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Major Announcements last week:· Australian Retail Sales .2% vs .4% expected
· Canadian Building Permits 2.4% vs 2.9% expected
· Australian Unemployment rate 5.0% , as expected
· UK Manufacturing Production -.1% vs +.5% expected
· UK cash rate unchanged, and no further Q.E , as expected
· US Weekly Jobless Claims fall by 38k to 383k, lowest since the Lehman Brothers collapse
· China raises core interest rate by 25pts for the 3rd time to curb inflation
· NZ January Retail Sales -1.1% vs -0.3% expected (released today)
Market Overview:Last week currency markets lacked strong direction, as USD fortunes were mixed. This saw most currencies well contained within recent ranges. The USD was under pressure for most of the week, as the EURO and GBP found reasonable support, with noted central bank demand. YEN was also in demand, as stories circulated of large unwinding of “out of the money importer hedge positions”. This unwinding explained the lack of appreciation in the USD/YEN rate, that is normally seen as interest rates (bond yields) rise in the US. End of the week news of Egypt’s Mubarak steeping down, saw “risk assets” (those currencies that do well when things look positive e.g. NZD and AUD) rally, the Dow and S&P 500 finish on levels last seen in mid-2008, and oil drop to a ten-week low.
Longer dated interest rates have moved higher in the US braking through high levels seen mid December. The driver for the rise is the stronger economic outlook in the US. US data remains mostly upbeat across the board. Of note however, was the fact US Fed Chair did not alter his comments of wanting to see sustained job creation before accepting the recovery was truly established. But with the Unemployment rate having dropped and sentiment surveys pointing towards a rosier outlook, the chances of further US Quantitative Easing programs (basically the printing on money aimed at jump starting economic growth), are probably now close to zero. Market realisation of this, and associated higher US interest rates, saw the USD regain lost ground in a reasonably quick manner towards the end of the week. Another positive factor was the sharp decline in Weekly jobless claims numbers -38k to 383k and the lowest number since before the Lehman Brothers collapse.
In the UK the Bank of England (BoE) left the cash rate unchanged, which was widely expected. However GBP did strengthen and Friday nights producer price index rose much more sharply than expected in January. Therefore speculation is now that the BoE will be forced to raise interest rates before the year end. The Monetary Policy Committee meeting minutes in a couple of weeks will be widely watched to see if the number of votes for a raise in the cash rate has increased. The week ahead sees UK CPI on Tuesday and another inflation report on Wednesday. With large inflationary pressure evident, any large increase will add further pressure for the BoE to lift rate. Retail Sales on Friday will also be watched closely for a gauge of how consumer sentiment is developing. Some commentators are picking the GBP to be the best performing currency strength wise in 2011. These building inflationary pressures are perhaps beginning to confirm their view, at least initially.
In Europe the talk was around the fact that German Bundesbank head Alex Weber would not be standing for the soon to be vacant position of head of the European Central Bank (ECB). Many commentators have long held the view Weber was the logical choice to take over from Trichet when his tenure ends shortly. The fact Weber is known for being extremely tough on inflation, had given markets confidence the cash rate would soon be higher, if inflationary pressure remained. Without Weber in the race for the top job, some of the EURO weakness can be attributed to this news. Weaker second tier data released in the manufacturing and industrial sectors also added to the weakening bias. The week ahead is light on top tier data with just German GDP and economic sentiment due Tuesday to draw any attention. Remember the peripheral Eurozone member Govt debt issues are never too far from the surface. Friday saw a sharp blowout in the cost of Govt debt funding for Portugal. So this issue may return to the spotlight again this week.
In Australia the weaker than expected retail sales numbers for December hardly caused a ripple, but points towards a two speed economy with the mining/energy sectors proving the driver of growth while the remainder of the domestic economy slows. The has not gone unnoticed by New Zealand politicians either. Prime Minister John Key and Finance Minister Bill English both referring to the situation at different times during the week. With 40% of New Zealand’s exports going to Australia, the last thing New Zealand needs at this stage of its faltering recovery, is a slowing Australian market. The Employment numbers in Australia remain strong with 24.5k jobs added and the Unemployment rate stable at a low 5%.
In New Zealand the December retail sales number released today disappointed at -1.1% versus expectation of -0.3%. NZ producer price index on Thursday, will provide further indication of pricing of inflationary pressures at the wholesale level.
In China the core interest rate was raised again for the third time by 25pts, in a further attempt to curb inflationary pressure. No major surprise to the markets, as pressures are likely to persist, so further measures should be expected. As noted previously, these will impact over the medium term on the demand for Australian exports, if China is unable to get inflation under control. The longer it remains untamed, the faster they will have to put the brakes on the growth. Should we see a forced slow down in China through 2011-12, the Australian dollar will be impacted more so than the soft commodity exporting NZD.