St George Economics economy and finance update

General:

Markets continued to be unsettled by developments in Cyprus and Europe last night. Cyprus has been given a Monday deadline otherwise the ECB will cut off liquidity to Cypriot banks.

The stark warning suggests that the EU might be prepared to let the Cypriot banks fail if Cyprus authorities cannot find a way to raise €5.8bn to secure a €10bn bailout from the EU and IMF, or negotiate an alternative bailout package.

A bill was proposed to let Cyprus Popular fail, but protect insured deposits (those up to €100,000) which has triggered protests, but Cypriot authorities are still working on structuring the deal and imposing capital controls.

Share Markets:

Share markets in Europe and the US fell on the concerns about Cyprus and an unexpected contraction in German manufacturing. The Dow closed 0.6% lower, the S&P500 fell 0.8%, while the Nasdaq dropped 1.0%.

Bonds:

US treasuries rose (yields fell) as Cyprus's banking concerns raised demand for safe haven assets.

Foreign Exchange:

The worries about the Cyprus banking system saw the euro weaken against the US dollar to its lowest in four months. The Australian dollar rose following strong Chinese PMI data yesterday.

Commodities:

Commodity prices weakened as Cyprus concerns weighed on risk appetite and the outlook for global growth. Gold prices however, rose to a one-month high on safe-haven demand.

Australia:

Labour market by industry data showed the loss of 29.9k jobs from the manufacturing sector in the year to February.  Significant job growth was seen in the wholesale trade sector (65.5k) and in transport, postal and warehousing (55.5k). Expansion of internet sales and distribution is thought to lie behind growth in these sectors. The finance and insurance sector shed 12.9k jobs while healthcare and social assistance put on 46.3k jobs. Structural change continues.

In other Australian news, housing affordability improved in the December quarter 2012 according to figures released by the HIA and the CBA while a leadership spill within the Australian Labor Party saw no change.

China:

The HSBC flash estimate for China's March manufacturing PMI index came in at 51.7, up from 50.4 in February. The increase suggests growth in China will be maintained at a solid pace.  The index was sub-50 in the second half of 2012.

Europe:

The euro zone composite PMI fell from 47.9 to 46.5 in first report for March. It was the weakest reading since November, reflecting weaker factory (46.6 from 47.9) and services (46.5 from 47.9) readings. The national detail showed a steady factory PMI at 43.9 but a new cycle low of 41.9 in France. Manufacturing in Germany also contracted according to their PMI index, falling to 48.9 in March from 50.3 previously. Weak readings are likely a reflection of concerns from Cyprus.

New Zealand:

New Zealand saw its GDP grow by 3.0% in the year to December 2012, up from 2.0% in the year to September 2012 and the fastest pace in three years. Growth in the December quarter was a solid 1.5%.

United Kingdom:

UK retail sales jumped 2.1% in February after snow disrupted January sales, which fell 0.7%. Based on anecdotal evidence that retail has been weak, it is likely that the February gain will be at least partially reversed in March.

The CBI industrial trends survey showed total orders edge lower from -14 to -15 in March. Export orders rose from -20 to -11 while domestic orders weakened.

United States:

US existing home sales rose 0.8% in February, the same pace of gain as seen in January. Single family home sales fell 0.2% while condo sales posted an 8.8% rise. The median price rose 11.6% in the year to February. The separate FHFA house price index rose 0.6% in January, to be up 6.4% in the year.

The Philadelphia Fed factory index rose from -12.5 to + 2.0 in March. It was the first non-negative reading for the year so far. The detail showed orders stabilise at 0.5 (from -7.8), shipments accelerate from 2.4 to 3.5 and jobs up from 0.9 to 2.7 in March.

The US leading index rose 0.5% in February the sixth straight non-negative reading. Of the ten components, only two were negative, orders and consumer expectations.

US initial jobless claims rose 2k to 334k for the week ending 16 March. The last two weekly readings are the lowest since early 2008 apart from in January this year when seasonal adjustment distortions were factors at play.

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