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Economies of Note - 8th July

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

Political headlines have continued to hold centre stage in Australia this week. The latest election vote count points to the existing Coalition government as looking likely to hold the 76 seats needed to form a majority government in the 150-seat lower house. Earlier in the week the RBA held the cash rate steady at 1.75% as expected, although Governor Stevens hinted at cuts in the future if inflation remains low. The tone of the statement was altered slightly from that prior as Stevens pointed to another possible cut in the current cycle. This has the market currently pricing another move by November this year. Key data released during the week started with building approvals for May which slumped from the month prior as it missed its estimate. The retail sales and trade numbers for the same month also disappointed, although with focus on the RBA decision a few hours later the impact was minimal. Attention will now turn to offshore events with the US employment report due later today. However, with the final vote counting in the Australian election still to come, watch for any surprise of a well hung parliament.

New Zealand
It has been a quiet week in NZ that has seen the local currency drift on the back of mixed performances in international markets for the majority of the week. However, pricing picked up in trade last night after the RBNZ revealed little urgency on the implementation of any further macro-prudential housing measures (more urgency would increase the scope for further interest rate cuts). Data released locally included the NZIER business confidence survey which saw an improvement amongst participants as a net 19% expected an improvement in their trading activity over the next quarter. Construction was seen as a key driver of economic growth, whilst the service sector also reported strong levels of activity. A severe shortage of skills in the building sector and a tightening in the labour market pointed to a possible lift in inflation in the months ahead. Data from QV research released during the week also highlighted the building supply issues as house prices rose sharply by an average of 3k a week over the last three months nationally. Data on dairy prices showed a 0.4% decline in average pricing overall in this week’s auction as pressure emerged on the WMP prices which dropped 4-6% in the longer dated contracts. Look to offshore and the US market for direction to end the week as the market absorbs the latest employment data from the US which has the potential to upset, especially given the markets eagerness to price out US rate hikes on the back of the Brexit saga.

United States
The shortened holiday week has seen the USD in a holding pattern ahead of today’s key June Non-farm payrolls employment release. Focus will be high on the data given that the market has now extrapolated the UK EU exit uncertainty as a further reason to reduce its estimates of Fed rate hikes, now not expected until 2018. This week has seen the release of the minutes to the last FOMC meeting which reinforced that the Fed was well aware of the potential Brexit turmoil when it chose to leave rates on hold. Divisions remain over how to proceed moving forward, although the members indicated a desire to maintain the flexibility to lift rates if the economy appeared to be gathering momentum and was safe from new shocks. Comments from various Fed officials over recent days have appeared relatively relaxed over the UK EU exit as they noted the ‘preparedness’ of the financial system and likely “relatively modest” impact on the US economy. Data released during the week included a marginal miss in the factory orders numbers and the more important ISM service sector index which jumped to 56.5 in June, its highest read since November. Employment data is in focus today and comes after the overnight upside surprises in the ADP Nonfarm read and weekly initial jobless claims.

United Kingdom
Brexit fallout has once again had a significant bearing on the fortunes of the GBP this week as it plunged to under 1.2800 against the USD at one stage. The near 15% fall from levels just prior to the EU vote came as the IMF warned that growth in the UK could decline by up to 4.5% of GDP by 2019 should the Brexit proceed. UK equities were choppy in trade over the week and whilst the FTSE 100 is now trading at levels higher than prior to the EU vote, the broader FTSE 250 has fallen 10% since the vote. Sentiment soured further during the week as six large UK property funds froze redemptions in the face of holders who were rushing to liquidate in light of the large uncertainty that hangs over the sector. Banks, insurers and property companies which have borne the brunt of the selling since the UK’s vote would have weighed significantly on the thinking of BoE Governor Mark Carney who delivered the Financial Stability Report this week. Carney announced the reduction of bank countercyclical capital requirements as part of the report in an attempt to allow extra lending to companies and households. Data released during the week started with construction PMI numbers which fell well short of their estimate, whilst the following services PMI also missed its forecast, although by a far smaller margin. Industrial and manufacturing production numbers surprised to the upside, although the read for the month of May was well in advance of the UK EU vote. In focus today is the UK trade data for May, although expect the US employment numbers and Brexit headlines to generate the real interest.

Brexit based Euro volatility has reduced notably in trade this week. Stresses in the Italian banking sector remain a cause for concern however. This plays out as the Italian government deliberates over a state bailout to address the roughly EUR300 billion of ‘bad’ debt in the beleaguered financial sector. Concerns remain high over whether the government bears the capital capacity to instigate a viable bailout package given the high levels of government debt, that at 140% of GDP, stand second only to Greece in eurozone gross terms. Data of note this week out of Europe started with PMI indicators (composite and services) which posted moderate rises across the key member countries and eurozone in general, although the data came prior to the impact of the current political uncertainty. Data from Germany included factory orders and industrial production figures for May which both missed their estimate by a decent margin. Minutes to the most recent ECB early June meeting predictably pointed to concern over the implications that a Brexit vote would have on eurozone growth. Policymakers also noted concern over the weak price pressures and stressed their willingness to provide more stimulus if inflation continued to miss their near 2% target. Focus for the Euro today will now turn to events in the US as attention moves to the latest June Nonfarm employment report.

The theme of Yen strength on the back of the uncertainty that has surrounded the marketplace post the UK EU exit vote has continued to drive trade this week. In focus locally is this weekend’s election on Sunday which sees the Japanese voters go to the polls to choose half of the 242 seats in the upper house of parliament. Current polling suggests PM Abe’s LDP party could achieve an outright majority in the upper house in a vote which the PM is portraying as a referendum of his policies on spending, reform and super-easy monetary policy (“Abenomics”), which has so far failed to ignite the Japanese economy. Comments this week from BOJ Governor Kuroda were old hack as he repeated a willingness to maintain QQE with negative rates for as long as needed in order to achieve the 2% inflation target, although for now he noted that inflation would remain around zero (or slightly negative) for the time being. Look to US data for direction into the end of the week with focus set to be squarely on the June Nonfarm payrolls employment report  and its implications for US rates.

Canadian data this week has so far been generally on the weaker side of expectations ahead of today’s June employment release. Events started with a small slide in the RBC Manufacturing PMI numbers from the month prior and the BoC Business Outlook Survey that pointed to soft business conditions ahead with continued reduced spending in the oil sector. Trade numbers for May revealed a larger than expected trade deficit and followed that from April which was revised higher to almost match Mays quantum. The two deficits are the highest on record and are a cause for concern given that energy exports in the latest month actually improved. Soft exports outside the US were notable and the data points to likely downwards adjustments to GDP estimates. Building permits fell markedly short of expectations, although the Ivey PMI lifted from the month prior as it exceeded its consensus. Recent trade has seen the CAD slide as oil prices fell to near two month lows on the back of a lower than expected US inventory draw. Look to oil and employment data from both the US and Canada later today for further direction to close out the week.