St George Economics economy and finance update

Share Markets: 

Good economic data, combined with ongoing monetary stimulus saw markets move higher overnight. 

The Dow rose 0.8%, the FTSE was up 0.9% and the German Dax index rose 1.6%. The Australian SPI 200 index was up 41 points overnight suggesting a positive start to the day's trade.

Bonds: 

Good news on unemployment claims and a positive report on the outlook for US manufacturing saw US 10 year bond yields rise 13 basis points to 2.71%.

US 2 year yields were more subdued rising just 2 basis points to 0.32%.  Despite strong equity markets in Europe, bond yields were little changed as the European Central Bank (ECB) and the Bank of England (BoE) remained on hold.

Foreign Exchange: 

The US dollar index rose almost 1.0% yesterday pushing the AUD to its lowest level since August 2010.

Its strength came on the back of positive economic news on manufacturing and the jobs market.

Commodities:

Oil and copper both moved higher on the solid economic news but gold slipped back in response to overnight strength in the US dollar.

Australia:

Yesterday's data on dwelling prices reveals that lower mortgage rates and improved affordability are luring buyers back to the housing market, spurring stronger growth in dwelling prices. 

According to RP Data-Rismark data, dwelling prices across capital cities rose by 1.6% in July, after another solid gain of 1.9% in June. 

In the three months to July, dwelling prices rose by 2.3% and in the twelve months to July, dwelling prices rose at the fastest pace in 2½ years at 4.9%. 

Since bottoming in May last year, dwelling prices have risen by 6.5%. 

While the housing market is in recovery, households still hold a degree of reticence around taking on extra debt.  It helps explain why this housing recovery is still slightly shallower than the last one in 2008/09.

In other housing data published yesterday, new home sales rose by 3.4% in June according to the HIA.

In separate data, a gauge of Australian manufacturing - the AiG manufacturing PMI - slumped 7.6 points to 42.0 in July, representing the biggest decline since April. 

The last reading above 50, which represents the divide between expansion and contraction, was in February 2012. 

The fall in the AUD and fall in interest rates has not been enough to turn around a challenging business environment for manufacturers.

Trade prices data were also published yesterday.  Both export prices and import prices fell by 0.3% over the June quarter. 

Through the year, export prices fell by 6.4% and import prices were down by 2.4%. The trade price data gives us the figures to calculate the implied terms of trade for the June quarter. We estimate that the terms of trade were flat in Q2 to be 4.2% on a year ago.

Finally, the Bureau of Statistics yesterday issued a notification that the June quarter CPI release included an error in the calculation of core CPI and seasonally adjusted headline CPI estimates. 

The resulting revisions are minor and have no implications for RBA policy. To the extent that there are changes, these lower the most recent trajectory for core inflation slightly.

China: 

The official manufacturing PMI published by the National Bureau of Statistics (NBS) rose from 50.1 in June to 50.3 in July.  This rise confounded expectations shaped by the weak flash estimate of the HSBC series published recently. 

The final estimate for the HSBC series was published yesterday and stayed unchanged from the flash estimate.

The HSBC gauge fell to 47.7 in July from 48.2 in June, but it did contain some positive forward-looking elements.

China's government has pledged to prevent growth from slipping below a "reasonable" level.

Europe: 

The ECB remained on hold following its meeting overnight. At the press conference, ECB chief Draghi noted recent improved surveys "tentatively confirm the expectation of a stabilisation in economic activity" but warned that market expectations of rates rises were premature and would require a much stronger outlook than the ECB's base scenario.

The Eurozone manufacturing PMI was revised up from 50.1 to 50.3 in July, confirming some recent stabilisation in the industrial sector after two years of contraction.

The French PMI was revised slightly lower to 49.7 but Germany was revised up 0.4 points to 50.7. 

United Kingdom: 

Bank of England remained on hold overnight and there were no new policy innovations introduced or suggested by the new governor Mark Carney.

The UK manufacturing PMI jumped from 52.9 to 54.6 in July, its highest in more than two years.

United States:

The ISM manufacturing index rose from 50.9 to 55.4 in July, its strongest reading since 2011.

The detail showed an 11 point rise in production to a nine year high at 65, and the fastest pace of hiring in a year.

The size of the increase throws some doubt on the numbers given its recent stability.

US initial jobless claims fell 19k to 326k in the week ended 27/7, their lowest in more than five years though possibly still distorted by auto industry shutdown seasonality issues.

The much-watched monthly US non-farm payroll data will be released tonight. The market is expecting job growth of around 185k.



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