AMP Capital Investors Limited ABN 59 001 777 591, AFSL 232497

Investment Strategy & Economics

Weekly market & economic update

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist
WEEK ENDING 6 APRIL 2012

Data/Event

Units*

Movement LATEST PREVIOUS 52.4 +0.3% 48.4 8.3%

Trend

US Institute of Supply Managements (ISM) manufacturing index, March Australia Retail sales, February China Non-manufacturing purchasing managers index (PMI), March US Unemployment rate, March

index mom index actual

53.4 +0.2% 58.0 8.2%

Financial markets
Indicator S&P/ASX 200 Index S&P/ASX 200 Property Trusts US S&P 500 Dow Jones Eurostoxx UK FTSE 100 Japan TOPIX CITIC/S&P 300 China A MSCI World (ex-Aust/in LC) Aust 90-day bank bill yield Aust 10-year bond yield US 10-year bond yield Oil West Texas Crude A$ in US cents TWI Friday, 6 April 2012 4,320 827 1,382 239 5,724 814 2,089 910 4.30% 4.03% 2.05% 102.46 1.0313 76.4 Friday, 30 March 2012 4,335 820 1,409 247 5,769 854 2,058 923 4.28% 3.98% 2.21% 103.02 1.0346 76.9 Weekly change -0.3% 0.9% -1.9% -3.3% -0.8% -4.7% 1.5% -1.4% +2 bps +5 bps - 16 bps -0.5% -0.3% -0.7% 6 April 2011 4,913 872 1,336 290 6,041 840 2,781 933 4.91% 5.54% 3.55% 108.83 1.0433 76.5 12-month change -11.8% -6.0% 5.4% -14.8% -4.5% 1.8% -26.0% -1.0% -61 bps -151 bps -150 bps -5.3% -0.8% 0.5%

Major upcoming global economic releases and events

Date 9 April 12 April 12 April 13 April Data/Event China Consumer price index (CPI), March US Producer price index (PPI), March Australia Unemployment rate, March US CPI, March *Units yoy mom actual mom Previous +3.2% +0.4% 5.2% +0.4% Forecast +3.4% +0.3% 5.3% +0.3%

*Month-on-month (mom); quarter-on-quarter (qoq); year-on-year (yoy); seasonally adjusted annual rate (saar)

Headline developments of the past week

> The past week has seen a swing to risk off with shares, commodities and growth currencies like the Australian dollar (A$), all weak on worries about Spain, capped off by a disappointing jobs report in the US. After a strong March quarter, some sort of consolidation or correction is inevitable and this may be what we are starting to see. The focus in Europe is shifting to Spain which faces an extremely difficult balancing act in implementing more austerity to reduce its budget deficit but not so aggressively that the recession deepens and only worsens the deficit. Spains public debt at just over 70% of gross domestic product (GDP) is way below the 120% plus of Greece, but its heading in the wrong direction and its banks are at risk should the economic downturn intensify. These concerns were reflected in a poor bond auction which saw Spanish 10-year bond yields pushed above 5.7% for the first time since January, which in turn has pushed bond yields higher in Italy and France. This will need to be watched closely. The minutes from the US Federal Reserves last meeting signalled there was no need for more easing unless growth slowed again and this certainly didnt help investor sentiment. However, the minutes are heavily dated given numerous comments by Chairman Bernanke in the period since the meeting that the US recovery remains fragile with the implication that easy policy will have to remain in place and that further quantitative easing is still possible, particularly with less-than-expected jobs growth in March appearing to vindicate Bernankes concerns. A week ago I thought a Reserve Bank of Australia (RBA) rate cut was quite likely at its April meeting. But no such luck, with the RBA leaving rates on hold. The case to cut interest rates is overwhelming: GDP growth is running well below trend; key sectors of the economy such as retailing, construction, manufacturing, tourism and the financial sector are depressed with the mining boom providing an insufficient offset; the labour market is weakening; fiscal drag equal to around 2.5% of GDP is about to hit the economy; and wages growth and inflation are benign. And now, even the trade boost to the economy is showing signs of softening. However, the RBA has at least moved to a strong easing bias in acknowledging output growth is below forecast and below trend but decided to put off a cut until it gets a look at the March inflation data. We think it will be benign and clear the way for a May cut. However, the RBA should have cut in February and the delay is needlessly threatening the economy. Having admitted growth is weaker than expected it would have made more sense to get a cut out of the way rather than make it contingent on a CPI statistic that could temporarily surprise on the upside resulting in a further delay.

