Economy on the improve, albeit slowly


Building approvals rose by 3% in August, in line with our expectations but stronger than consensus expectations for a rise of 1.0%. 

It is the second consecutive monthly rise and the strongest level of approvals in seven months. Approvals remain at a high level. 

They are just 5% away from the peak in this cycle struck at the start of this year.  

The stabilisation of approvals at an elevated level suggests that residential construction should remain relatively buoyant and help support the economy in its transition.

The trade deficit improved for the third consecutive month, narrowing $288mn to $787mn in August. It was the smallest trade gap in five months. 

Imports fell 2.5% and exports weakened 1.5% in August. The outlook for Australia's trade position is promising given the recent fall in the Australian dollar. 

The AUD depreciation and ongoing transition in mining from investment to production should see Australia's deficit narrow further in months ahead and help offset the impact of weaker commodity prices

In comments before a Senate Inquiry into housing affordability, RBA Assistant Governor Edey discussed some key issues within Australia's housing market. 

Edey focused on improving supply factors to improve affordability, rather than by adding to demand. Concerns that were raised in the RBA's Financial Stability Review regarding the relatively strong investor activity in Sydney and Melbourne were also reiterated. 

Edey also pointed out that the responsibility for macroprudential tools lies with APRA. 

Share Markets:

European Central Bank (ECB) President Draghi disappointed the market by neither moving any closer to broad-based asset purchases nor detailing the size of asset-backed bond purchases.

It left investors worried that the ECB's asset-purchase program is inadequate to revive the euro-area economy.

European equities fell sharply, temporarily hurting US equities and slightly denting the US dollar. The Eurostoxx 50 closed down 2.8%. 

The US's S&P500 later recovered to finish flat on the day. 

The Dow Jones also ended the session unchanged.

Interest Rates: 

US 10-year Treasury yields ranged between yesterday's one-month low of 2.38% and 2.43%.  US 2-year yields ranged between 0.56% and 0.52%. 

Australian interest rates ranged in sympathy with the global moves; 3-year government bond future yields between 2.66% and 2.71% and 10-year yields between 3.43% and 3.48%.

Foreign Exchange:

After correcting lower yesterday afternoon, the US dollar index ranged sideways overnight. EUR/USD rose from 1.2615 to 1.2692 during Draghi's press conference, squeezed by the non-delivery of further stimulus signals.

USD/JPY fell from 108.55 to 108.01. AUD/USD ranged sideways between 0.8765 and 0.8816, after receiving a boost in yesterday's Asian trade from the better-than-expected local data.

NZD/USD was the day's outperformer, thanks to yesterday's short squeeze. It ranged overnight between 0.7837 and 0.7912. AUD/NZD ranged between 1.1126 and 1.1191.


Gold futures fell overnight, moving closer to erasing this year's gains as an improving US economic outlook curbs demand for the metal as an alternative investment. 

Oil prices also fell overnight, after Saudi Arabia signalled that it is ready for a price war with other OPEC members that would deepen oil's biggest slump in more than 2 years. 

Yesterday Saudi Arabia cut its official selling price for crude to Asia to the lowest since 2008.  Meanwhile, the widely-watched basket of commodity prices, the CRB index, fell overnight too.


Details of the asset backed security and covered bond programs (ABSAPP and CBAPP) were not revealed until after the ECB press conference, so no informed questions could be asked of ECB President Draghi. 

Key details were missing. all we know now is that the CBAPP will start this month and the ABSAPP later in Q4, and that lower rated ABSs and covered bonds from Greece and Cyprus that are currently not eligible as collateral for monetary policy operations "will be subject to specific rules with risk-mitigating measures".

It has emerged that the ECB is in the process of hiring three ABS traders to price the program, who will start work in November (hence its later start date) and market counterparties are telling us they are loathe to sell what ABS they currently hold.

It boils down to this: The ECB will need to price their purchases extremely keenly to gain any traction; otherwise this program is dead in the water.

Draghi reiterated that "should it become necessary…the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate" without specifying what these instruments might be.

Eurozone producer prices decelerated to -1.4% in the year to August, from -1.3% in the year to July.  Weaker commodity prices and a weaker euro will interact to drive upcoming monthly outcomes.


Russia is not planning capital controls, according to Russian President Putin because the central bank has enough tools to ensure financial stability.

United Kingdom: Bank of England (BoE) financial policy committee reported that the government's Help-to-Buy scheme, allowing homebuyers to transact with deposits as low as 5%, was neither a material factor behind recent house price gains nor a potential cause of economic instability.

However, the BoE is seeking further powers to impose macro prudential controls on the housing market.
Meanwhile, the UK PMI construction rose from 64.0 in August to 64.2 in September, which is the second highest level on record.

United States:

Factory goods orders fell 10.1% in August, with the new information being a 0.4% fall in the non-durables component (durables fell 18.4% due to aircraft orders volatility). Factory stocks rose just 0.1%, after a flat July. 

Also the New York ISM index rose from 57.1 in August to 63.7 in September.

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