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Economies of Note - 3rd October

Written by Ian Dobbs on October 3rd, 2014.      0 comments

Some mixed economic data from Australia this week has added to the general increase in market volatility seen recently. Wednesday’s retail sales figures were disappointing printing at just 0.1% versus expectation of 0.4%. The Australian dollar saw some pressure on the back of this result. Yesterday however we saw better than forecast figures from building approvals (3.0% vs 1.1% expected) and the trade balance (-787m vs -800m expected). These figures helped the AUD to recover much of that lost ground. RBA assistant governor Edey testified to a Senate committee yesterday and he was keen to stress the central bank wasn’t trying to kill the property investor market. There are however imbalances building in housing and something does need to be done. The ratio of house price to incomes is at the top of its historical range and house prices have risen significantly faster than incomes. Some sort of macro prudential tool is likely to be used as the RBA doesn’t want to raise rates to deal with the problem. We are unlikely however to see LVR’s (loan to value ratios) similar to what have been implement in New Zealand as they would target the wrong sector of the market. Next week we have the RBA rate statement and employment change to draw focus.

New Zealand
The big news of the week from New Zealand was the revelation on Monday that the RBNZ had intervened in the currency by selling NZD’s to the tune of 521 million in August. This saw the New Zealand dollar drop dramatically in a very short time frame. Since then there has been little in the way of supportive economic data released. Building consents for August came in flat and if you strip out apartment consents, they actually fell 1.6%. This is probably just a soft patch with activity expected to pick up over the coming months. The ANZ business confidence index for September fell from 24.4 to 13.4. This is in line with other confidence indicators that have pulled back from the extremely high levels seen earlier in the year. On Wednesday night Fonterra held its latest dairy auction and the result didn’t make good reading. Prices fell by 7.3% after holding stable a fortnight ago. Fonterra only very recently revised down its forecasted payout for 2014/15 to $5.30 and this is now starting to look optimistic. They said at the time dairy prices would need to recover 30% by March to achieve that payout. They now obviously need to recover 37% by March. Russian sanctions and increased global supply means the outlook for a quick recovery in prices is not great. A payout of below $5.00 is probably well below the cost of production for farmers who have now gone from boom to bust inside of nine months. There are very real flow on effects for the NZ economy as farmers tighten their belts and cut discretionary spending. Next week looks to be a quiet one data wise with only the quarterly NZIER business confidence index of any note.

United States
A raft of softer than expected data this week will have the Fed feeling no urgent pressure to raise rates. Consumer confidence fell to it’s lowest reading since May when it came in at 86.0. The market was expecting 92.5, so this was a big miss and it may be an indication of weaker consumer spending going forward. Manufacturing PMI also surprised somewhat pulling back from 59.0 last month to 56.6 this month, as did construction spending which printed at -0.8% versus expectation for +0.5%. This is a concerning number with the previous month also revised down by 0.6%. We still have plenty to digest ahead of the weekend however with the trade balance, non-manufacturing PMI and the all-important employment report set for release tonight. The market is looking of a gain in non-farm payrolls of +216k and the unemployment rate to remain stable at 6.1%. Next week the highlight will be minutes from the latest Fed meeting due out early Thursday morning.

United Kingdom
The UK Pound has failed to gain support from data this week which has largely been underwhelming. The best result came from the final reading of GDP for the second quarter which printed at 0.9% versus expectation of 0.8%. It was however calculated using new EU revisions and as such the impact was muted. Current account data came in worse than expected as did manufacturing PMI which pulled back to 51.6 from 52.2 previously. Consumer confidence fell a touch to -1 from +1, this is however still above the 12 month average. Last night we got construction PMI to throw in the mix. It was stronger than forecast at 64.2, but a number of dovish comments from BOE officials negated any potential positive impact on the currency. The BOE’s Broadbent was quoted as saying the UK is still not ready for a rate hike. While Forbes, another BOE official, said data doesn’t show sufficient inflation pressure. Tonight we get the PMI from the economies biggest sector, that of services. It is expected to moderate slightly from last month and come in at 59.1 Next week along with the Bank of England rate meeting we have manufacturing production, Halifax house price index, the trade balance and the BOE credit conditions survey.

The past week has seen some mixed data from the Eurozone. Taken overall it has done nothing to alter the current view that the region is struggling with dangerously low inflation and low growth. Earlier in the week the ECB’s Nowotny was quoted as saying low interest rates are not enough for economic recovery. This was backed up by ECB President Draghi who repeated a now familiar call when he said monetary policy alone cannot restore confidence and return the Eurozone to growth. He added fiscal and structural policies must do their part. He repeated these calls after last night ECB meeting, at which the central bank left policy unchanged. They did however give further details on the asset-back securities and covered bond purchase programme that is going to start in the second half of October. The ECB sounded a little more concerned about inflation saying downside risks to medium term inflation have increased. Draghi also suggest that it wasn’t just energy prices keeping inflation low. He said the fall in inflation increasingly reflects structural problems such as unemployment. This is something of a departure from previous statements. Some in the market where hoping there would be mention from the central bank about the potential for sovereign QE, where the bank would make unsterilized purchases of government bonds, but in the end  Draghi made no mention of it. The economic calendar is lighter next week with the highlights being German factory orders, French industrial production and a speech by Draghi.

We have seen a real mix bag of data from Japan this week. Disappointing household spending figures were countered by a much bigger than forecast increase in retail sales. Industrial production came in soft but unemployment, average cash earnings and housing starts were better than expected. The quarterly Tankan survey results were similarly mixed. The large manufacturing index increase from 12 to 13, which is the highest level since the March quarter. The larger non-manufacturing index on the other hand fell from 19 to 13 and that marks the second straight decline. There certainly seems to have been a sharp deterioration in business condition for the non-manufacturing sector. Yen weakness could certainly be playing a part in this. The Japanese economy minister Amari was on the wires this week stressing excessive currency movements are undesirable. A recent report by the Japanese Chamber of Commerce found 80% of all companies polled consider the current 109 Yen to USD level undesirable. Many manufacturers are even struggling with the weak Yen as the higher prices of imported parts are squeezing profit margins. Yesterday afternoon the former finance minister suggested further yen weakening may trigger intervention. Next week we have the Bank of Japan Monetary Policy Statement and press conference to digest along with the current account, core machinery orders and tertiary industry activity data.

The only data released from Canada so far this week has been GDP for July. The headline number disappointed printing at 0.0% against expectations of 0.2%. Looking into the detail took some of the sting out of the report with the flat result driven by a drop in oil and gas production. This completely offset gains in manufacturing of 1.0%. Energy production will have its peaks and troughs, but an improving manufacturing sector is important for long term health of the Canadian economy. Tonight we get trade balance data and next week we have Ivey PMI, building permits, and employment numbers to digest.