WEEKLY ECONOMIC BRIEF â 5 October 2012 Chief ... - LGsuper
WEEKLY ECONOMIC BRIEF â 5 October 2012 Chief ... - LGsuper
WEEKLY ECONOMIC BRIEF â 5 October 2012 Chief ... - LGsuper
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
<strong>WEEKLY</strong> <strong>ECONOMIC</strong> <strong>BRIEF</strong> – 5 <strong>October</strong> <strong>2012</strong><br />
Key Points<br />
• Global equity markets rallied following solid US data and favourable Spanish stress test results<br />
• Spain unlikely to ask for assistance as long as 10-year government bond yields remain below 6 per cent<br />
• RBA cuts rates by 25 basis points<br />
<strong>Chief</strong> Economist’s View<br />
Overall, market sentiment was mildly positive this week, with equity markets rallying by around 1 per cent (as measured by the<br />
MSCI World Index, local currency). Positive sentiment was driven by upbeat US economic data, comments by US Federal Reserve<br />
(Fed) Chairman Bernanke that monetary policy would continue to support the US economy and the release of favourable results<br />
from the Spanish bank stress tests. In Australia, the focus was on the <strong>October</strong> Board meeting of the Reserve Bank of Australia<br />
(RBA), which saw the RBA cut the official cash rate by 25 basis points (bps).<br />
Developments in Spain are currently focusing market attention on the European debt situation. This week, markets were concerned<br />
with two key questions surrounding Spain: (i) will the €100 billion set aside to recapitalise Spanish banks be sufficient and (ii) when<br />
will the Spanish government ask for assistance in the recapitalisation of its banks? Results from bank stress tests by Spain’s<br />
independent auditors suggested that €59.3 billion would be required to recapitalise Spanish banks in the event of an adverse<br />
economic scenario; an amount significantly less than the €100 billion bailout fund to be set aside by the European Union. With 10-<br />
year yields on Spanish sovereign debt having retreated since early September, to a level below 6 per cent, the pressure on the<br />
Spanish government to apply for assistance from the EU has eased. In response to speculation over the timing of a request for<br />
assistance, Prime Minister Rajoy re-iterated that the government was not yet ready to ask for a bail out, reinforcing our view that he<br />
would hold off requesting aid as long as interest rates on Spanish debt remained at levels at-or-below 6.0 per cent.<br />
Our research, based on simulations using QIC’s proprietary version of the NiGEM global economic model show that if Spain were<br />
to increase its sovereign debt liabilities by €100 billion, the additional financing would need to be at an interest rate of 5.0 per cent<br />
or less for Spain to keep its public finances on a sustainable path. Without an increase in liabilities, our results indicate that Spanish<br />
debt could remain on a sustainable path, given its current budget targets over the coming two years, with interest rates of 6.5 per<br />
cent or less. Consequently, Prime Minister Rajoy could avoid signing away Spanish sovereignty by not seeking assistance for bank<br />
recapitalisation from the EU, but only if the market rates remain around current levels. As long as rates stay below 6.0 per cent, we<br />
expect Prime Minister Rajoy will resist applying for assistance.<br />
In his statement following the RBA <strong>October</strong> Board meeting, where the official cash rate was cut by 25bps, Governor Stevens<br />
maintained that a strong pipeline of capital expenditure by the mining sector would continue to support growth into 2013. However,<br />
he also noted that the peak of the construction phase of the mining boom was likely to be lower than previously anticipated and that<br />
other sources of demand would need to increase to offset a drop in mining investment. Rather than a seamless transition from the<br />
investment-driven construction phase of the mining boom to the export-driven operational phase of the boom, the Australian<br />
economy is now facing a potential “gap” year in 2014 as the mining companies shelve new projects and delay expansions of existing<br />
