Australian Markets Weekly: 13 February 2017

The Australian budget in the first six months of this financial year is tracking a little higher, but not significantly worse than recent budget forecasts

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S&P still watching – Budget forecasts can’t slip

  • NAB hosted S&P analysts at a lunch last week. In this week’s edition we review our impression of the key issues for Australia’s AAA rating. S&P’s negative outlook reflects general concern with Australia’s level of net external debt, coupled more recently with the failure of successive governments to return the budget to balance as forecast. S&P reiterated that no further slippage to the current forecast to return the budget to balance by the early 2020s would be tolerated. That said, our assessment was that S&P did not seem closer to downgrading Australia. This is a slight improvement on our assessment before Christmas when we thought a downgrade was quite likely by the middle of this year.
  • Trends in Australia’s budget over the first six months of 2016-17, suggest, the deficit is tracking marginally worse than forecast, but immaterially so in our opinion. GST and PAYG taxes are growing slowly, though company tax receipts have begun to strengthen. Outlays continue to grow strongly. The latter will likely be (and should continue to be) the focus of the government if it wants to secure its forecasts for a return to balance.
  • Fed Chair Yellen’s semi-annual testimonies on Tuesday and Wednesday – along with other Fed speakers – will be keenly focused on this week for any further clues as to when the Fed will next raise rates – and by how much over 2017.
  • In Australia, the highlights will be Tuesday’s January NAB Business Survey (given the sharp improvement in business conditions in December), Wednesday’s Consumer Confidence report and the latest update on the Australian labour market (on Thursday). The RBA’s Alex Heath and Luci Ellis speak on Wednesday and Thursday, respectively. NAB sees some slight upside risk for employment growth this month, given some undershooting of our models in recent months.

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