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Economies of Note - 4th September

Written by Ian Dobbs on September 4th, 2015.      0 comments

It has been a dismal week for data out of Australia. Although both building approvals and the trade balance came in better than forecast, their impact was negligible and they were largely side-lined by GDP and retail sales figures. Both these latter two releases paint a concerning picture for the Australian economy. GDP printed at just 0.2% for the second quarter, well below the 0.4% forecast. First quarter GDP was 0.9% and so maybe there was a little ‘give back’ from that prior strong result, but this was a poor outcome none-the-less. The data also showed a rise in the household savings rate which would suggest consumers are a little cautious at the moment. That assumption was backed up by retail sales figures that were released yesterday. Sales fell 0.1% from a month earlier, the first drop since May 2014. The market was expecting a gain of 0.4%. Both these two results should only strengthen the case for further easing from the Reserve Bank of Australia (RBA) over the coming months. That being said, the central bank made no hint of moving in that direction when they released their rate statement on Tuesday afternoon. Although their meeting came prior to the GDP and retail sales releases, I think it’s fair to say they had probably been advised of the data early. The RBA made scant reference to the trouble in China and the statement only really confirmed the bank remains firmly “on hold” for the time being. It wasn’t only Australian releases that weighed on the AUD this week. Chinese manufacturing data on Wednesday hit a fresh six year low with the sector now well into contractionary territory. This was a key driver for the Australian dollar which fell to the lowest level since 2009 at 0.6985 in the wake of the release. Next week we have business confidence, consumer sentiment, inflation expectations and employment data to digest.

New Zealand
This week saw another big decline in NZ business confidence, countered by a further recovery in dairy prices. Business confidence plummeted to a six year low at -29.1 from a prior reading of -15.3. It doesn’t bode well for the near term performance of the economy which is facing some serious headwinds at the moment. On a more positive note we saw another solid gain in dairy prices at Fonterra’s latest auction. The GDT index jumped 10.9%, with the key whole milk powder price a touch stronger than that. It must be remembered however, that Fonterra has significantly reduced the amounts offer recently and this has no doubt helped. The broader dairy market fundamentals haven’t changed much with still very high levels of production in Europe and the US creating oversupply, and as such we can’t get too excited about recent gains. Next week we have the Reserve Bank of New Zealand’s (RBNZ) monetary policy statement to digest. The bank is widely expected to cut interest rates by 0.25% at this meeting and that is well factored into the market.

United States
Over recent weeks Fed officials have continued to convey their willingness to start hiking interest rates and although the domestic economic environment is largely supportive of such a move, globally everything suggests they should wait. As such this months Fed meeting is still turning out to be a cliff-hanger. Market expectations have dropped to around a 30% chance of a hike, but that could change dramatically after tonight’s non-farm payrolls report. This employment data could well make or break the prospect of a rate hike on Sep 18th. A lowish number, say 170k or below, may well end any talk of a September hike and could see the USD come under some real near term pressure. On the other hand a strong number or say +230k will bolster the argument of those FOMC members who desperately want to get interest rates off the ‘lower bound’. It’s all shaping up to be a very interesting night in the US. Other data this week has been bit mixed. ISM manufacturing PMI declined to 51.1 from 52.7 prior. The market was looking for a reading close to unchanged. This would the lowest reading since May 2013. The ISM non-manufacturing PMI however, remains at very healthy levels and is consistent with continued solid GDP growth. It printed last night at 59.00 which was better than the market expectation of 58.3. The Fed also released their Beige Book, which is an analysis of current market conditions, mid-week and in it they said most districts reported modest to moderate growth in the period of July to August. Monday is a US holiday so it will be a slow start to next week. We do however have producer prices and consumer sentiment to digest later in the week.

United Kingdom
The focus this week in the United Kingdom was on the PMI readings from the manufacturing, construction and service sectors. Manufacturing PMI declined a touch to 51.5 against market expectation for an unchanged reading at 51.9. The new orders component of the report fell for the fifth straight month, while the employment component dropped for the first time in two years. Construction PMI made slightly better reading improving to 57.3 from 57.1 prior. However, this was softer than market expectations which were for a reading of 57.6. Housing activity really lead the gains with commercial work also a touch stronger. The same can’t be said for civil engineering projects which remained very soft. Last night we got the services PMI which is by far the most important as the service sector makes up three quarters of the UK economy. It came in softer than forecast at 55.6 down from a prior reading of 57.4. It certainly seems the UK economy is losing a little momentum at the moment and when you add in the very soft inflation picture it suggests the Bank of England won’t be in any hurry to raise interest rates. Next week to draw focus we have the Bank of England’s interest rate meeting. They now release the rate statement, voting pattern and minutes all at the same time so there is plenty to digest.

A raft of second tier data out of Europe this week has had little overall impact with the main focus on last night’s European Central Bank meeting. There has been growing speculation in the market that the ECB may look to increase QE (quantitative easing) at some stage in the future and while President Draghi didn’t directly reference a QE increase last night, he certainly hinted towards it. The central bank also made a technical adjustment to the current programme by increasing the amount of any single-issue bond the bank can buy to 33% from 25%. At the outset of this QE programme many forecasters said the biggest problem is the bank won’t fund enough bonds to buy, and this increase is largely acknowledging that is an problem. The ECB also lowered their growth and inflation forecasts and signalled their willingness to act further if needed. Draghi said inflation may well turn negative in the coming months although the bank believes it will be transitory. He believes the recovery will continue, but at a slower pace, and that the downside risks have increased thanks to further declines in oil prices and a major weakening of emerging market economies. The bank certainly sounded like they were laying the groundwork for a potential further easing and as you would expect this weighed on the Euro. The single currency has seen solid gains across the board over recent weeks as risk aversion in the wider market drove the Euro higher, but Draghi may well have put an end to that last night and you would now imagine there will be very willing sellers into any periods of EUR strength. Next week's economic calendar looks pretty light with little in the way of market moving data scheduled for release.

We have seen largely only second tier data from Japan this week which hasn’t materially impact the Yen. The currency has seen big swings however, on the back of fluctuations in risk sentiment with stock markets continuing to be very volatile. For the record we have seen softer than forecast readings from industrial production, housing starts and capital spending. While the services PMI and composite PMI were both a stronger than forecast. Of more interest will be today’s release of average cash earnings data. The market is looking for a year on year gain of 2.3%. Income is obviously closely related to spending and this is therefore a key metric in Bank of Japan’s fight to achieve 2% inflation. Next week from Japan we have the current account, the final reading of GDP, consumer confidence and core machinery orders set for release.

The price of oil has been a big factor in the value of the Canadian dollar recently, with movements in the currency largely tracking those of the key commodity. We did also have some notable data this week with GDP for June coming in stronger than forecast at +0.5%. The market was expecting a gain of just 0.2%. That stronger finish to the second quarter still wasn’t enough to stop the economy entering a technical recession. GDP for the whole of the second quarter ended up at -0.5%, following a 0.8% decline in the first three months of the year. The third quarter is expected to be somewhat better given that unemployment has remained reasonably steady and wages continue to grow. We get the employment figures tonight and along with Ivey PMI data. The market is expecting a small gain in employment of 2k, with the unemployment rate to remain unchanged at 6.8%. Next week we have the Bank of Canada rate meeting to draw focus along with data on building permits.