Daily Market Digest: Australia credit ratings, Germany & UK industrial output

• Australia’s credit rating put on ‘Negative’ watch list by Standard and Poors ratings agency.
• Germany’s industrial production contracts 1.30% in May
• UK’s industrial and manufacturing production fall less than expected
• In the US ADP report showed that private payrolls increased 172k, more than the expected 158k

Today’s Economic events

• Australia AIG construction index 53.2 vs. 46.7 previously
• Japan leading indicators 100.0% vs. 100.10%
• German industrial production m/m -1.30% vs. 0.10%
• French trade balance -2.8bn vs. -4.9bn
• Swiss foreign currency reserves 609bn vs. 602bn previously
• Switzerland CPI m/m 0.10% vs. 0.0%
• UK Halifax HPI m/m 1.30% vs. 0.40%
• UK manufacturing production m/m -0.50% vs. -1.20%
• UK industrial production m/m -0.50% vs. -1.0%
• ECB releases monetary policy meeting accounts
• ADP nonfarm employment change 172k vs. 158k
• US Weekly unemployment claims 254k vs. 269k
• Canada building permits m/m -1.90% vs. 2.10%

Coming Up

• Canada Ivey PMI
• Crude Oil inventories

S&P Global Ratings puts Australia on ‘negative’ watch list

Following up on its warnings earlier this week after the latest federal elections in Australia resulted in no clear victory, Standard and Poors Global ratings put Australia’s credit ratings on the ‘negative’ watch list but retained its AAA investment worth ratings (for now).

“Given the outcome of the July 2, 2016, double-dissolution election, in which neither of the traditional governing parties may command a majority in either house, we believe fiscal consolidation may be further postponed,” S&P said.

S&P said that a combination of the government’s budget deficit and the current political climate were some of the reasons to put Australia on its negative watch list. The ratings agency said that there was a 1 on 3 chances that Australia’s credit ratings could be downgraded within the next two years if the Australian parliament wasn’t likely to legislate on savings or revenue measures to put a lid on its budget deficit by 2020.

The ratings agency said that since the 2008 global financial crisis and the end of Australia’s mining boom, the country’s finances were weaker. “Without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement,” the ratings agency said in its statement on Thursday.

Ratings agencies Fitch and Moody’s currency rate Australia at AAA, but also warned that the political gridlock could lead to an increase in the economy’s fiscal deficit.

Shane Oliver, head of the investment strategy at AMP Capital said: “It’s probable that a formal downgrade will follow unless the new government is able to hold the line on the budget deficit projections, which will be hard given the likely state of the Senate.” He, however, sounded optimistic that a ratings downgrade would not be disastrous for Australia.

German industrial production falls in May

Industrial production in Eurozone’s largest economy contracted 1.30% in May, according to data released by the economy ministry earlier today. It was bigger than the expected decline of 0.10% after output rose 0.50% in April and was the weakest in 21 months. The data compiled by the economy ministry showed that manufacturing sector output declined by 180% while construction output fell 0.90%. Energy output, on the other hand, increased 3.90% in May.

The ministry’s statement said “Industrial production was weak in the middle of the second quarter” noting that several long weekends and bad weather might have played a role on the data. The ministry was, however, optimistic, stating that “after weaker progress in the second quarter, industrial production should resume its moderate upwards trend.” The weak industrial production number follows yesterday’s factory orders which stagnated in May. Germany’s economy got off on a strong footing this year, but many question the sustainability in light of Britain’s decision to leave the EU and broad weakness in the emerging markets which could weigh on German exports.

Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt said, “The latest data only confirm the picture of a two-speed economy. While the domestic economy is booming, the former growth engines are weakening. With weaker industrial production, a traditional increase in investment becomes also less likely.”

UK Industrial and Manufacturing Production fall less than expected

Industrial and manufacturing production data from the UK showed a less than expected decline in the month of May, according to data from the UK’s Office for National Statistics revealed on Thursday. On a month over month basis, industrial production fell 0.50%, less than the forecast declines of 1.0%, while manufacturing production fell 0.50%, less than the expected forecasts of 1.20% declines. Previous month’s data was revised higher to show April’s industrial production rising to 2.10% from 2.0% while manufacturing production was revised from 2.30% to 2.40%. On a year over year basis, industrial and manufacturing production are up 1.40% and 1.70%, slightly lower than April’s upward revised 2.20% and 1.50% respectively.

Declines were largely concentrated in the pharmaceutical and textile sectors which until now enjoyed strong growth in the previous month.

The ONS said, that “throughout the previous 12 months, manufacturing – the largest component of production – experienced alternating periods of expansion and contraction which have resulted in current manufacturing levels being 1.7% higher than those recorded in May 2015.”

The data was however very backward looking and still doesn’t account for the UK’s verdict on its EU membership, which according to some economists could weigh heavily on the UK’s economy in the months ahead. Still, despite the outcome, the weaker exchange rate of the sterling is expected to boost exports in manufacturing sector.

The sterling was unmoved on the data, but the declines were seen limited today. GBPUSD eventually rose to $1.2983 to post a recovery. Niels Christensen at Nordea said “Today we have a bit of a pause, we have had a few days of quite sharp moves in equities sterling and the yen,” but notes that the sterling remains vulnerable while the yen remains at risk of a potential intervention to stem the yen’s rally.

US Private sector adds 172k jobs in June

Private employers in the US added 172k jobs in June, more than the expected 159k and higher than May’s 168k which was revised down from 172k, data from ADP and Moody’s showed on Thursday. Small business with fewer than 50 employees accounted for the most of the job hiring, adding 95k jobs during the month and extending the previous month’s 84k addition. Medium sized business between 50 and 499 employees brought in 52k jobs during the month, slightly lower than May’s 60k print while large businesses added 25k during the month.

Mark Zandi, Chief Economist at Moody’s Analytics said, “Job growth revived last month from its spring slump. Job growth remains healthy except in the energy and trade-sensitive manufacturing sectors. Large multinationals are struggling a bit, and Brexit won’t help, but small- and mid-sized companies continue to add strongly to payrolls.”

On a sector basis, construction jobs fell 5000, after rising 9000 in the previous month while manufacturing continued to extend its losses, shedding 21k jobs in June. Ahu Yildirmaz, VP of ADP Research Institute said in a statement, “Since the start of 2016; average monthly job creation has slightly dropped. Lackluster global growth, low commodity prices and an unfavorable exchange rate continue to weigh on U.S. companies, especially larger companies.“