At was another big week in Australia with the a number of the key monthly releases showing further deterioration in the non-mining sectors of the economy while the trade balance was a shinning light with another strong performance. The RBA also updated their medium term forecasts which are looking increasingly optimistic relative to reality.
TD-MI Inflation Index
On first blush it looks as if the RBA has made some significant upward revisions to their inflation forecast, for both headline and core prices, which it partly due to the slightly higher starting point after the impact from the floods lingered through the second quarter.
However due to the introduction of the Carbon Tax, the RBA released a secondary set of inflation forecasts excluding the effects of the Carbon Tax with the only change to their outlook for inflation a reflection of the higher starting point.
All in all the RBA has left their central scenario largely unchained over the medium term however there are clearly growing risk to that tendency which is likely to result in actual outcomes falling short of their expectations in our view.
As we noted yesterday the SoMp look like a backward looking document.
Offshore it was US data which dominated with a number of key indicators suggesting the momentum in the US economy continues to fade.
The July Purchasing Managers Indices provided a mixed read on the Chinese economy with the manufacturing PMI continuing its trend lower with the official index falling from 50.9 to 50.7 while the private reading produced by HSBC fell below 50 to 43.9 indicating that activity fell over the month. The Services PMI fared a little better rising from 57 to 59.6 however there was a bigger divergence with the HSBC index which fell from 54.1 to 53.5.
In a week where Rio Tinto’s results showed it was all about prices driving the improvement even as volumes fell we should all worry about this mining boom and what is really driving it. The key for Australia is whether or not the persistent slowdown in manufacturing will eventually feed into lower demand for our raw materials which impacts prices and thus investment intentions and jobs.
A poor ISM manufacturing index reading really got markets moving south early in the week when the index slump far more than the market was expecting. The index dropped to 50.9 in July, indicating that the pace of activity almost stalled with the slowdown in the second quarter dragging on early into the 3rd quarter. The market had only been expecting a small decline from 55.3 to 54.5. The non-manufacturing ISM was also softer, but the fall was a little less significant that the manufacturing index, as it fell from 53.3 to 52.7, however it was expected to rise to 54.5.
US Consumer Income and Spending
While the manufacturing ISM shook the markets on Monday night, the surprise fall in consumer spending which was released Tuesday night tipped them over the edge. Consumer spending had been slowing since February however the negative 0.2 in June was the first fall since September 2009 and only the second drop since the spending climbed out of its GFC induced slump in April that Year. The fall shouldn’t have come as too much of a surprise given the GDP figures showed personal consumption only rose 0.1%over the quarter. What is concerning is that the drop has followed an enduring slowdown , suggesting it is not a one off despite incomes still slowly rising.
German Industrial Production
While the European periphery is getting all the attention over the debt problems, industrial production in the Euro-zones biggest and strongest economy continues to lose momentum with production falling for the second time in the past three months. Industrial production fell 1.1% in June which was its biggest monthly drop since October 2009. The annual growth continues to slow, falling to 6.6% down on its recent peak of 14.5% in February. We think this slowdown will continue given the relationship we see with Chinese Leading Indicators.
US Non-Farm Payrolls
The headline number beat expectations with total nonfarm payrolls growing by 117k in July which was ahead of the 85k the market was expecting ahead of the release. Interestingly the final outcome was very close to where the market was expecting nonfarm payrolls to print earlier this week before expectations were downgraded as the week progressed. However, it wasn’t all good news with the household survey showing total employment actually fell by 38k meaning that the fall in the unemployment rate from 9.2% to 9.1% was a result of more American’s leaving the workforce. Interestingly the employment to population ratio fell to 58.1%, the lowest level since 1983 while the participation rate fell to 63.9% to its lowest level since 1984, meaning the actual unemployment rate is much higher than the 9.1% suggests.
Yours in data – The Lighthouse Research Team.