Australian Markets Weekly A weekly outlook for Australia, key global economies and markets

Australia > Economics Australian Markets Weekly A weekly outlook for Australia, key global economies and markets 20 July 2015 RBA minutes, CPI and RBA Governor Speech A moderately busy week in Australia, with the RBA Minutes (Tuesday), a speech by the RBA Governor and the Q2 CPI on Wednesday and the RBNZ expected to reduce rates on Thursday. In this Weekly: We suspect little flow on for Australian rate pricing from the RBNZ and BoC moves central banks are responding to their domestic circumstances, and the Australian economy, so far, continues to perform better than expected. For that same reason, the Minutes and Q2 CPI are also likely to be less significant than usual, though the Governor s speech could give some new information on how the Bank is seeing things. Our core views remain broadly on track, in spite of all the recent uncertainty about Greece and China: the non-mining economy is currently more than offsetting the drag from the mining economy especially as far as the labour market is concerned. This will see the RBA on hold at 2% for an extended period. The Fed continues to edge toward tightening in the next few months, which should provide support for the US$ and allow the $A to continue to ease toward year-end targets of US$0.72. This week, we also review a few of the more popular questions we received last week while marketing to clients in Melbourne, including: (i) why are consumer and business confidence diverging (and how will this resolve)?; (ii) how is Chinese apartment investment affecting the Australian housing market; and (iii) are we worried about the recent sharp drop in the good time to buy a dwelling question in the WBC consumer confidence survey? This Week For us, the main Australian event this week will be the RBA Governor s speech on Wednesday (no topic as yet released). This may shed some new information on how the RBA is seeing the Australian economy and in particular why the labour market is performing better than the Bank expected. We think the reason is that the much larger non-mining economy is outperforming the weak mining economy. The Q2 CPI seems less market relevant, given the likely focus of the Bank on activity trends and given low wages growth will continue to keep inflation broadly contained, irrespective of the Q2 outcome. Key markets over the past week Last % chg w eek Last bp / % chg w eek AUD 0.7372-0.5 RBA cash 2.00 0 AUD/CNY 4.58-0.4 3y sw ap 2.27-3 AUD/JPY 91.5 0.1 ASX 200 5,673 3.6 AUD/EUR 0.681 1.1 Iron ore 50.7 1.1 AUD/NZD 1.131 2.2 WTI oil 50.8-2.7 Source: Bloomberg For the record, NAB expects a higher 0.8% q/q headline outcome (in line with market), driven by around a 12% q/q rise in petrol prices. The trimmed mean and weighted median measures are both expected to be around 0.6% q/q (also in line with market). We also expect the RBA Minutes to be less significant than normal, given the virtually unchanged text from last month. Our greatest focus will be on any reasons the RBA gives for unemployment having been better than expected in recent months, something that will see the Bank need to revise its near-term unemployment forecasts in the August Statement of Monetary Policy. We d also expect there to be greater coverage of Greece and China than was reported in the Board Meeting Statement. Chart 1: