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Economies of Note - 28th August

Written by Ian Dobbs on August 28th, 2015.      0 comments

Data from Australia this week has taken a back seat to concerns about Chinese, and global, stock markets. That been said, the two domestic releases we have seen have drawn some attention, and rightly so. We saw construction work done come in much stronger than forecast at +1.6%. The market was expecting something around -1.5%. This was the best reading since late 2013 and although it read more like a report from 2011 when the mining boom was in full swing, it was largely the result of infrastructure work which will not be sustained. The other notable release was private capital expenditure. While the headline number here disappointed printing at -4.0% versus expectations for -2.5%, there was a sizeable improvement in planned investments for 2015-16. Overall however the report is somewhat disappointing and suggests there is a lot of work still to be done for the Australian economy to transition away from mining. Next week’s economic calendar looks a bit more interesting with building approvals, the RBA rate meeting, GDP, retail sales and the trade balance all set for release.

New Zealand
It has been a wild week for the New Zealand dollar as concerns about the Chinese economy, and their stock market in particular, rippled around the globe. In between the gyrations on world bourses however, we did have some domestic data to digest. Tuesday’s inflation expectations came in unchanged and had no real impact on the market. Wednesday’s release of the trade balance was worth noting though with a better than forecast deficit of -649m for July. The improvement was driven by an increase in the value of exports which was up 14%, when compared to July 2014. Although that was partially due to a weaker New Zealand dollar, there were also small increases in the total volume of exports. Meat exports rose 24%, while fruit exports jumped 51%. Tourism is set to become the country's biggest export earner in the near future. Annual visitor numbers reached three million last month and the lower currency is going to continue to help that sector as well. Next week we have business confidence, building consents and other dairy auction to draw focus.

United States
Septembers Fed meeting is shaping up to be a very interesting event. The market turmoil we have seen this week would suggest the chance of an interest rate hike has diminished and I personally believe in all likelihood they probably won't pull the trigger just yet. But the economic data that has come out of the States this week would certainly support a hike. CB consumer confidence surged from a reading of 91.0 last month to 101.5 in August, completely unwinding the prior decline. Durable goods orders also came in much better than forecast up 2.0%. The market was expecting a decline of 0.4%. Not only were all the components of the report strong, but there were positive revisions to prior readings as well. Last night we saw GDP for the second quarter revised sharply higher from the first estimate. Q2 GDP now stands at +3.7%, revised up from 2.3%. If we have another week of strong data next week, rounded off with a solid jobs report on Friday, the Fed will really have something to think about. They desperately want to raise interest rates this year, but the Chinese economic slowdown, and its global ramifications, is a massive spoke in the wheel.

United Kingdom
There has been very little of note released from the United Kingdom so far this week. Tonight we get the second estimate of GDP for the second quarter. The market is expecting the reading to remain unchanged at +0.7%. On Wednesday we did get the CBI realized sales metric which improved from 21 to 24. Although not a stellar result at all, it does suggest some underlying support for retail sales. The UK Pound has lost some ground in recent days and it’s hard to point the finger at any particular reason for the selling. It may well be that the recent market volatility combined with concerns around China and global growth in general are pushing back expectations of an interest rate hike by the Bank of England, and this in turn is weighing on the GBP. Next week we have the trifecta of PMI’s from the manufacturing, construction and services sectors to digest along with data on net lending to individuals.

Although the Euro surged higher in the early stages of this week it wasn’t driven by fundamental data at all. We did see a positive result from the German IFO business climate index which came in stronger than forecast at 108.3, but that figure certainly didn’t drive the Euro to any large degree. The currency’s rise was rather a factor of market positioning, heightened volatility and risk aversion. Most forecasters have been predicting the Euro to decline further over the course of this year, and as such many players in the market are positioned short (sold) Euros. When Chinese stocks kept plunging and this lead to contagion in other world bourses markets panicked and traders decided to take risk off the table. That meant unwinding their Euro shorts (sold positions) and as such the single currency rallied strongly. There has also been suggested recently that the Euro is becoming a ‘safe haven’ currency, and as such it will find a big increase in support during times of market turmoil. With all the problems the Euro region has seen in recent years it would seem odd for the Euro to suddenly become a safe haven play. I suspect its performance in the end is more about market positioning, but only time will tell. One thing's for certain, as markets have calmed down in recent days the Euro has started to give back much of its gains. If long term forecasters are correct, this week has likely provided a great opportunity to sell the single currency with a view to broader declines into year end. There is a raft of second tier data from the Eurozone next week, but the market primary focus will be on the European Central Bank's interest rate meeting on Thursday.

The Japanese Yen saw some serious volatility this week with a classic ‘safe haven’ rally as global stock markets wobbled. China’s economic slowdown has come at the worst possible time for Japan and is largely going to be responsible for them undershooting growth and inflation targets. Many forecasters expect the Bank of Japan will be forced to ease monetary policy further this year and those expectations have been bolstered by officials’ comments this week. An advisor to PM Abe was quoted as saying “if GDP growth [in the third quarter] is zero or negative, then we will need both monetary easing and fiscal measures”. The Chinese Yuan devaluation is a negative for Japanese exporters and the dramatic gains in the Yen seen earlier this week only added insult to injury. Officials will be pleased to see that in recent days, as things have calmed down, the Yen has started to weaken again, but it would be naive to believe the market turmoil is completely behind us. In the past few hours we have seen a raft of data released from Japan. Household spending and retail sales figure proved somewhat contradictory with the former coming in on the soft side, while the latter was stronger than forecast. Inflation was largely as expected printing at -0.1% year on year, while employment was a touch better with the unemployment rate dipping to 3.3% from 3.4% prior. Next week the economic calendar looks a little lighter with just average cash earnings of any note.

There has been little in the way of notable economic data released from Canada this week. We get the raw material price index tonight, but it’s unlikely to be a market mover. Like most currencies the Canadian dollar has seen volatility this week on the back of Chinese and global stock market concerns, but oil prices are also influencing. In the past 24 hours a significant rebound in the price of oil has supported the CAD somewhat. Unfortunately there aren’t many forecasters predicting a big recovery in the price of oil, or any commodities for that matter, in the foreseeable future. Years of low global interest rates and high Chinese demand has resulted in a massive oversupply of commodities in general and it’s going to take a long time, and significant pain, for industries, and whole countries, to adjust. Next week sees a more interesting economic calendar for Canada. GDP, the trade balance, employment change and Ivey PMI will all draw focus.