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Economies of Note - 14th November

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

The past week has seen some mildly encouraging signs from what has been mostly second tier data. The best result came from business confidence, which actually saw the headline reading decline to 4 vs the previous reading of 5. Although that headline number wasn’t so great, looking deeper into the report made much better reading. The business conditions component jumped from 1 to a reading of 13. That’s the highest level since 2008 and the biggest point jump on record. Consumer sentiment has also improved a touch coming in at +1.9% up from the previous +0.9%. That index is still however, 12.5% below its level of a year ago. Wage growth came in bang on expectation at +0.6%, while inflation expectations edged up to 4.1% from 3.4% previously. The other positive news this week has been that Australia and China are set to agree a free trade agreement. This could have potential benefits for many sectors of the economy. Yesterday afternoon the RBA’s Kent made an on the record speech. He reiterated the AUD was above estimates of fundamental value given falling resource prices, and that is may well depreciate further once the Fed starts raising rates. He believes growth will be below trend in the near term, but will pick up in the future helped by low rates that encourage household to save less and spend more. In something of a surprise he also said the RBA hasn’t ruled out FX intervention. The focus now turns to the Reserve Bank of Australia's minutes set for release on Tuesday, just ahead of the Treasuries mid-year economic and fiscal outlook.

New Zealand
The main focus in New Zealand this week was on the RBNZ’s Financial Stability report released on Wednesday. There had been plenty of speculation in the media that Governor Wheeler might signal an easing of the LVR restrictions put in place late last year, but it seems the bank does not think now is the right time. Wheeler said that while housing risks had reduced thanks to a slowing of price gains, the current strong migration flows mean it would be too risky to ease the LVR “speed limit” at this stage. Overall Governor Wheeler said that while the four key risks remain the same in May’s report, the balance of these risks has shifted in the past six months. Those four key risks are: the housing market, high levels of debt in the dairy sector, a potential slowdown in China, and the banking systems reliance on offshore funding. Also this week we go the latest reading from the Business NZ manufacturing index. It improved in October to 59.3 from a prior reading of 58.5. That is the best reading for 2014 and the second highest reading since 2007. Next week we have retail sales, producer prices, and the latest Fonterra dairy auction to digest.

United States
A bank holiday on Tuesday means it has been a quiet one for data from the United States so far this week. Last night we did see weekly unemployment claims and JOLTS jobs openings data, both of which continue to point to a healthy employment market. The Fed’s Dudley was in the wires saying patience was needed in timing of the first rate hike. He did however add that market expectations for rate lift off in mid-2015 are reasonable. Still to come this week we have the key releases of retail sales and consumer sentiment, both out tonight. The focus will then turn to next week’s data in the form of producer prices, building permits, the FOMC minutes, inflation and the Philadelphia Fed manufacturing index.

United Kingdom
It’s been an interesting week for the UK Pound. The currency came under all sorts of pressure on Wednesday night after the Bank of England (BOE) released their quarterly inflation report. The bank has slashed inflation forecasts for 2014 to 1.2% from 1.9% previously, with 2015 forecasts cut to 1.4% from 1.7%. They said inflation could well fall below 1% in the next six months before recovering back toward 2% over the next three years. This lower inflation forecast has been driven by lower imported commodity prices and weak demand. The bank also signalled that rates won’t be going up until the second half of next year at the earliest. They see the UK outlook a little weaker, with downsides risks from Europe and upside risks from the US. On a more positive note, Governor Carney did say they are seeing the first tentative signs of wage growth. This was certainly evident in the employment data also released on Wednesday. Although the claimant count change fell by a little less than forecast at -20.4k, average hourly earnings were up 1.0% vs expectations of +0.8% and a prior reading of 0.7%. Real wage growth is key to containing any near term dip in inflation and helping build a robust sustainable recovery. Next week we get the latest reading of inflation which will be very closely watched. We also get the BOE minutes and retails sales data to digest.

There has been little in the way of data to cheer about from Europe this week. Industrial production disappointed, as did German wholesale prices and Sentix investor confidence. The latest monthly report from the OECD showed their indicators point to weaker Eurozone growth ahead and they said it was “high time” for more growth and investment friendly policies. ECB President Draghi has been on the wires saying unemployment in the Euro area remains unacceptable high. He added monetary policy has done and will continue to do its part, but it is not enough. Structural reforms are needed along with fiscal policy that promotes investment and growth. The ECB released their monthly bulletin last night and it was largely a re-hash of the statement we saw after the recent rate meeting. They did stress the council is unanimous in its commitment to act further if needed. A recent survey found that 50% of respondents think the central bank will undertake sovereign QE over the coming months. Tonight we get GDP data from France, Germany, Italy and the Eurozone as a whole, along with the final reading of inflation. The GDP data should be interesting with the very real risk of a negative result. Next week the focus turns to German economic sentiment, along with manufacturing and service sector PMI’s.

Data out of Japan this week has been something of a mixed bag. The best result came from core machinery orders that printed well above expectation, while revised industrial productions was also a little stronger than forecast. On the negative side we saw a drop in consumer confidence and economy watches sentiment index, both of which also missed expectation. The monthly Reuters Tankan survey (not to be confused with the official quarterly Tankan report) showed current manufacturing sentiment has improved, although their outlook is a lot more cautious. The media has been full of rumour and speculation about a snap election in Japan, along with debate about whether the next round of sales tax hikes should be delayed or not. Prime Minister Abe has seen his approval ratings fall as the economy fails to recover from the previous sales tax hike and he may go to the polls to seek a fresh four year mandate to continue with his plan to reinvigorate the economy, often referred to as “Abenomics”. Next week we have GDP data and the Bank of Japan’s (BOJ) Monetary Policy Statement to digest.

Data from Canada hasn’t had much impact this week. We have only seen housing starts and the new house price index released and both came in a touch below expectation. The housing sector remains a risk in Canada and policy makers have been nervous about it since the US market collapse in 2008. In a speech by the Bank of Canada’s (BOC) Schembri this week, he noted the main risks to the economy come from China, Europe and the housing market. On a positive note US senators on Wednesday voted to approve the Keystone XL pipeline which aims to bring Canadian oil to the Gulf of Mexico coast. This pipeline is a positive for Canada as it would double the flow of heavy tars sand oil from Canada to refineries in the Gulf Coast. Tonight we get manufacturing sales numbers to digest, while next week the focus will turn to wholesale sales and inflation data.