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Economies of Note - 9th May

Written by Ian Dobbs on May 9th, 2014.      0 comments

It has been a busy week for Australian economic releases, although none of the data has been a real game changer for the current outlook. On the negative side we saw weaker than expected building approvals (-3.5% vs +1.3% expected) and retail sales (+0.1% vs +0.4% expected). While on a more positive note we have seen the fourth positive trade balance in a row which came in at +0.73b, and employment change which printed at +14.4k vs expectation of +8.8k. All of those job gains were in full time employment and this helped the AUD to make some decent gains as a result. The Reserve Bank of Australia (RBA) released their rate statement which was largely unchanged from the previous one. They expect inflation to be consistent with the 2-3 per cent target of the next two years and continue to see the exchange rate as high by historical standards. A period of stability in interest rates is likely. The economic calendar is a little lighter next week with business confidence and the annual budget the highlights.

New Zealand
The New Zealand employment market continues to perform well with employment change registering an increase of +0.9% against expectation of +0.6%. The unemployment rate did tick up from 5.8% to 6.0%, but this is just representative of an increase in the participation rate. That is to say, more people are entering the workforce as the prospect of gaining employment improves. Fonterra’s latest global dairy trade auction registered its sixth successive decline falling -1.1%. We have now seen a fall of around 23% from the peak back in February. This would normally weight on the value of the NZD, but for most of the week the local currency was a strong performer. It took a speech from RBNZ Governor Wheeler to trigger a meaningful pullback in the NZD when he suggested the central bank could intervene in the currency market if the currency remained high in the face of worsening fundamentals. The reality is the RBNZ are unlikely to intervene anytime soon, and this was most likely a well-timed ‘jaw boning’ operation. The bank is not going to sell NZD’s whilst they are hiking interest rates. A pause in the tightening cycle would be a more prudent approach to deal with an overvalued currency and we could well see just that after next month’s widely expected 0.25% hike. Next week we have the RBNZ financial stability report, along with retail sales and the annual budget release to digest.

United States
It has been another week of mostly positive releases from the United States that have failed to help the value of the USD, which has been under pressure across the board. We have seen a number of institutions revising down estimates for first quarter growth on the back of lower than expected trade balance numbers, although second quarter estimates remain strong and have actually increased recently. Fed Chair Janet Yellen testified in front of the joint economic committee and she stressed the reasons for the Q1 slowdown were transitory. She added recent data was encouraging and that there is no formula or timetable for when the Fed will raise rates. Consumer credit figures showed the largest increase in more than a year jumping to $17.5b from $13.0b previously. You have to be confident in the economy to take on more debt and that’s certainly what US consumer seems to be doing. Conditions in the non-manufacturing sector improved with the PMI climbing to 55.2 from 53.1 previously, and unit labour cost data posted its biggest rise since Q4 2012 when it printed at +4.2%. The market was expecting a gain of +2.6%. There are a lot of views, and not much consensus, on why US Treasury yields remain so low and why the USD is so weak. The 10 year Government bond is little changed at 2.62% with the 30 year trading at 3.40%. The highlights on next week’s economic calendar include retail sales, producer prices, inflation, building permits, and consumer sentiment.

Data out of Europe continues to be less than impressive. The few bright spots such as retail sales that printed at +0.3% vs -0.2 expected, have been overwhelmed by a plunge in German factory orders (-2.8%) and French industrial production (-0.7%). But the main focus this week was on the ECB’s rate meeting last night. Although the bank left rates unchanged and took no further action at this stage, President Draghi gave a very clear signal that we can expect something from them at the June meeting. By that time the ECB will have updated inflation forecasts and Draghi said the bank will act if those forecasts merit it. He also spoke at length about the level of the Euro and said it was a ‘serious concern’. The bank has a number of options to deal with low inflation and the high level of the currency. Interest rate cuts, liquidity measures, or even outright quantitative easing are all on the table. There will likely be a lot of discussion and opinion around this over the coming month and the market will be keen to get any hint of which way the bank is leaning. Next week we have German economic sentiment numbers along with inflation and GDP data to draw focus.

United Kingdom
Tuesday saw the release of data on the service sector of the UK economy (its largest sector) and the numbers continue to look good. Services PMI rose to 58.7 from 57.6 previously. The other focus this week was last night’s Bank of England (BOE) monetary policy meeting, but it turned out to be a very subdued affair. As widely expected, the central bank left rates, and the level of QE, unchanged and they didn’t release any statement. We will have to wait a couple of weeks to get the minutes of the meeting to see what discussion there was around the UK housing market. This issue is at the forefront of things that need to be address in the economy at the moment. The OECD this week warned the housing boom risks overheating the UK economy. Governor Carney is keen to keep rates low for as long as possible and many believe he will try to rein in property prices using regulation or other unconventional methods. Tonight we get manufacturing production data along with the trade balance. Next week the focus turns to employment and the BOE inflation report. Carney is also due to speak on Wednesday and maybe he’ll drop some hints as to how he plans to deal with housing.

It has been a very quiet week for Japanese data with only the Bank of Japan (BOJ) minutes of any real interest. Even they failed to have much of an impact with the central bank maintaining its view that the economy is likely to continue to recover moderately. There was certainly no hint the bank feels any need at this point to add to the current stimulus they are providing. Most members agreed the bank should continue quantitative easing as long as necessary to meet the 2% price target. Although they expect to see some fluctuations due to the sales tax increase, they believe consumer spending will remain resilient. Next week’s current account, GDP, and tertiary industry activity data will provide the major focus.

The three releases from Canada earlier in the week all disappointed. The trade balance, Ivey PMI, and building permits have all come in below expectations. Last night however we did get a significantly better than expected result for housing starts. Admittedly the most important piece for data is still to come tonight in the form of employment change. After last month’s strong reading of +42.9k the market is looking for a more modest result of around +15k. The unemployment rate is expected to remain unchanged at 6.9%. Next week we have the semi-annual Bank of Canada review along with manufacturing sales data to digest.