St George Economics economy and finance update

Share Markets:

European markets were weak on Friday night but US markets recovered a little of their recent losses as the implications of a stronger US economy sank in and 'bargain hunters' emerged.

The FTSE100 was down 0.7% and the DAX fell 1.8%.  In the US, the Dow rose 0.3% as did the S&P500.

Bonds:

Australian ten year bond yields spiked higher to 3.76%, their highest since early 2012. At the same time, US long bond yields pushed up to 2.53% having stood at 1.63% in May.

If US liquidity is to be tapered back, the era of very low bond yields may well be over.

On Friday, money market rates in China were down sharply from the highs reached in the previous session on reports that the People's Bank of China had injected liquidity. Although this would suggest that the PBoC will prevent a significant dislocation in money markets, the initial tightening of liquidity seems to have been policy induced by the PBoC to reign in excessive credit growth.

Foreign Exchange: 

After a torrid week, the AUD is held at around the US 92 cent level on Friday night, however,its previous supports are fading so caution is required.

The USD gained ground against the majors as talk of 'tapering QE' continued and as appreciation of US economic momentum took hold. The AUD was mildly firmer against the yen, sterling, the euro and the NZD.

Commodities: 

A stronger USD saw the price of oil decline but prospects of better growth of industrial production in the US saw copper prices rise. Gold bounced back unconvincingly following a sharp fall during the week as inflation fears subsided.

Australia:

No data released.

China:

See the bond markets section regarding credit issues in China.

New Zealand:

ANZ job ads fell 1.7% in May, following a revised 0.7% gain in April, and point to some headwinds for the labour market.

ANZ consumer confidence rose from 123.7 to 123.9 in May, a three year high. Low interest rates and rising house prices are likely supporting the confidence of consumers in New Zealand.

United States:

No US data to report, however, James Bullard of the St Louis Fed, one of the two dissenters at this week's FOMC meeting, said the Fed may yet need to increase its asset purchases above $85bn per month, rather than tapering purchases, if inflation continues to decline.

The other dissenter, Kansas City Fed's Esther George, believed that policy was already too accommodative and risked pushing inflation expectations higher.

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