WEEKLY ECONOMIC BRIEF – 12 October 2012 Chief ... - LGsuper

WEEKLY ECONOMIC BRIEF – 12 October 2012
Key Points
• Global equity markets fall despite a strong US labour market report
• US earnings season commences on a downbeat tone
• Disappointing labour market report in Australia likely to prompt a further 25bp rate cut in November
Chief Economist’s View
Despite a strong US labour market report, financial market sentiment was largely negative over the week as a broad range of data
continues to point to a weak global economic outlook. Over the week, global equity prices fell by 1.4 per cent (as measured by the
MSCI World Index, local currency). In contrast to recent weeks, where policy announcements or economic data releases have
dominated investor responses, this week, investors digested a range of data from diverse sources, including: IMF/World Bank
economic forecasts; commentary by Chinese policymakers; ratings agency sovereign debt downgrades; US earnings reports and
guidance; and US labour market data. In Australia, market participants were also required to digest an unexpected rise in the
unemployment rate.
During the week, the IMF released its latest World Economic Outlook. Its latest forecasts show a downgrade to average annual
global economic growth in 2012 and 2013 from 3.5 per cent to 3.3 per cent and from 3.9 per cent to 3.6 per cent, respectively. The
World Bank revised its forecasts for China, downgrading its outlook for economic growth in 2012 from 8.2 per cent to 7.7 per cent,
and in 2013 from 8.6 per cent to 8.1 per cent.
As the outlook for China deteriorates, market participants and economic commentators await a response from policymakers. Over
the week, Governor Zhou of the People’s Bank of China flagged an easing of monetary policy in the face of a deteriorating external
economic environment. Governor Zhou’s comments add to an increasing list of announcements signalling policy action, however,
we continue to wait for these comments to be translated into action.
Although hard economic data from Europe is generally delivering positive surprises, market sentiment continues to be driven by
developments in the debt crisis. Over the week, August European industrial production beat forecasters’ expectations in Germany,
France, Italy and Spain. However, overshadowing the positive news on industrial production was the downgrade to Spanish
sovereign debt by rating agency Standard & Poor’s.
Reporting season for the September quarter commenced for US companies this week with a downbeat tone. Reports from
resource and metal companies highlighted the impact of slowing Chinese growth, with Alcoa reducing its forecast for global
aluminium consumption and Chevron reporting a fall in third quarter earnings driven by output losses from Hurricane Isaac and
falling global oil prices. On a brighter note, September non-farm payrolls data showed a pick-up of 114k jobs over the month,
with a further increase of 86k in backward revisions, while the unemployment rate fell unexpectedly from 8.1 per cent to 7.8 per
cent. While data anomalies partly explain the fall in the unemployment rate, the improvement in employment evident in the
payroll data is promising, with the three-month moving average now tracking a monthly rate of increase of almost 150k.
Labour market data also featured significantly in Australia this week. However, unlike the US, the unemployment rate
unexpectedly rose over September, from 5.1 per cent to 5.4 per cent. Although the Australian labour market experienced robust
growth in employment, adding 14.5k jobs cf forecasters’ expectations of only a 5k increase, a rise in the participation rate
resulted in a sharp increase in the labour force and therefore the unemployment rate. Australian monthly labour market data is
notoriously volatile, but the overall trend has been one of generally soft employment growth. With the unemployment rate now
also rising, we expect the Reserve Bank of Australia will cut the cash rate by 25 basis points to 3.00 per cent at its November
meeting.
Matthew Peter
Chief Economist
m.peter@qic.com
Drew Klease
Senior Economist
d.klease@qic.com
Lynda Bourke...
Economist
l.bourke@qic.com
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Financial Market Update
• Global equity markets fell in the last week as global growth projections from both the IMF and World Bank were revised lower,
Spain’s credit rating was downgraded by Standard and Poor’s to just above junk status, and the US earnings reporting season
kicked off on a poor note. Japanese equities underperformed, with falling machinery orders seen as evidence that territorial
disputes with China are beginning to have a real impact on the economy. The MSCI World Index fell by 1.4 per cent during the
week, but remains largely unchanged so far this month and is 10 per cent higher than the start of the year.
