St George Economics economy and finance update

Share Markets:

Sentiment was weighed down by disappointing data which revealed the European economy contracted by more than expected.

The news drove down European stocks and kept the US share market subdued. However, a positive US jobs report helped lift the mood later in the session. The Dow finished 0.1% lower, but the S&P500 and Nasdaq both rose 0.1%.

Bonds:

US treasuries rose (yields fell) after the GDP report in Europe reignited concerns about the outlook for growth.  Ten-year yields have fallen from a ten-month high, back to below two percent.

Foreign Exchange:

The US dollar rose against most currencies as risk aversion set in. The euro fell to its lowest in three weeks after Europe's GDP contracted by more than expected. The Australian dollar was little changed and is currently trading at around 1.036.

Currency markets are awaiting official comments from a G20 meeting which is currently underway in response to growing concerns about "currency wars".

An official has reportedly said that the G20 wants to avoid using the term "currency war", but is committed to avoid exchange rate misalignments and that "exchange rates should not be policy tools."

Commodities:

Commodity prices were mixed, despite rising global growth concerns. Gold prices dropped to a six-week low after European GDP contracted and a report showing gold demand fell for the first time last year since 2009.

Copper prices however, rose on hopes that Chinese demand will hold up well.

Australia:

The Westpac-Melbourne Institute index of consumer inflation expectations rose 0.2 percentage points in February to an annual rate of 2.2%.

Despite rising, expectations remain well-anchored and there has been very limited impact from the introduction of the carbon price.

The Westpac-Melbourne Institute index of consumer unemployment expectations was virtually unchanged in February rising by just 0.1%. The index remains relatively high in comparison to the long-run average and points to ongoing wariness about labour market from consumers.

Europe:

Eurozone GDP contracted 0.6% in Q4, below the -0.4% consensus forecast. National GDP reports were also released today for many member states:

  • Germany (-0.6%),
  • France (-0.3%),
  • Italy (-0.9%),
  • the Netherlands (-0.2%) and
  • Portugal (-1.8%)

all contracted.

For the euro zone aggregate, GDP growth in Q4 was the weakest in the current recession. 

Greece contracted at a -6.0% annual pace in Q4. The eurozone recession is now five quarters long, although not as deep as in 2008-09.

Japan:

The Japanese economy remained in recession towards the end of 2012. GDP declined 0.1% in Q4, the third consecutive quarter of contraction. It followed a revised 1.0% contraction in Q3 and a 0.2% contraction in Q2.

However, the outlook is a bit more positive now that the yen has depreciated, the global backdrop has improved and fiscal stimulus is on its way. That being said, further reform and policies could be administered to address some of the challenges facing the long-term challenges facing the Japanese economy.

The Bank of Japan (BoJ) left monetary policy unchanged as widely expected.

However, the outlook was more upbeat and said that the economy appeared to be "bottoming out". Governor Shirakawa is due to step down after 19 March, after which his successor is expected to be more supportive of Prime Minister Abe's stance for more aggressive monetary policy easing.

New Zealand:

The business NZ PMI rose 55.2 in January from a revised 50.4 reading in the previous month, reflecting greater optimism for the global economy.

The ANZ-Roy Mogan consumer confidence index lifted 2.3% to 121.1 in February, the highest in just under three years.

United States:

US initial jobless claims fell 27k to 341k in the week ending 9 February. Unlike in January, the Labor Department did not report any seasonal adjustment issues driving the drop.

Therefore it could indicate a genuine reduction in layoffs and a positive sign for the US labour market.

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