Weekly Market Commodity Report week commencing 25th June

This week in Australia saw the release of the new motor vehicle sales figures which recorded a rise of 2.4% in May compared to a fall of -1% in April. The year on year performance was 22.4% although it must be remembered that new vehicle sales were coming off a very low base last year after Japanese and global supply chains were disrupted due to of the Japanese Tsunami in March 2011. Dwelling commencements fell 12.6% in the first quarter (forecast -1.0%) after a fall 4.5% in the previous quarter. The data which is a good indicator for new residential housing activity showed that housing commencements in the first quarter are at their lowest level since 2001. The Skilled Internet Vacancy Index rose in seasonally adjusted terms in May by 3.4% after a 7.1% fall in April with an annual decline of 11.1%. The April Leading Index from Westpac-Melbourne Institute revealed an increase 0.5% for April after a rise of 0.3% in March. The other major news out of last week was the release of the RBA minutes which showed that despite the negative information and events that were occurring at the time of the board meeting the arguments for a further reduction were "finely balanced". The "finely balanced" comment has resulted in markets reducing the chances of a July rate cut from 65% to 50%. The next "live" meeting now appears in August thereby allowing more time for the recent rate cuts to work their way through the economy. Although recent data points to a softening in the Australian economy the unemployment rate is still around 5% and annual GDP will be north of 3%. As such the RBA will probably still look to the release of the CPI data due out shortly before the August meeting to ensure inflation is still at the lower end of the 2% -3% range before it considers reducing the cash rate further.

In international news the major event of the past week was the formation of the pro-austerity New Democracy-led coalition government in Greece. After the Greek election result the focus quickly shifted to Spain and the solvency concerns of its banks. An independent audit revealed that Spain's banking system will require 62 billion Euros in a worse case scenario (the EU creditors have provided a 100 billion facility). During the week Spain was also able to get away 2.2 billion of 2, 3 and 5 year government bonds but had to pay a record yield of 6.07% for the 5 year bond. The G20 summit concluded in Mexico on Tuesday with the world leaders promising greater co-ordinated policy action and with tentative steps made towards a banking union in Europe although this appears a long way off. On Thursday it was the US Federal Reserve's turn to take centre stage with a downward revision of 2012 economic growth and an upward revision of unemployment. The Federal Reserve cut 0.5% from economic growth to a 1.4%-2.4% forecast for this year and forecasted unemployment to now stay above 8% for this year and in the 8%-8.2% range. The markets were further disappointed when the US Federal Reserve announced an extension of "Operation Twist" (the buying of long dated treasuries and the selling of short dated ones) rather than another round of quantitative easing (QE3). Over the weekend the leaders of the four largest EU economies (Germany, Italy, France and Spain) agreed to mobilise 1% of European GDP that is 120 -130 billion Euros for the purpose of kickstarting growth in the euro zone.

The week ahead will once again be dominated by international news with the European Union heads of government summit to be held on Thursday and Friday. There is also the official Chinese purchasing managers index which is a key measure of the Chinese manufacturing sector. Locally there is data out on private sector credit.

Chris Tselentis
Treasury Dealer

Telephone: (08) 8425 4204
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