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Economies of Note - 9th December

Written by Ian Dobbs on December 9th, 2016.      0 comments

Dominating focus in Australia this week was the RBA monetary policy statement and the Q3 GDP report. The decision by the RBA to leave rates on hold at 1.5% was unanimously expected. Governor Lowe noted risks to global growth which included inflation which remains below most central bank’s targets, including Australia’s anaemic 1.3% (RBA target is 2-3%). Markets currently place only a 12% chance that rates will be hiked in 2017. Estimates for Wednesday’s Q3 growth numbers which were lowered after Monday’s weak Q3 Company operating profit numbers proved well-founded, although underestimated the degree of disappointment after growth fell 0.5% in the quarter. Many economists noted that the slump coincided with the Brexit uncertainty, and the Australian federal election and US presidential election. A strong rally of ~5-6% in key $AUD sensitive commodities of coking coal and iron ore helped the AUD rebound. Other data included a better than expected Q3 current account deficit and worse than expected October trade balance. Home lending and investor housing finance numbers are due today whilst next week sees employment data on Thursday.

New Zealand
Dominating interest in NZ this week has been the changing political landscape after the surprise decision by PM John Key to step down next week. Finance Minister Bill English has the public backing of caucus and looks like to take over the leadership from Key. English delivered the Treasury’s Half Year Economic and Fiscal update yesterday which painted a rosy picture around the economy of rising wages, strong growth (which was expected to average around 3% over the next five years), and increasing surpluses. Unemployment was forecast to fall to 4.3% by 2021 as average wages increased to 66k (+12.8%). Low interest rates, tourism and population growth, and a booming construction sector were seen as the drivers. RBNZ Governor Wheeler also pointed to the promising growth outlook in a speech delivered this week. Wheeler also commented that the low point for inflation had probably passed and that the trend may finally be turning for the NZ dollar. The GDT dairy auction was the key scheduled currency indicator of interest to the currency markets this week. Overall prices rose by 3.5% which was broadly in line with expectations. Prices have now risen by 56% since July and 74% for the price of whole milk powder. GDP data on Thursday dominates the data calendar for next week.

United States
This week has been far quieter in the US which has seen the greenback drift lower in trade for most of the week. Events early in the week included Fed official commentary which pointed to support for less accommodative monetary policy and a stronger than expected non-manufacturing ISM which rose to its highest level since October last year. Strength in employment and business activity were the highlights of the report. October factory orders exceeded expectations by posting its strongest rise since June last year. Strength in capital goods new orders points to a potential rebound in the recent investment slump. Other data included the October trade deficit which widened beyond expectations, although rising imports reflected consumer good demand which is benefiting from a strong labour market and consumer confidence. JOLTs job openings exceeded expectations for October although declined from the month prior. The continued drop in the weekly MBA mortgage applications since the election points to concern over future higher US rates. Focus for next week is on the busy data calendar and Wednesday’s FOMC meeting.

United Kingdom
Trade in the sterling has been relatively muted this week over the UK Supreme Court case which is challenging the rule that parliament must trigger Article 50 in order for the UK to start EU exit negotiations. A decision is not expected until January which has left the market to consider mixed data which included a stronger than expected services PMI which hit 10 month highs in November. Manufacturing output fell by the most in 8 months in October. The release fell well short of market expectations and was weighed by a slump in pharmaceuticals. Industrial production also disappointed on the back of a slide in oil and gas extraction due a shutdown in a key oilfield. Halifax house prices maintained their rate of monthly and annual growth in a result which met the market’s expectations. Focus for today is on trade data for October, whilst next week we have a very busy week that includes inflation data on Tuesday, employment on Wednesday and the BoE meeting/retail sector data on Thursday.
Focus for much of this week was on yesterday’s ECB meeting which saw the Euro undergo significant volatility as the market digested the announcement. An extension to the bond buying programme which was expected was delivered after the ECB said they would continue government bond purchases until December 2017. The pace of buying from April 2017 would be scaled back from the present EUR 80 billion per month to EUR 60 billion and the pool of bonds available to be purchased was extended to include bonds with a 1yr maturity and bonds with a yield below the ECB deposit rate. The Euro eventually traded sharply lower on the news. Data released over the week included minor disappointments in the euro zone (EZ) services and composite PMI reads and German factory orders which easily surpassed expectations. The final read of the EZ Q3 GDP remained unchanged quarter-on-quarter, although the year-on-year read was revised up 0.1% to 1.7%. Consumption continued to be the driver of growth as household and government spending accelerated. Focus for next week will include ZEW confidence on Tuesday, although focus continues to be on the perilous Italian banking sector and European/Italian politics.
It has been an uneventful week for news and yen trade in Japan this week. November household confidence disappointed and the marginal rise in average cash earnings was also under expectations. Further minor disappointments came via the leading index and coincident indicator, although neither release interested the markets. The dominant release of the week was yesterday’s third quarter GDP report which saw the preliminary release revised down to 0.3% q/q (from 0.5%) against expectations of a moderate 0.1% upwards revision. A reduction in the initial estimates of capital expenditure and inventories drove the decline. Balance of payment data included a current account surplus which exceeded expectations in October. Data next week starts with core machinery orders on Monday although Wednesday’s Tankan survey and industrial production data will be of the most interest.

Interest in Canada this week included Wednesday’s Bank of Canada (BoC) policy meeting which saw rates left on hold at 0.5% (as expected) and the bank issue a statement that was widely interpreted as dovish by economists. Governor Poloz said the bank had “actively discussed” the possibility of a further rate cut to boost the economy back to full capacity as he spoke of the significant economic slack as export growth and business investment weighed. The trade deficit for October was much better than expected after it narrowed to its lowest level in nearly a year on the back of higher prices for energy products. The Ivey PMI disappointed by easing against expectations of a small gain, although remained well into expansionary territory. Building permits and new house prices exceeded expectations in October. Expect direction next week to take a stronger lead from oil given the lack of data due.