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Economies of Note - 11th July

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

The Australian dollar received a boost from Tuesday’s business confidence data that came in on the strong side. The reading of 8 was a step above the prior months result and we have now seen a steady improvement in this index since April. The business conditions component showed a bigger improvement jumping to 2 from a prior result of -1. That’s its highest reading since January. Wednesday’s consumer sentiment was however a little disappointing coming in at +1.9%. Although that is an improvement over the prior reading of +0.2%, we are yet to see solid bounce back from the -7.0% reading seen after the May budget. Taking this result in context of last week’s soft retail sales data and I think it’s safe to say the Australian consumer is very cautious at the moment. Yesterday’s employment change data looked promising with the headline figure coming in at +15.9k against expectation for +12.0k. But looking into the break down showed all the gain, and then some, was made up from part time employment. Full time jobs actually decreased -3.8k. The unemployment rate also ticked up a notch to 6.0%. Overall, this week’s data will have done little to alter the RBA’s current ‘neutral’ stance. The central bank seems likely to be on hold into next year. That outlook should be reinforced next week with the release of the RBA minutes on Tuesday.

New Zealand
This week’s Quarterly Survey of Business Opinion confirmed what last week’s business confidence data showed. That is that confidence is retreating from the exceptionally high levels seen earlier in the year. This moderation in business confidence comes in tandem with the pullback in commodity prices, namely dairy, although none of this seems to have bothered the New Zealand dollar which continues to trade up around post float highs. The currency was given a boost by news from Fitch ratings agency that they have affirmed NZ’s AA sovereign rating, but upgraded the outlook from stable to positive. Yesterday we saw manufacturing PMI data for June which improved to 53.6 from 52.6 prior. This confirms that production levels remain healthy despite the very high dollar. The sector has now been in expansion for 21 months. Next week’s highlight will be inflation data set for release on Wednesday and this is the only major release ahead of the RBNZ meeting on July 24th.

United States
It has been another frustrating week for those with a bullish view on the US dollar. Last week’s strong non-farm payrolls figure failed to ignite much in the way of buying and the USD has been on the back foot for much of the past five days. The improving labour market sentiment was reinforced this week with job openings data showing a good jump from last month's reading. The index is actually now higher than the previous peak back in 2007. But the main focus for this week was the FOMC minutes released early yesterday morning. Unfortunately there wasn’t much in there for the bullish US dollar crowd either. To be fair there was little of material significance in the release at all and the USD lost further ground as the market was a little disappointed the minutes weren’t more positive. The Fed sees broadly balanced jobs, growth and inflation risks and they plan to end quantitative easing in October, as widely expected. Probably the most interesting part of the release was the statement that some Fed officials saw investors as too complacent on risks. They suggested there is insufficient investor uncertainty on the economy and rates. This current period of low volatility, and rising stock prices, won’t go on for ever and the Fed is right to warn investors. Whether anyone takes heed of it is another story. Next week there is plenty of data to digest with retail sales, producer prices, building permits and consumer sentiment the highlights.

United Kingdom
The GBP has largely ignored the slightly weaker than expected data seen this week, although to be fair, most of it was second tier stuff. The Bank of England held their rate meeting last night and as expected there was no change to interest rates of the level of QE. We did see comments this week from new BOE member Nemat Shafik, who is a former IMF official. She said it’s the BOE job to focus on the risks to financial stability and the aspects that may cause them. To that end the banks recent housing measures were very wise in aiming to pre-empt a potential worrying bubble from emerging. She added rising indebtedness is the biggest risk from the housing market. Next week we get the latest readings from two key pieces of data, inflation and employment. Both will be closely watched.

There has been little of significance released from Europe this week. On Monday German industrial production undershot expectations. This was followed by the German trade balance which was better than forecast, while the French trade balance was worse than expected. Last night we saw data on French industrial production which was very disappointing as well. None of this had a dramatic impact on the value of the Euro which has remained subdued. Also out overnight was the ECB monthly report. In it the central bank largely reiterated statements from last weeks’ rate meeting and press conference. They said monetary operations to take place over the coming months will add to accommodation and will support bank lending. Rates will stay at present levels for an extended period, and the governing council is unanimous in its consent to use unconventional measure if necessary. The Euro may not have weakened dramatically since the ECB took interest rates negative in early June, but the uptrend against the USD has halted and with the decidedly average data coming out of the region at the moment it’s hard to see it gaining any real ground from here. Next week we have German economic sentiment and inflation data to draw focus.

We have seen some very mixed data from Japan this week. Tuesday saw better than expected current account figures that were driven in large part by income from overseas investments. This was also the fourth current account surplus in a row.  Unfortunately any positive sentiment from this was completely undone by yesterday’s shocking core machinery orders data. That figure came in at -19.5% against expectations of +0.9%, and it comes on the back of last month’s -9.1% result. It is also the largest decline on record. This raises real questions about the validity of last week’s Tankan report which suggested firms were planning to increase capital spending. We also saw a disappointing result from the Tertiary Industry Activity data which printed at +0.9% vs expectations for +1.9%. The only bright spot was a small uptick in consumer confidence figures released yesterday afternoon. So some real questions marks still hang over the Japanese economy and its ability to bounce back from April's sales tax increase. Next week’s BOJ meeting will likely see them continue to talk the economy up and reaffirm that current measures will stay in place until the 2% inflation goal is reached.

The key data for Canada this week is still to come. Tonight we get the latest employment numbers and the market is expecting an increase in employment of around 20.7k with the unemployment rate to remain stable at 7.0%. Earlier in the week we saw strong building permits data, but this was largely offset by a significant fall in the Ivey PMI. Yesterday’s housing start data was also better than forecast although its impact on the market was minimal. Next week should prove interesting with manufacturing production, the Bank of Canada rate meeting, inflation and wholesale sales data all set for release.