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Economies of Note - 25th July

Written by Ian Dobbs on July 25th, 2014.      0 comments

Reserve Bank of Australia Governor Stevens spoke on Tuesday afternoon, but he shied away from commenting directly on the Australian dollar or monetary policy. He did say that low rates are doing the things they normally do and that the RBA is doing all that could be reasonably expected at the moment. He added that he hopes never to be in a position to need unconventional policy (read: quantitative easing). That seems very unlikely at the moment, especially in light of Wednesday’s inflation data. The headline figure was right on expectation at +0.5%, but the trimmed mean figure (which is key for the RBA) was a touch stronger than forecast at 0.8%. This is also a significant jump from the prior reading of 0.5%. The net result of this data only serves to underscore the central banks current ‘neutral’ stance. It is certainly not weak enough to justify a rate cut, while there is little evidence of enough upside pressure to create concern. The Australian dollar took the news positively jumping higher across the board. It was then given a further boost yesterday when Chinese manufacturing data beat expectations. It seems the target stimulus measures the Bank of China recently implemented are having the desired effect. Next week from Australia we have new home sales, building approvals, import prices and producer prices.

New Zealand
The main event in economic terms for New Zealand this week was the RBNZ rate statement released yesterday morning. The central bank chose to hike rates again by 0.25% to 3.50%, but then also signalled a pause in the tightening cycle. They also took the opportunity to ‘jawbone’ the currency lower saying ‘the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall’. The decision to pause has been driven by declining export prices for dairy and timber, continued moderate inflation figures, and a cooling of the housing market. The bank now thinks it is prudent that there be a period of assessment before interest rates adjust further towards a more neutral level. It seems likely the bank will pause until at least December, although they could easily be on hold until March next year. Expectations for when the next hike will come will be driven by data between now and then. The bank would have been happy with the reaction of the currency that fell one cent against the USD in the hours after the release. Other data this week in the form of net migration and the trade balance have been supportive for the economic outlook with both figures coming in above expectation. There is little on the calendar for next week with only building consents of any note.

United States
A broad rise in prices during May took annual inflation in the US to 2.1%, its highest level since October 2012. On Tuesday we got Junes inflation figures and the headline number remained at 2.1% which was widely expected. The core reading however, which strips out food and energy actually fell a touch, coming in at 1.9% from 2.0% previously. The Fed will be happy to see core inflation moderate a touch as it gives them some extra breathing space before the need to start normalising monetary policy. A couple of readings from the housing market this week have given conflicting signals. Existing home sales were up 2.6% in the month at the highest levels since October 2013, but new home sales disappointed coming in well below expectation with the prior reading also revised down. Last night’s weekly jobless claims figure will have helped to cement views for a strong monthly payrolls result at the end of next week. Jobless claims fell to 284k from 303k previously. That was below expectation and the lowest level since 2006. The USD gained ground on the back of the data last night and overall this week it has started to show hints of a little more strength. We are still a long way from the broad based rally many would have expected by now, but the dollar does seem to be starting to find its legs. Other data to watch out for next week include pending home sales, consumer confidence, manufacturing PMI and GDP.

United Kingdom
There have been a couple of key releases from the UK so far this week, and tonight we get the latest reading of GDP to add in the mix. Wednesday saw the Bank of England (BOE) minutes hit the wires and the market was a little disappointed the Monetary Policy Committee (MPC) voted unanimously to keep rate on hold. There was some expectation that one or two of the more ‘hawkish’ members might vote for a hike. The failure for that to eventuate saw the UK Pound lose some ground. There was some discussion within the committee about the case for early rate hikes, but it seems concerns about hurting the recovery outweighed anything else, hence the 9-0 vote. Governor Carney also said in a speech this week the BOE have given clear guidance that when rates do rise it will be gradual and limited. The other key data point released this week was last night’s retail sales figures. The June figure was a little disappointing coming in at +0.1% vs the +0.3% expected. This one result probably understates the underlying strength of the consumer recovery. If we take a look at the whole second quarter we see that sales volumes rose between April and June at a rate of 1.6% which is the fastest quarterly pace in ten years. So although the UK Pound has seen a little bit of pressure this week on the back of these releases, the big picture remains the same. The UK recovery is continuing at a decent pace and the risks have to be skewed to a rate hike coming sooner rather than later. The highlight next week will be manufacturing PMI due on Friday evening.

There hasn’t been a lot of data released from Europe this week. The most interesting figures came in the form of manufacturing PMI’s. The French result declined further into contractionary territory while the German reading continues to perform well beating expectation. That helped the overall Eurozone reading improve a touch to 51.9 from 51.8 previously. The Euro continues to decline ever so slowly, which will be pleasing for the ECB. An official from the central bank this week said the June rate cuts are affecting the market exactly as they wanted. The talk is now that there will be no further changes in policy until at least December. This week we have also seen data showing consumer confidence declined a touch and that EU debt to GDP ratios continue to grow. Euro wide debt now stands at 93.9% of GDP, up from 92.7% in the final quarter of last year. Obviously there is still a lot of work to be done in the Eurozone. The German IFO business climate index released tonight will be closely watched as it is a good leading indicator of the broader German economy. The market is expecting a very small decline to a level of 109.6. Next week we get inflation, unemployment and German retail sales data to digest.

The Japanese government this week trimmed their economic growth forecasts for the current year to 1.2% from 1.4% previously. They blamed this on foreign demand with exports not growing as much as expected. Japan has the worst debt to GDP ratio of any industrialized nation, currently sitting well above 200%, and the government stressed it won’t give up on its battle to bring debt issuance under control. Making matters even more difficult is the fact that Japan is dealing with some significant demographic challenges, and this point was recognized by Prime Minister Abe this week. Data wise we have seen the trade balance come in a little better than forecast while manufacturing PMI disappointed missing expectations by a fair margin.

The only data released from Canada this week has been retails sales. The headline figure rose more than expected at +0.7%, but the core number that strips out autos was a lot tamer coming in at just +0.1%. This was below the +0.3% expectation and as such it weighed on the currency to a degree. Next week we get the Raw Material Price Index and GDP data to digest.