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Economies of Note - 1st May

Written by Ian Dobbs on May 1st, 2015.      0 comments

It has been a relatively quiet week in terms of economic releases from Australia. We did see import prices come in much weaker than expected at -0.2% and private sector credit come in as forecast at 0.5%, but neither of them had much lasting market impact. RBA Governor Stevens delivered a speech on Tuesday, but he specifically refused to comment on monetary policy ahead of next week’s interest rate meeting. That meeting should prove very interesting with many economists still calling for a 0.25% cut from the RBA. The rest of the market isn’t so sure and it’s probably close to a 50/50 call. Iron ore prices have continued to rebound this week and that will make pleasant reading for the central bank. It has certainly helped to underpin the Australian dollar that has made significant gains over the past five days. The currency eventually saw some pressure last night after an article in the Sydney Morning Herald was published that said the central bank will be cutting rates next week. Along with the RBA rate statement next week we get data on building approvals, the trade balance, retail sales and employment change.

New Zealand
Although the main focus this week in New Zealand was on the RBNZ rate statement which hit the wires yesterday, there were a couple of other releases worth noting. NZ’s trade balance for March saw a strong rebound from the prior months disappointment. The trade surplus of 631m was double the expectation of 315m. Digging into the detail of the report showed exports to China declined for the seventh straight month and are now down 29% from a year earlier. This saw China slip back into second place in terms of our biggest export market, with Australia once again number one. Fonterra announced a cut to is forecast milk pay-out of 20 cents taking to NZ$4.50/kg. Fonterra said the cut reflected the continuing and significant volatility in dairy prices caused by over-supply in the market. This put a little bit of pressure in the NZD which then saw further losses after the release of the RBNZ’s monetary policy announcement. The bank left interest rates unchanged and largely repeated the tone of Deputy Governor McDermott’s speech last week. They said they are not considering a rate increase and that it would be appropriate to lower the cash rate if demand weakens. They added the NZ dollar continues to be unjustifiably high and unsustainable in terms of NZ’s long-term economic fundamentals. The bank is clearly on the ‘dovish’ side of neutral, and although a rate cut this year is not out of the question, it is however unlikely. Next week to draw focus we have another dairy auction from Fonterra along with employment data.

United States
The USD remained under a fair amount of pressure for much of this week and was only saved further damage by the Federal Reserve’s monetary policy announcement out early yesterday morning. In the lead up to that statement there were two critical data releases that were both very soft. On Tuesday we saw the CB Consumer Confidence Index released and it fell sharply from 101.4 to 95.2. The market was expecting a small increase to 102.6. Then on Wednesday we got the advance reading of first quarter GDP and it was a shocker coming in at 0.2% versus 1.0% expected. Digging deeper into the detail didn’t help the picture at all either. There was a massive inventory build in the first quarter which will provide something of a hangover on growth going forward. If you stripped out the effects of that inventory build, first quarter growth was well into negative territory. The commerce Dept said US growth slowed due to the strong dollar, severe weather, west coast port dispute and lower energy prices. The Fed believe that this slowing in growth over the winter months is largely due to transitory factors and that growth will bounce back in the second and third quarters, much like what happened in 2014. Their rate statement was reasonably optimistic and they certainly didn’t come across as overly concerned about the poor economic data of the first quarter. There was nothing in the statement to rule out a June interest rate hike, although it still seems unlikely. The FOMC said it will raise interest rates when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. A bounce back from the very poor start to 2015 will almost definitely happen, the question is will it be strong enough to see the Fed pull the trigger on the first rate hike in eight years. The severe weather and industrial action are most certainly ‘transitory factors’ but the impact of the stronger dollar and the massive overhang of inventories will linger for a lot longer. The months ahead will prove very interesting as the market tries to gauge the underlying strength of the US economy. Expectations at this stage are centred around a rate hike in September, or potentially December. Still to come this week we have ISM manufacturing PMI data out tonight. Next week we get the factory orders, the trade balance, non-manufacturing PMI, and non-farm payrolls numbers.

United Kingdom
The UK released preliminary GDP data for the first quarter on Tuesday night and it didn’t make great reading. Growth of 0.3% was significantly weaker than the forecast of 0.5% and half the prior quarters 0.6%. A fall in oil prices led to an unsurprising slide in oil and gas output, but weakness in other areas is largely unexplained. Services output for one was down significantly driven lower by the business and financial sector. There is some real debate about whether this soft figure is an aberration, or a sign of a weakening trend. We may have to wait for revisions to the number over coming weeks before the picture becomes clearer. One thing's for sure, it’s not the sort of result the current government wanted to see less than two weeks out from an general election. We have manufacturing PMI data to digest this evening, then next week

We have seen a very mixed bag of data from Europe this week. German retail sales and unemployment change were both weaker than expected, but were countered by a stronger than forecast German inflation reading. Eurozone economic sentiment fell a touch in April, but the inflation expectations component has made a sharp recovery from -0.8 prior to +0.7. The ECB put a lot of weight on inflation expectations so this data will give them some comfort. Overall Eurozone employment remains unchanged at 11.3% and Eurozone inflation also remained steady at 0.0% for the headline, and 0.6% for the core rate. Next week to draw focus we have manufacturing and service PMI data, retail sales, industrial production and German factory orders.

In terms of data this week from Japan we have seen disappointing retails sales numbers and better than forecast industrial production figures. The main focus was however on the Bank of Japan (BOJ) and their monetary policy statement released yesterday. The bank made no change to policy settings with and 8 - 1 vote. One board member has voted to taper government bond purchases, but he was turned down by the majority. The bank says considerable uncertainty exists on the outlook for prices, but they expect inflation to hit their 2% target in the first half of 2016. The believe prices are steadily improving although they won’t hesitate to adjust policy if needed. Later today from Japan we have household spending, inflation and employment data to digest. Next week is looking very light with on the BOJ minutes of any note.

Canadian GDP data for February hit the wires last night and it showed the economy remained stalled as the severe slowdown in the energy sector was compounded by freezing winter conditions. The 0.0% result was expected after January’s -0.2% reading and the Bank of Canada has previously conceded that the first quarter of this year will be ‘atrocious’ data wise. They are much more optimistic about growth going forward however, and believe the low Canadian dollar will help parts of the economy such as the manufacturing sector. Governor Poloz is due to speak again tonight and then next week we get the trade balance, Ivey PMI, building permits and employment data.