Commonweath Bank Economics: Global Markets Research Daily Alert 08-31-2011

8/4/2019 Commonweath Bank Economics: Global Markets Research Daily Alert 08-31-2011

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Economics: Daily Alert31 August 2011

hris Tennent-Brown FX Economist T. +612 9117 1378 E. [email protected]

Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and atww.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.

US shares post modest gains in a choppy session.

The US Conference Board reported that its consumer confidence index hit a 2-year low of 44.5 in August, down from 59.2 in July. The S&P/Case-Shiller home price indexmeasure of 20 metropolitan cities eased by 0.1pct in seasonally adjusted terms inJune. In unadjusted terms, prices were up 1.1pct.

Minutes of the last Federal Reserve meeting revealed that some participantswanted to take bolder action to stimulate the economy but "were willing the accept thatthe stronger forward guidance as a step in the direction of additional accommodation."At the meeting the Fed vowed to keep interest rates low for another two years.

European shares rose again on Tuesday in thin trade. UK shares led the way withinvestors playing catch-up after the market holiday on Monday. The FTSEurofirstindex rose by 1.0pct with the UK FTSE up 2.7pct. Shares in both BHP Billiton and RioTinto rose 4.3pct in London trade. Mainland European markets were mixed with theGerman Dax losing 0.5pct, Italian shares down 0.2pct but Spanish shares up 0.5pct.US sharemarkets finished with modest gains on Tuesday as investors mulled thelatest economic data and minutes of the last Federal Reserve meeting. The Dow hada volatile session, falling at the open to be down 110 points, before gaining to be up91 points in late trade. The Dow lost 70pts in the last 15 minutes to end the day up20pts or 0.2pct. The S&P 500 was also up by 0.2pct and the Nasdaq gained 0.6pct.

US treasury prices rose on Tuesday (yields lower) as traders bet that more economicstimulus would be forthcoming. US 2yr yields fell by 2pts to 0.196pct and US 10yr yields fell by 8pts to 2.176pct.

The US dollar lost ground against the Euro and major commodity currencies over theUS session. The Euro fell in European trade from US$1.4530 to lows near US$1.4385

before recovering to end US trade near US$1.4440. The Aussie dollar rose from lowsaround US106.15c to US107.20c, ending US trade near US106.80c. The Japaneseyen held between 76.60 yen per US dollar and 76.90, ending US trade at JPY76.65.

Global oil prices rose again on Tuesday. Commodities were generally higher inresponse to a weaker greenback and improved investor risk appetite and traders werewatching new tropical storms forming other the Atlantic. Nymex crude oil rose byUS$1.63 to US$88.90 a barrel and London Brent crude rose by US$2.14 to $114.02.

Base metal prices rose on the London Metal Exchange on Tuesday in response to aweaker greenback and improved risk appetite of investors. Metals rose between 0.8-3.2pct with lead, nickel and zinc faring the best. And the gold price also was stronger in line with other commodities with Comex December gold up by US$38.20 an ounceor 2.1pct to US$1,829.80.

Ahead : In Australia, the RP Data-Rismark Home Value index is released together with private sector credit. In the US, the ADP employment index is released together with Challenger job layoffs.

Source: Bloomberg 7.00AEST

2.08

2.13

2.18

2.23

2.28

0.170

0.180

0.190

0.200

0.210

08:00 14:00 20:00 02:00 00:55

US TREASURY BONDS

2yr (lhs)

10yr (rhs)

%%

1150

1175

1200

1225

1250

1150

1175

1200

1225

1250

08:00 14:00 20:00 02:00 00:55

US EQUITIES

S&P500 (lhs)

S&P500 Futures (rhs)

75.0

76.0

77.0

78.0

1.430

1.440

1.450

1.460

08:00 14:00 20:00 02:00 00:55

USD

EUR/USD (lhs)

USD/JPY (rhs)

0.730

0.740

0.750

1.060

1.070

1.080

08:00 14:00 20:00 02:00 00:55

AUD

AUD/USD (lhs)

AUD/EUR (rhs)

