Australian Markets Weekly: 17 July 2017

Economy with momentum into Q3

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Overview:

  • The NAB Business Survey continues to reflect positive momentum in the Australian economy. Business conditions continue to run at well above average levels, levels which in the past that have been consistent with strong growth in domestic demand.
  • Importantly, capacity utilization trends seem to be solidifying to the upside – cap use has historically been a useful indicator of interest rate trends in Australia, but has not been as helpful recently in the recent period when underemployment has been prevalent.
  • The Survey reports that businesses are spending more on labour inputs. Together with other indicators of labour demand, the NAB Employment index continues to suggest that employment should continue to grow at around 20k per month in trend terms, sufficient to put some downward pressure on the unemployment rate.
  • It’s early days yet, but the NAB Labour costs index rose by 1.2% (at a quarterly rate) in June, producing the strongest annual growth rate (4.3%) since September 2012 when the economy was at the peak of the resources expansion. It’s a hint – and yet to be confirmed – businesses may not just be increasing headcount but be increasing unit wage costs. The last time that annual growth was at this level, the Wage Price Index was growing by 3.7% y/y. (It was just 1.9% in Q1.) Offshore, the USD lost traction at the end of last week on the back of another low reading on US inflation and somewhat softer US Retail Sales in June.
  • NAB expects that this Thursday’s Labour Force report should see employment rise 15K with a steady unemployment rate. Offshore, after today’s stronger Chinese Q2 GDP, the US Q2 earnings season gets underway in earnest. The ECB and the BoJ meet, the ECB is expected to remove its expressed willingness to extend the size and/or duration of its current €60bn per month bond buying. NZ also releases its Q2 CPI, often providing clues on aspects of Australia’s CPI due on Wednesday week.
  • RBA Deputy Governor Guy Debelle speaks on Friday on Global Influences on Domestic Monetary Policy, a highly topical speech, with the AUD starting this week comfortably above 0.78 on the back of a softer USD.

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