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Economies of Note - 1st july

Written by Ian Dobbs on July 1st, 2016.      0 comments

Risk appetite linked to the mood of the offshore financial markets has once again played the critical role in the performance of the AUD this week. Large falls in global equities on Friday and Monday reversed in trade this week as sentiment rebounded as global central bank’s moved to restore confidence in the wake of Friday’s UK EU exit vote. As with all the currencies covered, the data wrap in Australia this week has played second fiddle to the sentiment on global markets. HIA new home sales followed last month’s fall with a similar sized decline, whilst new credit issued to consumers and businesses in Australia rose less than expectations after growth eased 0.1% from last month’s result. Focus now turns to this weekend’s federal election where current opinion polls point to a tight race. Betting odds favour a Liberal-National Coalition win, although the election result is unlikely to have an impact on monetary policy.

New Zealand
Confidence which has returned to global markets this week comes on the back of the heavy falls seen in global equities in the days after the UK’s surprise decision to leave the EU on Friday. Pledges from central banks around the world to keep liquidity flowing into the market in the wake of the referendum has helped stem the blood loss. This comes as European stocks capped a three day rally of 6.8% and the UK’s FTSE 100 erased its post-Brexit losses to return to highs not seen since August last year. The improved sentiment has helped the ‘risk’ currencies retrace much of Friday’s plunge in trade during the week. NZ data this week which started with trade numbers for May on Monday has had little impact in light of the events offshore. The trade data posted a small lift from the month prior, this was the 5th consecutive monthly increase as non-dairy exports boosted the result. Building consents numbers yesterday slipped from the month prior, although business confidence in June was seen reaching six-month highs according to the ANZ’s survey released yesterday. Once again the construction and tourism sectors made key contributions to the lift in confidence. Heading into next week expect the performance of international financial markets to once again determine the fate for the NZD.

United States
Volatility in financial markets has remained high this week in the aftermath of the UK decision to leave the EU. Continued uncertainty across the Atlantic and the resultant pressure on the GBP and EUR has seen the USD retain a large portion of its post Brexit gains. This played out despite the improvement in sentiment which has driven global equities and ‘risk’ currencies higher since Monday’s lows. Despite improving confidence market pricing has now removed any prospect of a Fed move up in rates until 2018. Economic data out of the US this week has been mixed. Negative reads included data on the latest services PMI, Dallas Fed manufacturing index, May trade, pending home sales and real consumer spending (Q1). Consumer confidence hit an eight month high however in June, as improving asset prices bolstered both the present and expectations series. This came alongside an upwards revision to the Q1 GDP data, better than expected Chicago PMI and dip in continuing jobless claims which helped balance the incoming data flow.

United Kingdom
Friday’s decision by UK voters to leave the EU has continued to heap pressure on the GBP this week. Respite for the local currency noted earlier in the week was helped after moves by the BoE to inject liquidity into the financial system. The gains proved short lived after BoE Governor Mark Carney indicated yesterday that further policy easing will likely be required over the (northern) summer given the deteriorating UK economic outlook. The political landscape in the UK remains fractured after Friday’s Brexit vote. This as the Conservative party copes with the looming departure of PM Cameron and exit of pro-Brexit campaigner Boris Johnson from the leadership race, whilst in opposition the Labour party has seen more than 50 team members resign and its leader Jeremy Corbyn overwhelmingly lose a vote of no-confidence. The turmoil has had little impact on UK equities however, which has seen the FTSE 100 regain all of its Brexit inspired losses as it reached levels last seen in August last year. Economic data out of the UK this week included yesterday’s Q1 GDP report which showed the economy growing in line with expectations at 2% y/y, a number which was unchanged from the prior estimate. Credit data included a rise in mortgage approvals and mortgage lending for May, whilst net lending to individuals also rose from the month prior as all three releases exceeded their consensus. Look for Brexit sentiment to drive again next week. Data on the immediate horizon includes PMI manufacturing numbers today.

Discussion on the UK’s decision to leave the EU on Friday has continued to dominate events in Europe this week. The talk comes as many senior EU leaders push for the UK to notify the EU formally of its exit and begin its talks promptly in a bid to prevent prolonging the economic uncertainty that will linger over the continent while the negotiations take place. Sources have indicated that the ECB was considering weighing looser rules for QE as concerns mount that the Brexit will deplete the pool of assets available for purchase whilst ECB President Draghi warned that the EU growth could be reduced by up to 0.5% over the next three years given Britain’s decision to leave the EU. Data released out of Europe this week has had little consequence on proceedings. German retail sales beat expectations in May, whilst unemployment in Europe’s largest economy declined by more than expectations in June. Preliminary inflation numbers across the euro-zone were seen coming in slightly higher than the consensus for the same month. Manufacturing data will round out the week later today, although once again it will be political news from Europe that looks most likely to drive the Euro into the week’s end.

Improving confidence helped by the provision of central bank liquidity and the reality that the UK’s exit from the EU will play out over a prolonged period helped global equities and risk sentiment lift over the course of the week. Waning ‘safe haven’ flow on the back of the improving sentiment has pushed the Yen lower (against the USD) during trade this week. However, the relative strength of the Yen overall has helped limit the bounce in Japanese equities to 4.8% from the post-Brexit lows (Nikkei 225). Strength in the Yen this year has been one of the key determinants in the poor performance of Japanese stocks which have declined 18.2% year to date (US S&P 500 +1.3%). Data this week out of Japan which had no bearing on proceedings was to be expected given the gravity of the shifting offshore sentiment. Retail sales fell by more than expected in the month of May, whilst preliminary industrial production figures for the same month released yesterday posted a disappointing result after the contraction greatly exceeded expectations. On a positive note the lower tier housing starts and construction orders numbers both exceeded their consensus as did the large manufacturers Tankan index this morning.

Volatility in international markets which has swung from sharply negative after Friday’s Brexit news to more positive over the course of the week has helped the Canadian dollar stabilize against the USD in recent trade. Oil prices rebounded from their Brexit lows helped in part by a bullish inventory report earlier in the week which saw US commercial crude inventories fall by a larger than expected 4.05M in the week to June 24. Data out of Canada this week was dominated by yesterday’s April GDP report which rose in line with forecasts as Canada’s economy expanded for the first time in two months. Raw material prices increased by 6.7% in the month of May, more than the 5% expectation and well up on last month’s small rise. Data next week starts with RBC manufacturing PMI numbers on Monday, although again expect offshore sentiment and oil price volatility to have significant bearing.