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Economies of Note - 21st February

Written by Ian Dobbs on February 21st, 2014.      0 comments

The minutes from the latest RBA meeting released on Tuesday held few surprises. The central bank expects a ‘period of stability in interest rates’ while the lower exchange rate should help boost economic activity. They suspect the lower exchange rate was a contributing factor in December quarters inflation surprise and believe the labour market will continue to be weak for some time yet. The wage cost index released on Wednesday will have helped to soothe any concerns about higher inflation. It printed at +0.7% for the fourth quarter and +2.6% on a year earlier. That’s the slowest pace of growth in wages on record. There has been a fair amount of focus on China recently with commentators noting iron ore stockpiles at Chinese ports are at record levels. There is concern that this points to a drop in end demand which would signal slower growth ahead. On top of this came yesterday’s very poor Chinese manufacturing PMI data. The index fell to 48.3 against an expectation of 49.5. That’s a seven month low. This again points to a weakening in Chinese manufacturing growth over the coming months. There is little to get excited about on next week's economic calendar with only construction work done, private capital expenditure, and private sector credit data set for release.

New Zealand
We’ve had a mixed bag of data from New Zealand this week however none of it has had a material effect on the current positive economic outlook. Monday’s retail sales were a fair bit weaker than forecast coming in at +1.2% vs +1.7% expected. This was countered to a degree by job ads data that printed at +2.8% for January, which would indicate continued improvement in the employment market. Producer prices data yesterday was also on the soft side although it seems it was in large part due to lower electricity prices which were driven by lower demand over the summer months. The ANZ consumer confidence index fell -2.1% for February, although this only represents a small pullback from multi year highs. Finance Minister Bill English was quoted as saying the NZD may be 20% overvalued. It is certainly high against many other currencies, but that’s for good reason. The economy is performing very nicely and the RBNZ is highly likely to be the first western central bank (by a substantial margin), to raise interest rates when they meet next month. Next week we have inflation expectations, the trade balance, building consents, and business confidence data to digest.

United States
The soft patch of US data has continued this week with a number of second tier releases coming in below expectation. The NY state manufacturing index (used as an indicator of wider manufacturing activity) fell to 4.5 from 12.5 last month and the Philly Fed manufacturing index was very weak as well. Housing starts and the NAHB housing market index were also both weaker than expected. Inflation data released last night came in bang on expectation, as did the weekly jobless claims number. Wednesday’s release of the minutes from the latest Fed meeting showed however that there is a strong commitment within the central bank to continue tapering, and the bar is set pretty high for changing the taper pace. Fed members also believe it could soon be appropriate to change forward guidance on the first interest rate rise, especially if the unemployment rate continues to fall. These views were backed up by subsequent comments from the Fed’s Bullard when he said the ‘improving labour market should guide Fed policy’ and the Fed’s Williams who said ‘Although recent data has been somewhat disappointing, monetary policy should take a medium term view.’ Tonight we get data on existing home sales, while next week we have services PMI, consumer confidence, new home sales, durable goods orders, and GDP data to draw focus.

It hasn’t been a great week for European data with the majority of releases undershooting expectations. Soft economic sentiment numbers were backed up by weaker readings from the manufacturing sector. Eurozone service sector PMI was broadly in line with expectation, as strength in the German reading offset weakness in the French number. Consumer confidence data released last night also decreased last month against expectations of a small increase. The IMF believe the ECB should act again. They released a statement saying a drift lower in European inflation expectations could raise deflation worries and that further monetary easing was needed in the Eurozone. We get inflation data next week and another soft reading here could well be the trigger for a move to negative interest rates by the ECB at their next meeting. Also next week we have German business and consumer climate data, German retail sales, French consumer spending, and Eurozone unemployment.

United Kingdom
Tuesday saw the release of inflation data for the UK and the headline Consumer Price Index (CPI) moderated a touch coming in at +1.9% against expectations of +2.0%. There was only a muted reaction in the market however as a couple of other measures of inflation, namely the Retail Price Index (RPI) and Producer Price Index (PPI) both printed stronger than expected. Wednesday saw the release of the Bank of England minutes and in them officials noted that strength in the GBP will have put downward pressure on the CPI. They believe that GBP strength is due to better UK demand outlook, and that there is plenty of scope in the economy to absorb spare capacity before needing to raise rates. Wednesday also saw the release of employment data which showed the number of people out of work in the UK fell by 125,000 in the December quarter. The unemployment rate actually ticked up a touch to 7.2%, but taking a three month average, the trend is most certainly down. Unemployment claims for January also fell by 27,600 which was more than expected. That marks it 15th consecutive monthly drop. So the outlook for the UK economy remains favourable and this should continue to see the GBP slowly appreciate. Next week BOE officials will be testifying to a parliamentary select committee on the inflation outlook, and we also get the second reading of GDP and consumer confidence data.

Data from Japan this week has been disappointing with GDP, industrial production, the trade balance all coming in below expectation. The Bank of Japan (BOJ) released their monetary policy statement on Tuesday afternoon and although they’ve kept their economic assessment unchanged Governor Kuroda stressed they will not hesitate to adjust policy if risks materialize. One thing they did do at the meeting was to announce the increase, and expansion, of a loan scheme that was previously set up to encourage banks to lend to growth sectors. The scheme has been doubled in size and extended for one year. It provides cheap lending to banks who in turn lend to targeted growth sectors of the economy. It’s not a game changer for the Japanese economy, but it does signal the central banks willingness to act. With the negative impact of the upcoming sales tax increase just around the corner, the bank could well be forced to do more. There isn’t much else set for release until the end of next week when we get manufacturing PMI, household spending, inflation, industrial production, and retail sales all on Friday afternoon.

It has been a quiet week so far for economic data from Canada. That all changes tonight however with the key releases of inflation and retails sales scheduled. We did get wholesale sales data on Wednesday evening and that came in at a very disappointing -1.4% against expectations for -0.5%. This weighed on the Canadian dollar which has been on the back foot for much of the past few weeks. Next week the only releases of note are the current account and GDP figures out on Thursday and Friday respectively.