Greece, China, RBA and the Labour Market

This week we look at the Greek vote; recent developments in Chinese equity markets; the RBA’s July Board meeting; and upcoming important Australian labour market releases for June.

• Another very busy week, with the reaction to the unexpectedly strong Greek ‘No” vote, continued focus on Chinese equity market developments and an RBA Board meeting and important Australian labour market data updates to focus on.

• Market reaction to Greece has been largely as expected with a greater probability of default and EUR exit than previously thought resulting in bond yields being well bid, the USD and JPY rallying and corresponding weakness in EUR and the AUD. The moves so far in currency markets have been relatively small, though bond yields have declined relatively sharply. To be sure, it is still not clear how things will eventually turn out. An EU Council Meeting on Tuesday will likely provide an important guide as to whether European politicians will be prepared to cut an improved deal for Greece, or whether we will progress further down the path of eventual Greek exit. To date, it must be said, the markets’ reaction continues to be relatively muted and orderly, perhaps reflecting less private sector linkages than previously.

• In the longer term, AUD weakness (and Australia’s economic outlook) is more likely to be driven by ongoing issues in China, with the Shanghai Composite losing 12% for the week, iron ore prices down nearly 10% and May retail sales data tending on the soft side on Friday. The retail sales data is a little contrary to recent anecdotes, though the softness in WA and NT is expected, given the large exposure to mining of these two economies. This week’s labour market data will provide an important check on the veracity of the retail trade data. Of late, job advertising and employment growth have been picking up sufficiently in the large non-mining economies to outweigh the drag from WA and the other mining regions, such that the unemployment rate has stabilised or even begun to fall slightly.

• Should China’s economy continue to weaken, the risks of an even lower $A, and further RBA easing would increase, even though the $A has recently achieved the previous target levels indicated by the Governor. That said, we suspect this month’s Board meeting will contain little change in message from the June meeting.

• On the data front, we will be looking for a continued strengthening in job advertising, but some retracement of the outsized employment gains recorded in May. The market looks for no change in employment, where NAB forecasts the risk of a 17,000 decline.

For a full synopsis of the markets this week download:

• Australian Weekly Markets: July 6 2015 (PDF, 606 KB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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