer prices and private sector credit numbers, while next week’s economic calendar looks a lot healthier. Building approvals, retail sales, the trade balance and employment change are all set for release along with the latest Reserve Bank of Australia rate statement.
 

New Zealand
The main focus for New Zealand this week was on this morning’s RBNZ rate statement. As expected the central bank left the cash rate unchanged at 3.50%, but a somewhat more neutral tone to the statement saw the New Zealand dollar come under pressure. The central bank acknowledged the recent soft inflation data and dropped the reference to the “need for further policy tightening’s” that was present in the September statement. They also said house price inflation had fallen “significantly” since late-2013, in part thanks to the LVR restrictions. Also, the level of the NZD remains “unjustified and unsustainable”. This was a much more neutral statement than the previous one and as such confirms the growing market expectation that the RBNZ are now on hold until at least late next year. Other data released this week was ANZ business confidence which showed something of a rebound from recent lows, and building consents are due tomorrow. Whilst the business confidence was of interest, it had minimal market impact. Next week we have another global dairy auction result from Fonterra, along with the latest employment numbers.
 

United States
The week started off with the USD under pressure on the back of some weaker than expected data. Services PMI and pending home sales both missed expectation, but the bigger impact came from durable goods orders. The headline number printed at very soft -1.3% vs expectations for +0.4%. The core reading, which excludes transport items such as aircraft, wasn’t much better, printing at -0.2% vs expectations of +0.5%. Durable goods orders are a proxy for business investment and these were disappointing numbers. The data so far this week hasn’t been all bad however. The Richmond manufacturing index printed at its highest level since 2010, and The Conference Board Consumer Confidence Index jump from 89.0 to 94.5, which is its best level since 2007. The main event of the week was always going to be this mornings Fed rate statement and it didn’t disappoint. It was no surprise the central bank announced the end of quantitative easing (QE), but the tone of the statement was a little more ‘hawkish’ than the market was expecting. The Fed maintained the reference to a “considerable time” between ending QE and hiking rates, but they upgraded their assessment of the labour market saying “conditions improved somewhat further, with solid job gains and a lower unemployment rate”.  The previous statement had suggested “significant underutilization” of labour resources, but this time they said “underutilization of labour resources is gradually diminishing”. They acknowledged recent low inflation suggesting it was largely the result of energy prices and added “the likelihood of inflation running persistently below 2 percent has diminished somewhat”. The USD made good gains across the board on the improved tone of the statement and markets are now starting to think a rate hike mid next year is on the cards. Still to come this week we have the core PCE price index, personal spending and income data along with revised University of Michigan Consumer Sentiment Index. Next week from the US we have key data in the form of ISM manufacturing and non-manufacturing PMI’s, the trade balance and the monthly employment report.
 

United Kingdom
Tuesday saw the release of the CBI realized sales index which maintained a healthy level of +31. A large 48% of respondents reported sales volume increases in October, with only 17% saying volumes had declined. This helped to ease the pain of the previous weeks retail sales data for September which came in much weaker than forecast. The only other data we have seen this week has been “net lending to individuals” and mortgage approvals, both of which came in a touch below expectations. The BOE’s Cunliffe has been on the wires saying there are grounds to wait for clearer signs in wage growth before raising rates. He added, softening pay and inflation mean the bank should be cautious about tightening policy in the basis of falling employment alone. Understanding how long employment can improve without creating inflation is now key for policy. Tonight we get the Nationwide house price index and next week there is plenty of key data to digest. Manufacturing, construction and service PMI’s are set for release along with the Bank of England (BOE) rate meeting.
 

Europe
It has been a quiet week so far for data from Europe. The ECB bank stress tests released on Sunday didn’t highlight too many concerns and as such the impact on the Euro was limited. Monday’s release of the German IFO business climate index disappointed dropping to 103.2 from 104.7 previously. There was little to cheer about with pessimism growing at the Eurozone’s core. French consumer confidence was also soft printing at 85 vs 86 expected. The key data for the week is released tomorrow evening in the form of inflation. The market is looking for a small improvement to +0.4% y/y from the previous +0.3% reading. With inflation undershooting in many countries recently driven by declining energy prices the risks are there for another softer than expected outcome. Next week there is a raft of second tier data set of release, but the main focus will be on Thursday’s ECB rate meeting and subsequent press conference.
 

Japan
Tuesday saw the release of retail sales and industrial production data from Japan, and both came in better than expected. This will be somewhat pleasing for the Bank of Japan (BOJ), although the economy still has a long way to go to recover from April's sales tax hike. Governor Kuroda himself said this week the economy is showing some weakness in output, although he added a positive cycle remains intact. The IMF aren’t so confident about any positive cycles, with a release this week suggesting Abenomics is failing to turn the Japanese economy around. They say a weaker Yen hasn’t boosted exports and stock market gains haven’t spurred domestic consumption. They added structural reforms have not been strong enough for Japan to break out of a stagnant economy. Tomorrow we get inflation and household spending data along with the BOJ monetary policy statement. Next week there is little to get excited about on the economic calendar, with on the BOJ minutes and average cash earnings of any note.
 

Canada
The only data from Canada this week has been the raw materials price index. This index measures the change in price of raw material purchased by manufacturers and is considered a lead indicator of inflation. The index printed much weaker than expected at -1.8% and suggests there is little in the way of pipeline inflation pressure in the economy at the moment. Bank of Canada (BOC) Governor Poloz released a speech saying monetary policy stimulus remains appropriate. He added Canada still has considerable excess capacity in the economy. Tomorrow we have GDP data to digest and next week the economic calendar is looking very healthy. Governor Poloz speaks again and we also get the trade balance, building permits, Ivey PMI and employment change data.