RBA expects growth to stay below trend for the year ahead

Share Markets:

Share markets started on a positive note - the Dow and S&P500 hit intraday record highs.

However, gains were erased later on to be little changed. European markets finished slightly higher, recovering from an early dip.

There appeared to be little reaction to the run of mixed economic data.

Interest Rates:

US treasuries strengthened (yields fell), on US jobs data which came in below consensus expectations. Yields on 10-year US treasury notes fell 2 basis points to 2.35%.

In Australia, yields on 3-year bond futures fell 1 basis point to 2.61%, and yields on 10-year bond futures fell 3 basis points to 3.34%.

Foreign Exchange:

The US dollar index slipped slightly, on the weaker jobs data. However, it remained strong against the yen on talk that Japanese PM Abe will call a snap election in December.

GBP also came under pressure on signs that the UK housing market was softening.

Meanwhile, the Australian dollar temporary dipped yesterday afternoon after RBA Assistant Governor Kent failed to rule out currency intervention, but then recovered. It is now trading at just above 87 US cents.

Commodities:

Most prices of commodities weakened. Oil prices hit a four-year low on a surge in US crude stocks and worried that the Saudis would not agree to cuts to oil output.

Australia:

Consumer expectations for the pace of inflation lifted 0.7 percentage points (ppts) to 4.1% in November.

The trend series rose a more modest 0.1 ppt to 3.6% in November (October was revised from 3.3% to 3.5%).

Overall, the lift in expectations that was observed through the first half of 2014 faded through Q3; expectations fell to levels last seen in October and November of 2013, but we have now seen a meaningful bump up.

But this lift is occurring from a low level and so, to date, inflationary expectations remain well anchored.

Reserve Bank Assistant Governor, Christopher Kent, gave a talk on the business cycle yesterday.

Key points from his speech included that the RBA expects GDP growth in Australia to stay below trend in the coming year and reach being a bit above trend by 2016.

He also noted that below average confidence and greater uncertainty have contributed to subdued non-mining business investment, but recently these factors have changed for the better.

Further, history suggests non-mining business investment will pick up in time and that there is a better chance of non-mining business investment picking up with the fundamental factors currently in place.

These factors include the ready availability of finance at low cost, greater growth of demand and capacity utilisation increasing.

In the questions & answers session, Kent repeated recent RBA rhetoric that the AUD is still too high relative to fundamentals.

China: 

Retail sales grew by 12.0% in the year to October, similar to the pace recorded in September and meeting consensus expectations.

Industrial production failed to meet consensus expectations of 8.0% in the year to October. It grew by 7.7%, from 8.0% in the year to September.

It suggests that the slowdown in industrial production may not yet have bottomed.

Europe:

A survey of forecasters conducted by the European Central Bank (ECB) revised down their forecasts for growth and inflation.

The lower inflation forecast of 1.0% in 2015 highlights that the deterioration in inflation expectations will increase pressure on the ECB to broaden the scope of its monetary stimulus.

Japan:

Machinery orders rose 2.9% in September, following a 4.7% gain in August. That leaves the annual growth rate at 7.3%, up from a contraction of 3.3% previously.

New Zealand:

Food prices were flat in October and on a year ago were 0.9% higher.

The data suggests some upside risk to the next CPI result. This is important for the Reserve Bank of New Zealand, which is watching inflation unusually closely at present and will be feeling a little less nervous that inflation could dip below the target band.

As expected, fruit and vegetable prices saw a seasonal decline, but this was offset by rising prices for meat and poultry and groceries.

In other data, the stratified house price index rose by 0.6%, its largest monthly gain since March. The average number of days taken to sell a house also eased back a little (though it remains above levels seen earlier in the year).

The gains were noticeably broad-based. House prices rose across the main centres, and sales bounced in almost all regions.

United Kingdom:

The UK RICS house price index found a net balance of 20% of surveyors reporting higher house prices in October. It was down from 30% a month ago and averaged 56% over March to May.

Most house price indicators are coming off the boil.

United States: 

US initial jobless claims rose 12k to 290k for the week ending 8 November, but overall claims remain at a very low level. They continue to indicate that the US labour market is in reasonable shape.



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