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Economies of Note - 15th July

Written by Ian Dobbs on July 15th, 2016.      0 comments

The Australian dollar has fared well against its US counterpart this week. Continued strong gains in global equities and demand for risk based currencies when combined with solid employment data for June and clarity over the outcome of the Australian Federal election (that saw the incumbent Liberal Coalition remain in power with a reduced majority) all helped bolster support during the week. Data released during the week was dominated by yesterday’s employment numbers which were treated positively by the market as full time job creation surged during the month and the unemployment rate held steady at 5.8%. Other releases included a smaller than expected decline in home lending and rebound in total lending from a month earlier. Business confidence numbers from NAB were positive as the read doubled from a month earlier although consumer sentiment dipped on the back of local election uncertainty and Brexit concerns. Look for US data (led by inflation) to set the tone of trade over coming days’ as key local data led by the RBA minutes on Tuesday lacks.
New Zealand
Sentiment towards the local currency took an unexpected hit in trade yesterday after an announcement by the RBNZ that they will give a brief update to the market on its economic assessment next Thursday (9am NZT). The logic behind the update is the long period until the next monetary policy statement as the RBNZ moves to its new release timetable. The move lower in the NZD comes as the market was growing increasingly comfortable with the notion of no move (cut) at the August meeting and reflects concern that the RBNZ is growing increasingly frustrated by the recent NZD strength and may make moves next week to ‘jaw bone’ (most likely) it lower. This as expectations for a reduction in August moved from 40% to 65% after the headline. Data released during the week was minor in nature. Electronic card retail sales rose from the month prior whilst food prices for June rose less than expected, despite the 8.4% jump in the price of vegetables. Business PMI numbers were seen advancing from the month prior whilst the latest data on offshore government bond holdings showed a decline to 30 June (less local investing appeal, NZD-). Attention now turns to today’s US data (led by inflation) before the local Q2 inflation numbers due on Monday.

United States
Data which is skewed heavily to releases later today has meant a quiet start for the USD overall this week. News of interest has come mainly via comments from various Fed officials including (amongst others) Mester who noted the strong underlying economic fundamentals in the US and Lockhart who said he saw growth continuing at around 2% p.a. and inflation moving closer to the Fed’s 2% target. Dallas Fed Kaplan said the FOMC should be slow and patient in raising rates in a theme which echoed many members as they negotiate the clouded economic waters after the UK’s Brexit vote. US equities have continued to rally this week which has seen both the Dow and S&P reach record highs as investors reach for yield and earnings growth in light of the current poor yields on offer which see many government bonds yielding zero or less. Economic events this week included the Fed’s Beige book which noted an economy expanding at a moderate pace and “slight” price pressures. Data included a drop in the JOLTs job openings for May and initial jobless claims which held the previous levels against expectations of a deterioration. Producer prices were seen stronger than the consensus and turns attention on today’s US inflation numbers for the same period. Other releases today include retail sales, NY Empire Manufacturing and Michigan consumer sentiment amongst others.
United Kingdom
Improved sentiment has seen the pound rally to two week highs against the greenback this week. The gains came as the market reacted to a more certain political environment after the Conservative party quickly moved to remove uncertainty by a electing new Prime Minister (Theresa May) into office on Wednesday. Yesterday’s BoE interest rate meeting was the other highlight of the week. The decision to not cut rates took the market by surprise and added to the GBP strength as the misplaced market saw a ~86% chance of a cut ahead of the meeting. The committee voted 8-1 to stay on hold and hinted at the launching of a stimulus package in August in a move which would target shoring up the recent falls in business and consumer confidence. The bank said that without a return to more normal conditions that most committee members would expect policy loosening in August. For now they said they would like to wait and see if the economic upheaval caused by the recent Brexit vote clears before making such a move. Looking forward to next week we will see a return to economic data focus as the market looks to numbers on inflation, producer prices, retail sales and employment.
It has been a relatively quiet week for pricing in the Euro this week which has seen it ebb higher on a strengthening GBP and improved market sentiment which has seen the Euro Stoxx 50 equity index follow other indices by rising 4.4% so far this week. Data considerations have been light over the week and started with Italian industrial production numbers which missed their expectation by a wide mark. German inflation numbers which printed in line with expectations highlight the soft inflationary environment on the continent in a theme that was echoed across Spain and Italy. Eurozone industrial production data disappointed and expect today’s euro area inflation data to reflect the regional prints from earlier in the week (low inflation and mainly in line with expectations). Look for influence to come from the greenback today given the heavy US data schedule although continue to watch for headlines on the Brexit issue and on the beleaguered European banking sector.
Sentiment towards the Yen this week has continued to be marked by a reduction in the ‘safe haven’ demand as global equity markets become increasingly relaxed over the prospect of a Brexit and as investors react to PM’s Abe’s win in the upper house and accompanying likely introduction of significant amounts of further stimulus. The win has seen Japanese equities continue to build on their gains over the course of the week as meetings during the week with former US Fed Chair Ben Bernanke led to increased speculation that the stimulus program would be expanded to include ‘helicopter money’ (central bank money creation). The discussions come as Abe stated that he wants to accelerate Japan’s exit from deflation and as the government reduced its forecasts for GDP growth and inflation in fiscal 2016. Data released during the week started with core machinery orders that continued its weak trend and producer prices that also remained soft. The latest capacity utilization and industrial production figures were also disappointing and did little to alter the tone. Look to US data today for direction which includes numbers on inflation and the retail sector.

This week in Canada was dominated by the mid week BoC monetary policy report. This saw the Canadian central bank leave rates on hold (0.5%) as was widely expected. The report was less dovish than expected however which saw the CAD rally as expectations for a cut by year’s end were marked lower. The BoC downgraded its GDP forecasts for 2016 (1.7% to 1.3%) and 2017 although the reductions were expected. The report helped mitigate any losses that may have eventuated for the local currency on the back of a fall in the oil price that was seen (-~5% WTI) mid week as investors reacted to data which showed American consumers struggled to make inroads on the large gasoline inventories, this despite it being the peak driving season. Other economic points of interest included new house prices that rose by more than expectations in May, the data came as the BoC this week pointed to house price gains which look unsustainable across many parts of the country. On the immediate horizon are numbers on the manufacturing sector today although look for US data and oil to play the greater lead.