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Economies of Note - 6th June

Written by Ian Dobbs on June 6th, 2014.      0 comments

The week started off on a negative note for the Australian economy when building approvals data on Monday printed at -5.6% vs expectations of +2.1%. Looking into the detail took some of the sting out of the headline number as most of the weakness was in the ‘apartments’ sector. Private sector house approvals were down a more modest -0.3%. Tuesday’s retail sales data had little impact coming in close to expectation at +0.2% which was an improvement over the prior reading of +0.1%. As expected the RBA held rates steady on Wednesday and the statement provided little fresh insight. They repeated the call that a period of stability in rates is likely, and that the Australian dollar remains high by historical standards. We did get some volatility around the release of GDP data. The headline number was came in at +1.1% which is significantly better than the expectation of +0.9%. But again, looking into the detail of the report gave a more accurate picture and this limited the positive impact. It seems seasonal adjustments to the mining sector made up a good portion of the growth. Domestic demand only increased by +0.3% and consumer spending was relatively modest at +0.5%, and business investment actually contracted by -1.2%. Next week the highlights include business confidence, consumer sentiment, and employment change.

New Zealand
This week saw yet another fall in Dairy prices at Fonterra’s regular auction. This time the aggregate price fell by -4.2% on the back of increased supply earlier in the year. This weighed on the New Zealand dollar which continued to trade heavily in the first half of the week. We also saw data on building activity which showed it grew at its fastest pace since 2002. This is not a huge surprise however, with the Christchurch rebuild continuing at pace, and demand for new dwellings in Auckland. Construction will continue to be a large driver of growth over the coming year. There was little else of note this week and the focus now turns to the RBNZ monetary policy statement next Thursday. Another 0.25% hike is widely expected with some in the market suggesting the central bank will then pause until December or so. It could certainly prove to be a very interesting meeting.

United States
It has been an interesting week in the United States with the USD starting to show some signs of life and long term interest rates backing up from recent lows. Monday’s release of manufacturing PMI was a debacle, but in the end the final reading was only slightly weaker than expectation. At least the release of non-manufacturing PMI went smoothly, and more importantly it rose significantly from 55.2 last to 56.3 this time. That result was higher than the expectation for a reading of 55.6 and helped to underpin some of the USD’s gains. The trade balance did disappoint at touch as did ADP employment change. The latter is however not a good indicator for tonight’s key release of non-farm payrolls. This will be the most important release of the week and expectations are for a gain of around 212k.

There was only ever one main focus for this week in Europe and that was last night’s ECB meeting. We did get the latest reading of inflation on Tuesday which came in below expectation at only 0.5%, matching the low seen in March. This only served to reinforce expectations for action from the ECB and last night they announced a combination or measures. They cut rates, but most importantly, they have taken the deposit rate negative. They will now effectively charge banks who deposit excess funds back with the central bank. This is obviously designed to encourage lending and added to this they have opened a liquidity programme for banks that is tied to lending. This programme will provide easy and cheap funding for banks who lend to the nonfinancial business sector, and the household sector, excluding mortgages. They have stopped short of outright quantitative easing, although it is certainly a possibility down the road. The bank has said they will continue to prepare a plan for outright purchases of Asset Backed Securities. The market seems to be comfortable with the measures undertaken, although the Euro actually strengthened a touch after the announcement. The big problem with these measures is you can increase the supply of loans as much as you like, but if the demand isn’t there it won’t achieve much. The old adage of ‘pushing on a string’ comes to mind. Europe needs structural change to foster growth which will in turn create demand for loans. This is the job of governments, not the central bank. The economic calendar is a lot lighter next week with industrial production and the ECB monthly bulletin the highlights.

United Kingdom
We have had a raft of data from the UK this week along with the Bank of England meeting, and none of it has really impacted market sentiment or expectation. Manufacturing PMI was very close to expectation, construction PMI was weaker than forecast, but this was countered by services PMI which beat expectations. The BOE left rates, and the level of QE, unchanged and release no statement. The UK economy continues to perform strongly and by Governor Carney’s own admission they have ‘edged closer’ to the point where interest rate will need to rise. It just seems that is still a way off, i.e. sometime in the first half of next year. Pressure in the housing market continues to grow with house prices in May up 8.7% from a year earlier. Next week the focus moves to manufacturing and industrial production figures along with employment change data.

There is a growing feeling in the market that the Japanese economy might withstand the effects of the Aprils sales tax increase a lot easier than previously thought. We have certainly seen a sharp drop in retail sales, but other data points have been encouraging. This week we got figures for capital spending which were much better than forecast at +7.4%, and average case earnings which improved +0.9% vs expectation of 0.6%. A lot of analysts are starting to believe the BOJ will not introduce any new easing measures this year. Despite this data the Yen has actually weakened somewhat over the course of the week. Next week we get readings on the current account, GDP, tertiary industry activity, and core machinery orders. We also have the BOJ monetary policy statement and press conference.

It has been a tough week for the Canadian dollar. Data has come out uniformly weaker than expected and the central bank struck a very cautious tone at their rate meeting. The BOC left rates unchanged at 1.0% and suggested that although the economy was rebounding after a weather affected first quarter, there could be less underlying momentum than previously thought. That would certainly be backed up by last night data with both building consents and Ivey PMI coming in well below expectation. The latter fell dramatically to 48.2 against expectations of a small rise to 56.3. Anything below 50 represents contraction in the business surveyed and is a concerning result. Next week is a lot quieter on the data front with only housing starts, the house price index, and manufacturing sales of any note.