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Economies of Note - 20th December

Written by Ian Dobbs on December 20th, 2013.      0 comments

There hasn’t been a lot of data released from Australia this week. We did get the Treasury’s mid-year economic and fiscal outlook (MYEFO) on Tuesday and it was a little gloomy. There were lower projections for GDP growth and these have resulted in substantially larger fiscal deficits. Moody’s rating agency came out and said although this would normally be somewhat credit negative, the low starting point for Australian government debt means they are comfortable maintaining the country's Aaa rating. On Wednesday we got comments from RBA Governor Stevens when he appeared before a parliamentary committee. He said the central bank has an open mind on whether further rate cuts are needed and that although they haven’t intervened in the currency, they still might do just that. However he wouldn’t want to signal it ahead of time. With the AUD making fresh cycle lows yesterday in the wake of the Fed announcement, intervention seems very unlikely.

New Zealand
All indications are that the New Zealand economy continues to gain momentum. 2014 is shaping up to be a good one for economic growth. Business confidence data released this week has highlighted that outlook coming in at 64.1 against an expectation of 60.5. Manufacturing confidence hit a 15 year high, services sector confidence is at its best level since 1999, and the agricultural sector is the most confident is has been since 1994. This was followed by GDP data released yesterday. The market was expecting a result of 1.1% for the third quarter, but the actual number came in at 1.4% (3.5% y/y). Growth was driven by the dairy sector that bounced back strongly from last summer's drought. The increase in agriculture has been the largest in more than 25 years as good whether helped boost production. Yesterday we also had the release of the trade balance for November. It came in at a surplus of $183 million, and is the first surplus for a November month since 1991. No surprises for guessing the sector that helped produce that result? There is no data out next week from New Zealand or in fact the week after that.

United States
Although the main focus this week was on the Fed meeting and policy statement released yesterday morning, there were some other data points worth noting. Industrial production was much stronger than expected and has now surpassed peak pre-recession levels, taking the index to a six year high. The current account deficit for the third quarter fell to its lowest level in four years, and as a percentage of GDP it’s now at the lowest level since 1998. Housing starts in November were up 22.7% which is the fastest growth since 1990 and the highest level since February 2008. Growth is increasing and unemployment is dropping. This is hardly the environment for the Fed to be running the ‘panic stations’ monetary policy that they have been. That policy being zero interest rates and printing $85bln a month in new money. Even with this as a backdrop, only about 40% of economists expected the Fed to reduce their money printing / asset purchases (QE) at their meeting on Thursday. That is an indication of how poor Fed communication has been for the last six months or so. But at the end of the day that is exactly what the Fed have decided to do. Starting in January they will now only buy $75bln of bonds and mortgage backed securities each month, and they expect to take similar moderate steps at upcoming meetings with purchases ending altogether in late 2014. The Fed was clearly shaken by the market reaction back in June, when the mere suggestion of tapering caused big moves in all markets. So to soften the blow yesterday Ben Bernanke sought to enhance his commitment to keep short term interest rates low for a long time after the bond buying programme ends. He now expects to keep rates low well beyond the 6.5% unemployment threshold previously stated, as long as inflation remains in check. He also sounded warnings on low inflation and stressed further reductions in asset purchases will be data dependant. He will have been happy with the market’s reaction, equities were up over 1%, the USD gained mildly across the board and long term interest rates were only up a touch. The latter two are likely the start of broader trends, I can’t however be convinced that is the case for stocks. We now head into the Christmas trading period with greatly reduced liquidity in most markets. This can lead to quiet trading and small ranges, or the complete opposite! Data next week to draw focus comes in the form of personal spending, durable goods orders, and new home sales.

Data out of Europe this week has continued to highlight the growing divide between Germany and the rest of the Eurozone. Earlier in the week we got German manufacturing PMI that expanded to 54.2, while the French number contracted to 47.1. German services PMI came in at 54.00, while the French result was 47.4. Tuesday saw the release of German economic sentiment data which had a big jump to 62.00 from 54.6, and then on Wednesday German business climate data made further small gains from already solid levels. At the other end of the spectrum is Greece with its unemployment still running at 27%. This is the biggest problem the ECB faces. The rest of Europe could use a dose of outright quantitative easing from the central bank, but the Germans just won’t allow it, and the German economy doesn’t need the risk of asset bubbles that comes with it. The good news for the ECB was that inflation data this week came in as expected at 0.9%. That is still very weak and the ECB is certainly concerned about the downside risks, but least it looks to have stopped falling for now.

United Kingdom
It has been another good week for data from the United Kingdom. Inflation moderated a touch more to 2.1% from 2.2% previously. A survey by the Confederation of British Industry (CBI) on industrial order expectations came in at its highest level for 18 years. The CBI also surveys current sales volumes and that came in very strong as well. The house price index continues to surge and ratings agency Fitch released upgraded growth forecasts for 2014 and 2015. On Wednesday we got employment data that again beat expectations. The unemployment rate has fallen to 7.4% which is its lowest level since 2009. Average weekly earnings have also grown, picking up by 0.9% in the three months to October compared to a year earlier. This however is still well below the level of inflation at 2.1%, which means in real terms people’s incomes are still falling. Bank of England (BOE) Governor Carney said the recovery has beaten his expectations. He also believes his forward guidance policy is understood by businesses and is having an effect on the real economy. But he would say that wouldn’t he? Either way you look at it, the UK economy is set to perform well in 2014.

There hasn’t been a lot of data from Japan this week. The Tankan surveys on manufacturing and non-manufacturing both come in on the positive side on Monday, but Wednesday’s trade balance continued to widen. The weak Yen has certainly had an impact here as well as the countries dramatic increase in energy imports with nuclear reactors still offline. The Bank of Japan (BOJ) are looking to expand the industrial loan facilities that are due to expire in March. This programme allows banks to borrow cheaply from the BOJ and lend to certain industries. We have also had a number of comments from official suggesting the BOJ has significant room to boost bond purchases if required. That’s an interesting call considering they are currently buying 70% of all new government debt issued. The BOJ is likely mulling over options to increase stimulus to help counter the sales tax hike set for April.

The only data out of Canada this week has been manufacturing and wholesale sales figures which both surprised on the strong side. Food sales seemed to be the driving force behind the manufacturing sales number which printed at its best level since May 2012. Bank of Canada (BOC) Governor Steven Poloz was on the wires saying Canadian inflation is lower than we can explain. He also said the CAD weakness won’t help the export sector much, and he expects a soft landing for the housing market. The key data for the week is released tonight in the form of inflation and retail sales. Also Monday’s release of the GDP numbers will offer further insight into developments within the Canadian economy.