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Economies of Note - 6th March

Written by Ian Dobbs on March 6th, 2015.      0 comments

The Reserve Bank of Australia’s (RBA) rate meeting this week was the major focus for the markets. The central bank did not cut rates again at this meeting, but certainly retained an easing bias. The board judged that, having eased monetary policy at the previous meeting, it was appropriate to hold interest rates steady for the time being. They were quick to add however, that a further easing of policy may be appropriate over the period ahead to help support demand and keep inflation consistent with the target. The Australian dollar received a boost from the result, although the strong easing bias means the currency will find plenty of willing sellers on any periods of strength. Since the RBA decision we have seen a couple of key economic data releases in the form of GDP and retail sales. GDP came in a touch weaker than expected at 0.5%, while retail sales was right on expectation at 0.4%. The overall impact from both data releases was negligible. The RBA’s deputy Governor Lowe spoke yesterday and he said that although he suspects the Australian dollar is still too high, it is much closer to an appropriate level than in the past couple of years. He added they have the scope to lower interest rates if appropriate, and that any action is designed to boost the economy, not to drive the currency lower. Next week we get business confidence, consumer sentiment, inflation expectations and employment change data.

New Zealand
There hasn’t been a lot in the way of economic releases from New Zealand this week. Fonterra held their latest dairy auction on Tuesday night and prices were relatively stable with the price index up 1.1%. The very muted demand from China is a big concern and it’s something that not confined to just dairy products. The Reserve Bank of New Zealand (RBNZ) released a statement saying they have begun a consultation process with the aim of establishing a new asset class for lending to property investors. The implication is that at some stage down the road new macro prudential rules could be put in place to make lending to investors more expensive or harder to obtain. This would certainly be preferable to hiking interest rates as a means of cooling the Auckland property market. Next week we have the RBNZ rate meeting on Thursday to draw focus. This will be followed by the Business NZ manufacturing index on Friday.

United States
So far this week from the United States we have seen some mixed data, although arguably the most important release is still to come. Tonight's non-farm payrolls data is always closely watched and the market is looking for another solid reading of +240k, with the unemployment rate expected to drop a touch to 5.6%. Strength in the employment market, along with increasing wage gains, will be key factors in determining whether the Fed hike interest rates around June this year or not. Earlier in the week we saw manufacturing PMI miss expectations at 52.9, but this was countered by the non-manufacturing PMI reading which came in better than forecast at 56.9. The Fed also released the Beige Book this week which is a summary of current economic conditions. The Fed said economic activity continued to expand across most regions with payrolls either stable or expanding. They said wage pressure were moderate and limited largely to workers in skilled occupations. They were positive on consumer spending but added that reduced capital expenditure from oil and gas producers in some areas could impact. Next week to draw focus we have retail sales, producer prices, and consumer sentiment data.

United Kingdom
Data from the UK this week has been supportive of the outlook for continued solid economic growth. Both the manufacturing and construction PMI readings increased from the prior month and also came in above expectation. The construction sector in particular is extremely positive with the steepest rise in output activity in four months. The services PMI reading did fall a touch and came in below expectation, but the overall level of 56.7 is still consistent with very healthy growth in the sector. The Bank of England (BOE) met last night by as widely expected they left rates unchanged. At this stage most forecasters believe the BOE won’t hike rates until early next year. But with activity indicators suggesting a robust start to 2015, there is potential for those expectations to be brought forward. Wage data over the coming months will be key in this regard. If wages start showing consistent gains the BOE will be comfortable that inflation has bottomed and they could easily look to hike rates sooner than currently expected. Next week we get manufacturing and industrial production data, the NIESR’s estimate of GDP, and the trade balance.

Although we have started to see a slight improvement in some European data recently, it hasn’t translated into support for the Euro. The single currency came under all sorts of pressure mid-week and traded to 11 year lows against the USD. Last night’s ECB meeting proved interesting for on a couple of fronts. The central bank didn’t adjust rates at all but they did signal they would start purchasing bonds next week as part of the previously announced quantitative easing programme. The scheme aims to inject EUR 1.1 trillion into the Eurozone economy by purchasing EUR 60 billion of assets each month. The central bank has also upgraded growth forecasts for this year. They now see GDP of 1.5% in 2015 up from 1.0% previously. Draghi said growth would slowly strengthen to 2.1% by 2017. Next week is looking a little light in terms of economic data from the Eurozone. We do have French and Italian industrial production figures, German inflation and the Eurogroup meetings, but none of that is likely to have a major market impact.

Data on average cash earnings for January was released this week in Japan and it showed earnings gained 1.3% year on year. This was the same as December’s revised reading and slightly above expectations. Unfortunately for PM Abe, it seems corporates aren't rushing to boost pay packets. A recent report has found the worker compensation as a percentage of corporate income in 2014 fell to its lowest level since 1991. Companies are piling up internal reserves after making record profits, but not passing this on in the form of higher wages. Achieving 2% inflation will be very hard without solid gains in wages. Comments from a Bank of Japan (BOJ) official last night hinted at reservations around further easing. Kiuchi said that QE effects are diminishing and there could be dire consequences if side effects are ignored. He said shifting to a policy targeting interest rates, rather than the monetary base, could be an option in the long run. Next week we get current account and GDP data, along with core machinery orders and consumer confidence.

After blindsiding the markets with an unexpected rate cut in January, the Bank of Canada (BOC) this week left rates unchanged. What’s more, they sounded suspiciously like a bank who are now very ‘neutral’ in terms of potential future action. They removed any ‘dovish’ bias saying “The risks around the inflation profile are now more balanced.” Ahead of this meeting the markets had generally expected another interest rate cut at some point over the coming months. But that now seems much less likely. Adding to the better economic outlook this week we saw GDP data that came in at 0.3% versus 0.2% expected. The Ivey PMI also increased from 45.4 to 49.7, although this was a touch less than forecast. Tonight we get building permits and trade balance data, then next week we have the new house price index and employment change figures.