Australian Markets Weekly: 3 July 2017

Population tilting higher.

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Overview:

  • Markets took their lead from central banks last week following strong hints from the ECB, Bank of Canada and Bank of England of starting to remove policy accommodation in the near future. Bond yields moved higher in response.
  • Two year bond yields – a proxy for priced-in central bank rate moves – have risen across the globe. Japan has been the exception where yields have been flat. Comments from the ECB’s Draghi, BoC Governor Poloz, the Fed’s Williams, and the BoE’s Carney have all added fuel to this global market move.
  • Following on from RBA Board member Harper’s comments earlier in June, former RBA Board member Dr. John Edwards said last week that “if the RBA’s economic forecasts prove correct …tightening could start earlier, or….at least the signaling”. He also spoke of a natural policy rate of 3.5%, implying 200 bps of tightening.
  • The sharpest rises over the past month in two year yields have been in Canada (+41 bps), the UK (+20), Australia and New Zealand (+16-17), Germany (+14), and the US (+10 bps).
  • Last year’s Census revealed a material upgrade to Australia’s population count, with growth now estimated at 1.6% over the course of last year – equivalent to an additional 373k persons. Before the census, national population growth was estimated at 1.5%. However, the Census revealed even faster growth in “retirement age” cohorts that are continuing as a faster drag on measured labour market participation.
  • Over time, rising population continues to create the foundation demand for new dwellings. More people also means more consumer spending, however, very tepid growth in consumer spending and flat retail volumes at present points to any such positive population growth effects being neutralised by subdued wages.
  • This week, local focus will be mainly on the RBA statement tomorrow against the background of more positive global and Australian economy trends and the May Retail Sales report, expected to reveal modest growth. The US ISM Manufacturing release tonight and Payrolls Friday are the offshore highlights.

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