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Economies of Note - 24th January

Written by Ian Dobbs on January 24th, 2014.      0 comments

1:45pm(NZT)
Australia
There have been a couple of interesting releases this week that have caused some sharp moves in the value of the Australian dollar. Wednesday’s inflation data was a big surprise printing at +0.8% for the December quarter, against an expectation of +0.4%. The year on year rate came in at 2.7%. This is the highest reading in two years and all but eliminates the chance of any further interest rate cuts by the RBA. The central bank targets a range of between 2% and 3% for inflation and in their November forecasts they saw CPI ending the year around 2.25%. With the actual level now running substantially above that, they have very little room to manoeuvre. It seems the main culprit has been the rapid fall in the value of the Australian dollar which has pushed up import prices. These are now being passed through the supply chain to consumers and it will have been a very unwelcome surprise for the central bank. The AUD jumped sharply higher on the number and remained well supported heading into Wednesday evening. Yesterday however, we got the latest figures on manufacturing out of China and these surprised to the downside. The result of 49.6 for the manufacturing PMI was weaker than expected and below the key 50 level, which denotes contraction in the industry. This was the lowest reading since July and it continues a downward trend seen in the series over the last few months. The AUD snapped lower on this to trade back to where it was before the inflation data. Next week we have business confidence, new home sales, and producer prices data to digest.


New Zealand
The only data of significance from New Zealand this week were the inflation numbers. These came in a touch higher than expected and have caused a few commentators to call for a rate hike when the RBNZ meet next week. Although the inflation data itself probably isn’t enough to trigger a rate rise from the central bank, when you add it to all the other strong data the country has seen recently, it makes a more convincing argument. It will certainly make next week's decision a much closer call than many had expected. If they don’t go next week, then a hike in March is almost a certainty. Other data released this week includes the manufacturing index, which came in a touch below expectation, and consumer confidence that continues to grow. Thursday’s RBNZ rate statement is the obvious focus for the upcoming week, and this is followed by trade balance data on Friday.  
 
 
United States
It has been a very quiet week on the data front for the United States. Last night we did get the latest reading from the manufacturing sector, which declined a touch from last month. We also got weekly unemployment claims which came in a touch better than expected and existing home sales of which missed expectations.  None of this will have had any impact on the Fed who look set to reduce quantitative easing purchases by another $10 billion after their meeting next Wednesday. That expectation will have been reinforced by news that the IMF have raised US growth forecasts to 2.8% from 2.6%. Along with the Fed decision next week, we have durable goods orders, new home sales, GDP, and consumer confidence data to digest.


Europe
There has been a lot going on around the Eurozone this week. The International Monetary Fund (IMF) released their growth forecasts and they see European growth of 1% this year. However, there are many risks for the Eurozone, not the least of which is deflation. IMF chief economist Blanchard puts the chance of that at 10-20%. That’s big enough to be a real concern for ECB. Greece is back in the headlines. Negotiations with “Troika” (EC,IMF and ECB) to plug their funding gap have been strained. Original forecasts were the gap was between 2 -10bn Euro, but it now seems it could surpass EUR 14 bln. And that was before Greek courts made a ruling unwinding salary cuts (that were part of the previous bail out conditions) to the police and army. On the data front we have actually seen some pleasantly surprising results. Manufacturing and service sector data from Germany, France, and the Eurozone as a whole, beat expectation as did consumer confidence. This helped to give the EUR a lift in the last 24 Hours. Euro area government debt has also fallen for the first time since 2007. It fell to 92.7% of GDP in the fourth quarter of 2013 from 93.4% previously. One man who’s not getting overly excited is ECB president Mario Draghi. He was quoted last night as saying “We are indeed seeing encouraging signals and the first signs of economic recovery in the euro area, but the recovery is still weak and distributed unequally. Overall the risk of setbacks is great. I would be very wary of overly optimistic forecasts”. That’s a very fair assessment of where the Eurozone is at. Next week’s economic calendar is a little light with mainly German data to focus on. The highlights will be German retail sales and business climate index.


United Kingdom
The UK Pound made some gains this week thanks to further strong employment data. Unemployment claims dropped further than forecast and the unemployment rate had a sizeable fall to 7.1% from 7.4%. It was only six months ago when BOE governor Carney laid out his forward guidance policy that said rates would stay low until unemployment hit 7.0%. The central bank thought it would take much longer for that level to be hit but now it’s not far away at all. The BOE are now having to convince markets that 7% unemployment isn’t a ‘trigger level’ for rate rises and that they may well hold rates low as employment falls further. This point was reinforced on Wednesday night with the release of minutes from the latest BOE rate meeting. The bank is concerned that recent consumption growth has been driven by declining rates of savings, and that is not sustainable in the long run. They would be much happier to see consumption driven by a pickup in income growth which would require higher wages. Sadly for much of the past five years growth in wages has run well below that of inflation. Also this week we have seen public sector net borrowing figures that were better than expect and CBI realized sales data that were a little disappointing. Next week the focus turns to GDP data set for release on Tuesday.


Japan
Japan’s primary focus this week has been the unchanged monetary policy decision that was announced on Wednesday. Accompanying information was a slight cause for concern as the BOJ downgraded expected GDP growth for the 2014/15 financial year. But on a positive note, Governor Kuroda also stated that if economic risks do not materialise there will be no need to change current monetary policy and the upcoming sales tax hike will not hurt the positive cycle building in Japans economy. The BOJ’s monthly economic survey results due later on today offers the final focus ahead of a busy data week coming. Next week sees trade, retail sales, employment and inflation numbers all due for release.


Canada
Earlier in the week we saw data on Canadian manufacturing sales that beat expectation by a good margin. However, this was offset to a degree by wholesale sales data that came in a touch under expectation. The main focus for the week was the Bank of Canada (BOC) monetary policy statement. As widely expected they left rates unchanged at 1%, and although they didn’t move specifically to an easing bias, they are certainly leaning that way due to very low inflation. They are also struggling to understand why increasing foreign demand isn’t leading to an increase in Canadian exports. They do see some upside risk however, with potential benefits from a lower Canadian dollar and stronger US growth. Last night they would have been pleased to see retail sales data come in at +0.6% against an expectation of only +0.2%. And tonight they will be very focused on inflation data that is due to hit the wires. Next week will be a quiet one with on GDP data out on Friday evening.
 
 

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