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By Sam Coxhead of www.directfx.co.nz
Last week saw a continuation of the major themes that have dominated the wider financial markets for 2012. Uncertainty in Europe looks to be re-emerging as political instability in Italy pushes debt funding rates higher for the non Franco-German governments. The major central banks look to continue their efforts to debase the value of their currencies. Expect further quantitative easing (QE: essentially the electronic printing of money, to stimulate economic growth) from the US FED this week, the Bank of Japan (BOJ) next week, the Bank of England (BOE) next year, and a lower cash rate from the European Central Bank (ECB) in the coming months. The fiscal negotiations are on going in the US. The lack of progress is starting to impact in the economy as evidence of lower investment and falling consumer sentiment emerges. The improved outlook in China has continued and this bodes well for intra Asian trade in particular. The Australian and New Zealand dollars remain in demand as they look like finishing 2012 towards the upper end of their well established ranges. Conceivably the direction less nature of the foreign exchange markets will continue into the opening months of 2013, as the opposing forces of European/US uncertainty and the massive stimulatory efforts from the central banks, continue to battle for the upper hand.
The last week has been a very busy and interesting one for the Australian economy. Building approval and retail sales numbers came in below analyst’s expectations. But the more important numbers of GDP and employment did not disappoint. GDP was close to expectation at a relatively healthy .5%, and the Australian employment market continued to show its strength with the unemployment rate falling from 5.4 to 5.2%. The Reserve Bank of Australia (RBA) matched expectations with a .25% cut to a new cash rate of 3.00%. However further policy accommodation is not guaranteed and the market will have to digest the future economic data as it comes to light, to create expectations of direction from the RBA. Adding to positive sentiment will be the latest monthly data from China over the weekend showing industrial production and retail sales both ahead of forecasts in November. This week little in the way of domestic focus in Australia, so expect the wider markets sentiment to provide the lead into the end of 2012. Next week the RBA monetary policy meeting minutes will be released on Tuesday, but should not be of material impact.
There was singular focus for the NZ economy last week. The first monetary policy statement from new RBNZ Governor Wheeler provided the expected unchanged cash rate. However, the very neutral and balanced statement certainly caught some of the market unaware. The scramble to buy NZ dollars following the statement was somewhat surprising. Investors looking for the RBNZ to signal a bias towards an interest rate easing, provided much of the initial demand. Current RBNZ projections see an unchanged cash rate of 2.50% for all of 2013. This week sees limited focus coming from the domestic economy. Next week finally sees the release of the 3rd quarter current account and GDP numbers on Wednesday and Thursday respectively. These provide the remaining focus for the year. Also of note has been Fonterra increased pay out forecast. The 2012/13 season expectations are now lifted to the 5.50 NZD farm gate pay out. This pay out lift has been on the cards since the improved Global Dairy Trade auctions over the past few months, but should provide an increased boost to the economy none the less.
The United States
The mixed outlook continued in the US economy last week. With a dark back drop of stagnating fiscal cliff negotiations the data flow was decidedly mixed. Employment, services and factory orders numbers beat expectations, while consumer sentiment and manufacturing numbers underperformed. The FED look likely to roll over to a new program of monetary easing at this week’s monetary policy announcement. Also of interest this week will be retail sales numbers, inflation and industrial production numbers. The fiscal negotiations will also remain at the very fore front of market focus. Last week’s plummet in the consumer sentiment is just an indication of the destructive nature of the uncertainty this situation promotes. Expect further brinkmanship from all parties on this issue, to the detriment of the wider US, and global economies.
The United Kingdom
The mixture of good and bad news for the UK economy continued last week. Manufacturing numbers were positive, but the construction and services sector remain under pressure. Finance Minister Osbourne released the latest Treasury forecasts for growth. 2012 growth expectations have been lowered to -.1% from the previous +.8% forecast, and expectation for 2013 and 2014 have been revised down also. As expected the BOE left monetary policy unchanged at their meeting last week, although further stimulation cannot be ruled out in the first half of 2013. The BOE monetary policy meeting minutes next week will likely shed further light on this. This week sees a relatively quiet economic calendar with the employment numbers on Wednesday providing the primary focus.
It has been an intense last week in Europe. The economic data was again mixed with reasonable manufacturing numbers being tempered by worse than expected retail sales data. Spanish efforts to meet deficit targets look to be have been in vain, and this saw bond yield increase. The ECB left monetary policy unchanged for the time being, but the prospect of lower interest rates remains real as serious debate was had on this subject. The flair up in Italian politics over the weekend has further increased uncertainty. Anti-austerity policy backers are gaining momentum in the polls and interim PM Monti has vowed to resign and cause early elections once his budget policies are passed early in the new year. Should Monti decide not to run for office, the increased uncertainty about the austerity program would likely see increasing bond yields for Italy, at a time that these could cause some major damage. It is reasonable to expect this to be major theme in 2013. Economic sentiment numbers, inflation and further manufacturing data provide the data focus for this week.
The build up to the 16 December elections remains intense in Japan. The YEN has remained under pressure for the most part as the LDP continue to lead the polls. Adding to the YEN weakness is speculation the BOJ will again add further stimulation to the economy at next week’s meeting. Reuters have anticipated the stimulation will be to the tune of ten trillion YEN. Yesterday saw the final GDP numbers for the 3rd quarter confirmed at -.9%, and interestingly with the second quarter revised down also, the economy finds itself in its fifth recession in the last 15 years. The remainder of the week sees the monthly core-machinery and manufacturing results provide the focus, albeit limited market reaction expected ahead of the election in the weekend.
The BOC left monetary policy unchanged as expected last week. It maintains a mild hiking bias with language such as “some modest withdrawal of stimulus will likely be required”. The economic data was mixed with construction numbers jumping, but the manufacturing index under performing. Of note has been the Government giving the green light for the Chinese investment funds to make a circa 15 billion investment in the Nexen iron sands company. This decision is undoubtedly positive for the CAD, as it removes a significant uncertainty for CAD demand. Next week is a busy one for Canadian economic news with retail sales, inflation and GDP all due for release.
Orinially posted at www.directfx.co.nz