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Economies of Note - 2nd October

Written by Ian Dobbs on October 2nd, 2015.      0 comments

Data from Australia so far this week hasn’t had much impact on the current economic outlook. That could change this afternoon with the release or retail sales however. Earlier in the week we saw building approvals decline by 6.9% versus -1.8% expected. The data is very volatile and the longer term trend is more important. Trend measures do however, continue to decline. Private sector credit was a little more positive coming in just above expectation at +0.6% for the month. Business credit is actually up 5.3% year on year which is encouraging. Australian manufacturing PMI for September was also a touch stronger than forecast at 52.1. That marks the third consecutive month in expansion (i.e. over 50), and it’s the first time we have seen that since 2010. The IMF releases a report this week on Australia and it wasn’t so rosy. They warn of a potential hard landing in Australian housing, saying house prices are 10% overvalued. They added RBA could ease further if growth disappoints. The RBA meet next week on Tuesday to review interest rates and while there isn’t much expectation for a cut just yet many do suspect further cuts could come late this year or early next. This afternoon’s release of retail sales will add a key piece to the economic jigsaw. The market is looking for a gain of 0.4% after last month's soft -0.1% outcome.

New Zealand
It has been a relatively quiet week on the data front from New Zealand. There have only been two releases and neither has a big market impact. Building consents declined by 4.9%, but this comes after last month's large 20.3% gains. The overall trend is more important here and it is certainly increasing. ANZ business confidence was also released on Wednesday and it recovered to -18.9 from the prior -29.1, which was a six year low. Agriculture continues to be the weakest sub sector, but overall the indicator points toward economic growth of around 2%. We get the NZIER’s quarterly survey of business opinion (QSBO) next week which will be closely watched. This is followed by the latest Global Dairy Trade auction which is also a key release for markets.

United States
We have seen some mixed data from the United States so far this week, but the biggest release is yet to come, that of non-farm payrolls change tonight. On the positive side we have seen better than forecast readings from personal spending, CB consumer confidence, ADP employment change and construction spending. The latter was however, tainted by negative revisions to prior numbers. On the negative side we have seen disappointing outcomes from personal income, pending home sales and ISM manufacturing PMI. The manufacturing PMI result came in at 50.2 and was just the latest in a series of declines since the index peak at 53.5 back in July. Concerns and uncertainty around both China and potential Fed actions seem to be weighing. Without a shadow of a doubt the bright spot of the US economy is employment. We get the latest reading on that with tonight's key payrolls report. The market is looking for a gain in payrolls of just over 200k with the unemployment rate holding steady at 5.1%. Any negative surprise will start to sow the seeds of doubt about a potential interest rate rise by the Fed in December (the October meeting is a very long shot), and will therefore weight on the USD. A positive outcome will continue to see the market happy to buy US dollar on any periods of weakness. Looking ahead to next week we have ISM non-manufacturing PMI along with the trade balance and the Fed meeting minutes to digest.

United Kingdom
The final reading of second quarter GDP was a little disappointing in the UK this week. While the quarterly figure came in as expected at +0.7% the year on year result was weaker at 2.4% versus 2.6% expected. However, his was countered by a number of other more positive releases which included a big improvement in the current account, a sizable jump in CBI realized sales, and the biggest jump in mortgage lending since 2008. We have also seen encouraging data on wages and productivity with unit labour costs jumping to 0.5% in Q2 from 0.3% in Q1, and output per hours improving to 1.3% from 0.5% prior. These are exactly the sort of figures the Bank of England (BOE) will want to see when considering interest rate rises and it certainly sharpens the focus for that to sometime in the first half of 2016. Last night’s release of manufacturing PMI was a touch softer than the prior reading at 51.5, but still stronger than expectations which were for an outcome of 51.3. We get construction PMI tonight and on Monday we have the more important service sector PMI. That will be followed next week by manufacturing and industrial production data, the NIESR’s GDP estimate, and the Bank of England interest rate meeting.

There have been a number of soft data points released from Europe this week which have only served to reinforce expectations that the European Central Bank (ECB) will eventually extend their QE programme. Eurozone inflation was the main focus and ECB President Draghi has been warning that the figures could start to slip again. He wasn’t wrong with September inflation falling to -0.1% from +0.1% prior. The weakness was driven by energy and as such the ‘core’ reading held up better at +0.9%, which was unchanged from prior. German retail sales were also disappointing printing at -0.4% versus +0.2% expected, as was Eurozone unemployment which failed to improve from 11.0%. Somewhat more positive was Eurozone manufacturing PMI which held steady at 52.0 suggesting a modest pace of expansion through the quarter. Overall the data hasn’t helped the Euro at all which has seen a modest amount of pressure over the past week. Data to draw focus next week includes retail sales, services PMI and German factory orders. We also have a speech by President Draghi and the ECB minutes set for release.

The key release from Japan this week was the quarterly Tankan survey which is considered a very good gauge of business activity and a leading indicator of broader economic health. The headline result from the manufacturing sector fell three points to +12 which was below expectation. This marks the first deterioration in three quarters and was largely driven by concerns about China. It also comes on the back of industrial production data which was much softer than expected at -0.5%. However, the service sectors mood improved to a two decade high at +25, which will be of some relief to the Bank of Japan (BOJ). Taken overall the Tankan report was probably neutral. The Japanese economy has been struggling ever since the sales tax hike back in 2014 and most forecasters expect further action from the BOJ at some stage. J P Morgan were out this week saying Japan is already “probably in recession” and they cut their GDP forecast for Q3 to -1%. Ex-BOJ deputy Governor Iwata was quoted as saying Governor Kuroda is too optimistic on the economy and inflation and that more easing is likely. We have a BOJ meeting next week, but it’s a little too early to expect action from them just yet. Other releases to watch out for include core machinery orders, the current account, average cash earnings, and the economy watchers sentiment index.

The key release from Canada this week was GDP data for July. It came in a touch stronger than forecast at +0.3%, but tempering this were negative revisions to the prior reading. This was however, the second consecutive positive outcome and it does confirm the economy has turned the corner after falling into recession in the first half of the year. Improving growth in the US should boost exports and help underwrite the economy over the coming months. This was certainly the takeaway from the manufacturing PMI result, which was driven to its lowest reading on record at 48.6 by the flow on effects of weak oil prices. Weakness was concentrated in the oil regions of Alberta and British Columbia, with the rest of Canada’s PMI levels remaining in expansion territory (i.e. above 50). Next week there is plenty to digest with the trade balance, Ivey PMI, building permits, employment change and the Bank of Canada business outlook survey all set for release.