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Economies of Note - 5th August

Written by Ian Dobbs on August 5th, 2016.      0 comments

12:00pm(NZT)
Australia
This week in Australia was dominated by events on Tuesday which included the key RBA interest rate decision. This saw the RBA cut rates to fresh historical lows of 1.5% as they noted a slowdown in lending to real estate investors and an appreciating currency- which has the potential to complicate the economic adjustment. The move failed to dampen appetite for the AUD, however as it rallied 100pts against the USD in the hours after the cut. Data released during the week started with the AIG manufacturing index and HIA new home sales, which both advanced notably from their prior reads. Data on Tuesday prior to the RBA decision was weak as both the building approvals and trade balance (for June) missed their estimates by a wide margin. The fall in building approvals was the second consecutive heavy fall. The broad based fall across both homes and apartments adds to the evidence that the Australian residential construction boom is now past its peak. Data from the retail sector was again disappointing after it added to the trend already seen over the 1st half of 2016. The impact of the numbers on the financial markets was minimal however. In focus today is RBA statement on monetary policy this afternoon and the following US data from the labour market (tonight).
 

New Zealand
The NZD has spent most of the week in a range around the 72c mark against the greenback since our last update.  The event calendar has been a relatively light one which started with the RBNZ quarterly inflation expectations survey on Tuesday. This revealed little change in expectations by respondents and was of very limited impact. The prospect for price increases remains low and is becoming well entrenched given that inflation has undershot the central bank’s target for eight straight quarters. Data on dairy prices was positive after the latest GDT auction rose 6.6% overall, whilst the important whole milk powder (WMP) price rose 9.9%. Higher Chinese participation and tightening tradable supplies were seen as reasons behind the rally. Data on the labour market released on Wednesday pointed to soft wage inflation as the Q2 labour cost index undershot its estimate. This led to some of the major bank’s reducing their forecast for employment growth and raising the unemployment rate for the release of the balance of the data which was delayed until August 17. Look for US leads to drive trade later today as we receive employment data from the world’s largest economy. Next week in NZ will be dominated by Thursday’s RBNZ cash rate decision where the market widely expects rates to be cut further to 2.0%.
 

United States
It has been a subdued week for the greenback thus far ahead of today’s key July Nonfarm Payrolls employment data. The week started with ISM manufacturing numbers which eased from the month prior. The strength which was seen in new orders indicates positive momentum moving forward, although weakness was noted in hiring and prices paid. Personal spending was seen easing past expectations as the savings rate reduced to 5.3% from levels which have been as high as 6.2% at the end of the first quarter. ADP Non-farm employment numbers were encouraging whilst the ISM Non-manufacturing report was slightly weaker than expected, although still points to above trend growth in the services sector. Comments from the Fed’s Kaplan acknowledged the part played by high non-US debt, overcapacity and slowing growth on conditions in the US, and how such issues make getting the Fed Funds rate to neutral “more challenging”. Kaplan argued that the burden for growth requires structural reform and fiscal policy which must join economic policy in order to tackle issues such as changing demographics and lower productivity.
 

United Kingdom
Yesterday’s BoE central bank meeting was the focus for GBP traders this week. This saw the BoE unanimously cut interest rates by 25 bps as expected to 0.25%. The first interest rate cut in seven years was accompanied by details of an expansion in the central bank’s balance sheet (up to GBP 170 Bn) via the purchase of gilts, corporate bonds and a lending program for banks. Governor Carney noted that the economic outlook had changed markedly and that “indicators have all fallen sharply, in most cases to levels last seen in the financial crisis”. Forecasts for growth were slashed by the largest amount ever as Carney pointed to elements of the stimulus that can be expanded, including the possibility of another rate cut. The announcement saw the GBP fall nearly 1.5% on the news (against the USD). Economic indicators released during the week were dominated by the revised PMI releases. This saw the manufacturing indicator revised lower from its flash estimate. The construction PMI was also revised marginally down (to its weakest level since June 2009), although the revision was less than that feared. The final services indicator matched expectations of 47.4. Rounding out the week will be Halifax house prices later today, although expect the US data flow to take centre stage.
 

Europe
It has been a relatively quiet week for the Euro this week. This has seen the single currency un-wind its early week gains against the greenback in recent trade. Data released during the week has been second tier. Marginal revisions to the German and Euro area manufacturing PMI’s were noted, although the equivalent Italian and Spanish prints disappointed. The Markit composite and services PMI indicators both edged their consensus as they remained in expansion territory. Retail sales across the eurozone were flat in June in a result which was a sizeable decline from the month prior and 0.1% less than expectations. The ECB monthly bulletin published yesterday created few ripples after it reiterated comments from the last ECB meeting as it pointed to the risks to the outlook for global activity and resilience of the euro zone markets in dealing with the fall-out of the Brexit vote. Local indicators later today will include the latest German factory orders numbers, although expect attention to remain centred on the later US Nonfarm Payrolls employment data.
 

Japan
Moderate gains have been seen by the Yen in trade against the greenback this week. Data released over the week has been minor in nature only. Manufacturing PMI numbers for July posted a minor improvement from the month prior. Household confidence for the same month eased from a month earlier as it failed to meet the market forecast. Details of the government stimulus announced last week hogged investor focus on Tuesday. This saw the Japanese cabinet approve 13.5 trillion yen ($US 132Bn) in fiscal measures which includes cash payouts to low-income earners and spending on infrastructure, although spending in the current fiscal year will amount to 4.6 trillion yen only. Minutes of the BOJ central bank meeting from June released on Wednesday provided little impetus as board members agreed on the need to examine the impact of negative rates and raised concerns over the pass-through of higher costs in the pricing being charged for services. Look for tonight’s US data (particularly employment) to drive trade to finish the week.
 

Canada
Fortunes for the Canadian dollar (against the greenback) have fluctuated so far this week ahead of the key local data wrap later today. Initial weakness which was seen earlier in the week was oil related and has subsided in trade overnight on the back of the subsequent sharp rally in the price of crude. Trader short covering and a modest stockpile drop at the delivery hub for US crude futures were seen driving the overnight oil move. The only data point so far this week has been the RBC manufacturing PMI release which ticked higher from the month prior, the number failed to garner any interest however. Interest remains elevated on the fall-out of the 15% foreign buyer property tax imposed in Vancouver. This as the number of property transactions filed in the two days prior to the taxs introduction at 15,000, exceeded the total for the prior month. Adding to the noise is anecdotal evidence of buyers walking away from deposits and failing to complete deals. Look for today’s Canadian and US data to drive trade into the week’s end. Key local releases include numbers on employment and trade.
 
 

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