WEEKLY ECONOMIC COMMENTARY Week beginning 9th May 2016

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1 WEEKLY ECONOMIC COMMENTARY Week beginning 9th May 2016 ECONOMIC DATA ROUNDUP DATA RELEASED LAST WEEK Economic Data Period Actual Previous NAB Business Conditions April NAB Business Confidence April Building Approvals March +3.7% +3.1% Trade Balance March -$2.16bn -$3.41bn Retail Sales March +0.4% 0.0% Despite both conditions and confidence being lower in the latest NAB business survey for April, the data continues to suggest that the business environment is positive at present. Business conditions fell 3 points to +9, with services still the best performing sub-category. However, manufacturing and transport are also relatively upbeat as the benefits of lower oil prices and earlier currency depreciation continue to flow through. Retail was up (+7) while trading (sales) and profitability fell in April but remained positive (+15 and +9 respectively). Business confidence was also resilient, falling only one point to +5, but is now slightly below the series average. Changes in confidence varied across industries, forward orders were up three points and back into positive territory (+2), inventories and capital expenditure were both up marginally - the improvements primarily driven by mining and construction firms while mining (-4) and wholesale (-11) were the only sectors showing a negative confidence level this month. Residential building approvals were up 3.7% in March to be down 6.5 % over the year. The growth this month was driven by the higher density other dwellings (i.e. units and apartments) which increased by 5.1% in March to be down 11.8% over the year. House approvals was also up this month, increasing by 2.4% to be down 0.8% annually. The trade balance fell to a lower than expected deficit of $2.163bn in March. Exports were up 4.3% due to an increase in resource exports (+9.5%), iron ore, travel and non-monetary gold while imports were up 0.7%, dragged lower by a fall in consumption goods (-2.2%). The better than expected (lower) number appears to be due to data noise, with a 56% increase in exports of other goods (reflecting volatility in exports of non-monetary gold). Balance of Trade Retail sales increased by 0.4% in March to be up 3.6% over the year and below the long run average of 3.8%. Sales were strongest this month in clothing and soft goods (+3.5%), other retailers (+1.1%), household goods (+0.7%) and food (+0.3%) (Notably liquor sales were up 1.4% and other specialised food retailing rose 1.8%). The Reserve Bank cut the official cash rate after their monthly board meeting last week to a new record low of 1.75%, with subdued growth in labour costs and the lower than expected inflation data the key reasons for the move. With the March quarter CPI data showing underlying inflation well below the RBA s 2% to 3% target band, the RBA clearly felt compelled to cut rates. The RBA seems to be more concerned about the economic growth outlook and don t seem particularly encouraged by the recent improvement in the data and revising of forecasts down, noting that labour market indicators have been more mixed of late. On housing, the RBA seems comfortable with the impact of earlier macro-prudential measures, noting that the potential risks of lower interest rates in this area are less than they were a year ago. The RBA s commentary around the currency remained unchanged. Data over the next week Economic Data Date Period Forecast Previous ANZ Job Ads 09 May April n/a +0.2% Westpac/MI Consumer Sentiment 11 May May +1.0% -4.0% Housing Finance 11 May March -1.7% +1.5% Weekly Market Commentary 1

2 ECONOMIC COMMENTARY LAST WEEK The main news last week was the surprise rate cut by the Reserve Bank of Australia following their board meeting last Tuesday, followed by the Federal Budget and the Statement on Monetary Policy. The RBA cut the official cash rate for the first time in a year, reducing the rate to a new record low of 1.75%. The accompanying statement highlighted lower than expected inflation, some softening in the outlook for the global economy and the mixed labour market data of late, as reasons for their decision. The Federal Budget contained no surprises, and therefore avoided any of the negative public reaction that accompanied the government s first budget last year there must be an election looming. The government forecasts an increase in the budget deficit this year but a return to surplus by , unchanged from last year and is based on modest expenditure restraint and an expected recovery in revenue. While expenditure restraints seem reasonable, the revenue recovery may be difficult (as has been the case for the government since the GFC) refer chart of the week for a table summary. Market reaction to the RBA rate cut was immediate, with interest rates and the Australian dollar falling and equities rallying while it was no surprise that the budget had very little impact on financial markets. By the close of trading on Friday, the 90-day bank bill was trading at 2.04% compared to 2.15% the previous Friday while in the long term maturities, 3 and 10 year bond yields closed lower at 1.57% and 2.30% respectively, from 1.86% and 2.52% a week earlier. CURRENCY After touching a high of USD early last week, the Australian dollar has fallen to its lowest level in almost three months after the RBA cut the official cash rate to a new record low of 1.75% last week. The Aussie fell 1.63 cents last Tuesday, the largest one-day decline in the Aussie since November 2011, and the currency continued to fall over the rest of the week. A drop in the oil price after OPEC again failed to agree on a deal to cut supply pushed all commodity-based currencies, lower which also assisted the Aussie s slide last week. The Australian dollar plunged another half a cent last Friday after the RBA s statement on monetary policy cut inflation and GDP forecasts. The underlying inflation now seen at 1% to 2% (previously 2% to 3%) while GDP was revised to 2.5% to 3.5% to the end of 2016 and 1.5% to 2.5% out to mid By the close on Friday, the Australian dollar was trading at USD compared to USD a week earlier. EQUITIES A solid (almost 2%) rally after the RBA rate cut soon ran out of steam as ongoing concerns about the outlook for global economic growth weighed on equity markets for most of the week. Mixed half-yearly profit results from three of the four major banks last week and softer commodity prices were also keeping a lid on any potential rally. Resource stocks were weaker after BHP shares fell over 10% last week following the Brazilian federal prosecutors filing a $44bn lawsuit in response to the catastrophic dam collapse in November last year. By the close on Friday the S&P/ASX200 Index was slightly higher, trading at 5,292.0 (but down from the week s high of 5,353.8) compared to 5,252.2 a week earlier. THIS WEEK After a busy week, the economic data and policy announcements slow down this week, with only ANZ Job Ads and housing finance data due for release. Consumer sentiment will be the likely highlight as it will provide a post-rate cut and post- Federal Budget view from the consumer. INTEREST RATE VIEW Since the RBA started easing monetary policy in 2011, they have followed a similar path of cut, cut and then pause. There are generally two rate cuts within three months before pausing to reassess the economic landscape and the effects of the cuts. Whether a follow up rate cut comes next month or in August (after the next quarterly CPI data) is difficult to predict but financial markets already have the probability of a cut in June at 10% and for August it rises to 48%. Economic Data 12 months ago 6 months ago 3 months ago 1 month ago Now Official Cash Rate day Bank Bill day Bank Bill year swap year swap year swap year swap AUD/USD S&P/ASX200 Index 5, , , , ,292.0

