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Economies of note - 3rd May

Written by Ian Dobbs on May 3rd, 2013.      0 comments

2:45 PM (NZT)
Australia saw a raft of largely uninspiring second tier data out this week, and the released news did nothing to materially change the current outlook for the economy. The current consensus that the peak in the mining/resource boom is well past and that support from the Chinese economy is waning, was only reinforced by the release of weaker Chinese manufacturing PMI data for April.
This coming week will provide a lot more in the way of insight into how the economy is actually performing, and what the RBA are thinking. Retail sales, house price and employment data are all set for release along with the Reserve bank’s rate decision. It will be very interesting to see if the RBA reinforces the market view that a rate cut in the second half of this year is looking increasingly likely. That expectation can only have gained traction after yesterday’s March building approvals made a very weak showing at -5.5% against and expectation of a 1.0% rise.

New Zealand
There was nothing of note this week to change the general theme of a reasonably firm domestic economy, underpinned by the Christchurch rebuild and a strong housing market. Dairy prices did drop (7.3pc) for the first time in 10 Global Dairy Trade (GDT) auctions, but having increased dramatically during the drought, this comes as no real surprise or concern. What will be of concern for the RBNZ is the housing market. The latest data from shows asking prices have reached all-time highs. That competes for attention at the RBNZ with the level of the currency which maintains its firm footing. Although at very elevated levels, it’s hard to see what in the near term could change the trend, and there aren't many commentators forecasting any material depreciation between now and the end of the year. Next week the domestic focus comes in the form of the 1st quarter employment numbers on Thursday.

United States
A mixed bag of data out of the US this week, with the bright spots being consumer confidence and house price data that both came in higher than expected. While on the other side, weaker manufacturing numbers have tempered any real enthusiasm. One of the big focuses this week was the FOMC rate decision and the accompanying statement released on Wednesday. As expected, there was no major change in the policy stance with a continuation of $85 billion a month in quantitative easing (QE). It seems increasingly likely that this level of stimulation will continue until at least late this year. The statement could have been read as a touch more optimistic with no references to ‘disinflationary pressures’ seen in previous months, but aside from that it really didn’t produce anything ground breaking. Equity markets are loving the continued central bank support with the S&P500 making new all-time highs this week. Key to the FED’s outlook is employment, and near term direction in the dollar could well be dictated by the result of non-farm payrolls data scheduled for release tonight. The last two weeks have seen a solid improvement in weekly jobless claims data, with the rate falling to the lowest level in 5 years yesterday. Whether that flows through into better payrolls data tonight remains to be seen.

Growing expectations of an ECB rate cut were cemented earlier in the week with the release of EUR-zone inflation numbers coming in well below forecast. Last night the ECB didn’t disappoint, cutting its key refinancing rate for the first time in 10 months. It now stands at 0.5% from 0.75% previously. The cut was largely factored into the market and in itself didn’t have a huge impact on the EUR. What did move the currency was comments from ECB head Draghi with regard to their deposit rate (the rate of interest banks receive on funds deposited with the central bank). He basically said that negative interest rates are technically possible, they will look at it with an open mind, and they stand ready to act if needed. It’s most likely just a threat, but the ECB are frustrated at the lack of lending to business and this would certainly impact that.

United Kingdom
Last week’s better than expected GDP numbers have been followed up this week by much improved manufacturing and construction data releases. That will help cement slightly better sentiment toward the UK, and could well see GDP numbers maintain a more consistent path going forward. There will be huge sighs of relief from the government if that proves to be the case as they have been coming under all sorts of pressure this year to ease austerity measures. Three numbers however don’t make a recovery, and next week’s releases of note that will be closely watched include industrial production, trade balance and the Bank of England (BOE) interest rate decision. The BOE decision will almost certainly see no change to rates. We will have to wait another two weeks to see the minutes from the meeting to get any insight into their thinking. With the fortunes of the UK so closely linked to those of Europe, the ECB decision to cut rates last night may well prove another small positive for the economy in the long run.

The scale of quantitative easing announced by the BOJ earlier in the month only goes to highlight the enormity of the task the government and the central bank have in trying to ignite the Japanese economy, and finally put deflation behind them. A mixed bag of data out this week hasn’t given a clear picture of just where they are at. Strong household spending figures were contradicted by weak retail sales data. Industrial production disappointed, while housing starts were better than expected. The stock market has certainly got a shot in the arm, and that seems to have aided the household spending to a degree. It is too early to answer the  question of whether it is sustainable. What is clear is that although the JPY has regained some of the ground it lost on the QE announcement, this is most likely a corrective move. The sheer scale of money printing (QE) that will be injected into the economy over the next 2 years will likely see further JPY weakness. Next week’s data won’t provide us with much more insight into the health of the Japanese economy, with trade figures and the JPY leading index the only data that will warrant attention.

The solid economic outlook for Canada has continued this week. Two pieces of data reaffirming the markets view that, at least on a relative basis, Canada is doing much better than most other major economies. GDP for February, and RBC Manufacturing PMI both beat forecasts, and this has continued to underpin the Canadian dollar, which has made broad based gains against most other currencies over the last few weeks. Expect much of the same next week, with the focus on housing starts and employment data, out on Wednesday and Friday respectively.