Kieran Bicheno

RBA's comments on the economy starting to brighten


The AiG performance of construction index rose to 47.1 in July from 46.4 in June. 

Despite the improvement, the reading below 50 indicates that the construction industry is still in contraction, albeit at a slower pace in July. 

Residential construction performed the strongest - apartment building jumped to its highest reading since August 2014. 

However, continued weakness in engineering and commercial construction continues to weigh down on the overall index.

The number of home loans for owner occupiers rebounded 4.4% in June, partly offsetting a 7.3% decline in May.

On an annual basis, home loans grew 3.0%, and point to ongoing solid demand within the housing market. 

The value of loans to investors declined 0.7% in June, and fell for two consecutive months for the first time since late 2012. 

The RBA will be encouraged that measures to curb investor lending are having some impact in tempering demand. 

However, housing demand is expected to remain strong, among both investors and owner occupiers, given interest rates remain low.

The RBA provided a more upbeat assessment of the domestic economy on Friday in its Statement on Monetary Policy in comparison to previous commentaries. 

Its forecasts for the unemployment rate have been lowered but its forecasts for inflation have been revised marginally upwards. 

The optimism comes as a result of a stronger labour market, an increase in consumption, low inflation and a weaker AUD. 

Other aspects brightening the outlook include export growth, low interest rates and improved results in surveys of business conditions. 

The global environment remains broadly positive although a further decline in Australia's terms of trade and a lift in the US Fed funds rate spell volatility for the AUD and financial markets. 

Given the relatively optimistic tone of the Statement, further cuts to the cash rate seem unlikely. We expect the RBA will leave rates on hold for the remainder of the year.

Share Markets: 

The monthly US payrolls report was close to economists' expectations, but the market reaction was mixed.

The US stockmarket weakened as investors increased pricing for a rate hike in September this year.

The Dow, the S&P 500 and the Nasdaq all fell 0.3%.

Interest Rates:

US government bond yields rose at the short end, but fell at the long end, resulting in a flattening of the yield curve.

The Fed fund futures indicated investors are now pricing in 50% chance of a rate hike from the Fed in September.

There is still another month of payrolls data before the Fed's September meeting.

Foreign Exchange:

The US dollar index traded a wide range, reflecting its indecision regarding the payrolls report. Initially it bounced to a three month high, retraced two hours later and ended the day slightly lower.

EUR/USD was similarly volatile but ended higher at 1.0963 at the time of writing. USD/JPY fell from 125.07 to 124.10.

The Australian dollar rose from 0.7345 on Friday morning to a high of 0.7420 on Saturday morning, gaining a boost from the RBA's more upbeat assessment of the Australian economy.

It opened slightly lower this morning, between 0.7397 and 0.7420, perhaps in response to the weekend's China data (see below).

NZD rose from 0.6529 to 0.6637 early Saturday morning. AUD/NZD fell from 1.1292 to trade around 1.1216 at the time of writing.


The copper price lost further ground after a surprise fall in German industrial production weighed on expectations for demand.


The trade surplus narrowed to US$43.03bn in July, from US$46.54bn in June. Exports fell 8.3% in the year to July, down from an increase of 2.8% in the year to June, with lower overseas demand, particularly from Europe, driving the decline.

The fall in exports will put additional pressure on China in its efforts to meet its 7 percent economic growth target for 2015.

Imports were also weaker, falling 8.1% in the year to July, down from a decline of 6.1% in the year to June.

Consumer prices rose 1.6% in the year to July, up from an increase of 1.4% in the year to June, with higher pork prices driving the increase.

Producer prices fell further, down 5.4% in the year to July, down from a decline of 4.8% in the year to June.

This was the lowest in six years, with producer prices having declined in annual terms for 41 consecutive months.


German industrial production fell 1.4% in June after a revised 0.2% gain in May. It was expected to increase slightly.

In the year to June, industrial production rose a disappointing 0.6%, falling from a revised 2.4% annual growth in May.


The Bank of Japan left its monetary policy unchanged in Friday's meeting. The Bank will continue to increase the monetary base at an annual pace of ¥80 trillion.

United Kingdom:

The trade deficit widened to £1601m in June, from a downwardly revised deficit of £885m in May (previously reported as a deficit of £393m).

United States:

Nonfarm payrolls rose by 215k in July, slightly below consensus forecasts for an increase of 225k.

June nonfarm payrolls, however, were revised higher from 223k to 231k. The unemployment rate held at 5.3% in July.

Hourly earnings rose from 0.0% in June to 0.2% in July. For the year to July, average hourly earnings rose 2.1%, up from 2.0% in the year to June.