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Economies of Note - 10th July

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

There have been two key releases from Australia this week for the market to digest. The first was the Reserve bank of Australia’s (RBA) rate statement on Tuesday. The bank left rates unchanged at 2% as widely expected. The statement itself was very much in line with the previous one with the bank maintaining its soft easing bias. There was only a brief reference to developments in China and Greece which was a little surprising considering the impact events, particularly in China, could have on the Australian economy. The bank stated “monetary policy needs to be accommodative”, which it currently is, and they are now largely in wait and see mode. They repeated the call that further declines in the Australian dollar are both “likely and necessary”. Yesterday we got the latest reading on employment and this was a little stronger than expected. The economy added a total of 7.3k jobs in June, with a big swing from part time to full time employment. Full time jobs increased 24.5k on the month. The three month average in total employment is now running at +12.6k which is pretty consistent with a stable cash rate at this stage. Based on this data the RBA will be happy to continue to wait and see. The Australian dollar has struggled this week thanks to developments in China and very soft commodity markets. Iron ore in particular has lost a lot of ground recently and an imploding Chinese stock market will only be negative for demand from that country going forward. Next week to draw focus we have business confidence, consumer sentiment and inflation expectations data.

New Zealand
The only real data released from New Zealand this week was Tuesday’s Quarterly Survey of Business opinion (QSBO). That index confirmed what other business confidence indicators have been showing recently with a decline from 23 prior to a reading of just 5 in quarter two. Although that’s a three year low, the result wasn’t a surprise to markets at all. We have also head from the Finance Minister Bill English this week that the crown accounts may well provide a surplus after all this year. The final outcome for the year will not be known until full accounts are published in October, but the Treasury are reporting the books we in the black to the tune of $1 billion at the end of May. The somewhat surprising result comes on the back of higher tax revenue and lower expenses. The New Zealand dollar has had a reasonably positive week considering the global environment. Short (sold) positions scrambling to lock profits in and take risk off the table have actually supported the currency which has seen gains on many crosses. Next week we have another dairy action to digest along with inflation data.

United States
There has been little too excited about in terms of data from the United States this week. Although non-manufacturing PMI did increase a touch, it was by less than expected. The trade balance was a little better than forecast, but weekly unemployment claims actually jumped significantly surprising many in the market. The minutes from the latest FOMC meeting hit the wires and they were slightly on the ‘dovish’ side. They said most participants “judged the conditions for policy firming had not yet been achieved”, and a number of officials warned against a premature interest rate rise. Fed officials made note of international developments, particularly China and Greece, and both those situations have deteriorated significantly since the meeting was held. Over all the minutes suggest the Fed may well be leaning more toward a December rate hike, as opposed to one in September. Fed Chair Yellen is set to speak tonight and the market will be keen to get further insight into her thinking on just when we might see and interest rate lift-off. Next week to draw focus we have data on retail sales, producer prices, inflation and consumer sentiment. Yellen is also to testify in front of a couple of senate committees, something she does twice a year.

United Kingdom
Volatility in the wider market has driven the UK Pound this week with domestic data and releases having a much smaller impact. Earlier in the week we saw better than forecast outcome for industrial production, but this was countered by a weaker outcome for manufacturing production. The NIESR estimate UK GDP for the three months to June increased to 0.7% from 0.6% prior. That is reasonably robust growth and nearly double the first quarters 0.4%. The NIESR said the pace of growth indicated that interest rate increases were getting closer, although it added that turmoil in Greece could delay a rate hike. The UK government released a budget that was broadly as expected. Cuts will be a little less than previously planned and the budget will remain in deficit until 2019-20. The Bank of England (BOE) met this week and as expected left interest rates unchanged at 0.5%. We now need to wait two weeks to get the minutes before we get a better feeling for thinking within the Monetary Policy committee. Tonight we have trade balance data and then next week we get the latest readings on inflation and employment.

At some point in the future the market will once again be able to focus on European data and how that should impact interest rate expectations and the exchange rate. Unfortunately for now Greece is still front and centre as the Eurozone hurtles toward the worst possible outcome, a messy Greek exit. There have been numerous deadlines throughout the past five months of negotiations, but this coming Sunday feels like the real deal. Greece could well be stepping into the abyss early next week. There is no road map for an exit from the currency union. It was never envisaged a country could ever leave. In fact when joining the Euro Greece had to destroy the printing plates for the old Drachma, as a symbol of how irreversible the decision was. I bet they wished they’d kept them now. Obviously a last minute agreement could be reached, but it’s a long shot. One European official probably summed it up best when he said it would take a “miracle”. There is a lot of anger and distrust on both sides of the negotiations. The Greek people won’t be too happy either. They were assured last week that their banks would open on Tuesday, but here we are with the banking system shut for a second week. Anyone foolish enough to have left significant deposits in Greek banks may wake to find they are subject to a big haircut next week. The coming few days are going to be key for European politicians as they peer over into the unknown. The Greek economy is relative small (and even smaller after five years of austerity) compared to the broader European economy, and whether it is in or out of the currency union is almost insignificant. A messy exit however, and the potential contagion from that, is what really worries politicians and markets.

We have had a couple of positive economic releases from Japan this week. The current account posted a much bigger than expected surplus thanks to a weak Yen and in influx of foreign tourists. Core machinery orders were also better than forecast at +0.6%. The Bank of Japan’s Kiuchi said he sees little chance of hitting the 2% inflation target by fiscal year 2017. This is in line with many economists who believe the BOJ will have to add further monetary stimulus in the coming months. Still to come today we have producer prices and consumer confidence data. Next week from Japan the highlight will be the BOJ’s monetary policy statement on Wednesday.

It has been a tough week for the Canadian dollar weighed on by disappointing economic data and soft commodity prices, particularly oil. The Ivey PMI came in below forecast at 55.9, but the bigger miss was the trade balance. The market was expecting a deficit of 2.6 billion but actual result was -3.3 billion. This was an ugly number and it now has economists worried about GDP. The Bank of Canada (BOC) will also be very concerned as they have previously been confident of a recovery from the poor first quarter. These releases really bring that into question. Tonight we have key employment data and the market is looking for a small fall of 9.0k jobs. The unemployment rate is expected to tick up to 6.9%. Next week along with manufacturing sales and inflation data we have the BOC rate meeting. It will be interesting to see if they continue to remain confident about growth going forward, or do they signal another interest rate cut could be on the cards?