insto - Australian financial markets

Last week's major economic indicator was the trade price indices published on Friday. Export prices rose a record 16.1 percent in second quarter after rising only 3.8 percent in the first. The increase in reflected a massive increase in the proces achieved for coal and iron ore, plus a general boost plus a 2.4 percent weakening in the exchange rate.

Retail sales rose a modest 0.2 percent and building approvals fell 6.6 percent in May, the ABS said. Economists said the RBA’s six interest rises were to blame. The seasonally-adjusted Australian Industry Group-PricewaterhouseCoopers Australian performance of manufacturing index dropped 3.4 points to 52.9 in June, just above the 50 point level indicating an expansion. The fall was caused by a drop in new orders.

After a data drought, some significant indicators are due this week. May private credit is due Wednesday.  The median market expectation is for a 0.4 percent increase, in a range of 0.1 percent to 0.5 percent. Economists say business credit is stabilising, but housing credit growth is expected to be weak, reflecting Reserve Bank tightening. May retail sales data are due on Thursday, following months of very weak data, which has surprised economists given the strong employment picture.

The week was as much about perceptions as reality. Business sentiment fell on the proposed RSPT, but conditions in mining were strong. Consumer sentiment fell, but the week’s data showed strong job creation, reduced underemployment and increased hours worked. The employment data and news of China’s exports growing 48.5 percent in May boosted the Australian dollar. It ended the week nudging 85 US cents.

GDP grows 0.5 percent in first quarter

The week’s economic data were second-tier: Construction activity increased in Q1, but the rise of 1.9 percent fell short of the median market expectation of 4 percent. Even so, construction work will make a healthy contribution to growth, with the sector representing around 16 percent of GDP, economists said.

"Never waste a good crisis" is advice usually attributed to Machiavelli, but German Chancellor Angela Merkel and her finance minister Wolfgang Schaeuble appear to have adopted it as a mantra. One would assume the German financial services regulator, Bafin, would have anticipated the likely market reaction to Germany's  ban on naked short-selling of German-listed securities and CDS transactions. Was it moralising desperation as claimed by commentators, or is there another explanation for this precipitate action?

The Commonwealth plans to sell $56 billion of government bonds in the fiscal year beginning July 1, up from $54 billion in 2009-10. The increase is less than had been anticipated due to the budget’s earlier than expected return to surplus. Treasurer Wayne Swan’s budget revealed that government debt would peak at 6.1 percent of GDP in 2011-12, and would be eliminated by the 2012-13 financial year.

The Australian dollar is 20 percent overvalued says Andrew Cooke, Goldman Sachs JB Were chief investment officer, and investors should take full advantage of it to buy internationally.

Cooke told a round table this week that there was not much more upside available from the terms of trade, and that interest rates in other markets would catch up with Australia’s, undermining the carry trade.