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Economies of Note - 17th April

Written by Ian Dobbs on April 17th, 2015.      0 comments

Earlier this week was saw an improvement in Australian business confidence which was countered to a degree by a decline in consumer sentiment. Yesterday’s employment data was however universally strong. Employment gained by much more than expected at +37.7k, these gains were mostly in full time jobs, and there were big positive revisions to previous numbers. For the past few weeks the Australian dollar has struggled to hold onto any gains but this data seems to have underwritten a more sustainable bounce. Although most economists, who were surprised when the Reserve Bank didn’t cut interest rates in early April, are still calling from a cut in May, this data does raise some real doubt. Next week to draw focus we have the minutes from the last RBA meeting along with the latest reading of inflation.

New Zealand
Business confidence data released earlier this week came in broadly in line with expectations and as such there wasn’t much in the way of market impact. The Reserve Bank of New Zealand deputy governor Dale Spencer gave a speech that said action was needed to reduce housing imbalances. He made no ground breaking revelations but the speech did underline just what a risk to financial stability the central bank views the current state of the housing market. With inflation so low the RBNZ has no room to hike interest rates to cool housing so other options need to be assessed. Fonterra’s latest dairy auction didn’t come in as bad as some had feared, but prices still fell another 3.6%. The key whole milk powder price fell by 4.3% and is now down 38.7% year on year. The impact on the New Zealand dollar was limited as action in the wider market on Wednesday night saw the result side-lined to a degree. That doesn’t do much to help dairy farmers however and this latest result will only put further pressure on Fonterra’s forecasted pay-out of NZ$4.70 per kg. Next week we have inflation data to draw focus along with visitor arrivals and credit card spending figures.

United States
It has been a very interesting week for the US dollar and the economic outlook in general. For much of the past couple of months economic data from the US has been disappointing and this week saw that trend continue. Without a shadow of a doubt the US economy ran into something of a wall in the first quarter of this year. The question that needs to be answered is whether this slowdown is just temporary and the result of poor weather and a stronger USD? Or is there something bigger going on under the surface of the US recovery? Up until the past 48 hours the market had largely brushed off recent poor economic data and US dollar buyers emerged on any periods of weakness. But it does feel like data this week has been the ‘straw to break the camel’s back’ so to speak and the USD is not finding the kind of support is has over previous weeks or months. The key releases this week that disappointed were retail sales and industrial production. The decline in industrial production was the biggest since August 2012. We also saw small business sentiment fall to a nine month low. The Fed released their ‘Beige Book’ which is a summary of economic conditions and they suggested that activity expanded in most regions although the strong dollar, falling oil prices and the weather have slowed activity in some sectors. There are many out there who believe there may be more to this slowdown that just temporary factors and only time will tell. One thing that is becoming clearer is that a June interest rate hike is looking much less likely. Tonight we have inflation and consumer sentiment data to draw focus. Then next week we get existing home sales, manufacturing PMI and durable goods orders.

United Kingdom
This week saw headline inflation data for the UK come in as expected at flat. There were some sighs of relief that the number didn’t print negative, but the UK Pound didn’t get any support from the data. In fact the currency saw some further pressure thanks to the core inflation reading coming in a touch below expectation at 1.0%. Losses were tempered by a better than forecast reading from Producer Prices data which printed at +0.3% vs -0.5% expected. Polls results continue to predict a very tight race for the upcoming general election and the Pound will continue to struggle with this much uncertainty around the outcome. Tonight we have employment data to digest. The claimant count (unemployment claims) is forecasted to drop by 29.0k with the unemployment rate falling a touch to 5.6%. Average earnings data will also be closely watched and the three month average is expected to remain at 1.8%. Next week we have the Bank of England minutes and retails sales numbers to digest.

Data from Europe this week has largely confirmed the improving economic outlook for the region. Eurozone industrial production came in much better than forecast at +1.1% and although there were some negative revisions the overall impact of the data was positive. The European Central Bank (ECB) held their latest rate meeting and as expected left policy settings unchanged. President Draghi struck an optimistic tone suggesting the Eurozone is benefiting from a convergence of low oil prices, improved government policy and the central banks own quantitative easing programme. He said risks surrounding the Eurozone have become more balanced and the latest data says the economy has gained momentum. That ‘balancing of risks’ I suspect does not include the Greek situation which draws closer to default and a potential exit from the Euro with every passing day. Standard and Poor’s obviously believe as much because they cut Greece’s rating from B- to CCC+ with outlook negative this week. Tonight we get the final reading of inflation and next week we have ZEW economic sentiment, manufacturing and service sector PMI’s, consumer confidence and the German IFO business climate index.

It has been something of a positive week for the Japanese economic outlook. On Monday we saw better than expected data from core machinery orders and producer prices, then on Wednesday industrial production figures were revised a touch higher as well. More importantly however is the news that Japan’s big companies will be raising pay by the most in 17 years. The government has been putting pressure on business to raise pay in an effort to help boost both growth and inflation. It seems that pressure has paid off. 62 large companies with 500 or more staff will increase pay by 2.59% which is the biggest jump since 1998. This is a key step toward the ‘virtuous cycle’ of economic growth that PM Abe and BOJ Governor Kuroda have been working hard to achieve. Next week's economic calendar looks a little light with only the trade balance on Wednesday likely to draw any attention.

There have been two key releases from Canada so far this week. The first was manufacturing sales data and it was just plain ugly. The headline was much weaker than forecast and there were big negative revisions to previous results as well. A large part of the oil sector is included in this ‘manufacturing sales’ data so that does explain some of the weakness and this helped to limit the negative impact. This data also came only a couple of hours ahead of the latest Bank of Canada (BOC) Monetary Policy Statement which was the main focus for the market. The BOC produced a somewhat surprisingly optimistic report effectively suggesting the worst of the damage from falling oil prices may already be behind them. They lowered the growth estimate for 2015 to 1.9% from 2.1% but increased the estimate for 2016. They have also increased inflation forecasts for the second half of this year and say the risks to that outlook are now roughly balanced. The bank believes the first three months of this year absorbed the brunt of the economic damage from the collapse in oil prices and they are now looking ahead with a surprising level of optimism. It’s fair to say there are many forecasters out there who would happily debate their ‘rosy’ outlook. Tonight from Canada we have inflation and retail sales data to draw focus. Next week looks a little lighter with just wholesale sales and the annual budget set for release.