China Update

(From NAB)
On balance, economic activity in China moderated in July. Industrial
production, exports and construction activity fell, while retail sales
increased. The outcome is broadly in line with our view that growth in some sectors would slow owing to the natural evolution of the economic cycle and policy tightening. In particular, the small declines in housing sales, house prices and construction activity seen over recent months are the desired outcomes of contractionary policy measures. More generally, we are reluctant to over emphasis the slowing given the monthly volatility in many Chinese statistics. Therefore, we continue to expect growth of slightly more than 10 per cent in 2010.

NAB also released the above survey results which showed that Business confidence fell sharply – down from 16 index points to 1 in the June Qtr. The 12-month profit outlook remains optimistic, but is down from 34 to 18 points.

Business conditions deteriorated further, down 15 points to 1. Cash flow sentiment declined and has turned poor, down 5 points to -3 points.

Key SME concerns: demand (34%), cash flow (22%) and borrowing costs (20%)

USA
Concerns remain in the US for the state of the economy and the potential for a double dip. As such yields in the long end of the yield curve remain subdued with 2-year yields at 0.53% and 10-year yields at 2.67%. This flattening in the US yield curve has been reflected in Australia and we expect, despite some recent retracing, longer yields to remain near current low levels and for our yield curve to maintain it's flat shape for the time-being.