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Economies of note - 1st November

Written by Ian Dobbs on November 1st, 2013.      0 comments

2:45pm (NZT)
RBA Governor Stevens spoke earlier in the week and his comment that “the level of the currency was not supported by fundamentals” saw the Australian dollar come under some pressure. But the currency has recovered some of the lost ground over the last couple of days on the back of decent new home sales data and very strong building consents numbers. The later was a real surprise coming in at +14.4% against expectation of +2.8%. It was also the third highest result in the last four years. There will be plenty to digest next week with retail sales, the RBA rate statement, trade balance, and employment data all set for release.

New Zealand
It has been an interesting week for the New Zealand economy. Moody’s rating agency caused some volatility on Wednesday when they revealed there had been discussion around cutting NZ’s AAA rating. Apparently NZ has the biggest investment gap for all the triple A rated countries and the current account deficit makes it vulnerable. The NZD fell on the headline, but eventually recovered. The RBNZ left rates unchanged at 2.5% yesterday and released a very balanced statement. The NZD rallied as traders focused on a warning from the bank that they don’t want to see persistent house price inflation compromise financial or price stability. However, the RBNZ also said the high exchange rate gives them room to be flexible as to the timing and magnitude of future interest rate increases. Over-all the statement has done little to change views and a rate hike in the first half of next year is on the cards. Following the RBNZ statement we got solid building consents data that come in close to last month at up 1.4%, and another very strong reading on business confidence. Next week’s calendar is pretty light with only employment data on Tuesday to focus on.

United States
The focus in the US this week was on the FOMC rate announcement and statement released early on Thursday morning. The statement was largely unchanged from previous ones although on balance it was considered to be a little more optimistic than the market had been expecting. This caused the USD to gain ground and stock and bonds to sell off a touch. Although the statement acknowledges a slowing in the pace of the housing recovery, it certainly doesn’t shut the door on a December tapering. Data between now and then would have to improve substantially though before anyone in the market seriously started pricing the risk of that in. To that extent in the last few days we have seen some mediocre private employment numbers that suggest next week's employment report will be another ho-hum affair. We have also seen the release of delayed inflation numbers for September which showed a very benign increase of 0.2%. The core number was even softer at 0.1%. This week we have also seen some weak retail sales data that was dragged down by a fall in auto sales. On a brighter note, the US Treasury Department released data showing the US deficit narrowed substantially in 2013. Although the deficit is still large at $680bln, it’s a lot better than last years $1,089bln, and is actually the smallest deficit in five years. Tonight we get the manufacturing index to digest and then next week the highlights will be non-manufacturing index, GDP, and the monthly employment report.

It has been a very interesting week for Europe and it’s economic outlook. Data over the past few weeks has been less than inspiring with most of it coming in on the soft side. Up until last night the Euro had ignored the weaker data and performed strongly, defying many predictions. But it seems a lot can change in the space of 24 hours and last night two key pieces of data acted as the straw to break the camel’s back. Eurozone unemployment rose from 12% to 12.2%, and inflation fell to just 0.7%. The ECB has previously said it sees the inflation risks as broadly balanced, but this last piece of data now says deflation is a very real threat. As a result we have seen forecasters rapidly changing their views. Economists who previously saw no change in rates until 2015 are now calling for a 25point cut next week. Expectations of another LTRO (long term refinancing operation- aimed at longer term interest rates) have also gained traction over the last few days, and it seems issues in Europe are once again going to take centre stage. Earlier in the week the EU’s Ollie Rehn was speaking in the US and was quoted as saying it’s ‘clearly premature’ to declare Europe's crisis over. He couldn’t have been more accurate. Greece and Troika officials (EU, IMF, and ECB) are once again facing off over the black hole in Greece's finances. Italy, which is literally too big to be saved by outside help, is struggling under the effects of austerity. Their debt to GDP ratio has risen 15 percentage points in 15 months (to 133%) because there is no growth. This is exactly what happened to Greece, with devastating consequences, yet the same medicine is being applied. German insistence on austerity when growth is desperately needed could prove fatal. There are however some bright spots. Spain saw retail sales data rise for the first time since June 2010 and their economy has officially emerged from a two year recession, growing 0.1% in the last three months. That will be a relief for the ECB who meet next week on Thursday to review monetary policy. All eyes will be on them to see what, if any, action they will take. Ahead of that we get readings on the manufacturing and service sectors, retails sales, and German industrial production.

United Kingdom
Data out of the UK this week has continued to support the on-going recovery. Some figures, like consumer confidence, have printed a touch under expectation, but looking at the bigger picture this just represents a tiny pullback in an otherwise strong uptrend, so the impact has been limited. House prices on the other hand continue to perform strongly up 1.0% in October against an expectation of a 0.7% gain. Tonight we get data on manufacturing which will be closely watched. And next week will be a big one with readings on the construction and service sectors followed by the Bank of England (BOE) interest rate meeting and statement.

For the most part the data out of Japan this week has supported the outlook for an improving economy. Household spending and retail sales were both strong numbers, and housing starts came in well above expectations. On the face of it, average cash earnings looked positive printing at a gain of 0.1%. But if you stripped out overtime and bonuses regular wages fell 0.3% in September, which marks the 16th straight month of decline. Japan may be succeeding in stoking inflation, but that won’t help in the long run if wages don’t keep pace. The Bank of Japan (BOJ) was upbeat on the economy in their monetary policy statement on Thursday while voting unanimously to keep policy unchanged. Next week is a light one for data, with the highlights being a speech from BOJ Governor Kuroda, and the minutes from the last BOJ meeting.

The Canadian dollar has been a poor performer over the past couple of months. A number of factors have led to this including falling oil prices, a slowing US economy and US government shutdown, and finally the Bank of Canada (BOC) moving away from a tightening bias to a more neutral stance. Earlier in the week we has some soft data on manufacturing prices paid and received, which is a lead indicator of inflation. This kept the CAD on the defensive, but in the last 48 hours the CAD has started to make a recovery. It may well have been the case that the CAD was too oversold, as markets love to push further than fundamentals justify. However, better than expected GDP last night certainly helped the case for recovery. The Canadian economy grew at 0.3% last month against an expectation of 0.2%. Next week we have building permits data, business diffusion index, housing starts, and employment numbers to digest.