mines. If this is the case, the decline in investment expenditure will no longer be adequately compensated for by rising export<br />
volumes, with the risk that economic growth slows sharply. If the RBA is convinced of the “gap year” scenario, they would need to<br />
cut rates to (i) lower the cost of borrowing to business and households and (ii) ease pressure on the Australian exchange rate.<br />
Given lags in monetary policy, the RBA would continue with its easing cycle into 2013, even if current rate of economic growth<br />
were to prove robust.<br />
Matthew Peter<br />
<strong>Chief</strong> Economist<br />
m.peter@qic.com<br />
Drew Klease<br />
Senior Economist<br />
d.klease@qic.com<br />
Lynda Bourke...<br />
Economist<br />
l.bourke@qic.com<br />
The Weekly Economic Brief is issued by QIC Limited ACN 130 539 123 ("QIC") and is compiled by QIC's Economics & Research Team.<br />
For further information regarding QIC’s investment solutions, please contact Kate Grant (Head of Client Relationship Management) on<br />
+61 7 3360 3999 or k.grant@qic.com<br />
Page 1 of 4
Financial Market Update<br />
• The Reserve Bank of Australia surprised markets and economists by cutting the cash rate by 25 basis points on Tuesday. This<br />
helped the S&P/ASX 200 rise 1 per cent on the day, to finish up 1.6 per cent over the week to Thursday. The decision led<br />
Australian 10-year government bond yields to fall 4 basis points to 2.98 per cent and the Australian dollar to weaken against all<br />
major currencies, falling 1.9 per cent against the US dollar.<br />
• Global equity markets edged higher over the week, with the MSCI World Index rising 0.7 per cent. European equities continued<br />
to underperform, undermined by the ongoing debt crisis. French equities fell 1.1 per cent over the week after the government<br />
unveiled its most austere budget in 30 years. Japanese equities fell 1.4 per cent, weighed down by a further deterioration in<br />
manufacturing sentiment.<br />
• Major government bond yields were little changed over the week. As expected, the Bank of England and European Central Bank<br />
left policy unchanged at their <strong>October</strong> meetings. We continue to expect the Bank of England will increase its asset purchase<br />
program by a further £25 billion next month.<br />
• In other currency markets, the Japanese yen underperformed falling 1.1 per cent against the US dollar and almost 2 per cent<br />
against the euro. Weaker economic data, combined with increasing political pressure for further policy easing after the PM<br />
reshuffled the cabinet for the third time this year, weighed on the yen. The new economy minister, Seiji Maehara, an advocate<br />
for the Bank of Japan to purchase foreign government bonds (which would have the impact of weakening the currency)<br />
announced that he would attend the BOJ meeting this week, the first minister to do so since 2003. In addition, the new finance<br />
minister, Koriki Jojima, stated that “the yen’s recent appreciation is one-sided and doesn’t reflect the state of the Japanese<br />
economy” and that they are ready to take bold action, raising expectations of further foreign exchange intervention to devalue<br />
the yen.<br />
Table 1. Financial market movements, 27 September - 4 <strong>October</strong> <strong>2012</strong><br />
Equity markets Level Change<br />
MSCI World Index (local currency) 927.1 0.7%<br />
US - S&P 500 1,461.4 1.0%<br />
Japan - Nikkei 8,824.6 -1.4%<br />
UK - FTSE 100 5,827.8 0.8%<br />
Germany - DAX 7,305.2 0.2%<br />
France - CAC 3,401.2 -1.1%<br />
Australia - S&P/ASX 200 4,452.4 1.6%<br />
Fixed interest (10 yr sovereign yields) Yield Change<br />
US 1.67% 1.9 bps<br />
Japan 0.77% -0.6 bps<br />
UK 1.70% -2.8 bps<br />
Germany 1.45% -1.1 bps<br />
Australia 2.98% -4.1 bps<br />
Foreign exchange Rate Change<br />
USD-JPY 78.480 1.1%<br />
EUR-USD 1.302 0.8%<br />
GBP-USD 1.619 -0.3%<br />
AUD-USD 1.024 -1.9%<br />
Commodity markets Level Change<br />
WTI oil price (US$/barrel) 91.71 -0.2%<br />
CRB index 310.45 1.0%<br />
Other Level Change<br />
VIX 14.55 -2.0%<br />
Source: Bloomberg<br />
Page 2 of 4
