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Economies of Note - 7th February

Written by Ian Dobbs on February 7th, 2014.      0 comments

It has been a very interesting week for news in the Australian economy. The statement accompanying the unchanged monetary policy decision from the Reserve Bank of Australia (RBA) shifted their bias from “easing” to a neutral stance. The recent higher than expected inflation number changed the view of the board, and by dropping the reference towards the AUD being uncomfortably high, the possible end of the easing cycle for the cash rate may well have arrived. Further adding to AUD demand was yesterday’s better than expected retail sales and trade numbers. The trade numbers were particularly strong, and couple with improved revisions of last month’s numbers Today’s Monetary Policy Statement from the RBA further reiterated their position that a period of stability in rates looks likely.

New Zealand
The sole focus for the domestic economy this week has been the important 4th quarter employment numbers. Whilst the Unemployment rate was as expected, dropping .2% to 6.0%, the detail provided some decent reading. Employment change was +1.1% vs an expected .6% rise. This number backs up the recent consumer and business confidence numbers that have risen to elevated levels. Certainly the economy has been somewhat insulated from the slow grinding recovery seen elsewhere. The Christchurch rebuild is underpinning demand across the economy. This backed up with continued export demand is providing and easy going growth path for the time being at least. Interest rate markets have priced a 25pt hike to the cash rate from the Reserve Bank of New Zealand a near certainty in March. This should underpin NZD demand to an extent, even in the face of lower risk asset prices globally as the US Federal Reserve attempts to reduce its unheralded monetary stimulus.
United States
This week has seen a mixed bag of data from the United States. Manufacturing PMI was weaker than expected, although the non-manufacturing result came in a touch stronger than forecast. Factory orders data beat expectations, although the trade balance released last night was a disappointment. The latter could also see some downward revisions to fourth quarter GDP estimates with exports down 1.8% month on month, and imports up 0.3%. However, all this data has been the entree to tonight main course which comes in the form of non-farm payrolls. The market is expecting a decent number (somewhere in excess of 180k added jobs),which would represent a bounce back after last month’s surprisingly soft reading. There was a lot of talk about that result being affected by extremely cold weather that hit parts of the US. The climate has been substantially better during this month’s survey week, and as a result the risks for this number are probably skewed to the topside. Next week should prove to be an interesting one with new Fed President Janet Yellen set to give her first public comments on monetary policy since taking up the position when she testifies in front of a senate committee on Feb 11th and 13th. We also have retail sales and consumer confidence data to digest.

There have been a number of second tier data releases out of Europe this week that have had little impact. However, we have seen two releases that highlight the fragility of the economic recovery in the region. Eurozone retail sales fell 1.6%, which is the biggest drop in two and a half years, and German factory orders unexpectedly declined by 0.5% as a result of weaker domestic demand. It’s hard to see this year being much better for Europe than the last. The European Central Bank (ECB) concluded their meeting in the early hours of this morning and have decided to take no further action to support growth at this stage. The Euro has rallied strongly on this result although the market may be getting ahead of itself. President Draghi clearly said the bank is ready and willing to act and that a complex situation prevented action this month. He stressed the decision not to act was also based on the need for more information. That information is likely to come in March with the release of fresh economic forecasts. If we continue to see low inflation between now and then, I expect to see the bank take action. We have German, French, and Italian industrial production data set for release over the next few trading sessions. While late next week we get GDP for the same countries and the Eurozone as a whole.

United Kingdom
There has been little this week to impact the current positive outlook for the UK economy. Readings from the manufacturing and services sectors both came in a touch below expectations, although these were countered by a strong result from the construction sector which is now expanding at its strongest pace since 2007. The Bank of England (BOE) held their interest rate meeting last night and as widely expected left rates, and the level of QE, unchanged. They was also no statement on forward guidance revision, which a few in the market where expecting. This helped to support the GBP to a degree. Tonight we get manufacturing production and trade balance data to digest, while next week the calendar is a little lighter with on the BOE inflation report of any note.

It has been a very quiet week for Japanese data. The only release of note has been average cash earnings that initially looked somewhat positive coming in a touch above expectations at +0.8%. Prime Minister Abe is desperately keen to see wages grow to help produce a self-fulfilling recovery in the wider economy. But looking into the detail of this report detracted a fair amount from the positive headline. The increase was largely made up from overtime worked and year-end bonuses, with base wages actually falling 0.2% year on year. That marks the 19th straight year on year drop for base wages and is driven by a growing number of low paid part time workers. PM Abe certainly has his work cut out for him. Data to watch out for next week includes the current account, consumer confidence, core machinery orders, and the Tertiary Industry Activity Index.

Canada released its first piece of positive data in quite some time last night, when the Ivey PMI came in at 56.8 against an expectation of 51.00. The prior reading was 46.3, so this marks a strong gain in the index which is a leading indicator of economic health. Unfortunately this positive data has only served to counter a couple of negative releases from earlier in the week. Building permits plummeted -4.3% against an expectation of a gain of 1.5%. This comes on the back of last month’s -6.6% result and is a worrying sign for a housing market that by any measure is overvalued. Yesterday’s trade balance was also a shocker with the deficit jumping to its highest level since November 2012. The deterioration was driven by a weak Canadian Dollar driving up the prices of imports. The actual volume of imports fell by 0.4%, while the price of imports increased 1.6%. Next week we have housing starts data and the house price index, along with the annual budget release and manufacturing sales data.