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Economies of Note - 31st July

Written by Ian Dobbs on July 31st, 2015.      0 comments

There has been little in the way of market moving data released from Australia so far this week. Yesterday we saw the latest building approvals figures and these were a little disappointing coming in at -8.2% versus expectation for -0.8%. However, this is a very volatile series and too much weight should not be put behind one month's outcome. As such it had a very limited impact on the Australian dollar. Import prices for the second quarter were also released and these came in bang on expectation at +1.4%. There was an interesting article in the Australian press this week that suggested the RBA is in the process of lowering their expectation for the trend growth rate. Governor Stevens alluded to this in a speech recently when he said the current rate of growth could be the ‘new normal’. If that is indeed the case it significantly reduces the chance of another rate cut from the central bank. Hopefully we will get more insight on this when the RBA release their monetary policy statement next week. In the next couple of hours we get producer prices data to digest. Next week should prove a lot more interesting with retail sales, the RBA rate meeting, the trade balance and employment data all set for release.

New Zealand
Reserve Bank of New Zealand (RBNZ) Governor Wheeler released a speech on Wednesday this week and it’s fair to say he wasn’t as ‘dovish’ (negative) as some in the market had expected. Although he acknowledged that further interest rate cuts are ‘likely’, he was quick to point out that some forecaster’s cash rate predictions would only be consistent with the economy moving into recession, and that’s not the central bank's view at the moment. The Governor pointed out several factors supporting economic growth including the lower level of the NZD and interest rates, high levels of migration, continued strength in the service sector and ongoing growth in construction. Countering this is NZ’s soft outlook for the terms of trade along with below trend demand and output growth. In our view the speech, and last week’s RBNZ rate statement for that matter, are consistent with at least one more 0.25% interest rate cut. This is likely to come in September. Any more cuts over and above that will be driven by the data to be released between now and then. The New Zealand dollar reacted positively to the speech as further short (sold) NZD positions were squared up. The only other release so far this week has been building consents which hit the wires yesterday. Consents fell 4.1% month on month from a prior reading of flat. Against a year earlier however, consents are still around 2.0% higher. Next week we have another dairy auction to digest along with employment data.

United States
Two key releases provided the main focus from the United States this week. The first was the FOMC rate statement that hit the wires early on Thursday morning. If the market was looking for a signal as to just when the first interest rate hike will be, they would have been very disappointed. There were subtle changes to the language used in the statement, in particular when referencing the employment market, and some forecasters suggested this lent toward a September hike, but countering this are nagging concerns about low inflation. The cold hard truth is the Fed remain data dependant in regard to the exact timing of an interest rate hike, but all things being equal, we will see one before the end of the year. In the end, the US dollar saw some appreciation in the wake of the statement. The second release to really draw focus this week was last night’s release of second quarter GDP. The market was expecting a solid bounce back from the poor first quarters -0.2% result. The outcome of +2.3% was just a touch lower than forecasts, which had centred around +2.5%, but the details were more encouraging and overall it’s still a healthy recovery from the prior result. As such the USD remained in demand following the release. Other data released this week included a better than forecast reading from durable goods orders and surprising falls in both CB consumer confidence and pending home sales. Next week to draw focus we have ISM manufacturing and non-manufacturing PMI’s, the trade balance and non-farm payrolls data.

United Kingdom
The United Kingdom released GDP data for the second quarter this week. The UK economy grew at 0.7% in Q2 up from 0.4% in the first quarter. That was exactly in line with market expectations. The expansion was driven by the service sector which accounts for just over three quarters of UK output. Industrial production, which drives around 15 percent of UK GDP, increased 1 percent. The GDP result won’t alter current expectations for a rate hike around the turn of the year. Bank of England (BOE) Governor Carney has said previously that sustained growth of around 0.6 per cent a quarter is needed to eliminate ‘spare capacity’ in the economy, and this is broadly in line with that. Lending data also drew attention this week, with mortgage approvals picking up more than expected along with consumer credit. This contrasts with business lending which saw the fastest fall in four years in June. Economic growth driven by a consumer credit boom is less than ideal. What you really want is increased lending to business so they can grow, produce more and employ more people. It’s certainly not panic stations with overall levels of household debt well below the 2008 peak, but it’s also not a sustainable growth model. Next week to draw focus we have PMI’s from the manufacturing, construction and service sectors along with the Bank of England interest rate meeting and inflation report.

The European Central Bank (ECB) released their monthly report this week and they suggest although inflation will be low in the next couple of months, they see it rising by year end. Inflation should pick up further through 2016/2017 on the back of further economic recovery, a weaker Euro and expected oil price rises. The added that recent indicators suggest steady growth in the second quarter, while highlighting increased risks and uncertainty about China due to stock market volatility. In terms of data this week, we have seen a small improvement in both the German IFO business climate index and overall Eurozone economic confidence. Countering these were slightly weaker than expected readings from German unemployment and Spanish GDP. There is still plenty of data to digest with Eurozone inflation and unemployment set to hit the wires tonight along with German retail sales. Next week we have a number of regional PMI’s to digest as well as German factory orders.

Up until this morning it had been a relatively quiet week for economic releases from Japan. The only data we had seen was retail sales and industrial production, both of which came in a touch stronger than forecast. In the past few hours however a rash of data has been released. Inflation looks to have come in a touch stronger than forecast, which will be encouraging for the central bank. But household spending was much weaker than forecast coming in at -2.0%. A government official has been on the wires suggesting the decline in household spending was largely due to bad weather during the month of June. The unemployment rate has also ticked higher to 3.4% from 3.3% prior. Next week from Japan the focus will be on average cash earnings, leading indicators and the BOJ monetary policy statement.

The only data released from Canada so far this week has been the raw materials price index, which printed at flat, and the producer prices index which came in close to expectation at +0.5%. Neither of the releases suggest much in the way of pipeline inflation pressure, although the rate of price falls does seem to be reducing. Tonight we have GDP data for May and it’s going to be a close call whether or not it prints negative again. The first four months of this year all produced negative GDP readings and an fifth month in a row would be longest string of declines since the 2008-09 recession. The Bank of Canada cut interest rates two weeks ago and revised down its growth estimates. Having said that, they are still forecasting a recovery in the second half of the year. Next week from Canada we get the trade balance, building permits, employment change and the Ivey PMI.