St George Economics economy and finance update

Share Markets:

Sentiment in equity markets rebounded on positive US economic data after the lacklustre sessions earlier in the week. The S&P500 had its second biggest gain this year, lifting 1.5%. The Dow rose 1.2% and the Nasdaq rose 1.3%.

Bonds:

US treasuries continued to move with equities instead of inversely, and also gained (yields fell).

A report suggesting that the Fed may push back on expectations of higher interest rates may have helped boost demand.

Trading in bonds is likely to remain volatile, reflecting the uncertainty in the outlook for Fed policy.

Currently, bond investors seem to be pricing in some chance that the Fed will wind back quantitative easing, with 10-year yields around 2.15 after trading below 2 percent for nearly a year.

Foreign Exchange: 

The US dollar weakened against most major currencies, with the dollar index falling to its lowest in almost four months.

The Australian dollar rose to trade above 0.96.

The better-than-expected jobs report yesterday seemed to have had a limited impact on the Aussie, however, the improvement in sentiment within share markets and overall US dollar weakness has boosted the AUD overnight.

Commodities: 

Commodity prices were mixed as investors weighed up the more positive US economic data and the prospect of monetary stimulus winding down.

Oil prices rose, while copper and gold prices fell.

Global: 

The World Bank has downgraded its forecast for global growth in 2013 to 2.2% from 2.4% previously.

For 2013, the World Bank expects growth of 3%. The Bank has described the slower pace of growth as a "new normal", reflecting slower growth rates in developing countries.

Australia:

Employment unexpectedly rose 1.1k in May on the back of a revised 45.0k gain in April.

Looking through recent volatility, job growth has been healthy.

Over 2013 so far, monthly job gains have averaged 19.9k. The unemployment rate fell from a revised 5.6% in April to 5.5% in May, which was aided by a fall in workforce participation.

Despite jobs growing a little faster than what we had anticipated, we expect that the pace of job growth will weaken to a more modest pace, given still subdued conditions and confidence among businesses.

Additionally, a softer pace of job growth would correspond with the current soft pace of domestic demand. 

This would suggest that the unemployment rate will edge higher, but remain below 6 percent.

The Westpac-Melbourne Institute survey of consumer inflation expectations indicates that inflation expectations remain well anchored.

For June, expectations fell 0.3 percentage points to an annual rate of 2.1%.

The Westpac-Melbourne Institute index on unemployment expectations however, revealed a more pessimistic assessment of the labour market by households.

The index rose 6.3% in June and the trend level is 22% higher than its long-run average.

United States: 

US retail sales rose 0.6% in May, its fastest rise in three months, reflecting a steeper rise in auto sales (1.8%).

Growth in core retail sales (excluding autos and gas) slowed from 0.5% to 0.3%, however, the data to date is suggesting Q2 will be stronger than Q1.

The May detail included the fifth straight fall in furniture sales and the fourth consecutive decline in department stores.

US import prices fall 0.6% in May as petroleum prices fell 2%. Excluding fuel, prices were down 0.3%, their third fall running and a function of US dollar appreciation.

US initial jobless claims fell 12k to 334k in the week ending 8 June.

It seems that the spending sequester has not led to an acceleration in the pace of layoffs, although they continue to point to jobs growing modestly.



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