Economies of interest this week : 22 June 2012

By Sam Coxhead of www.directfx.co.nz

The Australian Economy:
This weeks focus for the Australian economy was the release of the previous RBA monetary policy meeting minutes. These reveal the decision to cut 25pts to a cash rate of 3.50% was a line call. The move was not certaint and the decision was made because of the further escalation of concerns in Europe. The overall tone of the meeting minutes were not as “dovish” as widely expected and this has seen the interest rate market push yields higher as a result. Higher yields translate to Australian dollar demand over time. Indirectly of note has been the release of the latest Chinese manufacturing numbers that are at the lowest levels since March 2009 . The index is down from the previous months level of 48.4 to 48.1 this month. Next week is again quiet for Australian economic data, so again the majority of the lead will come from the wider market sentiment.

The US Economy:
Building permit and housing start numbers released earlier this week point towards further consolidation within those markets. The slow recovery in the US residential property market is crucial to the wider economic recovery. The FED monetary policy meeting was as expected. The FED have added to the “Operation Twist” program which aims to cultivate lower long term funding costs. Certainly further quantitative easing (QE) remains a tool at their disposal should the economy see further weakness in the second half of 2012. Overnight housing numbers released show a continued stablisation of housing, but this was tempered by a sharp drop in a manufacturing index which is closely followed by the markets. Next week sees a host of medium tier data due for release. This will add further colour to the outlook for the stuttering US recovery.

The UK Economy:
Inflationary pressure is finally easing in the UK, with the latest CPI number coming under expectation at 2.8%. This will be of welcomed relief to policy makers at the BOE. The BOE monetary policy meeting minutes just released show how close they came to adding to their QE program at the last meeting. It is highly likely that another 50 billion of the QE will be added to the current 325 billion initiative at the next meeting on the 5th July. Retail sales number last night revealed 1.4% increase in spending against an expected 1.1% rise in activity. This surprising number saw a pickup in demand for the Pound Sterling. Next week the final GDP numbers for the first quarter will be released on Thursday and these will be closely watched.

The New Zealand Economy:
The big focus in New Zealand this week has been the release of the first quarter GDP numbers. The strength was surprising at +1.1%, against an expectation of just a .5% rise in activity. The strength was broad based and encouraging, and provides a bit of a buffer for what should be a slower than forecast second half of 2012. Next week the domestic focus comes in the form of the NBNZ Business Confidence number released on Thursday. This will be followed but should be of limited impact for the markets.

The Canadian Economy:
It has been an interesting week for the Canadian economy. Canadian finance officials are increasingly concerned about the residential property market, particularly in the east. The mooting of reduction of the maximum duration of housing loans is being considered as a way to stem the enthusiasm in the market. This would be an alternative to a hike in the cash rate, which would of course be felt across all sectors. Bank of Canada (BOC) Governor Carney also commented that the 2012 growth forecast are likely to be lowered at some point. These comments came as the latest retail sales numbers were softer than expected. Later today the latest inflation numbers will be released and these will again be closely watched. Next week the sole focus will be the monthly GDP numbers on Friday.

The Japanese Economy:
The increasing lip service towards market intervention being paid by Ministry of Finance and Bank of Japan (BOJ) officials has kept YEN watchers busy this week. The latest BOJ rhetoric used words like “bold action” to weaken the YEN, and these statements point towards a commitment to see a weaker YEN no matter what Europe throws up at the market. This week has seen a larger than expected trade deficit announced and now the focus turns towards the retail sales, inflation and industrial production numbers next week.

The European Economy:
The dynamic environment in Europe continues.
Firstly, the downbeat economic data run continues with manufacturing indexes all lower Europe wide. Germany is not immune to the current environment with economic sentiment dramatically lower in May. The EU economic summit next week will be closely watched for any new initiatives.
Secondly, the financial pressure remains elevated and markets volatile. Early in the week the debt markets saw intense pressure. This pressure has eased somewhat on the expectation that Germany will allow the bailout funds to directly purchase stressed debt. Given the size of these combined funds, and their ability to leverage, this would be significant if it eventuates. The banking sector remains under pressure, with Spain officially to lodge for bank sector support next week. Greece’s newly formed government seem poised to request an extension of their bailout maturity terms. This will be interesting to watch at the very least. Germany is unlikely to cede an extension of terms without getting something in return.

Of note :
Moody’s have finally come out and adjusted lower the credit ratings of 15 of the largest banks in the world. British, American and European banks have been involved. These downgrades were flagged earlier in the year, but are still of significance.