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Economies of Note - 14th February

Written by Ian Dobbs on February 14th, 2014.      0 comments

Tuesday’s release of business confidence data showed the index improving for the third straight month. The index printed at its second best reading in three years and above its long run average. Analysts stated that improvements over recent months have established a clear upward trend in business activity. It’s a pity consumers aren't feeling as positive. Wednesday saw the release of consumer sentiment data and that index dropped for the third straight month. It is now down 7.5% on a year ago. It seems to be indicating that households are particularly concerned about the future. That could have something to do with the employment market which posted further disappointing data yesterday. The market was looking for employment change of +15.3k, but the actual result was a dismal -3.7k. Full time employment fell more than that, but was partially offset by a rise in part time work. The unemployment rate also ticked up to 6.0% from 5.8% previously. The RBA had recently projected a somewhat positive outlook, but this is likely to dent that optimism. The Australian dollar came under heavy selling pressure in the wake of the data. The IMF were also on the wires suggesting the AUD is still overvalued by between 5% and 10%. That would put it somewhere in the low 80’s and I’m sure the RBA would be comfortable with it there as well. There was little market reaction to the IMF’s release. The highlight next week will be the monetary policy meeting minutes on Tuesday.

New Zealand
It has been a very quiet week for economic data from New Zealand. The only release of note has been the NZ manufacturing index which maintained its recent solid performance coming in at 56.2. With little in the way of domestic drivers the focus has been on offshore events and this should continue next week. We do however have retail sales data on Monday to digest which could impact the currency.
United States
One of the focal points of this week in the US was the testimony delivered by Fed Chair Janet Yellen to the US House of Representatives, Financial Services Committee. These were her first public comments since becoming the Fed Chief earlier in the month. She delivered no major surprises and was keen to stress continuity in the FOMC’s approach to monetary policy. She is expecting moderate growth and job creation in 2014/15 and if this takes place then tapering will carry on in measured steps. The testimony usually comes in two parts with the second one scheduled for last night. Bad weather however prevented her from delivering it, and it seems recent weather is having far greater implications. The last two disappointing US employment results are being blamed, at least in part, on poor weather, and last night’s release of retail sales data is getting the same treatment. January sales were down -0.4% vs 0.0% expected. The only problem with blaming the weather is that that doesn't account for the three previous results for December, November, and October all being revised down as well. This was simply a poor result all round and the market reacted with a weaker USD. Some forecasters are now revising down their expectations of first quarter GDP. We certainly seem to have hit a soft patch of US data and if this continues Yellen’s ‘measured steps’ of tapering could be reconsidered. Tonight we get data on industrial production and consumer sentiment which will be closely watched. Next week’s highlights include building permits, the Fed minutes, inflation, manufacturing PMI, and existing home sales.

Eurozone industrial production for December printed at a disappointing -0.7% vs expectations for only -0.3% on Wednesday night. This weighed on the Euro to a degree, but nowhere near as much as comments by ECB official Corure. He was on the wires quoted as saying the ECB is considering a negative deposit rate “very seriously”. That certainly took the wind out of the Euro’s sails. He did follow that up with something more in tune with ECB President Draghi when he said they will need more information to see if they must cut rates. The market is currently pricing the chance of a rate cut next month at around 20%. Greece produced some more eyebrow raising data which showed unemployment hit a record high of 28%. And if that’s not bad enough youth unemployment climbed to 61.4%! Knowing what they know now, you have to wonder if they could turn the clock back to 2010 they wouldn’t rather chose to leave the Euro than go through this mess. They would most likely be in a much better situation now if that was the case. Tonight we get GDP data for the region, while next week we have German economic sentiment, manufacturing and service PMI’s, and consumer confidence data.

United Kingdom
It has been an interesting week for the monetary policy outlook of the UK. On Wednesday we had the Bank of England’s (BOE) quarterly inflation report and Governor Carney used this to signal a shift in his forward guidance policy. He has demoted the unemployment rate as a key threshold, and is now choosing to focus on spare capacity in the economy - often referred to as the output gap. In Carney own words “Despite the sharp fall in unemployment, there remains scope to absorb spare capacity further before raising the bank rate.” So the previously stated 7% unemployment threshold is now meaningless. But that doesn't mean rates won't be going up sooner than previously thought. Carney was optimistic saying the recovery has gained momentum underpinned by a revival in confidence and easier credit, and he hinted at a rate rise in early 2015. He doesn’t expect steep rate hikes though, suggesting when the bank rate does begin to raise rates it will very be gradual. He also believes when the economy is back to normal the level of interest rates is likely to be well below 5%. The UK Pound loved all this talk of rate rises and put on solid gains over the session. There will be plenty more to digest next week with inflation data, the BOE minutes, the unemployment rate, and retail sales all set for release.

It hasn’t been a great week for economic data from Japan. Monday’s current account and consumer confidence numbers were both disappointing. Then on Wednesday we got core machinery orders for December that printed at -15.7% vs and expectation of only -4.0%. That’s the biggest month on month fall since 1992. This was followed by Tertiary Industry Activity which also came in on the soft side. There has been some speculation that we could get further easing measures from the Bank of Japan (BOJ) after the sales tax increase in April. But the BOJ’s Kiuchi poured cold water on the idea saying more easing may do more harm than good. Next week’s releases of note include GDP, the BOJ monetary policy statement, the BOJ monthly report, and the minutes from the previous BOJ meeting.

There hasn’t been much in the way of market moving data from Canada this week. We did have the Canadian budget on Wednesday which shows the government is comfortably on track to balance its books in 2015. The deficit for the current period will be around $2.9bn with GDP in 2014 expected at 2.5%. Tonight we get data on manufacturing sales which will be closely watched and next week we have wholesale sales, inflation, and retail sales data to digest.