Better labour market outcomes than expected Core Views That said, despite recent volatility in markets and uncertainty over the economic outlook arising from Greek and Chinese developments, so far, NAB s core economic and market views remain relatively unchanged. The improvement in non-mining activity (especially in the two largest states NSW and Victoria) is more than offsetting the drag coming from the weakness in mining activity in regions and states particularly exposed to mining (WA most noticeably). This is especially visible in recent Australian labour market data, which has seen a strengthening in job advertising and employment, resulting in the unemployment rate trending down slightly in recent months. This supports NAB s forecast that the RBA has finished cutting rates at 2% - especially as much of the impact of the last two rates cuts still has to flow through the economy. Meanwhile, US labour market data continues to support the case for the Federal Reserve beginning to begin to raise rates from zero before the end of this year. The market continues to price less than a full interest rate rise, which seems a bit conservative to us (the risk seems of one or more rate rises in the next few months). As the US tightens, we expect the US$ to continue to broadly strengthen, which should see the $A continue to ease toward our year-end target of US$0.72. The main risks we are considering to these core views are: (i) the $A may fall below US$0.70 if the US$ shows greater National Australia Bank Research 1

broad-based strength; and (ii) whether the recent weakness in Chinese equity markets can significantly affect those parts of the Australian economy that are still receiving strong support from Chinese demand, namely, tourism and housing. It s too early to see any evidence of this, but we will be monitoring closely. Finally, we will continue to watch the balance of how the improvement in the non-mining economy compares to the drag from mining. For now, the former is outweighing the latter, especially in the labour market, which sees us very confident that the RBA will remain on hold for the foreseeable future. It seems a bit early to expect the market to focus on the next move in rates being higher any time soon, however, our rates strategists are recommending that less easing be priced into the Australian short end. Q&A There were a number of interesting questions from a few days of marketing in Melbourne last week. Here s a sample of the Qs and our As! Q: The most frequent question was, what was driving the current divergence between consumer confidence and business confidence? A: In the latest month, that likely reflects a combination of the timing of the respective surveys and the impact of the budget. The NAB business survey was taken in the last week of June, and likely continued to pick up more of the benefits from the small business measures in the May budget. These of course impact businesses rather than consumers. The timing of the NAB survey was also before the sharp escalation of concerns about Greek and Chinese developments, blanket media coverage of which likely impacted on consumer confidence measures surveyed in the early weeks of July. With Greek developments tracking toward resolution and Chinese markets stabilising, it s likely that consumer confidence should track back towards business conditions, this time around. Chart 