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Economies of Note - 22st August

Written by Ian Dobbs on August 22nd, 2014.      0 comments

The focus in Australia this week was centred around the RBA with Tuesday’s release of the minutes from the last rate meeting, and then a speech from Governor Stevens on Wednesday. The minutes contained few surprises with the bank reaffirming a period of stability in rates is appropriate and that they still view the AUD as high by historical standards. Governor Stevens’ speech on Wednesday did however provide some more interesting insight into his, and the central banks, thinking. The Governor believes growth in the year ahead will be close to trend, around 2 - 3 per cent, and that inflation should be consistent with the policy target, which is also 2 - 3 per cent. His most interesting comments came in relation to the limitations of monetary policy when he said “I’ve allowed the horse to come to the water of cheap funding, but I can’t make it drink.” When it came to the issue of rising unemployment he then added “I don’t think interest rates are the answer at the moment.” It seems the governor would struggle to make a case for further rate cuts and that’s not surprising considering they are currently at historical lows. The heavy lifting now needs to be done by the government in terms of legislation and policies to support growth and employment. Governor Stevens also suggested the risk of a fall in the Australian dollar is underappreciated and that based on most metrics it would be surprising if the AUD remains so high. The currency has been under pressure this week from a resurgent USD, and yesterday’s softer than expected Chinese manufacturing PMI data only added to the downside pressure. The economic calendar looks a little light next week with only construction work done and private capital expenditure of any note.

New Zealand
A number of releases have helped to push the New Zealand dollar lower this week. Tuesday’s producer prices data was much weaker than forecast and raises questions about just how much pipeline inflation pressure there is in the economy. This was followed by Fonterra’s dairy auction on Tuesday night and although it looks like prices might have started to stabilize, there was little evidence of any rebound. Over all prices slipped another 0.6%. The RBNZ’s survey of inflation expectations has also moderated with inflation seen at 1.96% in the year ahead. That’s down on the previous 2.08% result from three months ago. However, migration remains strong. The latest figures show net flows in July of +4540, which puts the yearly figure at 41,000. That’s the highest total since 2003. None of this will have impacted expectations for the RBNZ to remain on hold until at least December, or even potentially out to March 2015. Next week we have the trade balance, building consents, and business confidence data to draw focus.

United States
Largely positive data from the United States this week has helped boost the USD. Building permits and housing starts both come in on the strong side, while inflation was bang on expectation at +0.1% month on month, and +2.0% year on year. Yesterday morning’s release of the FOMC monetary policy meeting minutes didn't hurt the dollar either as they proved to be slightly more ‘hawkish’ than most were expecting. There was mention of raising rates sooner than currently anticipated if convergence toward the committee’s objectives occurred more quickly than expected. It certainly seems that an improving labour market has started to spark debate around bringing forward potential rate hikes and one can only assume that will intensify as the economy continues to improve. Last night again we received a raft of positive releases with weekly unemployment claims, manufacturing PMI, Philly Fed manufacturing index, and existing home sales all printing better than forecast. The market’s reaction to this latest data has however, been very muted. This is largely due to the upcoming speech from Fed Chair Janet Yellen at the Jackson Hole Symposium this weekend. The market is expecting Yellen to continue to be very ‘dovish’ (cautious) on the economy so any change in that stance will get a big reaction in the market. Past Chairmen have used this symposium to signal policy changes and it will be very interesting to see if Yellen does the same. Next week the focus turns to New home sales, durable goods orders, GDP, and pending home sales.

United Kingdom
A couple of key data points from the UK this week have come in on the soft side and this has seen the GBP come under some further pressure. Headline inflation fell to 1.6% from 1.9% previously, although the core inflation reading was only just below expectation at 1.8%. Retail sales also disappointed printing at +0.1% against forecasts for +0.4%. However, we have finally seen a split in the voting at the Bank of England with two members of the Monetary Policy Committee (MPC) voting for a rate hike at the last meeting. This was revealed in the minutes that were released on Wednesday. For these two members economic circumstances were sufficient to justify an immediate rate hike of 0.25%. The other seven members however, seem comfortable waiting for further evidence that wage growth will come before deciding to raise rates. Next week looks to be a little quiet with a UK bank holiday on Monday. The only data of note will be mortgage approvals, CBI realized sales, and preliminary business investment.

Largely uninspiring data out of Europe this week is consistent with the economy struggling to gain any real traction. Manufacturing PMI’s fell in both France and Germany which helped to drag the overall Eurozone composite reading down to 50.8 from 51.8 previously. The service PMI’s were a little better with France actually improving month on month, but again the overall composite reading declined from the previous reading. Consumer confidence also declined a touch. The impact of economic sanctions on Russia are certainly taking their toll on the Eurozone with German exports to Russia down 15.5% in the first half of 2014. That figure is only going to get worse with further sanctions implemented over the past couple of months. These come at a very tough time for Europe and will only add to pressure on the ECB to undertake further action. But with interest rates already negative, there is little else they can do aside from starting a round of asset purchases (quantitative easing). Europe needs growth and the only way that is going to happen is if governments abandon the push for balanced budgets and undertake pro-growth policies. ECB President is scheduled to speak at the Jackson Hole Symposium this weekend which could prove interesting. Then next week the focus turns to the German business climate index, along with Eurozone unemployment and inflation.

This week saw Japanese trade balance data that came in somewhat weaker than forecast at -964 billion Yen. Looking into the detail however, there were some encouraging signs. Exports rose for the first time in three months at +3.9%, while imports were up +2.3%. An improving global economy is helping exports and this should see them continue to grow faster than imports, which will gradually cut the trade deficit. The better export picture has flowed through to manufacturing PMI data that jumped to 52.4 from 50.5 previously. Output and new orders both rose sharply recording the fastest increases since before the implementation of April's sales tax hike. The government is yet to decide if it will implement another sales tax hike due in October, but if they do go ahead it seems likely they will try to soften the impact with a one trillion yen stimulus package. Next week there is nothing out until Friday when we receive a raft of data including household spending, inflation, industrial production and retail sales.

The only data of note released so far this week from Canada has been wholesale sales which came in above expectation at +0.6%. Tonight should prove interesting however, with both inflation and retails sales figure set for release. Core inflation is expected to come in at +0.1% on the month, while retails sales should improve to +0.4%. Next week the focus turns to current account and GDP data.