Australian Data

There's a number of important releases over the next two days including retail data, balance of payments and GDP which will give us a clearer picture of where the Australian economy is heading. The next important figure that could jolt the RBA from it's pause status is not out until the end of October however. This is the CPI.

USA - Bernanke

Bernanke spoke on Friday acknowledging growth in the USA faced some risks. He stopped short of announcing additional measures to stimulate the economy through quantitative easing (QE) - ie buying bonds in the market. Consequently the bond market there sold off with the 10 year bonds moving up a significant 17 bps re-tracing some of the move of the last few weeks. In Australia I'm led to believe we are seeing solid purchasing demand from central banks around the world for our AAA rated government bonds. This is likely to see our yields staying on the low side and the yield curve retaining it's flat shape for some time. There is also some talk of longer yields moving through the cash rate rendering our curve in an inverse shape.

In Australia there is quite a bit of data to be released with GDP due out on Wednesday.

USA

Worries in the US continue with Federal Reserve Bank
of Kansas City saying manufacturing activity in the region slowed
significantly in August. The headline index fell to zero from July's
reading of 14. After the recent falls in the Richmond and Philadelphia Fed
manufacturing surveys, the Kansas result was enough to continue growth worries.

USA - New Home Sales

Further negative news from the US overnight. New Home sales fell 12.4% in July to annualised pace of 276K, the lowest level in the series’ history dating back to 1963, and much worse than the market forecast for a flat outcome in July

Durable goods orders were also weak - they rose just 0.3% in July with expectations for 3.0% rise

AUST
Construction work done rose 3.5% in Q2 after 4.2% rise in Q1

USA - Growth Worries

US stock market sold off (-1.3%) and US treasury yields dropped (2-yrs by 2 pts to 0.46% and 10 yrs by 11pts to 2.49%) due to concerns about the health of the US economy. The big figure was that existing home sales fell by a record 27.2% in July to a 15-yr low of 3.83 million. The drop was as a result of the end of the home-buyer tax credit. Expectations were for a drop of 13% in July. The inventory of homes for sale lifted to 12.5 months - the most since at least 1999.

Hung Parliament

With a result unlikely for a week or two the financial markets will remain a little skittish over this period due to the uncertainty. The fact that both parties have a similar approach to economic matters however means that the impact will be minor and short lived. The dollar is the obvious area that is likely to see some selling pressure, the stock market may receive some selling while the impact on interest rates will be negligible. 10 year bonds futures have sold off this morning by 6 points but there's not much change in 90 day or 3-year futures.

RBA Minutes

The RBA seems pretty confident in China’s outlook, noting that “ recent indicators did not suggest a more marked slowdown than the staff had been expecting”.

The RBA expects underlying inflation to track within the target band coupled with a slowing in the domestic economy. They noted that “consumer spending remained subdued,...credit growth remained soft (and)... the housing market had stabilised”. The RBA Board seems very comfortable on hold.

Their Conclusion is pasted below:
(Link to full statement)

Considerations for Monetary Policy

Members noted that sentiment in financial markets had improved over the past month, particularly following the publication of the results of the stress test of the European banking system. Volatility in financial prices nonetheless was still higher than normal. The economic data suggested that the global economy was continuing to expand, though the pace of growth had probably eased since earlier in the year and it was still uneven among regions. Growth remained generally subdued in the North Atlantic countries that had been most affected by the financial crisis, though recent indicators for Europe had been more positive. Growth in the United States had moderated since the start of the year. The Asian region had experienced very strong growth, though it looked now to be slowing to a more sustainable rate. The moderation in growth in the Chinese economy had contributed to some easing in commodity markets, but the prices of Australia’s major export commodities were still at very high levels.

