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Economies of note - 8th August

Written by Ian Dobs on August 8th, 2014.      0 comments

The week started off well for Australia with better than forecast retail sales and trade balance data. These were followed by the RBA rate statement that was very similar to last month’s one. The central bank sees strong expansion in housing construction, although they still expect growth to be a little below trend in the year ahead. They added monetary policy is appropriately configured and the most prudent course is likely a period of stability in interest rates. The also still view the currency as high by historical standards. The impact on the AUD from the statement was minimal. Yesterday however, we did see a significant reaction in the Australian dollar after key employment data hit the wires. The market was looking for a gain of around 13.2k but the actual result showed a fall of 0.3k. To make matters worse the unemployment rate jumped to 6.4% from 6.0%. That’s the highest unemployment rate since 2002. The market reaction was swift with the currency losing half a cent to the USD in minutes. The net result of all this data is unlikely to affect the RBA’s current stance with interest rates on hold into next year. Business confidence and consumer sentiment provide the highlights next week along with the wage price index and inflation expectations.

New Zealand
New Zealand has seen two key releases this week and both of them weighed on the currency. Fonterra held its latest global dairy trade auction on Tuesday night and if you thought dairy prices must have been close to bottoming, you would have been very wrong. Prices fell another 8.4% overall, with whole milk powder falling 11.5%. We are now back to 2012 levels and it could get worse still. The falls were driven by a lack of Chinese demand and some estimates suggest it could be another two to five months before they re enter the market. Earlier in the year Chinese demand accounted for nearly 60% of all milk powder exports. Fonterra recently forecast a NZ$6 per kg payout for the 2014/15 season and that could start to look somewhat optimistic if prices don’t recover soon. The other notable release hit the wires only a few hours later and again it saw the downside tested in the currency. Employment change disappointed coming in at +0.4% vs expectation for +0.7%. Average hourly earnings were also less than forecast coming in at +0.5% which is down from the previous +0.7%. It wasn’t all negative though as the unemployment rate fell substantially to 5.6% from the prior 5.9%. That’s the lowest rate since March 2009. A large part of the fall in unemployment was however driven by a decline in the participation rate as the workforce remained static and the population grew. Next week the focus turns to retail sales and the Business NZ manufacturing index.

United States
We have seen a number of releases from the US this week that are consistent with the economic recovery gaining momentum. The first was non-manufacturing PMI that printed at eight year highs of 58.7. This was much higher than the 56.3 expectation. That data was quickly followed by factory orders for June, which also came in well above expectation at +1.1%. Orders for nondefense capital goods excluding aircraft (a measure of business confidence and spending plans) hit a record high up 3.3%. Continued data like this would certainly put pressure on the Fed to bring forward potential rate hikes. Adding to the week’s positivity was trade balance data that showed a significant improvement in the deficit coming in at -41.5 bln. Expectations were for -44.7 bln and this better result could easily see GDP estimates revised higher. Last night we got the latest reading from weekly jobless claims and they dropped again to 289k from 304k last week. Next week the focus turns to retail sales, producer prices, and consumer sentiment.

United Kingdom
We have seen some mixed results from the UK this week but certainly nothing that raises too much concern for the ongoing economic recovery. Construction PMI remains very healthy at 62.4 and the services PMI jumped to 59.1 from 57.7 previously. The service sector is the biggest sector of the UK economy and the result was well above expectation for a reading of 58.1. On the negative side this week we have seen softer than forecast readings from manufacturing and industrial production, along with a lower forecast of GDP from the NSIER. They see GDP for the three months ending in July around 0.6% which is well below expectation. We get the second estimate of ‘official’ GDP late next week and the market is looking for it to remain unchanged at +0.8%. We have also heard from Moody’s rating agency this week who have now downgraded the outlook for the UK banking system to negative from stable. They have done this as a result of new rules intended to prevent another taxpayer bailout. They added that the big banks are exposed to multimillion pound fine and lawsuits that could dent their profits. Last night the Bank of England (BOE) held their rate meeting and as expected there was no change to current policy settings and no statement was released. We will have to wait until August 20th to get the minutes of the meeting to see if any members of the committee dissented and voted for a hike. Next Wednesday however, we do get the committees latest economic projections with the release of the BOE inflation report. Ahead of that we also get UK employment data which will be closely watched.

The European economy continues to struggle along and the fragile nature of the recovery was reinforced this week by a couple of disappointing data points. German industrial orders collapsed to the lowest level since September 2011, coming at -3.3%. The market was expecting a gain of 1.0%. We also saw Italian GDP miss by a big margin when it printed at -0.2% vs forecasts of +0.2%. That poor result could easily have a negative impact on Italian public finances, which won’t be helpful at all. But it hasn’t all been bad news this week. We did see retail sales come in on expectation at 0.4% and service sector PMI close to expectation at 54.2. A number of the country specific PMI’s posted gains with France in particular climbing back above the 50 level that denotes expansion in the industry. Last night ECB President Mario Draghi took centre stage with his regular press conference at the conclusion of the central banks rate meeting. No change in policy was expected or announced, with the bank widely forecast to wait until at least December to see the effects of their negative interest rate experiment. Draghi did take the opportunity to try and weaken the Euro a little further by saying the bank will intensify preparations for asset backed security (ABS) purchases in expectation that the bank will go ahead with them, although a final decision is yet to be made. He added the latest data shows a slowing of growth momentum with the recovery remaining weak and fragile. The highlights from the Eurozone next week include German economic sentiment, industrial production, GDP, inflation and the ECB’s monthly bulletin.

There hasn’t been a lot of data released from Japan this week and what has hit the wires, has had minimal impact. The focus is squarely on the Bank of Japan (BOJ) monetary policy statement out later today and there is talk the bank could lower its economic assessment. An unnamed source at the BOJ was quoted this week saying the bank is concerned about weak export and output data and increasing sign of softness in the economy following the sales tax increase. If the bank does lower its economic assessment, it could be the first step toward further easing measures over the coming months. The Japanese Yen saw some interesting price action this week with a sharp drop in the USD/JPY on Wednesday night from 102.40 to 101.80 in the space of a minute and no one seems to know why. There was seemingly no trigger for what was the largest one-off decline in four months. The pair slowly recovered over the next 12 hours which suggests some sort of flash crash (computer algorithm gone wild) or fat finger (human error) was the driver. Next week we get the Tertiary Industry Activity index, BOJ minutes, GDP and core machinery orders.

We have seen universally strong data from Canada so far this week although the most important release, that of employment change, is still to come tonight. Wednesday’s trade balance showed the strongest result for two and a half year coming in at a 1.9bln surplus. Expectations were for a deficit of -0.1lbn. The dramatic improvement was driven by an increase in exports (+1.1%) and a decline in imports (-1.8%). The Ivey PMI came in on expectation at 54.1 which is a big improvement over the prior 46.9 result and building permits showed another big increase of 13.5%. This comes on top of last month’s +15.4% reading and was well above forecasts for a small -1.8% decline. If incoming data continued to print like this it could easily see the Bank of Canada (BOC) adopt a tightening bias, although at this stage they are expected to remain on hold well into next year. Next week we have housing starts, the house price index and manufacturing sales data to digest.