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Major global economic releases and implications

> US economic news was mixed, with solid ISM manufacturing and services conditions indexes, a strong rise in weekly retail sales, another rise in mortgage applications and a further fall in jobless claims on the one hand but a much softer-than-expected gain in payroll employment in March (+120,000 versus market expectations for a 205,000 gain) and disappointing readings for auto sales and construction. While the March payroll report was soft, our take is that it doesnt signal a sudden downturn in the US economy. Good weather likely pulled some employment forward into previous months and falling jobless claims and rising employment plans in the ISM surveys point to decent ongoing employment gains ahead. So it looks like more noise than signal. Japanese data was also positive with mostly stronger readings in the Tankan survey and stronger auto sales. European news was mixed following the decision of finance ministers to cap new bailout lending to 500 billion, rather than increase it to 740 billion as had been flagged. While the funding will be available earlier than previously indicated and 500 billion should be enough to cover any further assistance to Portugal and Spains funding needs over the next two and half years, it wouldn't cover Italys requirements. The smaller-than-hopedfor amount has made it less clear how much G20 nations will be prepared to contribute via the International Monetary Fund. On the data front, March Eurozone manufacturing PMIs were unchanged from earlier estimates, but services PMIs were revised up slightly. Both are consistent with a mild recession. The bad news though, was that Eurozone retail sales and German factory orders were both weak and unemployment rose further to 10.8%. In Italy it is at a record high with around one third of youth unemployed. As expected the European Central Bank left interest rates on hold and President Draghi made it clear that any talk of exit from easy monetary policies is premature. The news out of China also remains mixed, but consistent with a soft landing. Official PMIs rose in March and while the HSBC PMI fell, it was above the flash estimate and in any case all are at levels consistent with 8%. Meanwhile, average residential property prices fell for the seventh month in a row. While concerns about a hard landing remain, comments by Premier Wen Jiabao have struck a dovish tone and suggest further monetary easing is imminent. Finally, China announced a further opening of its domestic asset markets to foreign investors. Given the experience of the last few years I can't see a huge rush in, but it is good news longer term. India saw its manufacturing PMI fall sightly in March but remain solid.

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Australian economic releases and implications

> Australian economic data remained disappointingly weak with a sharp fall in building approvals, flat house prices, soft retail sales, weak readings for business conditions in the manufacturing and services sectors and another surprise trade deficit in February. The trade turnaround from last year's surpluses to deficits so far this year is concerning. While it appears to be at least partly driven by temporary disruptions at the very least it looks like trade will be a significant detractor from March quarter GDP growth which, coming on the back of poor readings for housing construction and retail sales, points to yet another quarter of below-trend growth. Global shares fell and bonds rallied on worries about a renewed intensification of the Eurozone crisis and a poor jobs report in the US. Global weakness and the lack of an RBA rate cut also weighed on Australian shares. Global growth worries and a stronger US dollar also weighed on commodity prices. Weak commodity prices and soft Australian economic data for retail sales, housing and trade saw the A$ pushed back below $US1.03. Chinese economic data releases for March will likely be the key focus of the week ahead. We expect inflation (Monday) to have remained around 3.2% after a sharp fall in February, growth in exports and imports (Tuesday) to remain soft, March quarter GDP growth (Friday) to have slowed to 8.5%, but March data for money supply and loan growth (Wednesday), industrial production, retail sales and investment (all due Friday) to have accelerated. Overall, expect the data to point to a soft landing but with plenty of scope to ease policy if need be. In the US, expect headline inflation (Friday) to have been boosted by gains in gasoline prices but core inflation to have remained benign. The Fed's Beige book of anecdotal evidence will also be released Wednesday. In Australia expect more soft readings for business confidence (Tuesday) and consumer confidence (Wednesday), a 1% fall in housing finance (Wednesday) and a further 10,000 fall in employment (Thursday) pushing unemployment up to 5.3%, from 5.2% in February. While I dont see a re-run of the last two years where shares peaked around April only to fall 15-20%, it does seem that the ride ahead will become a bit rougher. After strong rises in the March quarter, the easy gains are likely behind us: Europe is still a potential source of mishaps given upcoming elections in Greece and France, budget problems in Spain, austerity fatigue and recession; next years fiscal drag equal to 3.5% of GDP in the US may worry investors as could a soft patch in economic data after the strong patch of late; and China hard landing fears remain. However, any correction should be mild - say 5-10% rather than 15-20% - and we still see share markets higher by year end. Shares are cheaper than was the case a year ago - particularly against very low bond yields, the risk of a Eurozone banking meltdown has faded, momentum in global economic indicators is more positive, global monetary conditions are getting easier and there is lots of cash on the sidelines. Chinese and emerging country share markets should pick up as China starts to more aggressively ease economic policy. If the RBA continues to hold fast on interest rates and hard landing fears remain in China, Australian shares will likely remain a laggard. However, a rate cut from the RBA and another easing in China could change this. Low bond yields in major countries suggest low returns unless Europes debt crisis intensifies. Dont expect a bond yield melt up though, as higher inflation and US monetary tightening are still a long way off. The current correction in the A$ may have further to go reflecting soft data in Australia and worries about China. However, the A$ is likely to remain strong overall as the continuing global recovery supports commodity prices and as Australian interest rates remain above US rates.

Major market moves

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What to watch over the week ahead?

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Outlook for markets

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investors objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investors objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.