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Economies of Note - 19th December

Written by Ian Dobbs on December 19th, 2014.      0 comments

Domestic releases from Australia this week have had little impact on the economic outlook or the Australian dollar. The currency has continued to be influenced by volatility in commodity prices and offshore releases. Data out of China showed their factory activity actually shrank in December for the first time seven months, while in the US the Fed moved a step closer, albeit only a small step, to hiking interest rates. The RBA’s minutes showed they are firmly on hold policy wise, although the central bank have acknowledged the increasing market expectation for interest rate cuts next year. With the holiday period now well upon us there is little data of significance set for release from Australia until the first week in January. This doesn’t necessarily mean quiet markets however, and with so much going on in the world at the moment the reduced market liquidity can easily result in much bigger swings in price action that would otherwise be seen. The Australian dollar could be particularly vulnerable over the period.

New Zealand
The two key releases from New Zealand this week have both been a touch stronger than expected. Fonterra, and dairy farmers in general, will have been happy to see a small rise in prices after the latest dairy auction. Although the 2.4% increase is only a drop in the bucket compared to the declines seen this year, it is welcome news and provides a glimmer of hope for a broader recovery heading into next year. Yesterday we saw GDP data for the third quarter and this was a very good number. GDP printed at +1.0% versus expectations of +0.7%, with growth driven by primary industries which increased 5.8%. This is some of the strongest growth in primary industries in 15 years. We have trade balance data set for release next week and then there is little to get excited about until Fonterra’s next auction on January 7th.

United States
The two key releases from the United States this week were the inflation data and the FOMC statement. Somewhat unsurprisingly, inflation came in on the soft side driven lower by declining oil prices. Month on month inflation was -0.3% versus expectation of -0.1%. While year on year inflation is now running at 1.3% versus expectation of 1.4%. The core result, which strips out volatile food and energy was bang on expectation at +0.1%. In the rate statement released yesterday morning Fed acknowledged the lower inflation outcome and said even if it spills over into the core number, they see it as transitory, and the net effect of declining oil prices is positive for the economy. The Fed did remove the call for a ‘considerable time’ between the end of QE and rate hikes, preferring instead to say they will be patient before tightening. This is straight out of the play book from 2004 when the Fed hiked exactly six months after making a similar change in wording. Of considerable note in the statement was the lack of reference to current market turmoil or the weakening global growth outlook. Next week ahead of Christmas we get durable goods orders, final GDP and new home sales.

United Kingdom
The Bank of England (BOE) this week released the results of stress test conducted on the UK’s banks which showed a resounding pass mark even after severe stress. The Co-operative Bank was the only one to fall below the 4.5% capital threshold, but the BOE have since accepted their revised capital plan. UK inflation also hit the wires and it printed at the lowest level since 2002. Year on year inflation is now running at 1.0% versus expectations of 1.2%. The softer result was driven by declining oil prices and therefore not entirely surprising. Like most other central banks the BOE view declining oil prices as a positive for consumers and this should boost economic growth to a degree going forward. UK employment data was also released this week and it showed the claimant count (unemployment claims) declined by more than forecast at -26.9k. The unemployment rate was a little disappointing remaining at 6.0% against expectations for a small fall to 5.9%. Somewhat more positively though was the average weekly earnings data which jumped 1.4% from the prior reading of 1.0%. Rising wages are exactly what the Bank of England wants to see before they start hiking rates. The BOE minutes suggested just that when they hit the wires on Wednesday night. They also showed the voting pattern was the same as previously with 7 votes for unchanged rates and 2 votes for a hike. Last night’s retail sales figures we encouraging coming in much stronger than forecast. Sales for the month of November were up 1.6% versus 0.4% expected. Current account figures next week and manufacturing PMI on 2nd January are the data highlights over the Christmas / New Year period.

Eurozone manufacturing and service sector PMI’s this week both came in a touch stronger than expected which will have pleased the ECB. We even saw German ZEW economic sentiment improve more than forecast, although participants inflation expectations remain very low. The first round of Greek presidential voting took place and the president failed to reach the required level. There will be more voting between now and December 29th and if hasn’t achieved the required threshold by then the county will go to full elections sometime in late January or early February. With the anti-bailout Syriza party currently leading on the polls this could really shake things up in the New Year. Last night’s release of German IFO business climate index came in bang on expectation at 105.5. This is also a small improvement over the prior reading. There is a raft of second tier data scheduled for release between now and January 4th which should have only limited impact.

The only release of note this week from Japan was the Tankan report which hit the wires on Monday. The non-manufacturing index improved a touch, but the manufacturing index declined further. There was also a notable divergence between large and small firms, with the smaller firm much more pessimistic. The Japanese trade balance was released on Wednesday and it remained negative of the 29th consecutive month. The monthly deficit was less than expected however, thanks to the declining price of crude oil imports. We have the Bank of Japan (BOJ) monetary policy statement out later this afternoon, although no change in policy stance is expected. There is also plenty out next week with the BOJ minutes, household spending, inflation, industrial production, retail sales and average cash earnings all set for release.

We have seen a couple of releases from Canada this week that both came in below expectation. Manufacturing sales and wholesale sales both disappointed, which didn’t help the Canadian dollar that has been at the mercy of volatility in oil prices. Tonight we get inflation and retail sales data and as is the case in most other countries at the moment, the risks for inflation are on the downside thanks to weakness in the price of oil. Headline inflation is expected to fall 0.2% m/m while the core reading should come in at +0.1%. Retail sales are also expected to decline this month, by -0.4%, after posting a +0.8% gain last month. The only release next week is GDP out on Tuesday night.