Economies of interest this week : 18 May 2012

Friday 18 May 2012, 4:11PM
By Direct FX

By Sam Coxhead of

The Australian Economy:

It has been a relatively quiet week for action in the Australian economy. The focus was the release of the Reserve Bank of Australia (RBA) monetary policy meeting minutes on Tuesday. These minutes reveal the impetus behind the larger than expected cut to the cash rate from the RBA. There appears to be a battle with the banks over margins. The banks are claiming that wholesale funding rates have increased to an extent where they are not able to pass on fully the cuts in the cash rate from the RBA. Ironically this comes as the same banks announce record profits. At any rate, the 50 cut has had the effect of a cut of just over 25pts, in terms of the benefit to borrowers. The global commodity prices are again weaker this week, which in turn will effect mining exports overtime. Next week sees an empty economic calendar, so expect the wider market appetite for risk, or lack of, to be the primary driver the AUD sentiment.

The US Economy:
The economic data in the US has been mixed again this week. This mixed performance is relatively good on a global scale , considering the weakness being seen in Europe and the UK. The retail sales numbers were slightly below expectation, and inflation was as expected and remains a non issue for policy makers currently. Further signs that the housing market has at least stablised are encouraging, and housing starts were even better than expected. The Federal Reserve (FED) monetary policy meeting minutes were as expected and remains committed to lower interest rates for 2012 and probably further. Interestingly as the global outlook has deteriorated the longer end interest rates in the US have pushed to record lows this week , on the back of the safe haven bid for US debt. This move in rates has underscored the demand for US dollars. The manufacturing numbers released overnight were very weak, and this will be closely watched in the coming weeks to ascertain the full extent of weakness in the manufacturing sector. Next week is relatively light in terms of economic data, with further housing numbers and durable goods (large ticket items) providing the primary focus.

The UK Economy:
It has been a relatively quiet week in the UK economy. Unemployment claim numbers were encouraging as they dropped by 13.7k when a small rise was expected. In the Bank of England’s (BOE) inflation report the central bank made a candid assessment of the state of the economy. They pointed towards unusually uncertain growth prospects, thanks to the continuing turmoil in continental Europe. If the crisis in Europe escalate, as it increasingly looks likely, further quantitative easing is not out of the question to help the UK economy survive. Next week sees the release of inflation, retail sales and revised GDP numbers for the 1st quarter. Also being released are the BOE monetary policy meeting minutes, albeit these should not be too surprising given this week opportunity to communicate for the BOE.

The New Zealand Economy:
The NZ economy has undoubtedly going through a soft patch in the first quarter of 2012. Retail sales numbers released on Monday reveal a 1.5% decline in sales as the sector corrects following the growth it saw from the Rugby World cup in the second half of 2011. Adding to the clouded outlook was another disappointing result for the latest Fonterra diary auctions. Prices were lower again, this time by a whopping 6.4% in trade weighted terms. Payout projections have been appropriately lowered, and this will materially affect parts of the agricultural economy in the coming quarters. Next week is again light on economic data with just the quarterly RBNZ inflation expectations survey and the annual budget release on the cards, both of which will be of limited impact. The export sector will be very excited with the heavy nature of the NZD across the board. Of note, the expectations of an easing in the cash rate from the RBNZ have lowered this week, and further weakness from the NZD will again lower expectations.

The Canadian Economy:
The Canadian economy has had very little news so far this week. Comments from the Bank of Canada stated their concern over developments in Europe, and nervousness surrounding the banking sector. Later on today the monthly inflation numbers are due for release, but these will be of limited impact. Next week the focus is on Thursdays release of the retail sales numbers.

The Japanese Economy:
The highlight of this week has been the better than expected GDP numbers for Japan. These will be of encouragement to policy makers, as the strength was provided by the export sector. Next weeks’ Bank of Japan (BOJ) monetary policy meeting now dominates the landscape. The YEN demand has continued this week, as the uncertainty spirals in Europe. Finance officials and the BOJ will be watching developments very closely as the YEN strength will starve any growth overtime.

The European Economy:
The slow moving train wreck that is the European debt crisis may have actually gather speed this week. Fear of banks runs in not only Greece but Spain also have added to the tensions. Political issues are compounding financial and economic issues. Greece has another election  scheduled for June and have interim leadership in place. This next election will likely be a proxy for Euro-zone membership. On the economic front this week, the GDP numbers were better than expected thanks to activity in Germany. Inflation remains somewhat tame at 2.6%, but concerns were raised as economic sentiment numbers in Germany plunged. Manufacturing and services dominate the data focus next week, but in reality, the focus will remains on the peripheral debt markets and the liquidity of banks. Moody’s downgraded 16 banks in Spain last in the US session just to compound concerns. Somewhat immaterially Fitch have downgraded Greece to one notch above default. The ongoing viability of the Euro-zone is again being debated, expect negative sentiment to continue, and further measures from various central banks cannot be ruled out in the coming months.


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