Economic Update<br />
United States<br />
• Economic indicators released over the week generally surprised to the upside,<br />
providing some evidence that the current slowdown is showing signs of<br />
stabilisation.<br />
– Key business surveys picked-up, with the ISM manufacturing survey rising<br />
from 49.6 to 51.5 in September, the first reading above the 50 threshold<br />
since May. The non-manufacturing ISM survey rose from 53.7 to 55.1, its<br />
highest level since March.<br />
– Real consumer spending rose 0.1% in August following a solid 0.4% gain in<br />
July. Light vehicle sales data rose strongly in September from 14.46 million<br />
to 14.88 million (annualised), suggesting a pick-up in consumption over the<br />
month. This places modest upside risks to our 1.6% annualised real<br />
consumption growth forecast for the September quarter.<br />
– ADP private payrolls rose 162,000 in September, suggesting a continued<br />
modest improvement in employment since the slowdown in the middle of<br />
the year. We continue to forecast the official non-farm payroll<br />
employment measure, to be released tonight, to rise by 130,000 in<br />
September.<br />
– Construction spending was one of the few indicators to disappoint, falling<br />
0.6 per cent in August. Residential spending continues to trend higher, but<br />
non-residential spending has declined due to the uncertainty facing<br />
businesses around the impending fiscal cliff.<br />
• Despite the better data over the week, the indicators continue to suggest that<br />
the US economy will expand at a below-trend pace of slightly under 2 per cent<br />
annualised in the second half of <strong>2012</strong>.<br />
Euro area<br />
• Limited new economic information emerged from Europe this week.<br />
– The composite PMI for September edged up from the flash reading of 45.9<br />
to 46.1. Nonetheless, the index remains at a four month low and is<br />
consistent with a further contraction in the euro area economy during the<br />
quarter.<br />
– Real retail sales edged up 0.1% in August for the third consecutive month.<br />
While retail sales have moved modestly higher in recent months, new car<br />
registrations have fallen sharply suggesting a pull-back in overall consumer<br />
spending during the quarter.<br />
– Euro area unemployment rate remained at 11.4% during August.<br />
Unemployment rose to 25.1% in Spain, but remains low at 5.5% in<br />
Germany. A modest rise in the euro area unemployment rate to 11.6% is<br />
expected over the next few months.<br />
– Inflation edged higher from 2.6% to 2.7% in September.<br />
United Kingdom<br />
• Signs of slowdown emerging at the end of the September quarter.<br />
– The manufacturing PMI fell from 49.6 to 48.4 during September, while the<br />
services PMI dropped from 53.7 to 52.2.<br />
• While we expect the UK economy to expand by 0.7% in the September<br />
quarter, this is largely due to a rebound after the Diamond Jubilee public<br />
holiday depressed activity in the June quarter and the impact of the Olympics.<br />
Underlying growth in the economy is expected to be weak excluding these<br />
temporary factors, which is supported by the PMI surveys released this week.<br />
US -ISM survey (index, sa)<br />
60<br />
Non-manufacturing<br />
55<br />
50<br />
45<br />
40<br />
Manufacturing<br />
35<br />
30<br />
2007 2008 2009 2010 2011 <strong>2012</strong> 2013<br />
US -Car and light truck auto sales (millions, annual rate)<br />
16<br />
15<br />
14<br />
13<br />
12<br />
11<br />
10<br />
9<br />
2008 2009 2010 2011 <strong>2012</strong> 2013<br />
Construction spending (% y/y)<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
Residential<br />
-30<br />
-40<br />
Non-residential<br />
Total<br />
2003 2004 2005 2006 2007 2008 2009 2010 2011 <strong>2012</strong><br />
Euro area -Retailsales (volumes, sa, m/m%)<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
-1.5<br />
-2.0<br />
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12<br />
Euro area -Unemployment rate (%)<br />
11.5<br />
11.0<br />
10.5<br />
10.0<br />
9.5<br />
9.0<br />
8.5<br />
8.0<br />
7.5<br />
7.0<br />
