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Economies of Note - 30 January

Written by Ian Dobbs on January 30th, 2015.      0 comments

It has been an interesting week with expectations swinging wildly around the prospects for a rate cut by the RBA next week. Wednesday’s inflation data really bought into question the outlook for a cut as the data was nowhere near as soft as it could have been. Although the headline reading printed at 0.2% versus 0.3% expected, the trimmed mean CPI, which is very important for the RBA, actually came in stronger at 0.7% vs 0.5% expected. The risk of a cut from the RBA quickly diminished in the wake of this data, but since then markets have again started to price in a significant chance of the central bank reducing the cash rate when they meet week. Reasons cited for a cut include the recent surprise move from the Bank of Canada, further easing in Europe, low inflation and continued soft commodity prices. Although these factors may eventually lead to an interest rate cut is seems unlikely we will get one as early as next week. However, a number of central banks have caught the markets by surprise this year, so nothing can be ruled out. Other data of note next week includes building approvals and retails sales.

New Zealand
The key release from New Zealand this week was yesterday’s Reserve Bank of New Zealand (RBNZ) official cash rate review. Back in early December the central bank surprised many with talk of further rate hikes and the NZD respond by finishing the year on a reasonably firm footing. Yesterday however, the bank backed away from that hawkish tone and they are now firmly in the neutral camp. They said they expect to keep the OCR on hold for some time and future adjustments, either up or down, will depend on the flow of economic data. Most market forecasters expect the cash rate to stay at 3.50% until mid-2016 at least. They reiterated their view that the level of the NZD remains unjustifiably and unsustainably high. The currency came under heavy pressure in the wake of the statement trading to its lowest level in nearly four years against the USD. The only other data of note this week was the trade balance for December which hit the wires a couple of hours after the RBNZ statement. The deficit of -159m was the first December deficit in four years and was driven by increasing imports, notably aircraft and mobile phones, while declining milk powder prices were a drag on exports. Next week we have employment data to digest along with another dairy auction from Fonterra.

United States
The United States produced some dreadful data on durable goods orders on Tuesday which really raised some eyebrows. Month on month durable goods orders dropped 3.4% versus an expectation for a rise of 0.5%. Looking into the detail on made for even worse reading with the prior result revised down significantly as well. Quite simply there was nothing good in the release, least of all the fact that it marks the fourth fall in the past five readings. Helping to take some of the sting out of the data were the releases of new home sales and consumer confidence that hit the wires a couple of hours later. Both those results were much better than forecast with consumer confidence in particular making a significant improvement. The main focus on the week was the Fed rate statement released yesterday morning. It certainly wasn’t ground breaking, but some subtle changes in the language used suggested a slightly more ‘hawkish’ tone. The Fed repeated they can be patient in starting to raise rates and they see the economy expanding at a solid pace. Although they believe inflation will decline further in the near term, they see job gains as strong and the overall feeling is they remain on track to hike rates early in the second half of 2015. Tonight we get GDP data with the market expecting a result of +3.0%. Next week the focus turns to manufacturing and non-manufacturing PMI’s, the trade balance, and non-farm payrolls data.

United Kingdom
Fourth quarter GDP for the UK was released on Tuesday evening and it came in a touch below expectation at +0.5%. The prior result was +0.7% and the market was looking for a fall to +0.6%. Although the Q4 result was a little disappointing, annual growth is still running at the fastest pace since 2007. Growth was largely driven by the dominant services sector while industries such as construction and mining contracted. The UK Pound wasn’t unduly impacted by the data and has had reasonably good week overall. Tonight we have CBI realized sales and net lending to individuals data to digest, then next week we get PMI’s from the manufacturing, construction and service sectors along with the Bank of England (BOE) rate meeting.

Data from Europe this week hasn’t had much of an impact on the market. The most notable result was German inflation which came in weaker than expected at -1.0%. It will come as no surprise the result was driven by big declines in energy prices. There has been a lot of talk from officials regarding Greece, but until they actually sit down and start negotiating with the new Greek government it can largely be regarded as posturing. The markets are nervous, with Greek government debt trading up around 11% in yield. Outflows from Greek banks remain significant and the Greek stock market has seen some big negative days. Germany’s Schaeuble says the Greek election outcome doesn’t change the bailout conditions, while Angela Merkel said she found the debate about a Greek debt cut “astonishing”. In what may be a sign of things to come, the new Greek PM Tsipras has softened his tone somewhat and he now talks about a debt “renegotiation” as opposed to a “default”. We have a few weeks of uncertainty ahead of us before negotiations actually get underway and there will no doubt be a lot more posturing from officials. So far the impact on the Euro has been a lot less than in previous periods of Greek uncertainty, but it is still a serious risk factor. Tonight we get Eurozone inflation data along with German retail sales and French consumer spending.

The only data of note so far this week from Japan has been retails sales. The result was disappointing and it only serves to underline the challenge PM Abe and the BOJ face in trying to revive the economy. Sales in December fell 0.3% from November against expectations for a 0.3% rise. It was also the third straight monthly decline. Consumer spending took a big hit from last year’s sales tax increase and it has really struggled to recover. This afternoon we get the latest reading on household spending along with inflation and industrial production. The economic calendar next week is pretty thin with only average cash earnings of any note.

There has been no data at all released from Canada so far this week. We do get the monthly GDP figures tonight, but it’s unlikely to have a huge impact. The Canadian dollar remains on the back foot declining to its lowest level in six years against the USD. Continued weakness in oil and the very ‘dovish’ stance of the Bank of Canada are key drivers. Next week to draw focus we have Ivey PMI, the trade balance, building permits and employment change.