RBA shows doubts about the domestic economy

Australia: 

The RBA provided a somewhat downbeat assessment of the domestic economy in its Statement on Monetary Policy on Friday. 

Economic growth was revised down to 2.0% for the year to June 2015 and the forecast peak in the unemployment rate was edged up to 6.5%. 

The unemployment rate is forecast to reach 6.5% in mid-2016 and remain elevated until growth picks up to trend. 

The RBA's inflation forecasts were revised a touch lower.  Underlying inflation is expected to remain well contained and within the RBA's 2-3% per annum target band over the forecast period.

Share Markets:

US economic data boosted hopes that US economic growth is picking up, but not to the extent to force the Fed's hand in June. This was seen as a positive for stocks, as was the decisive UK election result. The

Dow rose 1.5%, the S&P 500 gained 1.4% and the Nasdaq was up 1.2%.

Interest Rates: 

US government bond yields fell on Friday night with the US payrolls and earnings data suggesting US official interest rates are likely to remain on hold in June.

Foreign Exchange:

The US dollar fell against the Yen, after the US payrolls and earnings data suggested US official interest rates are unlikely to rise in June.

Sterling continued to edge higher against the US dollar as the decisive UK election results were confirmed.

The Aussie dollar drifted higher against the US dollar, with AUD/USD trading just under 0.7930 at the time of writing.

News of a cut in China's official interest rates on the weekend helped the Aussie dollar open a little stronger this morning.

Commodities:

Commodities were generally stronger, with oil rising after the US payrolls boosted hopes of a pickup in US economic growth.

China: 

The People's Bank of China announced a cut in official interest rates yesterday. The 1-year lending rate will be cut by 25 basis points to 5.10%.

The 1-year deposit rate will also be lowered by 25 basis points to 2.25% (although the deposit rate ceiling will be expanded to 150% of the benchmark rate from the current 130%).

This was the third interest rate cut in six months. An interest rate cut was not unexpected given softer economic data in Q2, including a weaker HSBC PMI, softer export figures and another benign inflation update.

China's inflation data released over the weekend was slightly below expectations. CPI inflation edged up to 1.5% in the year to April.

This was an increase from CPI of 1.4% in the year to March, but below consensus expectations for a 1.6% increase in the year to April.

Producer prices remained deflationary, falling 4.6% in the year to April, which was unchanged from the 4.6% decline in the year to March. Consensus expectations had centred on a small lift to -4.5% in the year to April.

China's trade surplus rose to US$34.1bn in April, well up on the US$3.bn reported in March. For the year to April, imports fell 6.4% while exports were down16.2%.

Weak imports may reflect both volumes and values. The price of China's imported iron or has fallen substantially over the year.

United Kingdom:

The UK election result was more decisive than expected, delivering the Conservative Party under Prime Minister Cameron a parliamentary majority.

Halifax house prices rose 1.6% in April, after lifting by an upwardly revised 0.6% in March (previously reported as a 0.4% increase).

For the year to the April quarter, UK house prices climbed 8.5%, up from an 8.1% increase in the year to the March quarter.

The UK trade deficit narrowed to £2817 m in March, from a deficit of £3318m in February (previously reported as a deficit of £2859m)

United States:

US non-farm payrolls rose 223k in April, compared to a downwardly revise 85k increase in March (previously reported as a 126k increase).

The April payrolls outcome was close to consensus expectations for a 228k increase.

The unemployment rate slipped to 5.4% in April in line with consensus expectations, down from 5.5% in March.

This was the lowest unemployment rate since May 2008. Hourly earnings growth was disappointing at 0.1%.

This saw the annual rate lift to 2.2% in the year to April from 2.1% in the year to March. However, annual earnings growth still fell short of consensus expectations for a 2.3% increase and indicates that wages growth remains lacklustre.

The data confirms a lot of the Q1 softness was due to one-time negatives, but without wage growth there's nothing in this report to bring forward Fed tightening expectations.



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