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Economies of Note - 23rd September

Written by Ian Dobbs on September 23rd, 2016.      0 comments

Local leads have been light in Australia this week. The minutes to the September RBA meeting indicated that interest rates are likely to remain on hold in the foreseeable future. The RBA noted having eased in May and August and taking into account the recent data that current monetary policy was consistent with sustainable growth and achieving the inflation target over time. The first speech from new RBA Governor Philip Lowe noted favour for flexible inflation targeting (rather than keeping it in the tight 2-3% target range). This highlights little need of urgency for further rate cuts given current levels (1.7% trimmed mean y/y in Q2). Lowe noted “a lower exchange rate would be helpful”, but failed to jawbone the currency lower as he noted higher commodity prices and the yield on offer in Australia. Data releases included numbers from the housing sector which showed house prices gaining 2% on average across Australia’s capital cities in Q2. The numbers bucked a trend of six months of falls, although failed to reach the size of gain expected by the market. Look for a quiet week next which will put the focus on the US data calendar, particularly towards the end of the week.

New Zealand
Interest locally this week focussed on yesterday’s RBNZ OCR review and the latest GDT dairy auction the day prior. The latest cash rate review saw the Reserve Bank leave rates on hold at 2.0% and retain an easing bias for a move in November. Governor Wheeler noted the “excessive” house price increases and emerging evidence that the recent macro-prudential measures and tighter credit conditions were influencing the sector. Further crimping of housing investment credit demand is widely seen by most analysts as giving the RBNZ a greater ability to ease in order to address the current low levels of tradable inflation. Wheeler also noted the high NZD which remained too strong and “needed” to come down, even despite the recent rebound in key export prices. The mildly dovish statement reinforced selling sentiment in the kiwi that had started after Wednesday morning’s GDT dairy auction which failed to live up to expectations. The 1.7% overall gain was well down on the ~5-10% lift expected and included a marginal easing in the key whole milk powder (WMP) price. Other data included numbers on visitor arrivals and immigration which showed visitors reaching a record in August and long-migrants also remaining around record levels.

United States
Focus for trade in the US this week was on Wednesday’s FOMC interest rate meeting. This saw the Fed leave rates on hold (as expected) and leave the door open to a move in December, noting that the case for an increase in the fed funds rate had strengthened. The Fed downgraded their terminal rate to below 3% however and reduced next year’s hike projection from three hikes to two only, which saw the USD ease moderately during the day. Data released during the week was naturally of secondary importance. It started with numbers on homebuilder confidence which rose to 11 month highs and weaker than expected housing market data. These came after both the housing starts and building permits numbers for August failed to meet expectations (by a wide margin). Data released overnight included jobless claims, which fell by 8k last week, and existing home sales and the Chicago Fed national activity index which both disappointed. Focus to conclude the week will be on various Fed members due to speak and US manufacturing PMI data.

United Kingdom
This week has been a quiet one in the UK which has seen the pound sterling retrace some of last week’s heavy losses on the back of an easing in the greenback after yesterday’s US Fed meeting. Sentiment remains soft overall given the recent headlines on the Brexit issue (which have included exiting the EU single market and hints from the EU President that British PM Theresa May will invoke Article 50 to commence EU exit procedures in Jan/Feb.). CBI Industrial trend data released created little interest after it matched expectations at -5 in September. Comments from BoE policy maker Kristin Forbes provided some support in trade overnight after she spoke of the possibility that the BoE might need to revise up its economic outlook. Forbes reiterated her view that the UK economy won’t need further stimulus and noted that the impact on growth of reduced investment and spending may not be as acute as anticipated. Look for another quiet week next week with focus on mainly external events until Friday’s GDP and business investment data.

Trade has again been quiet in the Euro this week with most of the volatility coming yesterday thanks to a US Fed which left rates on hold and downgraded its projections for hikes in 2017 (EUR+). Local leads began with current account data on Monday which dropped sharply in July. Producer prices in Germany were seen slipping into deflationary territory for the first time in 6 months in August in a result which was below the flat reading expected. The results included a 5.5% fall in energy prices compared to the same month last year and come on the back of data which showed headline inflation falling back in Europe’s largest economy last month. The ECB economic bulletin noted a decline in market-based long-term inflation expectations by 0.19% to 1.29% between early June and early September. The series remains near record lows and has declined from 2.25% at the beginning of 2014. In focus to conclude the week will be the key regional and euro wide PMI reads later today, although expect a relatively downbeat market response.

Focus in Japan this week was on Wednesday’s BoJ monetary policy meeting. This saw the bank remain on hold and maintain the current stimulus levels pledging in the process to maintain quantitative easing until its 2% inflation target is overshot. The bank introduced a new framework of yield curve management which would target keeping 10-year interest rates around zero as it aims to bolster inflation and steepen the yield curve (higher long terms rates than shorter term rates). The move would also help the profitability of insurance companies and pension funds which are battling to get returns in the current low interest rate environment (Japan’s Government Pension Investment Fund logged more than $50 billion in losses last year as they moved away from low yielding government bonds). The markets saw the announcement as disappointing and bought the Yen which remains near 100 against the greenback. Data released during the week included August trade numbers which missed expectations on the back of a more muted than expected recovery in exports and manufacturing PMI today which moved back into expansionary territory.

This week has been a good one for the Canadian dollar so far which has seen it enjoy the benefit of a strong 6.7% rise in the price of WTI crude. Oil market gains have been seen on the back of the dollar’s slide after the US Fed kept interest rates unchanged (and reduced rate hike projections for 2017). Adding to momentum was US Energy Information Administration (EIA) data which showed a significant unexpected draw on crude stockpiles. Additional focus for the energy markets will come from the 26-28 (September) talks in Algeria between OPEC and other major oil producers where hopes remain of a deal for the first time in eight years to curb output. The only local data so far during the week has been wholesale sales which increased for the fourth consecutive month in July. The 0.3% rise was above expectations and was led by gains in the motor vehicle and parts subsector. Key data will come later today in the form of inflation and retail numbers, whilst next week data is quiet until Friday’s GDP report.