AUD/USD 1.0645 0.3% Australia 4.05 -0.02 CRB Index 340.95 1.1% Dow 11,560 0.2%

NZD/USD 0.8498 0.5% NZ 4.53 0.01 GS Index na na S&P 500 1,213 0.2%

EUR/USD 1.4410 -0.6% US 2.18 -0.08 Aluminium $/t 2387 na NASDAQ 2,576 0.5%

USD/JPY 76.77 0.2% AU less US 1.87 Copper $/t 9146 na FTSE 5,269 na

GBP/USD 1.6324 -0.4% NZ less US 2.35 Lead $/t 2568 na Shanghai 2,567 -0.4%

USD/CHF 0.8213 0.7% Nickel $/t 21864 na H.Seng 20,204 1.7% AUD/NZD 1.2527 -0.3% 3mth 4.88 0.02 Zinc $/t 2258 na Nikkei 8,954 1.2% AUD/JPY 81.73 0.4% 3yr 4.40 -0.01 Gold $/o 1793.5 -1.2% ASX200 4,269 0.1% AUD/EUR 0.7387 0.9% 5yr 4.78 -0.03 WTI Oil $/b 88.9 1.9% NZSX50 3,318 0.4%

AUD Swap Rates (%)

EquitiesCurrencies 10 Yr Bond Yields (%) Com m odities


2/9

Global Markets Research

Economics: Daily Alert

2

Economics: Preview

AUSTRALIA & NEW ZEALAND

Wednesday 31 August

NBNZ Business Outlook, Aug, Index

Headline, (47.6 prev)

Own Activity, (43.7 prev)

Business confidence continued to improve in July, following the sharprebound seen in the previous month. Improved profitabilityexpectations for the coming year are making businesses moreoptimistic about expanding, as reflected in the increase in investmentand hiring intentions.

In line with the improvement in demand, there are continued signs of inflation pressures in the economy. Pricing intentions rebounded,driven by increases in the retail, construction and services sector. Itappears businesses are using the improvement in demand to recoup

some of the operating margin lost over the past year. Recentvolatility in global markets poses the potential for some easing inbusiness confidence, but we expect it to remain at elevated levelsover the remainder of 2011.

Wednesday 31 August

AU Private Sector Credit, July, m/y%ch, (f) 0.2/2.7 (-0.1/2.7 prev)

Private sector credit fell unexpectedly in June, as business creditdeclined by 0.7%. The broader backdrop also weakened, with thegrowth pulse in housing credit declining and personal creditcontinuing to fall.

We expect a small rise in private sector credit in the July figures.Activity in the housing market has been recovering, with housing loanapprovals picking up over the 3 months to June. This should helpstem the deterioration in housing credit growth over the next fewmonths. A stabilisation in business credit flows will ease thedownward pressure from that segment. Other personal credit growthis likely to be mixed with the deterioration in equity markets over themonth of July (S&P/ASX 200 down 4.0% at month end) keeping a lidon margin lending growth.

NZ BUSINESS CONFIDENCE

-90

-45

0

45

90

Mar-98 Mar-01 Mar-04 Mar-07 Mar-10-90

-45

0

45

90

Ownbusiness

General econom ySource: NBNZ

% %

-15

0

15

30

-15

0

15

30

Jul-03 Jul-05 Jul-07 Jul-09 Jul-11

CREDIT(three-month-ended annual rate)%pa %pa

Households

Business


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3

INTERNATIONAL

Wednesday 31 August

JP Industrial Production, July, m/y%ch, (3.8/-1.7 prev)

Japanese industrial production continued to recover in June, lifting3.8% over the month. Industrial production was 1.7% lower compared to a year earlier.The unprecedented damage caused by the March earthquake andtsunami, which resulted in ongoing power shortages and supply chainissues, significantly hampered Japanese production levels. As theseissues have eased there have been signs of recovery in theproduction data. While production is expected to remain low on anannual basis, it should lift on a relative monthly basis. This trendshould continue as the economy recovers.

In addition to the issues related to the March disaster, the strong JPYis making Japanese products less competitive. This provides anadditional challenge for Japanese exporters.

