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Economies of Note - 10th April

Written by Ian Dobbs on April 10th, 2015.      0 comments

There have been two key Australian releases this week, both of which helped to support the Australian dollar. Retail sales for February rose by a stronger than forecast 0.7% from a month earlier. The market was expecting a rise of around 0.4%. Household goods and food retailing led the way. This data was followed a few hours later by the Reserve Bank of Australia’s (RBA’s) decision to leave interest rates unchanged at 2.25%. The market had widely expected another cut and as such the Australian dollar surged on the unchanged result. The RBA certainly hasn’t ruled out another cut saying “further easing’s may be appropriate” but they obviously feel now is not the right time. They will continue to assess the case for further action at coming meetings. Governor Steven’s took the opportunity to try and jawbone the currency lower saying “a lower AUD is needed for the economy” and “further falls in the AUD seem likely,” but these comments had little impact in light of the markets erroneous expectation for an interest rate cut. The RBA have said a number of times that what the economy lacks at the moment is ‘animal spirits’. Businesses are holding back on investing in new plant or people and that comes down to confidence in the economy. As much as a 0.25% cut in interest rates will help some segments of the economy, it won’t in itself underwrite business confidence. The RBA are trying to instil that confidence by reassuring business they will do whatever is necessary to support the economy. At this point that’s probably worth more than an actual interest rate cut. Next week to draw focus we get the latest reading’s on business confidence, consumer sentiment, inflation expectations and unemployment change.

New Zealand
There has been no economic data released from New Zealand over the past week. In the absence of domestic releases offshore factors have been the main driver of the currency. We have to wait until Tuesday next week to get the latest reading on business confidence and then on Wednesday we have another dairy auction from Fonterra. The week is rounded out on Thursday with the release of the Business NZ Manufacturing Index.

United States
At the very end of last week the United States released employment data for March and it didn’t make great reading. The market was expecting a gain in non-farm payrolls of around 250k, but the actual number came in much lower at just 126k. On top of this there were negative revisions to the prior two readings that totalled -69k. While the unemployment rate remained steady at 5.5%, the only real bright spot of the report was average hourly earnings which came in at +0.3% month on month versus +0.2% expected. Poor weather, a strong US dollar and weakness in the energy sector have all been fingered as having a negative influence on the result. It certainly makes a June lift off in interest rates much less likely, although the temporary impact of some of those influences suggests we may only have to wait until September, or potentially December, until the Fed is comfortable enough to hike rates. Yesterday morning we saw the minutes from the previous Fed rate meeting and these failed to shine much in the way of new light on the potential timing of a rate hike. The minutes said “several” participants believe economic conditions warrant a June hike, while “others” think it will be appropriate to wait until later in the year, and a “couple” are leaning toward early 2016. The Fed would not have seen the latest payrolls data at the time of this meeting so we can assume that the “several” participants may well now be taking a closer look at their June timeframe.

United Kingdom
Data released on Tuesday showed the UK service sector remains very buoyant, expanding at the fastest rate in 7 months. Services PMI came in at 58.9 vs 57.1 expected, the prior reading was 56.7. The service sector is the biggest sector of the economy and the fact it has moved up a gear bodes well for growth going forward. Strong economic growth in the lead up next month general election will certainly help David Cameron’s chance of re-election, although the latest polls show it’s a very tight race. At the moment there is nothing in it between Cameron’s Conservatives and the Labour party and this uncertainty is likely weighing on the UK Pound to a degree. Last night’s Bank of England (BOE) rate meeting was a non-event. There was no change in policy settings as widely expected. The bank won’t even be making any comment on the economy until after the May 7th election. Tonight we have manufacturing production data to draw focus, and next week we get the latest readings on inflation and employment.

Data out of Europe this week has continued to show the economy is displaying some signs of life. Spanish and Italian services PMI readings were both better than forecast and improved from the prior month. Spanish unemployment also dropped by 60.2k vs expectation for a 18.3k fall. Retail sales came in broadly in line with expectation at -0.2%. The small negative result comes on the back of four positive months and it does little to undermine the current consumer recovery which remains relatively strong. Greece continues to dominate the headlines and somehow the country managed to scrape together enough money to pay the IMF EUR450m yesterday. Greek officials have acknowledged that the country will run out of money by the end of the month if an agreement with the EU is not reached in time. Eurozone deputy finance ministers have given Greece a 6 day deadline to come up with revised reform proposals. The hope is a deal can be reached before the April 24th meeting with the Eurogroup. The Syriza government is doing little to try and mend a dysfunctional relationship with its creditors. Repeated demands for war reparations from Germany and a timely visit to Russia have only driven a bigger wedge between the two sides. No one could say that a Greek exit from the Euro is looking less likely. Next week we have the European Central Bank (ECB) rate meeting and the final reading of inflation to draw focus.

The Bank of Japan (BOJ) released their monetary policy statement on Wednesday and then yesterday we had the BOJ monthly report. Both releases followed a similar theme and one that the bank has been repeating for months now. They believe the Japanese economy is recovering moderately as a trend, inflation expectations are rising on the whole from a long term perspective, and that inflation is likely to reach the 2% target in the 2015/16 fiscal year. The market was largely unmoved by both releases and remains somewhat sceptical about the time period for achieving the 2% inflation target. Next week we have core machinery orders, the BOJ minutes, revised industrial production and consumer confidence data.

A couple of data releases this week have underlined the outlook for a softer Canadian economic performance going forward. The Ivey purchasing managers index (PMI) contracted at a faster rate than expected in March. It printed at 47.9 and that marks the third month in a row it’s come in below the 50 level which indicates either expansion or contraction. Yesterday we also saw building permits fall for the second straight month when they printed at -0.9%. The market was expecting a result of +3.4%. Sharp drops were recorded in Toronto, Canada’s largest city, and Calgary, Alberta, which is the financial centre of the country’s energy sector. The collapse in oil prices is really starting to hurt the Canadian economy and the OECD this week joined the growing chorus warning of a weaker Canadian growth. Tonight we have key employment data to digest with the market expecting employment change of -0.5K and the unemployment rate to tick up to 6.9%. There is also plenty of data set for release next week with manufacturing sales, the Bank of Canada rate meeting, inflation and retail sales all set to hit the wires.