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Economies of Note - 4th April

Written by Ian Dobbs on April 4th, 2014.      0 comments

1:15pm(NZT)
Australia
The Reserve Bank of Australia (RBA) delivered their rate statement on Tuesday afternoon and as widely expected they left rates unchanged. The tone of the statement was very neutral and there was little in the way of ‘verbal intervention’ with regards to the currency. They did state the exchange rate remains high by historical standards, but that’s as far as they went. In terms of interest rates they believe the ‘most prudent course is likely to be a period of stability in rates’. The overall impact in the market from this statement was very muted. Subsequent to rate statement we received data on building approvals which fell -5.0% against expectations for a -2.0% fall. The longer term trend in approvals is however up, and this result has done little to impact that. This slightly soft result was backed up by another couple of worse than expected releases. The AIG Services Index declined to 48.9 from 55.2 prior, and retail sales came in at +0.2% vs expectation of +0.4%. This was countered to a degree, by a better than expected trade balance result. Overall however, the somewhat softer data has failed to offer support to the currency that really needed it to maintain its recently elevated levels. As a result the AUD has come under some pressure in the latter half of this week. If next week’s key data in the form of business confidence and employment change also disappoint, the currency will easily give up further ground.


New Zealand
The economic calendar has been pretty thin this week from New Zealand. The currency however, has come under sustained pressure in the wake of Fonterra’s Global Dairy Trade auction result. That saw a fall in prices, albeit from still very high levels, of around 8%. This does mark the third auction in a row where prices have fallen, although this is not a complete surprise as supply has increased substantially. Commodity prices in general have moderated in the past month by -0.1% after previously rising by +0.9%. Earlier in the week we saw a small decline in business confidence, although this is still at very healthy levels. We get a different reading on business confidence next week along with the manufacturing index and house price data.


United States
Data from the United States this week has for the most part been a little disappointing. Arguably the biggest release is still to come with tonight’s non-farm payroll figure keenly awaited. The market is expected a result around +200k with leading indicators of employment pointing to a strong number. This would make up for the slightly weaker than expected readings from manufacturing and non-manufacturing PMI’s released over the past few days. Both index’s did improve from last month’s readings although the market was looking for a better recovery from the supposedly ‘weather affected’ data. The highlight of the week so far has been factory orders that came in at +1.6% vs +1.2% expected. Releases to draw focus next week include the Fed meeting minutes, producer prices, and consumer sentiment.


Europe
This week saw a mixed bag of data that started on Monday with a worrying fall in inflation to just 0.5% from 0.7% previously. We did get a slightly better than expected result for unemployment that now stands at 11.9%. Although the market was expecting a reading of 12% the actual result is still a very concerning number. GDP for the fourth quarter of 2013 was also revised down to just 0.2% from 0.3% previously. The main focus of the week however was last night’s European Central Bank (ECB) meeting. In it the bank chose not to take further action at this stage. The Euro weakened significantly however on news that officials had debated quantitative easing (QE) to tackle deflation risks. During the subsequent press conference President Draghi said it’s not an easy task designing a QE program for Europe due to structural differences with other countries in the way corporates fund. What is clear is that the option of QE is certainly now on the table, and that is something you wouldn’t have said a year ago. Dargahi also said the central bank discussed negative deposit rates although he reiterated he doesn’t see deflation risks in the Eurozone. He has explained away recent weakness in CPI as a function of energy prices and base effects of the Easter break. Only time will tell if he’s right. Next week’s economic calendar is a lot lighter with the highlights being German trade balance, French industrial production, and the ECB monthly bulletin.


United Kingdom
The UK Pound has performed well this week considering we have seen softer than expected readings from manufacturing, construction, and service PMI’s. All three indexes decreased slightly from previous results. They are however, all still at very healthy levels which are consistent with continued expansion in the sectors and this explains the muted impact in the market. The currency was given a small boost by comments from BOE Governor Carney who said interest rates could increase ahead of next year’s general election, which is scheduled for early May 2015. A hike in the second quarter of next year is broadly in line with current market expectations. The UK housing market remains in focus with prices continuing to march higher. London house prices are now 20% higher than their pre GFC 2007 peak. This is even more eyebrow raising when you consider that, adjusted for inflation, real wages are around 8% lower than they were back in 2007. The BOE’s credit conditions report released this week said more banks are willing to lend above 90% loan to value ratios. UK Chancellor George Osborne said regulators must keep a close eye on Britain’s housing market, and that they must be vigilant with regard to household debt.


Japan
The focus in Japan this week has been Tuesdays BOJ “Tankan” results. The “Tankan” is the BOJ’s quarterly business confidence survey and sentiment barely improved in the first quarter. The increased sales tax that took hold April 1st has been attributed for the low levels of business confidence. For this reason Japan has entered a potentially sticky next couple of quarters. The last sales tax increase in 1997 had a notable dampening effect on the economy, and business sentiment was far higher when that increase was initiated. These tankan findings will likely not be enough to force further stimulation from the BOJ at their monetary policy meeting next week, but they have certainly increased the chances. The data will have increased importance in the coming months. Economic news next week includes the Leading Economic Index, current account numbers, lending numbers and machinery orders data.


Canada
It really does seem that ever since BOC Governor Poloz pronounced a couple of weeks back that growth and inflation are likely to surprise on the downside, all Canadian data has come in better than expected. That was certainly the case for GDP on Tuesday that printed at +0.5% vs expectations of +0.4%. This was followed by the Raw Materials Price Index (considered a leading indicator of consumer inflation) that increased +5.7% against expectation for only +2.3%. That’s the biggest jump since June 2009. Then last night we got the latest trade balance data that printed at $0.29 bln against expectations of $0.20 bln. If Governor Poloz had the option to turn back the clock and withdraw his comments, I’m sure he would do just that. As a result of this improving data the Canadian dollar has recovered some of the ground lost in the wake of Poloz’s comments.
 
 

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