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Major Announcements last week:
· Chinese Trade Balance +26.7 Billion vs +18.9B expected
· German Constitutional Court rules in favour of ESM participation
· UK Unemployment claims -15k vs +.1k expected
· RBNZ leaves monetary policy unchanged
· US Fed embarks on aggressive QE3
· US Inflation +.1% vs +.2% expected
· US Retail Sales +.8% vs +.7% expected
· US Consumer Sentiment 79.2 vs 74.1 expected
· US credit rating downgrade from Egan Jones from –AA to AA
Last week in the financial markets was both interesting and somewhat surprising. Risk assets such as the AUD and NZD saw steady demand, as positive developments in Europe coupled with decisive action from the US Federal Reserve (FED), to improve sentiment. Certainly the FED have targeted the stubbornly low employment growth rate and will aggressively use policy to try and bolster the US employment market. Interestingly the EURO and Pound Sterling saw increased demand throughout Fridays offshore session, while the Australasian currencies lagged. The Bank of Japan (BOJ) announce monetary policy this week, and look poised to join the FED with further efforts to stimulate their economy. The US dollar has fallen by over six percent in the last two months, as the expectation of last week’s FED decision grew. This fact will not be lost on the BOJ decision makers as they contemplate the stubbornly high level of the YEN. The Bank of England (BOE) are becoming increasingly topical. The market now expects additional QE measure to be forth coming at their November monetary policy announcement. With most central bank monetary policy settings taken care of, the markets focus will return to the economic data. Indications are that the softer tone of the 2nd
quarter globally, has certainly continued into the 3rd. Monetary policy adjustments take time to filter through, and this means there are likely to be some tough indicators to feature in the coming months. The opposing pressures of weak global growth indicators, and widespread monetary stimulation, will likely continue in the short term.
Last week was relatively quiet for economic data in Australia. Recently under pressure hard commodity markets saw resurgent demand, and the FED’s move to QE3 should provide continued support in the coming months. Lower than expected home loans data points to a further softening in the housing market. Importantly for the Australian economy is the continued soft nature of Chinese economic data. The Chinese trade balance was demonstrably higher than expected last week, as import demand waned. This week the focus will be predominantly on the Tuesday’s release of the Reserve Bank of Australia (RBA) monetary policy meeting minutes. These are important as they help the RBA communicate their thoughts on the economy, and set the tone for future policy decisions. The slowing economy will likely see a reduction in the cash rate before the end of the year. Also of note will be the HSBC Chinese manufacturing data when released on Thursday. China remains very important to the fortunes of the Australian economy, and any additional measures from Chinese authorities to stimulate growth can be viewed as positive for the Australian dollar.
Last week’s focus in the New Zealand economy was the final monetary policy announcement by outgoing Governor Alan Bollard. In his own words he was happy to make a “reassuringly boring” assessment of the economy as he left the cash rate at a record low 2.50%. Monetary policy looks unlikely to require adjustment until well into the second half of 2013 , according to the banks forecasts. The NZ dollar saw strong demand immediately following the FED’s QE3 announcement, but gave back most of the gained ground against most currencies, except the beleaguered US dollar. This week will see the 2nd
quarter GDP number released on Thursday and this provides the weeks highlight. Market expectations are for a modest .3% rise, and reaction should be muted unless the number is materially different to this.
The announcement of the FED’s aggressive QE3 program dominated the focus in the US last week. The US dollar was correspondingly weak, especially against the resurgent EURO and to a lesser extent the Pound Sterling . The labour market is the target for the FED’s open ended policy, and until broad based momentum builds the policy will likely remain in place. Interestingly we saw a mixture of numbers released on Friday. Better than expected retail sales and consumer sentiment were partially offset by a 1.2% fall in industrial production numbers. This week sees the release of building permit, housing and manufacturing numbers. The ongoing reaction to the QE3 program will also be interesting to watch. Ratings agency Egan Jones downgraded the US credit rating from AA- to AA, and this may apply further downside to the US dollar in the near term.
Last week saw further recovery of the EURO. Firstly came the positive news of the German Constitutional approval of participation in the European Stability Mechanism (ESM). This decision was crucial for progress to be made towards this permanent bailout fund. Then came the FED’s aggressive QE3 program and the EURO saw further demand to set four month highs against the US dollar. This week sees a return of focus back to the economic data. Tuesday’s German business sentiment numbers are important for the bell weather economy and will be closely watched. Thursday sees the release of the monthly manufacturing numbers and these will provide the real focus. Ongoing developments with regards to the ESM will also continue to dominate headlines. These measures are very important for the strengthening of the foundations of the Euro-zone, and will be on ongoing importance.
Employment numbers provided the primary focus for the UK economy last week. Lower than expected benefit claims were a positive development. Debate around the upcoming BOE policy meetings has increased. It seems likely the monetary policy committee will embark on further QE. But strong debate surrounds whether or not a lower cash rate should accompany further QE. Unlike their US counterparts, the risk of increased inflationary pressure presents a stumbling block to a lower cash rate. Expect this to be an ongoing debate as we approach the October and then November meetings. The Pound Sterling saw solid demand at times last week. If sentiment in Europe continues to improve, expect to see ongoing demand for the GBP. This week sees the inflation numbers released on Tuesday, BOE monetary meeting minutes on Wednesday, and retail sales on Thursday.
Last week saw a smaller than expected current account number in Japan. This is a direct result of the strong level of the YEN. Last week also saw the final GDP numbers for the 2nd
quarter released and these showed at .2% rise. The YEN will likely be at the center of this week’s BOJ monetary policy announcement. With the FED implementing an aggressive easing policy, the BOJ are likely to follow suit with some further policy accommodation of their own at Wednesday’s meeting. Continued rhetoric from the BOJ and the Ministry of Finance points towards increased likelihood of direct market intervention also. Speculation of this nature saw the YEN underperform on Friday, and this is likely to be a continued theme in the short term.
Last week saw a lower than expected trade balance in Canada. This is further evidence of a slowing global economy as the number was driven by lower export demand. The FED’s aggressive monetary policy easing should be of direct benefit to the closely aligned Canadian economy. This week is another quiet one for Canadian economic data, but the focus comes from the monthly inflation data when released on Friday.