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Economies of note - 19th July

Written by Ian Dobbs on July 19th, 2013.      0 comments

The big news for this week in Australia was the release of the RBA minutes. These seemed to reduce the chance of a near term cut from the bank, as they view current policy as appropriate. With the effects of previous cuts and the weaker currency still flowing into the economy, it seems the bank is willing to take a wait and see approach. The market is currently pricing in around at 50% chance of a cut at the August meeting. The Australian dollar gained support from the reduced expectation of a cut, and made some decent gains against the USD. Yesterday we had the release of business confidence data which came in somewhat below expectation. This saw some sellers reemerge and push the currency back below 0.9200 against the USD. The only data of note next week will be inflation figures on Wednesday.

New Zealand
There has been little in the way of fundamental economic data out of New Zealand this week that has had any real impact. We did get inflation figures on Tuesday, but the numbers were very benign and there was little reaction. There was some positive news for dairy farmers with another strong global dairy trade (GDT) auction. The healthy prices will combine with a lower NZD to keep Fonterra’s expected payout looking solid going forward. Next week we have trade data and the Reserve Bank of New Zealand (RBNZ) rate decision to look forward to.

United States
It’s been a mixed bag on the data front this week for the US. Some surprisingly soft numbers from retail sales and housing starts, countered by better than expected industrial production data. But the focus for the week was always on Bernanke’s semi-annual testimony on the economy. After the mixed messages from the FED and resulting volatility of the past two weeks, the market was keen to hear what the Fed president had to say. He certainly tried to calm the market by saying the pace of bond buying (QE) is not on a preset course, and that highly accommodative monetary policy is still appropriate. Basically any tapering of QE is still data dependant, and even when the purchases stop altogether it will be a long time before cash rate hikes are even on the horizon. Overall though, the Fed still sees the economy expanding at a modest to moderate pace and a reduction of QE purchases at the September meeting is still likely. The USD suffered as a result of the slightly softer tone from Bernanke, but little has really changed and there will be plenty of buyers on bouts of weakness. Next week the focus will be on home sales data and durable goods numbers.

There hasn’t been a huge amount of data to trade off from Europe this week. Softer than expected economic sentiment numbers out of Germany were countered somewhat by better trade figures. Inflation came in bang on expectation and is of no concern to the ECB at the moment. The Euro currency itself has remains reasonably well supported in the face of continued concern over some of the peripheral nations. Portugal seems to be entering the now familiar austerity death spiral. The central bank has lowered its GDP growth forecasts for 2014 to 0.3% from 1.1%. This is the result of austerity, and Greece can attest to, will no doubt lead to the need for more austerity. Next week we get readings on the manufacturing and service sectors, as well as consumer confidence and the German business climate index.

United Kingdom
It’s been a very interesting week for the UK. On Tuesday we had inflation data that would have seen the new Bank of England (BOE) governor Mark Carney breathing a sigh of relief. It came in a little under expectation and just below the 3% annual level, above which Carney would have had to write a letter to the chancellor of the exchequer explaining why inflation was so high. The 2.9% result is still bad news for the work force who have at best been seeing wages increase at half that speed for the last four years. But the real highlight of the week has been the minutes from the last BOE policy meeting. This was the first one Carney had chaired and many had expected him to vote for more quantitative easing, as his predecessor Mervyn King had been doing. For a number of months now King and two others had been voting to increase the programme, but the other six members of the monetary policy committee had been voting against it. So the market was expecting another 6-3 result. This was not the case however as not only did Carny vote for no change in QE, he managed to talk the others to vote the same way. So a 9-0 result and one that caught the market by surprise. Although this doesn’t rule out more QE in the future, it makes it very very unlikely. It seems the MPC are happy to use forward guidance in place of further QE and we will be given more details on this at the August meeting. The GBP got an instant shot in the arm from the shock voting result and made gains across the board. The result should continue to lend support to the currency in the near term. The UK has also had out decent employment data showing the number of employed has increased and the unemployment rate has fallen 0.2% to 7.8%. None of this seems to have impressed the IMF who this week said the UK economy remains a long way from a sustainable recovery. That may be true, but UK is certainly heading in the right direction.

It’s been a very quiet week for economic news out of Japan with the only release of note being the minutes from the last Bank of Japan (BOJ) meeting. They held no real surprises with the bank saying they will continue to keep conditions very stimulatory until inflation hits target. The BOJ is optimistic the economy will return to a moderate path of recovery. Next week we get trade data and inflation figures to digest.

The focus this week for Canada has been on the Bank of Canada (BOC) interest rate decision and accompanying statement. The market had been expecting a cash rate hike later this year, but governor Poloz put pay to that with a much softer tone than expected. He made it clear that nothing will be happening with Canadian rates soon, and that the current stimulatory monetary policy is appropriate. The CAD weakened sharply afterwards as the market repriced the risk of potential hikes. There is now very little expectation of any hike in the next 12 months. The only data out next week is retail sales figures released early Wednesday morning.