2: Business conditions improving Q: There was also some interest in whether the interest rate cut by the Bank of Canada and a likely cut in rates by the RBNZ this week, might increase pressure on the RBA. A: Our take is that central banks around the world are responding more to their domestic economic fundamentals than any global trend at the current time, with the Bank of England and the US Federal Reserve of course much closer to interest rate rises. With the Australian labour market outperforming RBA expectations in recent months, in our opinion, there is no linkage from the BoC and RBNZ moves to Australian monetary policy in the near term, though of course, the moves will impact the relative pricing of Australian financial instruments vis-à-vis their Canadian and Kiwi equivalents. Q: Much of our presentation focused on trends in Australian house prices and demand and supply indicators. Not surprisingly, there was considerable uncertainty about Australian house prices over the medium term. In fact there was a wide range of questions, including: (i) did the sharp fall in the good time to buy a dwelling question in July possibly signal a turn in the market?; (ii) how was the Chinese demand for apartments playing out in the market how many of these apartments were not rented and so did not impact rents and vacancy rates; what could cause Chinese owners/investors to sell or rent; was there settlement risk that could ultimately see these properties on the market; and (iii) a number of variations of questions about when the peak impact on Australian growth from housing construction would occur and what would take the place for growth after this peak? Chart 3: Confidence in buying a dwelling has fallen A: A number of these questions, we do not know the answer to e.g. the amount of Chinese investment housing that remains outside the rental market (though anecdotally a considerable percentage), though it is worth of course continuing to think of events (presumably in China) that may bring these dwellings onto the market (either for sale or rent) at some stage. Along the same lines, could there be greater settlement risk for these properties should prices begin to fall before construction is completed or Chinese economic conditions or equity markets deteriorate sharply? Interesting from a growth perspective were the questions about when the peak contribution to Australian growth from housing construction would occur (not until 2015/16 according to NAB economic forecasts CSR s CEO also was in the press during the week arguing that the impetus to activity would persist for a number of years) and what might replace this contribution to growth. In part, some of this replacement, will occur from a reduced drag from mining. Finally, on the sharp fall in time to buy a dwelling, we will follow this trend over coming months. It s most likely that the fall likely reflected uncertainty associated with Greece and China, however, it could be that part of the fall reflected coverage of the further rise in prices and sales above reserve in recent months. Either way, the latter is unlikely to be a major consideration for monetary policy while the Australian labour market continues to improve. Ivan.Colhoun@nab.com.au National Australia Bank Research 2