Wednesday 31 AugustEZ CPI (Flash), Aug, y%ch, (2.5 prev)

The flash estimate of Eurozone CPI inflation is expected to holdsteady at 2.5% (YoY) in August. This will be the 9th month runningthat headline inflation is above the ECBs 2% target. The mainculprits for the elevated inflation readings remain energy and foodprices. Last months CPI print fell more than expected due to a sharpdrop in the Italian CPI reading, and particularly from the fall in clothingand footwear prices. Discounting in summer sales this year appearsto have been deeper than usual.

Wednesday 31 August

CA GDP, QII, q%ch saar, (3.9 prev)

GDP growth in Canada is expected to be flat in QII. Recentweakness in the Canadian economy has been driven by an expectedmoderation in government spending, Japan related supply chaindisruptions, and higher energy prices which have weighed onhousehold consumption. In addition, the strong CAD is acting as aheadwind on net exports. Canada recorded trade deficits during eachmonth of QII.

The Bank of Canada (BoC) expects growth in Canada to re-accelerate in the second half of 2011, led by business investment and household expenditures. We see downside risks to this outlook.

-40

-20

0

20

40

-40

-20

0

20

40

N ov -03 M ay -06 N ov -08 M ay -11

JAPANESE INDUSTRIALPRODUCTION

(Growth in Components YoY%)% %

Shipments

Inventories

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12

EUROZONE INFLATION%

ECB 2.0% Inf lation Target

%

Headline Inflation

Core Inflation

Headline Inflation (MoM%)

-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8

Mar-95 Sep-98 Mar-02 Sep-05 Mar-09 Sep-12

CANADA REAL GDP% %

YoY%

QoQ%


4/9



4

Economics: Review

Australia and New Zealand

NZ building consents data released yesterday showed a pick-up in residential consent issuance, which increased 13%over July. Excluding apartments, consent issuance increased 6.3%. While this pick-up is off a very low base, the resultdoes suggest tentative signs of a recovery in underlying housing construction over the coming year. Meanwhile, the surgein non-residential consent issuance was driven by public sector projects, with a large contribution from consents on workon Middlemore Hospital. Consents for private non-residential work is still fairly subdued, suggesting a soft outlook for private construction activity over the coming year.

The NZ Government revised up its cost of the Canterbury earthquakes to the EQC by $4b to $7.1b. As a result, theprojected Crown deficit has now increased to $18b. Treasury still expects a return to budget surplus by the 2014/15 year.Credit ratings agency Standard & Poors subsequently announced its ratings for both the EQC and the Government remainunchanged. With the Natural Disaster Relief Fund now run down to zero, the Government will have to pay for any shortfalland foot the bill on any fresh disasters.

AU Building Approvals July 2011

The number of building approvals rose by 1.0% in July but remain 15.0% below year earlier levels.

Activity in the medium high density segment remains particularly subdued.

Indicators of non residential activity remain soft.

The broad picture is one of residential construction activity still trending down and now running a little below long runaverages. The Territories are recording a robust lift in approvals. But weakness is evident across the States. Therebuilding effort in Queensland post floods is yet to make an impression on the data.

A number of developments are accentuating the impact of falling building approvals on the economy. The average realvalue of an approval has dropped a little, suggesting some shift towards building smaller dwellings. And the flow throughfrom an approval to a commencement has slowed. Data released last week, for example, indicates a spike in the value of dwellings approved but not yet commenced.

A number of other themes are playing out within the aggregate picture. These themes essentially reflect the mismatchbetween demand and supply in the housing market. This excess demand should see a base form under constructionactivity. Low residential vacancy rates and rising rents are consistent with this excess demand. As is the upward trend inapprovals for renovation activity (about 40% of overall residential construction).

RBA Governor Stevens indicated some concern about the inability of the supply side of the housing market to respond todemand in an affordable way in his recent Parliamentary testimony.

Indicators of non residential activity remain soft. The data is volatile and heavily affected by the end of the school buildingprogram. But the value of non residential approvals fell by 9.7% in July and is 6.6% below year earlier levels.

RBNZ view

The RBNZ suggests that current interest rate levels would not be needed much longer. We expect the RBNZ to remove its insurance cut in QIV 2011.

