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Economies of Note - 12th June

Written by Ian Dobbs on June 12th, 2015.      0 comments

Data this week showed Australian business confidence improved to its highest level in nine months in May. The index rose 3 points to +7, having apparently received a boost from the recent interest rate cuts. There was also a promising sign from the survey’s index of capital expenditure that rose 4 points to +10. Improving business confidence will be a welcome sign for the Reserve Bank of Australia (RBA) who have said in the past the biggest thing holding the economy back is the lack of ‘animal spirits’ in business. RBA Governor Stevens gave a speech this week and said the bank was open to the “possibility of further policy easing’s” but he raised real doubts about just how effective another interest rate cut would be. He said “much of the effect of monetary policy comes through the spending, borrowing and saving decisions of households.” “But of the three broad sectors - household, governments and businesses - it is the household that probably has the least scope to expand their balance sheets to drive spending.” Other data released this week saw consumer sentiment fall 6.9%, while employment change jumped +42.0k. The employment number was particularly surprising as the market was expecting a gain of only +12.1k. The Australian Bureau of Statistics were quickly out saying there may well be further problems with the data. Next week looks to be pretty quiet, with only the RBA minutes of any note.

New Zealand
There was only one certainty around yesterday’s Reserve Bank of New Zealand (RBNZ) rate decision, and that was we would see some volatility. With the market very divided on the expectation for a cut or not, a significant move in the currency was always likely. The NZ dollar didn’t disappoint either. Governor Wheeler’s decision to cut interest rates by 0.25% certainly generated some debate and he’ll be hoping he hasn’t stoked the fire of Auckland property prices too much. But in his view, Auckland house prices are a supply issue and it seems he’s not going to let that influence monetary policy. So what did cause the central bank to surprise many and cut rates? In their rate statement on the 30th April the RBNZ said “It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target.” There has been no evidence that wage and price-setting outcomes have deteriorated, so the bank must be forecasting reduced levels of demand. In the press conference after yesterday’s announcement Governor Wheeler laid out very clearly what has driven this shift. He said the bank's forecast for the terms of trade is now 7% lower than in was at the last MPS three months ago. That deterioration has been driven by dairy prices falling another 30% and petrol prices going back up. The bank believes the combination of those two factors will significantly slow income and demand growth, and hence we got a rate cut. The bank also signalled they expect to cut rates again over the coming months. The New Zealand dollar collapsed on the news, falling around two cents against the USD. With somewhat ironic timing, soon after the central bank announcement the REINZ released their latest house price data which showed Auckland property prices have surged 20% in the last year. The median price is up $29k in May alone. It’s hard to see any meaningful slowdown in the near term with mortgages just getting cheaper. The RBNZ’s recently announced LVR measures and the Government’s capital gains tax on investors will have some impact, but the significant fall in the currency over the past couple of months has only made our property market even cheaper for offshore investors. Next week to draw focus we have another Fonterra dairy auction, along with current account and GDP data.

United States
We have seen largely positive data from the United States this week, and this has only served to reinforce expectations for an interest rate hike from the Fed in September. The NFIB small business optimism index came in stronger than forecast at 98.3. The survey results are consistent with the economy growing at a moderate pace. The overall level of activity in small business is now back to what would be considered ‘normal’. Both wholesale inventories and business inventories came in above forecast which should have a positive impact on growth in the second quarter. Retail sales data out last night was also encouraging. The headline number was right on expectation at +1.2%, but core retail sales, which strips out auto, was better than forecast at +1.0%. The market was expecting a result of 0.7%. Import prices also jumped by the most in three years coming in at +1.3%. The rebound in oil accounted for much of the jump after petroleum prices reversed 10 months of falls to show the biggest gain since 2009. Tonight we get producer prices and consumer sentiment data to digest. Next week should prove interesting with the Fed meeting and rate statement to draw focus along with building permits and inflation data.

United Kingdom
We have seen some mixed data from the United Kingdom this week. Manufacturing production came in softer than expected while industrial production came in above expectations. The NIESR released it estimate of GDP for May which they see at 0.6%, up from 0.4% prior. A speech by Bank of England Governor Carney on Wednesday night was eagerly anticipated, but in the end he made no mention of monetary policy. The biggest release of the week ended up being the trade balance which surprised many with much reduced deficit. The trade balance for April came in at -8.6bn versus expectations for -9.9bn. It was the smallest deficit since March last year and was driven by improving exports (+4.8%) and declining imports (-4.8%). These figures suggest that trade could provide a net boost to growth in the second quarter. Next week from the UK we get data on inflation, employment and retail sales. We also have the Bank of England (BOE) minutes to digest.

There hasn’t been much in the way of key data released from Europe this week. German industrial production and revised GDP have been the highlights and both outcomes were encouraging. Industrial production in Germany printed at +0.9% versus expectations of 0.6%. That’s also a big improvement over the prior reading of -0.4%. While headline GDP for the first quarter remained unchanged at +0.4%, the breakdown was of the data suggested growth in the Eurozone is improving. All the signs are there that the gradual recovery should continue over the second half of this year, absent any surprise shocks such as a Greek exit. The news services are full of headlines and soundbites from officials on both sides, but at the end of the day a deal has still not being reached. One of the most distressing articles recently suggested Germany was looking at a plan for a ‘partial release’ of bailout funds. Providing Greece with just enough cash to get through a few more months so negotiations can drag on even longer would just be tortuous for all involved. Next week to draw focus we have ZEW economic sentiment, the final reading of inflation, and a speech from ECB President Draghi.

We have had some positive data from Japan this week which had little impact on the value of the currency. The same can’t be said for comments from officials which sparked a large appreciation in the value of the Yen on Wednesday afternoon. The week started well with a much better than forecast GDP figure of 1.0%. This was followed by core machinery orders that improved 3.8% versus expectations of -2.0%. As mentioned neither of those releases caused much in the way of market volatility. However, the Bank of Japan’s (BOJ) Governor Kuroda really set the market alight with comments suggesting it would be hard to see the Yen’s real effective rate falling further. He added it’s desirable that fx moves are in a range that reflects fundamentals. The market jumped on his comments and demand for Yen increased significantly pushing the currency sharply higher across the board. The economy minister later tried to back pedal saying Kuroda didn’t intent to move the market with is remarks, but the damage was done and the Yen held on to much of its gains. Next week from Japan we have the trade balance and the Bank of Japan’s monetary policy statement to digest.

We have seen some positive data from Canada this week. Housing starts came in stronger than forecast as did building permits which jumped 11.6%. It is a very volatile series so the gains need to be taken in perspective. The New House Price Index (NHPI) printed at +0.1% versus expectation of +0.2%. Bank of Canada (BOC) Governor Poloz spoke last night and he said the rate cut earlier in the year helped to mitigate risks in the financial system caused by the oil price shock. He said the impact of oil price falls should be partly offset by cheaper gas, stronger US growth, a lower Canadian dollar and easier monetary policy. He doesn’t see much risk of a sharp correction in house prices or conditions that would lead to a severe recession. Next week from Canada we get manufacturing sales, wholesale sales, inflation and retails sales data.