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Economies of Note - 25th September

Written by Ian Dobbs on September 25th, 2015.      0 comments

There hasn’t been a lot of data released from Australia this week, but the currency, and the economic outlook, have been under constant pressure. We did see a jump of 8.7% in the ANZ-Roy Morgan confidence survey, which was largely viewed as a vote of confidence in the new prime minister. The house price index also came in stronger than forecast at +4.7%, but it had no market impact. There have been a number of articles and reports by forecasters recently suggesting the Australian housing boom is peaking. A big reduction in auction clearance rates is highlighted as a sign of just that. It’s also part of the reason many forecasters have been revising down their economic forecasts for Australia. There is certainly a lot of negativity out there, with many banks now expecting further cash rate easing from the RBA either very later this year or in the first half of 2016. Waning support for the non-mining sector is only part of the picture. Slower global growth and a continued downturn in China are also key factors and in this environment it’s going to be hard to see the unemployment rate improving at all. Reinforcing this outlook was China’s manufacturing PMI data on Wednesday which declined again to 47.0. The market was expecting a small improvement to 47.6. Next week we have building approvals and retail sales data to draw focus.

New Zealand
The big news this week from New Zealand was Fonterra’s announcement that they are revising up the 2014/15 milk pay-out to $NZ4.40 per kg from $3.85. Forecasts for the 2015/16 season are also up at $4.60. Although that’s still below the cost of production for most farmers, it’s certainly a lot less gloomy than it could have been. Milk prices have lifted globally over recent months and these improved forecasts are as a result of exactly that. The New Zealand dollar has benefited from the improving dairy outlook and rightly so. We are also now seeing many forecasters push back their expectation for another interest rate cut from the RBNZ from October to December. The central bank were surprisingly dovish at the last meeting, but the dairy sector is now looking significantly better than their forecasts had assumed. This may well be enough to see them hold off cutting in October so they can take stock of how the broader economy is progressing. The only other data of note this week was the trade balance. Although it posted a bigger deficit than forecast, exports were stronger than expected and that is a positive development for economic growth. Next week we have building consents and business confidence data to digest.

United States
Data from the US hasn’t had a big impact this week. The US dollar has remained broadly in demand with gains against most other currencies. A weaker reading from existing home sales was countered by strong than forecast new home sales. Durable goods orders were generally disappointing. Although the headline reading fell less than expected at -2.0%, the core reading was softer than forecast and there were negative revisions to prior numbers. This weighed on the USD for a short time, but the market was waiting to hear from Fed Chair Yellen who was due to speak earlier this morning. She said she expects a rate hike later this year and the FOMC does not expect recent global economic and financial developments to significantly affect the path of monetary policy. Although there were no real surprises in her speech it does reinforce the view that despite deciding to keep rates on hold last week, the Fed still firmly believe a rate hike is coming before the end of the year. That expectation has largely been responsible for underpinning the USD gains this week. There is plenty of data to digest of the coming week with the highlights being CB consumer confidence, Chicago PMI, personal spending and income, ISM manufacturing PMI and non-farm employment change.

United Kingdom
The only data of note from the UK this week was public sector net borrowing. George Osborne’s plans to cut the deficit by a quarter this year certainly suffered a setback after the data showed borrowing rose GBP1.4bn to 12.1bn compared with the same period in 2014. The UK economy has slowed down a touch over recent months and the Chancellor’s deficit targets may well be hampered by a global slowdown on the back of China and emerging market in general. The Bank of England's (BOE) Broadbent has been on the wires saying he’s not surprised the markets have pushed back the timing of rate hikes by the BOE on the back of the global outlook. He added he’s certainly not concerned about emerging market risks and the BOE must weigh up a fairly robust UK recovery with weakness in the rest of the world. Next week to draw focus we have data on net lending to individuals, the current account, the final reading of GDP, manufacturing and construction PMI’s.

PMI data out of Europe this week was something of a mixed bag. France showed improvements in all PMI readings while Germany disappointed across the board. Overall the Eurozone PMI’s for both manufacturing and services declined a touch, but they are still well above the key 50 level which denotes contraction or expansion in the sectors. The highlight of the week, and the main focus, was on a speech by ECB President Draghi on Wednesday. He made it clear the central bank was more than willing to act further if the outlook deteriorated. He specifically said they would extend quantitative easing beyond 2016 if needed and that they are very alert to global risks. China’s slowdown, a rising Euro and lower oil prices are all contributing to making it harder for the ECB to get inflation back toward 2%. The ECB needs more time and evidence before committing to extending QE, but they are certainly willing to do so if needs be. Next week from Europe we have German retail sales, French consumer spending, inflation and unemployment data set for release.

It’s been a very quiet week for economic releases from Japan due to bank holidays on Monday, Tuesday and Wednesday. The only release of note has been manufacturing PMI which declined by more than expected to 50.9 from 51.7 prior. Worse than the headline number however, was the export orders component which declined by the largest amount in 31 months. Sales volumes to China are big factor in this and it’s causing a general slowdown of expansion in the Japanese manufacturing sector. We still have inflation data to come today, then next week we get retail sales, the quarterly Tankan report, household spending and the unemployment rate.

Two releases from Canada this week both disappointed. Wholesale sales came in flat versus expectation of a 0.3% rise, and although retail sales printed on expectation at 0.5%, if you strip out autos, it too was flat. The Bank of Canada (BOC) are hoping for the oil price shock to be limited to the oil sector, but disappointing core retail sales figure suggests it’s having a much broader impact. BOC Governor Poloz delivered a speech this week and he said Canada is a highly diversified economy. He added although 20% of Canadian GDP is resource related, “you’ve got to believe it’s better to have some of this stuff, than not to have this stuff”. He declined to make any predictions on where the price of oil might go. Next week we have the raw material price index and GDP data to draw focus.