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Economies of note - 16th August

Written by Ian Dobbs on August 16th, 2013.      0 comments

1:30PM (NZT)
Australia

The economic data out of Australia this week has been on the soft side, but had little impact on the overall market. Tuesday saw the release of business confidence figures that were very subdued. Business conditions remain at a four year low, while confidence dropped to an eight month low. Wednesday’s data on consumer confidence was somewhat better, actually showing an improvement in the index. However, the index is still well below levels reached in 2010. As mentioned there was little in the way of currency movement on the back of these results. The interesting thing will be to see readings for both of these indexes after the general election in September. Next week’s highlight will be minutes from the monetary policy meeting released on Tuesday.


New Zealand
Data out of New Zealand this week has been very supportive of the outlook for economic growth. At the beginning of the week we had firm readings on the housing sector with activity remaining strong for the time of year. On Wednesday we got retail sales data and it come in substantially stronger than expected. This was particularly so for the core reading which excludes automobiles and petrol sales. That printed at 2.3% against an expectation of 1.3%. This data helped the NZD gain on most crosses in the middle of the week. Thursday’s release of the manufacturing index was also much stronger than expected and helped to support the currency. It actually showed the third highest monthly reading since the series began. So some very solid data for NZ, particularly in light of the slowdown in our closest neighbour Australia. Next week the focus turns to produce prices, and inflation expectations.


United States
It has been a very interesting week for the US economy and the US dollar. Data has for the most part been supportive of the improving outlook. We have seen retail sales data that was a touch stronger than expected, inflation coming in on target, and last night we got a very good reading on weekly unemployment claims. This is a key indicator for the monthly employment report. Last night's numbers are consistent with monthly payroll gains of around 200k. This is very supportive of the USD and of the Fed tapering quantitative easing purchases in September. The initial reaction overnight was for a much stronger USD across the board. This however did not last as the USD hit a wall and eventually turned around erasing much of the gains, leaving many confused. Last week we spoke about the potential culprit for USD weakness being outflows from the US bond market. Overnight we got another piece of the puzzle. The US released data on foreign capital flows for May and these showed China, who own a massive amount of US bonds, reduced their holdings during that month by $20 billion. I suspect when we get figures for June, July, and August, we will see a much bigger decrease in holdings. US Treasury Bonds also backed up overnight to around two year highs. If China keeps selling at the same time the Fed reduces purchases, things could get very ugly, very fast. And rising interest rates are no friend of the stock market. A very interesting article from The Telegraph recently highlighted the precarious position the US equity market currently finds itself in. Investors have rarely been more leveraged than they are now, with margin debt exceeding the previous market peaks of 2000 and 2007. With the market near all-time highs, this is a big reverse indicator and warns of potential downside for stocks. Next week's key data points will be home sales and minutes from the last Fed meeting.


Europe
Data out of Europe this week has been supportive of the gradual recovery the ECB are expecting over the second half of this year. The highlights were German economic sentiment that showed a marked improvement and Euro-zone GDP for the second quarter. It came in a touch above expectation at 0.3%. This figure was aided by the French and German economies that grew faster than expected and that has helped to pull the Euro-zone out of a recession that lasted one and a half years. The EUR has found some support from this although the gains have been muted. Tonight we get data on the current account and inflation. Both will be closely watched. Next week the focus will turn to readings on the manufacturing and service sectors, as well as consumer confidence.


United Kingdom
The recovery in the UK economy seems to becoming more entrenched and sustainable. Added to the positive data out over the last few weeks, we have recently seen house prices rise for the fourth consecutive month. The pace of that rise is now the fastest since the market peak of November 2006. The Bank of England (BOE) would have breathed a sigh of relief when inflation data came in. It printed just a touch under expectation at 2.8%. On Wednesday we got figures showing the claimant count (for unemployment benefit) dropped much more than expected. It is now at the lowest level since February 2009. Although the unemployment rate was steady at 7.8%, the broader picture suggests that rate could fall sharply over the coming months. Last night we got retail sales data that came in much stronger than expected as well. The big question is why hasn’t the GBP had a much bigger reaction to all this good news. It is trading stronger on many crosses, but no-where near where I would have expected. Part of the problem could be the time of year. European markets are very quiet in general with summer holidays in full swing. This would lead you to believe there is plenty of room for the GBP to appreciate over the coming weeks, if the positive data continues. The economic calendar is a little thinner next week, with mostly second tier data and a second reading for Q2 GDP.


Japan
Japan has seen no data out since the beginning of the week, when we got disappointing GDP and somewhat better machinery orders. The Yen has been whipped around by big swings in the USD, and this is a trend we can expect this to continue. There was a lot of chatter about a potential corporate tax cut in Japan, although this has been denied by the government. And at this point the sales tax hikes are still going ahead as planned. Next week sees another light economic calendar with trade balance the only release of note.

Canada
It has been a relatively quiet week for economic news in Canada. In the build-up to the manufacturing numbers due for release later on today, only existing homes sales numbers have been of note. Existing home sales for July rose just .2% on the month, against a previously monthly increase of 3.3%. This headline number looks a little soft, but the average price was up 1.9% from June and the volume of sales rose 9.4% from a year ago. The BOC watch the housing market closely as it has seen larger gains than would be ideal for the central bank. The manufacturing number later on today rounds out the quiet week in Canada, ahead of the latest retail sales and inflation numbers next week.
 

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