RBA view

The QII CPI confirmed the inflation trend has turned up. Rate rises are likely. We expect a rate rise in November. The cash rate is expected to reach 5.75% by 2013.


5/9



5

US & CANADA

United States

FOMC minutes

The release of the FOMC minutes of the August meeting showed a few memberson the Committee favoured a more aggressive response to the slowing activity inthe US economy.

Minutes revealed that some participants wanted to take bolder action to stimulatethe economy but "were willing the accept that the stronger forward guidance as astep in the direction of additional accommodation."

The vote came to 7-3 in favour of the Committee pledging to keep its target ratelow until mid-2013. Overall, there was little indication in the minutes that further quantitative easing would occur in the September meeting.

The Conference Board consumer confidence reading dropped sharply from59.5 in July to 44.5 in August. While not quite as soft as the University of

Michigan measure, the reading is still back down to H1 2009 levels and confirmsextremely downbeat sentiment amongst US households

Canada

Canadas current account deficit widened to the second largest on record in QII 201. QII exports fell and imports rose, andthe quarterly deficit printed at C$15.3 billion. The result was weaker than median expectations, and is consistent with theweak QII GDP growth expectations for Canada. A separate report from Statistics Canada showed that between June andJuly, the Industrial Product Price Index (IPPI) declined 0.3% and the Raw Materials Price Index (RMPI) fell 1.2%. Thelargest contributors to the IPPI's decline were chemical products and motor vehicles, while mineral fuels were the major factor in the decrease of the RMPI.

FOMC view

Given the loss of momentum in the US economy, particularly in the labour market, we see a high risk of further Fed easing.

Bank of Canada view

Softness in the US economy is likely to affect the Canadian economy given the strong trade ties. We expect the BoC to remain on hold until mid 2012 before it embarks on a slow and steady removal of policy accommodation.

EUROZONE & UK

UK money supply and credit numbers confirm that despite ultra-loose monetary policy in the UK, broad money continuesto contract. M4 growth in the 12 months to July was -1.1% y/y. Credit numbers showed consumer credit rising by justGBP0.2b. in July, with mortgage lending totalling just GBP 0.7b. over the month. In general, there is no monetaryexpansion taking place despite the fact that Bank rate has been at 0.5% for 29 months.

European sentiment indicators generally surprised negatively in August. The aggregate Euro-zone business climateindicator dipped from 0.45 to 0.07, while the economic confidence measure dropped from 103.2 to 98.3. Confidence inindustry and the service sector also dropped more than expected to -2.9 and 3.7 respectively. In short all confidencemeasures softened on the month and slightly more than expected.

Bank of England view

The MPC continues to stress that the high UK inflation is transitory. Hence, given the subdued outlook for the UK economy,we expect the BoE to remain on hold until QII 2012.

ECB view

We now expect the ECB to pause its rate hiking cycle for the remainder of 2011. We are pushing back our expectation for the next rate hike until Q2 2012, at which point a steady series of interest rate hikes is likely to recommence.

0

2

4

6

0

2

4

6

Jul-05 Jul-07 Jul-09 Jul-11

FEDERAL FUNDS RATE% %

CBA(f)


6/9



6

CHINA & JAPAN

Japanese retail trade was weaker than expected in July, contracting 0.3% in the month (seasonbally adjusted) to be up0.7% on year ago levels.

Bank of Japan

In response to the recent natural disasters, the Bank of Japan has implemented further quantitative easing measures.Monetary policy in Japan is likely to remain accommodative for some time.

