NAB’s Chief Economist, Alan Oster provides his thoughts on the Australian and Global economy.
Financial markets remain focussed on a Greek exit from the Eurozone, wild gyrations on the Chinese equity market and further hints about a rise in US interest rates. Locally, markets are concerned about falling commodity prices and strong property prices.
Welcome to our July monthly market update.
In June, global markets remained focussed on the threat of a Greek exit from the Euro zone, as well as wild gyrations in the Chinese stock market and hints about when the US Federal Reserve might start unwinding its zero interest rate policy.
In the United States, economic data remained mixed. The June employment report looked fairly solid on the surface. Some 223,000 jobs were created, and the unemployment rate fell from 5.5% to 5.3% but markets were disappointed by other details in the report. There were large downward revisions to previous months’ figures, nil wages growth and the lowest workforce participation rate since 1977. US inflation also softened, and the Fed’s preferred inflation measure declined to an annual rate of 1.2% in May, from 1.3% in April. But other data such as personal consumption spending, retail sales and consumer confidence rebounded, which may encourage the Fed to raise rates later this year.
In Europe, negotiations between Greece and its largest creditors continued, but the two sides remain far apart on debt relief and further funding of the government and Greek banks. The failure to agree new terms saw Greece miss its end-of-June repayment to the International Monetary Fund (IMF). The Greek Government held a referendum in early July where the Greek population voted to support the government’s rejection of any more austerity measures.
Greek banks have remained closed since late June, having almost exhausted their cash reserves, and bank closures and capital controls are leading to many shortages. Whether Greece can re-open negotiations with creditors, avoid complete collapse of its banks and economy, and remain in the Euro, is uncertain. Fortunately, a Greek exit from the Euro is unlikely to have much impact on the wider European economy.
In China, economic data continues to be soft. The People’s Bank of China cut benchmark interest rates by 25 basis points (or 0.25%) for the second month in a row. It also cut the reserve requirement ratio by half a percentage point for banks that lend to rural borrowers and small and medium-sized enterprises.
This economic weakness has spooked investors in the Chinese share market, which has fallen by about 25% over the past month, although it is 80% higher than what it was a year ago.
Australian economic data has been reasonable, with much larger-than-expected jobs growth in May. The unemployment rate fell from 6.2% to 6.0%.
House prices continued trending higher, with capital city prices up 2.1% in June, and 9.8% over the past year. Prices in Sydney and Melbourne have continued to grow strongly, and this is flowing through to the residential construction sector – which is helping the economy transition away from mining investment to residential construction investment.
Global equities lost 2.9% and Australian shares fell 5.3% in June as markets were hit by jitters over Greece late in the month. Despite the equity sell-off, Government bond yields in major markets were mostly higher in June, leading to a fall in bond indices of around 1%.
On currency markets, the Australian Dollar finished the month little changed in the high 76 cent range, however, the Euro, British Pound and Yen were stronger against a weaker US Dollar.
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