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Economies of Note - 10th October

Written by Ian Dobbs on October 10th, 2014.      0 comments

The Reserve Bank of Australia held their regular monetary policy meeting on Tuesday and as widely expected they left policy settings unchanged. The statement released was largely unchanged from the previous one sighting a “period of stability in rates” as the most prudent course of action. The only thing you could take away from it was that the central bank is still well and truly in the neutral camp and rates are likely to remain on hold for some time. Interestingly, there little to no mention of the imbalances in the investor driven housing market which is something the bank had been repeatedly bringing up in the weeks prior. Yesterday we got the latest employment data from the Australian Bureau of Statistics who seem to have been struggling lately with the seasonal adjustment factor. They announced before the release that there was little evidence of seasonality in the July, August, and September months and that they would therefore not be adjusting this month’s data and revising the previous two months. Everyone scrambled to revise their forecasts and expectations ended up around the +15.5k mark. The actual number for September eventually came in at -29.7k which was something of a disappointment. Unemployment came in as expected at 6.1%. With all the uncertainty and volatility around employment numbers at the moment the bigger picture will only come clear with a few more months’ data under our belts. Other indicators suggest unemployment has stabilized and we are starting to see a gradual improvement in the labour market. Next week we have business confidence, consumer sentiment and inflation expectations to draw focus.

New Zealand
There has been little in the way of key economic data released from New Zealand this week. Tuesday’s NZIER business confidence index continued its decline from the extremely high levels seen earlier in the year, and this is very much in line with other confidence indicators. Bill English released the government’s financial report which showed an operating deficit of NZD 2.93b. This was NZD 338m wider than forecast. Total revenue was down 122 m and core government spending was up 176m. English said the drop in dairy prices will affect government revenue and it remains a significant challenge to return to budget surplus in 2015. Next week is another quiet one for NZ data with just the business NZ manufacturing index and another Global Dairy Trade auction from Fonterra to digest.

United States
By far and away the main event this week in the US was the release of the Fed meeting minutes. In the lead up to that release we saw some very ‘dovish’ comments from a couple of Fed officials. Kocherlokota said it would be inappropriate for the Fed to raise rates in 2015 and that just because unemployment is falling that’s not a reason to hike. The Fed’s Dudley said he still sees significant underutilization in the labour market and he expects inflation at 1.9% by the end of 2015, but the risks to that are on the downside. The actual minutes hit the wires early yesterday morning and there was nothing in there to suggest the Fed are moving any closer to raising rates. The minutes highlighted the Feds concerns about global growth and the disinflationary impact from a stronger US dollar. It seems the majority of committee members don’t see any inflationary pressure on the horizon and there is therefore little reason to raise interest rates. The markets reacted strongly to this release with the USD getting hammered across the board, long term interest rates falling, and stock markets gaining. These minutes are however, from the Fed meeting two weeks ago and between then and now we have seen a very healthy non-farm payrolls employment report. History has also shown that the tone of Fed communications can change dramatically in a short period of time. It is entirely feasible that at the next meeting on October 30th, the Fed come across a little more ‘hawkish’ and drop the reference to a “considerable time” between the end of quantitative easing and raising rates. Data released between now and then will play a key role in that decision and the highlights of next week’s calendar include retail sales, producer prices, building permits and consumer sentiment.

United Kingdom
A couple of data points released this week have suggested the UK manufacturing sector is cooling down somewhat from the strong growth seen earlier in the year. Manufacturing production came in at +0.1% vs expectations of +0.2% (the prior was +0.3%) and industrial production was flat against expectations for +0.2% (the prior was +0.4%). The British Chamber of Commerce warned of a “first alarm bell” for Britain’s rapid economic recovery as “the strong upsurge in manufacturing appears to have run its course”. These comments came on the back of their quarterly economic survey which showed the weakest export growth in almost two years. A strengthening UK Pound will certainly have had something to do with this as will the lack of demand coming from their biggest trading partner, Europe. Last night the Bank of England (BOE) held their latest rate meeting and as widely expected they left rates unchanged. We now have to wait two weeks to get the minutes from the meeting to get a better insight into what debate, if any, took place within the committee. Next week we have key inflation and employment data to digest.

Data from Europe this week has done nothing to improve the economic outlook for the region. In fact if anything it’s highlighted a worrying trend of late. German economic figures have recently started looking decidedly unhealthy and a couple of releases this week continued that trend. German factory orders fell 5.7% while industrial production fell 4.0%. Germany has been the engine room of what little European growth there has been to date and the prospects for the region will be bleak indeed if they slip into recession. Last night the German trade balance come in much worse than expected and forecasts for German growth in 2015 are beginning to get slashed. ECB President Draghi was on the wires saying he sees signs that the recovery is losing momentum and the longer inflation takes to rise the bigger the risks. He added that although the ECB has acted aggressively the Euro area must urgently raise growth potential and governments know they need to implement reforms. Draghi is set to speak a number of times again next week and we will likely see him reinforce these comments. We also get German ZEW economic sentiment data and the final reading of Eurozone inflation.

The Bank of Japan (BOJ) met on Tuesday and as expected left policy unchanged. They see Japanese inflation around 1.25% for some time, but believe it will slowly pick up and they are aiming for 2% within two years. The bank has acknowledged recent weakness in production, but they believe growth will turn positive in the third quarter after quarter two’s contraction, and the economy will continue to recover gradually. Data on core machinery orders released yesterday does support this view with a rise of 4.7% in August from the previous month. That marks the third straight month of increase and suggests business investment may be starting to recover. We get the BOJ meeting minutes later today and next week there is little to get excited about on Japan’s economic calendar.

We saw a very good result from the Ivey PMI on Tuesday when it printed at 58.6, up from 50.9 prior. The market was expecting a result around 53.4. The Ivey PMI is a survey of 175 purchasing managers and is viewed as a leading indicator of economic health. The Canadian dollar took heart from the result and made some gains across the board. This data was followed the next day by a very weak building permits release. This is a very volatile series however, and so the -27.3% result was taken in context. The prior result was +11.6% and the market was expecting a fall of around -6.0%. The most important data of the week is still to come with the release of employment change figures tonight. Employment is expected to have increased by 18.7k with the unemployment rate steady at 7.0%. Next week we just have manufacturing sales and inflation data to digest out on Thursday and Friday respectively.