St George Economics economy and finance update
Sentiment continued to be weighed down on the prospect of the Federal Reserve winding down stimulus, and as weaker-than-expected manufacturing data from China raised concerns about prospects for global growth.
This was despite some more upbeat economic news from the US. Share markets globally fell, although a positive earnings report from Hewlett-Packard limited losses.
The Dow and Nasdaq fell 0.1%, while the S&P500 fell 0.3%. Meanwhile, in Asian trade yesterday, the Nikkei fell the most in over a year, while the ASX200 dropped 2.0%.
US treasuries rose (yields fell) after solid demand for a sale of inflation-linked bonds.
Ten-year yields however remain above 2 percent, with markets continuing to mull over reduced bond purchases from the Fed.
There has been a negative reaction in Europe to the potential pull back of stimulus from the Fed. Spanish and Italian 10-year yields have posted their biggest increase in two months on worries that the unwinding of stimulus will dampen demand for higher yielding assets.
The US dollar weakened against most currencies with the US dollar index falling for the first time in three days.
The yen strengthened the most in five weeks, supported by weaker risk appetite.
After weakening on softer than expected Chinese data yesterday, the Australian dollar rose despite the more risk averse environment.
Commodity prices fell on concerns that the Chinese economy was faltering. Oil prices fell to the lowest in three weeks. Gold prices however, rose sharply as the US dollar weakened.
Consumer inflation expectations remain well contained. The Westpac-Melbourne Institute index of inflation expectations edged 0.1 percentage points higher to an annual rate of 2.3% in May, within the lower part of the RBA's 2 to 3 percent per annum target band.
The Westpac-Melbourne Institute unemployment expectations index rose 5.4% in May following a 1.3% rise in April, indicating a further deterioration the perception of labour market conditions. The deterioration partially reverses an improvement witnessed earlier this year.
The HSBC manufacturing PMI slipped to 49.6 in the flash estimate for May, the first reading below 50 in seven months.
The fall has cast some further doubt on the strength of the Chinese economy, and might lead to some downgrades to forecasts for 2013. Nonetheless, the economy still looks on track to post growth of around 7.5%, in line with the government's target.
PMI indices in Europe for May improved, with the composite index lifting from 46.9 to 47.7. Both the manufacturing (47.8) and services (47.5) indices rose from 46.7 and 47.0 previously but remain in contractionary territory.
Consumer confidence in the zone also improved from -22.3 to -21.9 in May, suggesting consumers are a little less pessimistic.
GDP in the first quarter was unrevised at 0.3%, confirming a 0.6% annual growth in the year to the March quarter.
New home sales rose 2.3% in April, taking the annualised pace of growth to a three-month high of 454k.
There were other signs of further recovery in housing. According to FHFA, US House prices rose 1.3% in March following a 0.9% increase in the previous month.
The Kansas City Fed manufacturing index rose from -5 to 2 in May, possibly providing an early indication that activity has improved again later into Q2.
Initial jobless claims fell by more than expected, from a revised 363k to 340k for the week ending 18 May.
The decline partially reverses a spike in the previous week, and continues to point to moderate growth in the labour market.
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