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Economies of Note - 27th May

Written by Ian Dobbs on May 27th, 2016.      0 comments

Reserve Bank of Australia (RBA) Governor Stevens delivered a speech on Tuesday that pressured the Australian dollar.  He said that inflation is very low and technically it is below their announced target. He added they are committed to inflation targeting and that they see the exchange rate as a shock absorber, and that at the moment the AUD is doing what you’d expect. This speech was viewed as somewhat more dovish than the RBA minutes released last week and it’s certainly increased the chances of another interest rate cut from the central bank over the coming months. The key data released this week was yesterday’s Private Capital expenditure. While the headline figure was weaker than forecast at -5.2%, the estimates for capex going forward have improved somewhat and this helped to limit the negative impact of the report. We have a speech from the RBA Assistant Governor in the coming hours which will be closely watched, then next week attention will turn to building approvals, GDP, retail sales and the trade balance.

New Zealand
A couple of conflicting releases helped to increase volatility in the New Zealand dollar this week. The first was Wednesday’s trade balance that came in much better than forecast. NZ produced a surplus of 292m in April vs expectation of only 25m. The rise was driven largely by a 4.0% increase in exports with smaller commodities, such as fruit, offsetting the falls in the dairy sector. The report supported the New Zealand dollar which helped it regain much of the ground it lost earlier in the week. Yesterday morning however the currency took another dive in the wake of Fonterra’s release of the forecasted farm gate milk price for the 2016/17 season. That came in at the lower end of expectations at $4.25 per kgms. Fonterra said conditions on the farm are very challenging and that the high NZD is impacting milk price forecasts. However, they did say they expect global dairy pricing to gradually improve over the season. Also released yesterday was the government's budget, but as this held few surprises there was little reaction in the markets. The government expects to post a NZ$668m surplus in the year to June 2016 and a surplus of NZ$719m for 2016/17. They see GDP growth at around 2.8% over the next 5 years, inflation at 2% in 2017, and unemployment falling below 5% in 2018. Next week to draw focus we have another Global Dairy Trade auction along with ANZ business confidence.

United States
We have seen some very mixed data from the US this week which won’t make the upcoming Fed meeting any easier to call. Housing market indicators continue to print on the strong side with new home sales and pending home sales both coming in much better than forecast. Countering this have been declines in the manufacturing and service sector PMI’s and a somewhat disappointing durable goods report. Although the headline durable good figure was stronger than expected, it seems to have been skewed by transportation orders. The core number, which strips out defence and transport spending, came in at -0.8% vs +0.3% forecast. Tonight’s preliminary reading of GDP will be closely analysed as will a speech from Fed Chair Yellen. The past couple of weeks have seen all other Fed governors singing the same tune in what seems to have been a very concerted attempted by the Fed to get a message out. That is that the June Fed meeting is ‘live’ i.e. they could decide to raise interest rates. This consistent message has been heard by the markets who have now priced in around a 35% chance of a rate hike, from what was only 4% a few weeks ago. The key opinion in the Fed however comes from Yellen, so if she also stresses June is ‘live’ when she speaks tomorrow morning, it should support the USD. Next week there will be plenty of data to digest. The highlights will be CB consumer confidence, ISM manufacturing, ADP employment change and Non-Farm employment change.

United Kingdom
The UK Pound has seen some renewed strength over recent weeks, but it’s going to be difficult for the gains to continue with the Brexit vote looming large. Poll results continue to be conflicting and this means the outcome is far from certain. As the referendum draws closer the potential for wild swings in the value of the GBP increases as economic data takes a back seat to various poll outcomes. We heard from the Bank of England's (BOE) Governor Carney earlier in the week and he said UK inflation has passed through its trough. He expects inflation to gradually rise through 2016. He added that a vote to remain in the EU would likely see the next move in interest rates being up, while a vote to leave the EU would slow growth and cause a weaker pound. The second estimate of GDP released last night failed to provide any real surprise printing as expected at 0.4%. Mortgage approvals were softer than forecast but that may well have something to do with the uncertainty around the upcoming referendum. Next week to draw focus we have a trifecta of PMI’s from the manufacturing, construction and services sectors.

We have seen a mixed bag of data out of Europe this week with the overall impact being a somewhat weaker EUR. Manufacturing PMI disappointed, printing below forecast and down on last month, while the service sector PMI performed slightly better coming in unchanged from prior. The best result of the week came from the German IFO Business Climate Index which increased to 107.7 from 106.7 prior. However, this was countered by the German ZEW Economic Sentiment reading which fell from 11.2 to 6.4. Greece was again in the headlines this week, but it was mostly good news. The Eurogroup agreed on a EUR10.3b disbursement to Greece which will only help to kick the can further down the road. It seems the IMF are still on board, despite their very strong preference for some sort of debt relief for the country. At this stage that’s still simply too unpalatable for European politicians to sell to their votes so it’s not getting much attention. Unfortunately Greece’s debt dynamics are still far from sustainable, barring some sort of miracle growth spurt. There is a raft of second tier data set for release next week, but he main focus will be on Thursday’s ECB rate meeting and subsequent press conference.

Data from Japan earlier in the week will raise some concerns about economic growth. Although the trade balance showed a bigger than forecast surplus, it was driven by a plunge in imports of 23%, while exports fell by a smaller margin of 10%. That’s far from reassuring data. This was followed by manufacturing PMI data that showed the sharpest deterioration in operating conditions in three years. There are many forecasters now suggesting that Abenomics has failed. The ambitious reform package kick off in 2012 by PM Abe hasn’t gained the traction is was aiming for. Added to this it’s starting to look like monetary policy has reached limits in Japan, in terms of stimulating growth and inflation. The central bank can do more of the same, but it’s having less and less impact. PM Abe now has a very tough decision to make on whether to delay the next sales tax hike planned for next year. Raising sales tax is key to gaining international trust in the ability of the Japanese government to service is immense debt load. But the economy just isn’t strong enough to support it at this stage. If legendary bond investor Bill Gross is right, Japan has only one option. That is for the central bank to buy all the government debt and then simply forgive it. The ramifications of that sort of move would be beyond dramatic. Japan’s aging population is however a demographic time bomb and ultimately it’s looking more and more likely something very extreme will need to take place in the coming years. Data next week to draw focus includes retail sales, household spending, unemployment and consumer confidence.

There has been little in terms of economic data from Canada this week. The main focus was the Bank of Canada rate statement, but even that held few surprises. The central bank left interest rates unchanged at 0.5% as widely expected, saying the “current stance of monetary policy is still appropriate”. They said Q1 growth appears to be in line with BOC projections, while Q2 GDP could be cut by 1.25 percentage points due to the Alberta fires. They also stated that housing vulnerabilities have increased. The highlights of next week’s economic calendar will be GDP and the trade balance.