St George Economics economy and finance update

Share Markets: 

Most US share market indices finished a volatile session nearly flat after the US Federal Reserve gave no hint that a reduction in the pace of its bond-buying program is imminent. 

The S&P 500 index closed the session unchanged and the Dow Jones finished down just 0.1%.

Yesterday, equity markets in China were boosted by report released on Tuesday night where leaders pledged to support growth by "pre-emptively fine-tuning economic policy".


US 10-year Treasury bond yields initially rose from 2.60% to 2.70% following the US data. But, then slumped to 2.59% in the wake of the FOMC statement.

Australian 3-year government bonds yields followed US rates, initially jumping from 2.58% to 2.65% but then falling to 2.57%. The 10-year yield rose from 3.73% to 3.81% and then fell to 3.71%.

Foreign Exchange: 

There was lots of volatility in currency markets overnight.

The US dollar index mimicked US interest rates, rising initially and then falling to a one-month low. 

EUR/USD fell from 1.3300 to 1.3210 but then rose to 1.3345 - a six-week high.

AUD/USD initially fell from 0.9040 to a three-year low of 0.8927 (three-year low) and remains not far from this level at the time of writing. 

Against the NZD, the AUD extended its decline to 1.1200 - a five-year low.  The price action in the AUD remains negative.


Commodity prices were mostly higher, despite the few clues from the Federal Reserve on the path of quantitative easing. Support was gained from stronger than expected US GDP and employment data.

However, gold prices slipped in volatile trade. 


Credit in the private sector had another month of modest growth, rising by 0.4% in June, although it was the strongest monthly growth rate since December 2012. 

Annual growth rebounded to a tepid 3.1% in the year to June, from 3.0% in the year to May. 

Households and businesses remain cautious, despite the improvement recorded in this month's data and the successive interest rate cuts from the RBA since November 2011.

Business credit rose by 0.5%, the strongest pace of monthly growth since December 2012, although annual growth remained a very soft 0.9% in the year to May. 

Housing credit growth was moderate, rising by 0.4% in June, although investor housing credit is picking up.  Other personal credit rose by a subdued 0.2% in June.


The euro zone unemployment rate stayed steady at 12.1% in June while the core annual inflation rate eased from 1.2% in June to 1.1% in July. 


Housing starts rose 15.3% in the year to June, the tenth consecutive month of positive annual growth.

New Zealand: 

ANZ business confidence rose from 50.1 to 52.8 in July, the highest in 14 years.  Rising house prices and low interest rates helped boost confidence, particularly within the construction industry.

United Kingdom: 

GfK consumer confidence rose from -21 to -16 in July, the highest in over three years.

United States: 

The US Federal Reserve concluded its two-day policy meeting overnight. The Fed said that the US economy continues to recover but is still in need of support. 

The Fed offered no indication that it is planning to reduce quantitative easing, choosing to stay silent on the topic.

The Fed made a few key adjustments to its post-meeting statement.  Each of these adjustments was to the downside or citing a new risk, which gave the statement a dovish tilt.

First, it downgraded modestly its view of the recovery, calling the pace of growth "modest" compared with "moderate" previously.

It also noted that mortgage rates "have risen somewhat", implicitly flagging this as a potential headwind to the housing recovery which is crucial to the wider economic recovery.

And the Fed added that "inflation persistently below 2% could pose risks to economic performance". 

Also, with appropriate policy, economic growth "will pick up from its recent pace" was replaced with "will proceed at a moderate pace". 

Consensus still expect the Fed to start scaling back its bond-buying program in September, but these changes in the statement give the Fed room to wait if economic data between here and now suggests they need to.

In earlier data released, US GDP grew by 1.7% at an annualised rate in Q2, but recent history was revised lower. 

The Q2 detail relative to Q1 showed slower consumption growth, stronger business investment, similar housing growth, less of a drag from government, a bigger drag from net exports and a smaller boost from restocking. The annualised pace in Q2, however, beat consensus expectations of 1.0%.

Growth in each of the four prior quarters saw growth revised lower, such that the annual pace of growth in Q1 2013 was revised down from 1.6% to 1.3%.

Note also the 0.8% core PCE deflator was the second lowest on record and the rate that triggered the deflation scare and QE2 in late 2010. 

Given these data, the conditionality Bernanke set out for tapering asset purchases is not being met.

In other data released, private companies in the US boosted payrolls in July by the most this year.  ADP employment lifted by 200k in June, after an upwardly revised increase of 198k in May.

The US employment cost index rose 0.5% in Q2 despite wages/salaries and benefits both growing just 0.4%. The data included an upwardly revised 0.5% (from 0.3%) for total compensation in Q1.

The BLS warned that an error in the Q1 data was being investigated.

The Chicago PMI edged up from 51.6 to 52.3 in July, the weakest pair of readings since late last year and prior to that, since the recession 4-5 years ago.

Despite the higher headline, production, orders and jobs all recorded lower readings in July.

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