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Economies of Note - 9nd October

Written by Edited by Ian Dobbs on October 9th, 2015.      0 comments

The RBA cash rate announcement hogged the limelight in Australia this week with other key data releases lacking. Tuesday’s consensus expectations which centered around no change in the cash rate were upheld as the RBA again left interest rates unchanged at 2%, the fifth month in a row. The statement was virtually the same as September’s although the RBA noted further softening of conditions in China/East Asia and pending Fed rate normalisation over the period ahead. Earlier in the day the August Trade Balance deficit disappointed at 3.095 bn, which was both well above expectations and the month prior and was led by a 1% lift in imports. Going forward expectations for a resumption of RBA rate cuts will likely be heavily influenced by perceptions surrounding the durability of the recent improvement in key commodity prices and improving risk sentiment witnessed over the course of the week.

New Zealand
The release of another strong GDT auction result, the fourth gain in a row dominated the news in New Zealand this week. The GDT-TWI rose a solid 9.9% and was led by strong gains in WMP (+12.9%) and SMP (+13.4%), moves largely consistent with the NZX futures pricing. The slow start to production and limited Fonterra GDT offering are expected to continue to be price supportive for dairy in the immediate future and should create a further impetus for milk price forecasts to move back toward $5.00/kg ms. The rebound in dairy prices will allow the RBNZ further time to assess the impact of the recent 75 bps in rate cuts (2.75% cash rate). An uncertain international environment as evidenced by a reduction in the IMF global growth forecasts this week will continue to mean risks to further interest rate moves remain to the downside. Earlier in the week the NZIER’s quarterly survey of business opinion (QSBO) showed a deterioration in confidence (Sept. Qtr) over the general business situation, to the lowest levels seen since March 2011. Surveyed firms displayed a greater degree of confidence over their own business outlooks than in the June quarter however.

United States
The release of the minutes of the Federal Reserve’s Sept. 16-17 meeting today was the highlight in the U.S. this week. The minutes revealed that policy makers decided to delay rate normalisation amid continued concerns over low inflation and to allow additional time to assess the effect of the recent economic turmoil in overseas markets on the American economy. U.S. initial jobless claims eased to 263k (274k exp.) from a revised 276k last week, further partial indicators including the JOLTS survey and the employment component from the non-manufacturing ISM survey suggest that labour market conditions remain solid despite last week’s September NF Payrolls disappointment. A movement towards rate normalisation would now appear contingent on the Fed’s confidence that inflation won’t undershoot their objective given the Fed’s job market goal has largely been achieved.

United Kingdom
The Bank of England (BoE) left policy settings unchanged at its meeting today with only one member dissenting and voting for a rate hike from the current 0.5% setting. Like the U.S. Fed the BoE struck a mildly dovish tone noting concerns over low inflation that would likely remain below 1% until spring 2016. Some members noted recent evidence of a shorter lag in the response of inflation to interest rate changes than that previously thought, this should allow the bank more scope to let inflation pressures emerge before commencing policy tightening. Earlier in the week the release of U.K. industrial and manufacturing production data saw solid outcomes (August Industrial Production +1.0% m/m, Manufacturing Production +0.5% m/m) adding to the solid construction PMI data release of last week, although downward revisions to historical manufacturing production data led to disappointing annual growth overall.

The ECB minutes echoed concerns aired by the BoE and U.S. Fed over weak inflation, the governing council also saw risks to euro area growth and like the BoE noted the deterioration in emerging market (EM) economies, adding that conditions in financial markets had tightened. The council said it would be prepared to provide further stimulus should the financial market volatility and deterioration in EM growth prospects become entrenched although said it was happy to get greater clarity around the medium-term implications of these recent events. Earlier in the week August German industrial production recorded an unexpected 1.2% m/m decline (+0.2% exp.), similarly German factory orders also underwhelmed falling 1.8% m/m (+0.5% exp.). Concerns over additional weakness will continue to mount as growth prospects in EM economies wane and the implications of the VW scandal begin to take their toll.

The BOJ Monetary policy statement on Wednesday was the highlight of the week in Japan. This saw the BOJ keep monetary policy unchanged and pledging to increase the monetary base at 80 trln yen annually, although the BOJ board member Kiuchi’s proposed tapering of JGB purchases to 45 trln yen annually was turned down by an 8-1 vote. Their assessment of the Japanese economy was unchanged whilst business sentiment was observed staying at a favourable levels and inflation likely to be at around 0% for the time being, well below their 2% target. Kuroda noted that the monetary easing was having its intended effects and would remain until 2% inflation is reached around H1 2016 (depending on oil prices).

Tuesday saw the release of Canadian August trade data which saw the largest drop in exports since Jan 2012 (-3.6% vs. +1.0% prior) this helped the trade deficit expand to $2.53bn from $0.82 bn previously as extremely weak petroleum product prices continued to weigh. The IMF downgraded forecasts for the Canadian economy on the same day reducing its growth forecast by half a percentage point to 1% this year and 1.7% in 2016. The Sept. Ivey PMI marginally missed expectations at 53.7 vs the 54.0 forecasts although still sits above the 50.0 expansionary level. The low impact August Building Permits fell 3.7% well below the +0.8% expectations although September Housing Starts surprised to the upside at 230.7k y/y (200k exp.).