St George Economics economy and finance update

Share Markets:

The US stockmarket regained its footing on Friday night, with the Dow and the S&P 500 finishing at record highs.

The Dow edged up 0.2%, the S&P 500 rose 0.4% and the Nasdaq gained 0.8% for the session.

Bonds:

Bonds fell sharply at the long end (yields rose) as the dollar's gains against the Japanese yen prompted selling of Japanese government bonds and German bunds and led to the selling of longer dated US government debt.

Investors focused on the rumour of a Wall Street Journal article by Jon Hilsenrath saying the Fed was mapping out a QE tapering strategy.

The article did appear after the New York close, so further reaction is possible today. Bill Gross, head of bond fund PIMCO said on Friday night that the 30-year bull market in fixed income had likely ended. 

Foreign Exchange: 

The Aussie dollar lost ground versus the US dollar from Friday morning, at one point dropping below parity, although it is trading just above that level at the time of writing.

The US dollar was buoyed by increased talk about the Fed's eventual scaling back of its quantitative easing.

The Yen weakened against the Aussie dollar and the US dollar after data showed Japanese investors were buying increasing amounts of foreign bonds over the past week.

Over the weekend the G7 did not reproach Japan regarding monetary easing, instead focusing on Japan's economic recovery indicating they remain tolerant of the falling Yen, which opened the door for further Yen selling this morning.

Commodities: 

Commodity prices, which are denominated in US dollars, fell on Friday night hurt by US dollar strength. Copper prices, however, defied the trend, rising, as stockpiles declined.

Australia:

In the RBA's quarterly Statement on Monetary Policy, there appeared to be very little changes in its assessment to the outlook for the global and domestic economy. 

Growth and inflation forecasts were downgraded marginally in the near-term, but forecasts were unchanged over the rest of the forecast period.

The RBA also assessed the risks the outlook as being "balanced", seemingly more so than its SOMP published in February. There was also very little guidance on the future direction of rates. However, the language used suggests a shift to a more neutral stance.

Additionally, the few changes to the RBA's assessment on the global and domestic economy suggest that the RBA is not poised to cut rates again immediately. We expect the RBA to remain on hold over the next few months, but recognise that another rate cut cannot be completely ruled out.

Europe:

German exports rose 0.5% in March, which only partially reversed February's 1.2% decline. Over the quarter, however, exports rose (after declining in the previous two quarters).

Japan:

Japan's current account surplus rose from ¥637.4bn to ¥1251.2bn in March, the highest level in a year indicating that the weaker yen is helping to boost exports, and income earned from overseas.

United Kingdom:

UK exports jumped 4.9% in March, to their highest level since July. But with imports up 3.2% in March, the visible trade balance only narrowed a little from £9.2bn to £9.1bn.

United States: 

The US monthly budget statement was in line with expectations, rising to a surplus of US$112.9bn in April, from US$59.1bn last year.


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