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Economies of Note - 2nd May

Written by Ian Dobbs on May 2nd, 2014.      0 comments

It has been a relatively quiet week for economic data out of Australia. The few releases we have seen have had little market impact. Private sector credit came in right on expectation at 0.4%, and the manufacturing index dropped a touch to 44.8. Yesterday we also saw import and export prices that both came in stronger than expected for the March quarter, although a good portion of the increase was due to a weaker Australian dollar. Even the release of Chinese manufacturing PMI data failed to spark life into the market when it printed close to expectation at 50.4. Next week should prove more interesting with some key economic releases on the calendar. Building approvals, trade balance, the RBA rate review and statement, retail sales, and employment change are all set for release.

New Zealand
New Zealand has seen a couple of solid release this week. The trade balance continues to improve and building consents jumped +8.3% vs expectation of +2.0%. The trend for new dwellings has almost doubled since March 2011, although it’s still well below the peak set back in January 2004. The RBNZ put out a release showing its LVR lending restrictions have had an impact in the first six months since implementation. High loan to value lending fell to 5.6% from 25.0% prior to implementation. It is however, a lot harder to judge the effect on actual prices from the policy. Next week we only have employment data to draw focus which is set for release on Wednesday.

United States
The US economy is entering a very interesting period. Without a shadow of doubt, the first quarter was a shocker for growth. That was confirmed when the advance reading of GDP printed on Wednesday night at 0.1% vs 1.2% expected. The previous quarters result was 2.6%, so it was a big fall. Some other poor figures this week, notably construction spending, have seen a number of institutions predict Q1 GDP will actually be revised into negative territory. The big question is how much of this weakness was due to extreme winter weather, and will we get a big bounce back in the second quarter. Historically that has been the case, but it’s hard to compare previous extreme winters with the current situation in the US. Nothing the economy has seen in the last five years compares to historical episodes. The GFC, the massive stimulation and money printing by the FED, this is all uncharted territory. The bond market certainly doesn’t believe a bounce back in growth is around the corner. Ten year treasuries bonds are trading close to their lowest level this year at 2.59%, 30 years bonds are at the lowest level since June 2013, and the USD is show no signs of the broad rally many were expecting this year. The markets are showing warning signs that perhaps all is not well in the economy. Are cracks starting to appear in the economic outlook as the US winds down the massive stimulation it has been providing through money printing (QE)? Or have the markets got it all wrong and current levels provide a phenomenal opportunity to buy USD, sell interest rates, and bet on US economic growth? One key piece of data tonight could help with that decision. Non-farm payrolls data is set for release and once again the market is looking for a strong number in excess of 210k. This week has seen some other strong releases. Pending home sales, personal spending, and manufacturing PMI data all came in above expectations. So tonight’s number will be closely watched and perhaps it can add some much needed volatility to what has been a relatively subdued FX market over the past few weeks. Data to draw focus next week includes non-manufacturing PMI, the trade balance, and a testimony from Fed Chair Yellen.

Inflation in Europe, or to be more precise, the lack thereof, continues to be a concern. Earlier in the week German inflation came in below expectation printing at -0.3%, broader European money supply growth moderated to +1.1% from +1.3% previously, and loans to the private sector contracted -2.2% vs expectation of -2.0%. As a result of these releases, the market revised down its expectation for preliminary Eurozone inflation for April to just +0.7%, and that’s exactly where it printed on Wednesday. Although the ECB continue to suggest deflation is not a threat, you have to ask where’s the risk in adding further stimulus to the economy at this point? The ECB meets next week on Thursday and this will be the key event for the week, however few expect they will undertake further action at this stage. The June meeting could be a different story however. On the positive side this week we have seen French consumer spending come in stronger than expected at +0.4% and German unemployment change drop further than forecast falling by 25k. We get Eurozone unemployment tonight which is expected to remain stable at 11.9%.

United Kingdom
We have seen mostly supportive data from the UK this week. GDP for the first quarter came in at +0.8%, which was slightly below the +0.9% expectation. However, It is a still a solid result and improves on the previous quarter +0.7% reading. Manufacturing PMI was stronger than forecast, as was net lending to individuals data and the Nationwide house price index. The latter is starting to raise further concerns among officials. The BOE’s Dale said “we should be nervous about the housing market”. His concerns were backed up by the BOE’s Cunliffe who said it’s “dangerous to ignore momentum from rising UK house prices”. He added whether to act on housing is the hardest judgement for the Bank of England’s (BOE’s) financial committee in coming months. If things continue this way the market will likely bring forward its expectation for a rate hike early next year. Tonight we get construction PMI and next week service PMI will be followed by the BOE rate meeting.

The only positive result from Japan this week was average cash earnings data that increased 0.7% year on year against an expectation of 0.2%. This did little to improve sentiment that took a hit from poor manufacturing PMI data that collapsed to 49.4 from 53.9 previously. Industrial production for March also underwhelmed printing at +0.3% vs expectation of +0.6%, and construction orders for March came in at -8.8% vs +12.3% previously. The Bank of Japan (BOJ) took no further action after their policy meeting, although it does look like they’ve downgraded 2014 GDP forecast to 1.1% from 1.4%. Prime Minister Abe is vowing to cut corporate tax and he might tie it to a deal to hike wages to help stimulate inflation. Through all this the Yen has been relatively subdued throughout the week. That is likely to continue with a Japanese banking holiday on Monday and Tuesday next week. The only release of note with be Wednesday’s minutes from the BOJ meeting.

It has been a quiet week data wise for Canada with only GDP, which came in bang on expectation at +0.2%, and the Raw Material Price Index which missed forecasts printing at +0.6% vs +1.2% expected. Governor Poloz has been on the wires saying inflation in Canada remains low and that the value of the Canadian dollar has an “almost arithmetical relationship” with prices of natural resources. When asked about the potential for a rate cut, he said if the export recovery does not materialize as expected, the outlook for inflation would therefore be lower, and the bank would re-evaluate its stance. Rate cuts would then be a possibility. Next week should prove interesting with the trade balance, Ivey PMI, building permits and employment change all set for release.