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4 June 2012

Australian Markets Weekly

A weekly outlook for Australia, key global economies and markets

In this issue
RBA To Cut Again This Week International Economic Roundup FX Strategy Interest Rate Strategy What to Watch Australia Weekly Calendar of Global Economic Releases Forecasts 1 4 5 6 7 9 10

RBA To Cut Again This Week

RBA to cut again, likely 25 bps; more to come Global growth outlook taking a turn for the worse Soft domestic sectors looking weaker China and Indian growth slowing Treasury preparing plans for worst case Euro fallout Week ahead: RBA Board Tuesday, Employment Thursday and Housing Finance Friday

RBA set to ease monetary policy again in June

Late last week, we changed our RBA rate call and we now expect the RBA to cut the cash rate again at this weeks Board meeting, with a cut of 25bps taking the cash rate to 3.5%. We continue to expect a further cut of 25bps in August, because we expect the upcoming Q2 CPI (for release on 25 July) to confirm inflation at the bottom of the target band. We see the risk that the RBA may still go lower than the 3.25% cash rate we are forecasting after the August Board meeting. If there is a meltdown in Europe, then we would expect much more aggressive rate cuts from the RBA. A key rationale for our change of heart is that the outlook for global growth has deteriorated since the last Board meeting in May, due to the Greek election and heightened fears that Greece may leave the Euro, with undoubtedly negative but uncertain ramifications for the Eurozone more generally. Whilst it is by no means certain that Greece will leave the Euro, the negative effects on confidence and activity from the past months asset market falls are likely to worsen the recession already evident in Europe. Spain of course is also right in the mix, also negatively affecting global confidence. Data surprises turning ugly again
Australia and China
200

Talking points
RBA To Cut Again This Week : RBA to cut again, likely 25 bps; more to come. Global growth outlook taking a turn for the worse. Soft domestic sectors looking weaker. China and Indian growth slowing. Treasury preparing plans for worst case Euro fallout. Week ahead: RBA Board Tuesday, Employment Thursday and Housing Finance Friday. International Economic Roundup: US labour market improvement falters in May. Spains public finance reforms running into recession and inertia/ monitoring headwinds. Asias growth more than fraying at the edges. Week ahead: real focus on Chinas May activity and inflation data at the end of the week; Feds Beige Book, services/non-manufacturing PMIs and the ECB meeting. FX Strategy: The AUD is likely to continue to be influenced by broader global sentiment. Local data may be mixed and the RBA is expected to ease. The AUD spent May depreciating, with spot remaining above the model AUD/USD estimate of 0.90. The risks remain to the downside. Interest Rate Strategy: Recent global economic data releases have confirmed that global growth has taken a knock from the ongoing uncertainty in Europe. Our bond and swap yield forecasts have been revised down due to lower growth outlook. RBA to cut another 50bps to 3.25%, starting with 25bps next week.

Europe and the US

Economic data surprise index +/- %
200

Economic data surprise index +/%

150

150

100

100

50

50

-50

-50

-100

Australia China

-100

United States Europe

Source: Citigroup

-150

-150

-200 Source: Citigroup

-200

-250

-250
Dec 05 06 Jun Dec 06un 07 J Dec 07 08 Jun Dec 08 un 09 J Dec 09 un 10 J Dec 10 11 Jun Dec 11 12 Jun

Dec 05un 06 ec 06un 07 ec 07un 08 ec 08un 09 ec 09un 10 ec 10un 11 ec 11un 12 J D J D J D J D J D J D J

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If that were not concern enough for the stability of global financial markets, negative data surprises from China and Asia more generally (weakness in Indias Q1 GDP this week), will only add to the Boards concerns about the growth outlook for Australias major trading partners at this weeks RBA Board meeting. US data of course has also been lacklustre in the last little while. Domestically, while our NAB Survey still is printing Business Conditions just a touch below trend, the gap between the best performing Mining sector and poorly performing Retail and Manufacturing sectors has been widening, notwithstanding that the big employing sectors of health and education have remained solid. Domestic manufacturing struggling
Aus: Manufacturing activity
Value added growth vs PMI
10.0 70

Sydney prices have not escaped the cautionary mood this month (-1.2% in the month/-3.6% over the year), while Brisbane-Gold Coast prices (-0.4%/-6.5%), Perth (-1.7%/-3.9%) and Hobart (-1.2%/-8.9%) recorded further declines in May and on a year-to basis. Adelaide prices rose 1.2% in May, but remain 2.4% lower than year earlier levels. Among the smaller capitals, Darwin prices had a setback for once (-2.4%/-1.2%) while in Canberra prices were also soft (-1.5%/-0.9%) if more resilient to now than the major capitals. We could also add to that list the further weakness in Fridays AiG PMI Manufacturing index for May. The index slipped back to 42.4 from 43.9, and back to the lowest level since last September with a pullback in both the production and the new orders index, both in the low 40s and if that were not pressure enough some pick up in input prices, at least for this month.
Capital spending

The growing wedge between mining and the rest

Business Capital Expenditure
% of GDP, real terms
7

7.5

65

5.0

60

2.5

55

Percent

0.0

50

Index (diffusion)

-2.5

45

-5.0

Manufacturing industry value added, real, left

"Other" industries
4

40

-7.5

35

-10.0

AiG Manufacturing PMI, right

3 30 2

Mining

-12.5 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

25

Manufacturing
1

Source: NAB Global Markets Research, Reuters EcoWin

Our recently released NAB On-line Retail report for April was very weak and official retail data for April posted a fall, confirming the industry continues to struggle. Residential construction and non-residential building is weak with approvals woeful. Against that, investment in mining is booming but the sector could delay projects if commodity demand slows - some public announcements of projects being delayed have already been made. Against this backdrop, with the likelihood that inflation is set to stay low for the rest of the year at least, means that there is room for the RBA to cut by a further 25bps, to provide some fillip to domestic business and consumer confidence.

