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Economies of Note - 19 February

Written by Ian Dobbs on February 19th, 2015.      0 comments

The only release of note from Australia this week was the minutes from the Reserve Bank of Australia’s (RBA) February meeting. This was the meeting where they surprised many by cutting interest rates 0.25%. The market currently expects another rate cut by the RBA, but the minutes have created some doubt around the timing of the next move. The minutes showed the central bank had considered waiting until March to act, but decided to cut in February because they could use the Quarterly Statement on Monetary Policy, released three days later, to further explain the move. This suggests it wasn’t so much urgency due to economic factors that drove the timing of the Feb cut, but more the ability to communicate effectively with the market. As such the chance to a quick second cut in March has now diminished. Markets are now leaning toward May as the likely timing for the next move. Next week we have private capital expenditure data to draw focus.

New Zealand
The past week has seen a couple of strong economic releases from New Zealand. Monday’s retail sales were very good coming in well above expectation at +1.7% for the fourth quarter. This comes on the back of a 1.6% increase the previous quarter and suggests the consumer is in good spirits. On Tuesday night dairy prices continued their recovery posting the fifth consecutive gain. The overall index jumped 10.1% while the price for whole milk powder, which is the most important component, increased 13.7%. This recovery in prices is making the current forecasted pay-out of $4.70 per kg look a lot more achievable. This will certainly be welcome news for farmers who are battling drought conditions in many parts of the country. Next week to draw focus we have inflation expectations, the trade balance, building consents, and business confidence.

United States
Aside from non-farm payrolls data, the majority of key economic releases from the US recently have been coming in softer than forecast. That trend continued this week with a number of releases missing expectation and actually declining from the prior reading. The Empire State Manufacturing Index, Build Permits, Producer Prices, and Industrial Production were all disappointing. This is starting to weigh on the US dollar and this morning’s release of the FOMC minutes didn’t help. These produced the first hint that the Fed may be inclined to hold off tightening in June, preferring to keep rates lower for longer given the weak inflation outlook and other risks. These other risks includes the outlook for China, Ukraine, Greece and the Mideast. It seems policymakers may want more evidence of continued growth and signs that inflation has bottomed before lifting interest rates. This could well cause something of a sea change in market expectations, which in turn could see a much bigger squeeze out of long (brought) US dollar positions. There will be plenty to digest next week with the highlights being New Home Sales, Inflation, Durable Goods Orders, and GDP.

United Kingdom
We have seen a number of key economic releases from the United Kingdom this week. Inflation hit the wires on Tuesday evening and it came in right on expectation at +0.3%, down from the previous result of +0.5%. This is the lowest inflation of modern times and not surprisingly it is driven by declining energy costs. It’s also likely to fall further with the Bank of England (BOE) believing it could well go negative at some stage over the coming months. A period of disinflation (a temporary decline in prices) is not a major concern as long as it doesn’t turn into permanent deflation. That seems unlikely in the UK where the employment market remains very healthy and wages are starting to grow. Last night we got the latest reading on Claimant Count Change (unemployment claims) and it declined by more than expected at -38.6k. Adding to this positive result was the unemployment rate that dropped to 5.7% from 5.8% previously, and Average Weekly Earnings which increased by more than expected at +2.1%. The BOE monetary policy meeting minutes were also released last night and there were no real surprises in the 9-0 vote to keep rates unchanged. With inflation low, and still declining, the chances of a rate hike this year a rapidly diminishing. At this stage the market believes the most likely timing for a lift off in interest rates is sometime in the first half of 2016. Next week to draw focus we have CBI Realized Sales, the second estimate of GDP, and Preliminary Business Investment data.

Although the focus in Europe remains on the continuing negotiations between Greece and the EU, there has been some data released worth mentioning. The German ZEW Economic Sentiment index jumped to its best reading in 12 months at 53.0, while the Euro-wide index also improved to a level of 52.7. The improvement is likely as a result of the recent announcement by the ECB to undertake quantitative easing which has lifted optimism somewhat. Unfortunately the Greek situation has the potential to undo any gains if a deal isn’t reached soon. Neither side wants go through the extremely messy divorce of a Greek exit, but it seems they will continue to play this game of ‘chicken’ right up until the last moment. Still to come this week we have the very first ECB minutes, which are due to be published tonight, then manufacturing and service PMI data hits the wires on Friday night. Next week we get the German IFO Business Climate Index, details of the latest targeted LTRO (ECB long term lending to banks), along with German inflation data.  

Japanese GDP released on Monday was softer than forecast, although it did show the economy escaped from recession by growing 0.6% in the fourth quarter. The market was expecting a result of 0.9%. Yesterday the Bank of Japan released their latest Monetary Policy Statement. There was no change in policy with the bank maintaining its unprecedented monetary stimulus in an effort to stoke an economic recovery and boost inflation. Governor Kuroda believes exports will continue a moderate recovery on the back of global growth and a weak yen. He also said conditions are good for salaries to rise and that inflation expectations are rising over the long term view. Although a lot of economists are forecasting the Bank of Japan will have to expand stimulus by the end of October to help achieve their inflation target, there has been talk lately that the bank are mindful of the downside effects of more QE. Next week we get the BOJ minutes, household spending data, inflation, industrial production, and retails sales figures.

The only release of note so far this week from Canada has been Wholesale Sales data that far outpaced expectation. The December reading of +2.5% was the biggest jump since January 2011, and took the value of wholesale sales to the highest reading since records began in 1993. The market was expecting a reading of just +0.4%, which would have only just reversed the previous months -0.3% decline. The auto sector led the way with gains of 9.0%, but most other sectors also posted gains. This was a very good result and comes hot on the heels of last week’s strong manufacturing sales data. Tonight we get Retail Sales with current expectations centred around a decline of -0.7%. The only data next week is that of inflation set for release on Friday.