City East July 2010

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Market update

City East

Carsten PedersenDirector, Financial Markets & InternationalWestpac Institutional Bank

July 2010



US Steroids filling the gap in 2010 not 2011



China PMI & industrial production turn



The terms of trade & nominal GDP growth



Australia: recovery and rotation



Westpac–MI unemployment expectations



Consumers turn cold on housing ...



Rate rises will again stretch mortgage belt



Population growth, led by migration



Participation to temper fall in u/e rate



Inflation: risk of return to 2008 spike



RBA responds to inflationary pressures

0.0

0.4

0.8

1.2

1.6

Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10

%

0.0

0.4

0.8

1.2

1.6

%

Trimmed mean quarterly change

15

forecasts

GFC



The Australian dollar: actual versus fitted



The Australian dollar & 2yr swap spreads



AUD/USD & AUD/JPY



AUD/EUR & AUD/NZD



Australian dollar & US equities: volatility



Current Forecasts – July 2010

Latest Dec-10 Jun-11 Dec-11

RBA Cash 4.50 4.50 4.75 5.25

3yr swap 5.00 5.40 5.60 5.60

10yr 5.25 5.30 5.30 5.50

AUD/USD 0.89 0.90 0.90 0.86

AUD/EUR 0.69 0.70 0.72 0.73

AUD/NZD 1.23 1.22 1.20 1.19

EUR/USD 1.30 1.28 1.25 1.21



Cost of insurance against default



Bank bonds: net issuance surges



Key positives

Key Positives• Terms of trade will boost incomes and mining

investment.• Strong momentum from population growth.

• Confidence measures well above average levels.• Strong government fiscal position.• Sound banking system.• Export upswing driven by mining.• Sustainable gains in house prices.



Key negatives

Key Negatives• Sticky inflation causing further rate hikes.• Strong Australian dollar • Cautious consumers finally dealing with excessive

debt levels• Fiscal policy will be a growth drag in 2010 and 2011.• Funding and regulatory constraints on banks will

limit credit .• Slowdown in China and uncertain growth profiles for

US & Europe.



Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141.Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information,consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac’sfinancial services guide can be obtained by calling 132 032, visiting www.westpac.com.au or visiting anyWestpac Branch. The information may contain material provided directly by third parties, and while suchmaterial is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice toexclude liability for the information. The information is subject to change without notice and Westpac is

under no obligation to update the information or correct any inaccuracy which may become apparent at alater date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac EuropeLimited is a company registered in England (number 05660023) and is authorised and regulated by TheFinancial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send ane-mail to [email protected] or fax us on +61 2 8254 6934 or write to Westpac Economics atLevel 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number andcompany details on all correspondence. © 2010 Westpac Banking Corporation. Past performance is not areliable indicator of future performance. The forecasts given in this document are predictive in character.Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks anduncertainties. The ultimate outcomes may differ substantially from these forecasts.

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City East July 2010

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