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Economies of note - 8th November

Written by Ian Dobbs on November 8th, 2013.      0 comments

1:15pm (NZT)
Australia
This week has been a busy one for news in the Australian economy. As can be expected at this stage of an economic cycle, the news has been mixed. In terms of the data, strong retail sales numbers on Monday have been balanced out by today’s soft employment numbers, where the Unemployment rate rose as expected to 5.7%. Of note was a fall in full time employment, and the next month’s data will now be of particular importance to see if a trend starts to establish. The RBA monetary policy announcement was broadly as expected. The RBA remain poised to react if needed to softer economic data, and again reiterated their view that the Australian dollar was outperforming the economies fundamentals. The quarterly RBA Monetary Policy Statement expected later on today will offer further insight to their read on the economy, and of course conditions in the wider global economy. Next week is relatively light on economic news, with Tuesday’s NAB business confidence data offering the primary focus for the week.


New Zealand
The dominant piece of economic news in New Zealand this week has been the release of the stronger than expected 3rd quarter employment numbers. The 1.2% increase in employment has pushed the Unemployment rate down to 6.2%. Growth has been driven by strength in construction and hospitality sectors, predominantly in Christchurch and Auckland. With this kind of number supporting the concept of initial hikes to the 2.50% cash rate in the first half of 2014 from the RBNZ, the NZD has been in demand on all crosses following the release. Slightly balancing out this positive sentiment has been the second monthly fall in dairy prices from the Global Dairy Trade auctions. This is a healthy settling down of prices after the recent peak in demand. Next week will see the focus turn to the release of the 3rd quarter NZ retail sales numbers on Thursday, and the bi-annual RBNZ Financial Stability report which is due early Wednesday morning.


United States
US economic activity seems to be slowly progressing to date there has been little noticeable effect from the two week government shutdown. Earlier in the week we saw data on factory orders that improved month over month, and on Wednesday night we got the latest reading on the service sector of the economy. The result was above expectation and showed there is solid expansion in the sector. Looking into the detail of the report showed the employment component has picked up as well and that bodes well for the broader economic outlook. Wednesday also saw the release of the leading index which is a combination of ten economic indicators and designed to predict the direction of the economy. The index held steady at a respectable 0.7% which was right on expectation. Expectations for the economy were given a boost last night after GDP data for the 3rd quarter hit the wires. The result of +2.8% was much higher than the market was expecting which was in the area of +2.0%. As a result the USD has strengthened. But in a graphic display of how central bank money printing has affected markets, the US stock market has lost over 1.0% so far today on the back of the good economic news! That is because good economic data makes tapering by the Fed sooner rather than later a more likely proposition. And one of the biggest effects quantitative easing (money printing) has had is to inflate the stock market. So a potential reduction quantitative easing is negative for stocks. The week is far from over however and tonight we get what could be the biggest number so far, with the employment report set for release. Next week is a little lighter in terms of data with the highlights being the trade balance, productivity, capacity utilization, and industrial production.


Europe
Data from Europe this week has been patchy at best and nowhere near good enough to overcome last week’s surprisingly soft inflation figure. As a result of that figure, and the fragile nature of the recovery so far, the European Central Bank (ECB) last night decided to cut interest rates again. The move takes the deposit rate from 0.5% to 0.25%, and has seen the Euro weaken substantially. After the cut ECB President Draghi said “In principle, we could cut even further” and the fact remains that further action is a very real possibility. Up until last night the ECB had cut 375 points and if that hasn’t had the desired effect, what’s another 25 points going to do? The truth is it’s largely symbolic. One of the problems the ECB has is cuts are not flowing through the banking system and resulting in more / cheaper lending to the areas in the economy that need it. Lower rates aren't been passed on by banks because they are worried about their own finances. The LTRO’s (long term refinancing operations) that pumped cash into the banks found its way either back on deposit at the ECB, or into government bonds. As a result the ECB have undertaken a check of the banking system which will include stress tests for each bank. This review will take a year to complete and should any banks fail a stress test, they will be forced to raise capital. In the meantime, Draghi has made it abundantly clear the he will do whatever it takes to support the Euro area. That could easily mean we see further LTRO’s, negative deposit rates, or some other measure if the need arises.


United Kingdom
It has been another solid week for the UK economy with data underlining the fact that there is some real momentum starting to build. On Monday we got data on the construction sector that showed it is expanding at a very healthy rate, and on Tuesday we got a reading on the service sector of the economy. Bearing in mind that it makes up around 78% of UK economic activity, it therefore carries a lot of weight. The reading of 62.5 can only be described as spectacular. Anything over 50 denotes expansion in the sector and this result was not only above expectation, but the strongest reading in 16 years. This has reinforced views that the employment rate is likely to fall below the 7% forward guidance threshold, well ahead of schedule. To back this up on Wednesday we got better than expected industrial production numbers and last night the Bank of England (BOE) had their interest rate meeting. As widely expect they left rates and the level of quantitative easing unchanged. Barring another crisis, the next move in UK rates will be a hike. The only question is how far in the future will that be? Many commentators are starting to question why rates are at an emergency low 0.5% when the economy is, by any measure, booming. Next week will be interesting with the key releases of inflation, unemployment, and retail sales on the calendar.


Japan
There have been no economic data or releases this week to materially change the outlook for Japan. The most interesting thing to note is how surprised the Bank of Japan (BOJ) was when the Fed decided not to back in September. This was revealed in the BOJ minutes from there Oct 2-3 meeting. As a result a number of BOJ official now see US economic policy harder to predict, and many others said the Japanese central bank should learn from the negative impact of Fed communication. Next week we have the current account, core machinery orders, and GDP to draw focus.


Canada
It has been an interesting week so far for the Canadian economy. The volatile building consents number was disappointing at +1.7% for the month, albeit this data is of limited impact. However the monthly Ivey Purchasing Managers Index (leading indicator of economic health) has surprised to the high side with a large leap in activity to 58.2 on the index against an expected result of around 52. This comes after the recent run of average economic news that has seen any expectations of cash rate hikes from the BOC shelved until late 2014. So this positive surprised has seen the beleaguered CAD initiate a fight back of sorts. Whether or not this increased demand leads to further momentum with be guided by the monthly employment numbers that are due for release later on today. Next week sees the focus turn to the trade numbers on Thursday, and manufacturing data on Friday.
 

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