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Economies of Note - 27th January 2017

Written by Howard Wilcox on January 27th, 2017.      0 comments

Wednesday’s release of inflation data caught the market a little by surprise with the 2016 inflation rate coming in lower at 1.5% with the CPI for December up by only 0.5% against an expected 0.7% which would have given an annualised outcome of 1.6%. This weaker than expected figure shows that the economy is still susceptible to further weakness and it will take longer for inflation to move back into the 2-3% target band making it likely that the RBA will revise downwards its growth and inflation forecasts, increasing potential for another interest rate cut. Our view is that rather than a further cut, rates will now stay longer for lower with any rate moves being very data dependent. The RBA has its first meeting on February 7th. The Australian dollar was sharply lower on release of the CPI data, falling from around 0.7600 against the USD to 0.7515 low over the day, however it has gradually retraced the majority of this loss, helped in part by the rally in equity markets as risk trades become back in favour.  

New Zealand
In contrast to Australia, the New Zealand CPI released Thursday showed a jump of 0.4% in the December quarter lifting the annual rate back to 1.4%, higher than the expected 1.2%. This has pushed inflation back into the RBNZ’s inflation band of 1-3% for the first time since Q3 2014.The higher inflation rate has been affected by the recovery in international oil prices pushing up petrol prices and the continuing housing market price increases. This latest data makes it fairly clear that we have seen the low water mark for interest rates and although the RBNZ will not be in a hurry to raise rates, given the still fragile state of the global economy we expect rates to remain on hold for the next 6 months. More information will come next month when the RBNZ Governor releases the monetary policy statement on February 9th.

United States
Although disappointingly for market participants there has not been much detail or discussion on tax reform, infrastructure growth planning and deregulation, US markets remains Trumptastic, with the Dow surging to past the 20,000 level to new highs, also helped by some good corporate earnings results. With President Trump quickly signing several executive orders along with more positive US economic data, this has also added clarity to the markets boosting confidence in the USD and equities. US economic data releases remain positive underpinning the equity rally, with services PMI figures last night exceeding expectations. Later tonight there are GDP figures for first estimate Q4 GDP expected 2.9%, next week will bring the FOMC statement which if positive on the growth outcome, will stoke speculation about the timing of more rate hikes thus propelling the USD and bond yields higher. Markets closed on a slightly softer tone, as news broke that the Mexican President had cancelled a visit to the US and concerns that the rising US-Mexican tensions were seen to threaten one of the world’s largest bilateral trade relationships. However, overall the week has been positive for the USD/ US equities and we expect next week to begin in the same vein, the FOMC statement on Wednesday and Non-farm payrolls on Friday should provide further direction.

United Kingdom
After concerns on the announcement earlier in the week that the UK Parliament would have to vote on the EU exit, this has been largely ignored as PM May charters a course for a “hard” Brexit with the GBP having enjoying a solid rally as data showed manufacturing confidence was increasing. UK GDP data for Q4 released last night reinforced the solid economic performance, showing that real GDP in the United Kingdom rose 0.6% (2.4% on an annualized basis) in Q4-2016 relative to the previous quarter. Growth surprised to the upside, above the consensus expectation which called for 0.5% growth. For 2016 as a whole, GDP grew 2.0%, a slight slowdown from the 2.2% growth rate registered in 2015. The UK PM is the first foreign leader to visit the US after the election and she will be hoping to nail down a commitment from Trump for a UK-US bilateral trade deal, however any such deal would not take effect until the UK can extricate itself from the UK, but would be positive signal for UK industry and the economy in general.

European economic data continues to remain largely positive with a better than expected rise in German consumer confidence, however the Eurozone currency unit is still under the effect of the “Trump-trade” and has drifted lower against the US unit. Expectations continue that the Eurozone economy will have a relatively “flat’ year with a 1.3% growth driven by the continued ECB stimulus. But with elections due in several European nations in the next 3-4 months, there remains little appetite to address the ongoing structural and institutional weakness that have kept the Eurozone trapped in a low growth zone over the last few years.

Japanese December CPI data is due later today, expectations are for 0.2%-0.3% year-on-year which would be below the previous 0.4%, this level would indicate that there is little chance of a cut in the BoJ stimulus measures anytime soon.
The stronger US economic growth continues to contrast with that of Japan, keeping pressure on the JPY for moves back over the 115 level towards the 120.00 region.

The only economic release from Canada this week has been Wholesale Sales, which came in below expectations at 0.2%. How US President Trump’s policies will affect trade between the two countries is going to be key for the CAD, but for now the market is in the dark. Next week we have Canadian GDP data to digest along with a speech from Governor Poloz.