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013<br />
UK -Manufacturing PMI (index)<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
2007 2008 2009 2010 2011 <strong>2012</strong> 2013<br />
Page 3 of 4
China<br />
• Survey indicators suggest the weakness in the Chinese economy continued in<br />
September<br />
– The manufacturing PMI remains edged up from 49.2 to 49.8 in September,<br />
while the non-manufacturing PMI fell from 56.3 to 53.7.<br />
Japan<br />
• Japanese economy is expected to contract in the September quarter, weighed<br />
down by slowing external demand and a high exchange rate. Incoming data was<br />
consistent with this view:<br />
– Industrial production fell a further 1.3% in August, following a 1% decline<br />
in July.<br />
– Large manufacturer sentiment remains weak falling from -1 to -3.<br />
– While retail sales rebounded 1.5% in August, this simply offset the 1.5%<br />
decline in the previous month.<br />
• The slowing economy is yet to hit the labour market, with the unemployment<br />
rate edging down from 4.3% to 4.2% in August.<br />
• Japan remains in deflation, with the inflation rate remaining at -0.4% in August.<br />
Australia<br />
• Disappointing economic data during August may lead to a further rate cut by<br />
the RBA in coming months<br />
– Retail sales rose by a soft 0.2% in August.<br />
– Trade deficit widened from $1.5 billion to $2.0 billion on falling export<br />
values.<br />
– Monthly credit growth remained subdued at 0.2% in August.<br />
– Building approvals rebounded 6.4% in August, but that followed a 21%<br />
drop in the prior month.<br />
China -NBS Manufacturing PMI (index)<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
2007 2008 2009 2010 2011 <strong>2012</strong> 2013<br />
Japan -Industrialproduction (sa, index, 2005 = 100)<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
75<br />
70<br />
2007 2008 2009 2010 2011 <strong>2012</strong> 2013<br />
Japan -Consumer prices (% y/y)<br />
3<br />
2<br />
1<br />
0<br />
-1<br />
-2<br />
-3<br />
2005 2006 2007 2008 2009 2010 2011 <strong>2012</strong> 2013<br />
Australia -Retail sales (values, m/m%)<br />
1.5<br />
1.0<br />
0.5<br />
0.0<br />
-0.5<br />
-1.0<br />
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13<br />
Sources: Thomson Reuters, ABS<br />
QIC is a wholesale funds manager and its products and services are not directly available to retail investors. QIC is a company<br />
government owned corporation constituted under the Queensland Investment Corporation Act 1991 (Qld). QIC is regulated by<br />
State Government legislation pertaining to government owned corporations in addition to the Corporations Act 2001<br />
(“Corporations Act”). QIC does not hold an Australian financial services (“AFS”) licence and certain provisions (including the<br />
financial product disclosure provisions) of the Corporations Act do not apply to QIC. Please note however that some wholly<br />
owned subsidiaries of QIC have been issued with an AFS licence and are required to comply with the Corporations Act. QIC, its<br />
subsidiaries, associated entities, their directors, employees and representatives (“the QIC Parties”) do not warrant the accuracy<br />
or completeness of the information contained in this document (“the Information”). To the extent permitted by law, the QIC<br />
Parties disclaim all responsibility and liability for any loss or damage of any nature whatsoever which may be suffered by any<br />
person directly or indirectly through relying on the Information, whether that loss or damage is caused by any fault or negligence<br />
of the QIC Parties or otherwise. The Information is not intended to constitute advice and persons should seek professional<br />
advice before relying on the Information. QIC owns the copyright and all other intellectual property rights in all Information, or<br />
has a licence or agreement to use that copyright where it is owned by someone else. You may only reproduce the Information<br />
for personal or non-commercial use, and it must not be distributed or transmitted to any other person, or used in any other<br />
way (except to the extent permitted by law).<br />
Page 4 of 4