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Economies of Note - 24th April

Written by Ian Dobbs on April 24th, 2015.      0 comments

Although the majority of economists are still calling for a rate cut from the Reserve Bank of Australia (RBA) when they meet in May, it is far from a done deal. Economic releases this week have only added more doubt to those calls and the reality is that it’s now close to a 50/50 decision. The big data this week was inflation that hit the wires on Wednesday. The Consumer Price Index came in a touch stronger than forecast at +0.2% for the first quarter of 2015. The market was expecting a result of +0.1%. Year on year inflation is now running at +1.3%. The RBA minutes were also released this week and they made it clear that the decision not to cut in April was so that officials would have more time to assess how the economy was tracking and responding to the February cut. With this week’s inflation result not really forcing the central banks hand at all, they could well decide to continue to wait and assess further economic data. Remembering also that last week employment data was much better than forecast. Iron ore prices have managed rebounded somewhat over the past few days which will also be a welcome result. Yesterday we saw business confidence data which fell to 0 from a prior reading of 2. This fall takes the reading further below its long run average. Not surprisingly capex expectations for the 12 months ahead were negative for the mining sector, but encouragingly they were positive for all other sectors. Next week do draw focus we have import prices, private sector credit and the producer prices index.

New Zealand
Inflation data this week from New Zealand came in a touch softer than forecast which helped to limit strength in the NZ dollar in the early stages of the week. The -0.3% for the first quarter was below expectations for -0.2% and was driven by falling petrol prices. Yesterday we had a speech from RBNZ assistant governor Dr John McDermott which put some real downside pressure on the NZD. He said the central bank is not considering any increases in interest rates. He added that near zero inflation is mostly due to low tradables inflation, caused by the slow global economic recovery, the high NZ exchange rate, and the recent sharp fall in the price of oil. The central bank will actually consider lowering interest rates if they see evidence of weaker demand and weakening domestic inflationary pressure. The reality is the central bank has a very neutral stance at the moment and they will likely be on hold well into 2016. Other second tier data releases this week in the form of migration figures and credit card spending were both supportive of the economic outlook going forward. Next week we have the trade balance, business confidence, and the RBNZ rate statement to digest.

United States
The United States produced some solid data on existing home sales on Wednesday with sales hitting an 18 month high. However, results since then have been somewhat disappointing with an increase in unemployment claims, a bigger than expected fall in manufacturing PMI, and weak new home sales figures. If tonight’s durable goods orders also prints on the soft side it will round out a poor week of data and have those who are still calling for a June Fed interest rate hike reassessing their expectations. It’s looking increasingly likely that the Fed will hold off until later in the year and this is weighing on the USD at the moment. The market will be paying very close attention to next week’s FOMC statement to see if the Fed signal’s exactly that. Ahead of that statement we have consumer confidence and GDP figures, then later in the week the ISM manufacturing PMI result will draw focus.

United Kingdom
The UK Pound received something of a boost this week from the release of the latest Bank of England (BOE) minutes. Although the vote to keep interest rates steady at 0.5% was still 9-0, two members said their decision was finely balanced. These will be the two members who voted for rate increases for a number of months in the second half of last year, and they may well be back to voting for hikes as soon as the election is out of the way. The tone of the minutes was also more upbeat than the market had been expecting. They said although inflation could turn slightly negative in the coming months, sterling strength may be lowering inflation faster than expected and this could imply a bigger bounce back. They also believe the Eurozone economy appears to be picking up, which is positive for the UK, and that it’s unlikely growth can be maintained for long without generating higher wages and price inflation. All members agreed it was more likely than not that interest rates will rise over the three year forecast period. Last night was also saw the latest reading of retail sales. These weren’t so positive coming in well below forecast at -0.5%. Impact on the GBP has been limited by the fact that timing of Easter may have had an effect. Also the fact that fuel sales numbers, which saw their biggest drop since April 2012, were a major driver. Next week, along with the usual political poll results, we get GDP and manufacturing PMI data.

We have seen a mixed bag of data from Europe this week, while Greece continues to draw headlines. ZEW economic sentiment data out on Tuesday was generally positive, supporting the view that the Eurozone economy has turned the corner. However, last night’s April PMI readings from both the manufacturing and service sectors were largely disappointing, suggesting the recovery road may not be a smooth one. French manufacturing PMI was particularly weak and it has now been below the 50 level, which denotes contraction in the sector, for the past 12 months straight. Europe may well bumble through the current Greek crisis, but the years ahead could prove even more challenging unless key structural reforms in countries like France, and Italy, are implemented. The past 48 hours has also seen a notable shift in the tone of statements regarding Greece. A level of optimism has crept in with hints that a deal may soon be reached. These negotiations still have a way to go but there is speculation that Greece’s recent effort to build closer ties to Russia may have been enough to see the EU soften it stance. The highlights of next week’s economic calendar will be inflation and unemployment data.

A combination of strong exports to the US, low energy prices, and a weak Yen has seen Japan post its first trade surplus in three years this week. The March surplus was driven by an increase in exports of 8.5% along with a decrease in imports of 14.5%. The data will provide a welcome boost for the Japanese economy which is slowly showing signs of life. Unfortunately this week we have also seen the manufacturing PMI which fell from 50.3 to 49.7, signalling a deterioration in operating conditions for the sector. Digging into the detail of the report however, showed the impact of the weak yen as companies noted a rise in new export orders for the tenth straight month. Next week we have the Bank of Japan (BOJ) monetary policy statement to digest, along with retail sales, industrial production, household spending, inflation and employment data.

Bank of Canada (BOC) Governor Poloz has been very blunt about just how poor he sees the first quarter of this year. He has previously described it as ‘atrocious’. The only economic data release this week backed up that view with wholesale sales for February printing at -0.4%. This follows a 2.9% decline the previous month. In January the BOC cut interest rates in what Poloz described as ‘taking out insurance’ against the risk the first quarter weakness persists. This week Poloz gave a strong signal that they may not cut interest rates again when he said the rate cut was ‘the appropriate amount of insurance’. The central bank has also been more upbeat on the economic outlook recently and this, along with some strength in oil prices, is helping to increase demand for the Canadian dollar. Poloz is due to speak again tonight and we can expect a similar optimistic tone. Next week we only have the raw material price index and GDP data set for release.