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Economies of note - 6th September

Written by Ian Dobbs on September 6th, 2013.      0 comments

1:45pm (NZT)
Ahead of the RBA rate announcement this week we had two other data releases of note. The first was building approvals on Monday which came in very strong, then on Tuesday we got retail sales which were a little disappointing. Chinese data over the course of the week has come in around, or a touch better than, expectation and is supportive of the view that the slowdown in China is abating. Goldman Sachs have actually revised up their forecast for Chinese GDP this year from 7.4% to 7.6%. As expected the RBA left rates unchanged at 2.5% but the tone of their statement was more balanced than before. Gone was the direct talk of more rate cuts, with the bank comfortable to wait and see the impact of past easing’s. They did mention again that the AUD is at a high level and could fall further, however the more neutral tone of the statement saw the exact opposite happen. The AUD immediately found buyers and made solid gains across the board. GDP data on Wednesday was also supportive of the currency, coming in a touch above expectation at 0.6%. Yesterday we got trade balance data that was well below expectation, although it had little impact on the market overall. Next week we have business confidence, consumer sentiment, and employment data. This weekend's election looks to be a done deal and barring any surprise should only have a limited impact on the currency.

New Zealand
There has been very little in the way of domestic economic releases out of New Zealand this week. Most of the focus has been on offshore events with central bank meetings in Australia, UK, and Europe. Fonterra’s global dairy trade auction showed a small decline in prices although they are still at very healthy levels overall. Tonight’s US employment data will be closely watched while next week we have the Reserve Bank of New Zealand monetary policy statement to focus on.
United States
Data out of the United States this week has been largely supportive of an improving economic outlook. The recovery seems to be slowly building momentum and tonight’s employment data should confirm that. Earlier in the week we got an improved reading on the manufacturing sector, construction spending beat expectation by a good margin, and weekly unemployment claims have remained at low levels. Last night’s non-manufacturing index also showed a healthy gain and came in well above expectation. Everything looks set for a tapering of Fed asset purchases at their meeting on September 19th. The economic calendar is a little lighter next week with the only key releases being retail sales and consumer confidence.

In general, data out of Europe is showing a very gradual improvement which is in line with the overall economic outlook. This was highlighted last night as the European Central Bank left rates unchanged, but trimmed their growth forecast for 2014. They now expect growth of only 1% next year. ECB president Draghi warned that he was ‘very, very cautious’ despite the Euro-zone exiting recession last month. He reiterated his forward guidance that rates will stay low for and expended period and in response to a question at the subsequent press conference Draghi said that a rate cut was discussed at the ECB meeting. This has kept the Euro on the back foot and it should continue to underperform as the economies of the UK and US build momentum. There is a raft of second tier data out next week, the highlight of which will be industrial production, and the ECB monthly bulletin.

United Kingdom
The UK is booming. At least that’s the impression the current data is giving. Although the economy is still smaller overall than it was in 2007, we have seen data across the board printing at levels not seen since before the crises. The manufacturing, construction, and service sectors are all expanding rapidly. The overall index for services came in at 60.5 which is the highest level since 2006. Digging deeper in the report showed growth in new work was at the highest level since 1997. The construction index is at its best level in 6 years and manufacturing isn’t far behind. In the last four months the OECD has almost doubled its outlook for growth in the UK. There is still plenty of work left to do. The unemployment rate is still high and as is public sector borrowing, but both those are lagging indicators and should improve as the recovery continues. Europe will continue to be a drag, but overall the Bank of England (BOE) must be happy with where the economy is headed. It’s no wonder they left rates unchanged at their meeting last night. They also decided not to release any statement. We can take that as a sign the current move higher in interest rates is not yet viewed as a risk to the recovery. This is all very supportive of the Pound Sterling which should continue to perform well over the coming weeks. The economic calendar is much lighter next week, with the only key release being the unemployment rate.
There has been some interesting news from the Japanese economy this week. Capital spending numbers were higher than expected, but these were balanced by underperforming average cash earnings results. But these were of secondary focus as the Bank of Japan’s (BOJ) latest monetary policy statement yesterday drew primary attention. The statement seems more positive that the previous one in August. While the BOJ voted to continue their stimulus program as their GDP numbers move positively higher, and the all-important pricing pressure slowly trends higher as well. These trends will sit well with policy makers that have been fighting a strong YEN and falling prices (deflation) for over a decade. With the Japanese stock market at multi year highs the bone of contention remains the increase of the sales tax to help the government start to tackle their huge debt problems. A arise in the sales tax would slow the economic resurgence, so the issue remains finely balanced. Next week sees mostly second tier data on the agenda, with current account, final GDP data and the minutes from this week’s BOY meeting all due for release.

Overnight saw the latest release of trade balance numbers joined by the release of the latest Bank of Canada (BOC) monetary policy decision. The trade numbers missed expectation by some 600 million CAD, and continues the recent trend of poor trade balance results for Canada. BOC Governor Poloz again left the cash rate unchanged at the 1.0% level it has been parked at since September 2010.  No change was expected, and the release came with limited impact. The BOC can be expected to remain on hold until the economy starts to pick up in 2014, with a likely hike coming towards the end of 2014. Obviously the bubbly housing market will be of concern to the BOC, but at this stage remains well away from alarm levels.