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Economies of note - 4th October

Written by Ian Dobbs on October 4th, 2013.      0 comments

2:00pm (NZT)
It has been a much better week for the Australian economy with a number of data points showing notable improvement. We have seen retail sales come in a touch above expectation and the manufacturing index moved up into expansionary territory for the first time in two years. The housing market certainly seems to be helping with prices increasing 1.6% month on month for September, and new home sales also recovering last month’s decline and then some to print at up 3.4%. It hasn’t all been positive though, with building approvals falling 4.7% m/m, although this is a very volatile series. Also the trade balance came in substantially below forecast as well. The services index released yesterday showed solid improvement, although it is still below the 50 level which denotes contraction or expansion in the industry. But the biggest reaction on the week came after the RBA’s cash rate decision and statement. As widely expected the central bank left rates unchanged and the statement was even more neutral than the previous one. Gone were referenced to the currency been overvalued with the bank now simply stating further falls in the AUD would be helpful. They also talked about the effects of previous cuts still flowing into the economy. Further cuts have certainly not been ruled out, but for now the RBA seem comfortable to sit tight and see how thing unfold. The AUD saw a good move higher as a result although it has given back some of those gains. Next week we have consumer sentiment, business confidence and employment data to digest.

New Zealand
A couple of statements from the RBNZ this week have caught the markets attention. The first was a release from Assistant Governor McDermott who said New Zealand's ‘neutral’ interest rate appears to have fallen and this will have a bearing on the interest rate households and businesses will face over time. He now believes the neutral cash rate to be around 4.5%. That is the rate at which inflation should be stable and the economy is growing at its trend rate. Then Governor Wheeler seemed to say in a release yesterday that we are going to hit that rate quicker than the market was thinking. He said rates may increase 2% between 2014 and 2016 to restrain inflation. He also said bigger rises would be needed if mortgage lending limits don’t slow house price gains. The latest data from Barfoot and Thompson also out yesterday shows the Auckland housing market is still performing very strongly with the median price up 6.9% to $600,000.00. With data like this we could be in for a rate very early in the new year. Next week we have business confidence and the manufacturing index to focus on.

United States
The debacle that is US politics has continued to take centre stage although the market seems to be taking it in its stride. The reaction to a Government shutdown has been very muted so far as most believe it’s only a matter of time before a deal of some sort is reached. Things might start getting very lively if we are still locked in a stalemate come Oct 17th when the debt ceiling needs to be lifted. A failure to do that will have wide ranging implications and would certainly create volatility. As a result of the shut down a number of data releases have been postponed including the all-important employment report that was due out tonight. Earlier in the week we did get a reading on the manufacturing industry which improved to its highest level since April 2011. We should still get the services index set for release tonight, but the main focus will continue to be on the circus in Washington.

It was an interesting week in Italian politics which ended with a big win for the current PM Enrico Letta and a humiliating defeat for Silvio Berlusconi, who just can’t seem to accept that his time is up. News of the confidence vote win for Letta hit the wires around the same time as ECB president Draghi was delivering his statement after the central bank decided to leave rates on hold at their latest meeting. The Euro got a good boost which was most likely from the Italian news, as much of what Draghi said was similar to previous statements. The ECB is cautiously optimistic about the recovery but continue to leave all options on the table should the need arise. Draghi also reaffirmed that rates are expected to remain at current levels or lower for an extended period of time. Second tier data out this week has been less than inspiring and has had no material impact on the current outlook for the economy. Next week we have GDP, industrial production for both France and Germany, along with German trade balance and factory orders.

United Kingdom
The key data this week from the UK were index’s for the manufacturing, construction, and service sectors of the economy. The manufacturing data was slightly weaker than expected and a touch down on August’s result, which was a two-and-a-half year high. But looking into the detail showed the employment and prices components were rising at their fastest pace in two years.  It was a similar story for the construction index which eased back from last month's six year high. But digging deeper revealed that residential construction rose at its fastest pace in a decade. Last night we got the services index and that showed continued strong expansion in the sector. The result was close to expectation and only just below last month's level which was the best reading since 2006. We also had comments this week from Governor Carney who said the BOE won’t tighten rates until the economy is growing sustainably. BOE board member Dale laid out how they plan to exit QE. He said the first tightening step would be a rate increase and the bank will then begin selling the QE purchases as policy tightens. He add that not selling the QE assets they have bought during QE would be indefensible. Next week's highlights will be manufacturing production, trade balance, and the BOE’s cash rate meeting.

This week saw the release of the 3rd quarter “Tankan” survey for Japan which covers both the manufacturing and service sectors of the economy. The result showed broad based economic improvements which certainly lends support the current policies of the government and BOJ. Prime Minister Abe also announced that he will proceed with the planned sales tax increase in April. There has been wide debate around whether the economy is strong enough to withstand the increase and to help ease the impact the PM also unveiled a stimulus package worth five trillion yen. The sales tax will rise from five percent to eight percent and it badly needed to help rein in what is the world’s biggest debt burden. Next week we get the BOJ monthly report, current account data, minutes from the latest BOJ meeting, core machinery orders, and consumer confidence.

Earlier this week we got Canadian GDP which came in on expectation at 0.6%, and reverses the previous months decline. The Bank of Canada (BOC) was on the wires saying annual growth of 2.5% is needed to absorb remaining slack in the economy. Luckily that’s exactly the level of growth they are predicting for the fourth quarter. They see growth strengthening in 2014 as a rotation away from consumption and towards exports and investment gains momentum. Early tomorrow morning we get the results from a survey of purchasing managers which is expected to show and gradual improvement from last month.