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Major Announcements last week:
UK CPI hits 3.7% YoY
German economic and Investor sentiment beats forecasts
NZ CPI as expected at 2.3%
Bank of Canada leaves the cash rate unchanged
NZ core-Retails Sales weaker than expected
UK Retail Sales weaker than expected
Canadian Retail Sales much better than expected
South African Building consents sees first decrease in 11 months
Last week was another interesting one for the markets. The major piece of sentiment change seems to be the acceptance of the European Govt debt situation for the time being. This stabilisation of sentiment has seen the cost of borrowing for peripheral member states decrease. This change in sentiment has been driven by what could almost be called a coordinated approach from China, Japan and Russia and their respective central banks to commit to buying European Debt. As the cost of funding diminishes, the perceived risk lessens. This has seen Fund buying of the EURO, a sign that Funds are also investing in EURO debt, which has been relatively absent for some time. European Finance ministers are still wrangling over the issue of enlarging the European Financial Stability Facility (EFSF), a larger EFSF would enable it to deal with current commitments along with any further added stresses such as the need to help fund Portugal and Spain, should that happen at some stage. Germany hold the key to this, as they would have to commit by far the largest portion of funds. I think that until extra funds are actually required, the EFSF will remain at its current size of 250 billion Euros.The USD traded in a volatile nature, it was under intense pressure for most of the week before recovering as the commodity markets saw some weakness. The mixed bag of economic data continues in the US as the economy drags itself off the ground. Housing numbers remain patchy, while manufacturing numbers are showing some signs of recovery. The corporate earning’s reporting season on Wall Street got off to a patchy start, with numerous companies missing analysts expectations. This can be expected in this part of the economic cycle as focus changes from cost cutting to revenue growth.
In the UK , the CPI number came out at 3.7%, this gave the GBP a boost as the market pushed for an earlier than previously expected beginning to the rise in the cash rate from the Bank of England. There will continue to be fierce debate in the UK about this. To raise the cash rate just as the reduction in Govt spending starts will make conditions tough on many home owners, as the economy will slow. Retail Sales were very weak in December with a -.8% decline against an expectation that they would drop by .2%.
In Australia, the toll from the devastating floods is still being counted, with wide spread impacts from Victoria to Queensland. The increased inflationary pressure caused by the flooding will be treated by the Reserve Bank of Australia as a short term impact, and will not stop them from delaying any further interest rate increases until the end of the year at earliest. This coupled with the reduced export receipts as mining and food exports drop, have impacted the performance of the AUD. As I discussed last week, the threat of further tight monetary policy in China is also impacting the commodity markets and weighing on the AUD.
The CPI number in New Zealand disappointed market participants who were looking for a larger than expected number when it came out at a GST increase effected 2.3% for the quarter. This coupled with both softer Retail Sales figures and weakening commodity prices saw the NZD lose ground against almost all its trading partners. This week’s Reserve Bank of New Zealand Cash rate review will offer no surprises as the domestic economy remains sluggish and the consumer sector remains in debt reduction mode.