Last week was an interesting one for the wider financial markets. The equity markets struggled with weaker US corporate earnings and this balanced some better economic news from China, the US and the UK. In Europe the situation remains uncomfortable, with economic indicators remaining under pressure as the wide spread austerity curbs any real chance of a return to growth in the short term. The Japanese economy remains in the spotlight as markets await what further measures the Bank of Japan (BOJ) will introduce at this week's monetary policy meeting. Concerns in Canada remain about the sustainability of its recovery, and the exposure of local banks to its inflated property market. Australian inflation numbers have moderated calls for more extensive easing to the cash rate. And the new Reserve Bank of New Zealand (RBNZ) Governor made a balanced assessment of the domestic situation in his first public address.
Last week’s lead in Australia was provided by the materially higher than expected 3rd quarter inflation numbers. The interest rate market has moved to rule out any chance of more than the expected 25pts of interest rate easing to come before the end of 2012. This paring back of expectations provided the Australian dollar with periods of solid demand. The apparent stabilisation of the economic outlook in China has also help bolster the Australian dollar. This week sees a relatively quiet week for Australian economic data. Wednesday sees the release of the latest building approvals numbers and the official Chinese manufacturing numbers on Thursday will also be of note.
Last week in New Zealand was all about the RBNZ and its new Governor, Graeme Wheeler. The brief statement accompanying the unchanged cash rate at the monetary policy announcement made no mentions of any potential cuts to the cash rate following the low inflation number from the previous week. Then came Governor Wheeler’s first public address. This proved to be a very balanced assessment of monetary policy in New Zealand. He touched on the highly topical subject of the high NZ dollar and the possibility of intervention. Reassuringly, he seems likely to continue with the measured approach shown by previous Governor Bollard. Overall the market should expect little chance of a change to the cash rate in the short term. With the 2.50% cash rate at post earthquake emergency lows, there is room to ease further if needed. But with Asian economic indicators stabilising, and the structural progress that has been made in Europe, the chances of further easing remain low. There is little in the way of economic data set for release in New Zealand this week.
Economic indicators continue to be mainly on the improvement side in the US. Last week saw better than expected new home sales, durable goods orders and advance 3rd quarter GDP numbers. Some of the detail of these numbers points towards fragmented progress, but this is to be expected. The GDP number was boosted by Government spending, and obviously this cannot be expected to continue into 2013, as the “fiscal cliff” approaches at the end of the year. The consumer spending recovery continues and this is in line with the recent improvement in sentiment surveys. The corporate earnings season has disappointed, and this undermined the stock market that saw a 1.5% decline for the week. The election continues to provide the major focus in the coming week, along with the latest employment results on Friday.
It was a mixed week for Europe last week. The latest manufacturing and services numbers both disappointed and point towards on going contraction within the broader economy. Spanish unemployment has hit 25% as the Government continues to stall on its probable approach for funding assistance. The hard path continues for Greece, who have had an extension of time frames accepted to get its debt to GDP ratios in order. This week will see further concentration on Spain as GDP numbers come on Tuesday. IMF warnings on the ability of Portugal to keep up with its bailout targets further clouds the waters in the short term.
The preliminary numbers for the 3rd quarter UK GDP was surprisingly strong at 1.0% (.6% expected). If we see an associated pick up in other indicators, further quantitative easing that has been widely speculated on, will probably be ruled out. The increased economic activity has been attributed to a boost in sentiment following the successful Olympic games and the Bank of England will be hoping this momentum follows through into this 4th quarter. This week sees a relatively light economic calendar in the UK with just manufacturing numbers on Wednesday and construction numbers on Thursday.
The BOJ is the undoubted focus this week in Japan. Tuesday’s meeting is expected to reveal the extent of their latest policy accommodation to try and stimulate their ailing recovery. The BOJ cut its economic assessments for eight out of nine of the regions in their latest quarterly report. Exports have tumbled 10.3% in the year to September, within the wider Asian economy struggling to counter weak growth within key western markets. Ratings agency S&P made further harsh assessments of the Japanese Governments fiscal position, stating “Japan’s deficits to remain high for a number of years” , and with this, Japans ability to deal with this continues to diminish.
The Bank of Canada (BOC) was the focus last week, and the market has been quick to reverse expectations of a cash rate rise at some stage next year. This turn around in sentiment has been quick and the statement accompanying the monetary policy was more balanced that the market expected. However, the BOC did cut its growth forecasts for the remainder of 2012 and 2013, along with stating the case for a cash rate rise was less imminent that in previous months. Just to round out a particularly hard week for the Canadian dollar, ratings agency Moodys placed six Canadian banks on review for downgrade, after assessing their exposure to consumer credit and the inflated Canadian housing market. This week sees another important week for the Canadian economy with GDP on Wednesday, and the last employment numbers on Friday to round out the week.
Major Announcements last week:
- Canadian Retail Sales +.4% vs +.3% expected
- Bank of Canada keeps cash rate unchanged at 1.0%
- Australian Q3 Inflation 1.4% vs .9% expected
- HSBC Chinese Manufacturing 49.1 vs 47.9 previous
- European Manufacturing 43.5 vs 43.9 expected
- US FED leave monetary policy unchanged
- RBNZ leaves monetary policy unchanged
- Prelim UK Q3 GDP 1.0% vs .6% expected
- US Durable Goods orders 2.0% vs .8% expected
- US advanced Q3 GDP 2.0% vs 1.9% expected