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Economies of Note - 3rd February 2017

Written by Howard Wilcox on February 3rd, 2017.      0 comments

After looking decidedly softer earlier in the week the Australian dollar turned on Thursday after a much better terms of trade figure for December. The trade data saw a surge into a record surplus at +3.511 bln against an expected AUD 2 bln. Building approvals were also not as bad as expected. The Australian dollar spiked sharply on the trade figure release, trading up to around 0.7695 against the US dollar but softened overnight back to the mid 0.7650 level. Also now becoming evident is the return of the mining sector as iron ore prices continue to hold firm which will help to drive the economy if this trend continues over the year. This stronger data should provide some comfort to the RBA ahead of next week’s policy decision, where it  now appears more certain that they will  leave rates on hold at 1.50%.

New Zealand
New PM Bill English had nothing much new to say during his state of the nation address on Thursday. There was increased funding for the police, but some details of this had already been previously released by other government officials. Economically there were comments around increased infrastructure spending and the ongoing need for free trade but no specifics on these policies, but these are likely to be revealed closer to the May budget by new Finance Minister, Steven Joyce. The New Zealand dollar has continued to be well supported during this week, even after an unexpected  rise in the unemployment rate from 4.2% to 5.8% caused a short sell-off from the 0.7350 level against the USD. New car sales figures out today were again strong, up 16% for January, a new record and continuing the 3 years of constant gains….positive signs of the solid economy.

United States
If markets were looking for the Fed to provide direction on future rate increases, they were disappointed last night after rates were left unchanged. The decision to leave the target federal funds rate unchanged in a range of 0.5 % to 0.75 % was unanimous and widely expected by the market. Fed Chair Janet Yellen, who didn't have a press conference scheduled after the meeting, will have a chance to explain the decision further during her semi-annual monetary-policy testimony to Congress in mid-February. There was little direction provided by the Fed on when it may next increase borrowing costs, as Fed officials struggle with the uncertainty created by the new Trump administration. Indications given by officials back in December were for 3 rate hikes throughout 2017, FOMC members have differing views over assumptions regarding the extent to which tax cuts, spending and regulatory reductions proposed by the Trump administration and Republicans will add to growth and inflation. The statement also made comment that expectations were for a return to moderate economic growth, further labour market strength and a return to 2% inflation. The odds have now increased that the next rate rise will around the June period rather than March this year.  The FOMC next meets on March 14-15.The Fed comments around the economy and employment were reinforced by a some positive data releases on Thursday. The US Manufacturing ISM figure had its 5th consecutive monthly rise, to the highest reading since November 2014 and better ADP January jobs data earlier on Wednesday night which showed an increase of 246k against an expected 168k. The better than expected ADP jobs data now increases the likelihood of Friday's Non-farm payroll data coming in above  200k ahead of previous market forecasts of  175k.

United Kingdom
On Wednesday the UK Parliament voted 498 to 114 to authorize Prime Minister Theresa May to Trigger Article 50 and begin the United Kingdom's withdrawal from the European Union. The vote officiates the result of the June 23rd, 2016 "Brexit" Referendum where a majority of UK citizens indicated a desire to leave the EU. Although it still has to pass through the House of Lords, this vote now authorizes Theresa May to begin the withdrawal process, which she has indicated she will do by the end of March, 2017. The Bank of England has left rates on hold at its policy meeting yesterday, maintaining a neutral stance that gives it the ability to move in either direction. However it is unlikely that the BoE would tighten rates in the next 12 months given the “Brexit” situation and other political uncertainties. Conversely any easing moves would require some unemployment increase or economic slowdown.

The Eurozone has had an interesting week, with the President Trump accusing Germany of weakening the EUR! The EUR has strengthened gradually over the week from 1.0619 to the current 1.0760 mark, but tonight's US jobs data should be strong, which should push the EUR back to the 1.05-1.06 zone. Also this week ECB officials responded to calls, after January inflation figures jumped to 1.8% higher than expected, to end its ultra-easy monetary policy. ECB board members commented this increase was mainly attributable to higher oil prices and that ups and downs in monthly data were not relevant if they were temporary and had no implications for medium-term price stability. They also remarked that proposals from the new US administration on import tariffs and other protectionist measures were alarming and may impact the economic outlook.

Japan also felt the ire of the new US President, also being accused of currency manipulation earlier in the week! The Japanese economy appears to be stabilising, with the Bank of Japan maintaining its existing policy stance at its Tuesday meeting as expected by the market, but raising  its economic growth forecasts. The GDP forecast was increased to 1.4% for the current year (up from the October forecast of 1%) and for 2017 up to 1.5% (prev 1.3%) , for 2018 up to 1.1% (prev 0.9%). The BOJ said in a statement on Tuesday that it expected inflation to rise to around its target of 2 percent around fiscal 2018. It cited signs that medium-to-long term inflation expectations have stopped declining and were showing some indications of rising. It also remarked that the labour market was tightening and that the effects of commodity-price declines were set to reduce, with a pickup in international commodity prices set to push up consumer prices.

Although the Bank of Canada endeavoured to talk the Canadian dollar lower, this had little effect as the CAD continued to strengthen against most of its major partners over the week. Given the positive tone the market has taken from the approving of the two pipeline contracts by the new US administration any problems with NAFTA trade renegotiations are now seen as more as a Mexican problem than one that will alter the strength of the Canadian economy. It may prove a little early to take this view given the flaky nature of the new US government.