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Economies of Note - 21st November

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

There were a couple of releases from Australia this week that drew the markets attention. The first was the minutes from the last RBA meeting. These were largely in line with expectations and in a very similar vein to previous RBA statements and minutes. The impact on the currency was there for muted. Subsequent to this release however, Governor Steven’s made a speech that did give the market something more to chew on. The tone of his speech suggested a moderation in the outlook for 2015 and that rates in Australia could be on hold for much longer than many thought. He said faltering jobs and wages growth meant it would be a couple of years before inflation triggered rate hikes. Obviously the caveat to this is that house prices increases are kept in check. Both the RBA minutes and Governor Stevens’ speech made reference to the still overvalued Australian dollar, which did decline somewhat throughout the second half of the week, although this was more as a result of the subdued outlook than the direct references to it. Next week we have private capital expenditure data and the Treasuries mid-year fiscal outlook to digest.

New Zealand
Monday saw retail sales data from New Zealand come in much better than expected at +1.8% for the quarter. This was significantly better than the forecast of +0.8% and helped to support the NZD in the early stages of the week. However, the currency ran out of steam on Wednesday after the latest Fonterra dairy auction results were released. Dairy prices fell again, this time by 3%, which will be very concerning for the economically important sector. Whole milk powder, which is NZ’s biggest dairy export, actually fell by 5.1%. This latest result now makes Fonterra’s forecast payout for the 2014/15 season of NZ$ 5.30 per kg very optimistic. It is likely to be revised lower at the December board meeting to somewhere under NZ$ 5.00. Yesterday we also saw producer prices data and it too was softer than expected. PPI input (which measures changes in the price of goods and raw materials purchased by manufactures) fell -1.5% versus expectations of a 0.3% gain. This would indicate there is little in the way of pipeline inflation pressure in the manufacturing sector. Next week we have inflation expectations, the trade balance, building consents and business confidence data to digest.

United States
Economic data and releases from the United States this week have generally been supportive of the economy and the outlook going forward. We did see a couple of softer than forecast results at the start of the week from industrial production, capacity utilization and the Empire State Manufacturing Index, but they all only missed expectation by a small amount. Since then we have seen a rash of stronger than forecast releases including producer prices, building permits, inflation and the Philadelphia Fed Manufacturing Index. Inflation has been undershooting expectations in most developed nations recently, but in the US it came in stronger than forecast at +1.7% year on year. This comes despite falling oil prices. The core inflation reading that strips out volatile food and energy increased to 1.8% from 1.7% in September. The Philly Fed Index was so strong you have to question the result. It printed at 40.8 versus expectation of 18.5, and this is the highest reading since 1993! Even if you assume there is something fishy in these numbers, you can’t deny that factory activity in the mid-Atlantic regions must be doing very well. We also had the minutes from the latest Fed meeting released this week and they were very balanced. The Fed discussed the weaker outlook for Europe, China and Japan along with the potential for inflation to undershoot their target in the near term. But there was also talk that it might soon be helpful to clarify the approach on the pace of future rate hikes. Some participants also wanted to drop the reference to a ‘considerable time’ between ending QE and the first rate hike. A recent survey of primary dealers in the US showed an overwhelming expectation of a rate hike around June 2015. Data like we have had this week will only serve to reinforce that expectation. Next week to draw focus we have GDP, consumer confidence, durable goods orders and new home sales data.

United Kingdom
We have seen two key data points this week from the UK the both came in above expectation. Inflation printed at 1.3% versus 1.2% expected and retail sales came in at +0.8% versus 0.3% expected. The Bank of England (BOE) also released the minutes from their latest meeting and these were perhaps a little more positive than many had expected. Although the bank acknowledged global growth is somewhat sluggish and this is constraining exports, they believe near term downward pressure on inflation will reverse as slack in the economy continues to be reduced. This should push inflation back to their target over the next 2-3 years. The voting pattern remained 7/2 to leave rates unchanged, with two voting or a hike. Other data worth noting this week was the house price index which showed prices still in the rise, up 12.1% y/y versus 11.7% previously, and the CBI industrial trend orders which measures economic expectations of manufacturing executives in the UK. This is considered a lead indicator of business conditions and it improved to +3 from -6 previously. Overall the releases this week have been supportive of the economy and the UK Pound, although the currency hasn’t gained as much as might have been expected. Next week we have the second estimate of GDP, business investment and CBI realized sales to draw focus.

The past week has seen improvements in Eurozone trade balance and the ZEW economic sentiment index, both of which came in above expectation. The improvement in economic sentiment breaks a string of falling results that started early this year and it may be that actions taken by the ECB over the past few months are starting to have an impact. These positive results have been largely negated by falls in both manufacturing and service sector PMI’s, both of which also missed expectation. Consumer confidence also fell a touch and its clear there is a lot more work to be done to turn the Eurozone around. The work can’t just be left to the central bank however, and governments need to start doing some of the heavy lifting. The ECB’s Mersch this week repeated the call made many times now, when he said monetary policy alone can’t create growth and that structural reforms in the Euro area must continue. Sadly these calls seem to be falling on deaf ears, at least in Germany, who really are standing in the way of adopting more growth friendly policies. The focus next week will be on inflation and unemployment data, although we also have the German business climate index, German retail sales and French consumer spending figures set for release.

Prime Minister Abe held live TV broadcast this week in which he declared he would dissolve Parliament then hold national elections for the Lower House on December 14. He also announced he will delay the next sales tax hike until April 17th. He explained the move by saying there are divided opinions about the economic policies they are pursuing and that he needs to listen to the voice of the people before they can continue down the path of ‘Abenomics’. He added he will resign if the coalition doesn’t gain a majority. It seems he is also considering cutting some of the sales tax that was introduced in April on items deemed necessities. None of this helped to turn the tide in the Yen which continues to lose ground across the board. The effect of the weakening Yen was apparent in the trade balance figures for October that were released yesterday. The trade deficit narrowed more than expected thanks to a big improvement in exports. Exports jumped 9.6% year on year rising at their fastest pace since February. This is the first piece of really good news the Bank of Japan have seen in a while and is encouraging considering the Yen has only weakened further since then. Next week we have the BOJ minutes, household spending, inflation, industrial production and retail sales to digest.

It has been a quiet week for data from Canada so far, with only one release of note. That was wholesale sales that hit the wires last night. It came in much better than forecast at +1.8% versus expectation of +0.7%. Last week’s manufacturing sales data was also stronger than expected and these are positive signs for the Canadian economy. Tonight we get key inflation data and the market is looking for a month on month increase of 0.2% for the core reading. Next week the focus turns to retail sales and GDP data.