0 Q1 Q3 04 Q1 Q3 05 Q1 Q3 06 Q1 Q3 07 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 08 09 10 11 12 Source: NAB Global Markets Research, Reuters EcoWin

Treasury preparing for worst case contingencies

Speaking to the Senate estimates Committee this week, Federal Treasury Secretary made clear that his department is preparing contingency plans should the situation unravel in Europe to extent to clog up financial markets risking another global recession. He noted how incredibly healthy the governments budget position was relative to the rest of the world, and that is policy makers would need to react is there was a clogging of the financial system and a global recession. He noted plenty of scope for monetary policy support, while for fiscal policy the government could use automatic stabilisers and go back into deficit to support activity. This now thinking aloud of what he would be recommending if Europe should fall apart is also a strong hint of his views going into tomorrows RBA Board meeting. He would not likely be standing in the way of another easing in monetary policy this month, should other members of the Board endorse that course of action, which we expect they will.

Local data still printing on the soft side

In addition to the weak building approvals data, there was yet more confirmation of the Australian housing market on the defensive, this came at the end of last week with the RP Data-Rismark house prices report for May. The RP Data-Rismark measure of established house prices was down 1.4% across the capital cities, to be down now 5.3% over the year, a faster rate of decline than has been evident over recent months. In April for example, established house prices fell 0.8% to be down 4.5% over the year to April. Regional prices fared somewhat better, to be down 0.2% in May, off 1.4% in year to terms. While we recognise that the data is not seasonally adjusted, its clear that the trend has been evident for some time and the year-to trend provides yet more confirmation of that. The faster rate of decline evident in April in Victoria picked up pace in May, prices down 2.7% in May after a 1.7% drop in April, prices now down 8.4% over the year to May. Other state capitals also generally showed continued weakness in May.

The week ahead

And so, the RBA meets tomorrow with rising expectation that they will cut the cash rate again. We have changed our RBA rate call, now expecting the RBA to cut by 25bps next week. This weeks survey of economists from Bloomberg has 14 expecting a cut in the cash rate this week (one for 50 bps and 13 for 25 bps cut) out of 27 economists in the poll, up from just four expecting a cut only a week ago. 13 expect no change in the RBA cash rate. The market is priced for not only a 25 bps cut in the cash rate but pricing in a 50% chance that the cash rate will be

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Australian Markets Weekly

4 June 2012

reduced by 50 bps. A year from now, the market is pricing in that the cash rate will be almost at 2.25%, a cumulative cut in the cash rate of 146 bps. Market pricing for a re-run of the GFC
RBA cash target and "what's priced in"
Market now pricing risk for abnormal disturbance/ global recession
8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 03 04 05 06 07 08 09 10 11 12

3yr benchmark swap rate

Actual RBA cash rate target

RBA cash rate "priced in", four quarters ahead

Implied OIS 4 quarters ahead Source: NAB Global Markets Research, Reuters EcoWin

As weve outlined above, the global economic outlook has deteriorated, while domestically there is no threat to the inflation outlook and softness across many domestic industries. On the data front, a number of key releases next week. Q1 GDP is released on Wednesday, and we look for a 0.6% rise for 3.3%yoy, although that forecast may be revised after the profits and inventories numbers on Monday, and the net exports and government spending figures on Tuesday. Thursdays employment report also a key next week, where we expect employment to fall 10K in May, pushing the unemployment rate back up to 5.1% after the very low 4.9% reading in April. On Friday, housing finance approvals in April are expected to be weak again, while the monthly trade deficit should improve after a fall in imports in April.

David.deGaris@nab.com.au Robert.J.Henderson@nab.com.au

National Australia Bank Research | 3

Australian Markets Weekly

4 June 2012

International Economic Roundup

US labour market improvement falters in May Spains public finance reforms running into recession and inertia/ monitoring headwinds Asias growth more than fraying at the edges Week ahead: real focus on Chinas May activity and inflation data at the end of the week; Feds Beige Book, services/non-manufacturing PMIs and the ECB meeting

US employment growth slows; unemployment ticks up

The market was always going to be jumpy on the release of the US payrolls report for May in the wake of a weaker-than-expected official China PMI that slipped back 3 points to just over 50, signs of slowing in the Chinese economy. The payrolls report was underwhelming from most angles with not only a meagre 67k rise in payrolls, half the growth expected, but net downward revisions of recent history of 49k and a one tick rise in the unemployment rate. The ISM was close to expectations, but even it slowed from 54.8 to 53.5. Not even a 0.3% gain in consumer spending was sufficient to shake the gloomy investor mood. Slower jobs had tongues wagging over whether thered be another round of Fed QE, with a rush for Treasuries and gold. US 10-year yields fell to less than 1.5% and German bund yields to 1.18%, yields unheard of in this lifetime in what was a very defensive market. US labour market hitting a flat spot
US Labour Market
Employment change (mn, left); unemployment rate % (right)
0.75 12

Spains economy and the troubled state of its public finances, he noted not only the difficulty of reaching its public finance targets but the attention that needs to be given to budgetary monitoring at different levels of government. He noted the need to adopt early warnings and control monitoring of public finances not only at the Federal level but also for all levels of Government given the highly decentralised nature of its public finances. Ordonez noted the risks to revenue forecasts given the weight of exports in growth (which are under pressure from weakness in growth of its major trading partners Italy and Portugal), weak consumption and of course the depressed state of real estate markets. Given the weakened state of the economy there are also upside risks to spending, as well as a worrying inertia to restrain spending from within government/ public administration. In strong language he advocated publication of regional monthly revenue and spending reports as soon as possible and that the law include coercive measures to ensure compliance with budgetary targets by all levels of government. These comments are far from anything approaching even a lukewarm endorsement of current public finance monitoring and adherence systems. Spains debt 80%: bank recapitalisation and more recession to come
General Government Gross Debt - 2012 Estimates
% of GDP

