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FX Update - US data surprises

Written by Ian Dobbs on November 12th, 2013.      0 comments

Market Overview:
Last week proved to be a very interesting one in the wider financial markets. Three major pieces of news provided the lead for some periods of wild price action, especially into the later end of the week. The European Central Bank (ECB) aggressively cut their “refi” rate by .25% to .25%, which is the first cut since May 3rd. Whilst not out of the blue, the move follows a very recent of a change in sentiment in the interest rate market in Europe as inflation numbers came in lower than expected. Adding to the mix were two materially better than expected pieces of economic news in the US. Both the GDP and employment numbers reversed the recent softer trends. The implications of which affect all markets with the prospect of initial tapering of the Quantitative Easing (QE) apparently re-emerging as a prospect for the December Fed monetary policy meeting. Australasian markets were not without their interest either. Australian news was mixed, with strong retail sales data coupling with soft employment news and a relatively neutral stance from the RBA at their monetary policy statement. In New Zealand the pressure builds on the RBNZ with materially better than expected employment numbers further boosting sentiment.
2:30pm (NZT)
The Australian dollar was weighed on last week by the very average employment data that showed a big fall in full-time work and a big increase in part-time employment. But this negative influence has been countered somewhat by consistently better than expected data coming out of China. The RBA have said that effects of previous rate cuts are still flowing into the economy and that was underlined yesterday by home loans data that showed a bigger than expected jump of +4.4%. In the last hour we have also seen business confidence figures that showed a substantial decrease from last month. This is helping to keep the AUD on the back foot. The rest of the week sees consumer sentiment, wage price index, and inflation expectations set for release.

New Zealand
There have been no market impacting releases since last week’s better than expected employment result. We did get credit card spending figures that came in a touch better than expected at +1.4% but there was little interest from the market in the result. Finance minister Bill English was on the wires reaffirming that the NZ budget is on track for a surplus in 2014-15. Tomorrow we hear from the RBNZ when they release their financial stability report. That is followed up on Thursday by retail sales data which will be closely watched.
United States
After Thursday’s surprisingly strong US GDP result all eyes turned to Friday’s release of employment data. The last few months have seen only average results for employment, with most releases coming in a touch under expectation. As a result the market wasn’t getting too carried away with forecasts for this month’s release, expecting an increase of around 120k. The actual figure however, was a surprisingly healthy increase of 204k. This makes it the second strongest reading since early 2012, and coming on the back of the GDP figure it helped to spur increased demand for US dollars. The report did show the unemployment rate ticked up from 7.2% to 7.3% but this was a direct result of the Government shutdown. The furloughed workers were able to apply for unemployment benefits during those two weeks off work, and so the unemployment rate should correct lower next month. The result has also increased chatter about a potential Fed tapering in December, although this is still only a remote possibility. A US holiday yesterday means it has been a quiet start to the week but over the coming days we have trade balance data, a speech from Bernanke, and we will also hear from incoming Fed Chairman Janet Yellen when she testifies on monetary policy before the senate banking committee.

Last week was dominated by the European Central Bank’s (ECB) decision to cut rates. The risk was always there after very soft inflation the week before. However, many in the market were only expecting a signal from President Draghi that a cut would follow in the December meeting, so the decision came as a bit of a surprise. Over the weekend we have seen comments from an ECB board member who said they can still cut interest rates further if needed and provide more liquidity to the Euro-zone banking system should it be required. The markets suspect any further action will likely take the form of adding liquidity with another LTRO (long term refinancing operation). A recent survey of economists showed 70% expect a new three year LTRO in the first quarter of 2014. Pressure on the Euro was kept up over the weekend after Standard and Poor’s rating agency downgraded France’s long term rating from AA+ to AA. S&P said the rating is constrained by the governments elevated spending and tax levels, and it’s high and still rising debt burden. This week we get GDP readings from France, Germany, and Italy, along with Euro-zone industrial production and a second reading of inflation.

United Kingdom
Last week was a good one for UK data with only the trade balance missing expectations when it was released on Friday evening. Earlier in the week we has good readings from both the construction and services PMI’s, as well as solid results from industrial and manufacturing production data. At this point it seems the only negative for the UK economy is that its fortunes are so closely tied to those of Europe. There is however, growing concern that lessons from the past have not been learnt, and that the UK housing market could once again be a cause for concern. Prime Minister David Cameron is having to defend accusations that the governments ‘help to buy’ scheme is only helping to inflate another property bubble. The PM says it’s all about helping hard working people get on the first rung of the property ladder, but last month alone 2000 new mortgages were issued under the scheme. This week will be another interesting one for the UK with inflation, employment, and retail sales all set for release. We also get the Bank of England’s (BOE’s) inflation report and a speech from Governor Carney to digest.

The only data out of Japan recently has been the current account figures released yesterday. That result highlighted the structural issues a weaker Yen and massive energy imports are causing. The seasonally adjusted result of -1.3 trillion represents a near record low for data stretching back to 1996. In the last hour we have seen the release of the tertiary industry activity index which came in below expectations at -0.2%. This is considered a lead indicator of economic health and the negative result has weighed on the Yen somewhat. Later this week we get consumer confidence, core machinery orders, and GDP data to digest.

Data out of Canada last week will have done nothing to influence the Central Banks neutral stance. The highlight was the Ivey PMI (a leading indicator of economic health) which came in well above expectation, however building consents were negative and employment data of Friday was largely uninspiring. Employment rose by 13,200 in October which was just a touch above expectation, but overall a very modest result. The unemployment rate remained the same as last month at 6.9% which is the lowest level since 2008. A Canadian holiday today means we have a very quiet week data wise with only the trade balance and manufacturing sales out towards the end of the week.

Major Announcements last week:
  • Australian Retail Sales +.8% vs +.5% expected
  • UK Construction PMI 59.4 vs 58.9 expected
  • RBA leaves monetary policy unchanged as expected
  • UK Services PMI 62.5 vs 60.4 expected
  • US Non-Manufacturing ISM 55.4 vs 54.2 expected
  • NZ Employment change +1.2% vs +.5% expected
  • Canadian Ivey PMI 62.8 vs 54.7 expected
  • Australian Employment change 1.1k vs 10.3k expected
  • BOE leaves monetary policy unchanged as expected
  • ECB curs “refi” rate by 25pts to .25% unexpectedly
  • US Advanced GDP 2.8% vs 2.0% expected
  • Canadian Employment growth 13.2k vs 12.7k expected
  • US employment growth 204k vs 121k expected
  • Chinese Inflation 3.2% vs 3.3% expected
  • Chinese Industrial Production 10.3% vs 10.1% expected