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Economies of Note - 30th May

Written by Ian Dobbs on May 30th, 2014.      0 comments

It has been an interesting week for the Australian economy and one with some positive undertones. Wednesday’s release of construction work done was a pleasant surprise coming in at +0.3% vs -0.5% expected. The increase was in large part due to residential construction which is a good sign of ‘rebalancing’ in the economy. As a result of this data a number of forecasters lifted their expectations for the private capital expenditure figures released yesterday. When that data hit the wires it initially looked very disappointing with the headline printing at -4.2% for the quarter vs expectations of -1.9% or higher. But the detail of the report provided better reading with the estimate of capital expenditure for 2014/15 well above forecasts. The non-mining part of business investment provided most of the upside surprise and this is exactly what the RBA are looking for in their ‘rebalancing’ of the economy. The Australian dollar received a boost from the data. The week hasn’t been without some negatives however. The Melbourne Institute’s leading index for April fell -0.5% vs the prior result which was flat at 0.0%, and this does suggest a loss of momentum in the economy. Prices for iron ore (along with other commodities) have also continued to fall and are now at their lowest level since September 2012. Overall however data this week is consistent with the RBA being on hold for the foreseeable future. Next week there is plenty to digest with the highlights being building consents, retail sales, the RBA rate meeting, GDP, and the trade balance.

New Zealand
We have seen a number of releases this week, but none of them have lent much support to the New Zealand dollar that has been under significant pressure. The trade balance came in below forecast but the real impact came from business confidence data which dropped to 53.5 from 64.8. This marks the third decline in a row, albeit from very healthy levels, and it now looks like the index has peaked back in February. Fonterra were on the wires announcing a cut to their forecasted payout for this season to $8.40 from $8.65 previously. This was well anticipated by the market with dairy prices having fallen consistently since February. They have also set an opening price of $7.00 per kg of milk solids for the 2014/15 season. Earlier this morning we got building consents data and this came in a touch better than forecast at +1.5%. Expectations were for a result of -3.5%. This is however a volatile series and as such the market impact has been muted.

United States
There have been some positive data releases from the US this week. Most notable was durable goods orders which increased 0.8% vs expectations of a -0.5% fall. The prior number was also revised up significantly adding to the upbeat tone of the report. Consumer confidence came in close to expectation at 83.00 which is an improvement on last month's reading, and service sector PMI climbed more than forecast to 58.4 from 55.00 last. Last night we saw weekly unemployment claims that dropped back to the 300k level. That level is consistent with a solid gain in nonfarm payrolls which is released at the end of next week. We also got the second reading of first quarter GDP last night, and this confirmed that the beginning of the year was a shocker for growth. The first estimate of Q1 growth was -0.1%, but last night that was revised to -1.0%. The market was expecting around -0.5%. The only positives you can take out of that number are that a) its historical, and b) the extreme winter weather played a part. Historically after extreme winters we have seen a strong rebound in growth in the second quarter, and there are signs that it could happen again. The long term interest rate market is certainly not pricing that in though, with 10 year Treasury bonds trading down to 2.40% overnight. We have also seen another indication that momentum in the housing market is waning with pending home sales coming in well down on last month, and substantially below expectation at +0.4%. Next week should prove interesting with manufacturing PMI, the trade balance, and nonfarm payrolls providing the highlights.

Next week is going to be a big one for Europe and the Euro with the ECB meeting on Thursday. We have seen further comments this week from officials that have helped to cement expectation for action. Just what form that action will take however, is far from clear. Draghi said the ECB will do everything feasible for the economy within its mandate. While the ECB’s Mersch said the meeting could produce a combination of different measures. They certainly need to do something with inflation likely to stay significantly below 2% in 2014 and unemployment a real concern. Data this week showed a rise in jobless figures for both France and Germany with money supply growth at its lowest level since 2010. Ahead of the ECB meeting next week we get the latest reading of inflation, retail sales, and German factory orders.

United Kingdom
It has been a quiet week data wise for the UK with only mortgage approvals and CBI realized sales results hitting the wires. Both of which came in below expectation. The CBI survey however, wasn’t as bad as the headline number suggested with its fall to +16 from +30. The report found 38% of retailer enjoyed an increase in sales during the month, while 22% suffered a fall. This difference of +16 being the headline number. Consumers eased back spending after the Easter break and this has been reflected in the result. It does still represent a month of generalized gains in sales and that now makes six month in a row. The trend is certainly positive. The Financial Times ran an interview this week with Martin Weale who is a member of the BOE’s Monetary Policy Committee (MPC). He suggested the central banks should start raising rates ‘sooner rather than later’ to avoid painful hikes in the future. He did stress that now is not the time for the first increase. This is just another indication that there could be some real debate / dissention within the MPC later this year. Next week we get a trifecta of PMI’s with the manufacturing, construction, and service sector index’s set for release. We also have the BOE rate meeting on Thursday evening and house price data to digest.

We are now starting to see the impact of April's sales tax hike in Japan. Yesterday we got retail sales data for April and it was significantly worse than expected. The market had expected a fall of around -3.3% but the actual result came in at -4.4%. This is the fastest pace of decline in three years and the big question now is how long will that data take to recover. Japanese officials continue to talk things up with the BOJ’s Shirai quoted as saying that positive cycles of output, income, and expenditure are likely to continue. Earlier today we had a raft of data hit the wires although none of it excited the market to any degree. Inflation and unemployment both came in largely as expected, while household spending stood out as a very soft result. This will no doubt also be as a result of the sales tax increase. Next week to draw focus we have capital spending data, manufacturing PMI, and average cash earnings.

This week was a very quiet one for Canadian data with only the current account of any note. It came in on expectation at -12.4 bln, which was an improvement over the prior reading of -15.6 bln. The new finance minister Joe Oliver was on the wires. He suggested the economy was moving in the right direction and inflation was well within the target range. He did warn however that exports are not improving quickly enough. Tonight we get GDP data and next week there will be plenty more to digest. The trade balance, BOC rate meeting, building permits, Ivey PMI, and employment change are all set for release.