The major news in the domestic economy had been that underlying inflation had continued to fall, in line with the Bank’s expectations, and was now below 3 per cent. Were it not for the effect of the rise in tobacco excise earlier in the year, CPI inflation would have remained below 3 per cent. Employment had continued to grow solidly but consumer spending remained subdued, even though confidence was high. Credit growth remained soft and the housing market had stabilised after the surge in prices late last year and earlier this year. Indicators of business investment remained strong. The staff forecast continued to suggest that GDP growth would strengthen in 2011 and 2012 to above-average rates. Accordingly, even though underlying inflation was expected to remain around 2¾ per cent over the next year, it was forecast to pick up a little thereafter.

Over late 2009 and early 2010, the Board had removed the unusual degree of monetary accommodation that had been put in place during the global financial crisis. By May, interest rates on loans to households and businesses had returned to around average levels. In the subsequent two months, with economic growth close to trend and inflation expected to decline to the target range later in the year, the Board had felt comfortable with the existing level of interest rates, particularly in an environment where there was a significant degree of market volatility.

Developments over the latest month had not materially changed the Board’s assessment. The inflation data released during the month were in line with the Board’s expectations for a decline, and the outlook for economic growth had not changed. Markets had settled somewhat, but there was still more uncertainty over the global outlook than there had been earlier in the year. The Board therefore judged the existing level of the cash rate as still appropriate, and decided to leave it unchanged for the time being, pending further information.

The Decision

The Board decided to leave the cash rate unchanged at 4.5 per cent.

Motor Vehicle Sales and China

Fell 2.6% in July after a 1.4% fall in June but are up by 11.6% over the year to July

China 2nd Largest Economy
Japan’s output in Q2 was $1.288 trillion and this is just short of China’s at $1.339tn. For the year, China at around $5tr will still be well behind the U.S.'s nearly $15tn output. On current trends, it will take 10 years for China to overtake the US.

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.

Employment Numbers

23,500 extra jobs were created in July which is a pretty good result and around expectations. This is the important number rather than the headline rate as it gives a better reflection of the state of the economy. The rate jumped to 5.3% but this is because more people were optimistic enough to enter the workforce increasing the participation rate from 65.3% to 65.5%.

The breakup of jobs was 27,700 more part-time and 4,200 less full-time.

The results will have been welcomed by the RBA as they don't want the labour market overheating too much or too quickly.

Slower Global Growth

Data from three important corners of the globe point to slower global growth. This has led to a movement away from risk causing a drop in the AUD, equity markets and a further drop in US yields.

In the US worse than expected June trade figures pointed to a downward revision for Q2 growth. The advance estimate of Q2 US GDP was 2.4%, and the trade data, showing the trade deficit widened to $49.9bn in June, much worse than the median $42.1 bn forecast, would take off around ½%

Industrial production and retail spending data in China confirmed the economy is slowing from the heated pace set earlier in the year.

UK growth outlook was revised lower by the BoE to 3% yoy in late 2011 from 3.5% yoy forecast in May. Inflation is projected in two years to be at 1.5% rising to 1.7% the following year.

In Australia however consumer confidence rose 5.4% in August after the 11.1% increase in July.

Employment figures are due out today with expectations for another solid gain after the 46k extra jobs in June. NAB forecast +20k in July with the unemployment rate remaining at 5.1%.

US FED

Ben Bernanke alluded to ways to extract themselves from the stimulus measures they took during the hight of the GFC. As rates were so low they undertook what's called Quantitative Easing (QE) where they bought stock to lower rates and put funds and liquidity into the market. As bonds mature the market has been wondering whether the FED would roll them over or begin to pull out of such measures. Last night in the US they indicated that as the economic situation was still shaky that they would roll over maturing bonds ensuring those funds remained in the system to prop the economy up.

Regarding the economic outlook, the FOMC said that “the pace of recovery in output and employment has slowed in recent months”. Economic factors, such as continued subdued inflation “are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

The end result is likely to be continued downward pressure on their yield curve and perhaps, due to the lack of stimulus coming from the States, on ours too.

