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Economies of Note - 19th March

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

The Reserve Bank of Australia’s (RBA) minutes released on Tuesday afternoon largely reflected market expectation for another rate cut in the coming months. The central bank considered a rate cut at its last meeting, but decided to pause to see more economic data. They believe the labour market will remain sluggish with spare capacity to last for some time. Board members “were of the view that a case to ease policy further might emerge”. The Australian dollar saw some pressure in the wake of the release. Somewhat more positively, yesterday saw the release of the leading index for February. This came in at +0.3% which is up from the prior +0.1% result. It marks the first above trend reading since January 2014 and suggests the economy could start to regain some momentum later this year. We have a speech from RBA Governor Stevens set for release tomorrow, then next week looks rather quiet with only the RBA Financial Stability Review of any note.

New Zealand
There have only been two releases of note from New Zealand this week. The first was Fonterra’s latest dairy auction which was very disappointing with the average price falling 8.8%. Whole milk powder dropped by even more coming in down 9.6%, and is now well below the USD3,500 level required to guarantee the $4.70 per kg forecasted pay-out. There were a number of factors driving the decline, but most forecasters agree the 1080 poisoning threat played little part. The New Zealand dollar reacted negatively to the dairy price news losing significant ground across the board. In the past few hours we have seen GDP data come in bang on expectation at 0.8% for the quarter. The previous quarter’s number was revised down from 1.0% to 0.9%. The market impact from this was marginal. Next week will be another quiet one domestically with only consumer sentiment and the trade balance set for release.

United States
This week was always going to be about the Fed, and how the recent run of soft data, payrolls not included, has impacted their current assessment of the economy. Although the Fed removed the word ‘patient’ from their statement, which is an indication interest rates could be raised at any upcoming meeting, the overall tone of the statement suggests they have taken a big step back from a potential interest rate hike in June. A lot of the other language used in this statement show’s a significant downgrade in their assessment of the current economic conditions. Fed Chair Yellen also specifically mentioned that the strong USD is pushing down inflation and is one factor in the growth downgrade for this year. The Fed has now moved away from trying to provide any ‘forward guidance’ on interest rates, and it’s down to economic data on a month by month basis as to whether they hike or not. Apart from employment figures, recent data has not been strong enough to suggest a June increase. The reaction in the foreign exchange market was swift, with the USD seeing across the board pressure. Some of the currency moves boarded on ‘disorderly’ but the market has since calmed down. It seems the long term trend toward a stronger USD will be taking an extended pause. The market will now want to see an improvement in a broad range of economic indicators before betting on further USD strength. Tonight we have the Philly Fed manufacturing index to digest, then next week we get inflation data, new home sales, durable goods orders, and the final reading of GDP.

United Kingdom
The UK pound has been seeing a fair amount of pressure recently, although economic data hasn’t been all that bad. Last night the UK released employment data and although the claimant count (unemployment claims) dropped by a touch more than forecast, the GBP saw further pressure. This was because the market chose to focus on wage data which did disappoint. Average earnings rose by just 1.8% vs 2.2% expected. Any potential turn around in inflation could be a long way off without an increase in wage pressure. Also out last night was the Bank of England (BOE) minutes which showed the vote to keep interest rates on hold was maintained at 9-0. The bank believes that divergent monetary policy could put upward pressure on the UK pound and that this could prolong below target inflation expectations. Tonight we have the government's annual budget release to digest, then next week we get inflation and retail sales data.

Data out of Europe this week has been consistent with a slight improvement in the economic outlook. Although the German ZEW economic sentiment index came in below expectation, it did still improve from the previous month and the current conditions component was much stronger the forecast. The Eurozone ZEW economic sentiment reading was also much better than forecast jumping to 62.4 from a prior reading of 52.7. The final reading of core inflation also came in a touch better than expectation at 0.7% year on year, up from the previous 0.6%. Tonight’s EU economic summit should provide some interest, with plenty of focus likely on Greece. The Greeks continue to isolate themselves and patience within the EU is wearing thin. The IMF, one of Greece’s main three creditors, is reported to have called Greece “the most unhelpful client” they have dealt with in their 70-year history. Next week we get manufacturing and service sector PMI data, along with the German IFO business climate index.

The Bank of Japan (BOJ) released their Monetary Policy Statement on Tuesday afternoon. There was little of interest in the statement with the bank repeating a number of well used phrases. The BOJ believes Japan’s economy continues to recover moderately as a trend, and that easing’s are having the intended effect. Although they see inflation falling to 0% for a time due to oil, they believe inflation expectations still appear to be rising on the whole from a long-term perspective. They also believe the weak Yen is helping exports and consumers are becoming more optimistic. Trade balance data released yesterday show the trade deficit nearly halved year on year in February. This was largely thanks to lower oil prices reducing the cost of imports, and analysts say Japan could even achieve a surplus soon. Governor Kuroda is set to speak this weekend, then next week we have household spending, inflation, and retail sales data to draw focus.

The Canadian dollar has suffered on the back of further declines in oil prices recently, and data this week on manufacturing and wholesale sales didn’t help the situation. Both data releases were down on the prior readings and well below expectation. Wholesale sales, which previously posted the biggest gain since 2009 at 2.8%, came in down 3.1% which is now the biggest fall in six years. Declining auto sales had a big impact. We still have some key data to come this week with inflation and retails numbers set for release tomorrow. Those two results will set the tone for next week, with little else of note scheduled for release.