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Economies of Note - 24th July

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

The Reserve Bank of Australia’s minutes released on Tuesday were largely in line with expectations and there were no big surprises. If anything the minutes suggested perhaps a more neutral bias than the market believes. They said “Steady policy was appropriate given current and prospective conditions”, and that they “would review coming data to judge if rates remain appropriate.” They also said a further fall in the Australian dollar was likely and necessary to provide assistance to the economy. On Wednesday we got the latest reading of inflation and it was also largely in line with forecasts. Headline inflation came in at +0.7% with the trimmed mean figure (which excludes the most volatile 30% of items) printing at +0.6%. Yesterday we saw quarterly business confidence improve to a reading of 4 from 0 prior. This is consistent with the long run average for the series and is the best reading since the third quarter of 2014. RBA Governor Stevens also released a speech this week in which he said the economy was making the required changes, just at a slower pace than the central bank would have liked. He added, although recent growth has been disappointing, it has hardly been disastrous, and that it may be that the lower growth rate of the past few years is now the new normal. Next week to draw focus we have building approvals, import prices and producer prices data.

New Zealand
The Reserve Bank of New Zealand (RBNZ) did what just about everybody in the market expected yesterday, and cut interest rates by 0.25% to 3.00%. The statement released however, was probably not quite as dovish (negative) as expected, and that fact, combined with record levels of short (sold) positions in the NZ dollar, caused the currency to jump sharply higher. Make no mistake, the central bank maintains a firm easing bias and another cut in September is very likely. The statement they released specifically said “At this point, some further easing seems likely.” Their rhetoric on the exchange rate has softened somewhat. They no longer refer to the level of the currency as “unjustified and unsustainable” instead suggesting “further depreciation is necessary”. The Governor also stated that inflation is expected to be close to the midpoint of the 1% to 3% target range by early next year. That’s hardly the sort of talk you would use to justify slashing another 100 points of the cash rate. So while one more interest rate cut is very likely, another one after that is 50/50 at best. With the market having swung exceptionally negative on the economic outlook and the NZ dollar over past couple of months, we are now seeing a slight moderation of those views. This near term NZD strength is likely run out of steam over the coming days, and longer term the risks are still all to the downside. But as we have said before, the easy work in the currency has already been done, downside price action from here will be a lot harder fought. Next week looks a little quiet on the data front with just building consents and business confidence set for release.

United States
It has been a relatively quiet week in terms of economic data from the United States this week. We did see another positive sign of strength in the housing market with existing home sales increasing by more than forecast at 5.49m. But countering this we saw some major benchmark revisions to industrial production data that suggests the sector has been much softer than reported over the past three years. The scale of the revisions were a surprise with the likes of durable goods production for 2012 lowered to 3.5% from 6.0%. 2013 was cut to 2% from 5%. It doesn’t make good reading and overall the industrial sector is 2.6% smaller than the Fed thought. Last night we got weekly jobless claims data and this was an eyebrow raiser. Jobless claims fell to 255k from 279k prior. That is the lowest level since 1973!. It’s unclear what drove the sharp decline and whether or not it will be reversed next week, but either way it gave the USD a significant boost. Tonight to draw focus we have manufacturing PMI and new home sales figures. Then next week we have durable goods orders, CB consumer confidence, the FOMC rate statement, GDP, the employment cost index and Chicago PMI.

United Kingdom
UK public sector net borrowing data released on Tuesday showed a further improvement in government finances. Net borrowing in June fell to 9.36bn down from 10.12bn prior. Improving tax revenues were a major driver of the decline. The Bank of England (BOE) minutes were released on Wednesday and they showed that if it hadn’t been for uncertainty around Greece, a couple of members may well have voted for an interest rate hike. That’s not completely surprising and recent comments from Governor Carney have suggested that an interest rate hike is going to “come into sharper focus around the turn of this year.” Last night produced a negative surprise with retail sales data declining unexpectedly. Sales in June fell 0.2% versus expectation of a 0.3% rise. Sales in the second quarter were therefore +0.7% which is slower than the first quarters +0.9%, although it’s still a healthy level of growth. Next week we have GDP data to draw focus along with net lending to individuals.

In something of a refreshing change, Europe has been mostly out of the headlines this week. The Greek crisis is drifting from the front pages and there has been little in the way of key economic data released so far. Tonight however, we do have manufacturing and service sector PMI readings which will be closely watched. While most readers will be aware that Greece’s current debt load, at nearly 180% of GDP, is completely unsustainable, it may come as a surprise just how precarious some other key European countries debt loads are. Both France and Italy are extremely vulnerable with debt to GDP ratios of 96% and 133% respectively. Now those ratios may be well below Greece’s but they are far from healthy and they are both growing. France is currently running budget deficits of around 4% of GDP and there is little hope of enough economic growth over the coming year to significantly improve that. Italy is running smaller budget deficits, but it’s debt pile at 133% of GDP is frightening, and again there has been almost no economic growth in the country recently. Both of these countries are too big to try and bail out should things spiral out of control. All we need is a significant slowdown of the global economy and these debt and deficit figures will start to balloon past the point of no return. One could easily look at the current rout in commodities as a very negative signal for global growth. The next Eurozone crisis may not be that many years away and it could be a whole lot bigger than Greece.

It has been a relatively quiet week data wise from Japan. The trade balance yesterday came in bang on expectation at -0.25t and had no market impact. Earlier in the week we saw comments from the BOJ’s Kuroda who said he expects the meet the inflation target (of 2%) in fiscal year 2015/16. He added he sees no need for additional QE now, but would not hesitate to ease if needed. The IMF are not so confident of him hitting that inflation target. In a report released last night they described the 2% target as ‘challenging’. They said inflation may pick up to 1.5% in the medium term, but gains past there look like a struggle. Japanese PM Abe was also on the wires this week saying they cannot say for definite they have escaped deflation. He wants to talk to firms to encourage capital investment and he is confident the government can create conditions to raise sales tax to 10%. Next week from Japan we data on retail sales, household spending, inflation and unemployment.

We have seen a couple of contrasting data releases from Canada this week. Wholesale sales disappointed printing down 1.0% against an expectation of +0.1%. But retail sales came in stronger than forecast at +1.0%. The market was expecting a gain of around +0.4%. The Canadian dollar has remained broadly under pressure thanks to last week’s interest rate cut from the Bank of Canada and oil prices that have declined back below $50 a barrel. Next week from Canada we have the raw material price index along with GDP data to digest.