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Economies of Note - 27 February

Written by Ian Dobbs on February 27th, 2015.      0 comments

Data from Australia this week hasn’t added any clarity to the debate around whether the Reserve Bank of Australia (RBA) will cut interest rates again when they meet next week. Construction work done fell by much less than expected coming in at -0.2% quarter on quarter. The market was expecting a result of -1.2%. Although the mining downturn is impacting construction, private home building activity is picking up much of the slack and that will please the central bank. The wage price index came in bang on expectation at +0.6% for the fourth quarter, and +2.5% year on year. The point to note here is that this is the equal lowest on record since the series began in 1997. This would support the case for further easing from the RBA. Yesterday we had private capital expenditure data and this was disappointing printing at -2.2% versus expectations of -1.6%. The cyclical downswing in mining investment is obviously a drag on capital spending. Somewhat more encouraging was the estimate for capex spending in 2014/15 which has only been revised down slightly. So next week’s RBA meeting will be very interesting. You could easily make a case for them to cut again, or hold off until May. Ahead of that decision on Tuesday afternoon we have building consents data, then later in the week we get GDP, retail sales, and the trade balance.

New Zealand
The New Zealand dollar saw some pressure early in the week on the back of inflation expectations data. Two year expectations for inflation fell from 2.06% to 1.8%, with one year expectations down at just 1.11% from 1.59% previously. This certainly supports the case for the Reserve Bank (RBNZ) to remain on hold this year, with some commentators suggesting it even gives the RBNZ scope to ease. However, that is unlikely with the Auckland housing market still red hot. The New Zealand Institute of Economic Research (NZIER) published their view on interest rates this week and they believe the central bank will remain on hold throughout 2015. Although they don’t believe the RBNZ can justify any change in the official cash rate this year, they do believe the bank should use further macro-prudential tools to cool the Auckland property market. Yesterday’s migration data will only add fuel to that fire with migration hitting a new record high of 53,800 in the year to January. That’s twice as many migrants as the previous year and there is no sign of a slowdown as yet. The other notable data release this week was the trade balance that showed a surplus of $56m versus expectations of a $162m deficit. The improvement was down to a reduced value of imports, thanks in large part to cheaper oil. Next week the economic calendar looks very light with only another dairy auction from Fonterra of any note.

United States
A major focus for markets this week was the semi-annual testimony by fed Chair Janet Yellen to the Senate Banking Committee. With a recent soft run of economic data the market was keen to see if there were any hints that an expected June interest rate hike might be delayed. Yellen was very balanced in her comments suggesting the Fed was pleased with economic progress, convinced there was room for improvement and still pondering when to start raising rates. Overall the market took the testimony as slightly ‘dovish’ and as such the US dollar came under some pressure. In terms of data this week we have seen some mixed results. Existing home sales and consumer confidence were both weaker than forecast, while new home sales and services PMI surprised on the strong side. Core Inflation data released last night also came in stronger than forecast as did durable goods orders. These caused something of a turnaround in the USD and it has made good gains in the past 12 hours. Tonight we have GDP data to draw focus and next week we get the ISM manufacturing and non-manufacturing PMI’s along with key employment data.

United Kingdom
The United Kingdom released the second reading of GDP last night and it came in right on expectation at 0.5% for the fourth quarter. Exports have showed a decent gain which will be pleasing to the Bank of England (BOE), but business investment was much lower than forecast. This is probably due to low oil prices driving down investment in the industry. Governor Carney also spoke this week and he Eurozone crisis as a serious risk for the UK. He added the central bank is aiming to get inflation back to 2% within two years. MPC member Weale said UK interest rates may have to rise earlier than markets expect, and that he is comfortable with the view of inflation at target in early 2017. Next week we have the trifecta of PMI’s from the manufacturing, construction and service sectors to digest, along with the Bank of England rate meeting.

With Greece slowly drifting from the headlines, at least for now, we can start to focus back on the broader European picture. However, it has been interesting to note the divisions that have quickly developed within the Syriza party as a result of their bargaining position completely collapsing in negotiations with the EU. Despite their best intentions, it is very clear Greece have only two choices. Either completely submit to the EU and their demands, or leave the Euro. For the time being there is no support for the latter from either the Greek population or the EU. ECB President Draghi spoke this week and he repeated the call that monetary policy can’t create growth by itself. He also said he is starting to see the first signs of confidence in the real economy. A few data points recently have started to show some improvement and we can add French employment to that list. Net change in French jobseekers recently printed at -19.1k versus +0.8k expected. French consumer confidence also improved a touch to 92 from 91 prior. German unemployment change was released last night and too showed some improvement printing -20k versus expectation of -10k. Tonight we get German inflation and French consumer spending data, then next week we have inflation, retails sales, manufacturing and service PMI’s, and the ECB monetary policy meeting.

There has been very little in the way of economic data released from Japan so far this week. However, we do get a slew of releases in the coming hours with household spending, inflation, unemployment, industrial production and retail sales all set to hit the wires ahead of the weekend. An article in the Nikkei this week made some interesting reading. It suggested the once rock-solid relationship between PM Abe and BOJ Governor Kuroda is starting to crack. This could have serious consequences for Japanese economic policy. This would tally with comments made a few weeks ago by Abe who suggested a revision of law guaranteeing BOJ independence remains a possible future option. Next week the highlight will be average cash earnings data out on Tuesday.

The only release of significance this week from Canada was a speech by Governor Poloz on Wednesday. The Canadian dollar received a boost as it sounded like he isn’t in a hurry to cut rates again. He said the recent rate cut buys them time to see how the economy responds to effects of the oil shock. The January cut also give him greater confidence of reaching full capacity and stable inflation by the end of 2016. Tonight we get inflation data and next week we have GDP, the BOC rate meeting, Ivey PMI, building permits and the trade balance.