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Economies of Note - 8nd September

Written by Ian Dobbs on September 8th, 2016.      0 comments

This week in Australia has been dominated by yesterday’s June quarter GDP report and Tuesday’s RBA monetary policy decision. The decision by the RBA to leave rates on hold at 1.5% was widely expected. It was delivered with a statement that created little fuss as departing Governor Stevens judged after having eased in May and August that leaving policy unchanged would be consistent with sustainable growth and achieving the inflation target over time. The latest GDP data was slightly below expectations for the quarter, although the year-on-year rate at 3.3% is the fastest in four years and well above the 2.75% deemed by many to be the new trend growth rate. The data helped the economy to have now gone 100 quarters without a technical recession. Other key data included the Q2 current account which came in better than expected, and numbers on company operating profits which also exceeded its forecast on the back of a strong performance in the manufacturing and mining sectors. In focus today is numbers on July trade this afternoon and home loans/investor housing finance tomorrow.

New Zealand
The New Zealand dollar has continued to propel higher against the greenback in trade this week. A weaker than expected US ISM services survey in the early hours of Wednesday morning saw the USD plunge in trade as the market moved to further reduce the odds of Fed rate hike pricing this year. The icing on the cake was another strong GDT dairy auction which saw the latest overall pricing jump another 7.7% when it was released shortly after the US data. The combination of events has seen the NZD TWI lift to levels some 3.3% above the RBNZ’s alternative August MPS scenario. This could see the cash rate falling to below 1% should the local currency strength be maintained. Other data released this week included the latest ANZ commodity price index which saw pricing continue to accelerate higher (reflecting stronger dairy prices), and June quarter manufacturing sales which rose 2.8% on the back a large rebound in meat and dairy manufacturing sales. Of interest next week will be the Q2 current account on Wednesday and GDP numbers for the same period on Thursday.

United States
Interest so far in the US this week was dominated by Tuesday’s ISM services survey which saw the USD marked lower after it missed the consensus by a large margin. The data comes on the back of disappointing manufacturing ISM report released last week and when combined with Friday’s underwhelming Nonfarm payrolls employment report has served to further lower expectations for a Fed move this month. Positive news came from the JOLTs jobs survey which reported record job openings in July. Other events of interest have included the Fed’s Beige book (a summary of economic conditions from each Fed district) which noted a modest rate of US economic expansion and wage pressure that remains benign outside of those in highly skilled jobs. Comments from the Fed’s Williams and Lacker continued the recent talk of a need to move towards a rate hike, although were overlooked in favour of the largely weaker US data story. In focus for the remainder of the week is today’s jobless claims data and talk from Fed speakers scheduled for tomorrow.

United Kingdom
The pound sterling has experienced a choppy time against the greenback this week as early week gains have been relinquished in recent trade. The week started with the latest services PMI read which continued the positive momentum seen from last week after it exceeded expectations by posting its largest ever monthly rise. The July manufacturing production data was weaker than expected and fell 0.9% in July. The largest decline seen in a year was the third consecutive monthly fall and reflects the uncertainty seen after the Brexit vote. Industrial production data for the same month exceeded expectations and was boosted by a rise in the oil and gas sector, a sector which to a large extent is insulated from the UK EU exit vote. The BoE inflation report hearings overnight were skewed to the dovish side (which has maintained pressure on the pound) as members spoke of the case for further easing and elements of the current stimulus which can be increased. A positive in the hearings came from Governor Carney who suggested that the UK economy was presently slightly stronger than that forecast by the central bank. Look to the US for direction to conclude the week although July UK trade numbers tomorrow may provide some interest.

Trade in the single currency this week has so far been dominated by buying interest after Tuesday’s weaker than expected US ISM services report. The data followed last week’s weak US manufacturing ISM and has further reduced the market’s expectations of a Fed move this month. Focus locally is on today’s ECB meeting which has many in the market speculating of policy changes due to the meek economic recovery and lack of inflation across the continent. An extension to the QE programme would be the most likely option although many in the market are opting for a ‘status quo’ type decision which would allow the ECB more time to organize a more thorough medium-term action and communication plan. Data so far this week has included EU services and composite PMI numbers which failed to meet expectations and German industrial production data for July which dropped by its largest amount in two years. A positive came from the better than expected monthly EU retail sales read although the data has had little bearing on the market ahead of today’s ECB meeting.

The Yen has held on to the majority of its gains seen against the USD this week. Initial gains were inspired by comments from BoJ Governor Kuroda after he delivered a speech that lacked the prior 2 year timeframe targeted for returning inflation to the 2% goal. Further gains were seen on the back of stop-loss related JPY buying (against the USD through 102). These were in part attributed to comments from the leader of the opposition Democratic Party who spoke of the BoJ’s 2% inflation target being too high and an overextended BoJ monetary policy. Data of interest was dominated by this morning’s June quarter GDP numbers, which despite beating expectations, have had only a minimal impact. Other indicators included average cash earnings that maintained levels from the period prior (beating expectations) and the leading composite index (12 economic indicators which predict the future direction of the economy) which exceeded expectations. Current account data for July was marginally weaker than expected when released this morning although so far none of the economic indicators have had much bearing on trade.

The overnight Bank of Canada (BOC) decision on interest rates has dominated focus in Canada this week. The report has seen the Canadian dollar marked lower in recent trade on the back of a dovish statement which pointed to the possibility of lower than expected growth and a risk that inflation may disappoint. The decision to leave rates on hold at 0.5% was widely expected and sees rates remain at a level which has been in place for over a year. The central bank noted disappointing exports and initial signs of a moderation in the Vancouver housing market (which recently imposed a 15% foreign buyer tax) as it highlighted its concern over the vulnerabilities that are associated with high household imbalances. Also released overnight was the August Ivey PMI indicator of economic activity which failed to meet expectations in a large part due to the sharp fall in the employment index component. Looking to the remainder of the week we have building permits and new house price data today which will be followed by the higher impact August employment report tomorrow (and housing starts).