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Economies of Note - 5th September

Written by Ian Dobbs on September 5th, 2014.      0 comments

The Australian dollar has had another good week thanks to solid data and confirmation from Reserve Bank of Australia (RBA) Governor Steven’s that the chance of further rate cuts is well off the table. On the data front we have seen better than forecast results from building approvals, GDP and the trade balance, while retail sales came in bang on expectation at +0.4%. The RBA left rates steady at their monetary policy meeting and as in previous statements said they believe a period of stability in rates is the most prudent course. They believe inflation will be contained due to the low growth in wages and that overall economic growth is likely to be a little below trend in the year ahead. They also reaffirmed they see the exchange rate high saying it is “above most estimates of fundamental value, particularly given the declines in key commodity prices”. Governor Steven’s then spoke on Thursday afternoon and in that speech he downplayed the chance of any further rate cuts. He said the record low rate of 2.5% was already accommodative, and then went on to warn of a potential housing bubble. He added that while trying to stimulate growth in the real economy the bank doesn’t want to foster too much build-up of risk in the financial sector. Those are not the words of a man who would even consider cutting rates further and as such the AUD gained ground. Next week we have business confidence, consumer sentiment and employment change data to draw focus.

New Zealand
The main economic focus for this week in New Zealand was Fonterra’s global dairy trade auction on Tuesday evening. Once again however, the result was less than favourable for dairy farmers and this saw the New Zealand dollar lose more ground. Overall prices declined another 6% and they are now at their lowest level since July 2012. This makes Fonterra’s forecast payout of $6 per kg for the 2014/15 season very optimistic. It could well end up closer to $5 and this has real flow on effects for the NZ economy. This result saw the currency under further pressure trading down to cycle lows against the USD and AUD. On a slightly more positive note it seems some heat continues to dissipate from the Auckland property market. Barfoot and Thompson, who are the biggest real estate agents in the region, saw the median selling price drop 2.3% in August falling from $645,000 to $630,000. All this likely adds up to the RBNZ remaining on hold until around March next year, with the risk they could be on hold a lot longer than that. We will get a better understanding of their thinking next week with the official cash rate review and rate statement scheduled for Thursday morning.

United States
Solid economic data has again helped to support the USD this week. The ISM manufacturing index hit a 10 year high in August printing at 59.0. Expectations were for a reading of around 57.0. This was backed up by better than forecast gains in construction spending, the trade balance, and last night’s non-manufacturing PMI data. The Fed released their Beige Book, which was reasonably positive. They saw moderate or modest growth in 10 out 12 regions. Arguably the most important data of the week is still to come with the release of non-farm payrolls figures tonight. The Fed continues to believe there is significant slack in the labour market and hence no urgent need to raise rates. That view is unlikely to be backed up tonight by what should be another strong employment result. The market is looking for gains of 226k which would make it the fifth +200k result in a row. The unemployment rate is expected to fall to 6.1%. Next week the economic calendar is a little lighter with retail sales and consumer sentiment the main focus.

United Kingdom
The UK Pound has remained under pressure this week, but not because of disappointing data. Although manufacturing PMI did miss expectations, both the construction and service sector PMI’s showed good gains, coming in well above expectation. These would indicate we are headed for another quarter of solid GDP growth somewhere in the vicinity of the +0.8% seen in first and second quarters. The Bank of England (BOE) held their regular rate meeting last night, but it was a boring affair with no change in policy and no statement released. We now have to wait until September 17th to get the minutes and see if any other members of the MPC have switched to the hawkish camp. The GBP has been weighed on by the prospect of a very close vote in the Scottish independence referendum set for September 18. The Pound is unlikely to gain much support from solid economic data until after that one-off ‘risk event’. Last night’s dramatic fall in the Euro also weighed on the GBP, although in the long run anything that is positive for the Eurozone economy will have flow on effects for the UK. Next week we have a speech from BOE Governor Carney, manufacturing production data, and the inflation report hearings where BOE officials testify before Parliament’s Treasury Committee.

Last night’s ECB meeting proved to be a very interesting event. The Mario Draghi led central bank pulled out all the stops in a last ditch effort to hold off deflation and try to stimulate growth. They slashed all interest rates by 0.10% taking the deposit facility down to -0.20%, and announced a QE programme to buy asset backed securities and covered bonds. Make no mistake this is basically the last throw of the dice for the ECB. Draghi himself said interest rates are now at the lower bound. He has said many times the ECB cannot fix the Eurozone alone and today he called again for governments to support growth with structural reforms. Draghi has done everything he possibly could and if the Eurozone fails to pull itself out of this mess, it will not be his fault. He singlehandedly saved the region from meltdown two years ago when he pledged to ‘do whatever it takes’ to save the Euro. That commitment turned around spiralling borrowing costs and bought valuable time for the region to sort itself out. But the only action governments have taken has been the German led austerity, and this has crushed any chance of real growth. The recent sacking of the French economy minister for speaking out again these policies suggests we are miles away from any meaningful change in direction. Today’s announcements from the ECB saw the EUR take a big hit. It is likely to remain under heavy pressure and in a declining trend for the foreseeable future and this will be have positive implications for the Eurozone economy. The problem for Draghi is that all this action he has undertaken will just serve to take pressure off governments from having to act.

The poor run of recent Japanese data was halted, at least temporarily, this week when average cash earnings data printed well above expectation at +2.6%. The market was expecting a result closer to +0.9%. This was the strongest reading since 1997 and should provide a boost for spending and confidence. Looking into the detail of the report did take some of the shine off it however, as a large part of the gains were driven by overtime. Regular earnings grew by a much more sedate 0.7%. Yesterday the Bank of Japan (BOJ) held their regular rate meeting and decided to keep the record level of stimulus unchanged at a 60-70 tln Yen annual increase in the monetary base. The bank is hoping this will be enough to stoke inflation and boost economic momentum that has taken a big hit in the wake of April’s sales tax increase. They expect the effects of the increase to gradually wane over time. Next week we get the current account, GDP, the BOJ minutes, Tertiary industry activity and core machinery orders data.

The Canadian dollar has had a positive week helped by improving trade balance data and a somewhat positive tone from the Bank of Canada (BOC) after their rate meeting. The central bank left rates unchanged at 1.0% and maintained their neutral bias, although the overall tone of the statement was certainly more encouraging that previously. The BOC eliminated any references to “serial disappointment” on global growth and suggested activity in the housing sector had been stronger than anticipated. The BOC is also cautiously optimistic on the prospects for US growth and the export sector. The likely scenario at this point is that the next move in interest rates will be a hike, but probably not until after the Fed have hiked which could be as far off as mid next year. Tonight we get key employment data along with the Ivey Purchasing Managers Index (PMI). The market is looking for a gain in employment of around 10.3k, and the unemployment rate to remain steady at 7.0%.