4:11 PM (NZT)
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Major Announcements last week:
· EU summit progress well received by market
· US pending Home Sales 5.9% vs 1.2% expected
· NZ NBNZ Business Confidence 12.6 vs 27.1 previous
· US Durable Goods Sales +.4% vs +.9% expected
· Japanese Retail Sales and Household Spending stronger than expected
· UK Q1 GDP unrevised at -.3%
· US Q1 GDP number unrevised at +1.9%
· US PCE Price Index (inflation) +.1% vs +.2% expected
As the markets patiently waited for the EU summit last week, the expectations were not great. There had been little in the way of progress from previous summits, so the market positioned itself for disappointment. Then came the news of progress. Direct long term support for struggling banks from the European Stability Mechanism (ESM), with European wide banking supervision to come from the ECB. This decoupling of pressures into separate banking and sovereign issues, paves the way for recovery of peripheral member debt markets overtime. The credit rating agencies have already commented that the scheme will materially take pressure off the government debt loads. There are still many details to be drawn up and issues to be sorted out, but these moves are positive and take away the immediate pressures on Government funding costs.
The market’s reaction has been to rush into risk assets. This indicates the markets positioning heading into the summit. Commodities rallied higher with oil up over 8% in Fridays offshore session. Equity markets raced higher led by European bourses and eased by sound economic data in the US. Whether or not the gains can be sustained remains to be seen, but the near term uncertainty has materially reduced. This week the focus turns back to various monetary policy meetings. Expect easier monetary conditions from both the Bank of England (BOE) and the European Central Bank (ECB), as economic growth measure receive renewed attention.
There was little of Australian domestic focus last week. Private sector credit numbers were as expected and new homes sales were down on the previous month, but still in positive territory. Indirect influence from China came as various reports point towards further stimulation to support their slowing economy. This comes as the latest official Chinese manufacturing numbers point towards a return to growth in the sector. In Australian this week the focus is varied from building numbers and the RBA monetary policy decision tomorrow, to retail sales numbers Wednesday and the trade balance Thursday. The RBA are expected to leave the cash rate unchanged at 3.50% at this meeting, but as usual their accompanying statement will be closely watched.
It was a relatively quiet week in New Zealand for economic data. The NBNZ Business Confidence survey revealed an unsurprising fall in business confidence. Given the uncertainty in offshore markets over the last few months, this was to be expected. Interestingly trade balance figures show increased exports and imports, pointing towards more activity than expected in the 2nd
quarter. This week sees another week lacking any top tier economic data. There has been latent demand for NZ dollars over the last couple of weeks, and this should continue, if the wider market improvement in risk appetite continues.
It was an interesting week for US economy observers last week. Importantly, the housing market continues to show signs of life. This materially should impact on sentiment over time, even if consumer sentiment gauges continue to see pressure in the short term. Durable goods order numbers were mixed and the final GDP number for the 1st
quarter was unrevised at 1.9%. The primary inflation gauge watched by the FED came in below expectations. This further eases the way for future monetary stimulation if required. This week coming sees the focus move back to the labour market with the employments numbers on Friday the primary focus of the week. Manufacturing numbers later on today, and services numbers on Thursday will also be closely watched.
European stock markets reacted positively to the announcements made at the conclusion of the EU summit. Funding costs on the peripheral nations have reacted positively also, moving demonstrably lower. The ECB is the focus of the week and there is an expectation of finely seeing a cut to the cash rate from the ECB. A move of 25 points is expected, but there are some seeing potentially for a 50 point cut, to a cash rate of .5%. The EURO will again likely take its lead this week from how the Spanish and Italian bond markets behave, as they remain the primary indicator to sentiment in Europe in the short term.
Last week was a quiet one for UK economic data. Public sector borrowing and trade deficit numbers were both higher than expectations, and comments from BOE officials were more downbeat than recent rhetoric. The European economy remains the primary concern and drain on UK growth aspirations in the short term. Expect another 50 billion GBP worth of quantitative easing (UK bond purchases to lower long term borrowing interest rates), at the BOE monetary policy meeting on Thursday. Also of note this week are manufacturing numbers late on Monday, construction numbers Tuesday and services data Wednesday.
Last week saw an interesting political landscape emerge in Japan. A positive vote to double the sales tax over the next few years saw the ruling party split and points to a likely leadership change in the short term. On the economic side the retail sales and household spending numbers were above expectations and deflationary pressure came in slightly less than forecast. Today has seen the important manufacturing numbers reveal that conditions have slowed by less than expected. The accompanying Services index was also positive, and shows stronger expectations for growth. The positive reaction to the conclusions from the EU summit has seen the YEN weaken as risk sentiment improves and this will be very much welcomed by Japanese policy makers and exporters alike. However the YEN remains at extremely high levels, and further weakness will be needed to materially negate the current intervention risk of policy makers in the short term.
The long awaited focus for the Canadian economy last week was Fridays release of the slightly stronger than expected monthly GDP number. This week sees the focus again come on Friday with a raft of data due. The latest building and manufacturing numbers are accompanied by the important employment numbers, with the unemployment rate expected to be static at 7.3%.