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Economies of note - 9th August

Written by Ian Dobbs on August 9th, 2013.      0 comments

4:15pm (NZT)
Australia

There has been plenty to focus on in Australia this week. Poor retail sales early in the week helped to keep the Australian dollar under pressure heading in the Reserve Bank (RBA) rate announcement. As widely expected they cut rates by 25 points to 2.50%. The AUD actually rallied after the news as the statement by the RBA dampened further rate cut expectations. Thursday’s release of employment data was very disappointing. The 10.2k fall in employment was well below expectations and should have proved very negative for the currency. The AUD did initially drop, but for some reason found plenty of buyers that eventually lifted it back up. The reason for that became clear a little later when Chinese trade data hit the wires. Chinese imports and exports both came in well above expectation helping to ease fears of a slowdown in the world's second largest economy. The AUD lept higher by 60 points in minutes. Today we have had the quarterly RBA monetary policy statement which has had minimal impact on the currency.


New Zealand
It has been an interesting week for New Zealand and the NZD. The Fonterra news dominated the early part of the week and saw the New Zealand dollar open Monday morning on the back foot. But as further details emerged and the week progressed the currency saw continued grinding appreciation from this early lows. Unemployment data came in very close to expectation and was of limited impact. The Fonterra run Global Dairy Trade (GDT) auction went off a lot better than many had predicted with only a small drop in prices, from what were elevated levels. This helped support the currency as it seems any further fallout from the contamination news will be limited. Next week’s data to focus on includes house prices index, retail sales, and manufacturing index.

United States
It has been an interesting week for the United States and the USD. Recent data has been largely supportive of the economic recovery, and has reinforced market expectations for a September start to QE tapering. However, the USD has weakened across the board. The best data of the week was the trade balance. This came in substantially better than expected. It was the best result since 2009, and was so good that it has caused economists to upgrade their growth figures for the second quarter. Some of these upward revisions have been very large. Barclays for instance, have increase their growth estimate for the second quarter from 1.8% to 2.5%! With potential for a boom in the US oil and gas industry, data like this could be common place going forward. So why has USD failed to gain any support from these results? The answer could well come from the bond market and is highlighted by the following quote from Bill Gross, who managed the world’s largest bond fund. In his recent note to investors he says “Bonds issued by less than Aaa-rated sovereign nations as well as corporations contain “credit risk,” which causes their yields to be greater than those of countries such as the U.S., providing an opportunity for bond investors.” I would add that with the largest buyer of US Treasury bonds (the FED) about to step away from the market, who would want to buy them? Ditching them in favour of other countries debt seems like a very good idea.


Europe
This week has seen mostly better data out of the Euro-zone and in particular from Germany. German factory orders and industrial production both came in well above expectation, although some caution is warranted in reading the data. It seems factory orders were boosted by some one-off big orders for aircraft and the industrial production gain was in large part recovering last month's fall. That being said, surprises to the strong side are always better than those to the weak side. This data does reinforce the European Central Bank's (ECB) view that a gradual recovery is likely in the second half of this year. The recovery is going to be very patchy though, and this was highlighted in the ECB’s monthly report. They have downgraded their growth forecast for 2013 to  -0.6%, although they still see improving growth ahead. They expect growth in 2014 of 0.9%. Next week’s data to digest includes GDP and inflation figures for Germany, France, and the Euro-zone as a whole. We also get a survey of German economic sentiment and Euro-zone industrial production.


United Kingdom
The run of great data out of the United Kingdom continued this week with much better than expected results for both industrial and manufacturing production. The GBP saw some increased demand from these figures, although the reaction was muted as the market was in waiting mode ahead of the Bank of England (BOE) inflation report. This was an important release as new Governor Carney was going to give further details on the forward guidance announced previously. In that detail released on Wednesday night, the BOE promised to keep interest rates low until employment falls to 7%. This initially sounded good and sent the GBP lower, however on closer inspection, and with a number of escape clauses included, the market quickly started questioning the strength of the policy. The forward guidance will be void if the BOE thinks inflation will be higher than 2.5% in its two year forecasts. Current inflation is 2.9% and has been stubbornly high for most of the past five years, although strangely enough the BOE keep forecasting it to fall. Many economists are also saying that unemployment could actually hit 7% a lot faster than the BOE is predicting, and hence this guidance is of limited use. The net result for the GBP was that with the event risk out of the way, and a policy of questionable credibility, buyers turned up in droves and pushed it higher. Longer term interest rates also backed up (the complete opposite of what the policy is trying to achieve) which can’t have impressed the new Governor. We get trade balance figures tonight, and next week there is plenty more for the market to digest. Inflation data, the BOE minutes, unemployment, and retail sales are all set for release.


Japan
There has been very little on the economic front to change the current view of the Japanese economy. The Bank of Japan (BOJ) had its rate meeting on Thursday and chose to maintain its ultra-easy monetary policy. They see the economy as “starting to recover modestly” and believe inflation expectations appear to be rising as a whole. This was very much in line with their previous meeting and largely with the market has expected. Debate around the upcoming increases in sale tax is on-going. Prime minister Abe wants to smooth the increase out over a number of years so as not to shock the economy, but need a law change to do it and that doesn't seem likely at this point. Next week's key releases are GDP, core machinery orders, and the BOJ minutes.


Canada
It has been a less than impressive week for Canadian data so far. Trade balance was a non-event, coming in bang on expectation. However, building permits and a survey of business activity were both shockers. These two very poor results highlight the potential for an economic slowdown, although caution is warranted reading too much into the data. Poor one-off readings being corrected the next month are not unheard of, and it’s therefore better to focus on the trend in a series. There was another announcement this week that has weighed on the CAD. It seems the government is putting measures in place to try to limit gains in the housing market, and these measures mean a potential rate hike down the road could be less likely. We still have housing starts and employment data to come this week. They are set to be released tonight. Then next week we have the BOC review and manufacturing sales.
 

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