By Sam Coxhead of www.directfx.co.nz
The Australian Economy:
It has been a very interesting week for the Australian economy. On Tuesday the Reserve Bank of Australia (RBA) cut the cash rate by 25pts, to 3.50%. The accompanying statement noted they see room for further moderation in Chinese growth and further weakness in European growth was likely. Assuming that inflation indicators remain reasonably soft, it is likely that further interest rate cuts, will follow in the coming meetings. Yesterday first quarter GDP numbers was a real surprise. The 1.3% increase in activity in the first quarter, is dramatically higher than the .5% expectation. The strength was driven by increased mining investments and activity in the financial services sector. Today’s employment numbers were stronger than expected with the strength coming from full time jobs and an increased participation rate. Of interest are also comments from Treasurer Swan, that Australia still holds considerable room for fiscal stimulation if required. Next week is quiet for top tier economic data in Australia, so direction will again come from offshore influences.
The US Economy:
It has been a mixed, but interesting week so far in the US. Sluggish factory orders added to the gloomy initial sentiment, before slightly better than expected services ISM number gave the market some well needed positive news. Adding to the risk appetite were comments from US FED member Evans that “extremely strong policy accommodation” was needed. As alluded to in previous commentary, this threat of further QE from the FED remains a valuable tool. Not that it is openly acknowledged, but it is the case especially when attempting to curb US dollar strength, such as we have seen in the last few weeks. Interestingly, UK bank Barclays released a paper early this week anticipating a further 800 billion worth of stimulation from the FED at some stage later this year. FED Chairman Bernanke makes his semi-annual monetary policy assessment on capitol hill later today, and his comments will be closely monitored following those of Evans yesterday. Next week sees the release of the important retail sales, inflation and consumer sentiment numbers, all of which could affect sentiment towards the US dollar.
The UK Economy:
There has been little to report so far in the UK this week. The focus comes later today, with the Bank of England’s (BOE) monetary policy announcement. Expectations have been building that additional quantitative easing (QE), may be announced. It will be interesting to see if any action is forth coming, given that interest rates from one year out, are at or close to record low levels. With the increased QE expectation, the GBP has seen further softening of its price action. Next week sees monthly manufacturing numbers and potentially inflation report hearings.
The New Zealand Economy:
There has been limited NZ economic data this week. The NZ government deficit was slightly lower than expected which is positive. Also of note was the results from the latest bi-monthly Fonterra diary auction that saw a 13.5% bounce in prices fetched from the previous auction. Given that prices slumped over 40% from their peak, this correction will be welcomed by New Zealand’s largest export sector. The RBNZ monetary policy decision is the focus next week, with the market pricing just a 20% chance of a 25pt easing. The statement will be the obvious focus, and the thoughts from Dr Bollard as he heads towards the end of his tenure.
The Canadian Economy:
Building Permits in Canada we released weaker than expected on Tuesday at -5.2% (expecting -.3%). The BOC monetary policy meeting was the primary focus and they left monetary policy unchanged as expected. The statement was fairly similar to the previous one, and this proved to be more upbeat than expected. This leaves the BOC in a position to react either way depending on what course the domestic and global economies take in the second half of 2012. The Canadian government has also made it clear they are in the enviable position of comfortably being able to provide fiscal stimulation, if worse case scenario’s play out on the global stage. Important manufacturing numbers are due later today, and the monthly employment numbers tomorrow. Next week is a quiet one for the Canadian economy, so expect the wider market to provide the lead.
The Japanese Economy:
The Japanese economy has had limited economic data to watch for this week. BOJ and Ministry of Finance officials however have provided further colour. The hard talking rhetoric with regards to curbing the suffocating strength of the Japanese YEN has intensified. Given the global environment the timing of any further intervention will be key. The bounce back in risk appetite this week has reduced some of the pressure in the short term. Current account and final GDP data are due tomorrow and will be of passing interest.
The European Economy:
The European economic and financial situation has become no less complex this week. However some signs of a positive path forward on bank recapitalization has improved sentiment somewhat. The ECB has held monetary policy unchanged, but seemingly remain open to further action. The ECB also seem content to place further pressure on politicians and authorities alike to offer further solutions of their own. Spain look poised to receive some funding assistance in the near future, but possibly with a different set of circumstances than with the previous bailouts. The Greek elections loom large on the 17th, and will create a nervous backdrop within Europe.
Of note :
The wild risk aversion and heightened uncertainty of the last month has stirred the juices of the global central banks. Lip service towards further policy accommodation has been given by the FED , the Peoples Bank of China (PBOC), the BOE and the somewhat unwillingly the ECB. The RBA have been easing interest rates and likely will continue to do so. These murmurings have stablised the risk aversion for the time being. Efforts by EU officials are paving the way for bank re-capitalisation measures to be made to stressed banks. Decoupling Bank and Government debt issues in paramount to finding solutions. Event risk remains high, and none so much as the upcoming Greek elections on June 17th. Expect central bankers to remain on high alert and in the headlines in the short term at least.