Last week encapsulated the broad themes that have driven the financial markets in 2012. With a multitude of complex factors influencing the markets, I will attempt to simply explain the primary drivers involved. The European Central Bank (ECB) met expectations with commitments to stem the funding issues in the European sovereign debt markets. It now is the turn of member state politicians to ratify their side of commitments in terms of the permanent “European Stability Mechanism”(ESM). In the US, the focus for the week were the employment numbers released late on Friday. These were materially disappointing, and firmly increase the likelihood of further quantitative easing (QE) from the Federal Reserve (FED) at Thursday’s monetary policy announcement. Unsurprisingly this saw the US dollar weaker across the board. The monthly economic data release from China came on Sunday and revealed a further slowing in their economy. In an effort to stem slowing growth China announced they are embarking on 150 billion US dollars worth of infrastructure spending. The opposing forces of weakening global growth and further central bank policy accommodation continue. These forces point towards further movement within the broader 2012 ranges for most pairings.
A weaker than expected retail sales number came ahead of the RBA monetary policy decision last week. The RBA held the cash rate unchanged at 3.50%, and remains flexible to act if further softness becomes evident in the economy. Of note will be the continued decline of the hard commodity prices in recent months, and this has led to a huge pull back in mining infrastructure spending expectations from Australia’s largest mining companies. Economic growth and employment numbers came in slightly below expectations and legitimise the careful tone being taken by the RBA. The economic indicators from China remain under pressure and this impacts sentiment for the Australian economy. Balancing these factors is the announcement of the 150 billion USD infrastructure spending injection by Chinese authorities, coupled with the potential for further QE from the FED on Thursday. This should provide some reasonable support for the AUD this week. With no top tier economic data in Australia this week, expect the lead to come from any actions from the FED , and any further news emanating from China.
There was no economic data releases of note in New Zealand last week. However, the NZ dollar was buoyed by news that the Fonterra diary auction had seen renewed demand. On a trade weighted basis the prices fetched were up 6%, as the ongoing drought in the US continues to boost the grain markets. Also of note were announcements from Rio Tinto and Solid Energy. Rio Tinto announced 100 job cuts as it struggles to contain costs at its Bluff based Tiwai aluminum smelter. Solid Energy suspended operations at its Spring Creek mine following the recent, but dramatic fall in the global coal demand. This week sees the Reserve Bank of New Zealand (RBNZ) as the focus. Expect no change to monetary policy, and an appropriately short statement from Governor Bollard at this final monetary policy announcement.
The US employment numbers on Friday dominated the focus in the US last week. The numbers were materially weaker than expected and the labour market now appears to be stuck in neutral. The recent Jackson Hole speech by FED Chairman Ben Bernanke pointed toward further policy accommodation if the numbers came in weak. Accordingly expectations for further action have increased since the employment numbers were released. This has undermined demand for the US dollar in the short term. Expectations are for an extension of the guidance for the current 0-.25% cash rate through into 2015. In addition to that further QE should be forthcoming. Alongside the FED’s monetary policy announcement on Thursday, we have inflation, retail sales and preliminary consumer sentiment numbers on Friday.
ECB President Mario Draghi backed up his words with action at last week’s monetary policy announcement. The frame work is now in place to support the stressed European debt markets, and the Outright Monetary Transactions (OMT) is at the core of that frame work. This involves the buying of member government bonds at a level and in a quantity at the discretion of the ECB. The cost of funding (bond yield) has dropped dramatically for the likes of Spain and Italy following the announcement. Consolidation at these lower levels, or making of further progress lower, is definitely EURO supportive in the short term. The focus now turns to the Euro-zone leaders and their ability to ratify the implementation of the ESM. Once the structural framework is implemented the economic outlook will again become the focus. The focus this week will come from the German Constitutional court ruling on the ESM and industrial production on Wednesday and inflation numbers Friday.
It was an interesting last week in the UK. Whilst slightly off the radar, UK manufacturing and services data beat market expectations. The Bank of England made no change to monetary policy as expected and next week’s meeting minutes will be closely monitored to gauge the tone of the meeting. This week sees the release of the latest house price number, trade balance and unemployment numbers. Wednesday’s employment numbers will be the focus, with employment growth expected to be close to flat. Interestingly the GBP lagged towards the end of last week, this has been attributed to large volumes of selling GBP and buying of EURO following the ECB announcement. Given the capital flight from Europe to the UK in the previous few months, this trend may well continue in the short term at the very least. The move towards more normal bond yields will calm investor fears, and make the EURO more attractive.
It was a quiet week for economic data in the Japanese economy last week. Rhetoric from Bank of Japan (BOJ) board members continued to flow freely. Comments regarding bold policy action if required intimated that further policy accommodation is likely to be forth coming. The high level of the YEN continues to be the major dampener on the economy as exporters continue to struggle. Final 2nd quarter GDP numbers were released at just .2% growth for the quarter this morning. Tomorrow sees the release of the latest manufacturing index and machinery orders on Wednesday.
The Bank of Canada (BOC) left monetary policy unchanged as was completely expected last week. In their accompanying statement they said they see widespread slowing in both developed and emerging economies. They also said the next move in monetary policy would likely be higher, but given the global economy the timing of such a move would have to be carefully weighed. Friday saw the building permit data come in below expectation. The unemployment rate was as expected at 7.3% with a higher than expected 34.4k jobs added for the month of August. Manufacturing numbers also beat expectations as demand from the US continues to strengthen. The sole focus for this week will be the trade balance numbers on Wednesday, however these should be of limited impact.
Major Announcements last week:
• Australian Retail Sales -.8% vs +.3% expected
• UK Manufacturing 49.5 vs 46.1 expected
• RBA leaves monetary policy unchanged
• UK Construction 49.0 vs 50.1 expected
• US manufacturing 49.6 vs 50.0 expected
• UK Services 53.7 vs 51.3 expected
• Australian GDP +.6% vs +.8% expected
• BOC leaves monetary policy unchanged
• Australian Employment -8.8k jobs vs +5.1k expected
• BOE leaves monetary policy unchanged
• ECB embarks on OMT program to support debt markets, cash rate unchanged.
• Canadian Employment 34.4k vs 9.9k expected
• US Employment 96k vs 123k expected, but previous two months also revised lower by 41k