WEEKLY ECONOMIC BRIEF â 5 October 2012 Chief ... - LGsuper

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Financial Market Update • The Reserve Bank of Australia surprised markets and economists by cutting the cash rate by 25 basis points on Tuesday. This 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 Australian 10-year government bond yields to fall 4 basis points to 2.98 per cent and the Australian dollar to weaken against all major currencies, falling 1.9 per cent against the US dollar. • Global equity markets edged higher over the week, with the MSCI World Index rising 0.7 per cent. European equities continued to underperform, undermined by the ongoing debt crisis. French equities fell 1.1 per cent over the week after the government unveiled its most austere budget in 30 years. Japanese equities fell 1.4 per cent, weighed down by a further deterioration in manufacturing sentiment. • Major government bond yields were little changed over the week. As expected, the Bank of England and European Central Bank left policy unchanged at their October meetings. We continue to expect the Bank of England will increase its asset purchase program by a further £25 billion next month. • In other currency markets, the Japanese yen underperformed falling 1.1 per cent against the US dollar and almost 2 per cent against the euro. Weaker economic data, combined with increasing political pressure for further policy easing after the PM reshuffled the cabinet for the third time this year, weighed on the yen. The new economy minister, Seiji Maehara, an advocate for the Bank of Japan to purchase foreign government bonds (which would have the impact of weakening the currency) announced that he would attend the BOJ meeting this week, the first minister to do so since 2003. In addition, the new finance minister, Koriki Jojima, stated that “the yen’s recent appreciation is one-sided and doesn’t reflect the state of the Japanese economy” and that they are ready to take bold action, raising expectations of further foreign exchange intervention to devalue the yen. Table 1. Financial market movements, 27 September - 4 October 2012 Equity markets Level Change MSCI World Index (local currency) 927.1 0.7% US - S&P 500 1,461.4 1.0% Japan - Nikkei 8,824.6 -1.4% UK - FTSE 100 5,827.8 0.8% Germany - DAX 7,305.2 0.2% France - CAC 3,401.2 -1.1% Australia - S&P/ASX 200 4,452.4 1.6% Fixed interest (10 yr sovereign yields) Yield Change US 1.67% 1.9 bps Japan 0.77% -0.6 bps UK 1.70% -2.8 bps Germany 1.45% -1.1 bps Australia 2.98% -4.1 bps Foreign exchange Rate Change USD-JPY 78.480 1.1% EUR-USD 1.302 0.8% GBP-USD 1.619 -0.3% AUD-USD 1.024 -1.9% Commodity markets Level Change WTI oil price (US$/barrel) 91.71 -0.2% CRB index 310.45 1.0% Other Level Change VIX 14.55 -2.0% Source: Bloomberg Page 2 of 4
Economic Update United States • Economic indicators released over the week generally surprised to the upside, providing some evidence that the current slowdown is showing signs of stabilisation. – Key business surveys picked-up, with the ISM manufacturing survey rising from 49.6 to 51.5 in September, the first reading above the 50 threshold since May. The non-manufacturing ISM survey rose from 53.7 to 55.1, its highest level since March. – Real consumer spending rose 0.1% in August following a solid 0.4% gain in July. Light vehicle sales data rose strongly in September from 14.46 million to 14.88 million (annualised), suggesting a pick-up in consumption over the month. This places modest upside risks to our 1.6% annualised real consumption growth forecast for the September quarter. – ADP private payrolls rose 162,000 in September, suggesting a continued modest improvement in employment since the slowdown in the middle of the year. We continue to forecast the official non-farm payroll employment measure, to be released tonight, to rise by 130,000 in September. – Construction spending was one of the few indicators to disappoint, falling 0.6 per cent in August. Residential spending continues to trend higher, but non-residential spending has declined due to the uncertainty facing businesses around the impending fiscal cliff. • Despite the better data over the week, the indicators continue to suggest that the US economy will expand at a below-trend pace of slightly under 2 per cent annualised in the second half of 2012. Euro area • Limited new economic information emerged from Europe this week. – The composite PMI for September edged up from the flash reading of 45.9 to 46.1. Nonetheless, the index remains at a four month low and is consistent with a further contraction in the euro area economy during the quarter. – Real retail sales edged up 0.1% in August for the third consecutive month. While retail sales have moved modestly higher in recent months, new car registrations have fallen sharply suggesting a pull-back in overall consumer spending during the quarter. – Euro area unemployment rate remained at 11.4% during August. Unemployment rose to 25.1% in Spain, but remains low at 5.5% in Germany. A modest rise in the euro area unemployment rate to 11.6% is expected over the next few months. – Inflation edged higher from 2.6% to 2.7% in September. United Kingdom • Signs of slowdown emerging at the end of the September quarter. – The manufacturing PMI fell from 49.6 to 48.4 during September, while the services PMI dropped from 53.7 to 52.2. • While we expect the UK economy to expand by 0.7% in the September quarter, this is largely due to a rebound after the Diamond Jubilee public holiday depressed activity in the June quarter and the impact of the Olympics. Underlying growth in the economy is expected to be weak excluding these temporary factors, which is supported by the PMI surveys released this week. US -ISM survey (index, sa) 60 Non-manufacturing 55 50 45 40 Manufacturing 35 30 2007 2008 2009 2010 2011 2012 2013 US -Car and light truck auto sales (millions, annual rate) 16 15 14 13 12 11 10 9 2008 2009 2010 2011 2012 2013 Construction spending (% y/y) 30 20 10 0 -10 -20 Residential -30 -40 Non-residential Total 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Euro area -Retailsales (volumes, sa, m/m%) 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Euro area -Unemployment rate (%) 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 UK -Manufacturing PMI (index) 65 60 55 50 45 40 35 30 2007 2008 2009 2010 2011 2012 2013 Page 3 of 4
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