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Economies of Note - 19th November

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

Data from Australia this week has mostly been a second tier affair and as such it has had little overall impact on the market. For the record, we saw softer than expected new motor vehicle sales figures, while the wage price index came in bang on expectation at +0.6%. The highlight of the week was the release of the minutes from the last Reserve Bank of Australia (RBA) meeting. Although they said that subdued inflation may afford some scope for further easing of policy, the overall takeaway was very balanced and this suggests the central bank are comfortably ‘on hold’ for the foreseeable future. The minutes said that very low interest rates are supporting household consumption and this will add significantly to demand in the next two years. They also noted that employment growth is stronger than expected and although recent mortgage rate rises have lessened policy support slightly, conditions are still accommodative overall. The biggest impact on the Australian dollar this past week has come from further declines in commodity prices. Many commodities look like they are heading back to recent lows and this is weighing on the basket of commodity currencies. Next week we have data on construction work done and private capital expenditure to digest, along with Treasury’s mid-year economic and fiscal outlook.

New Zealand
The New Zealand dollar has lost ground this week weighed on by broad based weakness in commodity prices. Tuesday night’s dairy auction in particular saw a significant fall in the price of whole milk powder, down 11%, while the overall index declined by 7.9%. This completely outweighed Fonterra’s earlier announcement that they are increasing their forecasted earnings per share for the current financial year to 45-55 cents. It’s looking increasingly likely that dairy farmers will face a second season of sub $5.00 per kg pay-outs and therefore many will see continued negative cash flow. Other data of note this week includes retail sales that came in stronger than expected printing at +1.6% for the quarter. Ten out of the fifteen retail industries had higher seasonally adjusted sales volumes. We also saw 2yr inflation expectations decline a touch to 1.85% from 1.94% prior. Next week looks like a quiet one on the data front with just the trade balance of any note.

United States
Data from the Unites States this week has in general been a little softer than forecast, although not soft enough to raise any real doubts about a December Fed tightening. Key inflation data did come in pretty much on expectation at +0.2% month on month and this will be of some relief to the Fed as it may well signal a stabilization in prices after a recent downward spiral.  The Empire State manufacturing index, industrial production, and housing starts all printed below expectation. Earlier this morning we had the release of the Fed minutes and these certainly signalled the door is open for a December interest rate hike. There is still a range of views within the Fed and recent oil price declines will raise questions about the future path of inflation. However, barring any major shocks the Fed is likely to pull the trigger on the first interest rate hike in nearly 10 years next month. At this stage the market is pricing in around a 70% chance of exactly that. This is providing continued broad based support for the US dollar. Data next week to draw focus includes preliminary GDP, CB consumer confidence, durable goods orders, personal spending and new home sales.

United Kingdom
The only release of note so far this week from the United Kingdom was inflation data that hit the wires on Tuesday evening. The term “noflation” has been coined to describe the UK’s situation for much of this year and Tuesday’s data largely confirmed that. Month on month inflation rose 0.1% but year on year inflation is running at -0.1%. The GBP did however, find some support from the core inflation reading, which strips out volatile food and energy. It printed a touch stronger than forecast at +1.1% year on year, up from 1.0% prior. The Bank of England (BOE) believe inflation will stay low until at least the second half of 2016 before gradually beginning to rise. The one part of the UK economy that is certainly seeing price gains is the housing market. House prices rose by 6.1% year on year in October according to the Office for National Statistics. That is up from 5.5% y/y in August. Tonight we have retail sales data to digest and the market is expecting a decline of 0.4%, partially reversing the very strong prior reading of +1.9%. The week is rounded out with public sector net borrowing figures tomorrow night. Next week to draw focus we have the inflation report hearings, a speech from Governor Carney and the second estimate of GDP.

Although the fallout from the weekend's terrorist attack in Paris remains front page news, there has been some economic data worth noting. Eurozone inflation came in a touch stronger than expected at 0.1%, with the core reading printing at 1.1%. The market had been expecting a reading of flat for the headline and 1.0% for the core rate. Although it would have come as a welcome surprise to the ECB it is certainly not strong enough to impact their current thinking. President Draghi has clearly signalled that they will take a look at further monetary policy options at their December meeting. Many in the market are expecting them to ease further and this is keeping the Euro on the back foot. ZEW economic sentiment readings for Germany improved to 10.4 from 6.7 prior, while the broader Eurozone reading declined to 28.3 from 35.2 prior. We have the ECB meeting minutes set for release tomorrow night along with a speech from Draghi. Next week sees manufacturing and service sector PMI’s hit the wires along with the German IFO business climate index.

GDP data from Japan on Monday confirmed what many had expected. That is that Japan entered back into technical recession in the third quarter. Preliminary GDP printed at -0.2% q/q which was worse than the -0.1% expected. This comes on the back of the second quarters -0.2% result and it will certainly make for some interesting discussion at today’s Bank of Japan (BOJ) policy meeting. The market isn’t expecting any further action from the BOJ at this stage and that’s partially because some of the detail in the GDP report paints a slightly better picture. The decline in GDP was driven by falling business inventories and weak investment, but consumer spending was more robust. The drop in inventories suggest companies are clearing stockpiles and this coupled with increasing consumer spending means they may well need to increase output over the coming months. The BOJ are certainly capable of delivering a surprise however, and so all eyes will be on the statement released later this afternoon. Next week we have the BOJ minutes, retail sales, household spending and inflation data to digest.

There has been little of note released from Canada so far this week. Only manufacturing sales data would have drawn any interest and it came in at a disappointing -1.5%. The market was expecting a reading of +0.3%. This obviously weighed on the Canadian dollar to a degree and further declines in oil prices are also not helping the currency. We get wholesale sales data tomorrow night along with inflation and retail sales figures. Those releases will set the tone heading into next week which looks to be a very quiet one data wise with only the raw material price index of any note, albeit of limited impact at the best of times.