St George Economics economy and finance update

Share Markets:

THE optimism supporting share markets continued for the fourth consecutive session, driving the Dow and S&P500 indices to new record highs.

Positive US jobs data and improved sales outlook from retailers were cited as the main factors driving sentiment. The rally in equity markets is also a reflection of easy monetary policy globally. 

The Dow and S&P500 both gained 0.4%, while the Nasdaq rose 0.1%.

Bonds:

Despite the buoyant mood in equity markets, US treasuries remained well supported, with yields on 10-year bonds marginally lower.

The prospect of ongoing stimulus measures or bond purchases by central banks is likely to prevent yields from rising significantly in the near-term.

Foreign Exchange:

The US dollar weakened against most currencies, while the euro strengthened.

The Japanese yen remains under pressure given the BoJ's new aggressive monetary easing stance and touched a new four year high against USD.

The Australian dollar initially fell after the domestic job report yesterday surprised markets on the downside, but recovered lost ground as risk appetite lifted. AUD continues to trade around 1.055.

Commodities:

The broad index of commodity prices (CRB index) slipped, dragged down by oil prices, as the International Energy Agency lowered its forecast for oil demand this year.

Gold however, partially recovered from a sharp drop in the previous session.

Australia:

As we anticipated, jobs retraced a net 36.1k in March, following the massive, revised gain of 74.0k in February. We had felt that the job gains reported in February did not completely add up with other partial indicators.

Although our forecast was on the lower end of expectations, job growth has been modest when looking through the recent large swings.

The data is now more in line with anecdotal evidence that the labour market continues to add jobs, but at a modest pace. The sharp drop in employment in March resulted in the unemployment rate edging up 0.2 percentage points to 5.6%, the highest since November 2009.

The Westpac-Melbourne Institute consumer inflation expectations edged 0.1 percentage points lower to 2.2% in April, and continue to point to expectations that inflation remains well contained.

The Westpac-Melbourne Institute employment expectations index rose 1.3% in April following a 3.7% decline in March.

While the index has fallen since its peak in September last year, it remains above its long-run average. This suggests that households are still a little cautious about job prospects, although less so than late last year.

Europe:

In its monthly report, the European Central Bank (ECB) reiterated that the "monetary policy stance will remain accommodative for as long as needed".

Given the weak outlook this is a fair assessment, but given the downside risks to the ECB's growth forecast, which was maintained at 1% for 2014, additional monetary easing will likely be warranted.

Japan:

Machine orders rose by a larger than expected 7.5% in February, partially recovering from a 13.1% drop in January.

The annual rate remains in decline falling by 11.3% in the year to February. However, there are hopes that the jump in February could signal the beginning of a pick up in capital spending reflecting a weaker yen and a more positive shift in sentiment.

New Zealand:

The business NZ PMI fell to 53.4 in March, retreating from a one-year high in February and points to a softening in manufacturing conditions in February.

United States: 

US initial jobless claims fell 42k to 346k in the week ending 6 April, more than reversing the seasonal jump in claims due to the Easter break.

It continues the mild downward trend in claims since the start of this year, and suggests that there has been a modest reduction in layoffs at US firms in the past few months.

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