St George Economics economy and finance update

Share Markets:

The focus for financial markets was on Europe and the comments from ECB Chief Draghi last night.

Draghi highlighted the downside risks to the economy, which dragged down equity markets. Share markets were however, due for a correction sometime soon, after strong gains so far this year. The Euro Stoxx lost 0.7%, while in the US, the Dow fell 0.3%, the S&P500 fell 0.2% and the Nasdaq dropped 0.1%.


US treasuries were little changed with 10-year yields holding just below two percent. Despite the improving global backdrop, recent concerns arising in Europe have been a reminder that risks remain to the outlook.

Foreign Exchange:

The euro fell against the US dollar after Draghi expressed concern about its recent strength.  Meanwhile, the Australian dollar tracked share markets and sentiment lower, falling to around 1.028.


Commodity prices weakened after Draghi's comments raised concerns about the outlook for global demand.

However, Brent oil gained on tensions in Iran, although WTI oil prices fell, weighed down by concerns on rising US inventories. 


Employment rose by 10.4k in January, modest monthly gain and slightly above consensus expectations, but it followed a revised 3.8k drop in December.

Overall job growth remains at a soft pace. The unemployment rate remained steady at 5.4% in January, against expectations for a rise. However, the unemployment rate continues to be kept down by falling workforce participation, which has been a running theme over the past few years.

Additionally, January's job gain was entirely due to a 20.2k rise in part-time jobs, while jobs in the more stable full-time category fell 9.8k.

The data doesn't change the notion that the labour market remains soft. Recent RBA commentary has suggested that the RBA is leaving the door open for another rate cut; however, we expect that it will need to see further evidence of a softening labour market and domestic demand, and will delay cutting rates until April.

NAB business confidence declined from a revised -4 reading to -5 in Q4, suggesting that firms remained pessimistic about the outlook. A weakening in business conditions over the quarter from 1 to -6 was also a worrying sign for domestic demand. However, sentiment may pickup after a recent improvement to the global backdrop since the beginning of the year. 

The AiG performance of construction index fell from 38.8 to 36.2 in January, and points to ongoing difficulties within the construction industry. However, there is scope for improvement given interest rates are low and house prices are beginning to rise in parts of Australia.


The European Central Bank (ECB) left rates on hold at 0.75%. In the press, ECB chief Mario Draghi reiterated that recovery should begin later this year, but with risks remaining on the downside.

There was upside risk to inflation from commodities and administered prices, but downside risks from weaker growth and more recently, the appreciating exchange rate.

In Draghi's comments he said, "We will want to see if the appreciation will alter our assessment as far as price stability is concerned", hinting at some concern about the recent rise in the euro, but that the exchange rate was not a "policy target".  The decision to hold the policy line was unanimous.

German industrial production rose 0.3% in December its first rise in 5 months, taking the annual pace of decline to -1.1% in the year to December.


Machine orders rose 2.8% in December, following a 3.9% increase in November, above consensus expectations for a 0.8% decline.  The outlook appears more promising for Japanese firms given the recent appreciation for the yen.

The annual rate of growth, however, remains subdued and slipped from 0.3% to -3.4% in the year to December.

New Zealand:

The unemployment rate unexpectedly fell from 7.3% to 6.9% in Q4, although this reflected a sharp fall in workforce participation. Employment declined 1.0% in the quarter, and 1.4% in the year to Q4. It was the third consecutive quarterly fall in employment.

United Kingdom:

The Bank of England (BoE) left rates unchanged at 0.5% and the Asset purchase program was left unchanged at £375bn at its meeting, but it took the unusual step of issuing a detailed statement, usually reserved for policy changes.

The key point was that CPI inflation is likely to rise further in the near term and may remain above the 2% target for the next two years, but for inflation to fall back to around the target thereafter. Due to current weakness of the economy, the Committee appeared willing to tolerate the temporary spike in expected inflation.

UK industrial production rose 1.1% in December, led by a 1.6% surge in factory production (machinery and chemicals the drivers).

In other news, exports rose 3.0% in December, outpacing a 1% imports gain, which saw the trade deficit narrow by £376mn to £8.9bn in December.

United States:

US initial jobless claims fell 5k to 366k in the week ending 2 February, a relatively minor move after big swings related to seasonality distortions in January.

US non-farm productivity fell 2% annualised in Q4 from 3.2% in Q3 as output slowed from 4.7% to 0.1%. Unit labour costs consequently rose to 4.5% in Q4 from -2.3% in Q3.

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