Key Overnight Developments
• Australia: Current Account Deficit Soars on Exports, Manufacturing Expands
• RBA Keeps Interest Rates Unchanged, Says Loose Monetary Stance “Appropriate”
The Euro and the British Pound traded in well-defined ranges in the overnight session, with the former moving sideways in a 40-pip band above 1.4315 while the latter oscillated within 50 pips below the 1.63 mark.
Asia Session Highlights
Australia’s AiG Performance of Manufacturing Index rose to 51.7 in August, showing the sector expanded for the first time in 14 months. Still, AiG chief executive officer Heather Ridout struck a cautious tone, saying that although “manufacturing activity has been improving…conditions are uneven and pressures remain on employment.” Indeed, looking at the components of the metric reveals that the rate of contraction in Employment accelerated for the first time since February. Ridout added that “There is a risk, particularly if interest rates are raised too early in the recovery phase, that as the effect of stimulus measures wane, the nascent recovery will fail to get traction.” The government of Prime Minister Kevin Rudd has distributed over A$12 billion in cash handouts this year and set aside A$22 billion for infrastructure projects.
Meanwhile, the Current Account Balance deficit widened more than economists expected in the second quarter, revealing a shortfall of –A$13.4 billion, shaving 0.2% off GDP in the three months to June. Preliminary forecasts had called for a –A$10.7 billion result. Exports dropped by a whopping 14.9%, more than doubling the -7.16% contraction in imports, with overseas shipments of gold (-40.1%), transport equipment (-35.9%), coal (-25.5%) and metal ores (-20.5%) leading the decline. This offered a counter-balance to the encouraging manufacturing PMI result, bolstering the argument that firms will be faced with sharp declines in sales as absent private demand is unable to replace the stimulative effects of the government’s fiscal measures.
The Reserve Bank of Australia kept interest rates unchanged at 3%, as expected. Bank Governor Glenn Stevens sounded broadly optimistic, saying “consumer spending, exports and business investment [are] notable for their resilience” while “Unemployment has not, to this point, risen as far as had been expected.” On inflation, Stevens noted that lower labor demand and commodity prices are likely to see prices continue to decline in the near term but “the likelihood of inflation being persistently below the target now looks low.” Such rosy comments notwithstanding, however, the bottom line is that Stevens and company judged that the “the present accommodative setting of monetary policy remains appropriate for the time being,” a disappointing outcome considering the hawkish tone of the RBA chief’s semi-annual testimony before the Parliament’s finance committee. The Australian Dollar sold off on the release, testing as low as 0.8407 to the US Dollar.
Euro Session: What to Expect
Switzerland’s Gross Domestic Product is expected to shrink 1% in the three months to June, marking the fourth consecutive quarter in negative territory and revealing the economy is now contracting at an annual pace of 3%, the fastest in at least 34 years. Looking ahead, a survey of economists conducted by Bloomberg expects output will continue to shrink though the end of this year and begin a modest recovery in the first quarter of 2010. However, this may prove too rosy: exports of goods and services account for a whopping 51.6% of the overall economy, an overwhelming majority of which are headed for markets in the European Union. Indeed, Germany, France and Italy alone make up a whopping 37.3% of foreign demand. Continental European economic growth is expected to trail sharply behind that of most other developed economies (with the notable exclusion of Japan) through the end of next year, suggesting overseas sales and with them overall performance may remain under water for substantially longer than consensus forecasts would have us believe. Deflation adds to the downside risks for the economy: annual inflation is expected to shrink for the fifth consecutive month in August; if this translates into expectations of lower prices in the future, consumers and businesses will perpetually delay spending and investment as they wait for the best possible bargain, bringing economic growth to a virtual standstill.
Turning to the Euro Zone, German Retail Sales are expected to grow for the first in three months, adding 0.7% in July, while the annual pace of decline moderates to -1.2% . The government’s 85 billion euro spending plan (including a “cash-for-clunkers” program to boost auto sales) is the likely catalyst behind the improvement. However, labor market data to be released later in the session is set to show that the German economy shed 30,000 jobs in August, bringing the Unemployment Rate to 8.4%, the highest since November 2007. Job losses will weigh on incomes and weigh on consumption, suggesting the economy will have a hard time building positive momentum after the flow of stimulus cash dries up. The broader Euro Zone Unemployment Rate result will probably follow higher, with forecasts calling for the metric to tick up to a decade high of 9.5% in July, mimicking the dynamics seen in the region’s top economy.
In the UK, the August edition of the Purchasing Manager Index is set to show that the manufacturing sector expanded for the second consecutive month. However, more attention is likely to be given to Net Consumer Credit, which is expected to remain flat at 0.1 billion pounds in July, a hair above the record low posted in March. This will serve to keep pressure on the Bank of England to press on with quantitative easing measures as banks fail to pass on lower interbank borrowing costs to the broader economy. Indeed, the market the BOE’s dovish posture seems to be the driving force behind sterling price action despite surface-level improvements in economic data: a trade-weighted index of the Pound’s average value topped out on 08/05, the day before the last rate decision, and has been trending lower ever since; a Credit Suisse index gauging traders' 1-year BOE rate hike expectations (as derived from overnight index swaps) topped out on the very same day.
Written by Ilya Spivak, Currency Analyst
Article Source - Australia Keeps Rates on Hold, Says Loose Monetary Policy ''Appropriate'' (Euro Open)
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