The Australian Economy:
This week the Australian economy has been full of data reporting and market volatility. Monday’s retail sales number revealed a .8% drop in activity for July and this was materially below the expected .3% rise. The Reserve Bank of Australia (RBA) left the cash rate unchanged as was widely expected. The tone points towards an easing bias that should see a cash rate .5% lower to 3.0% by the end of 2012. Second quarter GDP numbers revealed a .6% rise against an expectation of .7% and was accompanied by a .1% revision higher of the first quarter number. The employment numbers were also somewhat neutral in their impact with a 8.8k decline in the number employed being driven by a reduction in part time employment. Of note was the participation rate( those in or looking for work) drifted down .2% to 65.0% and 5 year lows. This accounted for the small reduction in the unemployment rate to 5.1%.
The Chinese numbers have continued to come in weaker than expected. Following on from last week’s manufacturing sector disappointment and Services number. This coupled with continuous downward pressure in the hard commodities markets has provided ample negative sentiment to undermine(excuse the pun) demand for the AUD. Australia’s 4th largest iron-ore producer Fortescue Metals announced dramatic cut backs to existing and planned mining investment following the dramatic fall in prices for iron –ore. Interestingly, the reaction following the important GDP and employment numbers has been one of mild AUD demand. This has been driven by investors reversing “sold AUD” positions after being disappointed with the close to expectation numbers.
The US Economy:
US manufacturing numbers saw the third straight month of contraction on Wednesday, and is in line with global manufacturing trends. Non-farm productivity numbers increased more than expected, which was a welcome surprise. The focus for the week comes later on today with the release of the August employment numbers. These are crucial to the Federal Reserve (FED), and their decision making process as we head into the monetary policy decision on the 13th of September. A disappointing number would likely lead to further policy accommodation from the FED in an effort to boost economic activity. This decision has far reaching implications around the globe, as this type of initiative inherently weakens demand for US dollars.
The UK Economy:
The economic data so far in the UK has surprised with its strength this week. After a long run of disappointing releases both the latest manufacturing and services sectors posted stronger than expected activity. Overnight the Bank of England left monetary policy unchanged as expected. The market now looks forward to the meeting minutes when released in a couple of weeks time. Interestingly Deputy Prime Minister Nick Clegg has called for growth policy to be bought forward. The recent, but material sentiment move away from austerity seems to be gathering pace. The ECB decision to instigate its OMT program will help sentiment in the UK’s closely correlated economy, and that will have positive externalities overtime.
The New Zealand Economy:
With little in the way of formal economic data in New Zealand this week, the economic sentiment has been driven by headlines in the business sector. Importantly the latest Fonterra diary auction results saw a rebound in prices fetched, with average prices being up 6% on the trade weighted basis. Partially countering that positive sentiment has been news from Rio Tinto that the Tiwai aluminum smelter operations would be scaled back with the recent fall in the global aluminum price making operations prohibitive. This follows Solid Energy’s stalling of operations at its Spring Creek coal mine for similar reasons. Next week the Reserve Bank of NZ (RBNZ) comes back into focus. Expect no change to monetary policy , but some downbeat words from Governor Bollard as he continues efforts to verbally intervene in the currency markets.
The Canadian Economy:
The Bank of Canada (BOC) made no change to monetary policy at their announcement on Wednesday. While this was expected the accompanying comments were closely followed. The BOC see wide spread slowing in both developed and emerging economies and this is of concern. However the domestic outlook remains in a moderate position and the next move in monetary policy is likely to be higher, whilst the timing will be carefully weighted. With Canada’s commodities holding up, expect the Canadian dollar to remain in demand as its recent surge suggests. Building, employment and manufacturing numbers come along side the important US employment numbers later on today, and these will be closely watched.
The Japanese Economy:
It has been a quiet week for economic news in Japan. The brief excitement has come from further verbal intervention coming from Bank of Japan (BOJ) members. The BOJ’s Miyao commented that he expects Japan to resume its moderate recovery. He also said that the BOJ needs to be careful and bold policy steps must be taken when required and this will likely come from steady progress with power easing via asset purchases. This continued rhetoric has seen a relatively stable YEN against the US dollar. Unfortunately stability at high levels is unhelpful to the Japanese export sector. As additional comments from the BOJ’s Shirakawa alluded to. He said that the high level of the YEN, and low Japanese factory output were a big negative for exports. Expect this rhetoric to continue in the absence of material YEN weakness, and policy initiatives to be forth coming. Final GDP numbers for the 2nd quarter and various manufacturing numbers next week provide the focus in the Japanese economy.
The European Economy:
The sole material focus for the week has been the pivotal European Central Bank (ECB) monetary policy announcement that came overnight. The ECB President continued his staunch and authoritative attitude and presented what should be game changing policy. The Outright Monetary Transactions (OMT) program will see the ECB support debt markets in Europe in a way that should materially change the tail risk in Europe. Assuming the European Governments are able to garner domestic support to commit to their part of the solution in the form of the European Stability Mechanism(ESM), the path forward has been forged in Europe. With the financial stability issues now sorted, the way is paved for the long road to economic recovery. The immediate effect has been the continuation of the recent EURO demand, while the wider markets have seen increased risk appetite as these fundamental risks in Europe have been by-passed, for the time being at least. Spain now seems set to apply for further funding support , once the ESM is ratified by EU leaders in October.
The wider market risk appetite saw material improvements following the ECB monetary policy announcement of their initiatives to help support stressed debt markets in Europe. However, the success of their plans the form of the Outright Monetary Transactions (OMT) program will not be complete for the next six weeks or so. This is because EU leaders still have to ratify their part of the larger solution, in the form of the permanent European Stability mechanism. It is likely that this will be passed by independent member state law makers, but is no certainty. Expect increased political posturing to continue, with the majority of the focus being on key player Germany.