For the full details, download the full report: Australian Markets Weekly 1 October 2018

• Many of the headlines surround the very negative impacts from the drought.  It’s more prominent in the East of course and largely absent in the West as far as this year’s crop production is concerned, resulting in a far less net negative GDP impact for the current financial year. Note also that agriculture accounts for 2% of GDP.
• This week, we take a closer look at Australia’s drought impacts, a drought that’s well and truly gripped the Eastern seaboard, examined in more detail by NAB’s Agribusiness Economist Phin Ziebell in his latest Rural Commodities Wrap.  This year’s summer crops in the East have been severely affected with Eastern production and exports set to be down sharply as a result.  Crops in the West though have had rains at the right time and look promising, though some late winter frosts might still yet affect yields.  The very regional and commodity specific story is drawn out by Phin in his latest Agri report in more detail, a report we have summarised in this Weekly.
• If you’d like to see his reports regularly, with forecasts for prices, production and more, please feel free to Ask the Economists or email Ziebell@nab.com.au.
• Last week ended with the market focussing on Italy, the Government announcing a Budget deficit at 2.4% of GDP, above the 1.6% recently proposed by Finance Minister Tria.  Italian bond yields rose measurably higher on the news, the Milan stock exchange declining 3.7% on Friday, while there was some spillover to the Euro and European stock markets, especially European bank stocks.
• US markets took this news in stride, more focussed on US events and news, the Fed-preferred measure of US inflation, the core PCE deflator for August remaining on target at 2.0% y/y, as expected adding to the news of a goldilocks economy with solid growth momentum but still contained inflation.
• For local markets, while there is quite a lot of economic data, a fair portion is second tier from a market perspective.  Friday’s Retail Sales report for August is the most market sensitive.  NAB forecasts a flat result for the month, based on the “big data” NAB Retail Sales Index though with is slight upside risk owing to a potential rebound in sales in the non-mining states.
• Tomorrow’s RBA Board is expected to keep rates steady again at 1.50% amid signs of a still positive high level outlook for the economy and contained inflation.  Housing, the Eastern drought, and trade/tariff policy remain understandable watch points against a still positive outlook for infrastructure, business activity, and the labour market.
• Offshore, to the extent that the market is not side-tracked by events in Italy and any Brexit-related news from the UK Tory Party conference, Friday’s US payrolls report for September will occupy its usual close market attention.  A particular focus will be whether there is any further step up in wage earnings growth.

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