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Economies of Note

Market Overview:

The 2018 year kicked off with the US Non-farm payroll data last Friday. The figure of 148,000 jobs created for the December month was below expectations of 190,000 however the unemployment rate was unchanged at 4.1%, remaining at its lowest level since December 2000 when it stood at 4%. The release saw the USD drop sharply against both the JPY and EUR, while precious metals prices jumped. However, there was relatively little movement in US stock indices with global stock indices continuing to rally as we get further into 2018. Investors continue to show little concern for high valuations (particularly across US equities) or the impact of tighter monetary policy preferring to focus on continued earnings growth and Trump’s business-friendly administration. So currently, leading on from last year, it appears there are few grey clouds to upset the current market exuberance, but it should be remembered that this bull run in equities is well extended, with every additional fresh record close-out bringing the market closer to the inevitable downside correction.

Australia (AUD)

This week is a quiet one for Australia on the data front with the main event being retail sales data on Thursday. Trade figures for November, released on Friday were a little downbeat, coming in below expectations at -628 million vs 915 million exp and compared with 105 million last month. Exports changed 0% month on month, while imports were up 1% m/m. This type of negative deficit is likely to have a negative effect on the GDP figures for Q4. Also of interest was a forecast from the Department of Industry, Innovation and Science released on Monday, suggesting a downbeat outlook for 2018 with billions less in earnings. For the fiscal year end  2017, the resources and energy sector is tipped to see record high exports earnings, up around $214 bio. However, this looks to be short-lived as exports quickly pull back to $200 billion the following 2018/2019 year, the report forecasts. This will make rebalancing the economy away from relying on mining receipts a priority for the government.

New Zealand (NZD)

Not much in the way of releases this week, and many businesses are still closed for the holiday break until next week. The NZD starts the week on a firm footing building on last week’s gains, with sentiment underpinned by the price increases at last week’s Global Dairy auction. With the election well and truly past, sentiment looks to be more positive as initial indications are that the new Government will take its time introducing new policy and that it will not radically change current policy which has been seen to be working in keeping the economic recovery turning over.

United States (USD)

Although last week’s jobs data was below expectations and the December non-manufacturing PMI data was also weaker than expected, momentum in the labour market remains strong with the unemployment rate (4.1%) at levels not seen for 18 years. The equity market remains on a tear, continuing to make new highs, with US equity markets starting the first full week of 2018 heading higher, with technology stocks leading the charge, as investors continue to price in the impact of tax cuts before corporate earnings results start later in the week. Risk assets globally appear to be enjoying a strong start to 2018, and the upcoming outlooks from leading companies may dictate the next move for equity markets. That said however, it should be noted that technical indicators are now stretched, with the market looking overdue for a correction. Economic indicators still remain solid for the Fed rate hike train to continue, with the next widow likely to be the March meeting, the end of January meeting looks too soon, as they will want to see the earlier hikes work through the system before another 0.25% increase.

Europe (EUR)

Eurozone data continues to be strong with retail sales, economic confidence and German manufacturing orders all above expectations. However, the continued lack of clear direction on forming a new German government looks to be still causing some nervousness in the market with EUR strength proving hard to find. ECB minutes of the December meeting are to be released later this week. Figures out late last week showed that Eurozone inflation remains weak, dropping to 1.4% in December, and core inflation ended 2017 where it started, at 0.9% as the economic acceleration is still not translating into rising inflation.

United Kingdom (GBP)

UK PM May announced a Cabinet reshuffle which is likely to dominate UK domestic agenda this week – especially given the lack of key UK data catalysts and potential new Brexit developments. Already the reshuffle has been derived by analysts as a mess, with several ministers refusing to take up positions. Failure to execute her reshuffle plans will leave Mrs May newly weakened in No 10 after starting the week hoping to put her mark back on the Government.  Politics aside, UK data releases continue to be generally solid, with data seen over the Christmas period generally encouraging – upward revisions to exports and investment within the national accounts, a lower current account deficit, business surveys generally remaining upbeat, household borrowing remaining broadly unchanged versus the previous month although evidence has been mixed on retail sales. Providing economic data continues along those lines, it looks as if the Bank of England will once again show inflation well above its target in its upcoming February Inflation Report. This would indicate multiple rate hikes of 0.25% likely, to bring inflation back to the target zone. Markets are currently only pricing in around two over the next 12 months.

Japan (JPY)

Japanese data continues to remain positive with retail sales, industrial production, housing starts, and construction orders for November all coming in above expectations. Trading was subdued in the Japanese Yen overnight due to a holiday in Japan, but the USD/JPY opens around 113.10 but we look for support at 112.90 to be tested later in the next 24 hours, a break of which could run to 112.60.

Canada (CAD)

It was a tale of two employment reports last Friday with the US Non-farm data slightly disappointing, contrasting with a much better Canadian jobs report. Canada’s data was a lot more impressive, with the unemployment rate sliding to 5.7% from 5.9%, confounding expectations of ticking up to 6.0%. The net change in employment revealed another month of stellar employment gains coming in at 78,600K, fractionally below last month’s 79.5k, but well above expectations of a mere 1k increase. The result was for the CAD to soar, with the USD dropping to 1.2356 on the CAD as market participants raised their bets for a Bank of Canada rate hike at the January gathering.

Major Announcements last week:

• UK Manufacturing PMI 56.3 vs 58.0 expected
• UK Construction PMI 52.2 vs 52.8 expected
• US ISM Manufacturing PMI 59.7 vs 58.1 expected
• UK Services PMI 54.2 vs 54.2 expected
• Australian Trade Balance -0.63b vs 0.55b
• EUR CPI 1.4% vs 1.4% expected
• Canadian Employment Change 78.6k vs 1.8k expected
• Canadian Unemployment Rate 5.7% vs 6.0% expected
• UN Non-Farm Payrolls Change 148k vs 190k expected
• US Unemployment Rate 4.1% vs 4.1% expected
• US ISM Non-Manufacturing PMI 55.9 vs 57.6 expected

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