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Economies of Note - 17th October

Written by Ian Dobbs on October 17th, 2014.      0 comments

Data from Australia this week has done little to alter the current outlook for the economy or the RBA’s cash rate. Business confidence index released on Tuesday showed a small decline to 5 from a prior reading of 7. This is the lowest reading since April 14. Lower commodity prices, excess capacity and cautious consumer spending have all played their part in the sedate outcome. Consumer confidence on the other hand picked up a touch to 94.8 from 94.0 previously, while inflation expectations fell marginally to 3.4% from 3.5%. None of this will have any implications for the current neutral stance of the RBA who a likely to remain on hold through most, if not all, of next year. Next week we get the minutes from the last RBA meeting, inflation data, and the Treasury’s mid-year economic and fiscal outlook.

New Zealand
The main focus for this week in New Zealand was on the result of Fonterra’s latest dairy auction. Prices recovered marginally with the index registering a 1.4% increase. That’s nothing in comparison to the 50% fall seen so far this year, but at least it wasn’t another negative result. This was the first rise in prices since June 17 and the best result since January 21. Yesterday we also saw the Business NZ manufacturing index which climbed to 58.1 from 57.0 previously. This represents healthy levels of activity for the manufacturing sector which has obviously been buoyed by recent falls in the New Zealand dollar. Next week the focus turns to inflation data and the trade balance.

United States
It has been a very interesting week in the US with some mixed data and some serious market volatility.  Things really kicked off on Wednesday night after US retail sales data and the Empire State manufacturing index both came in much weaker than expected. These releases came on top of recent concerns about global growth and it seems they were the straw that broke the camel’s back, so to speak. The US stock market was down 3% at one stage and long term bonds (interest rates) saw yields plummet dramatically. The US 10 year bonds traded down from 2.23% touching a low of 1.86% before turning around. The US dollar also got sold across the board. The reality is the US economy is still in pretty good shape and we saw supportive comments from Fed Chair Yellen and US Treasury Secretary Lew in an effort to try and calm markets. Last night’s data reinforced the view that the economy is continuing to perform well. Weekly jobless claims fell to 264k, which is the lowest level since April 2000. Industrial production came in at 1.0% vs 0.4% expected and capacity utilization jumped to 79.3% from 78.7%, which is the highest level since March 2013. The unwinding of ultra-easy monetary policy was never going to be a smooth affair. Market hiccups like we saw on Wednesday night could just be the beginning of a very volatile period for markets over the coming months. Tonight we get building permits, housing starts and consumer sentiment data. While next week we have inflation, manufacturing PMI and new home sales to draw focus.

United Kingdom
The UK Pound has come under some pressure this week thanks in large part to a significant decline in inflation. The market was expecting a small decline to 1.4% from 1.5% previously, but the actual result came in at just 1.2%. Without doubt a good portion of that decline will be due to the rise in the Pound seen over recent months, but that doesn’t change the fact that it takes all sorts of pressure off the Bank of England to have to raise rates. There is now zero chance of a hike this year, and the chances of a rate hike ahead of the May 7th general election next year have now also dramatically reduced. The other key release this week was that of employment, or more specifically the claimant count change. Unemployment claimant’s declined by -18.6k, which was less than the market expectations for -34.2K. The unemployment rate however, dropped further than expected to 6.0% from 6.2% previously. Average weekly earnings came in as expected at +0.7% year on year, which is far from inflationary. Next week we have the BOE minutes to digest along with retail sales and GDP data.

We have seen nothing this week to allay concerns about the outlook for the European economy. In fact global growth concerns are likely one of the major contributing factors to Wednesday night’s wild market volatility. European stocks got hammered down between 3% and 4% on many bourses. The previous night we got the latest German ZEW economic sentiment index reading and it printed negative for the first time since November 2012 at -3.6 vs 1.0 expected. That is a big fall from the prior reading of 6.9. Geopolitical tensions and generally weak economic developments in other parts of the Eurozone mean pessimists now outnumber optimists in Germany. That point is not lost on the German economic ministry who this week cut GDP forecasts for 2014 to 1.2% from 1.8% previously. Their outlook for 2015 got slashed even more to 1.3% from 2.0% previously. Eurozone industrial production fell -1.8% from a reading of +0.9% prior, in what is just the latest indication that growth in the Eurozone may well have contracted in the third quarter. On the back of quarter two’s also negative result that would officially put Europe back into recession. Looking further out the Eurozone can expect a long period of stagnation, rising debt ratios and worsening inflation pressures. The only way to turn this around would be a cohesive fiscal policy response from governments to promote growth. I can see no sign of that on the horizon. Next week’s dire readings will come in the form of manufacturing and service PMI’s from France, Germany and the Eurozone as a whole.

It has been a quiet week for data from Japan. We did get revised industrial production figures than declined to -1.9% from 1.5% previously. The Japanese stock market suffered on Thursday in line with other bourses declining by around 2%. We also head from BOJ Governor Kuroda who suggested the weak Yen is in line with fundamentals, although they will continue to watch it closely. There isn’t much to get excited about next week from Japan either with the trade balance the only release of note.

Low oil prices have weighed on the Canadian dollar this week along with some softer than expected data. Existing home sales came in at -1.4% vs expectation of 1.8% and manufacturing sales printed at -3.3% against forecasts for -1.6%. A good part of the decline in manufacturing sales came from autos and parts which fell 11.6%. Tonight we get inflation data which is always closely watched. The market is expecting a fall from 0.5% previously to 0.1% this time. Next week there is a raft of key data with wholesale sales, retail sales and the Bank of Canada rate statement set for release.