• In the US, the S&P500 fell by 2.0 per cent this week, while the tech-heavy NASDAQ fell by 3.2 per cent as the technology
sector underperformed. The key earnings report so far this week was from aluminium producer Alcoa, which reported a loss
from continuing operations, and reduced its estimates for global aluminium demand due to weakness in China in the second half
of the year. Oil company Chevron reported a fall in Q3 earnings driven by output losses from Hurricane Isaac and falling prices.
Consumer stocks have fared better, however, with retailer Wal-Mart commenting that back-to-school sales were very strong,
while Costco beat expectations with strong volume growth induced by discounting. Bloomberg reports that analyst
expectations for Q3 are quite downbeat, with earnings-per-share of S&P500 companies expected to fall 1.7 per cent in the third
quarter and sales falling by 0.6 per cent.
• Ten-year government bond yields were unchanged in the US this week, but rose in Europe as hard economic data suggested
that the European economy is not as weak as suggested by recent survey measures. In the US, non-farm payroll data for
September were stronger than expected (after allowing for revisions to the last two months) and the unemployment rate fell
from 8.1 per cent to 7.8 per cent. This helped offset the negative impact from IMF/World Bank growth projections.
• In currency markets, the US dollar strengthened against the Euro and Sterling, but weakened slightly against the Yen and $A.
The Euro was weighed down by an IMF report that estimated European banks may need to sell an additional $4.5 trillion of
assets to restructure their balance sheets in a downside global growth scenario, up 18 per cent on their April estimate.
Table 1. Financial market movements, 4 - 11 October 2012
Equity markets Level Change
MSCI World Index (local currency) 914.1 -1.4%
US - S&P 500 1,432.8 -2.0%
Japan - Nikkei 8,546.8 -3.1%
UK - FTSE 100 5,829.8 0.0%
Germany - DAX 7,281.7 -0.3%
France - CAC 3,413.7 0.4%
Australia - S&P/ASX 200 4,483.5 0.7%
Fixed interest (10 yr sovereign yields) Yield Change
US 1.67% -0.3 bps
Japan 0.76% -1.6 bps
UK 1.78% 8.0 bps
Germany 1.50% 5.6 bps
Australia 3.03% 4.8 bps
Foreign exchange Rate Change
USD-JPY 78.340 -0.2%
EUR-USD 1.293 -0.7%
GBP-USD 1.605 -0.9%
AUD-USD 1.026 0.2%
Commodity markets Level Change
WTI oil price (US$/barrel) 92.07 0.4%
CRB index 308.87 -0.5%
Other Level Change
VIX 15.59 7.1%
Source: Bloomberg
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Economic Update
United States
• Labour market conditions continue to gradually improve in the US
– Non-farm payroll employment rose by 114,000 in September, in line with
market expectations but modestly below our forecast of 130,000.
However, substantial backward revisions to July and August, totalling
86,000 jobs, revealed a healthier labour market in the September quarter.
Over the past three months, the average monthly gain in payrolls has been
146,000 a significant improvement from the 67,000 average gain in the
three months to June.
– The big surprise in the labour market report was the sharp fall in the
unemployment rate, which fell from 8.1% to 7.8%. This was due to an
873,000 gain in employment according to the household survey.
– Initial jobless claims fell by 30,000 to 339,000 in the week ending October
6, the lowest level since February 2008.
– The unexpectedly sharp fall in the unemployment rate and drop in jobless
claims likely reflects statistical noise and therefore is expected to be
largely reversed in the next data release. Nonetheless, looking through
the volatility there has been a clear gradual improvement in the US labour
market over recent months and we expect this trend will continue
through to the end of the year. Whether it can continue into 2013, will
depend on whether US politicians enact policies to avoid the impending
fiscal cliff.
• Trade deficit widens during August
– The trade deficit widened from US$42.5 billion to US$44.2 billion with
exports falling more than imports over the month.
– Based on the trade data to date, we expect net exports to subtract 30
basis points from annualised real GDP growth in the September quarter
(which we currently forecast at 1.8%).
