St George Economics economy and finance update

Stock Markets:

Share markets gained yesterday, despite a run of mixed economic data. Investors appeared to be relieved that Chinese economic growth met expectations, and encouraged by positive US earnings.

Equity markets shrugged off a weaker-than-expected US retail sales data, although news on manufacturing was positive.

The Dow and S&P500 rose 0.1%, while the Nasdaq lifted 0.2%.

Bonds:

US treasuries rose (yields fell) but were volatile on mixed economic data.

Disappointing retail sales scaled back expectations the Federal Reserve would wind back its stimulus program.

Another Fed official, Governor Daniel Tarullo, reiterated Fed Chairman Bernanke's earlier comments, said that any slowing of central-bank asset purchases would depend on economic gains.

Portuguese bonds rose, stabilising after concerns about political unrest.

Last week, Portugal's president said that early elections would be undesirable. Its 10-year bonds yields fell 21 basis points to 7.30%.

Foreign Exchange: 

The US dollar was volatile, as investors continued to weigh up the possibility the Fed would unwind its QE program.

The Australian dollar rose to around 91 US cents after Chinese economic data met expectations.

However, ongoing uncertainty about the Chinese economic outlook will be a major driver for the local unit.

Commodities: 

Commodity prices were similarly mixed, with conflicting signals from China and the US about the outlook for demand.

Oil prices rose, while copper prices fell. Gold prices were little changed. 

Australia:

Lending finance was mixed in May, with housing finance for owner occupiers and commercial finance (2.5%), which made up the bulk of lending finance, rising by 2.3% and 2.5% respectively.

Meanwhile personal finance (-3.1%) and lease finance (-4.2%) were weaker for the month of May.

New vehicle sales climbed 4.0% in June. For the year to June, new vehicle sales are up 7.1%.

The increase in new vehicle sales was led by sales of 'other' vehicles (6.6%), while passenger vehicle sales gained 3.7% and sales of sports utility vehicles were up 2.7% in June.

China:

Economic growth rose 1.7% in Q1.

The annual rate of GDP growth slowed to 7.5% in the year to the second quarter, which was in line with consensus expectations, but a slowdown from the 7.7% annual rate in the year to Q1.

At this level economic growth would be unlikely to overly worry Chinese officials with Finance Minister Lou saying last week that 6.5% economic growth wouldn't be a "big problem."

Economic growth in China is likely to weaken further as the government enacts policies to reign in debt levels.

Industrial production growth was softer than expected, slowing to 8.9% in the year to June, from 9.2% previously.

Fixed asset investment rose 20.1% in the year to June, down from 20.4% in the year to May.

Retail sales were stronger than expected, rising 13.3% in the year to June, down from 12.9% in the year to May.

Europe:

Fitch has cut the rating on the European Financial Stability Facility (EFSF), the euro zone's bailout fund to AA+ from AAA, following the credit ratings agency downgrade to France a few days ago.

The move puts Fitch's rating closer in line with ratings by S&P.

United States: 

Retail sales rose 0.4% in June, less than consensus expectations for a 0.8% rise.

The data is suggesting that consumer spending is growing at a modest pace, but failing to accelerate despite rising asset prices.

The outcome suggests that growth in Q2 has softened. 

In other data, the empire manufacturing index rose from 7.84 to 9.46 in July, the highest in five months.

The lift in the index suggests that the pickup in housing is beginning to translate into an improvement in manufacturing.


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