The New Year has started with a burst of positivity across most markets. A compromise in the US to avert the “fiscal cliff” has been joined by impressive Chinese economic data, massive stimulus in Japan and a positive slant for Europe from the European Central Bank. Last week equity market funds saw the largest money inflows in the last five years, providing hard evidence of the boosted sentiment. Without doubt the conditions have improved for the global markets, but the energy in the improved sentiment appears to have got ahead of itself. This week will see corporate earning’s results released in the US, and this may provide a sobering insight to business conditions in the final quarter of 2012. There is little in the way of expectations for rapid economic or labour market growth in the large economies in 2013. Expectations should be for staggering growth, as a protracted global recovery continues, with the influence of very accommodative monetary policy from the leading central banks.
It has been a mixed start for the Australian economy for 2013. Disappointing domestic numbers in the form of the trade balance, retail sales and building approvals have been counter balanced by buoyant indicators from integral trading partner China. The AUD has seen solid support for the most part, as would be expected with the boosted wider market sentiment seen to start the year. Offering support are commodity prices, especially the iron ore price being Australia’s number one export. This week sees the monthly employment numbers as the focus on Thursday, with the unemployment rate expected to lift a little to 5.4%.
The NZ dollar has had a very strong start to the year. European originated demand for NZ Government bonds has provided the underlying demand for NZ dollars, much to the disappointment of the local export sector. Increased commodity prices have been nullified for the most part by the level of the NZD. The Quarterly Survey of Business Opinion for the final quarter of 2012 released by the NZIER revealed a bounce in sentiment and activity. The increase has been driven by increasing construction momentum driven by the Christchurch rebuild, with manufacturing also looking more buoyant. Expectations should be for a stable NZ cash rate at 2.50% until early 2014, given the current lower inflationary pressure. This week sees the quarterly inflation numbers due for release, but in the current environment these will be of passing interest only.
The first week of 2013 saw successful fiscal negotiations between President Obama and Congress conclude, if only providing short term breathing space. The markets reacted positively to this and now the circus focus turns to the pending debt ceiling issue. Already pressure is building on this issue with comments from Fed Chairman Bernanke pressing for ceiling increases. The economic data in the US remains mixed with last week’s trade balance demonstrably wider than expected. This week sees the latest retail sales, inflation, manufacturing and consumer sentiment numbers due.
Leaders in Europe hope the economy may finally be at a point where is can start to recover from the debt crisis. The rhetoric from officials is continually pointing out the improved financial conditions for a majority of European nations. Certainly the actions from the ECB in 2012 have steadied the outlook and now the slow recovery should be able to start. Last week saw the ECB leave monetary policy unchanged in line with expectations. The accompanying comments point towards little chance of further easing or policy accommodation in the near term, and this has been EURO supportive. This week saw the latest industrial production numbers disappoint, but this was seemingly cast aside as the market continued to focus on the positive. Wednesdays inflation numbers provide the focus in the near term, and a stronger than expected number would help support the EURO at its seemingly elevated recent levels.
The UK economy continues its struggle for a sustainable recovery. Last week saw a mixed group of numbers released. House prices were higher than expected, but manufacturing and trade balance numbers disappointed. The Bank of England held monetary policy unchanged as expected. The GBP saw periods of heavy supply, as buying of EURO versus selling of GBP dragged the GBP lower across the board. This week sees the focus come from inflation numbers late on Tuesday, and retail sales numbers on Friday.
The new Japanese leadership has wasted no time in initiated their aggressive fiscal policies as they grapple with the third Japanese recession since 2007. Prime Minister Shinzo Abe’s up to 20 trillion YEN stimulation plans should undermine demand for the YEN over the medium term. Abe will also be announcing a new Bank of Japan Governor and has promised someone that will make bold policy moves to mirror efforts being made by the current leadership to overcome the deflationary conditions. Interestingly, Japan has also been pledging to buy large chunks European and US government debt, adding to the pressure on the YEN. With little in the way of Japanese economic data this week, expect offshore influences to dominate in the short term.
The mixed data continues for Canada. Last week saw better than expected manufacturing numbers balanced by a plunge in building permits and a wider than expected trade balance. This is typical of a staggered re-emergence to growth, and is an indicator that we will see the Bank of Canada keep its monetary policy unchanged in the short term at least. This week has seen an improved business outlook survey buoy demand for the CAD.
Major Announcements last week:
- Canadian Manufacturing 52.8 vs 51.3 expected
- European Unemployment rate 11.8% as expected (record high)
- Australian Retail Sales -.1% vs +.3% expected
- Chinese Trade Balanace 31.6B vs 20.1B expected
- BOE leave monetary policy unchanged
- ECB leave monetary policy unchanged
- Chinese Inflation 2.5% vs 2.3% expected
- US Trade Balance -48.7B vs -41.1B expected