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Economies of Note - 17th April

Written by Ian Dobbs on April 17th, 2014.      0 comments

The only release of note this week from Australia was the minutes from the last RBA meeting. These gave little fresh insight into the views of the central bank and once again there was a lack of real concern over the level of the currency. They mentioned it was high by historical standards and therefore less supportive of the economy, but that’s as far as they went. It certainly seems the central bank has decided it must learn to live with a high AUD, at least for now. We did get a raft of Chinese data released yesterday that was mildly supportive of the AUD with first quarter GDP coming in a touch better than expected.

New Zealand
The New Zealand dollar has lost some ground this week helped by a couple of soft data releases. The first came on Tuesday night with another fall in dairy prices at Fonterra latest global dairy auction. The fall of 2.6% marks the fifth straight decline in prices and the lowest level since early 2013. The outlook is for prices to remain under pressure on the back of significant increases in supply. But the week’s main focus was always going to be inflation data released yesterday with the market expecting a result of +0.5% for the quarter. The actual result however came in at just +0.3%, with the year on year figure printing at +1.5%. If you stripped out cigarettes and tobacco the quarterly result would have been flat. This is a key number and really does take some pressure off the RBNZ in terms of future cash rate hikes. It is unlikely to affect next week’s monetary policy meeting with another 25 point increased fully priced into the market. But it does bring into question the expectation for hikes in June and July. The RBNZ could easily hold fire at one of those meetings. Obviously the risk of a slower and/or lower path of interest rate hikes has seen the NZD come under pressure.

United States
Data out of the United States this week has been mostly positive. Retail sales and inflation both came in above expectation as did industrial production and capacity utilization. The Empire State Manufacturing Index and the NAHB housing market index did both disappoint, however these are second tier indicators and the overall level of them should not raise much concern. We have seen a lot of comments from Fed officials including a speech from Fed Chair Yellen last night. The overriding theme to take away from them all is that the Fed is going to be in no hurry to hike rates once QE purchases end. Any change to the current near zero rate policy will hinge on the distance the US remains from its employment and inflation goals. Contrary to what Yellen has stated previously, there is no rough timeline for this. There has been no discussion around what a ‘considerable time’ is. It could be 6 months, it could be a year. This very ‘dovish’ stance from the Fed is one of the factors keeping the USD under pressure at the moment. The problem with the current policy, and Yellen all but admitted this last night, is that the Fed are not focusing on the potential risks that the current policy entails. Near zero interest rates for five, or more, years could very well be sowing the seeds for the next economic catastrophe. With a short week next week the focus will be on existing and new home sales data, manufacturing PMI, and durable goods orders.

There hasn’t been a lot of good new out of Europe this week. Industrial production came in weaker than expected at +0.2%, as did German economic sentiment. The latter actually fell substantially from 46.6 previously to print at 43.2. That’s the fourth decline in a row. Although the broader Eurozone sentiment reading also fall a touch, it did come in above expectation at 61.2. Last night saw the release of the current account which undershot expectations and the second reading of inflation which was unchanged at 0.5%. As you would expect the Euro has remained somewhat subdued in light of these releases. Next week we get manufacturing and service PMI’s from both France and Germany, along with the German business climate index.

United Kingdom
The key data released this week from the UK has confirmed that the economy is on the right track and that the sustainability of the recovery is looking more certain. Inflation came in bang on expectation at a comfortable 1.6%. This is pretty close the ‘sweet spot’ where downside pressures aren't a concern but on the other hand it’s not so high that it’s squeezing consumers. The latter point was reinforced by average earnings data that printed at +1.7%. That is a touch below the expected level of +1.8%, but significantly it is above inflation for the first time in five years or so. The unemployment rate has also dropped below the Bank of England’s (BOE) previously stated, but now defunct trigger level, of 7.0%. The drop to 6.9% in this reading from the previous 7.2% helped boost the UK Pound when it was released last night. Next week the focus turns to the BOE monetary policy meeting minutes and retail sales data.

There has been little in the way of hard data from Japan this week. However, we have seen plenty of comments from BOJ Governor Kuroda, who has been singing a consistent tune. He believes policy easings are having the intended effect and that the economy will hit the 2% inflation target sometime next year. Speculation is rife however, that the central bank will ease further over the coming months as a result of the negative impact from the sales tax hike. A recent poll showed 11 out of 17 analysts expect the BOJ to easy in July. The focus next week turns to inflation data with the release of CPI on Friday.

The Canadian dollar has been under some pressure this week and last night the BOC piled on more when Governor Poloz said they hadn’t shut the door to further rate cuts. The comments came in the press conference after the BOC’s rate meeting and statement. To be fair the statement was very similar to last month and the bank hasn’t changed it’s ‘neutral’ position, but the bank is obviously less than confident about the future path of the economy. A pickup in exports and investment is critical for continued growth and although conditions are ripe for that, the bank just isn’t seeing it yet. They do believe however, that as the US recovery gathers momentum, Canadian exports will improve. The only data next week comes in the form of wholesale and retail sales.