180 160 140

123 153

% of GDP

120 100 80 60
40

113

112

107 89 79 79

22

24

20
0.50 10

0
0.25 8

Greece

Italy

Portugal Ireland

France Germany Spain

US

China Australia

Source: IMF Fiscal Monitor, April 2012

Person (millions)

0.00 6 -0.25 4 -0.50

Percent

China and Indias growth slowing

There were further signs of weakness out of China and India. The official Chinese Manufacturing PMI took a turn for the worse in May, down to 50.4 from 53.3, the weakest for January and running counter to its apparent trend of a mini-recovery in recent months that was at odds of the slowing in industrial production growth. This came in the wake of Indias March quarter GDP report that revealed a slowdown to 5.3% y/y from 6.1% over the course of 2011. Manufacturing industry has fallen 0.3% over the year to the March quarter now the weakest of the broad industry groups, no doubt suffering from the slowdown in exports, Indian exports were down 5.7% over the year to March; thats a stark contrast to the peak of 59.6% growth evident over the year to last July.

-0.75

-1.00 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: NAB Global Markets Research, Reuters EcoWin

Spanish fiscal program running to big headwinds

Spain reported this week that its deficit in the first four months of this year came in at a deficit of -25.5bn, up from a cumulative shortfall for the deficit for the same time last year of -16.9bn. This is not a good start to the current fiscal program - that is looking increasingly ambitious day by day - to reduce the deficit from 8.9% of GDP (well in excess of the targeted 6%) for 2011 to a target deficit this year of 5.3%. Even in the now unlikely eventuality that the Government meets its deficit target, debt to GDP, currently at 68.5%, would stabilise at above an even higher 80% in 2014. The Government forecasts that the economy will contract by 1.4% for 2012. For the year to date, Federal tax receipts are down 3%, with VAT receipts down a hefty 8.2%, thanks to the retrenchment of consumer spending, unemployment at 24.3%, and the economy in the grip of recession again. And those year-to date central government data come ahead of the inclusion of the recent 19bn government recapitalisation of bank Bankia. In the words of Spains central bank Governor Ordonez, appearing before a Senate this past week, this fiscal consolidation will be tremendously hard to achieve. Speaking about the outlook for

Offshore this week

China: Non-manufacturing PMIs, CPI, PPI, Industrial production, Fixed assets investment, Retail sales, Trade; India: Exports and imports, Services PMI Japan: GDP revision, Current account USA: Non-manufacturing PMI. Factory orders, Productivity, Feds Beige Book, Jobless claims, Consumer credit, Trade EC: Sentix Investor Confidence, Services PMI, Retail sales, GDP revision, ECB rate meeting NZ: Terms of trade, ANZ Commodity prices, Building work done david.degaris@nab.com.au
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4 June 2012

FX Strategy
The AUD is likely to continue to be influenced by broader global sentiment. Local data may be mixed and the RBA is expected to ease. The AUD spent May depreciating, with spot remaining above the model AUD/USD estimate of 0.90. The risks remain to the downside.

commodity prices may remain subdued. Golds ability to re-take its reserve mantle may depend somewhat on the markets perception of QE3. We would suggest that the prevailing tensions mean a lower AUD in the near term. A rebound depends most on global conditions, particularly in Europe around the end of June. Worsening US and Chinese economic data are also key.

AUD this week

Its a very busy week on the Australian, as well as global economic calendar. The market is priced for a bigger than 25bp easing from the RBA, while economists expect 25bp. A 25bp easing may not help AUD as the additional easing gets pushed down the curve, with European tensions remaining. Q1 domestic data should be solid but the latest data may be on the soft side. China releases its suite of monthly data next weekend which is particularly important for AUD, and the global environment will dictate the broader direction. Exhibit 1 AUD over May

AUD in May
The AUD spent much of May depreciating. A deteriorating global environment weighed heavily on the high beta currency. The AUD/USD dropped 6.8% in the month and the trade-weighted AUD was down just shy of 5%. AUD/USD spot is the lowest since November 2011 and the risks remain decidedly to the downside. The RBA kicked off the AUDs move by lowering interest rates more than expected at the May 1st meeting, but it was global events that were the big driver of the decline. Europe was the initial catalyst, with Greeces undecided elections and a swing towards a party that might see Greece out of the EUR, raising global risk aversion. Markets are very cautious about the contagion from a Greek EUR exit. Suggestions of a Greek and possible Spanish bank run contributed to the concern. Market attention then turned to Spain, as Bankias liabilities became the Governments obligations. The need to recapitalise Bankia has seen Spains sovereign yields at levels consistent with the rest of the peripherys needing assistance from the EFSF. Spain refuses to accept that it needs help. So far this is not appeasing markets. Towards the end of the month, global growth concerns have become a more dominant force. Australias data remains very mixed but not all bad. However, disappointing US data and worsening European growth is raising fears over Chinas growth and the expansion plans of Australias mining sector. Through the month, NABs economists revised the RBA forecasts twice and we end the month with an expected 25bp cut in both June and August; ending the year at 3.25%. The risks remain to the downside. We lowered our AUD forecasts and similarly, the risks remain very much to the downside.

Exhibit 2. What Moved AUD in May

US cents
1.0

AUD versus the model estimate

Our model estimating where the AUD should be right now, based on interest rate differentials, risk appetite, gold and metals prices shows the AUD pressures to the downside. The model estimates AUD/USD at 0.90. This is down from the April 27 estimate of 0.992. AUD/USD spot clearly remains above the estimate. With EM outflows dominating, we may be approaching a period where spot may catch-up with the model. The biggest contribution to the lower AUD model estimate was the drop in market risk appetite. As a global growth related currency, deteriorating sentiment on global growth should worry the AUD more than most currencies. This input has the potential to bounce quickly if Europe resolves its problems. Unfortunately, we have the Greek elections June 17 to get through, and Spains funding pressures. The earliest date to provide a possible reprieve is at the late June EU Leaders Summit. With the RBA cutting interest rates and the market pricing for a lot more easing, Australias eroding interest rate advantage is also a driver of a lower AUD. While there may be too much priced into the AUD rate curve, the additional easing expectations are likely associated with the unknown European outcomes. Until such time as EU problems ease, this gap is likely to remain. Global commodity prices are lower across the board, including metals. Gold prices are also lower, as the USD takes the mantle as the reserve asset of current choice. With lower PMIs expected, concerns about Chinas growth and Europe clearly slowing,

-1.0

-3.0

-5.0

-7.0

-9.0

-11.0

Interest rates

Metals prices

Risk appetite

Gold price

Total

Source: Bloomberg, National Australia Bank. Note: Driver of the model since Apr 27 2012.

