St George Economics economy and finance update

Share Markets:

Attention was focused on Europe given US markets were closed for Independence Day holiday.

The European Central Bank (ECB) and the Bank of England (BoE) both left policy unchanged, but their comments were aimed at keeping long-term interest rates low.

The ECB pledged to keep rates low for an extended period, while the BoE issued a statement for the first time.

The forward guidance and easy monetary policy stance boosted share markets.

European shares rallied, with the FTSE100 3.1% and the Euro Stoxx lifting 3.0%.


Bond yields in Europe fell on the new forward guidance from central banks and the possibility that the ECB could cut rates.

Yields on 10-year German bunds fell to 1.65%, well down from its peak at above 1.8%. Spanish and Italian yields also fell.

Portuguese 10-year yields fell 19 basis points to 7.27%, partially reversing a spike earlier in the week due to political uncertainty.

Foreign Exchange:

The euro fell to its lowest in five weeks against the US dollar on Draghi's comments that interest rates were to remain at present or lower levels.

GBP also weakened against the US dollar given expectations the BoE will keep interest rates low in the UK.

Although the Fed is expected to keep interest rates low for a long time, the shift in policy by signalling an unwinding in asset purchases is a divergence from the easing bias held by other central banks around the world.

This suggests further US dollar strength against other major currencies.

The Australian dollar gained slightly yesterday after RBA Deputy Governor Lowe played down talk that the RBA considered lowering rates at its last meeting.

More positive risk sentiment last night was also supportive for the AUD and is now trading at around 91.4US cents.


Brent oil prices fell on easing supply concerns.

The unrest in Egypt has yet to affect key supply route the Suez Canal. The stronger US dollar weighed on gold prices and other commodity prices -  copper fell from a 2-week high.


Building approvals fell 1.1% in May but this followed a strong 9.9% rise in April.

The annual pace of growth fell from 28.8% to negative 3.2% as a very large result in May 2102 was not replicated in 2013.

However, in trend terms building approvals are up 7.1% over the year to May. A bright spot was a recovery in approvals for private sector houses, which rose for the fifth consecutive month.

RBA Deputy Governor Lowe spoke yesterday, and played down the Governor's earlier comments that the RBA board took "a long time" to deliberate its cash rate decision on Tuesday.

The remarks were interpreted to mean that the RBA had considered lowering the cash rate.

Lowe responded by saying "the board did deliberate for a very long time, but always does" and that the governor's remarks were meant to be "light-hearted" and were "misinterpreted".


The European Central Bank (ECB) left policy settings on hold but forward guidance was adopted.

At the press conference ECB chief Draghi revealed that the Council had an easing bias, expecting key rates "to remain at present or lower levels for an extended period of time".

The comments were more transparent than usual, and could help keep down longer-term yields.

There were no further announcements about other non-standard policy options such as negative rates and measures that could involve using the ECB's balance sheet to take on risk.

The Council still expected recovery later this year but accepted that right now the economy was "going down, at a slower pace."

United Kingdom:

The Bank of England (BoE) also left policy unchanged, but the BoE also issued a statement after incoming Governor Carney's first policy meeting.

It noted that incoming data had been consistent with May's inflation report outlook for growth and inflation, but the rise markets rates higher had not, and would weigh on the outlook. 

The comments refer to the spike in global government bond yields on growing expectations the Fed would unwind its bond purchases.

The Monetary Policy Committee's recent assessment of the case for forward guidance "would have an important bearing on the Committee's policy discussions" at the August window.

UK house prices accelerated to an annual pace of 3.7% yr in Q2 according to the Halifax index, the fastest pace of gain since 2010.

United States: 

No data released.

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