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Economies of Note - 28st November

Written by Ian Dobbs on November 28th, 2014.      0 comments

The Australian dollar has been under pressure for much of this week. The RBA’s Deputy Governor Lowe did his best to talk the currency down in a speech on Tuesday. He said the real exchange rate of the AUD is still quite high and he sees a further drop over time. He also added the RBA can still lower rates if they need to. These comments just added to the negative sentiment toward the AUD that was already struggling on the back of softening commodity prices. Iron ore in particular has been in focus with prices falling below US$70 this week for the first time in five years. A glut of iron ore production has been compounded by declining demand from the world’s biggest user, China. It is for exactly this reason the central bank is keen to see the economy ‘transition’ away from mining into other areas of growth. Yesterday’s Private Capital Expenditure figures suggests this is slowly taking place. The data unexpectedly edged up in the third quarter, by 0.2%, which is the second straight gain. The market was expecting a fall of -1.9%. The equipment, plant and machinery component was much better at +4.4% versus expectations of -1.0%, and this could have positive implications for next week’s GDP data. Capital spending expectations for 2014/15 have also been revised higher and now stand 7.5% above where they were a year ago. Although this data was much better than expected it is still far from being considered strong and overall has done little to alter our view that the RBA will remain on hold for the foreseeable future. Along with GDP next week we have the RBA rate meeting as well as data on building approvals, retails sales and the trade balance.

New Zealand
The New Zealand dollar saw pressure in the early stages of this week helped by declining inflation expectations. Two year expectations fell to 2.06% from 2.23% previously. Trade balance data was also lower than forecast at -908m for the month of October, this was however an improvement over the prior reading of -1367m. Declining dairy exports were the main driver in seeing the data missing expectations which were centred around a deficit of -642m. This also saw China replaced as our top export market by our closest neighbour, Australia. Exports to China were some 40% lower in October from a year earlier. The only other data of note this week came in the form of building consents. These were up 8.8% as the numbers bounced back from last month’s dramatic fall, but again was of limited impact. Next week is looking pretty light on the data front with only the overseas trade index and another Fonterra dairy auction of any note.

United States
Data out of the United States this week suggests something of a moderation / stabilization in economic activity after a very solid third quarter. The second reading of GDP for the July - September period came in much better than forecast at +3.9%. The previous reading was +3.5% and economists had expected a small negative revision to +3.3%. Better consumer spending accounted for a good portion of the increase and this is only likely to increase with the benefit of lower petrol prices going forward. However, this was as good as the data got this week with a slew of subsequent releases all coming in below expectations. New home sales, Chicago PMI, personal income, core durable goods, consumer sentiment and weekly jobless claims all disappointed and eventually weighed on the US dollar. None of these releases were weak enough to raise alarms about the outlook and a slight moderation in activity from the booming third quarter won’t affect expectations for a Fed tightening sometime around the middle of next year. Next week there is plenty of key data to digest with the highlights being manufacturing and non-manufacturing PMI’s, the Fed’s Beige Book and non-farm payrolls.

United Kingdom
Bank of England (BOE) Governor Mark Carney spoke in front of the Treasury Select Committee this week and suggest the central bank will press on delivering an interest rate rise despite the shadow cast by the struggling Eurozone. He did add however, that the combination of low inflation and slowing international demand means hikes could come later, and at a slower rate, than previously expected. He believes there is substantial uncertainty about the estimate of slack in the economy, but that they may have finally turned the corner on wage growth. Market expectations for the first rate hike are currently centred around the third quarter of next year and Carney’s speech has done little to alter this. The second estimate of GDP was also released this week and came in bang on expectation at +0.7% quarter on quarter. We have also seen a couple of slightly weaker than forecast results from preliminary business investment and CBI realized sales, but both had little impact on the value of the GBP. Next week we have PMI’s from the manufacturing, service and construction sectors to digest along with the Bank of England rate meeting.

The Euro has managed some gains this week helped by recent small improvements in some data releases. One such release was Monday’s German IFO business climate index which saw the first improvement since April this year. French business confidence also came in a touch better than forecast while German GDP was in line with expectations at +0.1% for the quarter. Last night we got the latest readings on German inflation and unemployment. While unemployment fell by more than expected so did inflation, which came in at just 0.5% year on year. The market was looking for a result of 0.6% and while that only a small miss, when inflation is that low it is concerning. The ECB’s Noyer has been on the wires this week repeating the call that they are prepared to do more if there is a threat to their goals or outlook. He said the tools they could use include forward guidance and buying securities. A recent Reuters poll of economists show roughly 50% expect the ECB to launch sovereign QE, while unnamed sources within the central bank suggest a decision on whether to buy government bonds will be made in the first quarter of next year. We will hear from Draghi himself next week after the ECB’s rate meeting on Thursday. Other data to watch out for includes retail sales, German factory orders and PMI’s from Spain and Italy.

There hasn’t been much in the way of actual data released from Japan so far this week. In the next couple of hours we do get a rash of releases which include household spending, inflation, unemployment, industrial production and retail sales. The Japanese Cabinet Office released their monthly economic assessment this week. Although they left the overall assessment unchanged there were some notable changes to the previous release. They have turned a little more cautious about future conditions due to declines in consumer sentiment and cautious business confidence. The also suggested gains in the labour market have paused and some parts of the economy are weak. This is certainly a more realistic assessment of the current situation than BOJ Governor Kuroda came out with this week. He repeated the now regular statement that the economy is recovering moderately as a trend. If that was the case then why was there the need for the surprise easing a few weeks ago? The highlight of next week’s economic calendar will be average cash earnings data on Tuesday.

The only data of note from Canada this week was retail sales which came out on Tuesday night. The headline figure was better than expected at +0.8%, which is also a solid improvement over the previous reading of -0.2%. The main driver of the gains were autos, with the core retail sales number, which excludes automobiles, coming in flat at 0.0% against expectations of +0.4%. The Canadian dollar took a hit after the OPEC meeting last night voted not to cut oil production. This caused the price of oil to fall again which weighed on the CAD. Tonight we get GDP data for September and the market is looking for an improvement to +0.4% from -0.1% in August. Next week should prove interesting with the Bank of Canada rate statement, Ivey PMI, employment change and the trade balance all set for release.