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St George Economics economy and finance update

Share Markets:

The major US share market indices fell amid disappointing corporate earnings and growing concern that the Federal Reserve may cut its bond purchases after remarks made from the Fed Bank of Cleveland President.

The Dow Jones closed 0.3% lower and the S&P 500 index finished down 0.4%.

The ASX 200 share market ended sharply lower yesterday; we can expect a further sell off today given the poor lead provided by offshore share markets.

Bonds:

US 10-year Treasury bond yields ground lower throughout the overnight session, from 2.64% to 2.60%, despite the Fed rhetoric over the past two days.

A 10-year auction yielded mixed results, awarded at market yield but with a 2.5 bid-cover ratio - the lowest since 2009.

The Australian 3-year government bond yield fell from 2.54% to 2.48% and the10-year bond yield fell from 3.72% to 3.69%.

Foreign Exchange:

The US dollar index fell to its lowest level in seven weeks, on concerns about the scope and timing of the Federal Reserve's eventual tapering of its bond-buying program.

EUR/USD rose from 1.3266 to 1.3345, as Fitch affirmed Germany's AAA rating.

GBP surged after investors brought forward expectations of when the Bank of England will raise interest rates from a record low after a news conference by the central bank's head.

Combined with recent strong economic data, the fx market pushed GBP/USD from near 1.5200 to a high of around 1.5530.

USD/JPY made a one-month low of 96.33.

Meanwhile, theAUD/USD rose from 0.8920 to 0.9025 - a five-day high. Today's employment data will determine if the AUD's recent run can continue.

Commodities:

The price of crude oil dropped overnight while the price of gold rose. Gold futures snapped the longest slump in eleven weeks, as the USD's decline increased demand for the metal as an alternative investment.

Australia:

The number of housing finance commitments rose by 2.7% in June, the sixth consecutive monthly gain, to be up 12.7% in the year to June.

The value of all home loans rose by 1.2% in June and by 15.1% for the year to June.

This data provides further evidence that the successive interest rate cuts by the RBA since November 2011 are underpinning a recovery in housing.

This week's rate cut will further underpin this house-lending recovery.

The AiG performance of construction rose to 44.1 in July from 39.5 in June. This outcome was the highest since February and indicates that construction activity is declining (with a reading below 50),although at a less rapid pace than in June.

Europe:

Germany's industrial production data was firm strong in June at 2.4% growth. It comes on the back of yesterday's firm factory orders data.

Overnight, Fitch reaffirmed Germany's AAA status with a stable outlook. Fitch said that the debt-to-GDP ratio has peaked, the German economy is growing and the German government has overachieved on some key fiscal targets.

New Zealand: Employment lifted by 0.4% in Q2, after rising 1.7% in Q1. For the year to the second quarter, employment has risen 0.7%, up from 0.3% growth in employment in the year to the first quarter.

The unemployment rate lifted to6.4% in Q2, from 6.2% in Q1, but this remains below the 6.8% unemployment rate seen in Q4 last year.

The workforce participation rate edged up to 68.0% in Q2,from 67.9% in Q1, the highest since Q3 last year.

United Kingdom: At a news conference, Bank of England Governor Mark Carney said future interest rate rises in the UK would not happen until unemployment fell to 7% (currently 7.8%), something seen unlikely for at least three years.

But markets concluded that given a slew of recent upbeat British data, the unemployment rate could come down faster than the Bank of England's three-year time frame. Furthermore, the market was looking for a threshold closer to 6.5%.

United States:

Federal Reserve Bank of Cleveland President Sandra Pianalto said overnight that the central bank would be prepared to scale back asset purchases if the labour market remains on the stronger path followed since last fall.

On the previous day, Fed Bank of Chicago President Charles Evan said he "would clearly not" rule out a decision to begin curbing buying bonds in September. In data, the IBD/TIPP economic optimism index unexpectedly fell to 45.1 in August, after registering 47.1 in July.

The sub-components of economic outlook,personal finance and federal policies all fell.



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