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Economies of Note - 11th April

Written by Ian Dobbs on April 11th, 2014.      0 comments

The Australian dollar has been a standout performer this week, in the face of some mixed data. Business confidence for March printed at 4 down from a previous reading of 7. Business confidence is now at its lowest level since the election and below its long run trend. Consumer confidence on the other hand improved by +0.3% to 99.7. This is the first improvement in five months. Australian housing finance looked strong with home loans up +2.3% vs expectations of +1.5%. This is positive for the housing market. Arguably the most important data was released yesterday in the form of employment change. The headline number was significantly better than expected at +18.1k and the unemployment rate dropped to 5.8% from 6.1%. Looking into the detail took some of the shine off the report however with a drop in full time employment and an increase in part time jobs. Employment change is a volatile series and it is best to looks at the longer term trend in the data. Doing this we see job growth is running at around 14k per month, which is modest at best. This is probably consistent with the RBA being on hold for most the year. Shortly after the jobs data was released we got the latest trade data from China and this was a shocker. Imports and exports both fell by a substantial amount. Imports were actually down -11.3% against an expectation of +3.9%. This is negative for the Australian economy although the data should be taken with a grain of salt. Dodgy invoicing last year inflated previous numbers which could account for most of the current decline. Next week’s highlight will be minutes from the last RBA meeting set for release on Tuesday.

New Zealand
There have only been a couple of data points released this week from New Zealand. The NZIER business confidence index remained at 20 year highs and the NZ manufacturing index improved for the 19th month in a row to 58.4 from 56.5 previously. That result marks an eight month high for the index and comes despite a historically high currency. The only release of note next week is inflation (CPI) which will hit the wires on Wednesday.

United States
The United States Dollar has been under pressure across the board for much of this week. We saw heavy selling pressure in the wake of the Fed minutes which showed there was no discussion at the meeting around the timing of rate hikes once QE has ended. It seems Janet Yellen’s reference to ‘a considerable time’ being ‘around six months’ after QE was off the cuff, unprepared, and out of line with other members views. The market has substantially reduced the odds of a June 2015 rate hike as a result. Another key quote from the minutes read ‘several members said recent forecasts overstate the pace of interest rate rise’. For a market that seemed happy to sell USD anyway, this was just fuel on the fire. At the end of the day there is no set timing for interest rate hikes and Yellen might have just gotten ahead of herself. The Fed’s Plosser put it best when he said the timing of the first rate hike is ‘all about the data’. To that extent last night we saw weekly jobless claims fall to their lowest level since May 2007. This is a volatile series, but it is a significant fall and if the data holds around current levels it would be consistent with a much better employment picture going forward. So far the market has generally been disappointed with the bounce back in data from the winter cold snap, but here is still time for this to occur and if it does, the USD will be looking very cheap. Key data to digest next week includes retail sales, inflation, building permits, and industrial production.

There hasn’t been a lot in the way key data released from Europe this week. The mostly second tier releases have come in on the soft side. We have however, had plenty of comments from officials who seem to singing the same tune. Notably that the Euro is too strong, the ECB will act swiftly if needed, but risks of deflation are limited. The IMF continue to believe the central bank should act with their chief economist saying the sooner the ECB moves, the better, and that they should take all measures to fight deflation. The ECB seem to be sticking firmly to their projections that inflation will pick up again, but their projections never had the CPI at 0.5% in the first place. You have to ask where is the risk in acting now with an overvalued currency, very low growth, and inflation at a quarter of your target?! We will hear from Draghi himself over the weekend as he is scheduled to give a speech. Then next week we get industrial production, German economic sentiment, the trade balance, and CPI.

United Kingdom
It has been another very positive week for the UK economy. Strong readings for manufacturing and industrial production were backed up by an improving trade balance and a better than expected estimate of monthly GDP from the NIESR (National Institute of Economic Research). The IMF sees UK growth at 2.9% in 2014, which is the fastest in the G7. They also conceded they had been over pessimistic last year when they warned George Osborne to abandon austerity or jeopardize growth. Last night the Bank of England (BOE) left rates unchanged after their meeting and did release any statement. The UK Pound has been a solid performer this week as a result of data and further gains over the coming weeks look likely and the economy continues to expand. Next week’s highlights from the economic calendar will be inflation and unemployment.

The Japanese Yen has seen solid gains this week helped along by the Bank of Japan who took no further action after their meeting on Tuesday. Some in the market were expecting the bank to ‘tweak’ policy, but they chose to sit on their hands and delivered a statement very much in line with the previous one. Governor Kuroda seemed to actively downplay the chance of further action saying he is ‘not considering additional easing’s at this time’ and that he is convinced the 2% inflation target will be met. Further easing’s are certainly not off the table if the data collapses as a result of the recent sales tax increase, it’s just too early to see the impact. A warning sign did however come from Takashimaya department stores though when they reported a 25% drop in sales the first week after the tax hike. Governor Kuroda also won’t have been happy to see core machinery orders fall -8.8% vs only -2.6% expected. Next week we will hear more from Kuroda with speeches scheduled for Wednesday and Thursday. We also get consumer confidence and the Tertiary Industry Activity index.

The only data released from Canada this week was in relation to the housing market. Housing starts came in below expectation as did building permits. The latter printed at a very weak -11.6% vs -2.6% expected. It is however, a volatile series. Last night we got the New House Price Index (NHPI) which came in right on expectation at +0.2%. This is down a touch from last month’s +0.3%. Next week should prove to be an interesting one with manufacturing sales, inflation, and the Bank of Canada (BOC) rate review and statement all set for release.