By Bill Evans
Offsetting those negatives were dwelling approvals (+0. 30ppts); US industrial production (+0. 21ppts) and the yield spread (0. 12ppts). Commodity prices, the S&P/ASX200, and hours worked had a negligible impact. In July the growth rate in the Index has fallen further below trend to –0. 65 per cent.
Further out we expect that the growth profile for Australia will gather considerably more pace than is expected by the RBA and, arguably, the yield curve. Accordingly we continue to expect the next move in rates will be a tightening but not until the second half of 2015, with August currently pencilled in for the date of the first move.
Overall though, the main drag on momentum has shifted from the consumer to commodity prices and the yield spread. As discussed above and elsewhere, our view on the consumer is more positive although sentiment will remain vulnerable near term given the heightened sensitivity to political developments. Similarly, we expect commodity prices to broadly stabilise by the end of the year, although there will be some more weakness near term (prices in AUD terms will likely be down again for the month of August).
The Leading Index components provide some further insights. While the Index growth rate has been consistently below trend over the last six months, there have been some notable shifts in the components driving that below-trend pace.
Although the Leading Index components still capture some of the drivers (commodity prices) and effects of this cycle it will likely struggle to predict the magnitude and timing of associated growth variations due to the long lags on mining investment projects and the 'lumpiness' of investment in the sector (due to both the 'bunching' of projects and their very large size).
A positive spread implies positive expectations for the economy (both growth but also higher inflation) and expansionary policy settings. A 'negative' spread can be thought of as expectations for slowing growth and contractionary monetary conditions.
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