St George Economics economy and finance update

Share Markets:

Share markets bounced back with good news from both the US and Europe.

A positive US jobs report eased some concerns about the labour market ahead of the key non-farm payrolls data tonight.

The European Central Bank (ECB) also boosted sentiment by cutting interest rates and signalled it could do more.

The S&P500 and Dow both rose 0.9% with the S&P500 closing at a new high, while the Nasdaq rose 1.3%.

Bonds:

US treasuries continue to be well-supported despite rising share markets.

US ten-year yields fell marginally, and were close to their lowest this year. Growth concerns for the US economy are keeping US bonds in demand and investors are likely a bit cautious ahead of payroll data tonight.

Foreign Exchange:

The US dollar strengthened against most currencies as jobless claims fell to a five-year low, while the euro fell against the US dollar as the ECB cut interest rates and signalled the potential for more stimulus.

Despite the lift in sentiment in equity markets, the Australian dollar weakened reflecting US dollar strength and soft domestic building approvals data released yesterday.

The data has raised market expectations of an RBA rate cut next week and is now "pricing in" a 52% chance of a 25 basis point rate cut (previously 35%).

Although the data supports the case for another cut, we expect the RBA would prefer to see a little more weakness in the data before acting.

Commodities: 

Commodity prices rose, as the ECB boosted risk appetite. Oil rose around 3% with prices of gold and copper also gaining. 

Australia: 

Building approvals fell 5.5% in March. The weak result saw the annual rate of growth step down from 12.7% to 3.9%, the weakest annual pace in seven months.

The decline in March was driven by an 8.3% fall in approvals for private sector "other" dwellings or apartments. Trend growth has turned negative, and has now been in decline for three consecutive months.

China: 

The HSBC manufacturing PMI fell to 50.4 in April from 51.6 in March. The outcome is likely reflective of softer demand for Chinese product from Europe and the US.

Despite the result, growth in China should remain close to the government's growth target of 7.5%.

Europe:

The European Central Bank (ECB) cut interest rates 25 basis points to 0.50%, which many analysts had been predicting.

Although the cut would have limited impact in providing stimulus given banks are still lending at much higher rates particularly in the periphery.

It should still boost confidence and provide some support to the financial system.

At the press conference, ECB chief Draghi said the ECB Council will "stand ready to act if needed" and would consider negative deposit rates on cash parked at the ECB by banks (the deposit rate is currently at zero).

Therefore, banks would be charged for leaving excess cash with the ECB overnight.

The downside risks to the euro zone economy suggest further monetary policy action is likely. Draghi has said that the ECB will continue to provide all the liquidity banks required, at least through mid-2014.

On the data front, the final April PMI for manufacturing was revised up from 46.5 to 46.7, but it was still the lowest for the year so far.

United Kingdom:

The PMI construction index rose from 47.2 to 49.4, the highest since October last year, but still hovering below the 50 mark, signalling contraction.

United States: 

The trade deficit narrowed from $43.6bn to $38.8bn in March. A 0.9% fall in exports was more than offset by a 2.8% slide in imports.

In other data, US non-farm productivity grew at an annualised pace of 0.7% in Q1, constraining unit labour costs to a 0.5% rise, their slowest quarterly gain since 2008.

US initial jobless claims declined to 324k in the week ending 24 April, their lowest in over five years, suggesting that employee layoffs continue to slow.

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The information contained in this report (the Information) is provided for, and is only to be used by, persons in Australia. The information may not comply with the laws of another jurisdiction. The Information is general in nature and does not take into account the particular investment objectives or financial situation of any potential reader. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the Information without first seeking expert financial advice. For persons with whom St.George has a contract to supply Information, the supply of the Information is made under that contract and St.George's agreed terms of supply apply. St.George does not represent or guarantee that the Information is accurate or free from errors or omissions and St.George disclaims any duty of care in relation to the Information and liability for any reliance on investment decisions made using the Information. The Information is subject to change. Terms, conditions and any fees apply to St. George products and details are available. St.George or its officers, agents or employees (including persons involved in preparation of the Information) may have financial interests in the markets discussed in the Information. St.George owns copyright in the Information unless otherwise indicated. The Information should not be reproduced, distributed, linked or transmitted without the written consent of St.George.


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