Exhibit 3 AUD/USD versus the Model

1.10 1.05 1.00 0.95 0.90 0.85
0.80
AUD/USD

AUD/USD

Model estimate +/- 1 standard deviation

0.75 0.70 0.65 0.60 0.55 Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Source: Bloomberg, National Australia Bank. Note Based on weekly 2-yr swap yield spread, JoC industrial metals prices, risk-appetite index and gold price.

emma.lawson@nab.com.au
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Interest Rate Strategy

Recent global economic data releases have confirmed that global growth has taken a knock from the ongoing uncertainty in Europe Our bond and swap yield forecasts have been revised down due to lower growth outlook RBA to cut another 50bps to 3.25%, starting with 25bps next week

dont think the RBA will cut as much as what is currently priced by the market (149bps over the next year), but as long as the RBA stays on an easing bias, short yields are likely to remain around the current low levels. A drastic policy action in Europe would spur investors risk appetite and push yields higher, but as long as Europe remains in a limbo bond and swap rate can potentially go even lower.

Week Ahead
Profit and inventory numbers kick start a busy week domestically, then all eyes will be on the RBA on Tuesday while Q1 GDP numbers are released on Wednesday (NAB expects 0.6%qoq/3.3%yoy) followed by employment figures on Thursday. We expect employment to fall 10K in May, pushing the unemployment rate back up to 5.1% after the very low 4.9% reading in April. The Fed releases its beige book economic survey on Wednesday, GDP Numbers are also out in Europe and the ECB and BOE have rate decisions on Wednesday and Thursday respectively.

Recent Events
Economic data releases during last week confirmed that global growth has taken a knock from the ongoing uncertainty in Europe. Australian government bonds have remained in high demand reaching new record lows. Three year rates are now below the 2% mark, having rallied more than 40bps during the week to close at 1.96%. Similar demand in the long end of the curve has seen ten year yields punched through 3% reaching 2.76% by the end of the week. Bond swap spreads have continued to widen, as swap yields have been unable to keep up with the government bond rally. Three year swap rates closed the week at 2.95%, 36bps lower and in almost a parallel fashion ten year swap rates gave up 35bps ending at 3.75%. The lack of decisive policy action in Europe is having an impact on global growth. The uncertainty has meant that households have become more frugal, delaying big item purchases while corporates have become less optimistic on the future, pushing back capital expenditure decisions. Despite printing a lower than expected PMI number, policymakers in China have confirmed that there wont be a repetition of the fiscal stimulus seen during the GFC, adding to the concern around global growth. India is also slowing, at 5.3% the Q1 GDP number was well below the 6% psychological mark and market expectations. Until recently, the US was seen as the last bastion of growth, but signs of weakness have begun to emerge, this weeks Conference Boards Index of Consumer Confidence fell 3.8pts to 64.9 in May, its lowest reading since January. The Chicago PMI was also below market expectations and Friday abysmal employment figures with 69k new jobs versus the 150k expected by the market, confirmed that the US recovery is losing momentum. The thirst for safe havens has been a key factor keeping yields lower across core sovereign bond markets including Australia. But now, the deterioration of global growth prospects is also a contributing factor.

Views
Outright yields Swaps at new record low levels, but can go lower still. Our new forecast means we no longer see yields rising as high as we previously expected Swap Yield Curve Mixed forces through 2012. 3/10 slope now +74bps and around the middle of our probable +50 to +90bps range for 2012.

1: Whats priced in?

Period End RBA Cash rate US Fed funds ACGB10's UST10's Aus-US 10 year 3 Year Swap Rate 10 Year Swap Rate Aus 3/10 Swap Curve 3 Year Swap Spread

Now Weekly Jun-12 Sep-12 Dec-12 3.75 0.25 2.77 1.45 132 2.95 3.74 80 98 0.00 0.00 -0.33 -0.29 -4 -0.02 -0.03 -1 8 3.50 0.25 3.10 1.75 135 3.30 4.05 75 95 3.25 0.25 3.40 2.00 140 3.44 4.30 86 85 3.25 0.25 3.50 2.00 150 3.59 4.35 76 80

2: Swap rates lower across the curve

Looking Ahead
The reassessment of the global growth outlook has meant that our bond and swap yield forecasts have been revised down. Risk aversion has been the main driver for the current record low levels and while we expect risk appetite to eventually rise once again, we no longer see yields rising as high as we previously expected. Given the current global economic environment, we suspect well see more rounds of unorthodox monetary policies (QE and operation twist for instance) which will weigh on core global government bond yields. Domestically, the safe haven demand will provide further support to government yields as well as the expected reduction in new bond supply. NAB economists have pushed forward their RBA rate forecast, starting with 25bps on Tuesday and another 25bps pencilled in for August. In addition to the ongoing European saga, the deterioration in the global economic data means that the risk is that the RBA may do more on Tuesday. All in all however, we

skye.masters@nab.com.au / rodrigo.h.catril@nab.com.au

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Australian Markets Weekly

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What to Watch Australia

Business Indicators, Q1 (Monday, 11.30)

(L = Last, F=Forecast, M = Market Median, n/f = not forecast)