Euro area
• Incoming ‘hard’ activity data continues to point towards a smaller contraction
in the September quarter than suggested by the survey indicators
– Industrial production (IP) for the euro area looks set to rise in August for
the second consecutive month. Individual country reports revealed a 1.7%
gain in Italy over the month, a 1.5% gain in France, a 1.3% gain in Spain, a
2.5% gain in Greece, a 0.5% gain in the Netherlands, a 6.8% gain in
Portugal and a flat result in Ireland. While IP fell 0.5% in Germany, this
followed a strong gain in the previous month, with IP up more than 5%
annualised in the quarter to date.
– Germany’s seasonally adjusted trade surplus rose from €16.3 to €18.3
billion due to a 2.4% gain in exports.
– Overall, in our view the ‘hard’ activity data continues to suggest a
contraction in real GDP of 0.2% in the euro area during the September
quarter, slightly better than the 0.6% fall suggested by the PMI surveys.
United Kingdom
• Activity deteriorates in August after the post Jubilee holiday bounce in July.
– Industrial production fell 0.5% in August after a 2.8% gain in July.
– The trade deficit deteriorated from £1.7 billion to £4.2 billion due to a
2.4% drop in exports and a 3.4% gain in imports.
– We continue to expect the UK economy to expand by 0.7% in the
September quarter, but this is largely due to a rebound after the Diamond
Jubilee public holiday and the impact of the Olympics.
US -Change in non-farm payrolls (sa, 000s)
300
250
200
150
100
11
10
9
8
7
6
5
4
50
480
460
440
420
400
380
360
340
320
-25
-30
-35
-40
-45
-50
-55
-60
-65
-70
0
3-month
moving average
Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
US -Unemployment rate (%)
2005 2007 2009 2011 2013
US -Initial jobless claims (sa, 000s)
Claims
4-wk moving average
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
US -Trade balance (sa, $USbns)
-20
2003 2005 2007 2009 2011 2013
Germany -Industrialproduction (sa, index, 2005=100)
120
115
110
105
100
103
102
101
100
99
98
97
95
90
85
2007 2009 2011 2013
UK -Industrial production (sa, Index, 2008 = 100)
104
2009 2010 2011 2012 2013
Page 3 of 4

Japan
• Bank of Japan left monetary policy unchanged at their meeting last week.
6
5
SouthKorea-Policy rate (%)
South Korea
• Bank of Korea cut the base rate by 25bps to 2.75%.
– The move was widely anticipated by the market, although the decision was
not unanimous among committee members.
– The BOK cut their growth forecasts from 3% to 2.4% for 2012 and from
2.8% to 3.2% for 2013 due to weaker external and domestic demand.
– The BOK also announced their inflation target for 2013-2015 at 2.5%-3.5%,
narrower than the current 2-4% range.
Australia
• Unemployment rate rises sharply in September
– The unemployment rate rose sharply from 5.1% to 5.4% in September.
– Although employment rose a stronger-than-expected 14,500 over the
month, the unemployment rate rose sharply due to a jump in the size of
the labour force, with the participation rate rising from 65% to 65.2%.
• Both business and consumer confidence remains subdued
– Business conditions fell 3.5pts to -3.1 in September. Although, business
confidence improved 2.6pts to 0 in September, it remains at a low level.
– Consumer sentiment rose 1% in October to 99.2, remaining under 100
for the eighth consecutive month. It appears the surprise move by the
RBA to cut the cash rate to 3.25% on October 2 has had little impact on
consumer confidence.
• With confidence remaining weak and the unemployment rate beginning to rise,
we continue to expect the RBA will cut rates by a further 25 basis points to
3.00% in November.
4
3
2
1
0
2006 2007 2008 2009 2010 2011 2012 2013
Australia -Unemployment rate (sa, %)
6.0
5.5
5.0
4.5
4.0
3.5
2004 2006 2008 2010 2012
Australia -NAB Business conditions and confidence (sa, net balance)
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
2007 2008 2009 2010 2011 2012 2013
Australia -Westpac consumer confidence (index)
125
120
115
110
105
100
95
90
85
80
75
Confidence
Conditions
2002 2004 2006 2008 2010 2012
Sources: Thomson Reuters, ABS
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