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Economies of Note - 30th October

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

The Australian dollar has fallen more than 2% this week. This followed the release of weaker than expected Q3 inflation data (+0.5% vs. 0.7% exp. q/q,) on Wednesday, which saw the annualized rate fall to 1.5% (1.7% exp.). More hawkish than expected comments from the U.S. Fed at their monetary policy meeting kept alive the prospect of a U.S. rate hike in 2016, and this helped to also drag on the AUD. Market pricing for next Tuesday’s key RBA meeting now gives a ~ 50% probability for a rate cut from the current 2.0% cash rate after the poor Q3 inflation out-turn. Low commodity prices, weakness in China and lacklustre wage growth when combined with the move by the four big banks to increase interest rates on owner-occupier and investor mortgage loans add to the pressure on the RBA. Data released on Thursday also disappointed after HIA new home sales for September fell 4.0%. Export price price data for Q3 came in flat (vs. 0.5% exp.) and import price data which rose less than expected at 1.4% (1.6% exp.) to further reinforce the soft inflationary story. Private sector credit data to be released later today will be of interest before next week’s heavy data calendar which includes building approvals data on Monday, the RBA cash rate announcement on Tuesday and September retail sales numbers on Wednesday.
New Zealand
The tone this week has been dominated by the U.S. Fed and RBNZ interest rate meetings on Thursday. Sentiment towards the NZD soured after the U.S. Fed delivered a more upbeat assessment of the U.S. economy and indicated that a December U.S. rate hike is a distinct possibility. The RBNZ in contrast indicated as they did in their last interest rate review that the next move in rates would be down. Governor Wheeler commented that a further reduction in the OCR is likely in order to attempt to raise inflation towards the middle of the 1-3% target band. Wheeler also warned that the recent rise in the NZD, if sustained may dampen economic activity and inflation, necessitating the need for a lower interest rate path. The cash rate was left unchanged at 2.75%. Next week will be dominated by the release of the next GDT dairy price auction and NZ Q3 unemployment data on Wednesday.
United States
This week was dominated by the U.S. FOMC meeting released on Wednesday (Thursday Australasian time). Although the FOMC left policy unchanged, the dollar surged after the Fed delivered a more upbeat assessment of the U.S. economy than that expected, noting an improvement in business investment and household spending. The Fed also showed less concern over the impacts (on U.S economic activity and inflation) of the recent economic and financial market developments than that expressed in their last statement. A rate hike this year remains on the table with markets moving the chance from 30% ahead of the statement to 45 % after. U.S. data releases during the week were largely underwhelming. New home sales fell 11.5% m/m and headline durable goods orders fell 1.2% m/m. The CB consumer confidence measure at 97.6 fell well short of the 103.0 expectations. Pending home sales data declined 2.3% m/m in September (1.0% exp.) following Augusts 1.4% fall, which saw the annual pace moderate to 2.9% from 6.1%. The advanced estimate of Q3 GDP missed the expectations by a tenth, posting an increase of 1.5% annually, although a significant drag from elevated inventories in the quarter was noted. The outlook for the dollar next week will continue to hinge on expectations for a Fed rate hike at the December meeting. The U.S September PCE deflator reading tonight will be watched closely for any inflationary signs, whilst next Friday’s employment report will also be a critical component for the Fed’s decision process. Manufacturing and services PMI data through the week will also be of interest.
United Kingdom
U.K. GDP data for Q3 released this week showed growth moderating to 0.5% q/q from 0.7% in Q2. It failed to reach the 0.6% expectations, although was not entirely unsurprising given the recent easing in PMI indicators. Second tier mortgage approval and CBI industrial order indicators also underwhelmed. The GDP data will add to the BoE remaining on hold thesis. Comments from the BoE Governor Carney last weekend said that rate hikes when they occur would be well flagged to the market in advance and that they were likely to be gradually staged over time. Housing and consumer credit data released overnight both surprised to the upside, whilst M3 money supply and CBI reported sales data failed to meet expectations. Next week will be dominated by the BoE monetary policy meeting early on Friday morning NZ time.
Expectations of further easing by the ECB and a stronger appetite for the USD post the U.S. FOMC meeting have driven the single currency lower this week. The Euro-zone has seen a raft of largely second tier data during the week. German data released was solid. IFO confidence data surprised to the upside rising to 103.80 from 103.3, whilst a measure of Euro-zone economic and industrial confidence/business climate also showed an increase. The German unemployment rate remained at post-reunification lows of 6.4%. German inflation rose 0.2% y/y against the flat expectations, although continues to show that the inflation environment in the Euro area remains weak with significant excess capacity through the euro economy suppressing inflationary pressures. Spanish inflation data added weight to this argument after headline prices posted a 0.7% y/y decline in October. Later today we will see the release of Eurozone inflation and unemployment data along with Spanish GDP and German retail sales. Next week is dominated by the release of manufacturing and services PMI data.
It was a much busier data calendar out of Japan this week. Preliminary Industrial Production data for September released on Thursday rose 1.0% m/m (-0.5% exp.), a solid improvement from last month's 1.2% decline, whilst retail sales released a day earlier disappointed in falling 0.2% y/y from +0.8% the month prior (0.4% exp.).September Core inflation data released today marginally topped the -0.2% forecast at -0.1% y/y, unchanged from the month prior.The BOJ interest rate meeting later today will set the tone for trade over coming days. Market pundits expect the BOJ to cut forecasts for core inflation and real economic growth, although are divided on whether the BOJ will decide to expand its asset purchase program (currently 80 trillion JPY annually). The release of September construction order and housing starts data will take a back seat to the BOJ meeting. Next week sees the release of October Manufacturing PMI data in what is otherwise a quiet week.
The CAD has eased moderately during the week. Friday’s Canadian September inflation data which missed expectations (0.2% vs. 0.3% exp m/m) set the tone early in week, a tone which was helped once again by softening oil prices. A sharp re-bound in oil prices on Wednesday night gave the CAD some short-lived reprieve before it found itself once again on the back foot after the U.S. Fed released a more hawkish than expected FOMC statement, which led to generalized USD rally. Tonight’s Canadian GDP data will help set the tone for trade next week. Other data releases of note next week include RBC Manufacturing PMI data on Monday, September trade data on Wednesday, before the week is rounded off with the more key October IVEY PMI release on Friday. Energy market developments will naturally be pivotal for CAD sentiment also.