Calendar of Economic Releases Time NAB Country Economic Indicator Period Forecast Consensus Actual Previous GMT AEST Monday, 20 July 2015 NZ Performance Services Index Jun 58 22.30 8.30 UK Rightmove House Prices MoM/YoY Jul 3.0%/4.5% 23.01 9.01 GE PPI MoM/YoY Jun -0.1%/-1.4% 0.0%/-1.3% 6.00 16.00 EC Current Account SA May 22.3B 8.00 18.00 CA Wholesale Trade Sales MoM May 0.00% 1.90% 12.30 22.30 UK CBI Trends Total Orders Jul -7 14.00 0.00 UK CBI Business Optimism Jul 3 14.00 0.00 JN Supermarket Sales YoY Jun 5.7% 14.00 0.00 Tuesday, 21 July 2015 NZ Net Migration SA Jun 5140 22.45 8.45 AU ANZ Roy Morgan Weekly Consumer Confidence Index Jul-19 107.0/-3.6% 23.30 9.30 JN BoJ June 18-19 Minutes 23.50 9.50 AU RBA July Meeting Minutes 1.30 11.30 AU NAB Residential Property Survey Q2 1.30 11.30 NZ Credit Card Spending MoM/YoY Jun 1.9%/7.1% 3.00 13.00 JN Leading Index CI May F 106.2 5.00 15.00 JN Cabinet Office Economic Report Jul UK Public Finances (PSNCR) Jun 12.4B 8.30 18.30 Wednesday, 22 July 2015 AU Westpac Leading Index MoM Jun -0.1% 0.30 10.30 AU Skilled Vacancies MoM Jun -1.00% 1.00 11.00 AU CPI QoQ/YoY 2Q 0.8%/1.7% 0.8%/1.7% 0.2%/1.3% 1.30 11.30 AU CPI Trimmed Mean QoQ/YoY 2Q 0.6%/2.2% 0.6%/2.1% 0.6%/2.3% 1.30 11.30 AU CPI Weighted Median YoY 2Q 0.6%/2.4% 0.6%/2.3% 0.6%/2.4% 1.30 11.30 CH MNI Business Indicator Jul 53.5 1.45 11.45 CH Conference Board Leading Economic Index Jun 2.00 12.00 AU RBA Governor Stevens speaks to Anika Foundation (no speech title as yet) 3.05 13.05 JN All Industry Activity Index MoM May -0.60% 0.1% 4.30 14.30 UK Bank of England Minutes 8.30 18.30 EC Euro Area First Quarter Government Debt/Deficit 9.00 19.00 US MBA Mortgage Applications Jul-17 11.00 21.00 US FHFA House Price Index MoM May 0.40% 0.3% 13.00 23.00 US Existing Home Sales / MoM Jun 5.40M/0.9% 5.35M/5.1% 14.00 0.00 Thursday, 23 July 2015 NZ RBNZ Official Cash Rate Jul-23 3.00% 3.00% 3.25% 21.00 7.00 JN Trade Balance Adjusted Jun - 260.0B - 182.5B 23.50 9.50 UK Retail Sales Ex Auto Fuel MoM Jun 0.2% 8.30 18.30 US Chicago Fed Nat Activity Index Jun -0.05-0.17 12.30 22.30 US Initial Jobless Claims Jul-18 280K 281K 12.30 22.30 CA Retail Sales MoM May 0.60% -0.1% 12.30 22.30 UK CBI Reported Sales Jul 14.00 0.00 UK BBA Loans for House Purchase Jun 14.00 0.00 EC Consumer Confidence Jul A -5.8-5.6 14.00 0.00 US Leading Index Jun 0.20% 0.7% 14.00 0.00 US Kansas City Fed Manf. Activity Jul -5-9 15.00 1.00 Friday, 24 July 2015 NZ Trade Balance Jun +$353M +$100M 22.45 8.45 JN Nikkei Japan Manufacturing PMI Jul P 50.5 50.1 1.35 11.35 CH Caixin China Manufacturing PMI Jul P 49.7 49.4 1.45 11.45 NZ Residential Lending/LVR Jun GE Markit/BME Germany Manufacturing PMI Jul P 51.9 51.9 7.30 17.30 EC Markit Eurozone Manufacturing PMI Jul P 52.5 52.5 8.00 18.00 US Markit US Manufacturing PMI Jul P 53.6 53.6 13.45 23.45 US New Home Sales/MoM Jun 546K/-0.1% 546K/2.2% 14.00 0.00 Monday, 27 July 2015 JN PPI Services YoY Jun 0.6% 23.50 9.50 CH Industrial Profits YoY Jun 1.30 11.30 GE IFO Business Climate/Current Assessment/Expectations Jul 8.00 18.00 EC M3 Money Supply YoY Jun 8.00 18.00 EC M3 3-month average Jun 8.00 18.00 US Durable Goods Orders Jun 2.70% -1.8% 12.30 22.30 US Durables Ex Transportation Jun 0.60% 0.5% 12.30 22.30 US Cap Goods Orders Nondef Ex Air Jun 0.4% 12.30 22.30 US Cap Goods Ship Nondef Ex Air Jun 0.3% 12.30 22.30 GE Retail Sales MoM/YoY Jun 14.00 0.00 CA Bloomberg Nanos Confidence Jul-24 14.00 0.00 US Dallas Fed Manf. Activity Jul -4 14.30 0.30 Upcoming Central Bank Interest Rate Announcements New Zealand, RBNZ 23-Jul 3.00% 3.00% 3.25% US Federal Reserve 30-Jul Australia, RBA 4-Aug 2.00% 2.00% 2.00% UK BOE 6-Aug 0.50% Japan, BoJ 7-Aug 0.0%-0.1% 0.0%-0.1% 0.0%-0.1% Europe ECB 3-Sep 0.05% Canada, BoC 10-Sep 0.50% GMT: Greenwich Mean Time; AEST: Australian Eastern Standard Time National Australia Bank Research 3

