Economy is looking upbeat according to the RBA

Australia: 

Friday's Statement on Monetary Policy presented a rather upbeat commentary on the economic outlook.

Much of the optimism appears to centre on the recent lift in commodity prices, particularly iron ore and coal, and a stabilisation in the Chinese economy, despite considerable uncertainty around these areas. 

The RBA appeared more optimistic on the outlook for inflation, highlighting higher commodity prices and expected upward pressure on global inflation, rising labour costs and easing disinflationary effects from heightened retail competition to support their optimism. 

This suggests that the RBA will not be looking to lower official interest rates any time soon.  

We are more doubtful than the RBA regarding the assumptions, thus we expect that the RBA will lower official interest rates to as low as 1.0% over 2017.

Retail sales rose 0.6% in September, the second month to increase following months of near stagnation. This recent pickup in retail values appears encouraging, but after delving deeper into the data, the story is much less positive. 

The contraction in retail volumes suggests that the pickup was mostly due to a lift in prices for the quarter, which will most likely be transitory, rather than due to stronger sales volumes. When excluding the impact of prices, the volume of retail sales fell 0.1% in the September quarter.

Share Markets: 

Investors remained nervous ahead of this week's US Presidential election, despite a solid US payrolls report. The Dow, the S&P 500 and the Nasdaq all fell 0.2% for the session.

Interest Rates:

US government bond yields fell on Friday night, reflecting risk aversion in markets.

Yields on the 10-year government bond fell 4 basis points to 1.78% and yields on the 2-year government bond fell by 2 basis points to 0.78%.

The market is now pricing 76.0% chance of a rate hike in December, up from 69% a week earlier, according to the Fed Funds futures, with the jobs data seen as supportive of such a move.

Atlanta Fed President Lockhart (a non-voter) said "I consider that quite a satisfactory jobs report."

He said there's a relatively high bar, at least in pure economic terms…..to not moving in December." Lockhart hinted at event risk, however, noting "there are other things that go on in the world that could give pause and I don't completely rule them out."

Foreign Exchange:

The US dollar fell on Friday, amid nervousness ahead of the US election.

This morning, however, the US dollar jumped against the major currencies after Clinton received a boost from the FBI review.

The FBI released a letter indicating its conclusions on Clintons emails were unchanged from July.

The Euro drifted higher against the US dollar on Friday night, but weakened this morning. EUR/USD rose from a low of 1.1080 late Friday, to a high of 1.1176, before falling to trade around 1.1064 this morning.

The US dollar edged higher against the Japanese Yen on Friday, before jumping higher this morning. USD/JPY rose from a low of 102.83 on Friday afternoon, to trade around 104.30 at the time of writing.

The Aussie dollar defied the trend this morning, gaining ground against the US dollar on a lift in risk appetites following the FBI letter. AUD/USD, rose from a low of 0.7652 early Saturday morning, to trade around 0.7689 currently.

Commodities:

The oil price fell further to US$44.10 per barrel, on diminishing hopes of an OPEC production cut.

Japan:

In September, Japan's services PMI moved to expansion for the first time in three months to 50.5. This suggests that consumer spending is picking up after shoppers were forced to stay home during a series of typhoons.

Europe:

The Markit services PMI fell to 52.8 in the final reading for October, from an earlier reading of 53.5. It remains, however, above the September reading of 52.2 and indicates ongoing expansion of services sector activity in the Eurozone.

Producer prices lifted 0.1% in September, after falling by 0.2% in August. For the year to September, producer prices fell 1.5%, up from a decline of 1.9% in the year to August.

United States: 

Payrolls rose by 161k in October, which was a little below consensus expectations for an increase of 173k.

However, revisions to the previous month boosted the increase in September to 191k jobs, up from an earlier estimate of 156k.

The unemployment rate fell to 4.9% in October, from 5.0% in September.

The fall in the unemployment rate was assisted by a decline in the labour force participation rate to 62.8% in October, from 62.9% in September.

The underemployment rate fell to 9.5% in October, from 9.7% in September. It was the lowest reading on this broader measure of unemployment since April 2008.

Average hourly earnings jumped by 0.4% in October. For the year to October average hourly earnings rose by 2.8%, up from 2.7% in the year to September.

This was the highest annual pace of earnings since June 2009.

The trade deficit narrowed slightly to US$36.4bn in September, from a deficit of US$40.5bn in August.


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