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Economies of Note - 16th May

Written by Ian Dobbs on May 16th, 2014.      0 comments

It has been a quiet week for data from Australia. Monday saw the release of business confidence index which improved to 6 from 4 previously. Tuesday then saw the house price index and home loan data, which were both softer than expected. The main focus however, was on the Governments budget and while there has been plenty written about it, there was almost no impact on the currency. Moody’s rating agency said the budget was “credit positive” as it significantly improves the medium term outlook for fiscal deficits. This confirms Australia’s relatively low debt burden compared to other sovereigns and is supportive of the Aaa rating. Next week we have the RBA minutes, consumer sentiment, the wage price index, and inflation expectations data to digest.

New Zealand
The Reserve Bank of New Zealand (RBNZ) released their financial stability report on Wednesday and it held no real surprises. One of the biggest risks continues to be house prices which are overvalued on several measures. This combined with still high levels of debt in the household sector could cause problems in the event of a sharp correction. The bank did say they would consider starting to remove the LVR restrictions on lending later this year as long as they are confident immigration pressures won’t cause a resurgence of house price inflation. They also believe a slowdown in China would hurt NZ and global markets. The bank said rate rises will help dampen house price inflation and that they would ‘feel their way’ through the tightening phase. This week we have also seen retail sales data that was a touch softer than forecast. The first quarter gain of +0.7% was below expectations of +0.9%. Yesterday we had the Government budget in which Finance Minister Bill English projected a surplus of NZD 372 million for 2014/15. This was widely expected and there was no impact on the currency. The government sees debt declining to 20% of GDP by 2020. There isn’t a lot to draw focus next week with just producer prices and inflation expectations of any note.

United States
It has been an interesting week for the US with a mixed bag of data leading to further falls in long term interest rates. On balance, the data is supportive of the outlook going forward, and it seems the move in 10 and 30 year bonds is more about market positioning than economic fundamentals. The week started with retails sales data printing at just +0.1% vs expectation of +0.5%. However, the previous result was revised up to +1.5% and if you take the two months together and average them out, the trend is certainly healthy. Import prices fell significantly, but this was countered by producer prices that increased more than expected. Both those are pipeline measures of inflation and last night we got the actual measure of inflation, CPI. April CPI printed at 2.0%, which was right on expectation. So no deflationary pressure there. What’s more the core CPI measure came in at +0.2% vs +0.1% expected. Along with this data we saw weekly jobless claims fall to their lowest level in seven years. This is consistent with another solid nonfarm payrolls reading next month. A couple of regional surveys also came in strong than expected. The Philly Fed index and the Empire state manufacturing index are both considered lead indicators and they suggest activity is recovering nicely after the depress first quarter. However, on the negative side we did get worse than forecast results for industrial production and the NAHB housing market index. The latter continues to point to a worrying trend in the housing sector. We get further information on that sector tonight with the release of building permits which will be closely watched. This will be quickly followed by consumer sentiment data. Next week we have the Fed meeting minutes, manufacturing PMI, existing home sales, and new home sales.

None of the data released this week from Europe has impacted the continuing expectation for action from the ECB next month. It has in fact only helped to cement those views. Investor confidence (ZEW sentiment survey) in Germany fell for the fifth straight month, and the decline was the sharpest since May 2012. This helped drag the Eurozone ZEW reading down to 55.2 from 61.2 prior. Industrial production came in as expected at -0.3%, while a drop in GDP for France and Italy helped keep the Eurozone GDP reading to a very subdued +0.2%. The expectation was for and improvement to +0.4%. The final reading of inflation came in as expected at just +0.7%. There have been plenty of comments from officials with one anonymous source telling Reuters a rate cut is ‘more or less a done deal’. We have also seen reports that the German central bank, who for a long time have been against further action, are now on board for rate cuts. The Spanish press are say the ECB will take the deposit rate negative to -0.25%. This may only be one of a number of measures undertaken. Outright quantitative easing seems unlikely, but negative interest rates as part of a package of measures should see the EUR weaken a lot further. Next week the highlights will be manufacturing and service PMI’s and the German IFO business climate index.

United Kingdom
We have seen two key releases from the UK this week, both of which have seen the GBP come under some pressure. The first was employment data which showed the claimant count (unemployment claims) dropped by -25.1k. This was below the expected fall of -30.7k. The unemployment rate held steady at 6.8%. This was quickly followed by the Bank of England's quarterly inflation report which has these day’s turned into a quasi ‘policy statement’. In it Governor Carney downplayed the talk of earlier than expected rate rises and he struck a very ‘dovish’ tone suggesting interest rate hikes will be much gentler than in the past. This disappointed the market to a degree and saw the GBP lose significant ground. Carney said the bank continues to judge there is scope to make greater inroads into slack in the economy before raising the bank rate, and that the BOE will not target policy to a specific region (i.e. London), but focus on the UK as a whole. These comments are largely in regard to the London housing market which is far more buoyant than in other parts of the country. Next week the highlights on the economic calendar are inflation data, the BOE minutes, and the second estimate of Q1 GDP.

There hasn’t been a lot to draw focus out of Japan this week. The most interesting release came in the form of GDP which printed at 1.5% for the quarter, against expectation of 1.0%. That seems way too strong and is in fact the biggest overshoot of expectation in three years. We have to digest it in the context of last quarter's result however, that showed a big undershoot relative to expectation missing by the biggest amount in 18 months when it printed at just +0.2%. Averaging the two results out producers gains much more in line with expectation.  Next week we have core machinery orders, the trade balance, and the Bank of Japan (BOJ) monetary policy statement to digest.

It has been a very quiet week for Canadian economic data. The only releases have been the house price index for April, which gained +0.5% vs a prior reading of flat, and March manufacturing sales which beat expectation coming in at +0.4%. Both releases were mildly supportive of the currency, although the impact has been muted. Next week should prove more interesting with wholesale sales, retail sales, and inflation data set for release.