The company profits and non-farm inventories data will be crucial inputs into the Q1 GDP outcome. We expect to see a rise in both these statistics in Q1, with profits in particular rebounding after a very weak Q4 2011 outcome. Company Gross Operating Profits fell by 6.5% in the December quarter, with Mining down 8.7%, Manufacturing -5.1%, Construction -4.2%, Wholesale -8.2%, and Financial and Insurance -57.3% in the quarter. In Q1, we expect to see profits rebound, with an increase of 2.0% in the quarter. For inventories, we expect a 0.8% rise in Q1, after the 1.4% gain in Q4, which would mean a quarterly detraction from growth of around 0.3% in Q1. Profits: L: -6.5%; F: +2.0%; Median: -2.5% Inventories: L: 1.4%; F: 0.8%; Median: 0.7%

Profits to rebound after poor Q4 2011 result

Import s

Exports

Current account deficit, Q1 (Tuesday, 11.30)

Australias current account deficit widened to $8.4bn in Q4 from $5.8bn in Q3. All the deterioration was in the value of trade in goods and services (down $2.5bn to $3.6bn), whereas the net income deficit was steady at -$11.8bn. While there was an improvement in the real trade balance (export volumes up 2.2% and import volumes up only 0.6%, leading to the positive GDP contribution of 0.3pps), offsetting that was the deterioration in the terms of trade. The terms of trade fell 4.6% in the quarter, mostly due to a 5.5% fall in export prices (import prices fell 0.7%). So in value terms, exports values rose only 0.4% while import values rose 3.8%. In Q1, we expect to see the current account deficit widen even further, out to $12bn, after the large fall in export values in the quarter. In volume terms, the deterioration in the real trade deficit (again mainly due to a fall in export volumes) is expected to detract around 0.6 percentage points off GDP. L: -8.4bn; F: -12.0bn; Median: -14.8bn
Trade balance

CAD to deteriorate again in Q1 after fall in exports

Australia's Current Account Deficit
$Abn
-2.5

-5.0

-7.5

-10.0

AUD (billions)

-12.5

-15.0

-17.5

-20.0

-22.5 Q1 00 01 02 Q1 03 04 05 Q1 06 Q1 07 08 09 10 11 12 Source: NAB Global Markets Research, Reuters EcoWin

RBA Cash Rate Announcement, (Tuesday, 14.30)

The RBA meets on Tuesday and we expect them to cut the cash rate by 25 basis points to 3.50%. Elevated European uncertainty and signs of slower activity in China and India as well as weaker commodity prices give the RBA enough reason to cut again to try to boost domestic confidence and activity. With inflation clearly undershooting in the near term there appears to be little danger for the RBA to cut again so soon after the aggressive 50 basis points cut in May.
Percent

Another cash rate cut coming soon

RBA Cash Rate
7.5 7.0 6.5 6.0 5.5 5.0 4.5 7.5 7.0 6.5 6.0 5.5 5.0 4.5

Previously we had expected 25 point rate cuts in August and September. Effectively we have brought forward the timing of the cuts. Our rate profile now has cuts in June and August (post a lower than expected CPI in the June quarter as evidenced by continued retail discounting in our recent Monthly Business Survey). L:3.75%; F: 3.50%; Median:3.75%

(f)
4.0 3.5 3.0 92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Reuters EcoWin

4.0 3.5 3.0

National Australia Bank Research | 7

Percent

Australian Markets Weekly

4 June 2012

What to Watch Australia

GDP, Q1 (Wednesday, 11.30)

(L = Last, F=Forecast, M = Market Median, n/f = not forecast)

Q1 GDP is released on Wednesday, and we look for a 0.6% rise for 3.3%yoy, although that forecast may be revised after the profits and inventories numbers on Monday, and the net exports and government spending figures on Tuesday. After growth of just 0.4% in Q4, we are looking for a stronger rise in Q1, supported by the strength of private consumption and business investment.

GDP forecast to rise 0.6% in Q1

A u s tra lia n G D P
6 6

Annual G D P
4 4

3
Percent

3
Percent

Dwelling investment, public spending and net exports are likely to detract from growth. Looking ahead, we expect that business investment will drive most of the growth through 2012, but the recovery in residential construction is taking much longer than anticipated. Meanwhile household consumption is expected to continue growing at a steady pace while government spending will ease. L: 0.4%/2.3%; F: 0.6%/3.3%; Median: 0.5%/3.2%

(f)
1 1

Q u a r t e r ly G D P G r o w t h
-1 00 01 02 03 04 05 06 07 08 09 10 11 12 -1

S o u rc e : R e u te rs E c o W in

Employment, May (Thursday, 11.30)

The upside surprise in Aprils jobs report is expected to be partially reversed in May. Employment rose 15.5K in April, with the unemployment rate falling to 4.9% from 5.2%, after the participation rate fell further to 65.1%. The really interesting thing about the April data was that the participation rate fell at the same time as employment rose. Normally these two series move in lock-step (jobs up; part rate up and vice versa). It could be that all the negative talk about the economy is starting to effect confidence across households and this has led to this unusual divergence. Consumer confidence has been quite weak, despite the unemployment rate remaining at 5.2% or lower for seven months now. In May, we expect to see employment fall 10K, with the participation rate easing to 65.1%. That would see the unemployment rate rise back above 5% to 5.1% in May. L: Empl: +15.5K; Unemployment rate: 4.9%; Part rate: 65.2% F: Empl: -10K; Unemployment rate: 5.1%; Part rate: 65.1% Unemployment rate fell to 4.9% in April
A u s tra lia n L a b o u r M a rk e t
6 6

U n e m p lo y m e n t r a t e
5 5

Percent

A n n u a l E m p lo y m e n t G r o w t h
1 1

0 04 05 06 07 08 09 10 11 12

S o u rc e : N A B G lo b a l M a rk e ts R e s e a rc h , R e u te rs E c o W in

International Trade, April (Friday, 11.30)