Forecasts Economic Forecasts Annual % change Quarterly % change 2013 2014 2015 Australia Forecasts 2013 2014 2015 2016 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Household Consumption 1.7 2.5 2.5 2.7 0.3 0.4 0.8 0.6 0.5 0.7 0.5 0.8 0.5 0.5 0.5 0.7 Underlying Business Investment -4.5-6.4-10.2-10.2-4.9-1.5 0.8-3.5-2.4-0.9-1.0-1.5-4.6-2.1-4.1-2.0 Residential Construction 0.5 7.9 11.7 6.5-2.7 3.0 0.3 1.3 4.3 1.7-1.2 3.9 4.7 2.8 2.3 2.5 Underlying Public Spending 0.4 0.8 0.0 1.1 2.7-0.2-0.5 1.3 0.3 0.5-1.4 0.1 0.2 0.2 0.2 0.2 Exports 6.3 6.8 10.6 8.6 0.9 3.7-0.6 1.7 4.1-1.6 3.1 1.6 5.0 2.0 1.9 2.1 Imports -1.8-1.6 2.4 1.2-3.3 2.8-1.4-0.5-2.5 3.1-1.2-1.6 3.1 0.4-0.2 0.6 Net Exports (a) 1.6 1.7 1.8 1.7 0.9 0.1 0.2 0.4 1.4-0.9 0.9 0.7 0.5 0.4 0.5 0.3 Inventories (a) -0.3 0.0 0.1 0.0-0.2 0.3-0.3-0.2-0.3 0.9 0.1-0.7 0.5-0.2-0.1 0.1 Domestic Demand - qtr% -0.1 0.2 0.5 0.2 0.3 0.6-0.4 0.5 0.0 0.3 0.0 0.4 Dom Demand - ann % 0.5 1.1 0.8 1.0 0.5 0.0 0.6 0.7 1.1 1.5 0.7 1.0 0.8 0.5 0.9 0.8 Real GDP - qtr % 0.3 0.7 0.4 0.8 1.0 0.6 0.3 0.5 0.9 0.6 0.4 0.8 Real GDP - ann % 2.1 2.7 2.5 2.7 2.0 2.1 1.9 2.2 2.9 2.8 2.7 2.4 2.3 2.3 2.4 2.8 CPI headline - qtr % 0.4 0.4 1.2 0.8 0.6 0.5 0.5 0.2 0.2 0.8 0.8 0.9 CPI headline - ann % 2.4 2.5 1.8 3.1 2.5 2.4 2.2 2.7 2.9 3.0 2.3 1.7 1.3 1.7 1.7 2.5 CPI underlying - qtr % 0.5 0.6 0.6 0.9 0.6 0.7 0.4 0.6 0.6 0.6 0.6 0.7 CPI underlying - ann % 2.4 2.6 2.4 2.6 2.3 2.4 2.3 2.6 2.7 2.8 2.5 2.3 2.4 2.3 2.4 2.4 Wages (Pvte WPI -ann %) 2.9 2.5 2.2 2.2 3.1 3.0 2.8 2.5 2.6 2.4 2.4 2.5 2.2 2.2 2.2 2.2 Unemployment Rate (%) 5.7 6.0 6.3 6.3 5.6 5.7 5.7 5.9 5.8 6.0 6.2 6.1 6.2 6.3 6.3 6.4 Terms of trade -3.8-7.4-10.6-2.1 1.0-0.3-1.3 0.4-1.9-4.6-2.9-1.5-2.9-5.9-0.4 1.2 G&S trade balance, $Abn -10.4-9.2-21.8-4.7-3.0-2.8-3.3-1.3 2.7-5.1-4.0-2.7-3.7-7.6-6.3-4.2 % of GDP -0.7-0.6-1.3-0.3-0.8-0.7-0.9-0.3 0.7-1.3-1.0-0.7-0.9-1.9-1.5-1.0 Current Account (% GDP) -3.3-2.8-3.1-2.0-3.3-3.4-3.6-3.1-1.9-3.6-3.1-2.5-2.7-3.6-3.3-2.7 Source: NAB Group Economics; (a) Contributions to GDP growth Exchange Rate Forecasts Global GDP 20-Jul Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec year 2013 2014 2015 2016 20 Yr Avge Majors Australia 2.1 2.7 2.5 2.7 3.4 AUD/USD 0.7373 0.74 0.72 0.71 0.71 0.72 US 2.2 2.4 2.4 2.7 2.6 NZD/USD 0.6527 0.64 0.62 0.60 0.60 0.61 Eurozone -0.4 0.9 1.4 1.8 1.5 USD/JPY 124.13 124 125 126 126 127 UK 1.7 2.8 2.2 2.4 2.4 EUR/USD 1.0831 1.07 1.05 1.03 1.03 1.04 Japan 1.6-0.1 0.9 1.2 0.8 GBP/USD 1.5602 1.53 1.52 1.51 1.51 1.53 China 7.7 7.4 7.1 6.9 9.2 USD/CNY 6.2095 6.22 6.22 6.25 6.28 6.30 India 6.4 7.1 7.6 7.6 6.6 USD/CAD 1.2983 1.28 1.28 1.25 1.25 1.23 New Zealand 2.2 3.3 2.4 2.2 3.0 World 3.3 3.3 3.2 3.3 3.5 Australian Cross Rates AUD/JPY 91.5 92 90 89 89 91 Commodity prices ($US) AUD/EUR 0.6807 0.69 0.69 0.69 0.69 0.69 20-Jul Sep-15 Dec-15 Jun-16 Dec-16 AUD/GBP 0.4726 0.48 0.47 0.47 0.47 0.47 WTI oil 50.80 55 60 65 70 AUD/NZD 1.1296 1.16 1.16 1.18 1.18 1.18 Gold 1131 1150 1100 1060 1060 AUD/CNY 4.5783 4.60 4.48 4.44 4.46 4.54 Iron ore 51 60 61 58 54 AUD/CAD 0.9572 