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Economies of Note - 11th September

Written by Ian Dobbs on September 11th, 2015.      0 comments

We have seen a mixed bag of data from Australia this week. Both business confidence and consumer sentiment fell from the prior readings, although to be fair the results weren’t a total surprise. Consumer sentiment was largely just reversing part of the strong gains seen in the prior reading and so the market impact if this decline was limited. By far and away the most encouraging data we saw this week was yesterday’s release of employment data. Australian employment jumped 17.4k versus market expectation of 5.2k. This also comes on top of the very strong prior reading of 39.2k. The unemployment rate declined a touch as expected to 6.2%. This data would tend to suggest that the unemployment rate has stabilised somewhat and as such the Australian dollar gained ground on the back of the release. One thing which foreign exchange market hasn’t seemed to factor in just yet is the recent recovery in iron ore prices. Iron ore has been gradually recovering since the lows of mid-July and it’s now trading back above 56.00 a tonne. There are still big oversupply issues in the mining sector, and perhaps the price of iron ore will struggle to make further gains, but the current level probably doesn’t deserve the AUD trading below 0.7000. Next week we have the Reserve Bank of Australia (RBA) minutes set for release along with a speech from Governor Stevens to digest.

New Zealand
The Reserve Bank of New Zealand (RBNZ) cut its cash rate by 0.25% to 2.75% yesterday, as widely expected. The bank also said “at this stage, some further easing in the OCR seems likely. This will depend on the emerging flow of economic data.” Many in the market already expected the central bank will likely cut rates further to 2.50% at some point in the future, and although they certainly didn’t signal anything more than that at this stage, the statement they released was somewhat more ‘dovish’ than the market had expected. Governor Wheeler said the bank had plenty of room to cut rates much further if the need arises. He said a recession in China or a prolonged El Nino drought would be the sort of trigger needed for deeper cuts. He also said further depreciation of the currency was appropriate. It wasn’t all negative and the Governor did point out that growth is being supported by strong tourism and migration, construction activity and the lower level of the NZ dollar. The currency did come under heavy pressure on the back of the somewhat more negative statement, largely erasing all the gains seen in the prior 48 hours. I would expect to see the NZD underperform on most crosses over the coming days. Next week to draw focus we have another dairy auction along with GDP data.

United States
It hasn’t been a big week for economic data from the US this week. Tonight we have producer prices and consumer sentiment figures to digest, but the market is already looking ahead to next week’s key FOMC meeting. I think it’s fair to say the Fed have had a shocker in signalling their intention to the market. There is a lot of debate and many conflicting views around the potential for an interest rate hike, and this is only creating the potential for more volatility. The first interest rate hike from the Federal Reserve in nearly ten years is a big deal and with less than a week to go no-one really has a clue if they are going to pull the trigger or not. This is a less than ideal situation for markets that are in a very fragile state at the moment. The market is currently pricing in around a 30% chance of a hike, and if they do go, we could be in for a wild ride. Ahead of the Fed decision we have economic data on retail sales, inflation, building permits and industrial production to digest.
United Kingdom
Earlier this week we saw both manufacturing and industrial production from the UK come in well below forecast and they pressured the GBP to a degree. It seems an earlier than usual shut down for car manufacturers over the summer period was largely to blame for the weakness. The main focus this week was on last night’s Bank of England (BOE) interest rate meeting. The MPC (Monetary Policy committee) voted 8 - 1 to keep rates on hold, which was exactly the same voting pattern as last time. The bank hasn’t dramatically changed their economic outlook, although they say the risks are skewed moderately to the downside, in part reflecting the risks to activity in the Euro area and China. In their view the domestic economy is underpinned by robust real income growth, supportive credit conditions, and elevated business and consumer confidence. They still see inflation picking up around year end, and as Governor Carney has previously said, that is when the debate around an interest rate hike will likely start to come into focus. Next week we have three key pieces of data to digest. Inflation, employment and retail sales will all draw keen attention.

Probably the most interesting piece of data to come out of Europe this week was the revised GDP reading for the second quarter. GDP was revised to a solid 0.4% from 0.3% prior. This took the annual rate of growth to 1.5%. It does seem that the ECB’s quantitative easing programme is helping to turn the economy around and gain some real traction. Europe is exporting more than it’s importing and that is good for the region. Domestically however, there are still many headwinds. Government spending is down as is infrastructure spending and household spending. If governments were to implement some pro-growth strategies a much healthier economic recovery would certainly take hold. For the time being however, the German led instance on fiscal targets and austerity policies is dominating. Next week we have the ZEW economic sentiment index, industrial production and the final reading of inflation to digest.

We have seen a mixed bag of data from Japan this week, but none of it has had much impact on the currency. That’s not to say the Yen hasn’t seen some action, because it certainly has, but it’s mostly been driven by comments and announcements from officials. Prime Minister Abe announced a planned reduction in corporate tax of 3.3% for next year and this lead to the biggest one day percentage gains for seven years in Japanese stocks. It also pressured the Yen which then lost more ground last night after government party member Yamamoto said the 30th October Bank of Japan (BOJ) meeting would be a good opportunity for more easing. It’s very unusual for a government official to come out and be so specific about potential BOJ policy action. That aside, many in the market do expect further easing from the BOJ and so these comments only served to justify those views. It does seem that the whole “Abenomics” strategy has run out of steam and there are clear downside risks from China and global growth in general. We have a BOJ meeting next week and the market will be keen to see if they too signal the likelihood of further easing over the coming months.

The focus in Canada this week was on the interest rate decision from the Bank of Canada on Wednesday night. The bank has previously cut rates twice this year, but chose not to do so this time leaving them unchanged at 0.5%. The statement released with the decision sounded as if the bank believes the two previous cuts may well be enough to achieve their goals. The said “the simulative effects of the previous monetary policy actions are working their way through the Canadian economy.” The also noted that solid household spending and a firm recovery in the United States are helping to underpin economic activity. The overall takeaway was reasonably encouraging and this helped to support the Canadian dollar. Next week we have manufacturing sales and inflation data to digest.