3 CHART OF THE WEEK Federal Budget summary The Federal Budget includes a number of measures for agriculture, relating to water and drought, infrastructure, innovation and trade, as well as revenue and savings measures. Water and drought $2 billion in concessional loans (10 year period from 1 July 2016) to establish the National Water Infrastructure Loan Facility. Loan recipients will make interest only payments for up to the first five years, and have a further 10 years to repay the principal and any additional interest. $9.5 million for the National Water Infrastructure Development Fund, to fund water infrastructure feasibility studies in northern Australia, with the cost being met by redirecting funds from the Rural Research and Development for Profit program. $7.1 million to fund additional Rural Financial Counsellors who will provide free financial advice to farmers in drought-affected areas. Transport infrastructure Up to $593.7 million in additional equity to the Australian Rail Track Corporation over three years from for land acquisition and pre-construction works on the inland rail project. This does not commit the Commonwealth to construction, which is likely to cost several billion dollars. $220 million for the Murray Basin rail project, upgrading grain lines in western Victoria, matching the Victorian Government contribution Innovation and trade $50 million over four years to the Australian Grape and Wine Authority to promote wine tourism and Australian wine overseas. $15 million over four years for a carp control programme. A two year pilot program to improve access for farmers to training and information about co-operatives collective bargaining and innovative business models, with the costs being met from existing departmental resources Revenue and savings measures A reduction in the Wine Equalisation Tax (WET) rebate cap from $500,000 to $350,000 on 1 July 2017, and to $290,000 on 1 July 2018 and tighter eligibility criteria from 1 July Savings of $9.2 million to the Managing Farm Risk Programme, with a means test limiting eligibility to farm businesses with annual revenue of less than $2.0 million. An extra $2 million annually from changes to agricultural levies from 1 July 2016, including: a mandatory levy of $0.50 per tonne on all hay and straw prepared for export, replacing a voluntary levy; cessation of various deer levies and custom charges from 1 July 2016; an increase in the Emergency Plant Test Response Levy for growth of private plantation logs; and an increase in the citrus levy by $1.50 per tonne. Source: NAB Agribusiness, Budget : Agriculture May 2016

4 CHART OF THE WEEK Federal Budget in a table..but with a federal election looming, I m not sure how much of this will be implemented. Source: Federal Budget Papers, ANZ Research

5 About Rural Bank and Rural Finance Rural Bank has been a wholly-owned subsidiary of Bendigo and Adelaide Bank Limited since 2010 and is the only Australian-owned and operated dedicated agribusiness bank in the country. From 1 July 2014, Victorian agribusiness lender, Rural Finance joined Rural Bank as a division of Bendigo and Adelaide Bank Limited. As a specialist rural lender, Rural Finance has been fostering the sustainable economic growth of rural and regional Victoria for more than 65 years. Together, Rural Bank and Rural Finance are supporting farmers and farming communities by providing them with specialist financial tools, industry insights and investment into the future of the Australian agribusiness sector. Rural Bank s specialist farm finance tools are available nationally via a network of banking partners, including Bendigo Bank and Community Bank branches and Elders Rural Services. Additionally, Rural Finance has a network of offices across regional Victoria. Postal Address: PO Box 3660, Rundle Mall, SA 5000 Telephone: Facsimile: service@ruralbank.com.au Postal address: 57 View Street Bendigo VIC 3550 Telephone: Facsimile: (03) admin@ruralfinance.com.au Disclaimer: This report has been prepared by Rural Bank Treasury and is based on information obtained from public sources that are believed to be reliable. Whilst all care has been taken in compiling the information in this report, Rural Bank and Rural Finance make no representation as to the accuracy, completeness or timeliness of such information. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Rural Bank and Rural Finance and are subject to change without notice. Rural Bank and Rural Finance have no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein changes or subsequently becomes inaccurate. This report is provided for informational purposes only and does not take into account personal circumstances, objectives, financial situation or needs. The information contained within this report should not be relied upon without consulting independent, professional advice carefully to consider the appropriateness of the advice to your personal circumstances. Rural Bank and Rural Finance disclaim all liability in relation to any loss or damage suffered by the use of or reliance upon any information contained herein or in any attachment or annexure hereto by any person. Copyright Rural Bank Ltd ABN AFSL/Australian Credit Licence and Rural Finance a Division of Bendigo and Adelaide Bank Ltd ABN AFSL/Australian Credit Licence