Australia's Stimulus Plan May Be Losing Steam as Service Demand Shrinks (Euro Open)

The boost from Australia’s A$12 billion in cash handouts to consumers may be losing steam as sharp drops in sales and new orders led the service sector to shrink in July following yesterday’s unexpected drop in retail sales. UK Industrial Production and Euro Zone Retail Sales are on tap in European hours.

Key Overnight Developments

• Australia’s Trade Deficit Unexpectedly Shrank on Exports Rebound
• AiG Says Australian Service Sector Shrank in July as Sales, New Orders Fell
• UK Consumer Confidence Rose to Highest in a Year, Says Nationwide

Critical Levels

The Euro continued to oscillate in the familiar 1.4370-1.4430 range that has confined the pair since Monday’s New York session. Likewise, the British Pound continued to trade sideways between 1.6880 and 1.70.

Asia Session Highlights

Australia’s Trade Balance deficit unexpectedly narrowed in June, revealing a shortfall of –A$441 million, a notably better outcome than economists’ projections of a –A$800 billion result. The result was all the more dramatic given that May’s outcome was revised to show a deficit of –A$737 million, far larger negative reading than the –A$556 million originally reported. Exports grew for the first in four months to add 1.5%, driven primarily by sales of metals, machinery and transport equipment. Yesterday, the Reserve Bank of Australia opted to keep interest rates on hold at 3% for the fourth consecutive month citing, among other things, that “exports are notable for their resilience”. A survey of economists conducted by Bloomberg has forecast that the external deficit will cut just -3.24% off overall economic growth this year, the smallest negative contribution since 2001.

Countering positive cues from trade data, the AiG Performance of Service Index fell to 44.1 in July, revealing activity in the sector is once again contracting having expanded for the first in 15 months in June. Double-digit drops were recorded in inventories (-20.1%), deliveries (-15.2%), sales (-13.9%) and new orders (-11.3%). AiG chief executive Heather Ridout said the path to recovery will be “a long, hard slog”. The result follows yesterday’s unexpected drop in retail sales, adding to early signs that the stabilizing effects of the government’s A$12 billion in cash handouts to households that has propped up consumer sentiment in recent months may be starting to abate.

In the UK, Nationwide Consumer Confidence rose to 60 in July, the highest reading in over a year. The details of the report were not nearly as encouraging as the headline figure, however. The percentage of survey respondents expecting a pickup in employment in the next 6 months fell to 20% while 60% said they were expecting “not many” jobs to be available. This amounts to the worst set of labor market expectations among polled consumers since those recorded in April. Such attitudes may become more widespread as the jobless rate continues to push higher, weighing on consumer spending and dashing hopes of a meaningful economic recovery in the foreseeable future.

Euro Session: What to Expect

The annual pace of decline in UK Industrial Production is expected to moderate for the fourth consecutive month, with output shrinking -11.4%. Manufacturing Production is set to contract at the slowest pace since February, down -12.1% in the year to June. More of the same is likely ahead: July’s manufacturing PMI unexpectedly ticked into expansionary territory for the first time in 15 months, suggesting a further rebound is to be expected. However, as we mentioned in our British Pound Weekly Forecast, these readings are unlikely to prove particularly market-moving considering traders have likely already priced in the stabilizing effects of the ample global fiscal boost and inventory restocking that is driving current improvements into the exchange rate. Indeed, the question to be answered from here is what will happen after the flow of government cash dries up and the inventory cycle runs its course.

In the Euro Zone, Retail Sales are expected to decline -2.2% in the year to June, a modest improvement from the previous month’s -3.3% contraction. However, the reading still clearly falls along the down trend that has guided receipts lower since December 2006. Further, a downside surprise is not out of the question considering the unexpectedly dismal German retail sales result for the same period that was revealed earlier this week. Germany is the largest economy in the Euro Zone and lackluster activity there may well drag down region-wide performance. Evaluating the longer-term outlook, any sustained return to growth in retail spending is sure to be marginal at best with the unemployment rate set to hit 9% for the first time in 5 years in 2009 and surpass 10% in 2010 according to European Commission estimates.

Written by Ilya Spivak, Currency Analyst
Article Source - Australia's Stimulus Plan May Be Losing Steam as Service Demand Shrinks (Euro Open)

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