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Major Announcements last week:
Canadian GDP +.4% vs +.2% expected
NZ Labour Cost Index +.6% vs +.5% expected
NZ Building Consents plummet to record low, -16% from a year ago
Australian cash rate unchanged at 4.75%
RBA statement slightly more upbeat than market expected
UK House Prices better than expected
UK manufacturing numbers better than expected
US Manufacturing numbers better than expected
NZ Employment growth slumps, Unemployment climbs to 6.8%
Less “hawkish” than expected ECB, sees investors sell EURO
US Fed sees economy improving but remains cautious
US Employment numbers affected by weather, Unemployment rate falls to 9%
Over the last week we saw a continuation of market volatility, but for the most part the volatility was contained in fairly familiar ranges. Geo-political tensions and massive weather systems added to the complex mix of economic data as the western economies fight their way towards more buoyant economic growth. For the most part we saw more encouraging data released. Inflationary pressure is building in many parts around the globe, and we can expect this theme to continue into the medium term. Both Chinese and Indian officials have made comments regarding measures they will have to undertake if these pressures continue.
In the US we are starting to see more broad based signs of a pickup in the economy. Latest data from the housing, services and manufacturing sectors have all been encouraging. Last Friday’s Employment number was muddied by the extreme weather experienced over throughout January. The number of jobs added to payrolls disappointing at just +36k, while the Unemployment rate dropped to 9.0% from 9.4%. The Federal Reserve will be very happy to see the Unemployment rate dropping. Should this be sustained the Quantitative Easing program will come under the spotlight as the current round is due to end in June. US yields rose after the Unemployment number on Friday, with the bench mark 10 Year closing at 3.65%, after it broke through the December peak of 3.60%. These higher bond yields should prove to be USD positive in the shorter term if they can be sustained.
The data flow coming from the UK was also positive, with housing, manufacturing and services numbers all beating expectations. Real pressure looks to be building for the Bank of England (BoE) to start raising its cash rate. Inflationary pressure gaining momentum and the pickup in the economic numbers are being balanced by pending cuts in Government spending. The cuts to Government spending will certainly have an impact on growth. Timing will be the key for the BoE Monetary Policy Committee in their decision making.
In Europe the data was a little more mixed, although most of it was second tier. Of note was the European Central Bank (ECB) statement from ECB head Trichet following the decision to leave the cash rate unchanged. The terminology was far less “hawkish” on inflation than the market expected and this caught investors a little off guard. It appears that he making use of his time to “jaw bone” the market. A month or so ago when the EURO was under real pressure, and the Govt debt fears were high, he came out with fighting talk on inflation and this stopped the wave of EURO selling. Since then the EURO has been performing strongly, and I think the exporting sector would have started to feel the pressure had this momentum continued. A few timely “less hawkish” comments lowered the cash rate expectations from the ECB, and this saw the EURO soften. With Germany being Europe’s power house exporter, and also the largest contributor to the European Financial Stability Facility, it is easy to see why the head of the ECB would not want the EURO to gain strength too quickly.
The cyclone activity in Australia has done nothing to hinder the performance of the Australian dollar over the last week. The main focus was the Reserve Bank of Australia’s (RBA) statement accompanying its unchanged decision on its cash rate. The seemingly benign statement was well received by the market and there has been strong demand for AUD against all currencies.
In New Zealand the main focus was on the disappointing Employment numbers which saw the Unemployment rate climb to 6.8% from the previous 6.4%. This has seen the NZD retreat from its previously lofty levels against most currencies. The factor that remains supporting it is its close correlation to the buoyant AUD. As both the hard and soft commodity markets remain at, or close to record highs, the NZD will remain in demand from offshore investors, much to the frustration of the moribund domestic economy. With necessary deleveraging occurring in many sectors of the domestic economy, the slow emergence from the economic trough continues.