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Economies of Note - 29th August

Written by Ian Dobbs on August 29th, 2014.      0 comments

A couple of mixed results from Australia this week. Construction work done on Wednesday was a little disappointing coming in well below expectation at -1.2% for the second quarter. The market was expecting a smaller decline of around -0.4%, which would have been unchanged from the previous quarter. This weaker result could have negative implications for GDP with construction activity accounting for around 16% of the economy. However, this was countered by yesterday’s release of private capital expenditure data which was significantly stronger than forecast. The second quarter result of +1.1% was well above expectations for a fall of 0.9%. Adding to the positivity of the report were positive revisions to the prior result and as such the Australian dollar received a small boost from the release. There has been little else of note this week from Australia, however next week the economic calendar is looking pretty full. Building approvals and the current account will be followed by the RBA rate statement on Tuesday. GDP, retails sales and the trade balance round the week out.

New Zealand
Trade balance data from New Zealand came in on the soft side this week driven by a falling export prices for dairy and pine logs. The NZIER were on the wires suggesting the economic recovery has passed its peak and that interest rate increases were biting. They believe growth will ease from 3.5% this year to 2.7% next year and that the RBNZ should now keep rates on hold until 2016. That’s seems somewhat unlikely at this point. Fonterra announced a strategic partnership with a Chinese infant food manufacturer. The partnership has the potential to significantly lift the volume of exports to China with the infant formula market there expected to expand dramatically over the coming years. Over the long term this could certainly have a positive impact on trade and the NZD. Earlier this morning we saw the latest building consents and business confidence data. Both the releases come in on the soft side and helped to pressure the NZD a touch.

United States
It has been another week of very positive data from the United States. A good result from durable goods orders was followed by jump in consumer confidence to the highest level since October 2007. The second reading of Q2 GDP saw it revised higher to 4.2% which was much better than expectations for 3.9%. Weekly unemployment claims remain below the 300k level signalling the potential for further strong gains in next week’s monthly payrolls data. Pending home sales were also very strong, countering the only soft(ish) data on the week that was new home sales. The outlook for the US economy remains very positive and sooner or later the Fed are going to have to move to a more ‘hawkish’ stance and signal the prospect of a rate hike in the first half of next year. Gains in the USD took a pause this week, but the overall trend toward a stronger dollar should remain in place over the coming months. Of some note however, is the continued low level of long term US interest rates. They have failed to move higher over recent weeks, and in fact have actually moved lower. This is not what you would expect from an economy on the mend and with interest rate hikes in the foreseeable future. Next week the highlights include manufacturing and non-manufacturing PMI’s, the trade balance, and non-farm payrolls data.

United Kingdom
It has been a quiet week for data from the United Kingdom. So far we have only seen mortgage approvals that came in a touch under forecast, and CBI realized sales that were much better than expected. They printed at 37 which was the highest reading since June 2012. The British Chamber of Commerce have also been on the wires with a positive report. The have upgraded their GDP forecast for 2014 to 3.2% which would be the highest rate of growth since 2007. The also upgraded forecasts for 2015 and 2016, and see the first rate hike by the Bank of England (BOE) in the first quarter of 2015. The market is also starting to focus on the risks of the upcoming Scottish independence referendum. That vote takes place on September 18 and could throw a real spanner in the works of the UK’s economic recovery, with far reaching consequences. All indications are it could be a very close vote. There is plenty to draw focus next week with manufacturing, construction and service PMI’s set for release ahead of the BOE rate meeting on Thursday.

We have seen another week of generally disappointing data out of Europe and it is becoming increasingly likely that the European Central Bank (ECB) will undertake some form of quantitative easing in the foreseeable future. However, the prospect of more “growth friendly” fiscal policies in Europe has taken a big hit. ECB President Draghi made a call for fiscal policy to play a role in boosting demand last weekend, and this was quickly followed by the French economy minister calling for an end to Germany's obsession with austerity when he spoke on Sunday. Unfortunately by Monday afternoon he, and a large part of the French cabinet, were gone. It seems no one can publicly criticize President Francois Hollande’s (or Germany’s) policies, even though the French economy is all but stagnant and failing to generate jobs or growth after five years of Euro crises. A couple of years ago there was no way Germany would have even considered quantitative easing, yet now they accept it is necessary. By the time they realize they are strangling any prospect of growth in Europe with the strict adherence to austerity, another few years will have passed and Europe will have seen close to a decade of stagnation. It could then take them another decade to turn things around with the use of much more dramatic policies. Europe is looking more and more like Japan every day. Tonight we get the latest reading on Eurozone inflation and it is very unlikely to surprise on the strong side. The market is expecting a small decline to 0.3% from the prior reading of 0.4%, but it could well come in lower than that. The highlight next week will be the ECB rate meeting on Thursday. Ahead of that we get manufacturing and service PMI’s from Spain and Italy along with retail sales and German factory orders.

The Japanese government released its monthly economic assessment on Tuesday and although they have maintained their overall economic view, it does seem they are concerned about weakness in factory output and exports. The pullback in consumption after April's sales tax hike is also proving to be more prolonged than they expected and this raises serious doubts about the economy's ability to withstand the next hike (from 8% to  10%) planned for October. In the last few hours we have seen a raft of data hit the wires. Household spending numbers contracted by a larger margin than expected in July, further evidence of the impact of the sales tax increase. Tokyo inflation (good indicator for national inflation) came in bang on expectations at 2.7% on a year, and industrial production grew by lower than expected. Contradicting other statistics were the latest retail sales numbers which show a surprise +.5% jump against an expected fall in activity of .1%. Next week’s primary focus comes in the form of the BOJ’s monetary policy announcement on Thursday. Before then capital spending and average cash earnings data will offer passing interest.

The Canadian dollar has had a positive week, although it looks to have been driven by positioning and month end flows. The only data released so far has been the current account, which proved a little disappointing coming in at -11.9 billion against expectations for -11.6 billion. We do get GDP data tonight which will be closely watched, and next week there is plenty to draw focus. The Bank of Canada rate statement is followed by the trade balance, employment change and Ivey PMI data.