St George Economics economy and finance update

Share Markets:

US equity markets were weaker overnight as US manufacturing data weakened (see below) and the US Federal Reserve hinted that it may have to maintain its accommodative stance for longer due to the headwind of US budgetary restraints.

The US economy is growing but at a very modest pace.

The Dow fell 0.9% while in Europe the FTSE100 rose 0.3% and the Dax was up 0.5% on expectations that the ECB and other central banks would continue to stimulate economic activity.


The US Fed's commitment to continued asset purchases saw US long bond yields move 4 basis points lower to 1.63%.

Bonds yields also edged lower in Germany, the UK and Japan while in Australia 10 year government bond yields were steady at 3.10%.


Foreign Exchange:

The AUD begins the day a touch weaker against all major currencies. Weaker commodity prices appear to have been the catalyst.


The weak US manufacturing data knocked the stuffing out commodity markets with copper and oil down.

Copper fell over 3% while West Texas Intermediate crude was down over US$2 per barrel to US$91.0.


The AiG performance of manufacturing index slipped slumped to 36.7 in April, from 44.4 in March.

This was a four-year low, indicating that manufacturing activity contracted at its fastest pace in four years in April, as the strong Aussie dollar hurts manufacturers.

The new orders component (a leading indicator of activity) dropped to 32.4 in April, from 39.4 in March.

The employment component also worsened sharply, falling to 39.3 in April, from 48.7 in March.

RP Data-Rismark dwelling prices fell 0.5% in April, after rising 2.8% in the first quarter.

This was the first monthly decline since December.

For the year to April, dwelling prices have gained 2.7%.

HIA new home sales rose 4.2% in March, after falling 5.3% in February.

Demand was driven by unit sales, which jumped 5.7%, but failed to retrace the 11.0% decline in February.


The manufacturing PMI was marginally less strong than expected, falling to 50.6 in April, from 50.9 in March (compared to expectations for the index to slip to 50.7).

The new orders component was less strong, slipping to 51.7 in April, from 52.3.

New export orders weakened, falling to 48.6 in April, from 50.9 in March.

United Kingdom:

The UK PMI manufacturing index improved from 48.6 to a less contractionary 49.8 in April.

Other data included a 0.9% rise in house prices in the year to April, according to the Nationwide, the (equal) fastest pace of gain since late 2011.

United States:

The US FOMC maintained its accommodative policy stance, with only minor changes to the previous statement. The opening paragraph noted that "economic activity has been expanding at a moderate pace.

Labor market conditions have shown some improvement in recent months, on balance... but fiscal policy is restraining economic growth."

This is slightly more cautious regarding the job market and more emphatic about fiscal policy than the March statement which noted "a return to moderate economic growth following a pause late last year. 

Labor market conditions have shown signs of improvement in recent months... but fiscal policy has become somewhat more restrictive."

Also, regarding the asset purchase outlook, the following was added in today's statement: "the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

This makes clear that policy may yet be eased further, to ensure no inference could be drawn that the next policy shift would only be towards a less accommodative stance.

As in March, "the Committee continues to see downside risks to the economic outlook."

The US ISM manufacturing index slipped from 51.3 to 50.7 in April the lowest reading for the year so far.

This is the fourth year running that the ISM manufacturing index has given up early year gains in the second quarter, so there may be some statistical distortion at play.

US construction spending fell 1.7% in March due to a 2.9% decline in non-residential spending; the residential component rose 0.7% on top of a 2.2% February rise, but has failed to fully reverse the near 4.5% fall in residential spending between October and January.

US ADP private payrolls rose 119k in April.


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