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Economies of Note - 05 February

Written by Ian Dobbs on February 5th, 2015.      0 comments

2:30pm(NZT)
Australia
Somewhat surprisingly the Reserve Bank of Australia (RBA) moved from a neutral stance to actually cutting interest rates on Tuesday afternoon. Many in the market expected a cut would come, but not for another month or two and that the central banks would signal a move to an easing bias on Tuesday. But in keeping with the theme of central bank surprises in 2015, the RBA cut rates to 2.25% from 2.5%. They said growth was continuing at a below trend pace, domestic demand was quite weak, and the unemployment rate is moving higher. They added the economy will be operating with a degree of spare capacity for some time yet. The reaction in the currency market was swift with the Australian dollar losing nearly two cents against the USD and making fresh cycle lows just above 0.7600. Expectations are now that we will see at least one more 0.25% cut over the coming months. Adding to the week’s volatility was something of a bounce in commodity prices, especially crude oil, and this helped to generate a sharp reaction off the lows for the Australian dollar. RBA Governor Stevens is due to speak early next week and we also get readings on business confidence, consumer sentiment, inflation expectation and employment change.
 

New Zealand
A couple of key releases from New Zealand this week were both very positive and supportive of the economic outlook going forward. The first was Fonterra’s dairy auction which saw the price index jump 9.4%. Even more impressive was whole milk powder which increased 19.2% to US$2,874 a tonne. Although these gains will be welcome, Fonterra needs whole milk powder to trade at US$3,500 in order to achieve its forecasted pay-out. Yesterday we also saw the latest employment data from New Zealand. Employment was up +1.2% versus expectation of +0.8%. The unemployment rate actually jumped higher from 5.4% to 5.7%, but this was solely a result of a large increase in the participation rate. As the employment scene looks better more people enter the labour market to look for jobs and this helped to drive the participation rate to a record high of 69.7%. Overall these were very positive numbers. RBNZ Governor Wheeler spoke yesterday and his comments created some extra volatility. His speech was very balanced and the main take away from it was that the RBNZ are firmly ‘on hold’ for the time being. The market is currently pricing in a slight risk of a cut from the central bank later in the year. The only data of note next week is the Business NZ Manufacturing Index out on Thursday.
 

United States
Some mixed data from the United States this week has done little to alter the expectation that the Fed remain on course to hike interest rates around the middle of this year. A weaker than expected result from the ISM manufacturing index was countered by a larger than expected increase in the non-manufacturing index. Factory orders disappointed printing at -3.4% and ADP employment change, which is considered a very rough guide to the key non-farm payrolls data on Friday, was also softer than expected. A number of other second tier indicators have also displayed some weakness and these helped create a very sharp squeeze of long (brought) US dollar positions on Tuesday night. Buying USD’s against many other currencies has been the favoured trade of the past few months and this trade has become very crowded. The brutal moves we saw on Tuesday night are a warning sign that too many people in the market are positioned the same way around. Commodity currencies in particular (NZD, AUD, CAD) made sharp reversals from lows against the USD as oil and other commodities also saw good gains. The immediate focus in now on Friday’s US employment data, and the potential for a disappointing result to squeeze out more bought USD positions. The highlights of next week’s economic calendar will be retail sales and consumer sentiment.
 

United Kingdom
We have seen encouraging data from the United Kingdom this week. Manufacturing, construction and service sector PMI readings all showed improvement and came in stronger than forecast. These numbers would suggest the economy started 2015 on a very firm footing and are consistent with a quarterly GDP rate of around 0.5%. They will also allay some fears that the weakness we saw in data during the last few months of 2014 were more than just growth cooling during winter to a more sustainable pace. The Bank of England meets tonight and they are widely expected to make no change to monetary policy settings. Tomorrow sees trade balance data hit the wires and next week we have manufacturing production numbers along with the BOE inflation report to digest.
 

Europe
Europe has produced some slightly encouraging data this week with manufacturing PMI clinging to expansionary territory at 51.0, while service sector PMI actually increased to 52.7 from 52.3 previously. The improvement in the service sector was most notable in Germany and is likely aided by the weaker Euro. Eurozone retails sale also beat expectation printing at +0.3%, although the result is a drop from the prior reading of 0.7%. Greek officials have been doing the rounds in Europe trying to drum up support for their plan to deal with the current debt pile. They meet with their German counterparts tonight and I can only imagine they will get a very frosty reception. Without continued funding from Troika Greece will run out of cash in March, so the reality is the only thing Greece has to bargain with is a very disorderly exit from the Euro, which nobody wants to see. Next week to draw focus we have industrial production and GDP data.
 

Japan
There has been little in the way of market moving releases from Japan this week. Average cash earnings data came in bang on expectation at 1.6%. Somewhat more positively, the prior result of -1.5% was revised up to +0.1%. PM Abe made the interesting statement that a revision of the law guaranteeing Bank of Japan independence remains a possible future option. He added he expects the bank to do its utmost to hit the 2% inflation target which was agreed with the government under the joint statement. Next week we get data on consumer confidence, tertiary industry activity and core machinery orders.
 

Canada
A couple of releases from Canada this week have served to justify the Bank of Canada’s surprise rate cut late last month. The producer prices index fell 1.6% versus expectations of -0.5%. This wasn’t a huge shock, with declining energy prices the big driver. What was surprising however, was the fall in the Ivey PMI data. This is a leading indicator of economic health and is based on a survey of 175 businesses. The index fell from 53.8 to 45.4. Anything below 50 is indicative of contraction in activity. Something else to keep a very close eye on is the Canadian housing market. It has long been a point of concern for the central bank and is one of the worlds most overvalued property markets. Recent data from Calgary showed home sales collapsed 35% in January to the lowest level in seven years. New listings jumped a massive 40%. Like any market house prices can be severely impacted by sentiment and concerns about the Calgary market could easily become more wide spread. Still to come this week we have the trade balance, building permits and employment change data. Next week will see manufacturing sales and the new house price index draw attention.
 
 

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