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Economies of Note - 19th September

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

The only release of note this week from Australia was the RBA minutes which hit the wires on Tuesday. The minutes continue to support the view that the central bank remains on hold for the foreseeable future, with ongoing slack in the labour market and soft wages keeping a lid on any inflation pressure. However, they did highlight the risks around recent house price gains and they sounded a lot more concerned about this than previously. They said “Policy also needed to be cognisant of the risks to future growth that would accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage”. Recent house price gains have certainly been accompanied by an increase in leverage as investors are taking out a record proportion of new housing finance in Australia. This is obviously concerning the RBA and is something to watch over the coming months. China has also been a big focus this week with two announcements drawing attention. The first was a surprise move from the Peoples Bank of China (PBOC) to inject liquidity into their banking system. This action comes in response to recent poor data and some analysts suggest it’s roughly equivalent to a 50 basis point cut to the required reserve ratio. We have also seen an announcement from the Chinese government that they are tightening regulations around the importation of low grade coal. This will help Chinese domestic coal mines and could dramatically reduce imports, particularly from Australia. The rules are set to come into force in January 2015. Next week is a quiet one for data with only the leading index and the RBA financial stability review both out on Wednesday.

New Zealand
There have been two releases from New Zealand this week to draw focus. The first was Fonterra’s Global Dairy Trade Auction. Prices seem to have stabilized, at least for now, with the overall result unchanged from the previous auction. A sharp recovery in prices is unlikely anytime soon and Fonterra’s pay-out for 2014/15 will most probably end up somewhere below NZ$5.50. On a brighter note yesterday’s release of GDP for the second quarter came in a touch above expectation at 0.7%. The market was expecting a result of 0.6%. It seems the service sector was a big driver of growth with all 11 service industries increasing during the quarter. Overall services increased 1.4% which is the highest growth since the December 2006 quarter. This weekend’s G20 meetings will draw attention as will the NZ general election. We’re not expecting a huge reaction in the market to the election, unless it throws up some real surprises. Next week we just have consumer sentiment and the trade balance to draw focus.

United States
Data this week from the United States has been a bit of a mixed bag and its impact somewhat limited, with the market focusing instead on yesterday’s FOMC (Federal Open Market Committee) statement. Positive readings from the Empire State manufacturing index and the current account have been countered by weaker readings from inflation and industrial production. Headline inflation fell 0.2% versus expectations for +0.1%. The core inflation number came in flat and that marks the first time since 2010 it hasn’t risen. This data would have been negative for the USD except it came out only a few hours before the Fed statement and the market seemed keen on buying USD’s heading into that event. In the end that was the correct way to be positioned as the USD rallied further after the FOMC statement. Opinion is a little divided on just how much more ‘hawkish’ the statement actually was. For sure, the changes are subtle and the Fed continues to see a ‘considerable time’ between ending QE and starting rate hikes. But they have stressed they have flexibility to move faster if the economy warrants it, and they are now talking about exit strategies from this ultra-easy policy stance. Fed officials have also raised their median estimates for the benchmark Federal Funds rate to 1.375% at the end of 2015, up from a 1.125% forecast in June. The USD gained in the wake of the release and long term interest rates moved higher. Last night we saw weaker than expected readings from building permits and housing starts, but the numbers weren’t soft enough to raise concerns about housing at all. We also saw weekly unemployment claims drop significantly, which is a very positive sign for the employment market. We have the G20 meetings this weekend to draw focus, and next week from the US we get existing home sales, new home sales and durable goods orders data.

United Kingdom
This week has seen a number of key releases from the UK, but to be fair the majority of the focus has been on the Scottish independence referendum. That vote took place last night and the result is set to be released sometime early this evening Australasian time. The past week has seen the GBP move around a bit on various poll results, but the majority of them have predicted a small margin in favour of remaining part of the UK. Any other outcome will really throw a spanner in the works of the UK’s economic recovery and long term fiscal health. Data wise this week we saw inflation come in bang on expectation at 1.5%, although core inflation, which strips out volatile food and energy, did tick up a touch to 1.9%. The employment picture improved further with the claimant count (unemployment claims) falling 37.2k against expectations for a fall of 29.7k. The unemployment rate also dropped from 6.3% to 6.2% and average earnings were stronger than expected improving by 0.6%. The Bank of England (BOE) minutes held no surprises with another 7-2 vote in favour of keeping rates on hold and last night retail sales data came in bang on expectation at +0.4%. Next week’s economic calendar looks a little lighter with just mortgage approvals, public sector net borrowing, the Nationwide house price index and CBI realized sales set for release.

The main focus this week in Europe was last nights targeted LTRO by the ECB. The ECB were offering four year funds at 0.15% to 382 eligible institutions and the market was expecting a take up of around 150 billion euros. Demand turned out to be a lot less than forecast with only 82.6 billion Euros taken. This is a poor result and somewhat concerning. Are banks not taking the funds because there is no demand for loans from businesses? Or do the banks fear there could be a stigma attached taking the cheap funds? For now the market is undecided on how to interpret the poor result and as such the EUR hasn’t come under much pressure. But a second round of targeted LTRO’s is set for December and another poor take up there will have ramifications. Earlier in the week we saw economic sentiment decline in the Eurozone as a whole, but improve in Germany. We also had the final reading of inflation across the Euro’s 18 countries and it remained unchanged at just 0.4%. The market was however, expecting a small decrease to 0.3%, so the result is somewhat positive. The G20 meetings this weekend will draw focus and next week from Europe we get manufacturing and service PMI’s, German IFO business climate index and consumer confidence.

It’s been a quiet week for Japanese data with only the trade balance of any note. That did come in better than expected at Y -948.5 billion, but it’s still a very big number and the 26th month of deficit in a row. Bank of Japan (BOJ) Governor Kuroda has been on the wires with a couple of speeches. He believes the economy is on course to reach its 2% inflation target and added the bank will continue with easing’s until 2% inflation is stable. He also said it is vital that Japan secures confidence in its fiscal consolidation. He doesn’t believe the currency moves are posing any problems for the Japanese economy. Next week is a quiet one with a bank holiday on Tuesday. The only release of note is inflation data out at the very end of the week.

The only data of note from Canada so far this week has been manufacturing sales that came in well above expectation. The +2.5% result was much higher than forecasts for a gain of just 1.1% and a big jump from last month’s +0.9%.  Bank of Canada (BOC) Governor Poloz has also been on the wires with something of a positive tone. He reiterated the bank’s current neutral stance but said a Canadian recover appears to be underway. He sees early signs of an export pickup and is cautiously optimistic about the future for exporters. We have further key data tonight in the form of core inflation and wholesale sales figures. The CAD has had a good week and could make further gains tonight if the data remains positive. Next week sees only retails sales data set for release on Tuesday.