What to watch over the week ahead?

  • Australia’s labour force data for June is expected to show sluggish jobs growth. The market is expecting subdued growth of only +550 jobs for June with the unemployment rate edging up +0.1% to 5.6 %. Given sedate activity and confidence readings for the ‘non-mining’ economy, a weaker June job result would not be a surprise.
  • China’s money market interest rates and credit growth. After concerns over a ‘credit crunch’ type spike in interest rates in June, China’s money market appears to have calmed down last week. China’s seven-day repurchase rate has fallen from 5% at the end of June to 3.8%. China’s central bank’s assessment that the “tight liquidity situation will gradually ease” on 24 June seems to be justified at this stage. Yet confidence in China’s credit conditions will be tested by the release of June’s domestic credit data which may show a slowdown from the +17% annual pace.
  • Japan sees the release of consumer sentiment data for June. Japan’s central bank’s aggressive commitment to monetary policy stimulus has seen a robust performance from Japanese shares this year. This lift in asset prices is now feeding through to consumer sentiment which should thereby encourage rising consumer spending.
  • The US Federal Reserve (Fed) may provide some further guidance on when their bond asset purchases (or quantitative easing or QE) begins to wind down. The Fed releases the June policy meeting minutes on 10 July and these could clarify the possible timetable for reducing QE. The Federal Reserve Chairman, Ben Bernanke will give a speech on 11 July which should shine some light on his commitment to QE.

Outlook for markets

  • Global shares seem to be consolidating after June’s turbulence. Concerns over the Fed’s plans to reduce asset purchases (QE), China’s spike in interest rates and Europe’s recession appear to have diminished. Over coming months, there should be some optimism that global growth prospects are set to improve. The US employment and housing revival should gather speed while the European economy inches towards recovery.
  • This should create a solid corporate profit environment that should be favourable for global shares. Given global shares are undervalued on “Forward Price to Earning” ratios and with investors progressively switching away from government bonds, this remainder of 2013 should be rewarding for share investors.
  • Global government bond yields should drift sideways over the next few months as markets contemplate reduced asset purchases and liquidity support from central banks. Global bond markets are oversold and central banks are likely to reduce their bond buying support in a measured way rather than a sharp tightening. The Fed has signalled its intentions to taper the QE3 program of US$85 billion per month in purchases of government bonds and mortgage-backed securities but this is conditional on an improving economic outlook. However, for the medium term, less central bank buying support combined with a global growth pick-up should see government bond yields maintain their recent upward trend.

Headline developments of the past week

  • The Reserve Bank of Australia (RBA) Governor Glenn Stevens provided some excitement on 3 July with his joke that the bank had “deliberated for a very long time” at the June meeting. Financial markets interpreted this as a clear signal that the RBA would definitely cut interest rates soon, thereby seeing the Australian dollar slide below 0.91 cents against the US dollar. The RBA Deputy Governor then clarified the RBA Governor’s comments the next day as just a “light-hearted remark”. You have to worry when central bankers show a sense of humour.
  • There were more soothing comments and commitments from the European central banks which indicated that interest rates would be ‘low for longer’.
  • The European Central Bank (ECB) provided guidance that interest rates will “remain at present or lower levels for an extended period”. The ECB signalled this “unprecedented” move was motivated by “volatility”, implying major concern with Greece’s & Portugal’s precarious political situation, Europe’s weak banking system as well as the disturbing rise in unemployment rates.
  • Britain’s central bank also signalled the need for low interest rates to be maintained. The Bank of England statement after July’s meeting emphasised that the recent rise in market interest rates was “not warranted by the recent developments in the domestic economy”.

Major global economic releases and implications

  • US payrolls report provided a solid result. US employment increased by +195,000 jobs in June which was better than the expected +165,000 jobs. With May’s job result revised up by +20,000 to +195,000 extra jobs as well, this suggests that the US labour market is in an encouraging state. So despite the US budget tightening this year, as well as the looming concern that the Fed will reduce its QE program, the US labour market is doing reasonably well. However, the US unemployment rate held steady at 7.6% in June and is still above the 7% threshold that the Federal Reserve Chairman has suggested will end the QE3 program.
  • There were mixed result for US ISM business surveys in June which suggest that US economy remains on a modest 2% growth path. The ISM manufacturing survey rebounded by +1.9% point to 50.9. However, the ISM’s “Non-Manufacturing” survey slipped by -1.4 points to 52.2 which is a three-year low.
  • Europe’s unemployment rates continue to rise. For the 17 countries which have the euro as their currency, the unemployment rate rose by +0.1 % to 12.2% in May. The high unemployment rates of Spain (26.9%), Greece (26.8%), Portugal (17.6%) and Cyprus (16.3%) show that Europe’ recession, commitment to tighter government budgets and weak banking systems has had an alarming impact on their labour markets in recent years.

Australian economic releases and implications

  • At its July meeting, the RBA decided to keep Australia's cash interest rate steady at 2.75%. The accompanying statement maintains there is “some scope” for the RBA to lower interest rates further if necessary. The RBA recognises the recent soft activity with growth “a bit below trend”. This is “expected to continue in the near term as the economy adjusts to lower levels of mining investment”. The recent Australian Dollar (A$) decline is not viewed as a major inflation threat. Indeed the RBA appears comfortable with the recent A$ fall and views “the possibility that the exchange rate will depreciate further over time” would “help to foster a rebalancing of growth in the economy”. This suggests that the RBA is likely to cut interest rates in August.
  • Retail Sales disappointed in May. There was only a marginal monthly gain of +0.1% for nominal retail sales in May following April’s -0.1% fall. Annual sales growth is only running at 2.3% which is the lowest since February 2012. So caution on spending still prevails for Australian consumers despite the RBA’s interest rate cut in May.
  • Building approvals fell by -1.1% in May but this comes after a strong April result (+9.5%). Housing construction is expanding but the recovery is not as strong as would be expected having seen lower mortgage interest rates since November 2011.
  • May’s trade surplus improved significantly to A$670 million from April’s A$171 million with rising exports.

Major market moves

  • Global shares had a good opening week for July with European central banks emphasising low interest rates for longer while US Payrolls were solid for June. American shares (S&P 500) rose by +1.6% for the week. Europe saw mixed results with Germany’s DAX down -1.9% but the UK’s FTSE up +2.6 %. Australia’s ASX 200 had a better week with gains of +0.8 %.
  • Government bond yields have risen further with America’s payroll result for June generating concern that the ‘end is near’ for the Fed’s quantitative easing program. US 10-year government bond yields finished the week at 2.73% after starting the week at 2.48%.

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