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Economies of Note - 6th March

Written by Ian Dobbs on March 6th, 2014.      0 comments

It has been a much better week for Australian economic data, and this has helped the currency recover some of the recent lost ground. The positive news started with building approvals figures released on Tuesday. They surged +6.8% in January against an expectation of only +0.7%. This was the first gain since September last year, and is the sort of result the RBA are looking for to help offset the downturn in the mining industry. As widely expected the central bank left interest rates unchanged at their meet this week and they maintain a very neutral stance. This provided little overall impact on the currency. However, the same cannot be said for Wednesday’s release of GDP data. That result surprised the market coming in at +2.8% y/y for the fourth quarter. The market was expecting +2.5%. The currency jumped higher following the release. Earlier this afternoon we have also seen the latest retail sales and trade balance figures. These were both significantly better than expected as well and helped to push the AUD higher. Next week we get business confidence and consumer sentiment data along with inflation expectations and employment change.

New Zealand
It has been a very quiet week for economic data from New Zealand and there is little else set for release ahead of the RBNZ meeting next week Thursday. A hike by the central bank at that meeting is as much of a sure thing as you can get in the financial markets, and as such the impact should be fully priced in. The only news of note this week came from the results of the Global Dairy Trade auction which showed Fonterra sold nearly twice as much milk powder volume as this time last year. The prices achieved at the auction have dropped a touch, but are still at very healthy levels overall. These results simply underline the fact that the dairy sector has had a bumper season, aligned with the record dairy pay-out announced last week.

United States
There has been some interesting data from the US this week. Unfortunately most of it points to another soft employment result when Friday’s key non-farm payrolls figures are released. The best data came from manufacturing PMI that hit the wire early Tuesday morning. That index beat expectations improving to 53.2 from 51.3 previously. Unfortunately the non-manufacturing sector couldn’t match the result. That data was released last night and the index fell to 51.6 from 53.8 last month. This was the weakest result since February 2010. Of more concern however was the employment component that collapsed to 47.5 from 56.4 in January. This signals a worrying lack of job creation in the service sector. Last night we also had the ADP employment report, which is a lead indicator for Friday’s non-farm payrolls release, and it too disappointed coming in significantly below expectations. Another soft non-farm payrolls report tomorrow would make for a very concerning trend in US employment data of late. Next week's highlights include retail sales, producer prices, and consumer sentiment.

Tonight’s European Central Bank (ECB) meeting should be a very interesting event. The most recent data from Europe hasn’t been all that bad, but whether that will be enough to see the central bank maintain current policy remains to be seen. The key result was last week’s inflation data that came in a touch stronger than expected. This has been followed up in the last few days with manufacturing PMI which came in on expectation at 53.2, and last night’s service sector PMI which surprised with an improvement to 52.6 from 51.7 last month. A recent Bloomberg poll showed 14 out of 54 economists are expecting a cut from the central bank tonight. Comments from ECB officials over the past month have made it clear negative interest rates are a real option, but I don’t think we are quite there yet. If the bank decides not to cut rates, they could still take action in the form of non-standard measures. President Draghi has made it very clear he is happy to ‘think outside the box’ and there are a range of options he could use to help support growth. The head of the IMF’s European department was on the wires last night calling for the central bank to take action to reverse the downward drift in inflation. He is suggesting rate cuts, LTRO’s, or even outright QE is needed to forestall the risk of a slide into deflation.

United Kingdom
The key data from the United Kingdom so far this week has been the trifecta of PMI’s. Results from the manufacturing, construction, and service sectors have been largely supportive of the on-going recovery. This should be reflected by a lack of any real surprise or action from the Bank of England (BOE) when they meet tonight. The economy is progressing as well as can be hoped with the biggest drag, being Europe, completely out of the central banks control. With the employment market continuing to perform better than expected, a rate hike in the first half of 2015 is looking more and more likely. Next week we get data on manufacturing production and the trade balance along with the BOE's quarterly bulletin.

Data from Japan last week was broadly supportive of the economic recovery. Industrial production, retail sales, and inflation all came in above expectation. This week we have seen capital spending figures for the fourth quarter of last year that were up 4.0% on a year earlier. This follows a rise of 1.5% the previous quarter. However, the result was a touch below expectation for a 5.1% rise, and it does signal that Japanese companies remain cautious about spending on production facilities. The only other data of note this week has been average cash earnings’ which fell by -0.2% against expectations for a +0.3% rise. This won’t make pleasant reading for PM Abe, who is desperate to see salaries increase in order to create a ‘virtuous cycle’ of economic growth. Next week we have the current account, GDP, the BOJ monetary policy statement, tertiary activity index, and core machinery orders to digest.

Monday saw the release of the Raw Materials Price Index for Canada which printed stronger than expected at +2.6% up from last month’s +1.8%. This is a leading indicator of consumer inflation and it would suggest that downside risk to the inflation outlook are diminishing. The Bank of Canada (BOC) however, are still concerned about downside risks and said just that in the statement released after their meeting last night. Their actual wording was the downside risks to inflation ‘remain important’. Which is a small adjustment from the previous statement that said downside risks had ‘grown in importance’. The BOC left the cash rate at 1.0% and will continue to monitor the economic outlook going forward. There is further key data set for release tonight in the form of building permits and Ivey PMI, then tomorrow night we get employment change and the trade balance.