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Economies of Note - 17th July

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

We have seen some mixed economic data from Australia this week. A small improvement in business confidence was offset by declining consumer sentiment, while inflation expectations picked up a touch to 3.4% from 3.0% prior. None of this had much impact on the Australian dollar that continues to be influenced by offshore factors and soft iron ore prices. Some positive data out of China did provide the currency with a brief respite from the selling, but when the Bank of Canada cut interest rates again on Wednesday night, commodity currencies in general came back under pressure. Next week we have the minutes from the last Reserve Bank of Australia meeting to draw focus. We also get the latest reading on inflation.
New Zealand
The two key economic releases out of New Zealand this week both disappointed. As such the NZD has been under heavy selling pressure. Wednesday night’s dairy auction was a shocker. Another fall in dairy prices, this time of 10.7%, immediately weighed on the currency. There was nothing you could point at in the results to offer any glimpse of hope. The important category of whole milk powder fell by a whopping 13.1%. Almost immediately forecasters revised down their expected pay-outs for 2015/16 to levels under $NZ4.50/kg, some now even expect it could be sub $NZ4.00/kg. If anyone needed any more convincing that another interest rate cut was coming from the Reserve Bank, this would have been more than enough. But just to reinforce the case, at 10:45am yesterday morning we also saw inflation data come in below expectation. Inflation rose 0.4% in the June quarter, which was up from the prior -0.3%, but the market was looking for a gain of 0.5%. Most of the gain was however on the back of petrol prices. Without that the reading would have been flat. The declining NZ dollar will eventually boost inflation, but those effects will take time to work through and probably won’t be seen until the third or even fourth quarter of this year. Another interest rate cut from the RBNZ next week a done deal, the questions is how many more cuts will we get this year? Many now expect two further cuts after that, taking the cash rate back to 2.50%.

United States
It has been a relatively full week of economic releases from the United States this week. Data wise, we have seen another disappointingly soft retail sales figure with sales actually falling 0.3% in June. The market was expecting a gain of 0.2%. Adding to the negativity of the report were downward revisions to May’s reading as well. However, these numbers were countered by stronger than forecast outcomes for producer prices, the Empire State manufacturing index, capacity utilization and industrial production. There is more data tonight to digest with inflation and consumer sentiment both set for release. One of the main focuses this week was on Fed Chair Yellen’s semi-annual testimony before a couple of senate committees. She didn’t drop any bombshells and largely reiterated previous comments that if things pan out as expected then it would be appropriate to lift interest rates “at some point this year”. She added that although there is still some slack in the job market, and they are not yet at full employment, she does expect that slack to diminish as the economy continues to strengthen over the rest of 2015. The most notable point she made was that the pace of tightening is more important that the timing of the first hike. She said starting to raise rates earlier may allow for a more gradual path of rate hikes. Next week is looking a lot lighter in terms of data from the US. Existing home sales, weekly unemployment claims, manufacturing PMI and new homes sales are the only notable releases.

United Kingdom
The two key data releases from the United Kingdom this week both came in a touch softer than forecast. They didn’t stop the UK Pound making good gains on the back of comments from Bank of England Governor Carney. Inflation for June came in flat which was a touch below the 0+0.1% expected. The core inflation result was also subdued at 0.8% vs 0.9% expected. We also saw softer than forecast reading from employment data. The unemployment rate actually ticked up to 5.6% from 5.5% prior and wage growth was also a touch softer than forecast at 3.2%. That is however, an improvement over the prior reading of 2.7%, so it’s certainly heading in the right direction. None of this data has dramatically impacted the BOE’s positive view of the economy and when Governor Carney said “the point at while interest rates may begin to rise is moving closer” the UK Pound reacted by jumping higher across the board. Another MPC member Mile’s was also on the wires and he said the time to start normalization of interest rates is ‘soon’. He sees the neutral rate at about 3.00% in Early 2018. Next week from the UK we have the BOE minutes to digest along with public sector net borrowing and retail sales data.

Greek MP’s have voted in favour of new austerity measures that will secure a third bail-out to stave off the threat of bankruptcy. While voting was going on inside the Greek parliament, there were violent clashes on the streets outside. The EU have also approved the release of EUR7bln in bridging finance and the ECB have increased liquidity support to the Greek banking system. The IMF this week released another eyebrow raising report on the sustainability (or should I say unsustainability) of Greek debt. It shocked many because it went a lot further than ever before in agreeing with what many forecasters have been saying for a long time. That is that Greece’s debt, in its current form, will never be paid back. The IMF said Greece needs debt relief far beyond what Europe has been willing to consider so far. Current projections have Greece’s debt peaking at 200% of GDP in the next two years. They said the Eurozone creditors’ alternatives are either annual transfers to help with the Greek budget, or deep upfront debt haircuts. The cold hard reality is that any bail-out that fails to recognize the unsustainability of Greece’s current debt load is simply creating a bigger crisis down the road. The sooner Europe realises this, the better for everyone.

The main focus in Japan this week was on the central bank’s monetary policy statement released Wednesday. As widely expected the bank left policy settings unchanged, but they did revise down growth and inflation forecasts. They now expect the economy to expand 1.7 per cent in the year to March 2016, while inflation would come in at 0.7 percent. Those forecasts are down from 2.0 per cent and 0.8 percent respectively, estimated earlier this year. Indications are that the second quarter of this year may have been much weaker than previously thought, with some suggesting GDP in Q2 may even be negative. Bank of Japan (BOJ) chief Kuroda believes any downturn would short lived and he still expects to hit the 2 percent inflation target next year. Many forecasters believe the BOJ’s outlook is a little too optimistic and that they will be forced to expand monetary stimulus later this year. Next week from Japan the only release of note is the trade balance on Thursday.

With the Canadian economy not rebounding as expected in the second quarter of this year, the Bank of Canada (BOC) was forced to cut interest rates again this week. They cut the cash rate to 0.5 per cent from 0.75 per cent prior. Much like New Zealand this will only add fuel to an already overpriced housing market, but the central bank felt they had no choice. Governor Poloz said “while vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment.” During the press conference Poloz added economic developments had been ‘quite disappointing’ and there was ‘no doubt’ that they had suffered a mild contraction. He said the facts have changed quite quickly in the last 2-3 months with oil investment now expected to fall 40% this year. The Canadian dollar fell sharply following the BOC’s decision. We have inflation data tonight to draw focus, and then next week we get wholesale sales and retail sales data.