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Economies of Note - 8th May

Written by Ian Dobbs on May 8th, 2015.      0 comments

The Australian dollar has had a good week despite a 0.25% rate cut from the Reserve Bank of Australia (RBA) and some decidedly average data releases. It seems price action in the currency has had more to do with market positioning than underlying fundamentals. Although to be completely fair, we have also seen a recovery in iron ore prices that has helped to support the AUD to a degree. The big event on the week was the decision to cut interest rates by the RBA. The AUD initially fell on the news but then a vicious bounce ensued that continued for the next 36 hours. It seems a large part of the market has gone into the decision short (sold) Australian dollars, and classic ‘sell the rumour, buy the fact’ situation developed. One thing that certainly helped was the AUD was that the statement the central bank released wasn’t overly negative. In fact it was reasonably optimistic. The bank just felt that with inflation so low and a fair amount of spare capacity still in the economy, this provided them with an opportunity to cut rates and underwrite the recovery somewhat. In their words the “easing will reinforce recent encouraging trends in household demand”. We get a much more in depth assessment of the economy from the RBA in a couple of hours when they release their Monetary Policy Statement. In terms of data this week, we have seen softer than expected releases for the trade balance, retail sales, and employment change. That being said, the retail sales and employment results weren’t all that far away from forecasts, hence the lack of downside price action in the currency. Next week to draw focus we have NAB business confidence, the annual budget release, home loans and the wage price index.

New Zealand
The New Zealand dollar has been under pressure this week, weighed on by a poor employment result. Dairy prices also fell again at Fonterra’s latest auction, but decline of 1.8% was well factored into the market and didn’t come as a surprise at all. It does seem however that we may be waiting a lot longer than expected for prices to start recovering, thanks in part to Russia extending their ban on imports until at least the end of the year. The big move in the NZD came in the wake of employment data. Although employment change was reasonably strong and close to expectation at +0.7% for the quarter, a jump in workforce participation saw the unemployment rate remain unchanged at 5.8%. The market was looking for a fall to 5.5%. The other impact of an increasing labour force, which is been driven by record positive migration, is that wage gains remain very soft. Average hourly earnings were up just 0.2% versus expectations of +0.9%. The RBNZ has said that “It would be appropriate to lower the official cash rate if demand weakens, and wage price setting outcomes settle at levels lower than is consistent with the inflation target.” With inflation currently running in the lower half of the 1-3% target range, and little in the way of wage pressure, this has only served to reinforce the central banks ‘dovish’ stance. A number of economists are now forecasting a rate cut, or even two, from the RBNZ in the coming months. Next week we have the RBNZ financial stability report, a speech from Governor Wheeler, the Business NZ manufacturing index and retails sales data

United States
The United States has produced some mixed data this week, with backward looking results much worse than forward looking indicators. Trade balance data released on Tuesday evening was very disappointing with a surge in imports helping to create the largest trade deficit since 2008. This has led many to revise down Q1 GDP results by as much as 0.5%. That would mean US growth in the first quarter of this year was actually negative. However, the more forward looking ISM non-manufacturing PMI index did improve to 57.8 from 56.5 prior, marking its highest reading since November. It seems the negative influence of poor winter weather is now a thing of the past which does bode well for growth going forward. US labour cost data was also released and this came in stronger than expected at 5.0%. This would suggest a building of inflationary pressure which we may start to see later in the year. Unfortunately in the same report it was revealed that labour productivity (the measure of goods and services per hour worked) decreased by 1.9% in Q1. What is concerning is that this follows a fall of 2.1% in Q4 2014, and it marks the first back to back fall since 1993. In fact that’s only happened three times in the last quarter of a century. The problem is that over the long run wage gains and productivity are reasonably well correlated. So either productivity needs to pick up, or these wage gains won’t be sustained. Tonight we get what may well be the most important release of the week with non-farm payrolls data set to hit the wires. The market is expecting a gain in employment in excess of 200k. Next week we have data on retail sales, producer prices, industrial production and consumer sentiment to digest.

United Kingdom
Last week’s disappointing fall in manufacturing PMI was compounded this week by a fall in construction PMI. The result of 54.2 was well below forecast and down on the prior reading of 57.8. Thankfully the service sector PMI result made better reading, improving by more than forecast to 59.5. The service sector accounts for three quarters of the UK economy and is therefore the most important of the three PMI’s. However, this week’s focus was always on the outcome of the general election. It seems the early exit polls are telling a very different story from the pre-election polling and the Conservative party looks close to be taking a significant majority. This has proved positive for the UK Pound that has made solid gains in the past 12 hours. The final outcome won’t be known for some hours yet though, so we could still see plenty of volatility. Next week from the UK we have the Bank of England rate meeting on Monday, followed later in the week by manufacturing production, employment data, and the BOE inflation report.

The Euro has had a good week buoyed by some improving data. Spanish unemployment fell by 118.9k which was close to double the expectation. Manufacturing PMI improved a touch to 52.1, while services PMI jumped from 53.7 to 54.1. The European commission also slightly upgraded economic forecasts for 2015. They now see growth at 1.5% and inflation at +0.1%. On the disappointing side we did see a small miss for retails sales which printed at -0.8%, but the market reaction was minimal. Greece managed to make a EUR200 million payment to the IMF and there has been some speculation that a deal with its creditors may be just around the corner. Next week we have Eurogroup meetings on Monday which could potentially produce an agreement with Greece. Later in the week we have GDP data to digest from France, Germany and the Eurozone as a whole.

It has been a very quiet week for releases from Japan thank to bank holidays on Monday, Tuesday and Wednesday. We did get the BOJ minutes but these are from the meeting before last week’s one. The market impact is therefore very limited and they contained no real surprises for the market. Next week we have leading indicators, current account and consumer confidence data to draw focus.

Earlier this week Canada posted its worst monthly trade deficit in history as the full impact of plunging oil prices flowed in the data. The deficit for March was $3.02 billion, much worse than the forecast of $-0.8 billion. Oil is one of Canada’s biggest exports and the deterioration appears to have been led entirely by the collapse in crude prices. The February result was also revised heavily lower making the first quarter’s deficit an absolute shocker. There were silver linings in the data with the actual volume of exports increasing. Excluding the energy sector Canada’s exports were up a solid 2.4% in March. The central bank is optimistic the economy will improve from the poor first quarter and this strength in non-energy exports will encourage them. They will also be encouraged by a jump in the Ivey PMI released this week. It is considered a lead indicator of economic health and the index jumped from 47.9 to 58.2, a seven month high. Last night we saw building permits data which saw a jump of 11.6% in what is a notoriously volatile data series. Tonight we get employment change figures and the unemployment rate. The market is looking for a small fall in employment of -4.5k, with the unemployment rate expected to tick up to 6.9%. Next week’s economic calendar is looking very light with just manufacturing sales of any note.