The Week Ahead Calendar - Australasia, Japan and China

Time Forecast

Date AEST Econ Event Period Unit Last Market CBA

Tue 30 Aug 08.45 NZ Building permits Jul m%ch -1.4 ~ ~

09.30 JP Job-to-applicant ratio Jul ratio 0.6 0.6 ~

09.30 JP Jobless rate Jul % 4.6 4.6 ~

09.50 JP Retail trade s.a. Jul m%ch 2.9 0.5 ~

11.30 AU Building approvals Jul m%ch -3.5 ~ 2.0

11.30 AU Building approvals Jul y%ch -15.5 ~ -12.8

Wed 31 Aug 09.15 JP Markit/JMMA manufacturing PMI Aug Index 52.1 ~ ~

09.50 JP Industrial production Jul P m%chy%ch

3.8-1.7

1.4-1.9

~~

10.30 AU RPData-rismark median city values s.a Jul m%ch -0.2 ~ ~

11.00 NZ NBNZ activity outlook Aug Index 43.7 ~ ~

11.00 NZ NBNZ business confidence Aug Index 47.6 ~ ~

11.30 AU Private sector credit Jul m%chy%ch

-0.12.7

~~

0.22.7

14.00 JP Vehicle production Jul y%ch -13.9 ~ ~

15.00 JP Construction orders Jul y%ch 6.0 ~ ~

15.00 JP Housing starts Jul y%ch 5.8 4.2 ~

Thu 1 Sep 08.45 NZ Terms of trade index QII q%ch 0.9 ~ 6.0

09.30 AU AiG performance of manufacturing index Aug Index 43.4 ~ ~

11.30 CH PMI manufacturing Aug Index 50.7 51.0 ~

11.30 AU Private capital expenditure QII q%ch 3.4 ~ 5.0

11.30 AU Retail sales s.a. Jul m%ch -0.1 ~ 0.3

12.30 CH HSBC manufacturing PMI Aug Index 49.3 ~ ~

Fri 2 Aug 09.50 JP Monetary base Aug y%ch 15.0 ~ ~

09.50 JP Capital spending QII q%ch 3.3 2.0 ~

Sat 3 Aug 11.00 CH PMI non-manufacturing PMI Aug Index 59.6 ~ ~


7/9



7

Calendar North America & Europe

Please note all days and times are UK time, not local release day/times

UK Forecast

Date Time Econ Event Period Unit Last Market CBA

Tue 30 Aug 09.30 UK Net consumer credit Jul bn 0.4 ~ ~

10.00 EZ Economic confidence Aug Index 103.2 102.0 ~

13.30 CA Current account (BOP) QII CAD bn -8.9 -13.8 ~

14.00 US S&P/CS composite-20 city home price index Jun y%ch -4.5 -4.8 ~

15.00 US Consumer confidence QII Index 59.5 52.0 ~

19.00 US Minutes of FOMC meeting Aug ~ ~ ~ ~

Wed 31 Aug 00.01 UK GfK consumer confidence survey Aug Index -30.0 -31.0 ~

08.55 GE Unemployment rate Aug % 7.0 7.0 ~

10.00 EZ CPI estimate Aug y%ch 2.5 2.5 ~

10.00 EZ Unemployment rate Aug % 9.9 9.9 ~

13.15 US ADP employment change Aug 000 114.0 103.0 ~

13.30 CA GDP Jun m%ch -0.3 0.0 ~

13.30 CA Quarterly GDP annualized QII q%ch saar 3.9 0.0 ~

14.45 US Chicago purchasing manager index Aug Index 58.8 53.8 ~

15.00 US Factory orders Jul m%ch -0.8 1.4 ~

Thu 1 Sep 06.45 SW GDP QII q%ch 0.3 ~

07.00 GE GDP QII F q%ch 0.1 0.1 ~

08.15 SW Real retail sales Jul y%ch 7.4 ~ ~

08.30 SW PMI manufacturing Aug Index 53.5 ~ ~

09.00 EZ PMI manufacturing Aug F Index 49.7 49.7 ~

09.30 UK PMI manufacturing Aug Index 49.1 49.5 ~

13.30 US Initial jobless and continuing claims Aug 000 ~ ~ ~

15.00 US ISM manufacturing Aug Index 50.9 48.5 ~

Fri 2 Aug 09.30 UK PMI construction Aug Index 53.5 ~ ~

10.00 EZ PPI Jul y%ch 5.9 6.2 ~

13.30 US Change in non-farm payrolls Aug 000 117.0 95.0 ~13.30 US Change in private payrolls Aug 000 154.0 128.0 ~

13.30 US Unemployment rate Aug % 9.1 9.1 ~


8/9


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Commonweath Bank Economics: Global Markets Research Daily Alert 08-31-2011

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Transcript of Commonweath Bank Economics: Global Markets Research Daily Alert 08-31-2011