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Economies of Note - 18th September

Written by Ian Dobbs on September 18th, 2015.      0 comments

The main release from Australia this week was the RBA minutes out on Tuesday. The minutes largely confirmed that the central bank remains firmly on hold for the time being. They did highlight that the risks around the global outlook, and in particular China, have increased recently, but that it was too early to assess the extent to which this would materially impact forecasts for GDP growth. Aside from that we didn’t get a lot of new information about the central bank's view and the impact on the Australian dollar was negligible. Governor Steven’s has been speaking this morning however and he said although the economy isn’t growing as fast as they would like it is progressing though a major adjustment. He believes Australia is probably halfway through the decline in resource sector investment and non-mining activity is improving. The rate of unemployment has stopped rising and the central bank is pretty comfortable with current policy settings. Somewhat interestingly he also said the Australian dollar is not seriously misaligned at this point. The RBA usually take every opportunity to talk the currency down but there was none of that in his speech today. Next week looks a little light on the data front. We only have the house price index and the RBA’s financial stability review to digest.

New Zealand
We have seen to key releases from New Zealand this week. The first came in the form of another very positive dairy auction from Fonterra. The overall price index was up 16.5% with the key whole milk powder price increasing 20.6%. That makes three straight gains for dairy prices totalling over 40%. Reduced supply and the risk of an El Nino drought no doubt helped in supporting prices. Forecasters have started to increase they expected pay-out toward $5/kg from $4.5/kg or lower. The New Zealand dollar made some gains in the wake of the announcement, but they were short lived. GDP data on Thursday undermined support for the NZD when it printed softer than forecast at 0.4% for the second quarter. The market was expecting a result of 0.6%. Growth in the second quarter did improve from the first quarter 0.2% but it was a disappointing result and only serves to highlight the headwinds starting to impact on the economy. Next week to draw focus we have consumer sentiment, visitor arrivals and the trade balance.

United States
After what feels like a lifetime of waiting we finally had the FOMC statement released in the early hours of this morning and it’s certainly created some volatility. The Fed left interest rates unchanged and Janet Yellen sounded more ‘dovish’ than many would have expected. There was only one dissenter in the voting, so it was a near unanimous decision to keep rates at zero, and the Fed have lowered their projections for inflation. At the end of the day it was this lower track for inflation combined with uncertainties around the global outlook that drove the decision. The labour market is the bright spot of the US economy but Yellen even said her personal view is that there is more ‘slack’ in the labour market than the unemployment rate would suggest. Although every Fed meeting from now on is a potential opportunity for the Fed to hike, they didn’t sound like a central bank of the verge of lifting rates. There were no strong signals that a hike could come anytime soon. The December meeting is looking like a 50/50 call at this stage. The USD came under broad pressure as you would expect in the wake of the announcement, and I would expect that to continue over the coming days and weeks. Next week we have existing home sales, durable goods orders and the final reading of second quarter GDP to look forward to.

United Kingdom
We have seen some key data from the United Kingdom this week, but only one release had a significant impact. Wage data was by far and away the highlight with a noticeable pickup in private sector pay. Overall growth in wages ex-bonus is the highest since 2009 coming in at 3.2% in July. That is substantially stronger than expected and it served to underpin some solid gains in the GBP. It’s especially impressive as inflation, which was released on Tuesday is almost non-existent. The market got a reading of exactly as expected at 0.0%. Bank of England (BOE) Governor Carney said wage growth is starting to pick up and the BOE’s Forbes said he believes there is very little slack, if any, in the labour market. Data like this will help to convince the central bank that inflation will eventually pick and and it certainly brings forward the prospect of an interest rate hike. Last night we saw retails sales data and it too came in bang on expectation at 0.2%, up from a prior reading of 0.0%. Next week there is little to get excited about with only public sector net borrowing data likely to draw any attention.

We have seen a mixed bag of data from Europe this week. Better than forecast outcomes from industrial production and the trade balance were countered by disappointing readings from ZEW economic sentiment and inflation. The Euro area trade balance for July was a surplus of EUR22.4bn, the second highest monthly surplus on record. Economic sentiment however, declined sharply to 33.3 from 47.6 prior. The current conditions component of the survey performed better, but the future outlook was also negative with six month expectations falling to the lowest level this year. The final reading of inflation for August came in at 0.1% vs 0.2% and this will only serve to increase expectations of further quantitative easing from the ECB. Overall the data this week has done little to alter the current economic outlook for the Euro area. Next week the economic calendar looks pretty full with manufacturing and service sector PMI’s, German IFO business climate, a speech from ECB President Draghi and the targeted LTRO allotment.

The only release of note from Japan the week was the Bank of Japan’s (BOJ) monetary policy statement. The bank left policy unchanged and said the economy continues to recover moderately, but that exports and output are affected by the slowdown in emerging economies. The issues with emerging markets are really only just beginning so it’s hard to see a quick turnaround underwriting any improvement in Japanese export or output in the foreseeable future. Combine that with falling consumer confidence and weak demand and it’s not hard to see why many in the market are expecting further easing action from the BOJ over the coming months. The real question is will more QE have any positive implications. Sure, it will weaken the Yen some more which will help exports, but it will also push up the price of imports and potential depress domestic demand even more. The wheels are slowly falling off the whole ‘Abenomics’ experiment and Japan faces just as many head winds and issues as prior. Next week is a quiet one with a bank holiday to begin with. Later in the week we have manufacturing PMI and inflation data to digest.

We haven’t had much data released from Canada so far this week. The highlight has been manufacturing sales which improved by more than forecast at 1.7%. The gains look to have been led by automotive sales which were up strongly. Tonight we get inflation data and the market is looking for the core rate to come in at 0.2%, up from the prior 0.0%. One positive for the Canadian dollar this week has been the strong gains seen on the price of oil. After the EIA reported US inventories declined by much more than expected last week, the price of oil jumped around 5%. Next week we have wholesale sales and retail sales data along with a speech from Bank of Canada Governor Poloz to digest.