RBA holds rate as China worries continue

1 September, AtoZForex.com, Lagos – The week started off with the ANZ business confidence from New Zealand. The official release showed that business confidence slipped further into the red, led by agriculture. Key survey indicators that more closely correlate to GDP also weakened, with several at their lowest levels since 2009. That’s a worry.

Business confidence remains on the ropes, hitting a new six-year low in August. A net 29% of businesses are pessimistic about the general economy, the fifth consecutive monthly decline. For the second consecutive month, general business sentiment was in negative territory across all five sub-sectors. Agriculture was by far the most pessimistic, whilst construction and services are the least downbeat. The NZD remains low, after several weeks of weakness.

Screen Shot 2015-09-01 at 7.15.29 AMRBA holds rate at 2.00%

The RBA chose to keep its interest rate at 2.00% for a fifth consecutive month after two cuts this year. In the accompanying monetary policy statement, Gov. Glenn Stevens noted that the global economy is expanding at a moderate pace, with some further softening in conditions in China and East Asia of late, but stronger US growth. Key commodity prices are much lower than a year ago, in part reflecting increased supply, including from Australia.

Australia’s terms of trade are falling, speaking about the local economy, Mr. Stevens pointed that most of the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year.

Overall, the economy is likely to be operating with a degree of spare capacity for some time yet, with domestic inflationary pressures contained. Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate. In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. The Australian dollar is adjusting to the significant declines in key commodity prices. All of these factors have influenced the central bank’s decision to hold rate at 2.00% for another month.

Australia’s building approvals m/m showed the trend estimate for total dwellings approved fell 0.7% in July and has fallen for five months. The seasonally adjusted estimate for total dwellings approved rose 4.2% in July following a fall of 5.2% in the previous month.

China worries continue

Worries over the state of the Chinese economy continue as data released this morning again fail to impress. The Manufacturing PMI came China manufacturing sector is losing steam as the sector slowed markedly in August, twin surveys showed on Tuesday, the latest sign that the world’s second largest economy is fast losing momentum. China’s official PMI, released earlier in the day, slipped to 49.7 in August. This marks the weakest level since August 2012, down from 50 in July and in line with expectations. This is the first time the official PMI has fallen below 50 in six months, according to Nomura.

Also, the final Caixin/Markit manufacturing purchasing managers’ index (PMI) slipped to 47.3 in August, the lowest reading since March 2009 and down from 47.8 in July. The reading, however, was a tad better than the flash reading of 47.1. The official PMI is skewed towards state-owned enterprises and large companies, while the Caixin PMI focuses more on small and medium-sized firms. A print above 50 indicates an expansion in activity while one below points to a contraction.

On the calendar for the day:

-8:30 AM GMT: UK Manufacturing PMI

-12:00 PM noon: CAD GDP m/m

-2:00 PM GMT: ISM Manufacturing PMI

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