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Economies of Note - 13th December

Written by Ian Dobbs on December 13th, 2013.      0 comments

2:30pm (NZT)
The key piece of data this week from Australia was employment change released yesterday. The headline increase of 21.0k was much better than expectations that were for a number around 10.0k. Looking into the detail of the report also made pleasant reading, with full time employment up 15.5k and part time up 5.5k. That is significantly better than last month's reading which showed a big swing away from full time work to part time work. Earlier in the week we got business confidence data that was largely unchanged from the previous month. This was followed by consumer sentiment which declined from 1.9% to -4.8%. None of this changes the broader outlook for the Australian economy which is struggling to gain any real momentum. It also won’t do much for government finances which could see the 2013-14 deficit blow out to as much as $45 bln. That is 50% higher than the $30 bln foreshadowed during the federal election and Treasurer Hockey said this week overall debt could end up on the wrong side of $500 bln. There is not much out in the way of data next week with the highlight being minutes from the last RBA meeting on Tuesday.

New Zealand
The week was all about the RBNZ monetary policy statement released yesterday. As universally expected the central bank left the official cash rate unchanged at 2.5% and they continue to signal that rates will start to rise next year. Their new forecasts have them raising rates by a total of 2.25% over the next 2 years, which is slightly more than their previous estimates. This helped to boost the NZD a little in the wake of the release. Although Governor Wheeler said the exchange rate is high and not sustainable in the long run, he fell short of suggesting its appreciation could delay the rate hikes. He repeated that it was too early to judge the effects of the LVR lending restrictions put in place in Oct, and that the RBNZ are serious about containing inflation. Strangely enough, they have actually revised down their projections for inflation in 2014 from 1.9% to 1.5%. Further out however their projections are broadly in line with previous estimates which are that inflation will be over 2% by 2016. To draw focus next week we have consumer sentiment, the current account, business confidence, and GDP data.
United States
For the most part recent data out of the US has been supportive of the recovery and increased the chance of Fed Quantitative Easing (QE) tapering next week. Last Friday’s employment numbers were certainly strong enough to support the case for a December taper, and these have been backed up by some other good results in the last few days. Wholesale inventories and business inventories have both come in well above expectation and these figures suggest GDP for the fourth quarter will be stronger than previously expected. Retail sales out last night also surprised to the upside coming in at 0.7% against an expectation of 0.6%. Another key hurdle for a December taper was eliminated this week when a cross party government budget deal was reached. This deal will keep the government funded for another two years and means we won’t be having another government shutdown come January 15th.  The key thing the Fed will have to debate in deciding whether or not to scale back asset purchases, is inflation. There is little in way of inflationary pressure at the moment, and the risk are that inflation could even moderate further. It is certainly going to be a close call next week at Wednesday’s Fed meeting and this will provide the focus for global markets over the coming days. There is other data out in the form of inflation, building permits, and existing home sales, but the reality is its all going to be about the Fed.

There has been little in the way of good news for Europe this week. Data continues to be lacklustre at best. The key figure this week was industrial production and that disappointed to the downside coming in at -1.1% against an expectation of 0.4%. The ECB released their monthly report last night, and in it they have lowered their inflation forecasts. President Draghi repeated the call that they will ensure price stability in both directions. We have had continued comments from other officials all week singing the same tune. That the ECB still has room to act and doesn’t rule out the use of additional steps. The IMF’s Lagarde said European demand remains weak and that Europe needs to improve credit flow. She said the ECB should act to stop inflation falling further and she sees room to relax European budget targets. It seems very likely that unless there is a dramatic turnaround in data over the next six weeks, the ECB will act again in the New Year. The big question is what form this action will take. Another LTRO which possibly links the cheap funding to banks actually lending more, or a move towards negative interest rates on central bank deposits? One thing is for sure, rates are going to stay low in Europe for a very long time. Next week we get manufacturing and service PMI’s, the trade balance, German economic sentiment and German business climate. President Draghi is also set to speak and we get the latest reading on inflation.

United Kingdom
It has been a relatively quiet week for data from the UK. We have seen the trade balance, that was a little worse than expected, and industrial production that was a touch better than expected. Overall there has been little impact on the current positive outlook for the economy. The National Institute of Economic and Social Research (NIESR) produce a monthly estimate of GDP and they suggest it has increased to 0.8% in November from Octobers 0.7%. We get the final reading of the official GDP figure, which is produced quarterly, next Friday. Ahead of that we’ll get readings on inflation and retails sales along with the minutes from the last Bank of England (BOE) monetary policy meeting.

It hasn’t been a great week for Japan with the majority of data disappointing to the downside. Monday’s soft reading of GDP for the third quarter has highlighted just how fragile the recovery in the economy is. Prime Minister Abe is going to have to deliver quickly on his promise of structural reforms or risk undoing all the good work achieved so far. On Tuesday we got results from a business activity index that printed at -0.7% against an expectation of 0.3%. This was followed on Wednesday by core machinery orders that also disappointed at 0.6% vs 0.8% expected. Next week will hopefully be better when we get the Tankan manufacturing and nonmanufacturing index. These indexes, which are set to be released on Monday, are produced quarterly and are a key indicator of economic health. Early indications are that business are optimistic and this should show through in the results. Later in the week we have the trade balance and the Bank of Japan (BOJ) monetary policy statement.

There hasn’t been much in the way of key data from Canada this week. We did get housing starts and the new house price index, which both came in a touch under expectation. The housing market is a big focus for the Bank of Canada (BOC) who were on the wires this week suggesting the pick-up in the housing market and debt are temporary. They believe the imbalances will stabilize and gradually unwind. History isn’t exactly littered with housing market bubbles that have gradually unwound, but at least the bank is optimistic. A recent study by Deutsche Bank put Canada at the top the list out of 20 developed countries for the most overvalued property market. The BOC say the risk to the financial system has decreased to “elevated” from “high” since June and they say they will continue to work with other authorities to monitor the market and household debt. Next week we get data on manufacturing and wholesale sales, inflation, and retail sales.