The trade balance for March recorded a deficit of $1.59bn, up from the deficit of $754mn in February, meaning that Australia recorded three deficits in a row for the first three months of 2012, after a string of surpluses over the period from April 2010 onwards (except for the QLD flood affected Feb-11 result). The key reason for the deterioration in March was a surge in imports which rose by 5%. While exports rose by 2%, the level is still well below the Q4 2011 outcomes. Commodity prices have eased and coal exports in particular are still suffering from the strikes in Queensland. In April a 3% fall in imports will improve the trade deficit to around $1.2bn, but exports are expected to be flat in the month, impacted by the fall in commodity prices. L: -1587m; F: -1200m; Median:-900m Weak exports hurting Australias trade position
A u s tra lia n T ra d e B a la n c e
3 0 .0 2 7 .5 2 5 .0 8 7

E x p o rts (L H S ) Im p o r t s ( L H S )

6 5 4 3 2 1 0 -1 -2 AUD (billions)

2 2 .5 2 0 .0 AUD (billions) 1 7 .5 1 5 .0 1 2 .5 1 0 .0 7 .5 5 .0

T r a d e B a la n c e ( R H
2 .5 0 .0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12

-3 -4

G o o d s a n d S e r v ic e s b a la n c e

E x p o r ts

Im p o r ts

S o u rc e : N A B G lo b a l M a rk e ts R e s e a rc h , R e u te rs E c o W in

Spiros.Papadopoulos@nab.com.au

National Australia Bank Research | 8

Percent

Australian Markets Weekly

4 June 2012

Weekly Calendar of Global Economic Releases

Time NAB Country Economic Indicator Period Forecast Consensus Monday, 4 June 2012 NZ Queen's Birthday Holiday UK Diamond Jubilee Bank Holiday AU TD Securities Inflation MAY AU Company Operating Profit QoQ% 1Q 2.0% -2.5% AU Inventories 1Q 0.7% AU ANZ Job Advertisements (MoM) MAY EC Euro-Zone PPI (MoM/YoY) APR 0.2%/2.7% US Factory Orders APR 0.3% EC Bills auctions in France and Netherlands Tuesday, 5 June 2012 UK Diamond Jubilee Bank Holiday AU AiG Performance of Service Index MAY AU Current Account Balance 1Q -12B -14.8B AU Net Exports Contribution 1Q -0.6pps -0.6pps AU Government Expenditure 1Q CH China HSBC Services PMI MAY AU RBA CASH TARGET JUN 3.50% 3.75% IN Markit Services PMI MAY GE PMI Services MAY F 52.2 EC PMI Services MAY F 46.5 EC PMI Composite MAY F 45.9 EC Euro-Zone Retail Sales APR -0.2%/-1.1% GE Factory Orders (MoM/YoY) APR -1.0%/-3.8% US ISM Non-Manf. Composite MAY 53.8 Wednesday, 6 June 2012 NZ Crown Financial Statements APR NZ Building Work Put in Place 1Q 3.0% UK BRC Shop Price Index (YoY) MAY UK Lloyds Business Barometer MAY AU Gross Domestic Product (QoQ/YoY) 1Q 0.6%/3.3% 0.5%/3.2% UK PMI Construction MAY 51.0 54.6 EC Euro-Zone GDP s.a. (QoQ) 1Q P 0.0% GE Germany to Sell Add'l 5b 5-Year Notes PO Portugal to Sell 6-Month and 12-Month Bills GE Industrial Production MoM (sa)/YoY APR -1%/0.8% EC ECB Announces Interest Rates JUN 1.00% 1.00% US Fed's Lockhart Speaks on Economy in Fort Lauderdale, Florida US Nonfarm Productivity 1Q F -0.60% US Fed Releases Beige Book Economic Survey Thursday, 7 June 2012 AU AiG Perf of Construction Index MAY UK BRC Like-for-like sales (YoY) MAY AU Emp Chng/Unemp/Part rate MAY -10K/5.1%/65.1% 0K/5.1%/65.2% UK PMI Services MAY 51.0 52.8 EC Bond auctions in France and UK BOE ANNOUNCES RATES JUN 0.50% 0.50% UK BOE Asset Purchase Target JUN 325bn 325bn US Initial Jobless Claims Jun-02 US Fed's Lockhart Speaks on U.S. Economy in Georgia (V) US Fed's Kocherlakota Speaks in Minneapolis (NV) US Consumer Credit APR $10.0B Friday, 8 June 2012 NZ Wholesale Trade 1Q JN Gross Domestic Product (QoQ) 1Q F AU Home Loans MoM APR -2.0% 0.0% AU Trade Balance APR -1200M -900M AU RBA's Stevens Gives Speech to Chamber of Commerce in Adelaide UK PPI Input Prices (MoM/YoY) MAY -1.0%/1.8% -1.2%/1.6% UK PPI Output Prices (MoM/YoY) MAY 0.2%/3.3% 0.2%/3.3% UK PPI Output Core Prices MAY 0.8%/3.0% 0.2%/2.3% US Trade Balance APR -$49.4B Saturday, 9 June 2012 CH CPI (YoY) MAY 3.2% CH PPI (YoY) MAY -1.1% CH Industrial Production YoY MAY 9.8% CH Fixed Asset Investment MAY 20.0% CH Retail Sales MAY 14.1% Trade Balance MAY $16.1bn CH Upcoming Central Bank Interest Rate Announcements Australia, RBA 5-Jun 3.50% 3.75% Canada, BoC 5-Jun 1.00% 1.00% Europe ECB 6-Jun 1.00% 1.00% UK BOE 7-Jun 0.50% 0.50% New Zealand, RBNZ 14-Jun 2.50% 2.50% Japan, BoJ 15-Jun 0.0%-0.1% 0.0%-0.1% India, RBI 18-Jun US Federal Reserve 20-Jun 0%-0.25% 0%-0.25% GMT: Greenwich Mean Time; AEST: Australian Eastern Standard Time; r: Revised
National Australia Bank Research | 9

