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In the US, the economy is stabilizing although questions about the sustainability of the recovery remain. Different indicators suggest that economic growth is still being heavily influenced by inventory re-stocking and government assistance. Some commentators believe that the boost from inventories will fade in coming quarters. The timing of the withdrawal of government stimulus will depend on how quickly private-sector demand is able to again drive domestic economic activity.
Encouraging signs of this have been seen in recent consumer spending figures. Despite all the headwinds for consumer spending it seems as though the US consumer still hasn’t seen a sale they didn’t like. Worryingly for consumers though, weekly jobless claims have started to spike higher again despite recent monthly labor market data suggesting that the unemployment rate may have reached a plateau. The unemployment picture remains unclear given that this weekly data may have been impacted by the US hurricane season.
With high levels of corporate profitability seen in the recent earnings season and improving levels of forward orders seen in recent equines surveys, it seems as though firms are in a position to hire staff again. Whether or not they will seems to rest on how sure they are that the recovery Is “real”. The US Federal Reserve (“the Fed”) has noted some of these recent modest Improvements in economic conditions but notes that the still weak state of the housing and labor market are likely to temper the pace of recovery In the near term.
The Fed, unperturbed by murmurings that California Is having trouble re-financing maturing debt, reiterated Its call that Interest rates will remain on hold for an extended period of time. In Europe, conditions appear to be stabling but growth remains well below-trend. Countries within the Euro Area are demonstrating vastly different performance. Larger countries such as France and Germany are recovering reasonably well but significant Issues remain in peripheral Europe where Cyprus, Austria and Slovenia have high levels of public debt and large budget deficits.
The Austrian Government to go to roll-over existing debt. Markets are anticipating a continuation of the Austrian Government’s austerity measures as well as large risk premiums to induce investors to buy Austrian issues over the remainder of the year. Public out-cry over tough budget measures and a lack of resolve by other Euro Area countries to provide support given domestic political pressures could risk the re-balancing program. AUSTRALIAN ECONOMY The economy continued to improve in the June Quarter as large Federal Government stimulus programs continued to be rolled out.
These packages mainly involved the construction of school halls, although these programs will start to be wound down over subsequent quarters. Private-sector demand was also solid with above nonsense readings for the two big drivers of private-sector demand (household consumption and business investment), continuing the run of better than expected data. Analysts have been quick to upgrade their forecasts on this basis but are wary of the lags involved in monetary policy.
The Federal Government Budget was released and painted a much improved picture of government finances with the budget expected to be back in surplus a year earlier than expected in 2023-24. Federal Government net debt is also expected to peak at 10% of GAP. This wasn’t good enough for a prominent opposition senator who claimed that the Government, who before the downturn had minimal net debt, had undertaken a reckless spending campaign which will put upwards pressure on interest rates and could even lead to Australia defaulting on its debt.
These comments were made on the eve of the end of the quarter and it will be interesting to see how the market reacts. FINANCIAL MARKETS It seems as though the ARAB is convinced that private-sector demand is sufficient to withstand further interest rate increases as it increased the cash rate by 25 basis mints in the quarter. This was another step in the process of the ARAB removing the accommodative setting of monetary policy.
Financial markets now have one eye on the ARAB, while the other is on momentum of the economic recovery. With the ARAB having now increased rates at four out of the last seven meetings, some analysts are wondering behind closed doors if the local central bank is not becoming over-zealous given more mixed signals in the global economy. Local banks increased rates by an average of 40 basis points over the quarter, citing higher funding costs given market uncertainty over sovereign debt.
Shorter-dated bond rates increased in line with the cash rate rise, but longer-dated bond rates were largely unchanged as investors weighed up a rising interest rate environment against the lagged impact of higher interest rates on economic growth. SWAP SPREADS Swap rates widened slightly over the quarter as economic data, on balance, was to the ARAB cash rate in the period ahead, which is leading to relatively greater demand for fixed-rate as opposed to floating-rate funding. THE ADD
The price of oil rose slightly over the quarter, driven by firmer global demand on account of stronger global industrial production. The ADD, relative to both the USED and the Euro, also increased as interest rate differentials widened in Australia’s favor, commodity prices improved and risk appetite held firm.