3:47 PM (NZT)
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Major Announcements last week:
· UK Inflation 2.8% vs 3.0% expected
· German Economic Sentiment -16.9 vs +3.8 expected
· US Building Permits .78m vs .73m expected
· US FED’s OMC leaves QE unchanged, but extend “Operation Twist”
· NZ 1st
QTR GDP +1.1% vs +.4% expected
· Chinese HSBC Manufacturing Survey 48.1 vs 48.4 previous
· Euro-zone Manufacturing Index 44.8 vs 44.9 expected
· UK Retail Sales +1.4% vs +1.1% expected
· Canadian Retail Sales -.3% vs +.2% expected
· US Philly Fed manufacturing Index -16.6 vs +.7 expected
· German Business Climate Index 105.3 vs 106.1 expected
· Canadian Inflation +.2 vs .3% expected
· EU announce 130billion stimulus plan
· ECB loosen collateral rules to ease bank access to funding
Last week proved to be as interesting as expected. As we move towards another critical time in the EURO’s history, it was announced the EU are to initiate a 130 billion stimulus plan to boost growth. Accompanying this positive news is the not so surprising news that the European Central Bank (ECB) is to loosen its collateral rules to enable banks to gain further access to funding. This week’s EU summit provides further room for the pushing of initiatives to help stablise the EURO. Global growth is looking sluggish and further downward adjustments to forecast can be expected. Market conditions have been difficult in the last week or so. Heightened uncertainty pushing levels of liquidity lower. Lower levels of liquidity often mean sharper than usual moves can frequently happen, and we expect these conditions to continue this week.
Last week the latest Reserve Bank of Australia (RBA) monetary policy meeting minutes revealed a less “dovish” tone than the market expected. Further easing to the cash rate is less certain than the market had priced, albeit moves will be reliant on the economic data flow in the short term. Of interest is further evidence of central bank diversification into the AUD and Australian bonds. Reuters sight Russia as the latest to be buying Australian Government bonds. With little in the way of top tier economic data in Australia this week, expect the lead to again come from the wider market appetite for risk, which will be predominantly driven by progress in Europe.
The top news in New Zealand last week was the surprisingly strong 1st
quarter GDP number. The strength in the number was reasonably broad based and saw many economists scrambling to explain it. This week is relatively quiet on the NZ economic data calendar, the focus will be the monthly release of the NBNZ Business Confidence Survey on Wednesday. The overriding lead will no doubt come from events in Europe and any progress made at the EU summit.
The US economy has certainly hit a soft patch of economic data recently. Although housing numbers are holding up, labour market indicators have softened and manufacturing seems to have weakened also in the 2nd
quarter. The FED extended their initiative keep long term interest rates low, but resisted further full blown quantitative easing (QE) for the time being. This week sees consumer confidence, durable goods sales, home sales and the final GDP numbers for the 1st
quarter due for release. Europe will also continue to be a primary driver of sentiment for the wider market, and will certainly affect demand for US dollars. Any surprising progress at the EU summit should see the USD under a little pressure, much to the pleasure of the US export sector.
It has been an interesting last week or so in Europe. The indicators have improved, but the EURO remains under pressure. The introduction of the 130 billion EURO stimulation program is positive, but will not be of immediate impact. The ECB loosening of collateral rules for banks borrowing from the ECB had been flagged, but was well received by the market none the less. It is interesting that the EURO has not seen any material gains on this news. Adding to the intrigue is the move in the Spanish debt markets back towards less dire funding levels. This should also be EURO positive. It appears the EURO is going to continue to see material gains and capital flight from Europe continues at breakneck speed. The EU summit is undoubtedly the focus for this week. Expect the emanating headlines to drive sharp moves with the lower levels of liquidity currently being seen across most markets.
Inflationary pressure is finally starting to ease in the UK. This will be reassuring to policy makers, who will now be more happy to provide further monetary easing if required. The latest Bank of England (BOE) monetary policy meeting minutes illustrate how close they came to acting at their latest meeting. It is highly likely we will see further QE in the coming months and this may hamper any material Pound Sterling strength in the short term. This week sees the latest current account data, final Q1 GDP reading and a speech from BOE Governor King as the focus.
The Japanese Yen market remains tense as the threat of further intervention from Japanese finance officials remains real. The YEN has softened a little of late, but further weakness will have to be seen to take the “bold action” intervention risk out of the market. Unsurprisingly last week’s trade deficit was wider than forecast reiterating what officials have been saying about the harmful effect of the strong YEN. This week sees the focus on the release of the retail sales, inflation and industrial production numbers.
Canadian officials continue to voice their concern at the hot residential property market in parts of Canada. Bank of Canada (BOC) staff have started to talk of alternative strategies aimed at cooling the property sector without curbing growth in other parts of the economy. Interestingly the BOC growth forecast will be likely revised down, as the economic recovery in the US slows. Softer inflationary pressure mirrors lower activity in the retail sector than what was expected. This week’s focus comes in the form of the monthly GDP number, which will be released on Friday.