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Economies of Note - 22nd May

Written by Ian Dobbs on May 22nd, 2015.      0 comments

In terms of data from Australia this week we have seen two releases that were both somewhat encouraging. Consumer sentiment increased 6.4% (the prior reading was -3.2%) boosted by the recent RBA interest rate cut and the friendly Federal Budget release. Consumer sentiment now stands at the best level since January 2014. Inflation expectations figures also showed a small improvement coming in at 3.6% up from the prior 3.4%. The other key release this week was the minutes from the RBA rate meeting. Although the minutes didn’t offer much in the way of fresh information on the economy, they did show the central bank maintains an explicit easing bias. The board believes a lower Australian dollar is both likely and necessary to help rebalance the economy. The board also agreed not to include any forward guidance on interest rates in the statement, but they don’t see that as limiting potential scope for action at future meetings. Next week to draw focus we have data on construction work done along with private capital expenditure.

New Zealand
Producer prices data came in on the soft side as expected this week, suggesting little in the way of pipeline inflation pressure over the coming months. We also saw inflation expectations data this week and two year expectations actually increased a touch to 1.85%. The prior reading was 1.80%. One year expectations rose to 1.32% from 1.11%. These were somewhat positive results as many forecasters had expected inflation expectations to actually fall. Fonterra’s latest dairy auction saw prices decline again, although only by 2.2%. The key whole milk powder price saw its smallest reduction of the past six months declining by only 0.5%. There were some positives to take away from the auction, specifically that there was the highest number of successful bidders seen this year, which could indicate that demand is picking up. Prices aren't expected to make any major recover in the near term but we may well have seen the lows. The New Zealand government released their budget yesterday and as expected it was a very prudent affair. The market impact was negligible. Also out yesterday were migration figures and credit card spending results for April. Both releases were strong with migration hitting new record highs, and credit card spending jumping 7.2% year on year. Next week we have the trade balance, building consents and business confidence data to draw focus.

United States
Earlier this week from the United States we saw housing starts data print at the highest level since January 2008 as well as post the biggest percentage jump since 1991. There may well be something fishy in the numbers however with these gains largely just reversing the weaker than expected outcomes of the past two months. The three month average is pretty much in line with expectation. The Fed also released the minutes from the latest FOMC meeting this week. They show that Fed officials were generally upbeat about the medium term outlook, although some doubt is creeping in with respect to the ‘temporary’ nature of the first quarters slow down. Officials actively debated whether the disappointing data, including weak consumer spending, were temporary or evidence of a longer lasting slowdown. The minutes made it pretty clear a June interest rate hike is very unlikely. At this stage September or December are likely candidates, although that still depends on seeing an improvement in the data. Last night we saw a number of releases that all disappointed. Weekly unemployment claims, manufacturing PMI, existing home sales and the Philly Fed manufacturing index all came in below expectation. The USD didn’t lose much ground on the releases, but the pressure will build if we don’t see a meaningful improvement soon. Tonight we get inflation figures and the market is expecting a very tame +0.1% for the headline number. Fed Chair Janet Yellen is also set to speak. Next week to draw focus we have durable goods orders, CB consumer confidence and GDP data.

United Kingdom
Inflation in the United Kingdom in April slipped into negative territory for the first time since 1960. The result of -0.1% wasn’t a huge surprise as the Bank of England (BOE) has waned a number of times we could see a temporary dip into deflation. Governor Carney himself said the British people should enjoy the very low energy and food prices while they last. The Bank expects inflation to pick back up later this year. What the UK is currently experiencing has been referred to as ‘good deflation’ which acts like a tax cut and puts more money in people’s pockets. A Bank of England analysis of 70 countries, over a period of more than 50 years, showed that in most cases where a country has experienced deflation, it has proven to be temporary, especially in those countries that have a free floating exchange rate. The BOE released the minutes from their last meeting this week and these reaffirmed their outlook for inflation to pick up later this year. They also noted that UK house price gains rose faster than expected and data points to the risk of further price gains in the second half of 2015. The vote to keep rates steady remained at 9-0 although the decision was ‘finely balanced’ for two members. Last night we got the latest reading on retail sales which was much stronger than forecast. Expectations were for an increase of +0.4%, but sales actually jumped 1.2%. Warm weather helped drive a jump in clothing sales which accounted for some of the strength, but even allowing for that, these were good numbers and the UK consumer is obviously feeling pretty healthy at the moment. Governor Carney is due to speak tonight and next week’s calendar is looking a little lighter. The highlight will be the second reading of GDP, but also get preliminary business investment, consumer confidence and CBI realized sales data.

For the most part data out of Europe this week has come in a touch softer than forecast. We did get a better than expected reading for Eurozone manufacturing PMI, but that was the only real highlight. Services PMI disappointed as did ZEW economic sentiment for both Germany and the Eurozone. None of the data was weak enough to impact the current outlook for the Eurozone, which is cautiously optimistic. The biggest risk to growth in the near term would be a Greek exit from the currency union. The Greeks are aware of this and it looks like they are willing to push it to the limit to gain some concessions. We are still no clearer on what the outcome of negotiations between Greece and the EU might be, but time is definitely running out. Greece has scraped together every last penny possible just to cover its obligations to this point. It seems without the release of more bailout funds within the next couple of weeks the country's finances will hit a brick wall. If history is anything to go by, the EU will do just enough to avert a crisis now, but we will be back to square one in another 6 to 12 months. The Euro did see a sharp bout of pressure on Tuesday evening after an ECB official suggested the central bank may ‘frontload’ its asset purchase programme ahead of the summer period which traditionally sees lower levels of liquidity. Somewhat disappointingly, that piece of market moving information was released to a collection of hedge fund and money managers at a private lunch. By the time it was released to the wider market the Euro had weakened significantly. ECB President Draghi is due to speak tonight and we also have the release of the German IFO business climate index. Next week the economic calendar is a little lighter with German consumer climate, French consumer spending, Spanish inflation and private loans data the only highlights.

We have seen a couple of encouraging data releases from Japan this week. Core machinery orders came in stronger than forecast at +2.9% as did GDP for the first quarter which printed at +0.6% versus expectations of +0.4%. These figures go a long way to backup official’s claims that the economy is “recovering moderately as a trend”. It does seem the negative effects of last year’s sales tax hike could be waning and that would certainly help growth going forward. The Bank of Japan release their Monetary Policy Statement later this afternoon. There is speculation the bank will upgrade their economic assessment which would be the first time in two years. If the bank does this it will certainly reduce the chance of further stimulus. A recent poll of analysts showed the majority still expect further stimulus from the BOJ over the coming months. That may well change after the BOJ announcement. Next week from Japan we have the trade balance, the BOJ minutes, retail sales, household spending, inflation and industrial production data.

The only data released so far this week from Canada has been wholesale sales which came in a touch below expectation at +0.8%. The market was forecasting a gain of 0.9%. Bank of Canada (BOC) Governor Carney has been on the wires and he said the January interest rate cut is working and the BOC expects the economy to return to full capacity around the end of 2016, with inflation at 2%. Although he did stress there is some real uncertainty around that outlook, he does believe the economy is on the leading edge of a positive cycle. Tonight we get inflation and retail sales data and the market is looking for inflation of +0.1% and retails sales of +0.7%. Next week the Bank of Canada has a rate meeting and we also get current account and GDP data.