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Economies of Note - 4th December

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

3:30pm(NZT)
Australia
Ahead of yesterday’s GDP result there were some very mixed views on which direction the next move in interest rates from the Reserve Bank of Australia would be. A number of banks were forecasting a rate cut in late 2015, while others suggested rates will go up, or at least remain stable next year. But after yesterday’s surprisingly weak GDP figure anyone forecasting a rate hike next year will be quickly reassessing their outlook. The market was expecting GDP for the third quarter of +0.7% but the actual result came in at just +0.3%. That is a big miss. Year on year GDP was 2.7% versus 3.1% expected. This data suggests that as the mining industry slows, the slack left in the economy isn’t being taken up by other sectors anywhere near as quickly as the RBA would like. The data weighed heavily in the Australian dollar that was already under pressure from declining commodity prices. The RBA held their last rate meeting of the year on Tuesday and released a statement very much in line with previous ones. They expect growth to remain a little below trend going forward, they believe the AUD needs to fall further to help balance growth, and unemployment will remain high for some time yet. While they believe a period of stability in rates remains appropriate, the potential for a rate cut next year has now significantly increased. Earlier this afternoon we got the latest reading on retail sales. These actually surprised on the strong side with positive revisions to previous numbers also engorging. Next week to draw focus we have business confidence, consumer sentiment, inflation expectations and employment change.
 

New Zealand
The key release from New Zealand this week came in the form of Fonterra’s latest dairy auction. Overall prices were down again falling by 1.1%, but whole milk powder, which is Fonterra’s biggest export, fell a whopping 7.1%. This was not the result dairy farmers were looking for and the only questions now is by how much will Fonterra revise down their forecasted pay-out for 2014/15 when they review it next week. The current estimate of $5.30 per kg is likely to end up below $5.00 and could even go sub $4.50. These levels are well below the cost of production for most farmers and will result in a significantly less amount of money flowing through the NZ economy. Finance Minister Bill English this week suggested the economy was resilient enough to withstand the fall in dairy prices, but that forecasts for GDP growth of 2.75% in 2016 seem “a little bit optimistic”. The New Zealand dollar saw pressure in the wake of the dairy result and lost ground on most crosses. There is now nothing of significance on the economic calendar until next Thursday’s RBNZ official cash rate review and monetary policy statement.
 

United States
Two key releases from the US so far this week have both come in much stronger than forecast. ISM Manufacturing PMI came in at 58.7 vs expectation of 57.9, while the ISM Non-manufacturing PMI printed at 59.3 vs expectation of 57.5. That non-manufacturing figure was the second highest reading in three and a half years. Some second tier data has also come in on the firm side, with construction spending up 1.1%, strong vehicle sales figures and a big jump in the New York ISM index. Data like this would suggest the Fed will remain firmly on course to hike rates around the middle of next year. There was one release which raised some eyebrows and could be significant in relation to rate hike expectations. Non-farm productivity data was revised a touch higher in line with expectations, but unit labour costs were revised sharply lower to -1.0% from +0.3% previously. That is a big drop in labour costs and hourly compensation data shows that wages are very subdued. There is little threat of inflation rising if wages remain stagnant and if inflation fails to pick up the Fed could decide to remain on hold for much longer than expected. The Fed released its Beige Book last night, which is a summary of commentary on current economic conditions, and in it they acknowledged only slight to moderate labour cost increases with overall price and wage gains remaining subdued. The rest of the report was more positive however with job gains described as ‘widespread’ across Fed districts, strong manufacturing and continued gains in consumer spending. Still to come this week we have key employment data in the form of non-farm payrolls numbers. The market is expecting gains or around 230k with the unemployment rate to remain steady at 5.8%. Next week retail sales, producer prices and consumer sentiment data will draw attention.
 

United Kingdom
The UK pound has been boosted this week by data showing continued solid expansion in the manufacturing, construction and services sectors. The service sector PMI was particularly strong and this is a key part of the economy that contributes significantly to GDP. The Office for Budget Responsibility released their latest forecasts this week and they now see GDP in 2015 at +2.4% vs +2.3% previously. The also see unemployment falling to 5.4% next year vs their previous estimate of 6.3%. The Bank of England and the Treasury have also announced they are going to extend the Funding for Lending Scheme (FLS) for one more year. It was due to expire in January 2015, but the bank wants the scheme to help small and medium sized enterprises gain cheap funding through to the end of next year. Tonight we have the Bank of England rate meeting, although it is likely to be a very subdued affair. No change in rates is expected and there won’t be much in the way of a statement released. Next week we have manufacturing production, industrial production and the trade balance to draw focus.
 

Europe
There has been little to get excited about this week from Europe. The final Eurozone manufacturing and service sector PMI’s both came in below forecast and down on the prior readings. Retail sales were also softer than expected at +0.4%, and producer prices had a sharp drop to -0.4% from +0.2% prior. The main culprit in dragging down producer prices was the energy component which shouldn’t be shock to anyone. Although lower oil prices are like a small stimulus to the economy in the long run, when you’re flirting with deflation it is less than ideal. If consumers adopt the mind-set that prices won’t go up at all, or might even fall, they can happily delay spending and an ugly cycle develops in the economy. Japan knows all too well what that feels like. The key event of this week however, is still to come with tonight’s European Central Bank meeting and subsequent press conference. A lot of attention will be paid to assessing how close the bank is to outright sovereign QE (unsterilized purchases of government bonds). Draghi has said many times the bank is working on a plan for such action, but that a decision to undertake it has not been made yet. There has been talk that they will make that decision in the first quarter of next year, and this seems reasonable, but President Draghi is certainly capable of springing the odd surprise. There is a rash of second tier data next week along with the results of the targeted LTRO set for release on Thursday.
 

Japan
The only data of significance out of Japan this week was average cash earnings. It came in at +0.5% which was below the forecast of +0.8%. It also marks the third monthly decline from the peak of +2.6% set back in September. If current polling is correct, it looks like PM Abe’s ruling coalition will succeed in gaining a healthy margin in the upcoming election. This would ensure a continuation of his plan to reinvigorate the economy while at the same time trying to get the fiscal position under control. Campaigning officially began on Tuesday and the vote will be held on December 14th.
 

Canada
The only release of note so far this week from Canada has been the Bank of Canada’s rate statement out last night. As expected the bank left rates unchanged at 1.00% with the balance of risks remaining in a zone where current monetary policy is appropriate. The bank does see sign of a broadening recovery that is leading to more balanced growth. Stronger exports are beginning to be reflected in increasing business investment and employment. Lower oil and commodity prices will weigh on the economy as will global growth that continues to disappoint. One key comment the bank made was that the output gap (the amount of spare capacity in the economy) appears to be smaller than projected in October. This is a hawkish remark as inflation pressure will build as spare capacity is absorbed. Subsequent comments from Governor Poloz said the bank believes it will take about two years of above potential growth before slack in the economy is used up. Still to come this week we have Ivey PMI and employment data to digest. Next week we have housing starts, building permits and the new house price index scheduled for release.
 
 

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