St George Economics economy and finance update

Share Markets:

Sentiment continued to improve overnight following China's growth pledge at the National People's Congress, a softer EU stance on fiscal deficits and solid US services sector activity data.

The Dow hit a record high and finished the session up 0.9% at a record closing high.

The S&P 500 gained 0.9% and was at a 5-year high and the Nasdaq was up 1.3% for the session.
 

Bonds:

US bonds slipped (yields edged higher), with hopes of higher spending in China and solid US services sector data boosting equities, dampening the appeal of safe haven government debt.

European peripheral bond yields fell, with Italian 10-year yields down 14 basis points to 4.74%, while Spanish 10-year bond yields fell 5 basis points to 5.04%.
 

Foreign Exchange:

The Aussie dollar gained against the major currencies, after the RBA left official interest rates unchanged yesterday. 

The US dollar softened versus the Aussie dollar, with improved risk appetites driving investors into higher yielding currencies.
 

Commodities:

Commodity prices were generally lifted by optimism regarding the outlook for economic growth.

Copper was boosted by China's pledge to maintain economic growth at 7.5%.
 

Australia:

The Reserve Bank of Australia (RBA) left its cash rate unchanged at 3.00% as widely expected.

The concerns surrounding the high Australian dollar combined with a subdued inflation outlook and low demand for credit indicate that the RBA maintains an easing bias, but will want to wait on the sidelines. 

The Statement again reiterated that "inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand". 

We continue to expect the RBA has room to cut rates once more by 25 basis points given there remain pockets of weakness in the domestic economy.

However, we believe that the RBA will need a bit more time to assess how earlier rate cuts are taking effect.

Although the run of data has been mixed, it isn't likely to be alarming enough to convince the RBA into action for the next few months.

We expect the RBA will delay cutting rates until June.

Retail spending jumped 0.9% in January, the largest monthly increase in six months, and possibly signalling that consumers are finally responding to interest rate cuts. 

Although a positive sign for retailers, we are cautious in being too optimistic given January's result followed three consecutive months of decline.

The current account deficit narrowed slightly, by $370mn, to $14.7bn in the December quarter. 

A slight increase in the goods and services deficit was more than offset by a decrease in the primary income deficit.

The range of partial indicators has led us to upgrade our GDP forecast to 1.0% in the December quarter taking annual growth to 3.4%.

Although it implies above trend growth, the upgrade largely reflects a temporary surge in public investment.

With the exception of a solid contribution from net exports (+0.6 percentage points), other demand indicators have been modest at best.

The AiG performance of services index rose to 48.5 in February from 45.4 previously, the highest in eight months.

Although the lift is encouraging, it remains below 50 which is signalling contraction in the services industry.
 

China:

China pledged spending to promote growth at the National People's Congress.

Outgoing Premier Wen said consumption was the key for China's economic growth, saying China would deliver economic growth of 7.5% in 2013.

The Ministry of Finance said fiscal spending as a percent of GDP would be at its highest since 2010 this year and in absolute terms would hit a record high.

China's HSBC services PMI declined from 54.0 to 52.1 in February.
 

Europe:

The Euro zone composite PMI was revised up to 47.9 in February, from the flash estimate of 47.3.

However, this remains below the 48.6 reading in January and below the 50 level, indicating contraction in activity.

Euro zone retail sales volumes rose 1.2% in January, reversing the 0.8% decline in December. For the year to January, retail sales are down 1.3%.
 

United Kingdom: 

The UK services PMI edged up to 51.8 in February, from 51.5 in January.

This was the highest reading since September last year.

A separate report from the BRC showed same store sales rose 2.7% in the year to February.
 

United States: 

The US non-manufacturing PMI rose to 56.0 in February, from 55.2 in January.

Business activity and jobs were little changed, but orders strengthened.

The US IBD-TIPP economic optimism index fell to 42.2 in March from 47.3 in February.

This was the lowest reading since late 2011, with the decline driven by economic outlook, Federal policies and personal financial outlook.


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