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Economies of Note - 29th April

Written by Ian Dobbs on April 29th, 2016.      0 comments

The data week in Australia was dominated by Wednesday’s release of the Q1 inflation data. A much weaker than expected print saw the AUD lose over 100pts against the USD immediately following the announcement. The 0.2% fall in the headline number during the quarter was ½ a percent lower than expectations. The important core measure fell to an annualised 1.7%, well below both the markets expectation and the RBA’s targeted 2% level. Expectations for an RBA rate cut next week jumped from around 13% prior to 58% after the data, whilst an 80% probability is now placed on the likelihood of two 25bps cuts by the year’s end. Private sector credit data due this afternoon is the other key data point of interest for the week and will come prior to a speech by RBA assistant Governor Debelle. The AUD has managed a partial recovery post the inflation data thanks to a continued improvement in key commodities and a weaker USD which has eased on the back of soft US data flow and a US Fed which remained cautious at yesterday’s FOMC meeting.

New Zealand
The event calendar in New Zealand this week was dominated by yesterday’s OCR review. This saw the RBNZ leave rates on hold at 2.25%, but deliver a slightly more hawkish statement than expected whilst still leaving the door open for further cuts should further policy easing be required. Risks around the housing market were noted from the current high net migration levels. Governor Wheeler also noted that he expected inflation to rise as the effects of low oil prices dropped out of the calculation and as capacity pressures built. The nature of the statement had many in the market reducing their expectations for further cuts this year. When combined with a weaker USD and stronger commodity prices, this has sent the NZD significantly higher against most of its key trading partner currencies over the last 24 hours. Trade data for March which was released earlier in the week had little impact as weaker than expected export numbers led to a miss in the monthly number. Building consents data released this morning declined sharply in the month of March reversing most of the previous month’s 10.8% gain.

United States
The USD (DXY index) has spent much of this week on the back foot. The week was dominated by yesterday’s FOMC monetary policy meeting announcement. The meeting saw the Federal Reserve hold rates (0.25-0.50%) and policy and make only minor adjustments to the wording from the March meeting as they removed the previous reference to the risks posed by global events by instead saying it would “closely monitor inflation indicators and global economic and financial developments”. The statement emphasised the strength of the domestic economy and job gains and indicators which point to additional strengthening of the labour market. The Fed shied away from any indication on the timing of the next move in rates, although market pricing for a June hike lifted by ~20% after the statement. Data this week started with a decline in New Homes Sales for March and a notable miss in the latest Durable goods numbers. Consumer confidence and Services PMI data for April both missed their forecasts, although the Pending Home Sales number exceeded expectations. Key data released overnight included the Q1 GDP report which undershot expectations as it recorded the weakest quarterly growth in 2 years. Personal consumption data also released overnight was a touch better than expectations.

United Kingdom
The GBP continues to trade with a solid tone against the USD in current trade as reducing expectations of a Brexit is seen as a key reason supporting the GBP. Fears of the economic consequences of an exit from the EU have no doubt helped swing the polls in recent weeks. These come as the Organisation for Economic Cooperation and Development (OECD) warned this week that an exit would leave the UK GDP 3% lower by 2020, and 5% lower by 2030. The data event calendar for the week was dominated by the advance estimate of Q1 GDP on Wednesday which rose in line with expectations. The annual rate was unchanged from the quarter prior, although the quarterly rate slipped on the back of weakness in production, construction and agriculture. Mortgage approvals data released a day earlier undershot the consensus, whilst the overnight release of the Nationwide House Price Index was slightly softer than expectations. Focus for tonight will again be on further mortgage and lending data although expect these releases to garner only a passing interest.

The EUR has continued to grind out gains against the USD over the course of this week. Local data releases have been second tier which has left the EUR to derive most of its demand from an environment of a weaker USD overall. Worse than expected key US data overnight and a message of one of caution from the US Fed yesterday have helped underpin the EUR gains in recent trade. Data released over the course of the week began with a decline in the German IFO business climate index on Monday. German consumer climate data topped expectations, although both the French and Italian consumer confidence numbers missed their forecast. European credit data showed that the slow recovery in the credit cycle is continuing, whilst German employment data indicates a continuation in the theme of gradual improvement, this as unemployment fell 16k in April (4k exp). German inflation data was soft however, and provides further evidence of benign inflation pressures. Of immediate interest for the EUR will be tonight’s EU Q1 GDP data, euro-zone inflation and unemployment numbers will also be released at the same time.

Trade in the JPY this week has been dominated by the events of the last 24 hours. This has seen the JPY soar by over 3.5% against the USD following the surprise decision by the BOJ to not provide any further stimulus to the Japanese economy at yesterday’s central bank meeting. The rally against the USD was the largest in more than seven years and came as speculation of raised stimulus mounted in recent days on reports last week that the central bank was weighing whether to provide negative interest rates to banks. Governor Kuroda defended the decision, citing the need for greater time to assess the effects of negative interest rates in the process repeating his pledge to do whatever is necessary to return inflation to the targeted 2%. Data released earlier in the day which showed core inflation falling to -0.3% y/y in March only served to heighten expectations of a BOJ move. Other data was more positive and included a rise in household spending, better than expected industrial production numbers, less than expected decline in retail sales and a small decline in the latest unemployment rate.

The theme of CAD strength against the USD remains well entrenched during trade this week. A quiet week for Canadian data so far has meant that once again it has been down to energy markets developments to drive CAD sentiment. The CAD has enjoyed positive momentum from oil prices which have set fresh highs for 2016 this week. In part as the USD eased after the FOMC left US rates on hold, but also after the EIA revealed that US oil production had fallen by another 20k barrels over the week. US production (8.94 million per day) is now down 800k barrels per day from the April 2015 peak. The markets now wait for direction from tonight’s Canadian GDP data for February to see whether the positive data-flow can continue on after last week’s strong retail sales and inflation prints. Raw materials price data is also scheduled for release but is likely to garner less interest.