We’ve seen some mixed data from Australia this week. Consumer Confidence made a good jump from 112.50 to 115.10, with the positive employment report of the previous week sighed as a factor. On the other hand we saw some soft inflation figures for the second quarter. Headline inflation came in at just 0.2% vs the expectation of 0.4%. The negative impact of the headline result was tempered by the RBA’s preferred inflation measure, the trimmed mean, which came in on expectation at 0.5%. Reserve Bank Governor Lowe was on the wires this week saying the central scenario remains for a gradual rise in underlying inflation.
He added that stability of unemployment has allowed the bank to be patient and that the slow rate of wage growth is likely to remain for a while. The Australian dollar has made gains this week, driven largely on the back of broad based USD weakness however. Next week we have the RBA rate meeting to digest along with the trade balance and retails sales data.
The RBNZ Assistant Governor John McDermott gave a speech this week which seemed to suggest the central bank will be on hold for some time yet. He said the RBNZ’s estimate of core inflation is running at about 1.4% and has broadly tracked sideways over the past year. He also said that NZ’s neutral rate has been falling and is now estimated at 3.5%. The ‘neutral rate’ is the interest rate which the bank believes is neither stimulatory nor constraining to the economy. Before the global financial crisis, the neutral rate would have been around 4.5%. If the neutral rate is falling, that means that current policy settings are less stimulatory than previously, meaning there’s less urgency to hike rates anytime soon. Some forecasters are now suggesting the RBNZ will be on hold until well into 2019. McDermott also said a lower New Zealand dollar would help with rebalancing in the economy, but by the price action this week, no one paid attention to that particular comment. In other news, NZ’s trade balance for June came in much better than forecast at 242m. Expectation was for a 150m surplus. We also had Fonterra lift its farm-gate milk price forecast up a couple of cents to NZ$6.75/kgms. They also announced a forecast earnings per share in the range of 45 to 55 cents. Next week to draw focus we have ANZ Business Confidence, another dairy auction, and NZ employment data.
It’s been another week of broad based USD losses. This time most of the blame will be put on the Fed as the United States dollar got sold heavily in the wake of their meeting. The move seemed a little drastic considering there was no significant change in tone from the central bank. Sure, they acknowledged recent inflation weakness, but they also gave the best signal yet that balance sheet normalisation is likely to begin after the September meeting. Overall the statement was pretty balanced. The reality is the Fed are attempting to normalize policy as a strong labour market and roaring financial assets give it a window to do so. They are not normalizing policy because inflation is soaring, we’ve all known this and yesterday’s meeting doesn’t change that. In this context the USD weakness seems a little undeserved. But markets can act irrationally at times and with the recent trend toward a declining USD, there wasn’t anything in the statement to turn that trend around. The Trump administration had a small win this week with a motion to proceed with the health care debate passing in the Senate. It’s largely just a procedural vote however and no one is overly confident of any bills actually getting passed in relation to health care any time soon. Last night we got the latest reading of Durable Goods orders. While the headline result came in at the strongest reading since June 2014, at +6.5%, the core reading was only up +0.2%. That’s because the headline result includes aircraft orders which can really screw the monthly numbers. Tonight we have more data to digest with the advance GDP number set for release. The market has revised up its forecasts for GDP in the wake to the strong Durable Goods result and they are now expecting and annualised result of around 3.0% for the quarter.
Data from the United Kingdom hasn’t had much impact this week. We did see the Preliminary reading of GDP for the second quarter, and that came in bang on expectation at 0.3%. That is an increase over the previous quarters 0.2% with growth driven by the service sector, most notably retail distribution, hotels and restaurants. Countering this to a degree was a decline in construction and manufacturing activity. The Bank of England (BOE) meet next week and they are expected to leave interest rates unchanged. We also have the trifecta of PMI’s from the manufacturing, construction and service sectors to digest.
Broad based USD weakness has dominated the market this week and the largely second tier data from Europe hasn’t had much impact. We did see manufacturing and service PMI’s from France and Germany mostly decline a touch, while the German IFO Business Climate index increased again to even healthier levels at 116.00. The ECB’s Mersch was on the wires quoted as saying the ongoing expansion in the euro area provides confidence, that euro area growth has improved but inflation is lagging, and that the ECB must reconsider policy settings with deflation risk now gone. He added he agrees with Germany’s Weidmann who said it’s time to slowly get off the gas. His comments only served to help support the Euro.
There has been little data of note so far this week from Japan. In the next hour or so however we will get a raft of releases including household spending, inflation, unemployment and retail sales. The Bank of Japan Deputy Governor Nakaso was on the wires quoted as saying there is still a long way to go to meet the 2% inflation target. He added that the bank will pursue the current monetary easing until they meet the price stability target and that Japan’s economy is expanding moderately, supported by overseas economies and increasing domestic demand. All of this is pretty much the standard stuff we hear from Governor Kuroda.
It’s been a quiet week on the economic data front from Canada this week. The only result of note so far has been Wholesale Sales data which came in much better than forecast at 0.9%. The market had been expecting a result around 0.5%. Tonight we get the monthly GDP data and expectations are for a gain of 0.2%. Broadly speaking the Canadian dollar has had a solid week supported by the Bank of Canada’s hawkish stance, improving oil prices and a very weak USD.