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Economies of Note - 11th December

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

The Australian dollar has continued to struggle this week with some local data releases keeping pressure on the currency. Falls in both business confidence and consumer sentiment have raised alarm bells, especially in light of the recent very weak GDP result. Westpac’s chief economist called the 5.7% fall in consumer sentiment “a very disturbing result” with the index now at its lowest point since August 2011. The property market remains a big focus with Australian Prudential Regulation Authority talking about potential limits on borrowing for property investment. At the same time the Australian Securities and Investment Commission are taking a hard look at interest only loans that now make up 42.5% of all new mortgage lending. That’s a record high and is very concerning as these loans are the most sensitive to movements in interest rates. In the past couple of hours we have seen the latest reading on employment change, with a nice boost in part-time jobs growth providing a highlight.

New Zealand
It has been an interesting week in New Zealand with two key releases drawing attention. The first was the announcement from Fonterra that they have revised down their forecast payout for 2014/15 to NZ$ 4.70 per kg from NZ$ 5.30 previously. This revision was widely anticipated and probably not as big as some had predicted. As a result the negative impact on the currency was very short lived. A much bigger reaction in the currency did however occur after the RBNZ released their monetary policy statement this morning. The central bank left the cash rate unchanged at 3.50%, but added “some further increase in the OCR is expected to be required at a later stage”. This comes after the October statement dropped any reference to the need for further tightening instead saying “a period of assessment remains appropriate before considering further policy action”. This talk of further tightening was a hawkish surprise and as such boosted the NZD which jumped over a cent against the USD and AUD in minutes. The RBNZ are firmly focused on the fact that the economy is running above what they see as capacity and in their view this will eventually generate inflation. They are at a loss to explain why non-tradable inflation hasn’t increased despite the economy currently running above capacity. The bank has also significantly revised up GDP forecasts for the coming few years. They don’t seem concerned at all about the potential for a slowdown in China or Australia which are NZ’s two biggest trading partners. The bank still believes the currency is overvalued and will moderate further, thanks to weak commodities, and they were actually surprised at the NZ dollars reaction to their statement. It is a little hard to reconcile their expectation for further falls in the currency with the potentially increasing interest rate differential NZ is now going to have with many other countries.

United States
It has been a relatively quiet week for economic news so far in the United States. The Jolts job openings data was slightly higher than expected at 4.83m and of particular interest was the jump in Crude Oil Inventories. Crude inventories came in at +1.5M barrels against an expectation of a 2.6M barrel fall. This played into the current plunge in the global crude pricing. Later today we get to see the latest Retail sales data with a marginal .1% rise expectation in the core index. Producer price data and the UoM Consumer Sentiment Index round out the week on Friday and will be closely watched. All these indicators are a good warm up for what is an important week to come, with the inflation numbers on Wednesday ahead of the Fed’s monetary policy meeting Thursday.

United Kingdom
The only real data of note released from the United Kingdom this week has been manufacturing and industrial production. Both figures came in significantly below expectation and weighed on the UK Pound. Trade deficit numbers were also released and they showed that although the deficit declined from the prior result, it is still very sizable indeed. The British Chamber of Commerce released a report suggesting the economy was set for a strong 2015. They did however highlight the risks around a premature rate hike. They warned that the UK’s dependence on consumer spending and mortgages means the UK economy is particularly sensitive to interest rates. Governor Carney was quoted on the press as saying the stimulus of low interest rates was still appropriate as they are currently seeing a period of low inflation. He believes inflation will dip below 1% and while interest rates will have to increase at some stage the pace of increases will be gradual. Next week is a big one for economic releases with inflation, the BOE minutes, employment data, and retails sales all set to hit the wires.

There has been little in the way off significant economic data released from Europe this week. We did see disappointing French industrial production data last night and earlier in the week the German trade balance came in better than forecast, but both releases had minimal impact on the currency. Greece is once again starting to garner a fair amount of attention. The Eurozone crisis really kicked off in Greece in 2009 and maybe we are now going to come full circle. Greek PM Samaras has called a snap election for the presidential post and if he doesn’t get the majority needed (and it looks like he won’t’) he will be forced to call a general election. Polls currently show the anti-bailout and anti-austerity party of Syriza would win such an election. The Greek stock market took the news of a surprise vote very badly and was down 13% on Tuesday. Should Syriza win it could spell real trouble for Greece. Unfortunately for Europe this isn’t an isolated event. In a number of countries the anti-austerity and even anti Euro fringe parties are gaining ground as populations become increasingly frustrated with the lack of economic progress. Next week we have manufacturing and service sector PMI’s to draw focus along with the German ZEW economic sentiment and IFO business climate indexes.

In Japan on Monday the final GDP numbers for the 3rd quarter were released. The data disappointed at a higher than expected -.5% fall confirmed and this produced an annual decline of 1.9%. Since then the BSI Manufacturing Index came in at 8.1 (13.1 expected) and this afternoon core machinery and tertiary industry data both coming in under expectations that were already pitched at pretty low levels. Recent polls continue to see Prime Minister Abe retaining leadership, and this would be confirmation that he has the mandate to continue with his “Abenomics” experiment. This should continue into Sundays elections. Aside from these elections, next week we have the excitement of the Tankan manufacturing and nonmanufacturing surveys to absorb. These come ahead of the final Bank of Japan monetary policy announcement on Friday.

The only data released so far this week from Canada has been housing starts and building permits. Both numbers came in below expectation and added a little further pressure to the Canadian dollar. Last night BOC Governor Poloz was on the wires suggesting the fall in oil prices might shave a third of a point off GDP, but wouldn’t be enough to derail the economy. He said the recovery has been frustratingly slow and that the biggest risk to the economy remains the housing market. He believes house prices are 10-30% overvalued. We get the latest reading from the New House Price Index tonight and next week we have manufacturing sales, wholesale sales, inflation and retails sales data to digest.