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Commonwealth Bank of Australia: The Week Ahead

Posted by Joseph Trevisani on Jun 28, 2013 4:35:00 PM
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The Week Ahead

We expect the RBA to leave the cash rate unchanged at Tuesday’s Board meeting.


The ABS publishes May data on retail trade, building approvals and the trade balance. 


US payrolls data for June should show employment continued to pick‑up at a steady pace.

It was a relatively volatile week for markets despite a lack of economic data.  Early in the week bonds and equities sold off on the expectation that the US Federal Reserve would taper its asset purchases.  But later in the week, two influential Fed Presidents spoke and suggested that markets had misinterpreted the US central bank's intentions and it was unlikely that stimulus would fade anytime soon.  As a result, equities and bonds both rallied.  Volatility is likely to remain elevated while markets seek further clarity on the Fed’s intentions with regards to quantitative easing (QE).  We expect the Fed’s decision on QE will be data dependent and we do not expect any tapering of asset purchases until September, at the earliest.  Given the importance of the labour market in Fed thinking, the US payrolls data out at the end of the week takes on extra importance.

It is important to note that the process of tapering reflects a reduction in the pace of monetary easing.  It is not a monetary tightening.

It was a quite week of domestic economic data, but next week there are a few key releases and events for the market to digest.  On Tuesday, the RBA meets to discuss interest rates.  As at Friday afternoon, markets had priced in a 22% chance of a rate cut following the Board meeting.  Pricing of a rate cut has diminished because of the recent fall in the Australian dollar.  A weaker local currency aids domestic businesses.  And it also puts upward pressure on inflation as the cost of imports rise.  We expect the central bank will leave the cash rate unchanged next week.  Chief 

On Wednesday, the ABS published data on retail trade in May.  Discounting in some retail trade categories has been weighing on nominal sales growth.  But CBA’s Business Sales Index suggests that May was a pretty solid month for retail trade and we expect to see a decent lift in sales over the month.  The trade balance for May is also published on the same day.  We are back in surplus territory and we expect May to continue the surplus streak due to a lift in export volumes over the month.  On Thursday, building approvals for May are published.  Approvals surged by 9.1% in April due to a jump in the highly volatile multi‑unit dwellings.  The underlying economic drivers of housing activity, namely low rates and pent up demand, are quite supportive of a rise in dwelling approvals.  We expect a sustained pick‑up over 2013, but the May read is likely to show a small fall in approvals following April’s spike.

The suite of Australian PMIs are due next week, including the AiGroup‑CBA Performance of Services Index.  These surveys have highlighted very low levels of business confidence. 

On the international front, US payrolls data is published on Friday.  Jobless claims suggest June payrolls should increase by close to May’s 175,000.  However, the pick‑up in momentum of temporary hiring in the past two months, a leading indicator for payrolls, suggests an upside surprise is possible.  The US ISM manufacturing index is likely to remain below 50 points in June. 

The ECB and the Bank of England both meet to discuss interest rates.  It will be Mark Carney’s first meeting as Governor of the Bank of England.  We do not expect any changes to monetary policy from either central bank this month.  The risks, however, lie with further policy easing from both central banks over the coming months if demand remains weak.  Currency Strategist Peter Dragicevich will be publishing a note later today on the new Governor of the Bank of England.




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