ANZ Job Ads

Job ads have slowed but there is still a positive outlook with a third consecutive monthly increase.

The job ads index rose again in July, up 1.3% after the 2.8% gain in June,

with annual growth in Job Ads up to 36.1% in July from 32.2%yoy pace in

June. The July increase was smaller than the previous two months’ increase, but in trend terms ANZ job ads rose 1.8% in July and 34.1%yoy, so still a very solid overall outcome

Employment numbers are out this Thursday with expectations for a median increase of 20k in employment and the unemployment rate to remain at 5.1%

Housing Finance

Figures released by the ABS have shown a slowing in housing finance growth with the number of home loans falling to a nine-year low. Total loans for owner-occupied homes dropped 3.9 per cent in June, reversing a revised 3 per cent increase in May. The monthly decline took the total number of loans for June to 46,420, the lowest since 2001. Analysts had expected a 2 per cent drop in the month.

The ending of first home buyer grants has had some impact with higher interest rates also having it's impact. June's fall was the tenth drop in the monthly gauge in the past 12 months.

RBA Statement On Monetary Policy

The Reserve Bank quarterly Statement on Monetary Policy left the

forecast track for underlying inflation unchanged, implying there is no

need to raise rates further for the time being. It looks like the RBA is

on hold until late this year or early next. CPI outcomes and the speed of

the fall in unemployment will largely dictate the timing of the next hike. The key takeaways from the report is a 0.5% increase (from May) to the RBA’s 2Q GDP forecast to 3.0% and unchanged GDP and underlying CPI forecasts to Dec 2012 thereafter.

For your reference their underlying forecast until June 12 is 2.75% but for June 12 and Dec Qtr 12 it rises to 3.00%

Rates Worldwide

European Rates

Both the Bank of England and European Central Bank kept rates on hold over night

RBA

The RBA will release it's Quarterly Statement on Monetary Policy today. This will contain updated forecasts for both GDP and inflation but major changes are not expected.

Trade

The big thing that has been mentioned by the RBA and economic commentators as potentially leading to a hike in rates is our trade position. Surges in commodity prices could mean that money coming into Australia from exports would far outweigh money going out due to imports, providing a big stimulus to our economy. The extra money sloshing around could put upward pressure on inflation they implied and therefore rates. Well yesterday we got the 'mother of all trade figures' so to speak. Australia recorded a record trade surplus for June of $3.54bn

This surplus was driven by a 7% surge in exports while imports were flat. The export surge reflected strongly rising commodity prices but also higher export volumes, especially for coal. NAB's expectations are for exports to continue to outstrip imports but as the investment boom gains momentum in 2011 imported capital equipment will cut into the surpluses.

It remains to be seen how quickly this surplus will feed through into inflation but a November rate hike, if not before, is a very real possibility.

Building Approvals

Australian building approvals fell 3.3% in June (market +2.0) with private housing approvals down 2.5%. This is the third month in a row and follows a revised 6.4% drop in May. The median market forecast was for building approvals to have risen 2 per cent in the month.

RBA

The RBA kept the official cash rate at 4.50% as expected. In the accompanying Statement, the RBA appeared comfortable with its current settings for policy, as the recent CPI was in line with its forecasts. On the economy, the RBA noted that the labour market has continued to firm gradually and wages growth has picked up, but households remain cautious and house price growth has eased. Expectations are for the next tightening to be at the end of the year after the next CPI figures at the end of October paint a clearer picture.

US GDP

Q2 GDP came out Friday showing 2.4% growth after 3.7%. The detail showed a mixed bag with headline growth just shy of expectations and the composition of growth showing a softening in consumer spending growth offset by accelerating business fixed investment.

RBA

The RBA meets this week but there's very little chance of a rate hike. On Friday they release their Qtly Forecast update and their expectations for inflation will be closely watched. Their current underlying forecast of 2.75% yr ending Dec 10 is right on track.