Actual

Previous

GMT AEST

0.3%/1.9% -6.50% 1.40% -3.10% 0.5%/3.3% -1.5%

0.30 1.30 1.30 1.30 9.00 14.00

10.30 11.30 11.30 11.30 19.00 0.00

39.6 -8.4B +0.3pps 54.1 3.75% 52.2 46.9 46.7 0.3%/-0.2% 2.2%/-1.3% 53.5

23.30 1.30 1.30 1.30 2.30 4.00 5.00 7.55 8.00 8.00 9.00 10.00 14.00 22.00 22.45 23.01 23.01 1.30 8.30 9.00 9.30 9.30 10.00 11.45 12.15 12.30 18.00

9.30 11.30 11.30 11.30 12.30 14.00 15.00 17.55 18.00 18.00 19.00 20.00 0.00 8.00 8.45 9.01 9.01 11.30 18.30 19.00 19.30 19.30 20.00 21.45 22.15 22.30 4.00 9.30 9.01 11.30 18.30 19.00 21.00 21.00 22.30 2.10 3.15 5.00 8.45 9.50 11.30 11.30 12.15 18.30 18.30 18.30 23.30 11.30 11.30 11.30 11.30 11.30 11.30

2.9% 1.3% 26 0.4%/2.3% 55.8 0.0%

2.8%/1.6% 1.00% -0.50%

34.9 23.30 -3.3 23.01 15.5K/4.9%/65.2% 1.30 53.3 8.30 9.00 0.50% 11.00 325bn 11.00 383K 12.30 16.10 17.15 $21.4B 19.00 2.5% 1.00% 0.3% -1587M -1.5%/1.2% 0.7%/3.3% 0.6%/2.3% -$51.8B 3.4% -0.7% 9.3% 20.2% 14.1% $18.4bn 3.75% 1.00% 1.00% 0.50% 2.50% 0.0%-0.1% 8.00% 0%-0.25% 22.45 23.50 1.30 1.30 2.15 8.30 8.30 8.30 13.30 1.30 1.30 1.30 1.30 1.30 1.30

Australian Markets Weekly

4 June 2012

Forecasts
Economic Forecasts
Annual % Chng Australia Forecasts Household Consumption Business Investment Residential Construction Government Spending Exports Imports Net Exports* Inventories* Domestic Demand - qtr% Dom Demand - ann % Real GDP - qtr % Real GDP - ann % CPI headline - qtr % CPI headline - ann % CPI underlying - qtr % CPI underlying - ann % Wages (Pvte WPI - qtr % Wages (Pvte WPI -ann %) Unemployment Rate (%) Terms of trade G&S trade balance, $Abn Current Account (% GDP) 3.4 2.6 3.8 5.2 14.1 18.1 -2.2 1.8 2.1 3.5 5.3 -10.1 -21.4 -5.2 3.0 2.4 2.9 5.3 -3.5 -41.6 -6.3 2011 3.4 19.6 1.1 -0.6 -1.6 11.5 -2.7 0.6 4.0 2.0 2012 3.6 17.3 -9.7 -1.0 4.0 6.2 -0.6 -0.1 4.0 2.7 2013 2.9 14.7 7.3 -0.7 5.5 7.6 -0.8 -0.1 4.3 3.6 2011 Q1 0.8 5.9 3.0 0.3 -6.3 2.3 -1.8 0.0 1.4 3.6 -0.3 1.2 1.6 3.3 0.8 2.4 0.9 4.0 5.2 3.1 2.4 -3.2 Q2 1.0 0.2 -0.7 0.4 3.0 3.4 -0.2 0.7 0.6 3.3 1.4 2.0 0.9 3.6 0.8 2.7 0.8 3.9 5.0 5.4 6.1 -1.8 Q3 1.1 17.2 -0.2 -2.7 2.2 5.8 -0.9 -1.1 2.2 4.9 0.8 2.6 0.6 3.5 0.3 2.5 0.9 3.7 5.3 3.2 6.1 -1.6 Q4 0.5 -1.2 -3.9 0.9 2.2 0.7 0.3 0.9 0.2 4.4 0.4 2.3 0.0 3.1 0.6 2.6 1.0 3.8 5.1 -4.7 3.6 -2.3 2012 Q1 1.4 4.3 -4.3 -0.1 -2.3 0.2 -0.5 -0.3 1.1 3.4 0.5 3.2 0.1 1.6 0.3 2.1 0.8 3.6 5.2 -5.8 -3.3 -4.7

Quarterly % Chng
Q2 0.7 3.3 -3.0 -0.1 2.0 1.0 0.2 -0.1 0.7 3.3 0.7 2.5 0.6 1.2 0.5 1.8 0.8 3.6 5.3 -3.9 -5.4 -5.2 Q3 0.6 2.9 -1.4 -0.3 2.1 1.1 0.1 0.0 0.7 1.8 0.8 2.4 1.3 1.9 0.6 2.1 0.8 3.5 5.5 -1.7 -6.1 -5.4 Q4 0.6 2.9 1.6 -0.4 1.1 1.3 -0.1 -0.2 0.8 2.5 0.7 2.7 0.8 2.7 0.6 2.1 0.8 3.2 5.4 -0.5 -6.7 -5.5 2013 Q1 0.8 3.7 2.3 -0.3 1.3 2.0 -0.2 0.0 1.1 3.2 0.9 3.1 0.6 3.3 0.6 2.4 0.8 3.2 5.4 -0.7 -8.0 -5.8 Q2 0.8 3.8 3.3 -0.1 1.1 2.3 -0.3 0.0 1.2 4.0 1.0 3.4 0.6 3.3 0.5 2.4 0.6 3.0 5.4 -0.5 -9.5 -6.1 Q3 0.7 4.1 3.5 0.2 1.1 2.5 -0.4 0.1 1.3 4.7 1.1 3.7 0.7 2.7 0.7 2.4 0.6 2.8 5.2 -0.4 -11.2 -6.5 Q4 0.7 3.8 3.1 0.2 1.1 2.4 -0.4 0.0 1.3 5.1 1.0 4.0 0.8 2.7 0.7 2.5 0.6 2.6 5.2 -0.4 -12.8 -6.8