0.94 0.92 0.89 0.89 0.89 Hard cok. coal 112 98 95 93 97 AUD/CHF 0.7090 0.73 0.73 0.74 0.74 0.00 Thermal coal 62 68 68 62 62 Copper 5470 6080 6260 6200 6170 Interest Rate Forecasts Japan LNG 9.9 11.0 11.0 11.0 11.0 20-Jul Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Aust rates RBA Cash rate 2.00 2.00 2.00 2.00 2.00 2.00 3 month bill rate 2.14 2.15 2.15 2.15 2.20 2.40 3 Year Swap Rate 2.26 2.4 2.6 2.8 2.9 3.2 10 Year Swap Rate 3.25 3.4 3.6 3.7 3.7 4.0 Offshore Policy Rates US Fed funds 0.25 0.50 0.75 0.75 1.25 1.50 ECB refi rate 0.05 0.05 0.05 0.05 0.05 0.15 BoE repo rate 0.50 0.50 0.50 0.75 1.00 1.25 BoJ overnight call rate 0.10 0.10 0.10 0.10 0.10 0.10 RBNZ OCR 3.25 2.75 2.50 2.50 2.50 2.50 China 1yr lending rate 4.85 4.60 4.60 4.60 4.60 4.60 China Reserve Ratio 18.5 18.0 17.5 17.0 17.0 17.0 10 Year Benchmark Bond Yields Australia 2.92 3.0 3.2 3.2 3.3 3.5 United States 2.35 2.50 2.75 2.8 2.8 3.0 Europe/Germany 0.79 0.4 0.6 0.7 0.8 0.0 UK 2.08 2.0 2.1 2.2 2.4 0.0 New Zealand 3.46 3.4 3.5 3.6 3.7 3.9 Sources: NAB Global Markets Research; Bloomberg; ABS National Australia Bank Research 4

Global Markets Research Group Economics Peter Jolly Global Head of Research +61 2 9237 1406 Australia Economics Ivan Colhoun Chief Economist, Markets +61 2 9237 1836 David de Garis Senior Economist +61 3 8641 3045 Tapas Strickland Economist +61 2 9237 1980 FX Strategy Ray Attrill Global Co-Head of FX Strategy +61 2 9237 1848 Emma Lawson Senior Currency Strategist +61 2 9237 8154 Interest Rate Strategy Skye Masters Head of Interest Rate Strategy +61 2 9295 1196 Rodrigo Catril Interest Rate Strategist +61 2 9293 7109 Credit Research Michael Bush Head of Credit Research +61 3 8641 0575 Simon Fletcher Senior Credit Analyst FI +61 2 9237 1076 Distribution Barbara Leong Research Production Manager +61 2 9237 8151 New Zealand Stephen Toplis Head of Research, NZ +64 4 474 6905 Craig Ebert Senior Economist +64 4 474 6799 Doug Steel Senior Economist +64 4 474 6923 Kymberly Martin Senior Market Strategist +64 4 924 7654 Raiko Shareef Currency Strategist +64 4 924 7652 Yvonne Liew Publications & Web Administrator +64 4 474 9771 Asia Christy Tan Head of Markets Strategy/Research, Asia +852 2822 5350 Distribution Kevin Tsang Marketing Manager +852 2822 5388 UK/Europe Nick Parsons Head of Research, UK/Europe, and Global Co-Head of FX Strategy +44 207 710 2993 Gavin Friend Senior Markets Strategist +44 207 710 1588 Derek Allassani Research Production Manager +44 207 710 1532 Alan Oster Group Chief Economist +61 3 8634 2927 Riki Polygenis Head of Economics, Australia +61 3 8697 9534 James Glenn Senior Economist Australia +61 3 9208 8129 Vyanne Lai Economist Australia +61 3 8634 0198 Phin Ziebell Economist Agribusiness +61 475 940 662 Amy Li Economist Australia +61 3 8634 1563 Dean Pearson Head of Industry Analysis +61 3 8634 2331 Robert De Iure Senior Economist Industry Analysis +61 3 8634 4611 Brien McDonald Senior Economist Industry Analysis +61 3 8634 3837 Karla Bulauan Economist Industry Analysis +61 3 8641 4028 Tom Taylor Head of Economics, International +61 3 8634 1883 Tony Kelly Senior Economist International +61 3 9208 5049 Gerard Burg Senior Economist Asia +61 3 8634 2788 John Sharma Economist Sovereign Risk +61 3 8634 4514 Jacqui Brand Personal Assistant +61 3 8634 2181 National Australia Bank Research 5

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