Source: NAB Group Economics; (*) Contributions to GDP growth

Exchange Rate Forecasts

4-Jun Majors AUD/USD NZD/USD USD/JPY EUR/USD GBP/USD USD/CNY USD/CAD Australian Cross Rates AUD/JPY AUD/EUR AUD/GBP AUD/NZD AUD/CNY AUD/CAD AUD/CHF 75.3 0.778 0.628 1.284 6.141 1.006 0.934 78 0.78 0.62 1.27 6.29 1.01 0.93 77 0.77 0.60 1.24 6.15 1.00 0.93 80 0.73 0.59 1.19 6.08 0.99 0.89 80 0.72 0.59 1.19 6.00 0.99 0.88 80 0.71 0.59 1.20 5.95 0.99 0.88 81 0.71 0.60 1.22 5.90 0.99 0.88 81 0.69 0.59 1.22 5.80 0.99 0.87 0.964 0.751 78.1 1.240 1.535 6.370 1.044 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 1.00 0.79 78 1.29 1.61 6.29 1.01 0.98 0.79 79 1.28 1.63 6.28 1.02 0.97 0.82 82 1.33 1.64 6.27 1.02 0.96 0.81 83 1.34 1.64 6.25 1.03 0.96 0.80 83 1.35 1.62 6.20 1.03 0.96 0.79 84 1.36 1.61 6.15 1.03 0.95 0.78 85 1.37 1.60 6.10 1.04

Global GDP
2010 Australia US Eurozone UK Japan China India New Zealand World 2.5 3.0 1.7 1.3 4.5 10.4 9.0 1.3 5.2 2011 2.0 1.7 1.5 0.8 -0.9 9.2 7.1 1.7 3.7 2012 2.7 2.3 -0.6 0.7 2.7 8.0 6.0 2.3 3.2 2013 3.6 3.1 1.1 1.8 2.2 8.2 6.5 2.7 3.7

Commodity prices ($US)

4-Jun WTI oil Jun-12 100 1610 130 210 115 7900 Dec-12 104 1500 120 215 115 7860 Dec-13 112 1340 120 205 115 7960

Gold
Iron ore Hard coking coal Thermal coal Copper

82.51 1617 135 235 92 7379

Interest Rate Forecasts

4-Jun Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 3.50 3.9 3.3 4.1 3.25 3.7 3.4 4.3 3.25 3.7 3.6 4.4 3.25 3.6 3.7 4.6 3.25 3.7 3.9 4.5 3.50 3.9 4.1 4.7 3.75 4.2 4.2 4.9

Aust rates
RBA Cash rate 3 month bill rate 3 Year Swap Rate 10 Year Swap Rate Offshore Policy Rates US Fed funds ECB refi rate BoE repo rate BoJ overnight call rate RBNZ OCR China 1yr lending rate China Reserve Ratio Australia United States Europe/Germany UK New Zealand 0.25 1.00 0.50 0.10 2.50 6.56 20.0 2.72 1.45 1.17 1.53 3.28 0.25 1.00 0.50 0.10 2.50 6.56 18.5 3.10 1.75 1.5 1.8 4.5 0.25 1.00 0.50 0.10 2.50 6.31 17.5 3.40 2.00 1.8 2.0 4.8 0.25 1.00 0.50 0.10 2.50 6.31 17.5 3.50 2.00 1.8 2.0 5.2 0.25 1.00 0.50 0.50 2.75 6.31 17.5 3.75 2.25 2.0 2.3 5.2 0.25 1.00 0.50 0.10 3.00 6.56 17.5 3.75 2.25 2.0 2.3 5.3 0.25 1.00 0.50 0.10 3.25 6.81 17.5 4.00 2.50 2.3 2.5 5.3 0.25 1.00 0.50 0.10 3.50 6.81 17.5 4.25 2.75 2.3 2.8 5.3
National Australia Bank Research | 10

3.75 3.36 2.95 3.75

10 Year Benchmark Bond Yields

Australian Markets Weekly

4 June 2012

Global Markets Research

Australia
Peter Jolly Head of Research, Australia +61 2 9237 1406

Group Economics
New Zealand
Stephen Toplis Head of Research, NZ +64 4 474 6905 Craig Ebert Senior Economist +64 4 474 6799 Doug Steel Markets Economist +64 4 474 6923 Mike Jones Currency Strategist +64 4 924 7652 Kymberly Martin Strategist +64 4 924 7654 Alan Oster Group Chief Economist +61 3 8634 2927 Tom Taylor Head of Economics, International +61 3 8634 1883 Rob Brooker Head of Australian Economics +61 3 8634 1663 Alexandra Knight Economist Australia +(61 3) 9208 8035 Michael Creed Economist Agribusiness +(61 3) 8634 3470 Dean Pearson Head of Industry Analysis +(61 3) 8634 2331 Robert De Iure Senior Economist Property +(61 3) 8634 4611 Brien McDonald Economist Industry Analysis +(61 3) 8634 3837 Gerard Burg Economist Industry Analysis +(61 3) 8634 2778 John Sharma Economist Sovereign Risk +(61 3) 8634 4514 James Glenn Economist Asia +(61 3) 9208 8129 Tony Kelly Economist International +(61 3) 9208 5049

Macroeconomics
Rob Henderson Chief Economist, Markets +61 2 9237 1836 Spiros Papadopoulos Senior Economist +61 3 8641 0978 David de Garis Senior Economist +61 3 8641 3045

Currency Strategy
Emma Lawson Senior Currency Strategist +61 2 9237 8154

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Skye Masters Head of Interest Rate Strategy +61 2 9295 1196 Rodrigo Catril Interest Rate Strategist +61 2 9293 7109

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Credit Research
Michael Bush Head of Credit Research +61 3 8641 0575 Ken Hanton Senior Credit Analyst +61 2 9237 1405

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National Australia Bank Research | 11